Q2 2025 United Natural Foods Inc Earnings Call
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Karen: Thank you for standing by. My name is Karen, and that will be your conference operator today.
Speaker Change: Good morning, everyone and thank you for joining us on Unfi's second quarter fiscal 2025 earnings conference call.
Speaker Change: Now you should have received a copy of the earnings release issued this morning, the press release and earnings presentation, which management will speak to our available under the investors section of the company's website on the events tab.
Speaker Change: We've also included a supplemental disclosure file in Microsoft Excel with key financial information joining.
Sandy Douglas: Joining me for today's call are Sandy Douglas, our Chief Executive Officer, and Matteo Tower D, Our president and Chief Financial Officer.
Sandy Douglas: Sandy and Matteo will provide a business update after which we'll take your questions.
Before we begin I'd like to remind everyone that todays comments made by management may contain forward looking statements. These forward looking statements include plans expectations estimates and projections that might involve significant risks and uncertainties.
Sandy Douglas: 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.
Sandy Douglas: I'd like to point out.
Sandy Douglas: On today's call management will refer to certain non-GAAP financial measures.
Sandy Douglas: The Phoenician and reconciliations to the most comparable GAAP financial measures are included in our press release and the end of our presentation.
Sandy Douglas: And finally, as we stated on our last call we changed the sales reporting on the face of our press release, which now breakdown our revenues in a manner consistent with the previously announced realignment of our wholesale business to.
Sandy Douglas: To provide historical context last week, we posted prior quarter sales under this updated approach to our website. We believe these changes will give you additional insight and transparency into our multi year strategy and sales performance.
Sandy Douglas: Now ask you to turn to slide six of our presentation as I turn the call over to Sandy.
Sandy Douglas: Thanks, Steve and thank you everyone for joining us this morning.
Sandy Douglas: As we shared in our release, we delivered another quarter of improving financial results and operational execution, while achieving key milestones of our multiyear plan.
Sandy Douglas: Our results also reflect solid sales growth and adjusted EBITDA growth of over 13% and significant improvement in year over year free cash flow.
Sandy Douglas: As a result, we've again raised our full year outlook for all financial objectives other than capital spending and remain firmly on track to deliver our longer term fiscal 2027 targets and to continue creating sustainable shareholder value.
Sandy Douglas: Today, I'm going to focus on three key areas.
Sandy Douglas: First I'll describe how we are working to increase the value we offer to both customers and suppliers.
Sandy Douglas: Then I'll discuss some accomplishments within our multi year plan and highlights from our results in the quarter.
Sandy Douglas: We've outlined our strategy of adding value for our customers and suppliers. While also improving UNFI is free cash flow and strengthening our balance sheet and we believe our recent results validate our strategy and demonstrate that we're delivering improving operational execution as we work to embed lean management practice.
Sandy Douglas: This is throughout the organization.
Sandy Douglas: We strive to learn and adapt as we have implemented our plans soliciting feedback from both customers and suppliers on what we're doing well and importantly areas in which we can improve.
Sandy Douglas: We routinely evaluate our potential to improve and create more value for all of our key stakeholders and by so doing we believe our value creation opportunity continues to grow.
Sandy Douglas: We expect our focus on continuous improvement to increasingly benefit the customers and suppliers, we partner with driving greater sales and profit opportunity for our mutual businesses.
Sandy Douglas: In turn we anticipate we will continue to create sustainable shareholder value.
Sandy Douglas: We have identified new areas to add value and increase effectiveness and efficiency. This includes opportunities to improve the customer and supplier experience in our wholesale distribution business expand services catering to key customer groups that have historically been underserved by the digital and professional services available.
Sandy Douglas: Eligible in our industry.
Sandy Douglas: Elevate our merchandising capabilities and make targeted investments in our private brands program to ensure that we have the unique innovative items retailers need to drive relevance and value with consumers. These are all opportunities that would be incremental to our multi year strategy.
Sandy Douglas: While we've been identifying new areas of value creation. We've also had another strong quarter, achieving key milestones within our multi year plan.
Sandy Douglas: <unk> leadership has helped us become more effective and efficient across our operations and our teams are embracing the principals and power behind Leanne.
Sandy Douglas: We've extended lean daily management into additional distribution centers and continue to see indications of success, including reducing shrink down to the second lowest level as a percentage of sales in the past 10 quarters.
Sandy Douglas: Lean Daily management is now practiced at nine Dcs and we plan to continue to methodically expand this discipline across our network.
Sandy Douglas: Importantly, these practices not only strengthen our operating efficiency, but also deliver improvements in the effectiveness and accuracy that benefit our customers and suppliers.
Sandy Douglas: We also continue improving our effectiveness and efficiency through targeted optimization within our distribution network. We successfully consolidated our Fort Wayne, Indiana distribution Center in mid February and transferred its volume to other more modern and efficient facilities nearby.
Sandy Douglas: Our previously closed D. C. In billings is also now under contract and the sale is expected to be completed in the fourth quarter of this year with proceeds to be utilized to further reduce net debt.
Sandy Douglas: Our Fort Wayne and Bismarck Dcs are actively being marketed and as we've mentioned we will not trade time for value as we seek to maximize our proceeds from these sales as.
Sandy Douglas: As part of our network optimization, we're also working to evolve select customer relationships to drive win win solutions that are mutually beneficial to both parties we've.
Sandy Douglas: We have already completed extensive work across our customer base to improve key agreements and in most cases, we've successfully achieve mutually beneficial outcomes for UNFI and our customers. We're now focused on doing the same for a few remaining agreements.
Sandy Douglas: While our goal is always to reach a win win agreement when a win win agreement is not possible, we will explore a mutually agreeable exit plan.
Sandy Douglas: In all cases, we are continuing to take actions that support our customers and suppliers and accelerate our multiyear financial targets to create shareholder value.
Sandy Douglas: Lastly, as we announced in January we have taken steps to realign our wholesale business into two product centered divisions that we expect will enable us to offer more differentiated and tailored solutions to customers and suppliers. One division will be focused on in conventional grocery products and the other will be.
Sandy Douglas: Focused on natural organic specialty and fresh products.
Sandy Douglas: The basis of our multi year strategy was a deep understanding of the unique ways that we can add value for customers that are included in the growing $90 billion plus target market. We've previously described.
Sandy Douglas: We believe these new more focused divisions supported by centers of excellence that will scale enterprise wide capabilities will enable our commercial teams to provide a more customized product and service center experience.
Sandy Douglas: This increasingly effective and responsive operating model is intended to help our customers and suppliers differentiate compete and grow profitably. We expect most of the organizational changes required to support this realignment will be completed by the end of this fiscal year.
Sandy Douglas: The strategic actions, we took during fiscal 2024, and thus far in fiscal 2025 to strengthen our foundation and execute our multi year plan are delivering results.
Sandy Douglas: During the first half adjusted EBITDA grew nearly 14% free.
Sandy Douglas: Free cash flow generation climbed nearly $250 million and net leverage has been reduced to three seven turns.
Sandy Douglas: This is the lowest net leverage level since fiscal 2023.
Sandy Douglas: As Matteo will describe in more detail, we expect to build on this performance during the second half of the year.
Sandy Douglas: In closing as we execute our strategy, 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 industry.
Sandy Douglas: As I described we're also continuing to identify further opportunities for value creation.
Sandy Douglas: We are focused on becoming the most efficient value, creating partner for our stakeholders, which in turn creates more opportunities for the approximately 27000, UNFI associates, who serve our customers and suppliers with dedication every day.
Sandy Douglas: Together, we remain confident our plan will continue to drive sustainable shareholder returns.
Sandy Douglas: And with that let me turn it over to Matteo to discuss our Q2 results lean progress and revised outlook Matteo.
Matteo: Thank you Sandy and good morning, everyone and thanks again for joining our second quarter earnings call.
Matteo: As Sandy stated our operating momentum execution and performance have continued to accelerate during the first half of fiscal 2025.
Matteo: We remain confident in our multi year strategy and the corresponding longer term financial objectives, we outlined during our fiscal 2024 year end call.
Matteo: Today, I will provide additional insight into our second quarter results, including our free cash flow generation and capital structure and comment on our updated outlook for fiscal 2025.
Matteo: With that let's review our Q2 results.
Matteo: Turning to slide eight.
Speaker Change: You will see the walk on the slide reflects the updated sales disaggregation, Steve described earlier our.
Speaker Change: Our second quarter sales grew nearly 5% to $8 2 billion.
Speaker Change: Our gains in the quarter were led by our natural products business, where sales increased by over 8% compared to last year second quarter, primarily reflecting higher sales and category penetration with existing customers.
Speaker Change: Our conventional products business was up just over 2%, reflecting new business wins and new customers over the past four quarters.
Speaker Change: Across our wholesale business volumes were up about 3%, which represented another quarter of sequential acceleration and a continuation of the favorable trends we sided as we exited fiscal 2024.
Speaker Change: This broadly outperform the key industry Nielsen benchmarks and partially reflects the benefit of new customer additions, we will begin to cycle later this year.
Speaker Change: Inflation was largely unchanged sequentially at approximately one 5%, which was close to 8% lower than last year second quarter.
Speaker Change: Total sales in our retail business, we're down about 3% compared to last year, primarily the result of five store closures over the past 12 months.
Speaker Change: On an <unk> basis or same store sales basis sales were down about 40 basis points, a sequential improvement of about 100 basis points compared to Q1.
Speaker Change: This also reflects positive I'd sales at cup the larger of our two banners after being roughly flat in Q1.
Speaker Change: Moving to slide nine let's review profitability drivers in the quarter.
Speaker Change: Overall, you can see that our wholesale business drove the growth in the quarter.
Speaker Change: Wholesale gross profit dollars net of higher operating costs were up nearly $20 million.
Speaker Change: This was largely due to higher volumes.
Speaker Change: However, our consolidated gross margin rate, excluding LIFO declined 20 basis points compared to the prior year period to 13, 2% of net sales.
Speaker Change: This was driven by a lower wholesale margin rate as well as a mix shift toward wholesale partly offset by hydro rate in retail.
Speaker Change: In wholesale our gross margin rate declined about 10 basis points versus last year's Q2, largely due to changes in customer and product mix and some targets strategic commercial investments.
Speaker Change: These impacts were nearly offset by innovation and efficiency initiatives, including value, adding supplier programs and a lower level of shrink sandy referenced.
Speaker Change: More than offsetting these gross margin rate decline was continued solid execution and management of our operating expenses, which compared to last years declined by approximately 40 basis points as a percentage of sales.
Speaker Change: As we've emphasized before we're laser focused on improving processes and removing waste. So we're better able to bring value and improving service levels to our customers and suppliers.
Speaker Change: Improving efficiency also partially reflects some benefits from the customer mix shift impacting our gross margin rate.
Speaker Change: Growing more quickly with large existing customers has benefits to route optimizations and drop sizes the benefit our operating expenses.
Speaker Change: Cindy mentioned, we have now rolled lean daily management out to 96, and we're pleased with improvements we are seeing.
Speaker Change: Several of the newer implementations have already seen initial low single digit productivity gains, which is a good progress to the higher gains we ultimately expect Ccs.
This is coupled with improvements in safety and delivery quality.
Speaker Change: Equally as important are the lessons that we've learned in the skills, we're applying to become more proficient.
Speaker Change: Teams are strengthening their ability to problem solve to ifs.
Speaker Change: Secondly, we identify and document countermeasures and a culture of championing breakthrough thinking has been embedded across our organization.
Speaker Change: These actions along with the other strategic initiatives undertaken in fiscal 2024 and to date in fiscal 2025 drove adjusted EBITDA to grow over 13% compared to the prior year quarter to $145 million.
Speaker Change: Our adjusted EBITDA rate expanded 13 basis points compared to the prior year to nearly one 8%.
Speaker Change: This represents a highest adjusted EBITDA margin rate since the third quarter of fiscal 2023.
Speaker Change: Our adjusted EBITDA combined with some benefits on below the line items led to strong adjusted EPS growth with adjusted EPS in the quarter of 22.
Speaker Change: Compared to <unk> <unk> in last year second quarter.
Speaker Change: Turning to slide 10, our improved profitability and continuous focus on deploying and adhering to lean principles helped drive $193 million in free cash flow in the quarter, which was approximately $77 million more than last year.
Speaker Change: Working capital in the quarter was an approximately $100 million cash benefit, which combined with our stronger adjusted EBITDA more than offset our capital investment and interest expense.
Speaker Change: This brings our year to date free cash flow to slightly more than $30 million.
Speaker Change: This represents an improvement of nearly $250 million compared to last year, our free cash flow use of $212 million in the first half.
Speaker Change: It also brings total free cash flow generated over the last 12 months to over $150 million.
Speaker Change: We continue to make earlier than anticipated progress on working capital management, including a net reduction in days on hand of inventory, which has been achieved through further refinement of the decentralized procurement model and improved forecasting constant I explained last quarter.
Speaker Change: Importantly, we're doing this while also driving fee rate improvements where supply is not constrained we deployed our free cash flow generated to reduce our net debt to close to $2 billion.
Speaker Change: And lowered our net leverage to three seven times, which is about a house turn less than last quarter and the prior year second quarter.
Speaker Change: There is also the first time, we're being below four times since fiscal 2023.
Speaker Change: This keeps us firmly on track to deliver our longer term deleveraging goal of less than two five times by the end of fiscal 2027.
Speaker Change: Looking at Slide 11 halfway through fiscal 2025, we continue to build confidence in our momentum and execution against our broader strategy and multi year plan.
Speaker Change: We're again, raising our full year outlook for all financial metrics other than capital spending.
Speaker Change: As outlined in our press release, the updated guidance for net sales is a range of 31, 3% to $31 7 billion, which represents a three 6% full year increase at the midpoint compared to fiscal 2024, when adjusting for the 50 <unk> week last year.
Speaker Change: This represents about a two 3% increase in.
Speaker Change: From the midpoint of our prior outlook.
Speaker Change: These increase partially reflects higher customer retention than what was previously expected as part of our network optimization.
Speaker Change: These are visited outflow close implies an expected sequential deceleration in sales growth from four 6% in the first half of fiscal 2025 were down 3% in the second half of the year.
Speaker Change: As anticipated cadence is largely due to the impact of timing associated with when we onboard a new customers in the prior year period.
Speaker Change: It also reflects the expectation that natural products will continue to lead growth across our business.
Speaker Change: We have raised the bottom end of our expectations for adjusted EBITDA by an additional $20 million, bringing the new range to $550 million to $580 million, which is more than an 11% increase over the last year at the midpoint.
Speaker Change: The mid points of our sales and adjusted EBITDA outlook implied that we expect adjusted EBITDA margin rate acceleration of around 10 basis points in the back half of the year compared to the 174% of sales in the first half.
Speaker Change: This reflects the benefit of the initiatives completed already as well as those we expect to take during the remainder of the year.
Speaker Change: Given the seasonal nature of our business. We expect total dollar sales in Q3 to be sequentially lower than in Q2.
Speaker Change: As a result, even though we expect our adjusted EBITDA margin rate to be higher in the second half, we will likely see adjusted EBITDA in Q3 declined marginally sequentially from Q2.
Speaker Change: While still growing solidly compared to the prior year.
Speaker Change: This reflects the benefit of ongoing strategic initiatives, which continue to ramp driving a better margin rate <unk>.
Speaker Change: Including the benefit of lower forecasted interest expense based on our year to date free cash flow performance, our EPS and adjusted EPS ranges have increased as well with adjusted EPS now expected to fall within the range of 70 to 90 cents per share compared to <unk> 14 cents last year.
Speaker Change: Full year free cash flow is now expected to be at least $150 million, an increase compared to our prior outlook of greater than $100 million.
Speaker Change: This represents a roughly $250 million increase compared to fiscal 2020 for full year free cash flow.
Sandy Douglas: As Sandy mentioned in mid February we completed the closure of our Fort Wayne distribution Center and consolidated the volume into other nearby more modern inefficient facilities.
Sandy Douglas: Previously optimize billings VC is under contract for sale and we are actively marketing the owned real estate for the other two Dcs that are being closed in the past six months, but as I've stated before we will not sacrifice value for time.
Sandy Douglas: We will continue to evaluate other opportunities along these lines, but have not included any incremental strategic actions in our updated outlook.
Sandy Douglas: Flipping to slide 12, we're off to a solid start at the Midway point of fiscal 2025, and we're encouraged by our operating momentum and the work streams in place to add value and better service to our customers and suppliers, while making UNFI and more efficient partner for both.
Sandy Douglas: Our efficiency initiatives powered in part by lean principles are largely generating the operating benefits, we expected while our volume trends reflect the successful execution of our customers as well as the trusted placing us everyday importantly, we're finding more ways to improve to bring even greater value to both sides of the.
Sandy Douglas: Our supply chain and ultimately create additional shareholder value and we're aggressively pursuing these opportunities.
Sandy Douglas: The strategy, we have outlined of bringing value to our customers and suppliers through a differentiated go to market proposition and strengthening service levels, while improving <unk> free cash flow is simple and powerful and our progress to date reinforces that we are working to accomplish.
Sandy Douglas: We remain confident and optimistic about our future and the value creation opportunity, we have as we work to improve our capabilities and customer facing execution.
Sandy Douglas: Our mantra of delivering and deleveraging remains intact and we look forward to updating you on our progress again this summer with.
Sandy Douglas: With that operator, please open the line for questions.
Sandy Douglas: 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, we ask.
Sandy Douglas: Ask that you limit your question to one and one follow up.
Sandy Douglas: We will pause for just a moment to compile the Q&A roster.
Speaker Change: The first question comes from John <unk> from Guggenheim. Your line is open.
Speaker Change: Thanks, Andy.
Speaker Change: The wholesale realignment and the and the new sales breakdown.
Speaker Change: One can you can you touch on functionally.
Speaker Change: The changes that have occurred.
Speaker Change: That will.
Speaker Change: <unk> your go to market day to day right interacting with your customers and the biggest benefit that you see.
Speaker Change: Then just so I understand natural and conventional is that.
Products natural products that are sold to any customer.
Speaker Change: For all products that are sold to largely natural customers and the same thing for conventional.
John Guggenheim: Good morning, John.
John Guggenheim: The second question you asked is yes, it's all customers.
John Guggenheim: What we learned from feedback that we've gotten from customers and suppliers is that.
John Guggenheim: Product expertise was a principal focus for them and so what we've done is taking that feedback we've aligned the wholesale business into two product center divisions.
John Guggenheim: Each focused largely on functional dedication in sales procurement and merchandising.
John Guggenheim: The scaled enterprise level capabilities behind them and supply chain and IP and across the company, but what customers wanted from US was we lead focus product expertise around the key levers that drive those categories and we organized that way, but its transversal.
John Guggenheim: Across customers so to the point of your second 'cause it.
John Guggenheim: Good question.
John Guggenheim: Natural products, we will be represented.
John Guggenheim: And an expert fashion by natural people, but the customer manager if the customer is principally conventional will come from conventional.
John Guggenheim: Okay.
John Guggenheim: Yeah.
John Guggenheim: My first part of that right. So how does this change.
John Guggenheim: I guess it doesn't change that much in terms of how sales are interacting with the accounts.
John Guggenheim: Yes, it's not a big change but.
John Guggenheim: I guess, the best way to think about it is.
John Guggenheim: The the customer who is principally focused on natural and organic products are they are very interested in innovation, they're interested in things that are changing.
Whereas the conventional pads a lot of those are big brands and Theyre looking for the best promotional activity and sharp price points.
John Guggenheim: It's a different merchandising motion, it's not completely different but it's enough different that we felt that segmented them, what's the best way to serve our customers.
John Guggenheim: Alright, and then just my last quick thing.
Speaker Change: For reference for incremental areas of potential.
Speaker Change: To the strategy of those for which one or two are the furthest along and do you think are the most impactful.
Speaker Change: If one or two standout.
Speaker Change: Sure I mean from my perspective.
Speaker Change: The.
Speaker Change: Services for customers, who have typically not been well served by pro services and digital services are the best.
Speaker Change: It's in development I think it has tremendous potential one of the things that that I would like to say internally is that UNFI needs to be in the retail media networks of the future in year, one not year four.
Speaker Change: But we are.
Speaker Change: Catching up quickly and we have an uphold pipeline.
Speaker Change: Products and services there that we think will serve customers very well in the future and give them the edge that they need to compete more favorably.
Speaker Change: Thank you.
Speaker Change: The next question comes from Bill Kirk from Roth Capital. Your line is open.
Hey, good morning, everybody I had a couple of things related to the closure of the Fort Wayne DC I guess first whether duplicate costs. While it was still open that are now gone.
Speaker Change: Is there a step down in depreciation expense with the closure and how large would that be and then finally, what did you learn in the process of closing that and rerouting that will help inform future facility closures and help inform that.
Speaker Change: Customer and facility kind of optimization.
Speaker Change: Hey, good morning, BLA, San Mateo here, so on the on the question on Opex.
Speaker Change: Duplicative cost. So we are ramping down very quickly the fort Wayne operations and with that the operating expenses. So we had.
Speaker Change: A little bit of kind of double dipping or double costing in the second quarter, but from now on we should expect to basically.
Speaker Change: Just transferred the all the activities to the receiving Dcs.
Speaker Change: Scaling down significantly the opex and the fixed cost added for Duane D C and see the full benefits for the rest of the year, which is part of the reason why we'd be able to high confidence case to increase EBITDA 10 basis points in the second half versus first half.
Speaker Change: There should be some step dominating in depreciation and amortization as well.
Speaker Change: And then relative to the to the learnings.
Speaker Change: Customer experience has been the first priority over and above.
Speaker Change: Turning to free cash flow benefit. So we spoke before about the safety quality delivery cost all within that order set of priorities and so understanding first of all how we were increasing operation ramping assortment to the receiving dcs, while ensuring that the customer experience was.
Speaker Change: As smooth as possible.
Speaker Change: Closing ADC ramping others.
Speaker Change: His top priority. So this is what we continue to embed as we continue our journey in terms of our DC network optimization billions in Bismarck we are.
Speaker Change: Smaller scaling away for Duane was more meaningful and as you've always stayed as we look at underperforming Bdcs. The journey continues.
Speaker Change: Thank you Ms <unk>.
Speaker Change: The next question comes from Scott <unk> from <unk> Capital. Your line is open.
Speaker Change: Hey, guys. Thanks for taking my questions.
Speaker Change: I just wanted to go back to what John was talking about.
Speaker Change: As far as the realignment of the business when the merger was done.
Speaker Change: Idea was putting the two entities together, a long time ago now and that there is leverage in putting those supervalu together with UNFI and the idea of one truck one bill maybe even one DC. It sounds like you guys are saying, hey, maybe that's not ideal.
Speaker Change: And I guess the question is do the two assets belong together over time or is that something you guys will consider as the years go on.
Speaker Change: Yes.
Speaker Change: Yes, thanks for the question.
Speaker Change: From my perspective, as the answers kind of both scale is good where scale is good and specialization is good we're specialization is good.
Speaker Change: What we were hearing from customers is they bought at my main.
Speaker Change: That said as conventional I need really good pricing I need the promotional intensity and focus of vendors.
Speaker Change: My principal product said is natural organic and specialty is all about product innovation and speed and generally those motions are two different types of processes and therefore, we found specializing that part of the organization to be in the interests of our customers.
Speaker Change: From a supply chain and it and back office standpoint, there is a lot of synergy available that we've been capturing and through those centers of excellence are.
Speaker Change: Places where efficiency that can be captured through enterprise wide capability. So Scott.
Speaker Change: Scott it's really both.
Speaker Change: Okay.
Speaker Change: So my second question is actually a really short one.
Speaker Change: The conventional was up I think two 1% on revenues.
Speaker Change: I know theres some wins in there can you talk a little bit about kind of core sales growth core volumes with continuing customers kind of ex the wins.
Scott: Sure Good morning, Scott So.
Scott: Although the overall volumes for unify what up 3% and within that.
Scott: Natural grew at a more accelerated fashion than conventional.
Scott: I would say what we saw is that conventional.
Scott: Roughly flat from a volume standpoint, and slightly better than the U S food kind of traditional grocery indicator.
Conventional have improved in part from adding from business from existing customers and we also believe that our volume changes have outpaced many of the conventional peer so.
Scott: We are pleased with the sequential progress that we have seen there we remain cautious with the kind of overall dynamic going on.
Scott: But pleased with what we've seen in the in the second quarter, knowing that again broadly we picked up favorable volume in early July of 2024, a growth of one 8% in the first quarter grew to 3% in the second quarter.
Scott: Okay, guys, thanks very much.
Speaker Change: The next question comes from Mark Carden from UBS. Your line is open.
Speaker Change: Morning, Thanks, so much for taking the questions. So you guys put together strong results brought up your guidance at the same time, we've seen some pretty big shifts in consumer sentiment over the last few weeks are you seeing any changes in end customer behavior in the early weeks of <unk> Cross really any of your channels or is your momentum really been pretty much sustained.
Speaker Change: We're really not seeing anything change.
Speaker Change: In fact over the last year or so we've continued to see generally very strong performance by our customer base.
Speaker Change: A lot of the causal and our growth or the success of the <unk>.
Speaker Change: Excellent group of customers performing very well in the marketplace.
Speaker Change: Obviously the <unk>.
Speaker Change: Really well differentiated sharp strategy retailers are doing very well, but in general we have not seen consumer behavior changed significantly over the past few weeks.
Speaker Change: There may have been a little bit of up stocking in some categories, but.
Speaker Change: Beyond that.
Speaker Change: Nothing too that we could call a trend.
Speaker Change: Great. That's helpful and then related to tariffs how much exposure do you guys have to imports overall would you expect to fully pass through that impacts either on a dollar or percentage basis, and then if we do see sustained tariffs. How do you think about the balance between incremental trade and from food away from home and any potential demand destruction as consume.
<unk> potentially control, there and shrink so to speak.
Speaker Change: Yes, that's a good question those are the variables that we're thinking about as well I think.
Speaker Change: Obviously, the most important message here is this all continues to evolve.
Speaker Change: So we will be paying attention to it.
Speaker Change: Our teams are obviously, very agile and thinking about diversification and resiliency of supply chains and options and levers that they can book.
Speaker Change: Ultimately, we learned a lot from the supply chain disruptions and Covid and so we're running some of the same plays to make sure we maximize optionality for our customers.
Speaker Change: I think you can over time the premise of your question is true that.
Speaker Change: It could start to change the value equation between food at home versus food away from home.
Speaker Change: But it's really too early to tell and what we're trying to do is make sure. We're doing the best job, we possibly can for our customers in any environment.
Speaker Change: Makes sense. Thanks, so much good luck.
Speaker Change: The next question comes from Andrew Wolf from C. L. King Your line is open.
Andrew Wolf: Hi, good morning.
Andrew Wolf: I wanted to start I guess with Matteo on the lean principles.
Andrew Wolf: In the nine.
Speaker Change: The new Dcs being I guess at least you gave a productivity.
Andrew Wolf: And in the low single digits, and I think last quarter and the two.
Speaker Change: Pilots in Texas, and Colorado was mid single digits.
Andrew Wolf: So is there anything other.
Speaker Change: Other than just timing.
Andrew Wolf: Newer in these new and benign or or is there anything there.
Andrew Wolf: We should know about or are your expectations kind of <unk>.
Andrew Wolf: Similar that they will trend up.
Andrew Wolf: Good morning, Andrew expectations remain at mid single digit plus.
Andrew Wolf: In terms of productivity gains and when you think about what we've been able to deliver in throughput for instance in the last several quarters.
Andrew Wolf: It's close to a 10% improvement.
Andrew Wolf: While higher cages.
Andrew Wolf: Proud we're so we see the benefits I would say that on the fact that for the new DC that move to LTM Lean Daily management recently.
It's just timing so we see the ones, where we had lean daily management implementation six months ago, we do see improving safety, improving delivery quality and starting generating more and more productivity and we expect to see the same from the seven move to lean daily management and adopted lean daily management.
Andrew Wolf: In the last three months.
Andrew Wolf: Got it thank you.
Andrew Wolf: Excuse me.
Speaker Change: Back to the top line that I think some folks have been asking about.
Speaker Change: This nice acceleration in volume.
Speaker Change: Sequentially and you talked about a lot of things so some supplier partnerships and how you changed.
Speaker Change: Some of the big change in.
Speaker Change: Youre addressing fees and so on and sharing data back.
Speaker Change: Back to the suppliers to help them.
Speaker Change: With their merchandising and then I think obviously there's rate alignment I think sandy already referenced.
Speaker Change: Procurement merchandising sales so on.
Speaker Change: So how do you.
Speaker Change: I could hear this and thinking.
Speaker Change: And conventional maybe that's more sophisticated suppliers using the data.
Speaker Change: Mchugh with programs and partnering that way and then.
Speaker Change: The Nashville, it's more internal like Hey, we really got to put some resources against us there's a lot of growth there, we're leaving on the table is that.
Speaker Change: Kind of conceptually.
Speaker Change: And qualitatively is that accurate or is it a little more.
Speaker Change: Once that im kind of portraying it.
Speaker Change: My takeaway.
Speaker Change: Andy I think you've got it.
Speaker Change: <unk>.
Speaker Change: The main thrust of the conventional products that is making sure that we're priced right and making sure that the promotions are focused.
Speaker Change: But like any generalization theres theres significant nuances across our conventional customer base, we've got ethnically position customers that are doing as well as any retailers in the country.
Speaker Change: And we have other customers who are working hard on building new differentiated programs e-commerce et cetera.
Speaker Change: But what they all have in common is they've got to be priced right and on the key items. So we are devoted to helping them do that on the natural side, obviously value is very important but innovation and uniqueness is really important that we knew we set a huge show on the west coast called Expo West and there were 80000 people out there trying to get advantage over each other.
Speaker Change: And we had a large team of merchants out there looking for new items and talking with customers to figure out what was going to create news and enthusiasm and their retail outlets in the second half so.
Speaker Change: They are different bases of competition at the end of the day, it's all about retail execution and I would say the biggest driver of our growth is this success of our customers.
Speaker Change: Okay, and if I could just sneak one in on the gross margin the contraction rate was a little better.
Speaker Change:
Speaker Change: The last quarter and I think.
Speaker Change: Asked about it last quarter as well so is there anything particular or is that just sort of that.
Speaker Change: And your own.
Speaker Change: Metrics or was it more.
Speaker Change: Realization of pricing or was it or mixed out better or.
Speaker Change: Shrink is there any.
Speaker Change: Significant.
Speaker Change: You improved the gross margin rates sequentially.
Speaker Change: Yeah, So Andy.
Speaker Change: Gross profit dollars by about $35 million, mostly through volume, but we also continue to see improvement in shrink.
Speaker Change: And the progress with the suppliers programs that are a very important part of our strategy.
Speaker Change: Rate was down about 20 basis points from 13, 4% last year to 13, 2% and what we see is progress reducing shrink.
Speaker Change: Randy mentioned that we are one of the lowest levels that we've seen in a long time.
Speaker Change: We continue to see ramp of our suppliers programs that you may recall.
Speaker Change: <unk> seen friction and improving transparency, while being accretive at the gross profit level.
Speaker Change: Also start seeing some of the benefits of the commercial value creation and stronger underwriting activities. So it's a very early innings, we know that it takes time to convert underwriting improvements into our margin in backlog, but we started seeing signs of it.
Speaker Change: And we're also focusing a lot more on understanding mix with a stronger analytical tools that we have whether it's customer or category and we actively work on dose so more to do there, but pleased with what we see at least with the controls on the Schrader suppliers program and the overall kind of underwriting.
Speaker Change: Environment.
Speaker Change: Thank you.
Speaker Change: Again do you have a question press star followed by the number of lines.
Speaker Change: The next question comes from Kelly Bania from BMO capital markets. Your line is open.
Kelly Bania: Good morning, and thanks for taking my question.
Speaker Change: I wanted to just ask.
Speaker Change: What your school with regard to demand for natural and organic by conventional retailers I guess the idea.
Speaker Change: Three years ago was that the cross selling opportunity with was quite significant.
Speaker Change: Got that.
Speaker Change: Into conventional retailers and just wondering if you're seeing a change in their interests and kind of stepping in to that further or if theres a changing even the marketing our sales efforts and kind of seeing that cross selling.
Speaker Change: Kevin just kind of the realignment.
Kelly Bania: Hi, Kelly.
Kelly Bania: Good question I think the answer to that is yes.
Kelly Bania: That opportunity that the team saw a bunch of years ago is still a very large one.
Kelly Bania: And there is a whole lot of category momentum for natural organic and specialty regardless of the channel.
Kelly Bania: We're seeing that both across branded and then also across our owned brand portfolio, particularly our wild harvest brand, which is doing extremely well and multiple channels, but.
Kelly Bania: We're seeing a very broad base consumer trend towards better for you products and that would show up in our natural portfolio.
Speaker Change: Okay. That's helpful.
Kelly Bania: Just a couple more questions.
Kelly Bania: Yes.
Kelly Bania: Lean daily management and some of the figures you gave there.
Kelly Bania: Sounds like it's been implemented in the 96 are those more conventional dcs or natural DC. Then there is the opportunity different as we look at those two sides of the business with it initiatives.
Kelly Bania: Good morning, Kelly and say, it's a very good question. It is a.
Kelly Bania: <unk> balance all natural and conventional Dcs so.
Kelly Bania: Obviously, you want to make sure that our teams.
Kelly Bania: <unk> and lean daily management principles equally, especially as we continue to evolve this kind of a more decentralized model.
Kelly Bania: Turning to describe on natural and conventional so it is it is in both.
Kelly Bania: We see positive results in both we.
Kelly Bania: Really like the fact that now every day and we had 19 that get together around that stand our kpis on safety quality delivery cost and getting to problem solving.
Kelly Bania: Fixing on developing counter measure very quickly.
Speaker Change: Okay. Thank you and just one more I guess on the new customer additions that you mentioned Matteo starting to cycle. Later this year any help you can give us on the magnitude of that.
Kelly Bania: Yes.
Kelly Bania: Channels that that impact.
Kelly Bania: And any insights into the pipeline for additional customer.
Kelly Bania: Additionally, before forward.
Kelly Bania: So when we think about the second half growth of 3% versus four 6%.
Kelly Bania: I would have a couple of considerations first we continue to see.
Kelly Bania: Several opportunities to find profitable growth.
Kelly Bania: In natural and conventional obviously faster growth in natural but several opportunities in conventional as well and then the offset to that is the fact data a few customers that we on boarded in the second half of 2024, we will start cycling. So we'll have tougher comps in a way.
Kelly Bania: I'll still delivering the same absolute dollars in second half of 2025 and beyond so I would think about.
Kelly Bania: Growth that we enjoyed in the first half was kind of decelerate lapping in the second half of 2024 for the remainder of the year.
Speaker Change: Kelly's Sandy here, the one thing I would tack on though which is part of your question is what is the pipeline look like and what I would tell you is that it's very strong it's strong across the $90 billion addressable market that we've identified and we continue to see opportunity.
Speaker Change: But I think that the guidance. We've given you is our high confidence guidance, but we're continuing to work to beat it.
Speaker Change: Thank you that's very helpful.
Speaker Change: Okay.
Speaker Change: And that concludes our Q&A session I will now turn the call over to Sandy Douglas <unk> CEO for closing remarks.
Speaker Change: Thanks, Operator as you heard on today's call. We continue to make solid progress on executing our multi year strategy and delivering our full year outlook.
Speaker Change: We have an excellent and very focused team in place with capability growing every day.
Speaker Change: We remain laser focused on creating value for our customers and suppliers, while making UNFI, a more effective and efficient organization.
Speaker Change: We again delivered strong sales adjusted EBITDA and free cash flow growth compared to last year's second quarter and our increased outlook reflects our year to date performance and growing level of confidence in our business model and customer base.
Speaker Change: As we implement our strategy we've continued to gain additional insight and believe that the opportunities before us are greater than the progress behind us to capture this opportunity. We know we must stay focused and strive to get better every day and we're committed to doing just that.
Speaker Change: By embracing lean management, we're becoming a more efficient and effective organization and creating sustainable shareholder value.
Speaker Change: For our customers and suppliers. We thank you for your continued partnership and the business we do together.
Speaker Change: 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.
Speaker Change: And for our shareholders. We thank you for the trust that you've continued to place in us.
Speaker Change: Again for joining us. This morning, we look forward to updating you on our progress in June.
Speaker Change: Ladies and gentlemen that concludes today.
<unk> com. Thank you all for joining and you may now disconnect.
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