Q4 2023 United Natural Foods Inc Earnings Call

September 26, 2023

background noise. After the speaker's remarks there will be a question and answer session. If you would like to ask a question during this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press the star one. Thank you. Steve Blumquist, Vice President of Investor Relations, you may begin your conference. Good morning everyone and thank you for joining us on UNFI's fourth quarter fiscal 2023 earnings conference call.

After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again Presti Star one.

Steve Bloomquist, Vice President of Investor Relations you May begin your conference. Good morning, everyone and thank you for joining us on Unfi's fourth quarter fiscal 2023 earnings conference call.

By now you should have received a copy of the earnings release issued earlier this morning.

By now you Should've received a copy of the earnings release issued earlier this morning.

The press release and earnings presentation, which management will speak to, are available under the investors section of the company's website. We've also included a supplemental disclosure file in Microsoft Excel with key financial information.

The press release and earnings presentation, which management will speak to our available under the investors section of the Companys website.

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.

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 strategy and business update, after which we will take your questions.

Andy and John will provide a strategy and business update after which we will take your questions.

Before we begin, I'd like to remind everyone the comments made by management during today's call may contain forward looking statements.

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 forward looking statements include plans expectations estimates and projections that might involve significant risks and uncertainties. These.

These risks are discussed in the company's earnings release and SEC filing.

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.

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.

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 like to now ask you to turn to slide 6 of our presentation as I turn the call over to Sandy.

I'd like to now 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 fourth quarter call. In my remarks this morning, I'll provide a brief overview of our results, the operating environment, and then provide an update on the actions that we are taking to continue to reset and restore our profitability and improve the value we create for our customers, suppliers, and in parallel, our shareholders.

Thanks, Steve we appreciate everyone joining us for our fourth quarter call.

In my remarks. This morning, I'll provide a brief overview of our results the operating environment and then provide an update on the actions that we're taking to continue to reset and restore our profitability and improve the value we create for our customers suppliers and in parallel our.

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As you saw in our release, our fourth quarter results for sales and capital expenditures were in line with the updated outlook we provided in June , while adjusted EPS and adjusted EBITDA finished towards the high end of their respective ranges.

As you saw in our release, our fourth quarter results for sales and capital expenditures were in line with the updated outlook. We provided in June while adjusted EPS and adjusted EBITDA finished towards the high end of their respective ranges.

UNFI has not been immune to the post-COVID, post-inflation challenges that the entire food industry is facing.

UNFI has not been immune to the post COVID-19 post inflation challenges that the entire food industry is facing.

Despite these challenges, we remain confident in our multi-year value creation opportunity and our plan to create and capture it.

Despite these challenges we remain confident in our multi year value creation opportunity and our plan to create and capture it.

We are seeking to build upon our strengthening foundation and market leadership position by investing in the necessary capabilities to create a differentiated, technology-enabled food retail services company that generates sustainable growth, profitability, and shareholder value.

We are seeking to build upon our strengthening foundation and market leadership position by investing in the necessary capabilities to create a differentiated technology enabled food retail services company that generates sustainable growth profitability and shareholder value.

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To this end, this morning, we also announced a refreshment of our board, adding three new members with deep food industry, business transformation, and investment stewardship experience, who we believe will be highly valuable in guiding our customer and supplier focused multi-year transformation plan in a disciplined manner that generates compelling shareholder return.

To this end. This morning, we also announced a refreshment of our board.

Adding three new members with deep food industry business transformation and investment stewardship experience, who we believe will be highly valuable in guiding our customer and supplier focused multi year transformation plan.

In a disciplined manner that generates compelling shareholder returns.

UNFI has a strong industry leadership position with an expansive supply chain as the largest wholesale grocery distribution and value-added food retail services provider in North America.

UNFI has a strong industry leadership position.

With an expansive supply chain as the largest wholesale grocery distribution and value added food retail services provider in North America.

with nearly 11,000 suppliers and manufacturers serving over 30,000 retail outlets.

With nearly 11000 suppliers and manufacturers serving over 30000 retail outlets.

And the long-term growth opportunity and pipeline we see in our core business remains significant within a $140 billion total addressable market for our core wholesale business.

In the long term growth opportunity and pipeline, we see in our core business remains significant within a $140 billion total addressable market for our core wholesale business.

However, considerable progress remains to be made modernizing and unifying our technology and network platforms as previous plans have taken longer than expected as the company faced the onset of the COVID pandemic, unprecedented inflation, and supply chain disruptions over the past few years.

Unprecedented inflation and supply chain disruptions over the past few years.

These events and their enduring consequences have brought cost increases across our total customer service system as we serve our large, diverse and growing customer base.

These advance and their enduring consequences have brought cost increases across our total customer service system as we serve our large diverse and growing customer base.

In previous quarters, we've outlined a four-part plan to transform and realize the full value of our platform.

In previous quarters, we've outlined a four part plan to transform and realize the full value of our platform include.

including details on how we plan to strengthen our supply chain for our retailers and suppliers through distribution network automation and optimization, introducing smarter technology systems, and investing in operational excellence and efficiency.

Including details on how we plan to strengthen our supply chain for our retailers and suppliers through a distribution network automation and optimization into.

Introducing smarter technology systems and.

And investing in operational excellence and efficiency.

We believe that we will further differentiate UNFI from our peers by complementing our profitable growth strategy with our operational transformation. And specifically, we expect to execute our transformation in a manner that restores and grows our profitability to sustainably improve shareholder value creation. We see significant sales and profit growth opportunities.

We believe that we will further differentiate UNFI from our peers by complementing our profitable growth strategy with our operational transformation and specifically, we expect to execute our transformation in a manner that restores and grows our profitability to sustainably improve.

Value creation, we see significant sales and profit growth opportunities.

So significant that we are unwilling to be incremental in our approach as we drive change and invest.

So significant that we are unwilling to be incremental and our approach as we drive change and investment.

Our transformation agenda is challenging and it will take time.

In the meantime, our management team is focused on working through the near-term environmental challenges.

In the meantime, our management team is focused on working through the near term environmental challenges reset.

resetting the business, and taking action to turn profitability around, while simultaneously investing in the business to sustain and significantly accelerate profitable growth over time.

Resetting the business and taking action to turn profitability around while simultaneously investing in the business.

Sustain and significantly accelerate profitable growth over time.

While we lay the groundwork for our transformation, the management team is also taking decisive action to revamp and lower our sustaining cost structure in the near term.

While we lay the groundwork for our transformation. The management team is also taking decisive action to revamp and lower our sustaining cost structure in the near term the.

The benefits from these more easily executable profitability drivers that I outlined on our last call will largely go towards offsetting higher operating costs that include additional labor and supply chain costs and the acceleration of work on our transformation initiative.

We also believe this transformation, including our planned investments to modernize and optimize our infrastructure, will help us to create a more nimble, streamlined, and responsive company. Let me briefly report on the near-term actions I previously outlined.

We also believe this transformation, including our planned investments to modernize and optimize our infrastructure will help us to create a more nimble streamlined and responsive company. Let me briefly report on the near term actions I previously outlined.

Since our third quarter call, we've captured nearly $100 million of benefits on a run rate basis.

Since our third quarter call, we've captured nearly $100 million of benefits on a run rate basis from work around our organizational structure SG&A spending and wholesale efficiency initiatives.

from work around our organizational structure as DNA spending and wholesale efficiency initiatives.

Having completed a deeper dive, we now believe a greater opportunity exists than we previously thought to continue to improve and become more efficient.

Having completed a deeper dive we now believe a greater opportunity exists than we previously thought to continue to improve and become more efficient.

As such, we're increasing the near-term value creation benefit from $100 million called that in June to nearly $150 million.

As such we are increasing the near term value creation benefit from $100 million called out in June to nearly $150 million. These amounts do not include the potential opportunity from improving our shrink rate, which as I mentioned on our last call is meaningfully higher than the pre pandemic.

These amounts do not include the potential opportunity from improving our shrink rate, which as I mentioned on our last call, is meaningfully higher than the pre-pandemic run rate, which we expect to improve over the course of the year as we operationalize process improvement.

Run rate and which we expect to improve over the course of the year as we operationalized process improvements.

These value creation initiatives are expected to benefit fiscal 2024, which will be an important year for UNFI as we take action to reset and begin to accelerate and expand our transformation program, including critical investments to our supply chain and technology infrastructure.

These value creation initiatives are expected to benefit fiscal 'twenty, 'twenty, four which will be an important year for UNFI as we take action to reset and begin to accelerate and expand our transformation program.

Including critical investments to our supply chain and technology infrastructure.

Let me provide some more details on our transformation program progress and our plan going forward.

Let me provide some more details on our transformation program progress and our plan going forward let.

Let me point you to slide six, which includes a summary of our transformation plan to truly leverage the power of our competitive advantages through what we're calling one UNFI. We're working to modernize and unify our technologies, infrastructure, and processes to drive better service for our customers and suppliers as well as improve our internal analytical capabilities to guide the company and help us be as dynamic and responsive as possible.

Let me point you to slide six which includes a summary of our transformation plan to truly leverage the power of our competitive advantages through what we're calling one UNFI, we're working to modernize and unified our technologies infrastructure and processes to drive better service for our customers and suppliers.

As well as improve our internal analytical capabilities to guide the company and help us be as dynamic and responsive as possible.

Slide 7 shows a broad roadmap of the key work streams we're pursuing over the next few years under the four transformation pillars that we previously identified.

Slide seven shows a broad roadmap of the key work streams, we're pursuing over the next few years under the four transformation pillars that we've previously identified versus the work we're doing around our supply chain, while we've called network automation and optimization, we formally announced at Centralia, Washington will be the first loan.

First is the work we're doing around our supply chain. What we've called network automation and optimization. We formally announce that Centrelio Washington will be the first location where Symbodix Automation Technology will be installed.

Patients, whereas symbiotic and automation technology will be installed.

On our last call, we also stated that we began the design phases for the next two installs and expect to be running up to four of these projects simultaneously as we further expand the automation levels in our distributions.

On our last call. We also stated that we begun the design phases for the next two installs and expect to be running up to four of these projects simultaneously as we further expand the automation levels in our distribution system will take learnings from Centralia to fine tune the implementation of ensuing Prague.

We'll take learnings from Centrelia to fine tune the implementation of ensuing projects prior to completion and expect to accelerate the pace of installs as we gain confidence in our processes and the intricacies of assistance.

<unk> prior to completion and expect to accelerate the pace of installs as we gain confidence in our processes and the intricacies of the system <unk>.

Collectively when we complete, these projects are designed to increase our capacity, improve our service levels, enhance the customer experience, make for a safer workplace, and importantly, create meaningful operating efficiency.

Collectively when we complete these projects are designed to increase our capacity improve our service levels enhance the customer experience make for a safer workplace and importantly create meaningful operating efficiencies.

We're also continuing our evaluation of fast and slow moving facilities and regional DCs and how best to migrate our network in a way that will further enhance our capacity, lower our cost structure, and optimize DC footprints and working capital levels.

We're also continuing our evaluation of fast and slow moving facilities and regional Dcs and how best to migrate our network in a way that will further enhance our capacity lower our cost structure and optimize D C footprints and working capital levels.

Next is our work around commercial value creation, which aims to enable us to generate more profitable and scalable growth through UNFI, and a more streamlined experience for our customers' suppliers. We see significant potential to increase the visibility of profitable growth opportunities and data-driven, real-time insights across our ecosystem.

Next is our work around commercial value creation, which aims to enable us to generate more profitable and scalable growth through UNFI and a more streamlined experience for our customers and suppliers, we see significant potential to increase the visibility of profitable growth opportunities and data driven.

Real time insights across our ecosystem.

said simply, our suppliers want to see our customers in their shoppers better so they can make productive investments in sales, merchandising, and marketing opportunities across the 30,000 plus retail locations that make up our customer.

Said simply our suppliers want to see our customers and their shoppers better. So they can make productive investments in sales merchandising and marketing opportunities across the 30000, plus retail locations that make up our customer base.

Our customers want them to do so. And UNFI's opportunity is to build the capabilities necessary for this to happen seamlessly.

Our customers want them to do so and unifies opportunity is to build the capabilities necessary for this to happen seamlessly.

We're also focused on building related capabilities and streamlining legacy processes to help customers and suppliers grow faster and more profitably together. And to ensure that UNFI is rewarded appropriately for the value created.

We're also focused on building related capabilities and streamlining legacy processes to help customers and suppliers grow faster and more profitably together and to ensure that UNFI is rewarded appropriately for the value created.

Over time, our goal is to evolve our go-to-market programs to reduce complexity and drive accelerated supplier-brand growth with and for UNFI customers.

Over time, our goal is to evolve our go to market programs to reduce complexity and drive accelerated supplier brand growth with and for UNFI customers. The third area of our transformation focus is enhancing our digital offering which is another way that we can more effectively connect our customers.

The third area of our transformation focus is enhancing our digital offering, which is another way that we can more effectively connect our customers and suppliers to grow their businesses collectively and profitable.

<unk> and suppliers to grow their businesses collectively and profitably.

Digital transformation is the key enabler to fully activate the commercial opportunities in our ecosystem. Opportunities that many of the large retail chains are activating now. While we will be providing more specifics as we progress in digital, let me give you a quick example of early progress in this area to help illustrate how important elements of this plan are coming to life.

Digital transformation is the key enabler to fully activate the commercial opportunities in our ecosystem opportunities that many of the large retail chains are activating now.

While we will be providing more specifics as we progress in digital.

Let me give you a quick example of early progress in this area to help illustrate how important elements of this plan are coming to life.

Our newest value added supplier program, UNFI Insights powered by Chris.

Our newest value added supplier program UNFI insights powered by crisp provides suppliers with a granular understanding and sell through data across natural and conventional channels directly through the my UNFI dot com supplier portal.

provides suppliers with a granular understanding of cell-through data across natural and conventional channels directly through the myunfi.com supplier portal.

The UNFI Insights team is dedicated to uncovering the latest data and actionable intelligence.

The UNFI insights team is dedicated to uncovering the latest data and the actionable intelligence, so suppliers and customers can see each other and their shoppers and drive mutual benefits.

So suppliers and customers can see each other and their shoppers and drive mutual benefits.

We have seen solid early adoption and positive initial feedback from suppliers of this early stage program.

And finally, our fourth transformation program is the work of technology infrastructure, unification, and modernization, where we plan to reduce the number of systems used to run the business across areas such as finance, warehouse management, procurement, promotions, and data management.

And finally, our fourth transformation program is the work of technology infrastructure unification and modernization, where we plan to reduce the number of systems used to run the business across areas, such as finance warehouse management procurement promotions and data management.

We're planning for our first go live implementation of a common warehouse management system, accompanied by what we're calling hyper support to ensure success, which will serve as the pilot for the continued rollout of a single solution.

As we've talked about before, this is consistent with our goal to simplify the business model, to lower our cost structure and improve the customer experience.

As we've talked about before this is consistent with our goal to simplify the business model to lower our cost structure and improve the customer experience.

Common platforms are expected to lead to enhanced efficiencies, more uniform data sets, and improved business management.

Common platforms are expected to lead to enhanced efficiencies more uniform datasets and improved business management.

Similar work streams are moving forward in other parts of the business guided by executive leaders and cross-functional teams.

Similar work streams are moving forward in other parts of the business guided by executive leaders and cross functional teams.

While we expect our transformation program to be a multi-year endeavor, we're already making progress adding incremental growth and profit accretive drivers to our business while also making long-term structural improvements to our efficiency processes and costs.

While we expect our transformation program to be a multiyear endeavor, we're already making progress, adding incremental growth and profit accretive drivers to our business. While also making long term structural improvements to our efficiency processes and cost base.

So in summary, I'd want to make sure that I leave you with three things.

So in summary.

I'd want to make sure that I leave you with three things.

First, fiscal 2024 is an important year as we emerge from three years of unprecedented volatility and look to reset our profitability in the near term while investing in critical foundational skills, infrastructure and capabilities that we believe will accelerate growth in sales and profitability for UNFI our customers and our suppliers.

First fiscal 2024 is an important year as we emerge from three years of unprecedented volatility and look to reset our profitability in the near term while investing in critical foundational skills infrastructure and capabilities that we believe will accelerate growth in sales and profitability for <unk>.

UNFI, our customers and our suppliers.

There have been and continue to be challenges that impact the entire food industry.

Second there have been and continue to be challenges that impact the entire food industry.

But we're taking decisive action, to strengthen the business and drive improved performance.

But we're taking decisive action to strengthen the business and drive improved performance.

We run a complex business and know the path forward will take time, tenacity and discipline and that will need to be adaptable along the way.

We run a complex business and know the path forward will take time tenacity and discipline.

And that will need to be adaptable along the way.

But we also know the way to fully realize our vision and maximize shareholder value creation is through a proactive combination of near term action and the multi-year transformation path that I've had.

But we also know the way to fully realize our vision and maximize shareholder value creation is through a proactive combination of near term action and the multiyear transformation path that I've outlined and.

And finally, with the steps we are taking to continue to strengthen both our leadership team and our board, we are positioning our company to capture the significant profitable growth opportunities that lie ahead.

And finally with the steps we are taking to continue to strength in both our leadership team and our board we are positioning our company to capture the significant profitable growth opportunities that lie ahead, we look forward to updating you on our progress along the way and let me now turn the call over to John for his insights on our <unk>.

We look forward to updating you on our progress along the way. And let me now turn the call over to John for his insights on our finance.

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Thank you, Sandeod. Good morning, everyone. As Sandeod noted, we finished the year toward the upper half of the outlook provided on our third quarter call, and our focus continues to be on driving improved capabilities, operational efficiencies, and near-term profitability.

Thank you Sandy and good morning, everyone. As Sandy noted we finished the year towards the upper half of the outlook provided on our third quarter call and our focus continues to be on driving improved capabilities operational efficiencies and near term profitability.

Today I will provide commentary on fourth quarter results, our balance sheet and capital structure, and our outlook for fiscal 2020.

I will provide commentary on fourth quarter results, our balance sheet and capital structure and our outlook for fiscal 2024.

With that, let's review our Q4 results. Turning this slide nine, fourth quarter net sales grew by 2% and totaled more than $7.4 billion. Primarily reflecting inflation and new business wins, which more than offset a decline in unit volume. Sales from our three primary wholesale channels grew by nearly 3%, including the impact of inflation of nearly 6% with supernatural growing the fastest at over nine percent. With that, let's review our Q4 results.

With that let's review, our Q4 results turning to slide nine fourth quarter net sales grew by 2% and totaled more than $7 4 billion, primarily reflecting inflation and new business wins, which more than offset a decline in unit volume sales from our three primary wholesale channels grew by nearly 3%.

Including the impact of inflation of nearly 6% with supernatural growing the fastest at over 9%.

This includes incremental volume from new customers added over the last year, additional categories and new store openings and supernatural, an increased item and category penetration with existing customers.

This includes incremental volume from new customers added over the last year additional categories, and new store openings and supernatural and increased item in category penetration with existing customers.

Unit volumes remain negative, but improved sequentially by about 100 basis points from Q3, and were slightly better than Nielsen's total U.S. food volume changes, which is representative of performance for the grocery industry as a whole. Retail sales declined 2% compared to last year's fourth quarter, primarily driven by lower unit volumes, partly offset by higher average unit retail price.

Unit volumes remain negative, but improved sequentially by about 100 basis points from Q3 and were slightly better than Nielsen's total U S. Food volume changes, which is representative of performance for the grocery industry as a whole retail sales declined 2% compared to last year's fourth quarter, primarily driven by lower unit volume.

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We've continued to experience pressure across our retail footprint, primarily located in the Minneapolis St. Paul Marks.

We've continued to experience pressure across our retail footprint, primarily located in the Minneapolis, St. Paul market due in large part the tightening consumer demand reductions in government support programs and more intense competition on price flipping to slide 10, adjusted EBITDA for the fourth quarter totaled $93 million, which was.

Do in large part the tightening consumer demand, reductions in government support programs, and more intense competition on price. Flipping to slide 10, adjusted EBITDAF for the fourth quarter totaled $93 million, which was at the top half of the implied range we provided in June . This compares to $213 million in the year ago fourth quarter.

The top half of the implied range we provided in June this.

This compares to $213 million in the year ago fourth quarter.

As we indicated would be the case with our updated outlook, the biggest driver for the decline in Q4 year-over-year profitability was lower levels of procurement gain opportunities, resulting from decelerating inflation. This resulted in a reduction in our gross profit rate prior to the life-o-charge in both years of approximately 175 basis points, or more than $100 million.

As we indicated would be the case with our updated outlook. The biggest driver for the decline in Q4 year over year profitability was lower levels of procurement gain opportunities, resulting from decelerating inflation. This resulted in a reduction in our gross profit rate prior to the LIFO charge in both years of approximately 100.

75 basis points or more than $100 million, we also experienced higher levels of shrink compared to last year's fourth quarter, which we are actively addressing our fourth quarter operating costs as a percent of sales were flat to last year.

We also experienced higher levels of strength compared to last year's fourth quarter, which we are actively addressing. Our fourth quarter operating costs as a percentage sales were flat to last year.

However, last year included approximately $14 million in higher performance-based incentive compensation expense compared to this year.

However, last year included approximately $14 million and higher performance based incentive compensation expense compared to this year.

Excluding this performance-based incentive compensation expense, our operating expense rate increased by about 25 bases.

Excluding this performance based incentive compensation expense, our operating expense rate increased by about 25 basis points.

A good portion of this came from higher health benefit costs driven by a higher level of claims, representing a more normalized run rate as associates return to more pre-pandemic medical visits. Within our retail segment, adjusted EBITDA decreased to $4 million, primarily due to margin investments intended to drive traffic and basket size improvements, as well as higher than normal costs associated with recently opened stores.

A good portion of those came from higher health benefit costs, driven by a higher level of claims representing a more normalized run rate as associates returned to more pre pandemic medical visits within our retail segment adjusted EBITDA decreased to $4 million, primarily due to margin investments intended to drive traffic and basket.

Operator: Any background noise? After the speakers remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press the star one. Thank you.

Size improvements as well as higher than normal costs associated with recently opened stores.

During the quarter, we opened one new store, bringing total stores open during fiscal 2023 to six stores. Our Gap EPS for Q4 was a loss of $1.15, which included $0.90 in aftertax costs and expenses composed primarily of life owe, restructuring, and business transformation. Our adjusted EPS told us a loss of $0.25 compared to $1.27 of income in last year's fourth quarter.

During the quarter, we opened one new store, bringing total stores opened during fiscal 2023 to six stores. Our GAAP EPS for Q4 was a loss of $1 15, which included 90 and after tax costs and expenses composed primarily of LIFO restructuring and business transformation or adjusted <unk>.

Steve Bloomquist: Steve Bloomquist, Vice President of Investor Relations, you may begin your conference.

Steve Bloomquist: Good morning, everyone, and thank you for joining us on UNIFI's fourth quarter fiscal 2023 earnings conference call. By now you should have received a copy of the earnings release issued earlier this morning. The press release and earnings presentation, which management will speak to, are available under the investor section of the company's website. 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.

<unk> totaled a loss of 25 compared to $1 27 of income in last year's fourth quarter.

This decline is primarily attributable to the lower adjusted EBITDA compared to last year, as well as lower non-cash pension income and higher DNA, which was driven by elevated levels of investment, which is expected to continue. Moving to slide 11, we finished the quarter with total outstanding net debt of just under $1.95 billion, a $70 million decrease compared to last quarter.

This decline is primarily attributable to the lower adjusted EBITDA compared to last year as well as lower noncash pension income and higher DNA, which was driven by elevated levels of investment which is expected to continue moving to slide 11, we finished the quarter with total outstanding net debt of just under one point.

Steve Bloomquist: Sandy and John will provide a strategy in business update after which we will take your questions. Before we begin, I'd like to remind everyone the 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 made differ materially from the results discussed in these forward looking statements.

Nine $5 billion, a $70 million decrease compared to last quarter.

This is our lowest net debt balance since the October 2018 closing of our Super Value acquisition, reflecting our strong efforts to prioritize debt reduction over the past several years.

This is our lowest net debt balance since the October 2018 closing of our Supervalu acquisition, reflecting our strong efforts to prioritize debt reduction over the past several years.

Our net debt to adjusted EBITDA leverage ratio finished fiscal 2023 at 3.0 times. Turning to slide 12, let's move to our outlook for fiscal 2024, which will be a 53-week year.

Our net debt to adjusted EBITDA leverage ratio finished fiscal 2023 at 3.0 times turning to slide 12, let's move to our outlook for fiscal 2024, which will be a 53 week year.

From a reporting perspective, our fourth quarter will have one additional week making it a 14-week quarter. We expect fiscal 2024's full-year net sales to grow approximately 3% or $900 million at the midpoint of the $30.9 to $31.5 billion range we've provided. This includes an approximate $600 million or 2% benefit from the 53rd week.

From a reporting perspective, our fourth quarter will have one additional week, making it a 14 week quarter, we expect fiscal 2020 Four's full year net sales to grow approximately 3% or $900 million at the midpoint of the $39 billion to $31.5 billion range, we provided.

Steve Bloomquist: And lastly, I'd like to point out that during today's call, management will refer to certain non-gap financial measures. Definitions and reconciliations to the most comparable gap financial measures are included in our press release and the end of our earnings presentation.

Sandy Douglas: I'd like to now 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 fourth quarter call.

This includes an approximate 600 million dollar or 2% benefit from the 50 <unk> week.

Our growth will include the addition of new business from customers added in fiscal 2023. We have yet to cycle the continued growth of selling more products to existing customers. New customer wins and anticipated strong growth within service.

Our growth will include the addition of new business from customers added in fiscal 2023, we have yet to cycle. The continued growth of selling more products to existing customers new.

Sandy Douglas: In my remarks this morning, I'll provide a brief overview of our results, the operating environment and then provide an update on the actions that we're taking to continue to reset and restore our profitability and improve the value we create for our customers. Suppliers and in parallel are shareholders. As you saw in our release, our fourth quarter results for sales and capital expenditures were in line with the updated outlook we provided in June.

New customer wins and anticipated strong growth within services.

We expect full-year inflation to continue to moderate and be in the low to mid-single digits, which is a decline compared to the over 9% reflected in our fiscal 2023 resume.

We expect full year inflation to continue to moderate and be in the low to mid single digits, which is a decline compared to be over 9% reflected in our fiscal 2023 results.

We're also expecting ongoing near-term volume headwinds as consumers continue to adapt to higher costs across their household budget.

We're also expecting ongoing near term volume headwinds as consumers continued to adapt to higher costs across their household budgets we.

Sandy Douglas: While adjusted EPS and adjusted EBITDA finished towards the high end of their respective ranges. UNFI has not been immune to the post-COVID post-inflation challenges that the entire food industry is facing. Despite these challenges, we remain confident in our multi-year value creation opportunity and our plan to create and capture it. We are seeking to build upon our strengthening foundation and market leadership position by investing in the necessary capabilities to create a differentiated technology enabled food retail services company that generates sustainable growth, profitability, and shareholder value.

We expect fiscal 2024's full year adjusted EBITDA to be in $450-$550 million ring.

We expect fiscal 2024 as full year, adjusted EBITDA to be in $450 million to $550 million range.

This decline primarily reflects approximately $125 million in lower anticipated procurement gains, primarily in last year's first and second quarters, resulting from the continued decline in the number of supplier price increases compared to the first half of fiscal 2023. It also includes normalized performance based incentive compensation accrual of approximately $62 million.

This decline primarily reflects approximately $125 million and lower anticipated procurement gains primarily in last year's first and second quarters, resulting from the continued decline in the number of supplier price increases compared to the first half of fiscal 2023. It also includes normalized perf.

<unk> based incentive compensation accrual of approximately $62 million. This compares to fiscal 2023, when no material performance based incentive compensation was paid to eligible associates.

This compares to fiscal 2023 when no material performance based in CINNF compensation was paid to eligible associates.

Partly offsetting these items is the estimated contribution of $9 million from the 53rd week.

Sandy Douglas: To this end this morning, we also announced a refreshment of our board adding three new members with deep food industry, business transformation, and investment stewardship experience, who we believe will be highly valuable in guiding our customer and supplier focused multi-year transformation plan in a disciplined manner that generates compelling shareholder returns. UNFI has a strong industry leadership position with an expansive supply chain as the largest wholesale grocery distribution and value added food retail services provider in North America, with nearly 11,000 suppliers and manufacturers serving over 30,000 retail outlets.

Offsetting these items is the estimated contribution of $9 million from the 50 <unk> week as well as the near term profitability drivers Sandy discussed earlier with nearly half of the actions addressing profitability from cost savings, including our recent regional reorganization and other SG&A and operating expense rationalization.

As well as the near-term profitability drivers, Sandy discussed earlier, with nearly half of the actions addressing profitability from cost savings, including our recent regional reorganization and other S-GNA and operating expense rationalization.

And the remainder being driven by skew rationalization and contract review benefits.

And the remainder being driven by SKU rationalization and contract review benefits. Additionally, as Sandy mentioned, we expect there could be some upside from shrink improvement as we operationalize and scale process improvements during fiscal 2024 from a cadence perspective, we would expect our first quarter to be the lowest of the year end.

Additionally, as Sandy mentioned, we expect there could be some upside from shrink improvement as we operationalize and scale process improvements during fiscal 2024.

From a cadence perspective, we would expect our first quarter to be the lowest of the year and absolute adjusted EBITDA dollar terms, and likely to be similar to the adjusted EBITDA level we generated during Q4 2023.

Absolute adjusted EBITDA dollar terms and likely to be similar to the adjusted EBITDA level, we generated during Q4 2023.

Sandy Douglas: And the long-term growth opportunity in pipeline we see in our core business remains significant within a $140 billion total addressable market for our core wholesale business. However, considerable progress remains to be made modernizing and unifying our technology and network platforms as previous plans have taken longer than expected as the company faced the onset of the COVID pandemic, unprecedented inflation and supply chain disruptions over the past few years. These events and their enduring consequences have brought cost increases across our total customer service system as we serve our large, diverse, and growing customer base.

Our first quarter is expected to have the largest percentage decline compared to last year as we cycle last year's elevated level of procurement gains and further build the benefits of our near term profitability initiatives. Finally, we expect fiscal 2024 as full year adjusted EPS to be in the range of 88 loss to 38 cents of adjust.

Finally, we expect fiscal 2024's full year adjusted EPS to be in the range of 88 cents lost to 38 cents of adjusted net income.

Net income.

This primarily reflects lower adjustity but the as well as lower non-cash pension income and higher DNA.

This primarily reflects lower adjusted EBITDA as well as lower noncash pension income and higher DNA.

It also includes about $21 million of higher net interest expense, primarily resulting from higher expected interest rates, and ABL balances during the year, and an additional week of interest.

It also includes about $21 million of higher net interest expense, primarily resulting from higher expected interest rates and ABL balances during the year and an additional week of interest expense.

More than 65% of our debt is currently fixed rate, taking into account our approximately $800 million of hedges in place, as well as our senior notes.

More than 65% of our debt is currently fixed rate taking into account, our approximately $800 million of hedges in place as well as our senior notes, we expect to invest approximately $400 million in the business in fiscal 2024 with a primary driver of the increase compared to fiscal 2023 being.

Sandy Douglas: In previous quarters, we've outlined a four-part plan to transform and realize the full value of our platform, including details on how we plan to strengthen our supply chain for our retailers and suppliers through distribution network automation and optimization, introducing smarter technology systems, and investing in operational excellence and efficiency. We believe that we will further differentiate UNFI from our peers by complementing our profitable growth strategy with our operational transformation. And specifically, we expect to execute our transformation in a manner that restores and grows our profitability to sustainably improve shareholder value creation. We see significant sales and profit growth opportunities, so significant that we are unwilling to be incremental in our approach as we drive, change, and investment.

We expect to invest approximately $400 million in the business in fiscal 2024, with a primary driver of the increase compared to fiscal 2023, being investments in our transformation agenda, with the largest component going towards network optimization and automation.

And our transformation agenda, with a largest component going towards network optimization and automation.

This also includes investments to improve critical infrastructure as well as drive higher profitability and growth in the future.

Turning to the summary on slide 13, we expect fiscal 2024 will be a pivotal year for our transformation and do a more modernized technology enabled partner for our customers and suppliers.

Turning to the summary on slide 13, we expect fiscal 2024 will be a pivotal year for our transformation into a more modernized technology enabled partner for our customers and suppliers.

While we expect this will be a multi-year endeavor, we are committed to making progress as quickly as possible and look forward to updating our shareholders on this path. We are confident we're taking the appropriate actions to best position UNFI for improved efficiency and profitability, enhanced growth, and long-term success.

While we expect this will be a multi year endeavor, we are committed to making progress as quickly as possible and look forward to updating our shareholders. On this path. We are confident we're taking the appropriate actions to best position UNFI for improved efficiency and profitability enhanced growth and long term success, we strongly believe that combining a <unk>.

Sandy Douglas: Our transformation agenda is challenging and it will take time. In the meantime, our management team is focused on working through the near-term environmental challenges, resetting the business, and taking action to turn profitability around, while simultaneously investing in the business to sustain and significantly accelerate profitable growth over time. While we lay the groundwork for our transformation, the management team is also taking decisive action to revamp and lower our sustaining cost structure in the near-term.

We strongly believe that combining a more dynamic and nimble UNFI with our industry leading position will enable us to drive meaningful and sustainable shareholder value creation. With that operator, please open a-

Dynamic and nimble UNFI with our industry, leading position will enable us to drive meaningful and sustainable shareholder value creation with that operator. Please open the lines for questions.

Sandy Douglas: The benefits from these more easily executable profitability drivers that I outlined on our last call will largely go towards offsetting higher operating costs that include additional labor and supply chain costs and the acceleration of work on our transformation initiatives. We also believe this transformation, including our planned investments to modernize and optimize our infrastructure, will help us to create a more nimble, streamlined, and responsive company.

At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. And your first question today comes from a line of Mark Carden from UBS. Your line is open.

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad and your first question today comes from the line of Mark Carden from UBS. Your line is open.

Morning, thanks so much for taking our questions. So looking to 2024, you're laughing a few quarters of lower inventory gains beginning in 2Q, your cost savings sound like they're falling nicely into place. Still, your guidance was assuming a meaningful step down in profitability.

Good morning. Thanks, so much for taking our question. So looking to 2024, Youre lapping a few quarters of lower inventory gains beginning in <unk>.

And your cost savings sound like they're falling nicely into place still your guidance is assuming a meaningful step down in profitability.

So what's changed the most relative to where your expectations may have been three months ago? How much of its macro driven and to what extent are you building in some conservatism just given all the initiates that you have in place?

What's changed the most relative to where your expectations may have been three months ago, how much of it is macro driven and to what extent are you building in some conservatism just given all the initiatives that you have in place.

Yeah, Mark, business handy. Thanks for your question. I guess we're looking at several factors. If you look at the fourth quarter and consider the momentum of the business, the addition back of performance incentives for executives, you get to a fairly low run rate. You add back then the actions that we've taken, most of which we've already captured, and you get sort of in the range of our midpoint.

Yes, Mark this is Andy Thanks for your question I guess, we're looking at several factors. If you look at the fourth quarter and consider the momentum of the business. The addition backup performance incentives for executives you get to a fairly low run rate.

Sandy Douglas: Let me briefly report on the near-term actions I previously out. Since our third quarter call, we've captured nearly $100 million of benefits on a run-rate basis. From work around our organizational structure, S-GNA spending and wholesale efficiency initiatives. Having completed a deeper dive, we now believe a greater opportunity exists than we previously thought to continue to improve and become more efficient. As such, we're increasing the near-term value creation benefit that from $100 million called out in June to nearly $150 million.

You add back then the actions that we've taken most of which we've already captured.

Get sort of in the range of our midpoint.

The external environment continues to be pretty soft, so I think we're going to manage our way this year, and we're taking a number of initiatives to try to optimize the results. But the net of all those factors gave us the range that we provided today.

The external environment continues to be pretty soft so.

We're going to manage our way this year and we're taking a number of initiatives to try to optimize the results, but the net of all of those factors gave us the range that we provided today.

Yeah, that's helpful. And then what are you seeing from your independent grosser base? Would you expect the pace of customer migration to mass to pick up in 2024 and further pressure to channel? And if so, how does that typically impact a man's and value-ladded services and private label?

Got it that's helpful. And then what are you seeing from your independent Grocer base would you expect the pace of customer migration to mask the pick up in 2024 and further pressured the channel and if so how does that typically impact demand for value added services and private label.

Sandy Douglas: These amounts do not include the potential opportunity from improving our shrink rate, which, as I mentioned on our last call, is meaningfully higher than the pre-pandemic run rate and which we expect to improve over the course of the year as we operationalize process improvements.

Yeah, I mean, you can't really generalize about independence. There's some incredibly strong environment ones and then some they're struggling. This community is the focus of our whole product service makeup. I mean, it's our job to help them succeed.

Yes.

I mean, you can't really generalize about independence, there is some incredibly strong and vibrant ones and then some that are struggling.

Sandy Douglas: These value creation initiatives are expected to benefit fiscal 2024, which will be an important year for UNFI as we take action to reset and begin to accelerate and expand our transformation program, including critical investments to our supply chain and technology infrastructure.

This community is the focus of our whole product service makeup.

Job to help them succeed I think broadly compared to independents and syndicated data where our customers are outperforming the market by a small margin.

I think broadly compared to independence and syndicated data where art customers are outperforming the market by a small margin.

But we've got a lot of programs and you mentioned two of them, brands and services that are designed to provide independence with a great own brand program at multiple price points and then services that help them save money and compete better.

Sandy Douglas: Let me provide some more details on our transformation program progress and our plan going forward. Let me point you to slide six, which includes the summary of our transformation plan to truly leverage the power of our competitive advantages through what we're calling one UNFI. We're working to modernize and unify our technologies, infrastructure, and processes to drive better service for our customers and suppliers as well as improve our internal analytical capabilities to guide the company and help us be as dynamic and responsive as possible.

But we've got a lot of programs and you mentioned two of the brands and services that are designed to provide independence with a great owned brand program at multiple price points, and then services that help them save.

Save money and compete better.

In the end, their success is the most important priority we have.

And the and their success is the most important priority we have.

Great. Thanks, so much good luck guys.

Thanks.

Your next question comes from a line up, giant Heimbuckle from Guggenheim Securities. Your line is open.

Your next question comes from the line of giant Heimbach <unk> from Guggenheim Securities. Your line is open.

a sandy maybe talk to you know what procurement gains were pre COVID-19 in a normal environment right it looks like I don't know maybe they got up to 250 or 300 million

Hey, Shannon.

Talk to what procurement gains were pre COVID-19 in a normal environment right. It looks like I don't know, maybe they got up to $250 to $300 million at.

Sandy Douglas: Slide seven shows a broad roadmap of the key work streams we're pursuing over the next few years under the four transformation pillars that we previously identified. First is the work we're doing around our supply chain, what we've called network automation and optimization. We formally announced that Centraleo Washington will be the first location where Symbotic's automation technology will be installed. On our last call, we also stated that we begun the design phases for the next two installs and expect to be running up to four of these projects simultaneously as we further expand the automation levels in our distribution system.

at the peak, right? Was that all just gains on stuff that was in your inventory, or was there a lot of forward buy, right? That went along with that. And you know, when you think about that, does that then, you know, what you would earn right over the past couple of years, right? Sort of an EBITDA margin in the upper twos.

At the peak right was that all just.

Gains on stuff that was in your inventory or was there a lot of forward buy right that went along with that and when you think about that does that then.

What you would earn right over the past couple of years right sort of an EBITDA margin in the upper twos.

Is that no longer attainable any time, right? Or over a very long period of time, because those inventory gains are just gonna be very diminimous the next couple of years.

Is that no longer obtainable any.

Time right.

Or over very long period of time.

Because there was inventory gains are just going to be very de.

The minimus.

Sandy Douglas: We'll take learnings from Centraleo to fine tune the implementation of ensuing projects prior to completion and expect to accelerate the pace of installs as we gain confidence in our processes and the intricacies of the system collectively when we complete these projects are designed to increase our capacity, improve our service levels, enhance the customer experience, make for a safer workplace, and importantly, create meaningful operating efficiencies. We're also continuing our evaluation of fast and slow moving facilities and regional DCs and how best to migrate our network in a way that will further enhance our capacity, lower our cost structure and optimize DC footprints and working capital levels.

Couple of years.

John Sandy, let me come at this a couple of ways and then I'll ask John Howard to add to my comments. Definitely we saw an out of pattern increase in procurement gains beginning in January of 22 and that

John Sandy let me come at this a couple of ways.

As John Howard.

To add to my comments.

Lee we saw out of pattern increase in procurement gains beginning in January of 'twenty, two and that last for a year before the year over year.

last year before the year over here.

disinflation started and that generated numbers in line with your estimates. And that was the out of pattern part. You've got really two things going on there. You've got actual price increase event.

Disinflation started in that that generated numbers in line with your estimates.

And that was the out of pattern part you've got really two things going on there you've got actual price increase event.

both the frequency and depth, and then you have promotions. And we saw decline in promotions while prices were going way up. What we expect to happen is that as price increase events decline, we expect promotions to come back, although they've done so very slowly.

The frequency and depth and then you have promotions.

And we saw a decline in promotions, while prices were going way up what we expect to happen is that as price increase events declined we expect promotions to come back although they've done so very slowly.

Sandy Douglas: Next is our work around commercial value creation, which aims to enable us to generate more profitable and scalable growth through UNFI and a more streamlined experience for our customers and suppliers. Our customers want them to do so, and UNFI's opportunity is to build the capabilities necessary for this to happen seamlessly. We're also focused on building related capabilities and streamlining legacy processes to help customers and suppliers grow faster and more properly together and to ensure that UNFI is rewarded appropriately for the value created.

But as we look forward and we see units continuing to be soft, the consumer to be stressed.

But as we look forward and we see units continuing to be soft the consumer to be stressed.

and inflation now returning to lower levels, we definitely expect consumer price companies to start promoting more. They'll need to in order to drive sales. And so we'll see a positive there. The out of pattern high number of price events have kind of returned back to more normal levels. We're still cycling the higher ones as John mentioned in his comment.

And inflation now returning to lower levels, we definitely expect consumer products companies to start promoting more.

They will need to in order to drive sales and so we will see a positive there.

The out of pattern high number of price events has kind of returned back to more normal levels, we're still cycling the higher ones as John mentioned in his comments.

uh... but net net uh... from a run rate perspective we'd expect it to be slightly positive as promotions come back John do you want to add anything no i think that spot on the only thing is to put some some numbers around that twenty three to twenty four impact uh... it's gonna be about a hundred twenty five million dollars that we've course factored into our guidance and most of that is gonna be in the first two quarters of f-y twenty four is we cycle those those gain that were still happening in the first half of f-y twenty three

But net net net from a run rate perspective, we'd expect it to be slightly positive as promotions come back John do you want to add anything no I think thats spot on the only thing just to put some numbers around that 23% to 24 impact.

Going to be about $125 million that we have of course factored into our guidance and most of that is going to be in the first two quarters of FY 'twenty four as we cycle. Those those gains that were still happening in the first half of FY2023.

Sandy Douglas: Over time, our goal is to evolve our go-to-market programs to reduce complexity and drive accelerated supplier brand growth with and for UNFI customers. The third area of our transformation focus is enhancing our digital offering, which is another way that we can more effectively connect our customers and suppliers to grow their businesses collectively and profitably. Digital transformation is the key enabler to fully activate the commercial opportunities in our ecosystem, opportunities that many of the large retail chains are activating now.

Great, and then maybe second thing, right? So leverage is gonna go from three to four times, right, turns.

Great and then maybe second second thing right. So leverage is going to go from three to four.

<unk> turns this year when you'd say that's temporary yeah. I think there was some commentary on the with the.

this year, let me say that's temporary. I think there was some contrarian with the, with the board changes.

With the board changes.

of strengthening the balance sheet. So do you feel a need to do that urgently? And then what do you do? I know you you securitize receivables before. I don't know if you want to do that. I don't know if you want to sell retail right at a low level. You know, I don't know what the options are, right? To strengthen the balance sheet short term.

Strengthening the balance sheet. So do you feel a need to do that.

Urgently and then what do you do I know you securitized receivables before I don't know if you want to do that.

Don't know if you want to sell retail right at or at a low level.

I don't know what the options are right to strengthen the balance sheet short term.

Sandy Douglas: While we will be providing more specifics as we progress in digital, let me give you a quick example of early progress in this area to help illustrate how important elements of this plan are coming to life. Our newest value added supplier program, UNFI Insights, powered by crisp, provides suppliers with a granular understanding of cell-through data across natural and conventional channels directly through the MyUNFI.com supplier portal. The UNFI Insights team is dedicated to uncovering the latest data and actionable intelligence so suppliers and customers can see each other and their shoppers and drive mutual benefits.

John , I'll answer that strategically and then I'll let John pick the part that beats his.

Hey, John I'll answer that strategically and then I'll, let John pick.

Apart the pieces.

The refreshment of our board from our point of view is gonna strengthen our offense. We have a transformation plan and the strategy that we're investing in and that we are.

The refreshment of our board from our point of view is going to strengthen our offense.

We have a transformation plan and the strategy that we're investing in and that we are.

Excited about and confident that it's gonna make a significant difference. Now we're in the investment phase.

Excited about and confident that it's going to make a significant difference now we're in the investment phase.

So it's obviously out there in the future that the benefits will come, but I think there's a board, new members and old members alike, we're aligned on the importance of that.

So it's it's obviously out there in the future that the benefits will come but I think as a board new members and.

And all members alike, we are aligned on the importance of that what the financial review with the New Board and a new skill sets is just going to help us make sure that we're sweating every decision we make in the most detailed way to ensure that not only are we driving knee.

What the financial review with the new board and the new skill sets is just going to help us make sure that we're sweating every decision we make in the most detailed way to ensure that not only are we driving me.

Sandy Douglas: We have seen solid early adoption and positive initial feedback from suppliers of this early stage program. And finally, our fourth transformation program is the work of technology infrastructure, unification, and modernization where we plan to reduce the number of systems used to run the business across areas such as finance, warehouse management, procurement, promotions, and data management. We're planning for our first go live implementation of a common warehouse management system accompanied by what we're calling hyper support to ensure success, which will serve as the pilot for the continued rollout of a single solution.

transformation strategy, but we're also maximizing returns to shareholders on a strong basis.

Transformation strategy, but we're also maximizing returns to shareholders.

Our strong basis, we have strong liquidity, we have the resources, we need to invest in the plan, but we want to make sure that every stakeholder ars customers suppliers and shareholders are getting the best possible return.

Strong liquidity, we have the resources we need to invest in the plan, but we want to make sure that

Every stakeholder or our customers, suppliers and shareholders are getting the best possible return.

John No.

not i think that's that's right i think the uh... the way we think about that leverage uh... just a little more granular John is uh... you're going to be taking a little higher than where we were in twenty three uh... but i don't want to lose sight of the focus that we have had over the past few years on reducing debt uh... since the acquisition we paid down one point four billion dollars worth of debt

I think that's right.

I think the way, we think about that leverage just a little more granular John is.

Target end up taking a little higher than where we were in 2003.

Sandy Douglas: As we've talked about before, this is consistent with our goal to simplify the business model to lower our cost structure and improve the customer experience. Common platforms are expected to lead to enhanced efficiencies, more uniform datasets, and improved business management. Similar work streams are moving forward in other parts of the business, guided by executive leaders and cross-functional teams. While we expect our transformation program to be a multi-year endeavor, we're already making progress, adding incremental growth and profit accretive drivers to our business, while also making long term structural improvements to our efficiency processes and cost space.

But I don't want to lose sight of the focus that we've had over the past few years on reducing debt since the acquisition, we've paid down $1 $4 billion worth of debt since the acquisition getting that total debt down to that below $2 billion.

since the acquisition, getting that total debt down to that below $2 billion. So we are continuing to focus on that as part of our overall capital strategy.

So we are continuing to focus on that as part of our overall capital strategy.

Thank you.

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

Your next question comes from the line of Lee at Jordan from Goldman Sachs. Your line is open.

Thank you, good morning. I first had a couple questions on cost savings. Just wanted to touch on the contract review part of the original 100 million. Is it fair to say that you're fully done reviewing your all of your contracts at this point and that they're fully consistent? Just any update on that. And then the second piece is around the incremental 50 million that you've found since last quarter. Just

Thank you good morning.

First I had a couple of questions on cost savings just wanted to touch on the contract review part of the original $100 million is it fair to say that you are fully done reviewing your following of your contracts at this point and that they are fully consistent just any update on that and then the second piece is around the incremental $50 million.

Sandy Douglas: So in summary, I'd want to make sure that I leave you with three things. First, fiscal 2024 is an important year as we emerge from three years of unprecedented volatility and look to reset our profitability in the near term, while investing in critical foundational skills, infrastructure, and capabilities that we believe will accelerate growth in sales and profitability for UNFI, our customers, and our suppliers. Second, there have been and continue to be challenges that impact the entire food industry, but we're taking decisive action to strengthen the business and drive improved performance.

Sandy Douglas: We run a complex business and know the path forward will take time, tenacity, and discipline, and that will need to be adaptable along the way, but we also know the way to fully realize our vision and maximize shareholder value creation is through a proactive combination of near term action and the multi-year transformation path that I've outlined.

Since last quarter.

What specifically are you seeing there? And then how should we think about timing? Have you is that fully incorporated within your guidance for next year?

What specifically are you seeing there and then how should we think about timing have you is that fully.

Within your guidance for next year.

Sure, highly as Sandy here. The specific answer to contracts is that a significant amount of that work has been done to assess them. There I would bucket the opportunities into immediate action, contractual improvement opportunities that obviously take time, and then projects in particular categories, for example, where we may be experiencing...

Sure Hi, Leo Sandy here.

The specific cancer two contracts is that.

Sandy Douglas: And finally, with the steps we are taking to continue to strengthen both our leadership team and our board, we are positioning our company to capture the significant profitable growth opportunities that lie ahead.

A significant amount of that work has been done.

SaaS them, there I would bucket the opportunities into immediate action.

Contractual improvement opportunities that obviously take time.

And then projects in particular categories for example, where.

We may be experiencing.

unsatisfactory economics where we need to work with the supplier to change how we go to market. And so a significant amount of the quick wins have been captured. The longer-term contractual ones are obviously being done in partnership with our customers or suppliers depending on where the contract sits. And the projects are obviously more ongoing.

Unsatisfactory economics, where we need to work with the supplier to change how we go to market and so.

A significant amount of the quick wins have been captured.

Longer term contractual ones are obviously being done in partnership with our customers our suppliers, depending on where the contract sits and the projects are obviously more ongoing in.

In terms of increasing our outlook, I would say that area has been an area that's been helpful. And remember that a lot of that is...

In terms of increasing our outlook I would say that area has been an area. That's been helpful and remember that a lot of that is necessary to offset increases in operating expenses and that makes sense to both suppliers and retailers.

Sandy Douglas: We look forward to updating you on our progress along the way, and let me now turn the call over to John for his insights on our financials. Thank you, Sandy.

necessary to offset increases in operating expenses and that makes sense to both suppliers and

John Howard: Good morning, everyone. As Sandy noted, we finished the year toward the upper half of the outlook provided in our third quarter call, and our focus continues to be on driving improved capabilities, operational efficiencies, and near term profitability. Today, I will provide commentary on fourth quarter results, our balance sheet and capital structure, and our outlook for fiscal 2024.

But we're going to make sure that every single one of our agreements is fair, it's modern, it's consistent.

But we're going to make sure that every single one of our agreement is fair. It's modern it's consistent and thoughtful relative to the unique characteristics of a given situation and so that's where a lot of the plus side has come the rest of the program is is as we've described as <unk>.

and that it's awful relative to the neat characteristics of a given situation. So that's where a lot of the plus side has come.

The rest of the program is, as we've described, SKU optimization, zero-based budgeting, flattening the organization to be more agile and more effective, and all of those programs are on schedule.

Optimization zero based budgeting.

John Howard: With that, let's review our Q4 results. Turning to slide 9, fourth quarter net sales grew by 2% and totaled more than $7.4 billion. Primarily reflecting inflation and new business wins, which more than offset a decline in unit volume. Sales from our three primary wholesale channels grew by nearly 3%, including the impact of inflation of nearly 6%, with supernatural growing the fastest at over 9%. This includes incremental volume from new customers added over the last year, additional categories and new store openings in supernatural, and increased item and category penetration with existing customers.

Flattening the organization to be more agile and more effective in all of those programs are on schedule.

Okay, great, thank you. And then my follow up is just a little bit longer term. Understand next year, you know, you're still executing on your transformation efforts. But how should we think about margins in a normalized environment? You know, is it possible to get there in 25 or how are you thinking about timing and what is the key unlocks you're looking to beyond whatever is happening in the inflation backdrop?

Okay, great. Thank you and then my follow up is just a little bit longer term understand next year you are still executing on your transformation efforts, but how should we think about margins in a normalized environment is it possible to get there in 25 or how are you thinking about timing and what is the key.

Unlocked here looking beyond whatever is happening in the inflation backdrop.

Sure.

Obviously, we haven't given an outlook for years past fiscal 24. And we intend to continue to refine our assumptions. And as we get the implementation plans laid down specifically, we'll have a more specific outlook for those years. But from my point of view, the opportunity, as I said in my script, that we see in the transformation agenda to

<unk>.

Obviously, we haven't given an outlook for for years past fiscal 'twenty four.

John Howard: Unit volumes remained negative, but improved sequentially by about 100 basis points from Q3, and were slightly better than Nielsen's total US food volume changes, which is representative of performance for the grocery industry as a whole. Retail sales declined 2% compared to last year's fourth quarter, primarily driven by lower unit volumes, partly offset by higher average unit retail prices. We've continued to experience pressure across our retail footprint, primarily located in the Minneapolis St. Paul Market, due in large part to tightening consumer demand, reductions in government support programs, and more intense competition on price.

And we intend to continue to refine our assumptions and as we get the implementation plans laid down specifically will have a more specific outlook for those years.

But from my point of view.

The opportunity as I said in my script that we see in the transformation agenda.

Make this company more profitable into allow it to grow faster and create more value for customers and suppliers is significant.

Make this company more profitable and to allow us to grow faster and create more value for customers and suppliers is significant and beyond that we haven't really provided public information.

and beyond that, we haven't really provided public information.

But it's a, it's a, we view the opportunity as significant as the simplest way to put it.

John Howard: Flipping to slide 10, adjusted EBITDAF for the fourth quarter totaled $93 million, which was at the top half of the implied range we provided in June. This compares to $213 million in the year ago fourth quarter. As we indicated would be the case with our updated outlook, the biggest driver for the decline in Q4 year-over-year profitability was lower levels of procurement gain opportunities, resulting from decelerating inflation. This resulted in a reduction in our gross profit rate prior to the LIFO charge in both years of approximately 175 basis points, or more than $100 million.

But it's it's.

We view the opportunity as significantly as the simplest way to put it.

Thank you.

And your next question comes from a line of Scott Muskin from our five capital. Your line is open.

And your next question comes from the line of Scott <unk> from our five capital Your line is open.

Hey guys, thanks for taking my questions. I got a couple kind of short ones and then maybe more strategic. So when you mentioned market share and you're kind of just a little bit above IRI Nielsen, are you referring to the total market or just the supermarket?

Hey, guys. Thanks for taking my questions I got a couple of kind of.

Short ones and then maybe a more strategic so when you mentioned market share and you're kind of just a little bit above IRI Nielsen are you, referring to the total market or just the supermarket.

In that particular line, I believe we were talking about the total market.

In that particular line I believe we were talking about the total market.

John Howard: We also experienced higher levels of strength compared to last year's fourth quarter, which we are actively addressing. Our fourth quarter operating costs as a percentage sales were flat to last year. However, last year included approximately $14 million in higher performance-based incentive compensation expense compared to this year. Excluding this performance-based incentive compensation expense, our operating expense rate increased by about 25 basis points. A good portion of this came from higher health benefit costs driven by a higher level of claims, representing a more normalized run rate as associates returned to more pre-pandemic medical visits.

And then I don't know if you had said it. Maybe I missed it. Did you talk about service levels in the quarter?

Perfect and then I don't know if you had said it maybe I missed it did you talk about service levels in the quarter.

Service levels, I don't know that we mentioned it, but we are seeing service levels improve sequentially. I think we mentioned last quarter that they were up about 10% as point for 12 months before, and they're remaining at that level.

Service levels I don't know that we mentioned it but we are seeing service levels improve sequentially.

I think we mentioned last quarter that they were up about 10 percentage points versus 12 months before and they're remaining at that level.

And then final rule, how's it keepin' goin' on here? Um, inflation, you guys said, low to mid single digits. I mean, you know, we're tracking it kind of flatish right now over the last six months. So that seems somewhat aggressive. And I'm just wondering maybe you could get into why you think it's gonna be at that level.

And then final housekeeping going on here.

Inflation, you guys said low to mid single digits.

We're tracking it kind of flattish right now over the last six months, so that seems somewhat aggressive and I was just wondering maybe you could get into why you think it's going to be at that level.

John Howard: Within our retail segment, adjusted EBITDAF decreased to $4 million, primarily due to margin investments intended to drive traffic and basket size improvements, as well as higher than normal costs associated with recently open stores. During the quarter, we opened one new store, bringing total stores open during fiscal 2023 to six stores. Our Gap EPS for Q4 was a loss of $1.15, which included $0.90 an after-tax cost and expenses composed primarily of LIFO, restructuring, and business transformation.

Yeah, I'm happy to take that one. The, we, we exited Q4 with just under 6% inflation for our business. And so the way we're thinking about that is it's going to continue to decelerate as we move through 24 ending somewhere in that very low single digits. But the average for the year will be something in the low single digits, 2 to 3%.

Yes, I'm happy to.

Take that one.

We exited Q4 with just under 6% inflation for our business and so the way we're thinking about that is it's going to continue to decelerate as we move through 'twenty four.

Ending somewhere in that.

Very low single digits, but the average for the year will be something in the <unk>.

Low single digits, 2% to 3%.

And then my final one is a little bit more strategic. When you look at automating these facilities, everyone's kind of on that path a little bit, given the activities from Walmart. How should we look at that from a timeline perspective? When would you have the bulk of the facilities automated? Is this a five-year process, just a little kind of thoughts on timing?

Okay. That's great and then my final one is a little bit more strategic.

John Howard: Our adjusted EPS totaled a loss of $0.25 compared to $1.27 of income in last year's fourth quarter. This decline is primarily attributable to the lower adjusted EBITDA compared to last year, as well as lower non-cash pension income and higher DNA, which was driven by elevated levels of investment, which is expected to continue. Moving to slide 11, we finished the quarter with total outstanding net debt of just under $1.95 billion, a $70 million decrease compared to last quarter.

Look at automating these facilities.

Everyone's kind of on that path, a little bit given the activities from Walmart.

How do how should we look at that from a timeline perspective, you win one.

Would you have the bulk of the facilities automated is this a five year process, just a little kind of thoughts on timing here.

Scott, I'm gonna answer that with the information that we've provided, unfortunately, which won't give you all the answer to that because there's some competitive sensitivity there. But before I do, let me make sure, in your first question, you asked a question about market share, and I wanna make sure we're connecting exactly on what the universe is. The universe that we're out performing is just the supermarket channel. It's basically life for life.

Scott I'm going to answer that with the information that we've provided unfortunately, which won't give you all the answer to that because there's some competitive sensitivity there, but before I do let me make sure in your first question you asked a question about market share and I want to make sure we're connecting exactly on what the universe is the universe that we're outperforming.

John Howard: This is our lowest net debt balance since the October 2018 closing of our supervalue acquisition, reflecting our strong efforts to prioritize debt reduction over the past several years. Our net debt to adjusted EBITDA leverage ratio finished fiscal 2023 at 3.0 times.

<unk> is just the supermarket channel, it's basically like for like.

It's not inclusive of discounters and club stores. So if you're comparing it to customers that are like our customers, we're performing slightly better than the broader market. On the...

It is not inclusive of <unk>.

Discounters and club stores, so if you're comparing it to customers that are like our customers were performing slightly better than the broader market.

John Howard: Turning to slide 12, let's move to our outlook for fiscal 2024, which will be a 53-week year. From a reporting perspective, our fourth quarter will have one additional week making it a 14-week quarter. We expect fiscal 2024's full-year net sales to grow approximately 3% or $900 million at the midpoint of the $30.9 to $31.5 billion range we've provided. This includes an approximate $600 million, or 2% benefit from the 53rd week. Our growth will include the addition of new business from customers added in fiscal 2023, we have yet to cycle, the continued growth of selling more products to existing customers, new customer wins and anticipated strong growth within services.

<unk>.

On the.

Question around automation.

As I mentioned in my script, we are going live in our first one. We have several other projects started.

As I mentioned in my script, we are going live in our first one we have several other projects started.

Our pace will be directly related to the capability and confidence we get in our ability to run those projects effectively and how many of them we can do at a given time.

Our pace will be directly related to the capability and confidence, we get and our ability to run those.

Projects.

Effectively it how many of them we can do at a given time.

They have a wide range of benefits.

Probably.

A very important one of those is the economic value they create.

And as we get full confidence and visibility into that, that will then dictate exactly what the end footprint looks like. Right now we're going to the most obviously productive sites.

And as we get full confidence and visibility into that that will then dictate exactly what the end footprint looks like right now we're going to the most obviously productive sites.

John Howard: We expect full year inflation to continue to moderate and be in the low to mid single digits which is a decline compared to the over 9% reflected in our fiscal 2023 results. We're also expecting ongoing near term volume headwinds as consumers continue to adapt to higher costs across their household budgets. We expect fiscal 2024's full year adjusted EBITDA to be in $450 to $550 million range. This decline primarily reflects approximately $125 million in lower anticipated procurement gains, primarily in last year's first and second quarters, resulting from the continued decline.

and that was what we announced in our first agreement with Symbatic. We also have some each-pick automation that we're doing in parallel. It's more tactical. In the end, we will automate our distribution system in a very disciplined and economic way, and the speed will directly relate to our capability to do it well.

That was what we announced on our first agreement with <unk>. We also have some each pick automation that we're doing in parallel it's more tactical but in the end, we will automate our distribution system in a very disciplined and economic way and the speed will directly relate to our capability.

To do it well.

Perfect. Thanks, guys. Thanks for taking my questions. Thank.

Thank you Scott.

Your next question comes from a line of Kelly Bonilla from BMO Capital Markets. Your line is open.

Your next question comes from the line of Kelly Bania from BMO capital markets. Your line is open.

John Howard: This decline in the number of supplier price increases compared to the first half of fiscal 2023. It also includes normalized performance based incentive compensation accrual of approximately $62 million. This compares to fiscal 2023 when no material performance based incentive compensation was paid to eligible associates. Partly offsetting these items is the estimated contribution of $9 million from the 53rd week, as well as the near term profitability drivers Sandy discussed earlier, with nearly half of the actions addressing profitability from cost savings, including our recent regional reorganization and other S-GNA and operating expense rationalization, and the remainder being driven by skew rationalization and contract review benefits.

Good morning, Thanks for taking our question.

I just wanted to ask again about the procurement games. I think one of the challenges with that has been just the visibility into how that has impacted the P&L. So I guess at this point, have you been able to go back and do some more analysis that gives you confidence in the magnitude of procurement gain headwinds that you have forecasted in fiscal 24? And then I have a couple more follow-up.

Just wanted to ask again about the procurement gains I think the one of the challenges with that has been just the visibility.

All of that.

Has impacted the P&L. So I guess at this point have you been able to go back and do some more analysis that gives you confidence in the magnitude of Kermit gain headwinds forecasted in fiscal 'twenty four.

And then I have a couple more follow ups.

I think principally calorie we do because we have now experienced Q3 and Q4 last year.

I think principally Kelly, we do because we have now experienced Q3 and Q4 of last year.

John Howard: Additionally, as Sandy mentioned, we expect there could be some upside from shrink improvement as we operationalize and scale process improvements during fiscal 2024. From a cadence perspective, we would expect our first quarter to be the lowest of the year in absolute adjusted EBITDA dollar terms, and likely to be similar to the adjusted EBITDA level we generated during Q4 2023. Our first quarter is expected to have the largest percentage decline compared to last year, as we cycle last year's elevated level of procurement gains and further build the benefits of our near term profitability initiatives.

And we have the ability now with all of that data to triangulate in on the data sources that we have and project it forward for Q1 and Q2. And the numbers John described in the script are how that's weighing on the P&L for fiscal 24.

And we have the ability now with all of that data to triangulate in on the data sources that we have and projected forward for Q1, and Q2 and the numbers John described in this script or how that's weighing on the P&L.

For fiscal 'twenty four.

I would go further to say that we have learned from that a lot about how our margin operates through our distribution systems and that's helping us create value, not just forecast.

I would go further to say that we have learned from that a lot about how our margin operates through our distribution systems and that is helping us.

Create value not just forecast.

Okay, and can you give us any color on the specific dollar amount?

Okay and can you give us any color on the specific dollar amount.

John Howard: Finally, we expect fiscal 2024's full year adjusted EPS to be in the range of 88 cents lost to 38 cents of adjusted net income. This primarily reflects lower adjusted EBITDA, as well as lower non-cash pension income, and higher D&A. It also includes about $21 million of higher net interest expense, primarily resulting from higher expected interest rates, and ABL balances during the year, and an additional week of interest expense. More than 65% of our debt is currently fixed rate, taking into account our approximately $800 million of hedges in place, as well as our senior notes.

and pacing of the return of promotions and what is baked into your guidance and how that compares to the historical levels of margin that you generate from promotional activities.

And think of the return of promotions and what is baked into your guidance and how that compares to historical levels.

Margin that you generate from promotional activity.

Sure Kelly, this answer is gonna frustrate you, but you may have some more information than I do on this. What we're seeing is, we're seeing suppliers.

Sure Kelly this answer is going to frustrate you, but you may have some more information than I do on this.

What we're seeing is we're seeing suppliers.

Talk about accelerating promotion.

Talk about accelerating promotions.

their actions are slightly behind their words, but because of the fact that inflation is coming down and unifelacity is not matching it on a one-to-one basis.

Their actions are slightly behind their words, but because of the fact that inflation is coming down and unit velocity is not matching it on a one to one basis it logical to us that we will see supplier promotions improve and Thats. What we believe they are saying, it's what they are.

John Howard: We expect to invest approximately $400 million in the business in fiscal 2024, with a primary driver of the increase compared to fiscal 2023, being investments in our transformation agenda, with the largest component going towards network optimization and automation. This also includes investments to improve critical infrastructure as well as drive higher profitability and growth in the future.

It's logical to us that we will see supplier promotions improve. And that's what we believe they're saying. It's what they're telling us. But it looks to be gradual and it may be a function of fiscal years and how next year, which most of the suppliers are calendar fiscal, will begin. But.

Us, but it looks to be gradual and it may be a function of fiscal years and our next year, which most of the suppliers are calendar fiscal will begin.

John Howard: Turning to the summary on slide 13, we expect fiscal 2024 will be a pivotal year for our transformation into a more modernized technology enabled partner for our customers and suppliers. While we expect this will be a multi-year endeavor, we are committed to making progress as quickly as possible and look forward to updating our shareholders on this path. We are confident we're taking the appropriate actions to best position UNFI for improved efficiency and profitability enhanced growth and long-term success. We strongly believe that combining a more dynamic and nimble UNFI with our industry leading position will enable us to drive meaningful and sustainable shareholder value creation.

But.

you know, from a supplier perspective, we're seeing it slowly increase, but it's still below pre-pandemic levels. From a retailer perspective, we're seeing promotions accelerate as retailers look to drive their price positioning, particularly those that are price-positioned. But...

From a supplier perspective, we're seeing it slowly increase but it's still below pre pandemic levels from a retailer perspective, we're seeing promotions accelerate as retailers look to drive their price positioning, particularly those that are price positioned but.

As suppliers get more promotional, we are eager to help them get a return and to invest more.

As suppliers get.

More promotional we are eager to help them get a return.

To invest more.

Okay.

Okay, that's helpful. And maybe just within your guidance, can you talk a little bit more about the retail profitability? That took a pretty big leg down here. And maybe can you talk about the factors? Is that, is that, is that, you know, you're only tail stepping up your own promotion?

Okay. That's helpful.

Just within your guidance can you talk a little bit more about the retail profitability that took a pretty big leg down here and maybe can you talk about the factory.

Operator: With that operator, please open the lines for questions. At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad.

Is that is that is that.

Retail stepping up your own promotions.

and I guess in similar vein, what is your guidance assume in terms of customer mixed with pressure?

And I guess.

Mark Carden: And your first question today comes from a line of Mark Carden from UBS. Your line is open. Good morning. Thanks so much for taking our questions. So looking to 2024, you're laughing a few quarters of lower inventory gains beginning in 2Q. Your cost savings sound like they're falling nicely into place. Still, your guidance is assuming a meaningful step down in profitability.

In similar vein, what does your guidance assume in terms of customer mix pressures.

Well, listen, when you look at our retail business, which is, I think about 10% of our business, we have an extraordinary brand franchise in CUB, which is the market leader in the Twin Cities area.

Well okay.

Listen when you look at our retail business, which as I think about 10% of our business.

We have an extraordinary brand franchise and Cub, which is the market leader in the twin cities area.

Sandy Douglas: So what's changed the most relative to where your expectations may have been three months ago? How much of its macro driven and to what extent are you building in some conservatism just given all the initiatives that you have in place? You get to a fairly low one rate. You add back then the actions that we've taken most of which we've already captured, and you get sort of in the range of our midpoint.

Twin Cities is a typical US market and it's prone to all the challenges that we see across the country. Reducing federal assistance, student loans coming back, there's plenty of pressure on the consumer. There's also a significant amount of price competition in the market and we're seeing that it's a big market for home market for one discounter, it's a big market for another and we're seeing all kinds of competitive activity. So our team.

Twin cities is.

A typical U S market and is prone to all of the challenges that we see across the country, reducing federal assistance student loans coming back there is plenty of pressure on the consumer.

There is also a significant amount of price competition in the market and we're seeing that.

A big market for one market for one discount or it's a big market for another and we're seeing all kinds of competitive activity.

So our team has doubled down on that and they're investing in promotions to try to retain and grow their customer count.

double down on that and they're investing in promotions to try to retain and grow their customer count. And then they're also experiencing higher than pattern labor expenses. So that's impacted their profitability.

Sandy Douglas: The external environment continues to be pretty soft. So I think we're going to manage our way this year. And we're taking a number of initiatives to try to optimize the results. But the net of all those factors gave us the range that we provided today. That's helpful.

And then there are also experiencing higher than pattern labor expenses, so that's impacted their profitability.

from a more broad standpoint and our outlook for our retail businesses incorporated in our guidance. So, but the CUB brand is a strong brand and we expect it to succeed doing for it.

From a more broad standpoint and.

Our outlook for our retail business is incorporated in our guidance so.

But that brand the <unk> brand has a strong brand and we expect it to succeed going forward.

Sandy Douglas: And then what are you seeing from your independent growth surveys? Would you expect the pace of customer migration to mass to pick up in 2024 and further pressure the channel? And if so, how does that typically impact the man's value that services and private label? Yeah. I mean, you can't really generalize about independence. There's some incredibly strong environment ones and then some they're struggling. This community is the focus of our whole product service makeup.

as it relates to kind of market shift.

As it relates to to kind of market shifts there is clearly pressure.

There's clearly pressure in the market coming from discounters. They're investing in their taking share and that's evident in the syndicated data.

In the market coming from discounters, they're investing and they are taking share and that's evident in the syndicated data.

What our job is to try to make sure that our independence and our customers in general are equipped with the best costs, the best promotional investments, and programs to help them compete effectively and to outperform their peer set first and a gain share in the market. And many of them are. Many of them are doing very well.

What our job is to try to make sure that our independence and our customers in general are equipped with the best cost the best promotional investments and programs to help them compete effectively and to outperform their peer set first and gained share in the market and many of them or many of them are doing very.

Sandy Douglas: I mean, it's our job to help them succeed. I think broadly compared to independence and syndicated data where our customers are outperforming the market by a small margin. But we've got a lot of programs and you mentioned two of them brands and services that are designed to provide independence with a great own brand program at multiple price points and then services that help them save money and compete better in the end. And their success is the most important priority we have.

Well.

I would say sales in general are soft at this stage and we're gonna continue to work to try to outperform the market but our guidance incorporates that kind of...

I would say sales in general are are soft at this stage and we're going to continue to work to try to outperform the market, but our guidance incorporates that kind of an outlook.

And Kelly just one reminder, the FY23 retail reflects the expenses to open those six doors that I mentioned in my script that we would not expect to repeat an FY24.

And Kelly just one reminder.

2023 retail incurred reflects the expenses to open those six stores that I mentioned in my script that we would not expect to repeat in FY 'twenty four.

Mark Carden: Great. Thanks so much. Good luck, guys. Thanks.

John Heinbockel: Your next question comes from a line of John Heinbockel from Guggenheim Securities. Your line is open. Hey, Sandy, maybe talk to what procurement gains were pre-COVID in a normal environment. It looks like, I don't know, maybe they got up to 250 or 300 million at the peak. Was that all just gains on stuff that was in your inventory? Or was there a lot of forward buy that went along with that?

Could you share a number on that John .

I don't think we've disclosed that number externally, but it'll be for all six stores, it'll be a few million dollars.

I don't think we've disclosed that number externally.

It will be.

For all six stores it'll be a few million dollars.

And maybe I could squeeze in one more here on on cappec.

Okay.

And maybe I can squeeze in one more here on Capex.

And if you are willing to comment at all on how that might play out over the next several years as you work towards this automation and optimization process, you have had CAPEX go here from 250 to 320 and now planned at 400 million. So should that continue to creep up in the out years?

And if you are willing to comment at all on how that might play out over the next several years as you work towards automate automation and optimization process.

Sandy Douglas: And when you think about that, does that then, what you would earn right over the past couple of years, sort of an EBITDA margin in the upper twos, is that no longer attainable any time or over a very long period of time because those inventory gains are going to be very diminimous the next couple of years. John, Sandy, let me come at this a couple of ways, and then I'll ask John Howard to add to my comments.

<unk> had capex go here from $2 50 to $3 20, and our planned at 400 million. So should that continue to creep up in the out years.

Yeah, Kelly, this is Sandy. I would say we haven't given out year guidance or really any specific strategic planning information largely because we're in the first year of really starting to roll out our transformation. But if you look at the $400 million in our capital budget, the majority of it is focused on transformation.

Yes, Kelly this is sandy.

What I would say.

Hey, we havent given.

Out year.

Guidance or.

Really any.

Specific strategic planning information largely because were in the first year of really starting to rollout our transformation.

But if you look at the $400 million in our capital budget. The majority of it is focused on transformation.

Sandy Douglas: Definitely, we saw an out-of-pattern increase in procurement gains beginning in January of 22, and that last per year, before the year-over-year disinflation started, and that generated numbers inline with your estimates. And that was the out-of-pattern part. You've got really two things going on there. You've got actual price increase events, both the frequency and depth, and then you have promotions. And we saw decline in promotions while prices were going way up. What we expect to happen is that as price increase events decline, we expect promotions to come back, although they've done so very slowly.

a minority being kind of the maintenance capital that keeps our system going. So we pivoted to investing in changing the profile of the company and accelerating profitable growth.

A minority being kind of the maintenance capital that keeps our system going so we've pivoted.

Two investing in changing the profile of the company and accelerating profitable growth.

Our plans going forward will be with our new lead constituted board and the financial review will be that rigorously go through all expenditures and make sure that every investment we make this coming year and forward delivers not only maximum transformation benefits but also.

Our plans going forward will be.

With our with our newly constituted board and the financial review will be to rigorously go through all expenditures and make sure that.

Every investment we make in this coming year and forward delivers not only maximum transformation benefits, but also outsized shareholder returns and so we wouldn't be.

outsized shareholder returns and so we wouldn't be in a able to give out your guidance on this but the process by which we will set that will be rigorous and will be designed to drive the transformation and deliver shareholder returns

Cable did give out year guidance on this but the process by which we will set that will be rigorous and will be designed to drive the transformation and deliver.

Sandy Douglas: But as we look forward, and we see units continuing to be soft, the consumer to be stressed, and inflation now returning to lower levels, we definitely expect consumer price companies to start promoting more. They'll need to in order to drive sales. And so we'll see a positive there. The out-of-pattern high number of price events have kind of returned back to more normal levels. We're still cycling the higher ones, as John mentioned in his comments.

Shareholder returns.

Thank you.

Your next question comes from a line of Peter Selle from BTIG. Your line is open.

Your next question comes from the line of Peter Saleh from <unk>. Your line is open.

Okay.

Great, thanks for taking the question. I just want to come back to the conversation around shrink. Can you give us a sense of what you have modeled into your 2024 God-into-dispoint for shrink? And are you seeing any changes there or is it kind of pretty consistent levels of shrink across product types and customers? Just trying to understand the dynamics going on at that level right now. Sure.

Great. Thanks for taking the question.

I just wanted to come back to the conversation around shrink can.

Can you guys give us a sense of what you have modeled into your 2020 for guidance at this point for shrink.

Sandy Douglas: But net net net, from a run rate perspective, we'd expect it to be slightly positive as promotions come back. John, do you want to add anything? No, I think that's spot on. The only thing is to put some numbers around that 23 to 24 impact. It's going to be about $125 million that we've, of course, factored into our guidance. And most of that is going to be in the first two quarters of FY 24 as we cycle those gains that were still happening in the first half of FY 23. Great.

And are you seeing any changes there or is it kind of pretty consistent levels of shrink across product types and customers just trying to understand the dynamics going on at that level right now.

Sure. Thanks Peter.

Shrink is an important opportunity for us. As we mentioned last year, the shrink levels in our business have...

Shrink is that important opportunity for us.

As we mentioned last year.

Shrink levels in our business has.

increased significantly over the past two years.

Increased significantly over the past few years.

Sandy Douglas: And then maybe second thing, right? So leverage is going to go from three to four times, right? Turns this year, let me say that's temporary. I think there was some commentary in the, with the, with the board changes of strengthening the balance sheet. So do you feel a need to do that urgently? And then what do you do? I know you secure ties receivables before. I don't know if you want to do that.

They're driven by forming categories, procurement, inventory gains, or losses, damages, and spoilage. And all four of those have different root causes.

They're driven by four main categories procurement.

Inventory gains.

Or losses.

Damages and spoilage and all four of those have different root causes.

And we've stood up a team to look at each of them and to manage them rigorously. We've identified root causes. We're rolling out new processes and training across our system. And the entire management system is producing some early results. We haven't disclosed the specific component of shrink improvement that's in our guidance. But we see the opportunity as being significant and multi-year starting with this fiscal year.

And we've stood up a team to look at each of them and manage them rigorously.

We've identified root causes we are rolling out new processes and training across our system.

Sandy Douglas: I don't know if you want to sell retail right at a low level, you know, I don't know what the options are, right, to strengthen the balance sheet short term. John, I'll answer that strategically. The refreshment of our board from our point of view is going to strengthen our offense. We have a transformation plan and a strategy that we're investing in and that we are excited about and confident that it's going to make a significant difference.

And the entire management system is producing some early results, we havent disclosed the specific component of shrink improvement that's in our guidance, but we see the opportunity as being significant in multiyear starting with this fiscal year.

Understood and then just lastly, Sandy, last we spoke on that, on that shrinks the net inventory piece, I think was kind of the piece we discussed in more detail. Shouldn't that piece really start to improve as your employees become more experienced and more tenured? Are you already seeing that or is that yet to come?

Understood and then just lastly, sandy last we spoke on.

On that shrinks the net inventory piece I think was kind of the.

As we discussed in more detail shouldnt that piece really start to improve as your <unk>.

Sandy Douglas: Now, it's obviously out there in the future that the benefits will come, but I think there's a board new members and old members alike. We're aligned on the importance of that. What the financial review with the new board and the new skill sets is just going to help us make sure that we're sweating every decision we make in the most detailed way to ensure that not only are we driving the transformation strategy, but we're also maximizing returns to shareholders on a strong basis.

Employees become more experienced and more tenured are you already seeing that or is that yet to come.

Yeah, that's a knowledgeable question. The answer to that is yes, that helped.

Yes, that's a knowledgeable question.

The answer to that is yes that helps.

Overall, operations improves as turnover goes down and that's a core part of our people strategy in our system.

Overall operations improves as turnover goes down and that's a core part of our people strategy and our system and Thats not just shrink can say all aspects of customer service and efficiency.

And that's not just shrink, it's at all aspects of customer service and efficiency. But in addition to folks being more experienced, there are also process and system improvements that are rolling out to try to take the variability out. And we've identified where the root causes are and we're in the process of rolling out the improvements. And I expect this number to get better as we go forward.

But in addition to.

Folks being more experienced there are also process and system improvements that are rolling out to try to take the variability out and we've identified where the root causes are and we're in the process of rolling out the improvements and I expect this number to get better as we go forward.

Sandy Douglas: We have strong liquidity. We have the resources we need to invest in the plan, but we want to make sure that every stakeholder or our customer suppliers and shareholders are getting the best possible return. John? No, I think that's right. I think the way we think about that leverage, just a little more granular, John, is taking a little higher than where we were in 23, but I don't want to lose sight of the focus that we have had over the past few years on reducing debt since the acquisition. We've paid down $1.4 billion worth of debt since the acquisition, getting that total debt down to that below $2 billion. We are continuing to focus on that as part of our overall capital strategy. Thank you.

Thank you very much.

Your next question comes from a line of Andrew Wolf from CL King. Your line is open. Thank you.

Your next question comes from the line of Andrew Wolf from C. L. King Your line is open.

Thank you good morning.

Yeah.

And I wanted to also ask the catbacks from

Andy I wanted to also ask the Capex from.

Executive and maybe Board view. Like, could you just give investors and us just some sense of how, you know, you guys are formulating?

Executive and maybe forward view.

Could you just give investors and us just some sense of how you know.

You guys are formulating.

planning, you know, return on investment or ultimate earnings power. I know some of it is, you said, is contingent on how the implementation goes and the returns that come from that. But, you know, catback has gone up quite a lot. So, could you just give us a sense of how you're thinking about that? And I guess one of the ways I'd like you to frame it, and you can frame it, other ways, is, you know, how much of this is margin recapturing the margin?

Planning return on investment or ultimate earnings power.

<unk> you said is contingent on how the implementation goes and the returns that come from that but.

Leah Jordan: Your next question comes from a line of Leah Jordan from Goldman Sachs. Your line is open. Thank you. Good morning. I first had a couple questions on cost savings. I just wanted to touch on the contract review part of the original $100 million. Is it fair to say that you're fully done reviewing all of your contracts at this point in that they're fully consistent? Does any update on that? Then the second piece is around the incremental $50 million that you've found since last quarter. What specifically are you seeing there? Then how should we think about timing? Is that fully incorporated within your guidance for next year?

Capex has gone up quite a lot.

So could.

Could you just give us a sense of how youre thinking about that and I guess one of the ways I'd like you to frame it and you can frame it otherwise.

How much of this is margin recapturing the margin.

that has been diminished recently and how much of this is I think even loaded to, you know, a robust pipeline. How much of this is really more top-line driven? Good.

That has been diminished recently and how much of this is I think you've alluded to a robust pipeline how much of this is really more top line driven.

Sure.

So let me start by saying that every dollar of capital that we allocate is screwed nice through several different angles.

So let me start by saying that every dollar of capital that we allocate.

As scrutinize through several different angles.

Sandy Douglas: Sure. I, Leah, Sandy here. The specific answer to contracts is that a significant amount of that work has been done to assess them. I would bucket the opportunities into immediate action, contractual improvement opportunities that obviously take time, and then projects in particular categories, for example, where we may be experiencing unsatisfactory economics where we need to work with the supplier to change how we go to market. A significant amount of the quick wins have been captured.

Maintenance capital is by definition maintenance capital. But what we have done is we've taken the transformation agenda and the capital that's embedded in it. And I think I mentioned in a previous question that it's about two thirds of the total capital. That's not all incremental. We've actually sweated through the maintenance capital and kind of zero-based it to try to source some of it. So the increase is not equal to the total of the transformation.

Maintenance capital is by definition maintenance capital, but what we have done is we've taken the transformation agenda and the capital that's embedded in it and I think I mentioned in the previous question that it's about two thirds of the total capital.

That's not all incremental we've actually sweated through the maintenance capital and kind of zero based it to try to source some of it. So the increase is not equal to the total of the transformation.

And I would say the biggest load of the capital right now is operational. It's automation and network related, which is focused on, I mean, there are top line benefits because customer service and customer experience gets better, but the big payoff is actually in efficiencies in the supply chain and then the ability to get more efficient growth out of the buildings that exist.

And I would say that the biggest load of the capital right now is operational it's automation.

Sandy Douglas: The longer-term contractual ones are obviously being done in partnership with our customers or suppliers, depending on where the contract sits, and the projects are obviously more ongoing. In terms of increasing our outlook, I would say that area has been an area that's been helpful, and remember that a lot of that is necessary to offset increases and operating expenses, and that makes sense to both suppliers and retailers. But we're going to make sure that every single one of our agreements is fair, it's modern, it's consistent, and that it's thoughtful relative to the unique characteristics of a given situation.

Network related which is focused on.

I mean, there are top line benefits because customer service and customer experience gets better but the big payoff is actually in efficiencies in the supply chain and then the ability to get more efficient growth out of the buildings that exist.

of automated building can actually produce a whole lot more sales than one that's not. And that gives you return on capital, it gives you working capital benefits, etc. So our transformation agenda.

Automated building can actually produce a whole lot more sales than one that's not and that gives you a return on capital that gives your working capital benefits et cetera. So.

Our transformation agenda.

Certainly it's focused on creating a great customer experience and enabling you to identify the serve the maximum number of customers and categories profitably.

Certainly is focused on creating a great customer experience and enabling UNFI to serve the maximum number of customers and categories profitably.

Sandy Douglas: That's where a lot of the plus side has come. The rest of the program is, as we've described, SKU optimization, zero-based budgeting, flattening the organization to be more agile and more effective, and all of those programs are on the schedule.

But in doing that, we want to have a system that works very efficiently. And then through the non-capital side of our transformation, which is more about how we work with suppliers and how we make the commercial system work, is how do we fully activate that using data to create growth and to earn profitability as we generate growth for some of the bigger protocols in the system which come out of our supplier.

But in doing that.

Wanted to have a system that works very efficiently and then do then sort of the non capital side of our transformation, which is more about how we work with suppliers and how we make the commercial system work is how do we fully activate that using data to create growth and to earn profitability as we generate growth for.

Sandy Douglas: Okay, great. Thank you. And then my follow-up is just a little bit longer term. Understand, next year, you're still executing on your transformation efforts. But how should we think about margins in a normalized environment? Is it possible to get there in 25 or how are you thinking about timing and what is the key unlocks you're looking to beyond on whatever is happening in the inflation backdrop? Sure. I think, obviously, we haven't given an outlook for years past fiscal 24.

Some of the bigger profit pools in the system, which come out of our suppliers.

So the very general answer, but if you want to follow up, Andy, I'm happy to answer.

So the very general.

Answer, but if you want to follow up Andy I'm happy to answer.

And that's okay. I just had one clarification follow up is he mentions. I think that I think the first you said it's mainly operational network, which is an eminence margin.

No that's okay I just had one.

Clarification follow up is <unk>.

You mentioned I think that I think first you said it's mainly.

Operational network, which to me means margins.

But then you said, you know, an automated system also has better throughput. So I just want to again back to the how you're justifying how the board is voting.

But then you said.

An automated system also has better throughput.

Sandy Douglas: And we intend to continue to refine our assumptions. And as we get the implementation plans laid down specifically, we'll have a more specific outlook for those years. But from my point of view, the opportunity, as I said in my script that we see in the transformation agenda to make this company more profitable and to allow it to grow faster and create more value for customers and suppliers is significant. And beyond that, we haven't really provided public information. But it's a, it's a, we view the opportunity is significant. It's the simplest way to put it.

I just wanted to again back to the high <unk>.

Justifying how the board is voting on this and <unk>.

Leah Jordan: Thank you.

justifying the investment. Is it justified all through margin and then-

Adjusted by the investment.

Is it is it justified all through margin and then.

you know, the better capacity that you get through automation allows more customers is that sort of even better return than you've already, you know, has already been agreed upon or...

Better capacity that you get through automation allows more customers.

Is that sort of even better return than you have already.

As already been agreed upon or is it both.

Okay.

Yeah, I mean, it's sort of which side of it do you look at it? There's definitely operating margin improvement check.

Yes.

Yeah.

It's sort of which side of it do you look at it.

There is definitely operating margin improvement check.

But there's returns on capital improvement to the extent that you can move more sales through a building and not have to build a new building.

But theres returns on capital improvement to the extent that you can move more sales through a building and not have to build a new building.

Scott Mushkin: And your next question comes from a line of Scott Mushkin from our five capital. Your line is open. Hey, guys, thanks for taking my questions. I got a couple kind of short ones and then maybe more strategic. So when you, you mentioned market share and you're kind of just a little bit above I or I, Nielsen. Are you referring to the total market or just the supermarkets? In that particular line, I believe we were talking about the total market.

Now, is that sales or is that just getting better asset productivity and driving returns up? Well, it's both. But I think we talked about in previous calls. There's a...

Now is that sales or is that just getting better asset productivity and driving returns up well it's both.

But the.

I think we've talked about in previous calls there is a.

This is a low margin business. So sales drives a low gross margin. To the extent that it can be done in a capital efficient way, that's going to create returns immediately for shareholders. To the extent that we have more customers.

This is a low margin business, so sales drives a low gross margin.

To the extent that it can be done in a capital efficient way that's going to create returns immediately for shareholders to the extent that we have more customers.

Sandy Douglas: Perfect. And then I don't know if you had said it. Maybe I missed it. Did you talk about service levels in the quarter? Service levels. I don't know that we mentioned it, but we, we are seeing service levels improve sequentially. I think we mentioned last quarter that they were up about 10 percentage points versus 12 months before. And they're remaining at that level. And then final little housekeeping going on here. Inflation you guys said low to mid single digits.

Besides the gross margin, it also increases attractiveness to our suppliers who will then invest to try to grow with the customer base that we have. That's one of our biggest assets and one of our biggest opportunities.

Besides the gross margin. It also increases attractiveness to our suppliers, who will then invest to try to grow with the customer base that we have that's one of our biggest assets and one of our biggest opportunities.

So very few of these investments have just one stream of value that's a part of the investment.

No.

Very few of these investments have just one stream of value that's a part of the investment.

but certainly the operating margin benefits are significant in the supply chain invest.

But certainly the operating margin benefits.

Sandy Douglas: I mean, you know, we're tracking it kind of flatish right now over the last six months. So that seems somewhat aggressive. And I'm just wondering maybe you could get into why you think it's going to be at that level. Yeah, I'm happy to take that one. We exited Q4 with just under 6% inflation for our business. And so the way we're thinking about that is it's going to continue to decelerate as we move through 24 ending somewhere in that very low single digits. But the average for the year will be something in the low single digits 2 to 3%.

Are significant in the supply chain investments, but they have sales and supplier margin benefits that come off and as well.

But they have sales and supplier margin benefits that come off them as well.

Okay, that's clarifying, thank you. And just one last question is more probably for John , on the $94 million variance in the wholesale gross profit.

Okay. That's clarifying thank you and just one last question is more probably for John on the.

$94 million variance in the wholesale gross profit.

Maybe give us a sense of, I know most of it's inventory game, but you did say shrink as well. Just kind of proportionalize that perhaps. And then if we were, if you were just to adjust all that out, what is going on with the underlying gross margin at the customer level? And you know, I kind of would, you know.

Could you maybe give us a sense of I know most of its inventory gain but you did say shrink as well just kind of proportion of lives that perhaps and then if we were if you were to just to adjust all that out.

What's going on with the underlying gross margin.

Sandy Douglas: Okay, that's great. And then my final one is a little bit more strategic. You know, when you look at automating these facilities, you know, everyone's kind of on that path a little bit given the activities from Walmart. How should we look at that from a timeline perspective, you know, when, you know, when would you have the bulk of the facilities automated? Is this a five-year process, just a little, you know, kind of thoughts on timing?

At the customer level.

Kind of with.

supernatural growing much faster, at least in the past, that's been kind of...

Supernatural growing much faster at least in the past that's been kind of.

Take it down the gross profit rate a bit. So could you just discuss the underlying gross profit?

Take it down the gross profit rate a bit so could you just discuss how the underlying gross profit is doing.

Yeah, I'm going to take this one too. The answer is that customer mix can affect our underlying growth profit. And sometimes the larger customers will generate a gross margin decline. There also tend to be very efficient customers. So when you get it to the bottom line, sometimes that's muted. We don't share specific information about customers. And as I mentioned earlier in the question on independence.

Yes, I'm going to take this one too.

The answer is the customer mix can affect our underlying gross profit.

Sandy Douglas: Here. Scott, I'm going to answer that with the information that we've provided, unfortunately, which won't give you all the answer to that because there's some competitive sensitivity there. But before I do, let me make sure in your first question, you asked a question about market share, and I want to make sure we're connecting exactly on what the universe is. The universe that we're out performing is just the supermarket channel. It's basically like for like.

And sometimes the larger customers will generate a gross margin decline. There also tend to be very efficient customers. So when you get it to the bottom line, sometimes thats muted, we don't share specific information about customers.

And as I mentioned earlier in a question on independence.

We see outsides growth from all over our customer base. It's more correlated with it.

We see outsized growth from all over our customer base, it's more correlated with the success of their brand and their concept than their size. So.

Sandy Douglas: It's not inclusive of discounters and club stores. So if you're comparing it to customers that are like our customers, we're performing slightly better than the broader market on the question around automation, as I mentioned in my script, we are going live in our first one. We have several other projects started. But our pace will be directly related to the capability and confidence we get in our ability to run those projects effectively and how many of them we can do at a given time.

Success of their brand and their concept and their side.

So, you know, when you see real strong growth coming from a very large customer, you probably got it right that it's going to be a little bit negative in the gross profit, but there are benefits to every customer relationship that, and we have...

When you see real strong growth coming from a very large customer you probably got it right that it's going to be a little bit negative in the gross profit but their benefit.

Every customer relationship that and we have really strong partnerships with our large customers and we mutually look for ways to create more value.

really strong partnerships with our large customers and we mutually look for ways to create more value for each other in the partnership and that's part of the process of account management.

For each other in the in the partnership and Thats part of the process of account management.

Okay. Thank you.

And your final question comes from a line of Bill Kirk from Roth Capital Partners. Your line is open.

And your final question comes from the line of Bill Kirk from Roth Capital Partners. Your line is open.

Sandy Douglas: They have a wide range of benefits. The probably a very important one of those is the economic side they create. And as we get full confidence and visibility into that, that will then dictate exactly what the end footprint looks like. Right now, we're going to the most obviously productive sites. And that was what we announced on our first agreement with Symbatic. We also have some each pick automation that we're doing in parallel. It's more tactical. But in the end, we will automate our distribution system in a very disciplined and economic way. And the speed will directly relate to our capability to do it well.

Hey, thank you everyone. Sandy, you just kind of hinted at something. You provide such vital access to market for so many brands, right? It's harder for them, especially the smaller ones to get the shelves really any other way. So I guess the question is, is there an ability or an appetite to increase the slotting fees to be in your warehouses, especially as you're making improvements to those warehouses?

Hey, Thank you everyone. Sandy you just you just kind of hinted at something.

Scott Mushkin: Perfect. Thanks guys. Thanks for taking my questions.

Provides such vital access to market for so many brands right, it's harder for them, especially the smaller ones to get the shelf really any other way. So I guess the question is is there an ability or an appetite to increase the slotting fees to be in your warehouses, especially as youre, making improvements to those warehouses.

Well Bill.

You just asked a super strategic question that I'm not gonna answer directly, but let me see if I can frame the answer in a way that would give you what I think you would be the question behind the question.

You just asked is super strategic question that I'm not going to answer directly.

But let me see if I can frame the answer in a way that would give you what I think you would be the question behind the question.

We see it significant opportunity to be a value added resource to help suppliers and our 32,000 customers see each other exchange data. And for the high margin suppliers who are very growth driven, to be able to invest, to deliver brand execution and growth consistent with their commercial strategies and ultimately their brand strategy.

We see a significant opportunity.

To be a value added resource to help suppliers and our 32000 customers see each other exchange data.

Kelly Banya: Thank you Scott. Your next question comes from a line of Kelly Banya from BMO Capital Markets. Your line is open.

And for the high margin suppliers, who are very growth driven to be able to invest to deliver brand execution and growth consistent with their commercial strategies and ultimate ultimately their brand strategies.

Kelly Banya: Good morning. Thanks for taking our questions. Just wanted to ask again about the procurement games. I think the one of the challenges with that has been just the visibility into how that has impacted the P and L. So I guess at this point, have you been able to go back and do some more analysis that gives you confidence in the magnitude of procurement gain headwinds that you have forecasted in fiscal 24.

The very, very largest retailers have built tools that help them do that.

The very very largest retailers have built tools that help them do that.

We see an opportunity for you and if I to get in that business and ultimately create growth opportunities in the most relevant brand building channels that a brand can have to execute it.

We see an opportunity for UNFI to get in that business and ultimately create growth opportunities and the most relevant brand building channels that a brand can have to execute it.

Kelly Banya: And then I have a couple more follow up. I think principally Kelly, we do because we have now experienced Q3 and Q4 last year. And we have the ability now with all of that data to triangulate in on the data sources that we have and project it forward for Q1 and Q2. And the numbers John described in the script are how that's weighing on the P and L for fiscal 24. I would go further to say that we have learned from that a lot about how our margin operates through our distribution systems.

So.

The question you ask is the specific type of fee. The way I might frame it is to flip it over and say, well, maybe there's a subscription fee for a different kind of partnership. That's all about moving the agenda faster and helping our customers be more competitive and more successful with brands and more investable. And that's something we're working on. It's not something we have completely figured out, but it's something that's working progress.

The question you asked is this specific type of fee.

The way I might frame it is to flip it over and say well maybe there is a.

Scripture and fee for a different kind of partnership.

It's all about moving the agenda faster and helping our customers be more competitive and more successful with brands and more investable.

And that's something we're working on it's not something we have completely figured out but its something thats work in progress.

Kelly Banya: And that's helping us create value not just forecast. Okay, and can you give us any color on the specific dollar amount and pacing of the return of promotions and what is baked into your your guidance and how that compares to the historical levels of margin that you generate from promotional activity? Sure, Kelly. This answer is going to frustrate you, but you may have some more information than I do on this. What we're seeing is we're seeing suppliers talk about accelerating promotions.

Okay, thank you. And if I could go back to John's question or one of John's questions in the beginning, the JCP team highlighted unified substantial assets.

Okay. Thank you.

If I can go back to John's question I want to John's question in the beginning.

The JCB team highlighted unify a substantial assets.

and it's hard not to think back to, I guess, this 2018, when super value, right, their assets, we're looking at either divesting retail and or philly specs as some of the own real estate behind the distribution centers. Is that what is implied by highlighting the substantial assets? Like, it's just hard not to think back to that. So I guess, is there an implication there or an inference to be made from highlighting the substantial assets in that way?

It's hard not to think back to I guess it was 2018.

When supervalu alright their assets.

Looking at either divesting retail <unk> sale leasebacks with some of the owned real estate behind the distribution centers.

Is that what is implied by highlighting the substantial assets like its just hard not to think back to that.

I guess is there an implication there or an inference to be made from from highlighting the substantial assets in that way.

Kelly Banya: Their actions are slightly behind their words, but because of the fact that inflation is coming down and unit velocity is not matching it on a one-to-one basis. It's logical to us that we will see supplier promotions improve and that's what we believe they're saying. It's what they're telling us, but it looks to be gradual and it may be a function of fiscal years and how next year which most of the suppliers are calendar fiscal will begin.

Okay.

Yeah, this is Sandy. What I would say there is in my conversations with James, I think he's excited about the potential of what you enough I can do. And so I think he uses the word asset broadly beyond just financial assets, but more market position, opportunity, mission.

Yeah. This is sandy what I would say there is.

In my conversations with James I think he's excited about the potential of what UNFI can do.

And so I think he uses the word asset broadly.

Beyond just financial assets, but more market position opportunity mission.

But part of what we're going to be doing with the board over the next few quarters is doing a really thorough financial review. Think of that as strategy with a fair amount of rigor to ensure that every dollar we use is maximizing its impact for our strategy and for shareholders. And so.

But part of what we're going to be doing with the board over the next few quarters is doing a really thorough financial review.

Think of that as strategy with with a fair amount of rigor to.

To ensure that every dollar we use is maximizing its impact for our strategy and for shareholders.

Kelly Banya: But you know, from a supplier perspective, we're seeing it slowly increase, but it's still below pre-pandemic levels. From a retailer perspective, we're seeing promotions accelerate as retailers look to drive their price positioning, particularly those that are price positioned. But as suppliers get more promotional, we are eager to help them get a return and to invest more. Okay, that's helpful. And maybe just within your guidance, can you talk a little bit more about the retail profitability that took a pretty big leg down here, and maybe can you talk about the factors is that is that is that you own retail stepping up your own promotion.

to the extent that we look at financial assets in that process, which we of course will, that will happen, but it'll all be tied to the context of what we're trying to accomplish to build a company that's extremely profitable and grows profitably for years to come.

Joe.

To the extent that we look at financial assets and that process, which we of course will that will happen, but it will all be tied to the context of what we're trying to accomplish to build a company that's extremely profitable and grows profitably for years to come.

Thank you Sir that's it from me.

And we have reached the end of our question and answer session. I will now turn the call back over to UNFI's CEO , Sandy Douglas for some closing remarks.

We have reached the end of our question and answer session I will now turn the call back over to UNFI CEO Sandy Douglas for some closing remarks.

Thanks operator and thanks to everybody for joining us this morning. Fiscal 2023 was a challenging and difficult year and we expect fiscal 2024 will continue to present macro challenges and other hurdles as we accelerate and expand our transformation journey.

Thanks, operator, and thanks to everybody for joining us this morning.

Fiscal 2023 was a challenging and difficult year and we expect fiscal 2024, we will continue to present macro challenges in other hurdles as we accelerate and expand our transformation journey.

Kelly Banya: And I guess in similar vein, what is your guidance assume in terms of customer mischief pressures? Well, listen, when you look at our retail business, which is, I think about 10% of our business, we have an extraordinary brand franchise in CUB, which is the market leader in the Twin Cities area. Twin Cities is a typical US market, and it's prone to all the challenges that we see across the country, reducing federal assistance, student loans coming back.

However, our team is energized to lead you and to fight into the future. I've spoken before about the competitive advantages we have, which we believe position us well, to succeed as we work to improve key capabilities and bring new value to customers, suppliers, and shareholders.

However, our team is energized to lead UNFI into the future.

Spoken before about the competitive advantages, we have which we believe position us well to succeed as we work to improve key capabilities and bring new value to customers suppliers and shareholders. This will be a multiyear improvement journey, where patience and persistence will be necessary, but we are confident we are on the.

This will be a multi-year improvement journey where patients and persistence will be necessary, but we are confident we're on the right path to reset the business, to turn around our profitability, and to accelerate sales and profit growth going forward.

Right path to reset the business to turnaround our profitability and to accelerate sales and profit growth going forward.

We expect to have additional proof points of our transformation strategy during the year and we'll provide updates as we execute.

Kelly Banya: There's plenty of pressure on the consumer. There's also a significant amount of price competition in the market, and we're seeing that it's a big market for home market for one discount or it's a big market for another and we're seeing all kinds of competitive activity. So our team has double down on that and they're investing in promotions to try to retain and grow their customer count. And then they're also experiencing higher than pattern labor expenses, so that's impacted their profitability from a more broad standpoint.

We expect to have additional proof points of our transformation strategy during the year and we will provide updates as we execute.

For our customers and suppliers, we thank you for your continued partnership and the business we do together. For the UNFI Associates listing 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 know these are challenging times, and we thank you for the trust you continue to place in us.

For our customers and suppliers. We thank you for your continued partnership and the business we do together.

For the UNFI associates listening today are 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 know these are challenging times and we thank you for the trust you continue to place in us.

Earning your continued trust is our highest priority. We look forward to updating all of you on our progress again in December after our first quarter.

Turning your continued trust is our highest priority.

Kelly Banya: And our outlook for our retail businesses incorporated in our guidance, so, but the CUB brand is a strong brand and we expect it to succeed going forward. As it relates to kind of market shifts, there's clearly pressure in the market coming from discounters. They're investing in their taking share, and that's evident and syndicated data. What our job is to try to make sure that our independence and our customers in general are equipped with the best cost, the best promotional investments and programs to help them compete effectively and to outperform their peer set first and to gain share in the market.

We look forward to updating all of you on our progress again in December after our first quarter.

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

This concludes today's conference call. Thank you for your participation you may now disconnect.

[music].

Kelly Banya: And many of them are. Many of them are doing very well. I would say sales in general are soft at this stage and we're going to continue to work to try to outperform the market, but our guidance incorporates that kind of an outlook. Kelly, just one reminder, the FY23 retail reflects the expenses to open those six stores that I mentioned in my script that we would not expect to repeat an FY24. Did you share a number on that, John? I don't think we've disclosed that number externally, but it'll be for all six stores, it'll be a few million dollars.

Kelly Banya: Okay.

Yeah.

Yes.

[music].

Yes.

Sandy Douglas: And maybe I could just squeeze in one more here on CapEx. And if you are willing to comment at all on how that might play out over the next several years as you work towards this automation and optimization process, we've had CapEx go here from 250 to 320 and now planned at 400 million. So should that continue to creep up in the out years? Yeah, Kelly, this is Sandy. What I would say is we haven't given out your guidance or really any specific strategic planning information largely because we're in the first year of really starting to roll out our transformation.

Sandy Douglas: But if you look at the 400 million dollars in our capital budget, the majority of it is focused on transformation. A minority being kind of the maintenance capital that keeps our system going. So we pivoted to investing in changing the profile of the company and accelerating profitable growth. Our plans going forward will be with our with our newly constituted board and the financial review will be to rigorously go through all expenditures and make sure that every investment we make in this coming year and forward delivers not only maximum transformation benefits, but also outsized shareholder returns. And so we wouldn't be able to give out your guidance on this, but the process by which we will set that will be rigorous and will be designed to drive the transformation and deliver shareholder returns.

John Howard: Thank you.

Peter Celle: Your next question comes from a line of Peter Celle from BTIG. Your line is open. Great. Thanks for taking the question. I just want to come back to the conversation around shrink. Can you guys give us a sense of what you have modeled into your 2024 got into this point for shrink? And are you seeing any changes there or is it kind of pretty consistent levels of shrink across product types and customers just trying to understand the dynamics going on at that level right now? Sure. Thanks Peter.

Sandy Douglas: The shrink is a important opportunity for us. As we mentioned last year, the shrink levels in our business have increased significantly over the past two years. They're driven by four main categories procurement, inventory gains or losses, damages and spoilage. And all four of those have different root causes, and we've stood up a team to look at each of them and to manage them rigorously. We've identified root causes. We're rolling out new processes and training across our system and the entire management system is producing some early results. We haven't disclosed the specific component of shrink improvement that's in our guidance but we see the opportunity as being significant and multi-year starting with this fiscal year.

Sandy Douglas: Understood. And then just lastly, Sandy, last we spoke on that shrink, the inventory piece I think was kind of the piece we discussed in more detail. Shouldn't that piece really start to improve as your employees become more experienced and more tenured? Are you already seeing that or is that yet to come? Yeah, that's a knowledgeable question. The answer to that is yes, that helps. Overall, operations improves as turnover goes down and that's a core part of our people's strategy in our system.

Sandy Douglas: And that's not just shrink, it's all aspects of customer service and efficiency. But in addition to folks being more experienced, there are also process and system improvements that are rolling out to try to take the variability out. And we've identified where the root causes are and we're in the process of rolling out the improvements. And I expect this number to get better as we go forward.

Peter Celle: Thank you very much.

Andrew Wolf: Your next question comes from a line of Andrew Wolf from CL King. Your line is open. Thank you.

Andrew Wolf: Good morning. Sandy, I wanted to also ask the CAPEX from executive and maybe board view. Like, could you just give investors and us just some sense of how you know you guys are formulating and planning, you know, return on investment or ultimate earnings power? I know some of it is you said is contingent on how the implementation goes and the returns that come from that. But you know, CAPEX has gone up quite a lot.

Andrew Wolf: So could you just give us a sense of how you're thinking about that? And I guess one of the ways I'd like you to frame it and you can frame it other ways is, you know, how much of this is margin recapturing the margin that has been diminished recently and how much of this is I think even alluded to, you know, a robust pipeline. How much of this is really more top line driven?

Sandy Douglas: Sure. So let me start by saying that every dollar of capital that we allocate is scrutinized through several different angles. Maintenance capital is by definition maintenance capital. But what we have done is we've taken the transformation agenda and the capital that's embedded in it. And I think I mentioned in a previous question that it's about two thirds of the total capital. That's not all incremental. We've actually sweated through the maintenance capital and kind of zero-based it to try to source some of it.

Sandy Douglas: So the increase is not equal to the total of the transformation, and I would say the biggest load of the capital right now is operational. It's automation and network-related, which is focused on, I mean, there are top-line benefits because customer service and customer experience gets better, but the big payoff is actually in efficiencies in the supply chain and then the ability to get more efficient growth out of the buildings that exist.

Sandy Douglas: Automated building can actually produce a whole lot more sales than one that's not. And that gives you return on capital, it gives you working capital benefits, et cetera. So our transformation agenda certainly is focused on creating a great customer experience and enabling you to identify the serve the maximum number of customers and categories profitably. But in doing that, we want to have a system that works very efficiently and then through the, sort of the non-capital side of our transformation, which is more about how we work with suppliers and how we make the commercial system work, is how do we fully activate that using data to create growth and to earn profitability as we generate growth for some of the bigger properties in the system which come out of our suppliers.

Sandy Douglas: So the very general answer, but if you want to follow up, Andy, I'm happy to answer. And that's okay. I just had one clarification follow up is he mentions, I think that I think first you said it's mainly operational network, which to me means margins. But then you said, you know, an automated system also has better throughput. So I just want to again back to the how you're justifying how the board is voting on this and justifying the investment.

Sandy Douglas: Is it, is it justified all through margin and then if, you know, the better capacity that you get through automation allows more customers. Is that sort of even a better return than you've already, you know, has already been agreed upon or is it both? Yeah, I mean, it's sort of which side of it you look at it. There's definitely operating margin improvement check. But there's returns on capital improvement to the extent that you can move more sales through a building and not have to build a new building.

Sandy Douglas: Now, is that sales or is that just getting better asset productivity and driving returns up? Well, it's both. But the, I think we talked about in previous calls there's a, this is a low margin business. So sales drives a low gross margin to the extent that it can be done in a capital efficient way. That's going to create returns immediately for shareholders to the extent that we have more customers. Besides the gross margin, it also increases attractiveness to our suppliers who will then invest to try to grow with the customer base that we have.

Sandy Douglas: That's one of our biggest assets and one of our biggest opportunities. So very few of these investments have just one stream of value that's a part of the investment. But certainly the operating margin benefits are significant in the supply chain investments. But they have sales and supplier margin benefits that come off them as well.

Andrew Wolf: Okay, that's clarifying, thank you.

John Howard: And just one last question is more probably for John. On the $94 million variance in the wholesale gross profit, could you maybe give us a sense of, I know most of it's inventory game, but you did say shrink as well. Just kind of proportionalize that perhaps. And then if we were, if you were to just do it, just all that out, what is going on with the underlying gross margin, you know, at the customer level, and you know, kind of with, you know, supernatural growing much faster, at least in the past, it's been kind of take it down the gross profit rate a bit.

John Howard: So could you just discuss how the underlying gross profit is doing? Yeah, I'm going to take this one too. The answer is that customer mix can affect our underlying gross profit. And sometimes the larger customers will generate a gross margin decline. There also tend to be very efficient customers. So when you get it to the bottom line, sometimes that's muted. We don't share specific information about customers. And as I mentioned earlier in the question on independence, we see outsides gross from all over our customer base.

John Howard: It's more correlated with the success of their brand and their concept than their size. So you know, when you see real strong growth coming from a very large customer, you probably got it right that it's going to be a little bit negative in the gross profit, but there are benefits to every customer relationship that, and we have really strong partnerships with our large customers and we mutually look for ways to create more value for each other in the partnership. And that's part of the process of account management.

John Howard: Okay, thank you.

Bill Kirk: And your final question comes from a line of Bill Kirk from Roth Capital Partners.

Bill Kirk: Your line is open. Hey, thank you everyone. Sandy, you just kind of hinted at something. You provide such vital access to market for so many brands, right? It's harder for them, especially the smaller ones to get the shelves really any other way.

Sandy Douglas: So I guess the question is, is there an ability or an appetite to increase the slotting fees to be in your warehouses, especially as you're making improvements to those warehouses? Well, Bill, you just asked a super strategic question that I'm not going to answer directly. But let me see if I can frame the answer in a way that would give you what I think you would be the question behind the question.

Sandy Douglas: We see a significant opportunity to be a value added resource to help suppliers in our 32,000 customers see each other exchange data. And for the high margin suppliers who are very growth driven to be able to invest to deliver brand execution and growth consistent with their commercial strategies and ultimately their brand strategies. The very, very largest retailers have built tools that help them do that. We see an opportunity for UNFI to get in that business and ultimately create growth opportunities in the most relevant brand building channels that a brand can have to execute it.

Sandy Douglas: So the question you ask is a specific type of fee. The way I might frame it is to flip it over and say, well, maybe there's a subscription fee for a different kind of partnership. It's all about moving the agenda faster and helping our customers be more competitive and more successful with brands and more investable. And that's something we're working on. It's not something we have completely figured out, but it's something that's working progress.

Sandy Douglas: Okay, thank you. And if I could go back to John's question or one of John's questions in the beginning, the JCP team highlighted UNFI's substantial assets. And it's hard not to think back to, I guess, this 2018, when super value, right, their assets, we're looking at either divesting retail and or sell lease backs with some of the own real estate behind the distribution centers. Is that what is implied by highlighting the substantial assets?

Sandy Douglas: Like, it's just hard not to think back to that. So I guess is there an implication there or an inference to be made from highlighting the substantial assets in that way? Yeah, this is Sandy. What I would say there is in my conversations with James, I think he's excited about the potential of what UNFI can do. And so I think he uses the word asset broadly beyond just financial assets, but more market position, opportunity, mission, but part of what we're going to be doing with the board over the next few quarters is doing a really thorough financial review.

Sandy Douglas: Think of that as strategy with a fair amount of rigor to ensure that every dollar we use is maximizing its impact for our strategy and for shareholders. And so to the extent that we look at financial assets in that process, which we of course will, that will happen, but it will all be tied to the context of what we're trying to accomplish to build a company that's extremely profitable and grows profitably for years to come.

Bill Kirk: Thank you, Sadia, that's it for me.

Operator: And we have reached the end of our question and answer session.

Sandy Douglas: I will now turn the call back over to UNFI's CEO, Sandy Douglas, for some closing remarks. Thanks, operator, and thanks to everybody for joining us this morning.

Sandy Douglas: Fiscal 2023 was a challenging and difficult year, and we expect fiscal 2024 will continue to present macro challenges and other hurdles as we accelerate and expand our transformation journey. However, our team is energized to lead UNFI into the future. I've spoken before about the competitive advantages we have, which we believe position us well, to succeed as we work to improve key capabilities and bring new value to customers, suppliers, and shareholders. This will be a multi-year improvement journey where patients and persistence will be necessary, but we are confident we're on the right path to reset the business, to turn around our profitability, and to accelerate sales and profit growth going forward. We expect to have additional proof points of our transformation strategy during the year, and we'll provide updates as we execute.

Sandy Douglas: For our customers and suppliers, we thank you for your continued partnership and the business we do together.

Sandy Douglas: For the UNFI associates listening today are thanks to each of you for everything that you do, for our business, our customers, our communities, and each other.

Sandy Douglas: And for our shareholders, we know these are challenging times and we thank you for the trust you continue to place in us.

Sandy Douglas: This concludes today's conference call. Thank you for your participation. You may now disconnect.

Q4 2023 United Natural Foods Inc Earnings Call

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