Q1 2025 United Natural Foods Inc Earnings Call
We also continue to rollout our revamped go to market program for suppliers, which aims to streamline and simplify their experience and help them accelerate their growth within our diverse retailer network.
Several of our large suppliers that have embraced the program have experienced volume gains it surpassed their peer group because they have taken advantage of the data and insights we provide in areas such as new item placement, we're bringing items discontinued during COVID-19 back onto customer sales, we continue to focus on bringing additional.
Suppliers into the program, while making sure participants of all sizes have the best experience possible and are able to maximize the value and the growth opportunities that UNFI is making available to them.
We will continue to execute our plan to pursue innovation in our offerings.
Optimize efficiency and strength in service levels to help drive even greater value and trust with retailers as well as buyers.
As we focus on becoming more efficient <unk> leadership has played a significant role in our progress.
He has deep experience in helping turnaround and improved businesses.
Largely through the disciplined implementation and rigorous follow through of lean six Sigma management principles.
This is already benefiting UNFI and our financial and operating performance.
I'll, let him provide more color and details momentarily, but let me talk at a high level about a few of the actions that we've taken to improve the overall customer and supplier experience, while removing costs and streamlining the organization.
Reducing or eliminating waste is a big part of what we're trying to accomplish over the next three fiscal years with shrink reduction a big focus over the past five quarters, we brought shrink in line with historic pre Covid levels, and we're now working to reduce it further while simultaneously driving.
Increase the capacity of our network through ensuring that we have the right assortment, which should help drive higher sales for us and for our customers.
Decentralising responsibility and accountability in the organization is another principle of lean.
The mutual development of key performance indicators that get measured and course corrected in near real time.
As Matteo described on our last call we have begun the process of pushing the lean framework into our distribution centers, where our local operators are involved in the process of creating and taking ownership of operational kpis.
These same associates are at the center of problem solving and creating action plans, where performance is not meeting expectations.
We piloted the process and two distribution centers and are pleased with the initial results.
Next we'll begin further aligning our organization to deploy this methodology across more of our facilities.
Our continued focus on network optimization has also proceeded as planned and we have completed the closure of both our billings and Bismarck conventional distribution centers, which we described last quarter.
We have retained the vast majority of the business. When these dcs, which is now being serviced from nearby more modern UNFI facilities with larger assortments.
We are now marketing the real estate.
For similar reasons, we made the decision to close our Fort Wayne, Indiana distribution center and transfer that volume to neighboring facilities in Pennsylvania, and Illinois, where we expect customers to see assortment and service level benefits.
Associates and customers were informed of this in mid November and we expect to complete this move early in calendar 2025.
Fort Wayne is another owned DC, which will begin marketing at the appropriate times.
We will continue to evaluate other similar optimization opportunities.
During the quarter. We also move natural volumes from our York DC into our 50% larger soon to be automated Manchester DC, which we expect will yield service quality and efficiency benefits for our customers suppliers and UNFI in the region, we can see the combination.
Adding value for customers and suppliers to support their sales alongside our efficiency focus delivering tangible operating and financial improvement.
As we have combined above market sales volume with our improving efficiency, we've been able to increase net sales per employee by over 6% compared to the prior period.
Which is structurally improving profitability and free cash flow generation.
This is partially a result of growing sales driven by the success of our customer base and expanding customer relationships.
As well as our actions to enhance the responsiveness of our organization and empowering associates deeper in the organization to make real time improvements all in we drove adjusted EBITDA growth of nearly 15% compared to the prior year first quarter.
And delivered our fifth consecutive quarter of sequentially, improving adjusted EBITDA dollars. This progress reflects strong execution against our targets and we will remain focused on executing at higher levels to continue to improve service levels efficiency and free cash flow, while reducing leverage.
As we execute we become even more confident in our multiyear objectives long term trajectory and in our ability to add value for retailers and suppliers across the food retail ecosystem.
We are focused on becoming the most sufficient value, creating long term partner for our stakeholders, which in turn creates more opportunities for the approximately 28000, UNFI associates, who serve our customers with dedication every day.
Together, we remain confident our plan will drive sustainable shareholder returns.
With that let me turn it over to Matteo to discuss our Q1 results.
Matteo: <unk> progress and revised outlook.
No.
Matteo: Thank you Sandy and good morning, everyone and thanks again for joining our first quarter earnings call.
Matteo: <unk> stated we're off to a solid start in fiscal 2025 and remain confident in our multiyear strategy and the corresponding long term financial objectives, we outlined during our year end call.
Matteo: Today, I will provide additional insight into our first quarter results, including our free cash flow and capital structure.
Some early proof points around the initial success, we've had with lean principles and comment on our updated outlook for fiscal 2025.
Matteo: Let's dive into our Q1 results turning to slide eight our first quarter sales came in at $7 9 billion.
Matteo: Four 2% higher than last year's first quarter.
Matteo: Wholesale volumes were up nearly 2%, which represented another quarter of sequential acceleration and continuation of the trends we experienced as we exited fiscal 2024.
Matteo: These volume increases reflected continued improvement across natural and conventional with our natural business again seeing significantly stronger trends compared to the overall industry as well as expanded relationships with new and existing customers.
Matteo: Inflation was largely unchanged sequentially at about 1% and down approximately two percentage points compared to the prior year quarter.
Matteo: Total retail sales fell 3% year over year with sales down one 4%, both lower declines compared to the fourth quarter of last year.
Matteo: This was partly the result of targeted promotional investments made to drive store traffic, which began partway through the quarter.
Matteo: Our team in conjunction with the Cup franchisees continues to refine and operating plan expected to drive improving top and bottom line performance as we move further into the fiscal year.
Matteo: Moving to slide nine let's review profitability drivers in the quarter.
Matteo: Our gross margin rate, excluding LIFO was 13, 3% of net sales in the first quarter.
Matteo: And about 40 basis points compared to last year, driven by both our wholesale and retail segments.
Matteo: Our wholesale margin rate declined approximately 40 basis points versus last year's Q1 due to changes in business mix at both the customer and product level lower procurement gains and ongoing strategic commercial investments.
Matteo: These were partially offset by progress driving innovation and efficiency, including through supplier programs and reduce shrink.
Matteo: One driver of our shrink improvement this quarter was our work around eliminating waste a key principle of lean management.
We have been successful and thoughtfully identifying and focusing our teams on several processes within our distribution centers.
Matteo: Our expense ratio had creeped up following the period of Covid and broader supply chain challenges.
Matteo: Our actions have led to lower operating expense increased capacity and more efficient workflows as well as reduced college.
Matteo: Retail gross margins were also below last year's Q1 levels, which as I mentioned earlier, we're driven by targeted price and promotional investments made to drive traffic primarily at Cub.
Matteo: More than offsetting the decrease in gross margin rate was solid execution and management of our operating expenses, which compared to last year declined by approximately 65 basis points as a percentage of net sales.
Santos: The Santos stated, we're focused on becoming a more efficient business that is better able to bring value and improving service levels to our customers and suppliers.
Santos: This has led to consistent efficiency gains across our supply chain, where we've generated a sequential improvement in throughput for three consecutive quarters and a 5% improvement in cases per hour in Q1 compared to last year's quarter.
Santos: Adjusted EBITDA for the first quarter grew nearly 15% compared to prior year quarter to approximately $134 million.
Santos: Absent the additional week in last year's fourth quarter. This was the fifth consecutive quarter of sequentially improving adjusted EBITDA.
Santos: These increased adjusted EBITDA during Q1 was complemented by lower than expected costs associated with our accounts receivable monetization facility as well as some investment gains.
Santos: Together these more than offset slightly higher amounts for depreciation and amortization and net interest expense.
Santos: This led to adjusted EPS of <unk> 16 per share compared to a net loss of <unk> <unk> per share in last year's first quarter.
Santos: Flipping to slide 10.
As I discussed on our last call, we're implementing lean principles throughout our business and supply chain and are encouraged with the early operational improvement in financial results were driven.
Santos: One major undertaking that we have completed over the last few months is a decentralization of our procurement function.
Santos: With transition from having one centralized procurement team to a DC based organization, bringing them closer to our customers and operations.
Santos: This has empowered teams to be more directly involved in demand forecasting, allowing for more timely and accurate inventory ordinary.
Santos: While there have been some initial adjustments along the way the team is embracing the process learning and steadily driving improvement.
Santos: We will continue to focus on driving sustained improvement in this area to help even better align demand with supply and to steadily increase customer service level, a core focus of our multiyear strategy.
Santos: The other initiative that I would highlight is the recently completed initial launch of lean daily management routines and distribution centers in Texas, and Colorado, where measures of success were built around key performance indicators for safety quality delivery and cost in that order of priority all meant to create supply.
Santos: Hi chain value for all unifies stakeholders, including our suppliers and customers.
Initial results showed an 11% improvement in fulfillment quality.
5% improvement in on time delivery and gains in warehouse labor productivity.
Santos: As we move through fiscal 2025, we plan to scale lean daily management processes methodically throughout our network, while sustaining our focus on quality and value delivery.
Santos: Turning to slide 11 <unk>.
Santos: This emphasis on lean principles helped drive profitability and free cash flow in the quarter.
Santos: Free cash flow in Q1 was a use of about $159 million roughly $170 million improvement over the past two fiscal years in which we use close to $330 million in the first quarter of each of these years.
Santos: This improvement included an incremental $56 million of incentive compensation in the first quarter, which was not paid out in the prior year due to the fiscal 2023 performance.
Santos: Our first quarter progress were largely due to faster than anticipated progress on working capital management.
Santos: This was partially driven through a shift in how and where we manage inventory.
Santos: The decentralization of procurement will be inventory management closer to the end customers, which is particularly important as we focus on the Q2 holiday selling season, and delivering strong service to our customer.
Santos: Because a portion of the year over year for whatever it is timing related we would not expect to see the same for what ability to last year for each of the remaining three quarters of the fiscal year.
Santos: Part of this is also driven by the non linear nature of the timing of the cash outflows for our supply chain and automation investments, which is captured in our updated full year outlook for free cash flow.
Santos: Our Q1 free cash flow was also reduced by nearly $70 million from the strategic decision to reduce the number of customers under our accounts receivable monetization program.
Santos: As I suggested on our last call. This program was originally implemented to reduce our effective borrowing cost.
Santos: The cost saving benefit no longer exist and it makes it neutral from a cost of capital perspective relative to other funding sources.
Santos: Although we plan to lower our user trait of these and similar programs unified retains the flexibility to strategically utilize additional capacity should we choose to do so in the future.
Santos: As is typical in Q1, our net debt levels increased sequentially and ended the quarter at $2 2 billion of net debt.
Santos: This contributed to our net leverage increasing by about two tenths of a turn to four two times, which is toward the lower range of the typical historical increase we are seeing during our first quarter as we prepare for the holiday selling season.
Santos: This performance in Q1 keeps us on track with our longer term deleveraging goals.
Santos: Looking at Slide 12 fiscal 2025 is off to a solid start and we're modestly raising our full year outlook for all financial metrics other than capital spending.
Santos: As outlined in our press release, the updated guidance for net sales is a range of $36 billion to $31 billion.
Santos: Which represents a one 3% full year increase at the midpoint compared to the fiscal 2024, when adjusting for the 50 <unk> week last year.
Santos: This represents about an 80 basis points increase in dollar terms from the midpoint of our prior outlook.
Santos: We've raised the bottom end of our expectations for adjusted EBITDA by $10 million, bringing the new range to $530 to $580 million.
Santos: Which is a 9% increase over the last year at mid point.
Santos: In terms of cadence for the year, we expect first half adjusted EBITDA growth in the high single digit to low double digit range compared to the prior year period.
Santos: This implies total adjusted EBITDA generation will likely be slightly back half weighted reflecting the cadence of actions, we're executing as part of our revised strategy and how this build into our results over the balance of the year.
Included the benefit of lower forecasted interest expense and a couple of small below the line items, our EPS and adjusted EPS ranges have increased as well with adjusted EPS now expected to fall within the range of 40% to 80 per share compared to <unk> 14 last year.
Santos: Full year free cash flow is now expected to be more than $100 million.
Santos: Which compares to our prior outlook of approximately $100 million.
Santos: Ah represents around 200 million in improved year over year free cash flow.
Cindy mentioned, we have completed the closure of both of our billings in Bismarck distribution centers and retain the vast majority of the business, which is now being serviced out of nearby facilities were.
Santos: We're in the process of marketing the real estate underlying both properties, but we will know certifies value for time, which is the same philosophy, we will apply for the Fort Wayne closure and future sale.
Santos: As I say the last quarter, we will continue to evaluate other opportunities along these lines, but have not included any incremental strategic actions in our outlook slip.
Santos: Flipping to slide 13, we enter fiscal 2025 with a stronger foundation and operating momentum, which continued through the first quarter of the new year our.
Santos: Our efficiency initiatives powered in part by lean principles are generating the operating benefits, we expected while our volume trends reflect the successful execution of our customers as well as the trust they are placing us everyday.
Santos: Our strategy of bringing our customers and supplier through a differentiated value proposition and strengthening service levels, while improving unify free cash flow is simple and powerful and we're executing against it.
So Andy myself and the entire leadership team remains confident and optimistic about our future and the value creation opportunity, we have as we work to improve our capabilities and customer facing execution.
Santos: Our focus on delivering and deleveraging remains intact and we look forward to updating you on our progress again next March with that operator. Please open the line for questions.
Thank you we are now opening the floor for a question and answer session.
Speaker Change: I'd like to ask a question. Please press star followed by one on your telephone keypad.
Speaker Change: First question comes from John <unk> from Guggenheim Partners. Your line is now open.
Speaker Change: Hey, Sam do you want to start with de centralized procurement.
Sam: Maybe just talk about balancing Brad do you want to manage the inventory locally, but you want to buy it with the benefit of scale. So how you are managing that and then when you think about accountability is great.
But if you can if you can write <unk> or make the compensation program sort.
Speaker Change: Sort of.
Speaker Change: And kind of make changes there to strengthen accountability, what do you want to do on the on the compensation side that might be different.
Speaker Change: Jonathan.
Speaker Change: As we said on the call a key tenant of our strategy is adding value to our customers and suppliers and a big part of that is having the products that they need delivered their stores in a timely fashion.
Speaker Change: And overall with those goals in place, we're focused on delivering strong customer fill rates and.
Speaker Change: We've set the goal of reducing our inventories back to pre COVID-19 levels within the scope of the multiyear plan.
Speaker Change: We view this in some respects like the shrink goal we've been pursuing over the past five quarters.
Speaker Change: And we see significant opportunities for improvement both in working capital and in service.
Speaker Change: Part of achieving better working capital efficiency as you know.
Speaker Change: Is moving the decision, making in the view closer to the store so that.
Speaker Change: Associates can be involved in the forecasting in the analysis and we expect the change to better serve customers and to be a more efficient partner.
Speaker Change: And we're always looking for ways to align compensation directly with the outcomes that we're seeking in the business I would also say that this is early days in this process, we're continuing to refine the model to make sure that it delivers exactly as it's designed and it's consistent with the lean principles that Matteo has brought to the company.
Speaker Change: And maybe as a follow up I think you mentioned, 5% improvement in cases per hour.
Speaker Change: I believe that was the number.
Speaker Change: You didn't give.
Speaker Change: What the result was in the two Dcs so I'm curious.
Speaker Change: I mean, you should see improved productivity beyond that right.
Leanne: Rollout leanne.
Speaker Change: Is that fair.
Speaker Change: When you think about time to implement sort of day one.
Speaker Change: When do you sort of hit your stride on on.
Speaker Change: Focus on productivity.
Speaker Change: Is that is it six months out.
Speaker Change: Year out is it longer what's the timeline.
Speaker Change: Hey, good morning, John It's Matteo.
As we discussed in the last call our goal is to target inventory in MST in HST.
Speaker Change: Productivity at our Dcs and that is through a combination of the <unk>.
Speaker Change: Lean principles that we're deploying as long as the benefits and the learning from the automation efforts. So it's a balance of the of the two.
Speaker Change: Specifically.
Speaker Change: Our two distribution centers, where we piloted lean daily management with safety quality delivery cost kpis with the 11% improvement in fulfillment quality, 5% improvement in on time delivery and also some benefits from a productivity standpoint, but bear in mind that these are six to eight weeks old.
Speaker Change: So there is a lot to ramp up there.
Speaker Change: The framework of six to 12 months between the deployment of lean daily management to be out of our Dcs and the learning and the ramping of the automation initiatives is the right framework and Thats, how were thinking extracting a $150 million of cost from the roughly $4 billion total cost from the business in the next three years.
Speaker Change: Thank you.
Your next question comes from Lee Jordan from Goldman Sachs. Your line is now open.
Lee Jordan: Thank you good morning, Thanks for taking my question. Your sales guide implies a deceleration for the balance of the year on a comparable 52 week basis.
Lee Jordan: And if you could walk us through how youre thinking about inflation and volume.
Lee Jordan: Drivers for the balance of the year underscoring that.
Speaker Change: Just surprised given the new business wins this quarter that you called out volume coming in a bit better than expected why is that not flow through in a bigger way for the remainder of the year.
Speaker Change: Hey, good morning, Thanks for the question. So in the first quarter, we saw volumes growing about 2% in wholesale.
Speaker Change: Average total growth of four 2% and that was a trend that we picked up in the <unk> 49, as you recall and carried into the early innings of the second quarter.
Speaker Change: We are thinking about the new guidance, which is now at midpoint $38 billion rounding is basically roughly 1% growth for the remaining nine months of the year that is balancing three dynamics one is the <unk>.
Rents that we continue to see with our natural customers.
Speaker Change: Second is the more modest volume declines that we've seen in conventional and then third the ongoing dynamics with the DC optimization. So as Sandy mentioned, we were able to retain the vast majority of our customers in billings and Bismarck.
Speaker Change: We're now going to go through a similar experience we had at Fort Wayne and we feel that the balance for the remaining nine months is again embedding no Greens can known dynamics, but also the strength that we see we see with the natural business and again.
Speaker Change: The more modest declines that we've seen.
Speaker Change: In conventional and we keep the overall commercial backdrop front and center as we think about the execution for the remaining nine months.
Speaker Change: Thank you and then just on a related follow up just digging in a bit more to the new business gains this quarter driving some of that volume.
Speaker Change: Categories are presenting the most opportunity for you now and then why do you.
Speaker Change: <unk> customers existing customers are more engaged now or how do you think you are resonating more today.
Speaker Change: Yes, Leo this is sandy.
Speaker Change: One of the things that's most interesting about the broader environment is how segmented and differentiated retailers that are performing very very well I will give you. An example, multi multi cultural focused customers.
Speaker Change: Many markets are materially outperforming the general market by their differentiated offer in the way they compete and obviously, we're focused on providing great support for them as well.
Speaker Change: Seeing the natural organic performance driving significant growth as well and so.
Speaker Change: As we think about the way we show up is making sure that we have the products services and programs that retailers need to drive their strategy.
Speaker Change: And inside the shop, there's a lot of growth in fresh there as we mentioned natural products and multi cultural products.
Speaker Change: But we're also bringing professional and digital services that are helping customers compete as well.
Speaker Change: Thank you.
Speaker Change: Your next question comes from Andrew Wolf from C. L. King Your line is now open.
Andrew Wolf: Hi, good morning.
Andrew Wolf: Wanted to ask about the gross margin rate.
Speaker Change: Traction in the quarter.
Speaker Change: And to give us any sense of the outlook there.
Speaker Change: At least sequentially.
Speaker Change: Chile versus the last couple of quarters, but at the end of last year last fiscal year.
Speaker Change: There was.
Speaker Change: A pickup in that.
Speaker Change: Gross margin contraction so.
You've talked about.
Speaker Change: But that sort of.
Speaker Change: Things I could contract at let's say, our convert commercial investments customer mix and things that we're helping we're shrink.
And other things could you sort of just dive a little deeper into the quarter.
Speaker Change: Why the contraction might have been greater than it was why it was greater than it had been and what's the outlook to the extent you're willing to talk about that.
Speaker Change: Good morning, Andy.
Speaker Change: Gross margin rate in the first quarter ex LIFO was 13, 3%.
Speaker Change: <unk> was 13, 7% in Q1 of last year and down about 20 basis points or so versus the fourth quarter.
Speaker Change: Notably it grew $7 million and contributed to seven of the $70 million EBITDA growth and if you unpack that $7 million to actually show about $13 million or a growth in wholesale and a decline related to volume in retail.
Speaker Change: There are a lot of drivers that go into the gross margin rate and we commented that the two key drivers were planned customer and product mix, which were partially offset by the improvement in shrink and supplier programs.
Speaker Change: Also bear in mind that some of the large customer mix pressure has some offset in opex with fewer and lower drops as again, we scale up our facilities.
Speaker Change: I would highlight that.
Speaker Change: We continue to be very focused on improving the margin rate, including trade our shrink improvement as Sandy mentioned, we're back to the pre COVID-19 levels, but we embrace kaizen and continuous improvement there we're focused on growing our professional and digital services business clearly give us some additional calories on the gross margin as well as <unk>.
Private brands and committed to grow both top and bottom line for retail.
Speaker Change: What also reward keen and revamping our commercial screening process as we commented in the last call. So within the $90 billion resilient space. We continue to look for opportunities to create and get recognition for value with customers and suppliers. So we're very focused on the gross margin conversion and an increase in the.
Gross margin conversion rates, we see sales growing on the other side. We're also pleased with effectively deliver substantial operating leverage wage topline up 4% operating expenses being down 65 basis points as a percentage of sales.
Speaker Change: Floating to a 15% growth in EBITDA.
Speaker Change: Great I appreciate that granularity so it sounds like the gross margin rate.
Contraction was much less so obviously in wholesale even though.
Speaker Change: Yes, it was more in line with the <unk>.
Speaker Change: Sales growth and I think as you spoke to there were some investment.
In retail, which I guess.
Speaker Change: The.
Speaker Change: Same store sales, improving and Thats why our retail gross margin was down year over year gross profit dollars.
Speaker Change: I think that's right. Andy This is sandy I would also point out that our retail business grew its EBITDA by $1 million versus prior year also so it's a part of a rebuild on a strategy that.
Speaker Change: Our franchises are our franchise community and the twin cities is working with our retail leadership to galvanize the brand and so.
Speaker Change: We're investing some in price to be more competitive, but we're funding it through the operations.
Speaker Change: I would say optimistic but early days of the retail turnaround in the twin cities.
And if I can ask a much longer focus kind of question if I will.
Speaker Change: I think the lean processes are sound like they are gaining traction.
Speaker Change: Rapidly and labor productivity and other efficiencies.
But their party no so.
I think it is.
Speaker Change: Quite reasonable to assume that it's the right sizing of the.
Speaker Change: Head count reduction.
Speaker Change: And <unk>.
Less facilities that really is driving the.
Speaker Change: Lower operating expenses.
Speaker Change: Adjusted.
Speaker Change: But I really want to get too as well that sort of mix change over time, when you start hitting the <unk>.
Speaker Change: Back end of the second half to the back end of the <unk>.
Speaker Change: Fiscal 2007 guidance is it going to be more of the lean processes.
Speaker Change: That really start to drive labor.
Speaker Change: Operating expense efficiencies more so than I think I would imagine.
Speaker Change: Upfront.
And let me do the first half of this and then I'll, let matteo dive into the the way the lean process works.
Speaker Change: But I would.
Speaker Change: Call out in our strategy for key components. The first is organic growth driven by a very resilient $90 billion segment of the industry.
Speaker Change: Segment, where we're seeing retailers grow and segment, where we are designed as a company to serve.
Speaker Change: In a differentiated way.
Speaker Change: Secondly, the focus on value added to customers and suppliers is a key component for how they compete and win and we are designing products and services and programs to do just that all of that creates the topline. The engine and then clearly efficiency is a huge component and a 30.
Speaker Change: A company with our margins and with a strategy to grow our operating margin sequentially is a core part of value creation, it's going to be important that were incredibly efficient our customers need us to be our suppliers do and so to our shareholders and then the final component of.
Speaker Change: Optimizing free cash flow is critically important element as we.
Speaker Change: Deleverage the company back to lower levels that we committed to in the three year plan and so I view, it really capability wise its sales and Merchandizing meeting lean management principles to drive a virtuous cycle and Matteo maybe lay out sort of the sequence for lean as we go forward yes.
Speaker Change: Sandy.
I really focus on two areas at the moment for Vermillion standpoint, the first one needs to deploy lean daily management as a way to create quite problem solving and counter measures at the point of impact Thats why we selected two distribution centers to pilot we have a few more implementing <unk>.
Speaker Change: And what also embracing it India functions.
Speaker Change: The second area is.
Speaker Change: <unk> elimination identifying non value added steps as a way to create capacity build capabilities and build efficiencies and there is a process that takes.
Speaker Change: Lot of discipline, and probably longer horizons, but we're very very focused on applying this methodology as a way to create value and efficiency for our customers and suppliers, while re margining you on.
<unk> and generating the free cash flow to get to two five times or less leverage by the end of 2027.
Speaker Change: Okay. Thank you for that.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Your next question comes from Kelly Bania from BMO capital markets. Your line is now open.
Speaker Change: Yes.
Speaker Change: Hi, good morning.
Ben Wood on for Kelly, Thank you for taking our question.
Speaker Change: I wanted to start with that first how is the demand for your services tracking and where are we in the.
Speaker Change: Evolution of some of those programs and offerings.
Speaker Change: Previously unify had disclosed it was about 20% of EBITDA, which we believe may be a little closer to a 30% plus given where EBITDA is expected now is.
Is that fair and where do you see services growing at and mixing to longer term.
Speaker Change: Yes, we I think we shared that number in <unk>.
Speaker Change: The beginning of fiscal 'twenty two.
Speaker Change: And at the time, we describe services and brands as being.
Speaker Change: A little bit more than 20% of our EBITDA.
Speaker Change: We said in less specific ways over the last couple of years that they continue to outgrow the company and that is certainly our strategy for those businesses.
Speaker Change: And I put them into three buckets.
There is the professional services that help retailers save money and run their stores their digital stores that help them modernize their tech stack and begin to attract investment like the early days program, we've built around retail media network.
Speaker Change: And then brands pluses, a broad strategy that we have to fit segmented brand portfolios to different retailers brand sets. A good example of that is our natural and organic portfolio, which is growing from mid to mid mid single to mid double digits.
Speaker Change: And from a growth perspective, so we still don't disclose the operating segment.
Speaker Change: Special segment, but it's a meaningful part of our profitability and even more meaningful part of our growth.
Speaker Change: Great. Thank you and then.
Speaker Change: Kind of following up on your last point, there sandy with some of the success and it seems pretty drastically different in kind of the natural and organic.
Speaker Change: Categories and channels are you seeing more interest from other parts of your wholesale universe to kind of adopt some of those offerings.
Speaker Change: Them into their assortment.
Speaker Change: Are any of your customers trying to chase volume growth by adding more natural and organic category.
Speaker Change: Sure.
Speaker Change: I think it's broadly.
Speaker Change: A consumer trend that.
Speaker Change: <unk> for you and healthier products are gaining traction and we're certainly going to follow what our customers want to do from a product and merchandising standpoint, So I think youre assumption is right.
Speaker Change: The interesting thing that I mentioned earlier, though is that the whole proposition that the retailer brings as important to their winning and.
Speaker Change: Being in our business, we are in the support business of customers whatever they are positioning and I do think the presumption of your question that natural organic and specialty products are important is a good one and certainly we're seeing that.
Speaker Change: Okay, and then just one quick follow up if I, if I may here.
Speaker Change: Where are we in the rollout of the simplified fee structure, what proportion of your customers are on that and what some of the main pushback you're hearing too.
A faster adoption for that.
Speaker Change: Yes, and I think what youre, referring to is our supplier go to market program and simplified supplier approach.
Speaker Change: We're well into the rollout of that.
Speaker Change: The supplier go to market programs for large suppliers, it's a customized program, we're well into the second year of that and we've seen some really compelling results from suppliers, who have been early adopters that should provide supplier approach, which is for all of our suppliers take 15% to 20 fees and eliminates them in <unk>.
Speaker Change: Replacing them with a single subscription and.
Speaker Change: That one has been broadly adopted across the smaller suppliers I would say.
Speaker Change: Or are we in the maturation of the process.
Speaker Change: I'd answer it two ways first is we're learning a lot as our suppliers and we're working hard to make the tools more accessible and easier, but I think in the process of the dialog. We have learned that we have an opportunity more broadly to work on the supplier experience and we have a whole a company effort that Matteo Eni review every.
Speaker Change: Week to improve key aspects of the supplier experience to take friction out to add transparency and to help our suppliers succeed with the program you asked about but more broadly in our ecosystem because it is important to our customers that we have the best brands and brands that are <unk>.
Speaker Change: Comfortable because they can see their business in our ecosystem and they can invest to grow and so that's why it's such a big priority of ours to include and to improve their experience.
Speaker Change: Great. Thank you guys.
Speaker Change: Thank you Gary.
Speaker Change: Your next question comes from Alex Slagle from Jefferies. Your line is now open.
Alex Slagle: Thanks, Good morning, and congrats actually wanted to follow up on couple of those clients can maybe it's a bit more on the supplier go to market programs and I think you would provide some examples of how successful it has been for certain suppliers, which sounds pretty impactful.
Alex Slagle: So curious on that and then just sort of how that feeds into your business.
Alex Slagle: Profitability specifically.
Speaker Change: Yes, I think.
Speaker Change: Ill try to give you a couple of examples show that whether one would be a big supplier and one would be a small one and obviously I won't name the suppliers thats up to them to do but.
Speaker Change: One very large supplier was part of the pilot and.
Speaker Change: They brought the strategic objective of trying to capture 35000 unique SKU retail store distribution opportunities that had fallen off during the supply chain disruption during COVID-19.
Speaker Change: And we built an effort to build programming for our retailers that would create the opportunity for retailers to access those brands and get our launch program that the supplier had built and we got about 95% of the way to the goal.
Speaker Change: And it taught us what we could do in that area and so that's now a part of some of the other customized programs to help retailers make sure they've got the right products that they want to have not just the ones. They had wind once they wanted to have ran out and so that's been a big initiative there.
Speaker Change: For smaller suppliers I think the biggest tool we've given them is the ability to see their sales through our system into retail, which with that data. They can then target their programming and and work with our sales force to try to make sure that their brands are doing as well as possible, particularly in.
Speaker Change: In stores that are growing and so I would describe the whole thing is a learning process.
Speaker Change: Early days the benefit to UNFI as we make slightly higher fees.
Speaker Change: The bigger.
Speaker Change: Suppliers approximately the same on the media and then we still keep fees low.
Speaker Change: But it's one fee not 15% to 20, so it allows suppliers to be able to plan and execute and as I said earlier in my broader answer we view this supplier experience as a strategic opportunity for improvement and we're in very much the early innings, but we're taking action on a weekly basis to try to get better.
Speaker Change: That's helpful. Thank you.
Speaker Change: Earlier, you mentioned natural and organic portfolio growth.
Speaker Change: <unk> mentioned in mid double digits, maybe I got the number wrong, but if you could just clarify.
Speaker Change: Yes.
Speaker Change: No I said all of that probably was confusing I was thinking about the three platforms within our natural private brands portfolio and one of them happens to be growing mid single one of them is going about 10, and one of them is growing about mid teens. So there are three different brands.
Speaker Change: Okay got it thank you.
Speaker Change: Your next question comes from Chuck Cerankosky from Northcoast Research. Your line is now open.
Chuck Cerankosky: Thank you good morning, everyone nice quarter.
Speaker Change: When you're talking about new customers how much of this is business coming back to you that that might have been lost during the most difficult parts of integrating the supervalu acquisition.
Chuck Cerankosky: <unk>.
How much of it might be getting towards the goal of selling.
Chuck Cerankosky: More organic to conventional.
Customers or add more conventional product to organic customers prior to the original goal. It's a complex question, but trying to get a sense of.
What are the new business is all coming from.
Speaker Change: Yes, good morning.
Speaker Change: The simple answer is that.
Speaker Change: The majority of the major gains is extending our relationship with existing customers.
And it's all across the board based on what they are buying from us.
Speaker Change: We're seeing some.
Speaker Change: Natural customers tap into us for specialty portfolios. We recently had a large natural customer who decided to take conventional products from us. So.
Speaker Change: It really does vary by customer type I would say if you were to say what's the direction. It usually goes it's usually us expanding natural organic or specialty into customers that don't have all three.
Speaker Change: That would be the largest opportunity that we're activating you don't see as many situations where conventional products go into natural retailers in fact, almost never do so hopefully that gives you some dimension on what the pipeline is.
Speaker Change: On the conventional side.
Sandy: Where where the volume is actually slip sandy how do you see that playing out going forward, especially if the.
Sandy: Economy sort of stays where its at where it with a lot of pressure on on budget constrained consumers.
Sandy: Yes.
Speaker Change: I would say Chuck is.
Speaker Change: It's very hard to paint a brush very far in retail.
Speaker Change: There are.
Speaker Change: Predominantly conventional retailers that are extraordinary brands and are growing very well.
Speaker Change: Do you see that with some of the big chains around the country.
But that are regional.
Speaker Change: As I mentioned earlier.
Speaker Change: Predominantly conventional products, but multi cultural focused retailers are putting up some of the best numbers in our system.
Speaker Change: I think the big challenge in the place where we.
We have work to do with our retail and there are others that do as well is the more centrally positioned retailers getting a strategy, that's sharper and more differentiated at least as it's compared to the big discounters.
Speaker Change: Right now the discounters have a fairly substantial price advantage and they're gaining share and so theres a whole lot of work being done by the balance of the industry to find points of difference and to execute well to improve the value proposition.
Speaker Change: Alright. Thank you very much good luck for the rest of the year.
Chuck Cerankosky: Thanks Chuck.
Chuck Cerankosky: Okay.
Speaker Change: Your next question comes from Scott Morgan from RFID Capital. Your line is now open.
Speaker Change: Hey, good morning, Andy Good morning Mikael.
Speaker Change: Thanks for taking my questions. So I was wondering if you can give us as how is it going to give us a different kind of revenue lay out next quarter, but I was wondering if you could.
Speaker Change: Maybe frame for us the revenue percentage associated with the legacy UNFI and the legacy Supervalu.
Speaker Change: I believe we have provided that publicly it's basically half and half.
Speaker Change: Okay.
Speaker Change: And Sandy how integrated the businesses I know we used to talk about this.
Speaker Change: Two years ago now one bill one truck like how integrated or sorry. The facilities. How integrated is are the two businesses at this stage.
Speaker Change: The the fulfillment systems are not particularly integrated and the simple reason is that the skus are very different.
Speaker Change: You typically have much higher velocity skus in the conventional system.
Speaker Change: Often full truckload deliveries, whereas in natural you can find a much wider range of slower moving products with.
Speaker Change: With smaller drops and multi drop routes and so the hearing before largely because of the interruption that govind app and.
Speaker Change: We've been focused on making those systems work very well and that's where the lean processes now engaged and it's why we speak so optimistically about the potential of lean because of the work ahead.
Speaker Change: Okay, and I'm sure I could dig through filings and stuff like that.
Speaker Change: <unk> been closing of those legacy UNFI or legacy Supervalu.
Speaker Change: They're all three of the ones that have been closed Matteo.
Matteo Eni: <unk> mentioned.
Matteo Eni: Billings Bismark in for Wayne for Wayne has not yet closed are all legacy supervalu.
Matteo Eni: Warehouses.
Matteo Eni: York closure that moved over to Manchester for 50% more square feet is a natural building, but we're automating that building and that's all being done for growth reasons.
It gives us a chance to capture what it's been.
D C that was operating almost at 180% of capacity, we're now able with the automation.
Matteo Eni: Continued to drive significant growth in the mid Atlantic market for natural.
Scott Morgan: And Scott all three of them are owned so as we mentioned we are starting the process to re market. These two properties.
And the idea there would be tariffs, obviously to pay down debt with those funds.
Scott Morgan: Number one two and three priority.
Our capital allocation methodology.
Speaker Change: And do you expect that to be material.
Speaker Change: We are in the process, we are now going to trade time for value. So we expect one of them too.
Speaker Change: Give us some proceeds by the end of fiscal 'twenty, five and yet our two into 2026 timeframe.
Speaker Change: Okay is there anyone else on the queue or can I have one more.
Speaker Change: Okay.
Speaker Change: Sure.
Speaker Change: Okay.
Speaker Change: And again this is something that goes.
Goes back a long time, I think we've talked about it a little bit off and on.
But to get cleaner here with the business it would be nice to get rid of retail.
Speaker Change: In my mind like kind of where where is your head around that sandy and the takeaway is that a possibility I know, it's so complicated up in the twin cities, but is that something that could go back on the table.
Speaker Change: And I think Scott this is what I said last time.
Scott Morgan: Everything is on the table from the standpoint that if we see a way to create more value for customers and suppliers and our shareholders. Most importantly in this case, we're going to be looking hard at it.
Scott Morgan: I would say about retail is Gov is the number one food store brand in the twin cities.
Scott Morgan: Not only owned by UNFI is also owned by many of our customers up there and Theres a lot of positive energy for what we can do with Cub, even though it's been soft for a couple of years and so.
Put all of that sales and profit in one place and it's very linked together from a customer ecosystem standpoint, it's not an easy thing to divest by itself. So the best strategy for us going forward is to keep it together and drive performance and that's the plan that the franchisee these and we have.
Scott Morgan: But never say never obviously, we're going to do what's best for our shareholders.
Speaker Change: Great guys. Thanks for letting me ask so many questions appreciate it.
Speaker Change: Thanks Scott.
Speaker Change: Your last question comes from Mark Carden from UBS. Your line is now open.
Speaker Change: Matthew Roswell from Mark Carden, Thanks for taking my question.
Speaker Change: On the previous earnings call public goal of achieving another $150 million of cost efficiencies this year.
Are you be able to share any more on your outlook, there and where it might be.
Speaker Change: Sure.
Speaker Change: Yes, good morning.
Speaker Change: So what we mentioned in the last call is that part of our three year strategic plan is to re margin the business with about $150 million solve cost out or incremental margins, which as you think about it as similar envelope as we deliver in 2024 as we had a lower exit run rate and through a lot of DCP.
Speaker Change: And a lot of efforts, we were able to achieve the $580 million of EBITDA for EBITDA for the year.
Speaker Change: So we are encouraged by the first quarter, we have about $1 billion of total cost to manage every quarter and we reduced the opex by 65 basis points from 13 <unk> percent a year ago to 12, 9% this quarter and what really leveraging two or three key principles. The first one is lean daily management.
Speaker Change: And the identification of waste to find a new capacity and new capabilities.
Speaker Change: That is already finding roots and benefits seen throughput and productivity, we were battery and throughput in the last three quarters sequentially and improved 5% year over year and then we continue to work on a more decentralized organization that allows more effective decision, making and also leaner and leaner.
Speaker Change: And we have been able to reduce the total number of employees by 5%, which is also a return to the transformation and severance investment that we made in 2024, we know that also offsetting some of the higher rent and some of the higher running cost as you as you would imagine so I think that first quarter at San Jose is early.
<unk> is a good proof points of our ability to control, what we can control and knowing that through that high single digit EBITDA growth that we provided for the next three years, we have a lot of variables under our control and so we need to continue to apply lean continue to be disciplined.
Speaker Change: And provide more and more proof points.
Speaker Change: Okay. Thank you.
Speaker Change: Yes.
Speaker Change: I would now like to hand back over to Sam.
Sam: Sandy Douglas for closing remarks.
Sandy Douglas: Thank you operator as you heard on today's call. We have made progress executing our multi year strategy and have early proof points that the strategy is taking hold and creating value for our customers and suppliers, while making UNFI, a more effective and efficient organization.
We delivered our fifth consecutive quarter of improving adjusted EBITDA, including mid teen growth in the quarter compared to the prior year period, and meaningfully improved free cash flow compared to the first quarter of prior years.
Sandy Douglas: Our increased outlook reflects this performance and our confidence for the balance of the year.
Sandy Douglas: We remain focused on the large opportunity for further improvement and are committed to getting better every day. So we can be a clear value creator for customers suppliers and in turn our shareholders. We've embraced lean management and remain on a path to deliver improving service levels and the longer term.
Sandy Douglas: <unk> financial objectives, we've set for ourselves.
Sandy Douglas: For our customers and suppliers. We thank you for your continued partnership and the business. We do together for the UNFI associates listening today alright, thanks to each of you for everything that you do for our business our customers our communities and each other and for our shareholders. We thank you for the trust you continue to place in.
Sandy Douglas: Yes.
Sandy Douglas: Thanks again for joining us this morning, I look forward to updating you on our progress in March and we hope everyone has a happy and healthy holiday season.
Sandy Douglas: Okay.
Speaker Change: This concludes today's call you may now disconnect have a happy holidays everyone.
Speaker Change: Okay.
Speaker Change: Okay.
[music].
Speaker Change: Okay.
Yes.