Q3 2025 United Natural Foods Inc Earnings Call
Ladies and gentlemen, thank you for standing by my name is Christa and I will be your conference operator today at this time I would like to welcome everyone to the U N F. I third quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be.
A question and answer session. If you would like to ask a question during that time simply press star followed by the number one on your telephone keypad and if you'd like to withdraw that question I can press star one.
Speaker Change: You and I would now like to turn the conference over to Steve Bloomquist, Vice President of Investor Relations, Steve You may begin.
Steve Bloomquist: Good morning, everyone and thank you for joining us on Unfi's third quarter fiscal 2025 earnings conference call.
Speaker Change: By now you should have received a copy of the earnings release issued this morning.
Speaker Change: The press release and earnings presentation, which management will speak to our available under the investors section of the company's website at Www Dot UNFI Dotcom. We've also included a supplemental disclosure filed in Microsoft Excel with key financial information.
Speaker Change: Joining me for today's call are Sandy Douglas, our Chief Executive Officer, and Matteo toward D D, Our president and Chief Financial Officer.
Speaker Change: Indian Matteo will provide a business update after which we'll take your questions before we begin I'd like to remind everyone that comments made by management. During today's call may contain forward looking statements. These forward looking statements include plans expectations estimates and projections that might involve significant risks and.
Speaker Change: Geez. 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.
Speaker Change: I'd like to point out that during today's call management will refer to certain non-GAAP financial measures.
Speaker Change: Definitions and reconciliations to the most comparable GAAP financial measures are included in our press release and the end of our earnings presentation. I'd now ask you to turn to slide six of our presentation as I turn the call over to Sandy.
Sandy: Thanks, Steve and thank you everyone for joining us this morning.
Speaker Change: Before discussing our Q3 performance I'd like to comment on the I T system security update we provided yesterday morning.
Speaker Change: As we disclosed yesterday the company became aware of unauthorized activity uncertain of our it systems on June 5th.
Speaker Change: We promptly activated our incident response plan implemented containment measures and are working to assess mitigate and remediate the incident with the assistance of third party cyber security professionals.
Speaker Change: Pursuant to our business continuity plans, we have implemented workarounds for certain operations in order to continue servicing our customers where possible and we're continuing to safely bring our systems back online and restore broad based customer service as soon as possible.
Speaker Change: Our entire company is focused on serving our customers.
Speaker Change: Our core values of transparency and doing the right thing service well as we manage through this incident and our core principles of our daily operations.
Speaker Change: We believe we are managing the incident capably with a very strong team of inside and outside professionals, including specialized experts, we will continue to keep our customers suppliers and associates regularly updated on our progress and next steps.
Speaker Change: Now, let me turn to Q3's results as.
Speaker Change: As you saw in this morning's earnings release.
Speaker Change: We achieved another solid quarter, driven by the strength of our customer base and disciplined execution of our multi year strategic plan.
Speaker Change: Our results reflect sales growth above the industry benchmark and adjusted EBITDA growth that was meaningfully higher than our sales growth leading to our highest adjusted EBITDA margin rate in two years.
Speaker Change: As part of our strategic plan, we expect to continue driving consistent annual margin expansion.
Speaker Change: This trajectory reflects our continued focus on creating value for customers and suppliers.
Speaker Change: While also systematically improving processes implementing technology to enhance customer service and strengthening operational efficiency.
Speaker Change: The third quarter was another quarter of year over year improvement in free cash flow, which is now well ahead of our original expectations year to date.
Speaker Change: This has enabled us to reduce net leverage by 1.3 turns compared to last year's third quarter.
Speaker Change: Based on our third quarter and year to date outperformance. We are tracking ahead of the three year fiscal 'twenty 'twenty seven financial objectives that we set last year.
Speaker Change: This gives us even more confidence that we will create long term sustainable value for our customers suppliers associates and shareholders.
Speaker Change: This performance demonstrates that our new more focused and efficient product centered wholesale structure.
Speaker Change: Is helping us better understand and meet both our customers and suppliers unique needs.
Speaker Change: A highly dynamic market.
Speaker Change: In some cases, we've supported customers with existing and new market expansions through our well scaled distribution capabilities.
Speaker Change: In other instances, we are serving new business and incremental categories for a period as retailers reconfigure their supply network or.
Speaker Change: Our strong topline performance. This quarter reflects the continued success of our winning customers and UNFI is ability to support their strategies across a variety of unique circumstances.
Speaker Change: We also recognize that both our customers and suppliers are navigating a dynamic macroeconomic environment.
Speaker Change: And we're focused on helping them plan for different scenarios.
Speaker Change: <unk> product alternatives, where needed and remain as competitive as possible.
Speaker Change: At the start of fiscal year 'twenty twenty-five I also shared that we would sharpen our focus on building win win relationships with suppliers and customers, which is largely driven profitable growth.
Speaker Change: Importantly, this process includes taking the right steps to adjust or exit relationships that are not mutually beneficial.
Speaker Change: Recently, we came to a mutual agreement with key food to end, our northeastern distribution agreement and help them transition to another wholesaler that we believe will better fit their needs.
Speaker Change: This enables UNFI to exit an unprofitable relationship and.
Speaker Change: And further optimize our northeast D C network by ceasing operations at our Allentown facility.
Speaker Change: Importantly, this will allow us to continue to more efficiently and effectively service, our customers and accelerate progress towards achieving our three year financial objectives.
Speaker Change: Next I want to focus on our second strategic objective, which is to become a more efficient and effective company for our customers and suppliers, which in turn is helping us accelerate free cash flow and strengthen our balance sheet.
Speaker Change: One year ago during our Q3 fiscal 'twenty 'twenty four call.
Speaker Change: I outlined four foundational initiatives under this objective.
Speaker Change: One intensify our network optimization.
Speaker Change: Second to focus and reduce annual capital spending.
Speaker Change: Third to optimize our cost structure.
Speaker Change: In forest to increase working capital efficiency.
Speaker Change: We've made significant progress on all four initiatives and we see continuing opportunity to enhance our performance going forward.
Speaker Change: A good example of the progress, we're making in improving execution and reducing waste is through the further implementation of lean daily management.
Speaker Change: With lean processes now being used in 20 of our 52 distribution centers.
Speaker Change: We are steadily improving safety quality delivery and cost and we continue to see significant opportunity for further improvement.
Speaker Change: Additionally, we've made progress to increase working capital efficiency by reducing our inventory days on hand back to pre COVID-19 levels, while also continuing to improve controllable fill rates.
Speaker Change: Fiscal year to date, we will reduce days on hand by over three days compared to the prior year.
Speaker Change: And we've steadily improved fill rates over the last few quarters.
Speaker Change: While we're making real progress we remain focused on continuing to drive fill rate improvements across our network.
Speaker Change: We set a year ago that we expected to generate up to $100 million in free cash flow during fiscal 2025 and that we would use these funds to reduce debt.
Speaker Change: One year later, we've surpassed our original target and further improved our balance sheet.
Speaker Change: And as reflected in our guidance, we expect to generate free cash flow over 50% higher than our initial outlook for the full year.
Speaker Change: By consistently executing these elements of our multiyear strategic plan and continuing to identify more areas for improvement.
Speaker Change: We see significant opportunity to accelerate achievement of the three year fiscal 2025 to fiscal 2027 financial objectives that we set at the end of last year.
Speaker Change: We believe that our improving execution adjusted EBITDA and free cash flow outperformance to date.
Speaker Change: Along with our network optimization proceeds will lower net leverage to nearly two and a half turns by the end of fiscal 'twenty, 'twenty, six which would be about a year earlier than our previous expectations.
Speaker Change: After we finalize our fiscal 'twenty twenty-six budgeting process. This summer we plan to update our long term financial objectives and provide a more in depth review this fall.
Speaker Change: In summary.
Speaker Change: We have work to do to manage the current disruption in our environment and we are very focused on doing so in a transparent principled and customer focused manner above.
Speaker Change: Above all else, we remain committed to becoming the most efficient effective and value creating partner for our stakeholders, which we expect will help to create sustainable long term shareholder value.
Speaker Change: With that let me turn over the call to Matteo to discuss our Q3 results and our revised outlook Matteo.
Matteo: Thank you Sandy and good morning, everyone and thanks again for joining our third quarter earnings call.
Matteo: As Andy stated, our operating momentum execution and performance have continued to accelerate as we completed the third quarter of fiscal 2025.
Matteo: Our confidence has grown with each passing quarter in executing our multiyear strategy and achieving our longer term financial objectives today.
Matteo: Today, I will provide additional insight into our third quarter results, including our sales and adjusted EBITDA growth free cash flow generation capital structure and outlook for this fiscal year with that let's review our Q3 results.
Matteo: Turning to slide eight our third quarter sales grew by seven 5%, what about $506 million to nearly $8 $1 billion.
Matteo: Our gains in the quarter were led by our wholesale natural products business, where sales increased by 12% compared to last years third quarter, primarily reflecting higher sales and category penetration with existing customers.
Matteo: Our wholesale conventional products business was up close to 3%, reflecting new business wins and new categories over the past four quarters.
Matteo: Across our wholesale business unit volumes were up about 4% compared to last year, which represented another quarter of sequential acceleration and a continuation of the favorable trends we have seen since the end of fiscal 2024.
Matteo: Unified volume again outperformed the key Nielsen industry benchmarks and reflects solid execution by our broad customer base.
Matteo: Is that perform on social reflects our consistent new business wins as retailers continue to recognize the value of working with a world scale wholesale partner able to provide the differentiated products and services to help them compete in a highly dynamic marketplace.
Matteo: During the quarter new business additions of this nature accounted for about half of our volume growth.
Matteo: Inflation was about one 5% largely unchanged sequentially antibody half percent lower than last year's third quarter.
Matteo: The remainder of our sales increase came from product mix, which added an additional 200 biggest points.
Matteo: Total sales in our retail business were up slightly compared to last year on.
Matteo: On a 90 basis or same store sales basis sales were up one 5%, reflecting sequential improvement across our store base.
Matteo: Moving to slide nine let's review profitability drivers in the quarter.
Matteo: Overall, our wholesale business continues to be the main source of growth.
Matteo: Wholesale gross profit dollars NATO modestly higher operating costs were up a combined $33 million, partially the result of higher volumes.
Matteo: However, our consolidated gross margin rate, excluding LIFO declined 30 basis points compared to the prior year period to 13, 4% of net sales.
Matteo: This was driven by a lower wholesale margin rate as well as a continued mix shift towards wholesale.
Matteo: Retail gross margin rate was flat to last year.
Matteo: In wholesale our gross margin rate declined by 20 basis points versus last year's third quarter, largely due to a continuing shift in customer and product mix.
Matteo: These impacts were partially offset by innovation and efficiency initiatives, including the value, adding supply your go to market programs that we've spoken about in the past and lower shrink expense.
Matteo: More than offsetting the decline in gross margin rate was continued solid operating expense management, which compared to last year declined by approximately 50 basis points as a percentage of net sales.
Matteo: This improvement reflects the leveraging impact from higher sales, our focus efforts on improving processes and removing waste as well as the operational benefits from the customer and business mix shift affecting our gross margin rate.
Speaker Change: As Andy mentioned, we're now executing lean daily management in 20 of our distribution centers and we're happy with the progress we are seeing.
Speaker Change: Across the Dcs were lean is beyond the ramp up stage, we are seeing injury rates declined significantly out of stocks improved by about 75% shrink decrease in throughput improve.
Matteo: And we're really just getting started.
Matteo: In fiscal 2026, we will be focused on value stream mapping to accelerate the systematic identification of waste improvement opportunities and additional areas, where we can bring value to our customers and suppliers. These actions along with other strategic initiatives undertaken over the past several quarters.
Matteo: Adjusted EBITDA growth of 21% compared to the prior year quarter to $157 million.
Matteo: Importantly, our adjusted EBITDA rate increased two 2% the highest in two years and 25 basis points higher than last year third quarter.
Matteo: 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 44 cents compared to 10% in last years third quarter, turning to slide 10, our improved profitability and continued focus on deploying lean principles helped drive 109.
Matteo: <unk> million dollars in free cash flow in the quarter, which was approximately $17 million more than last year's third quarter year.
Matteo: Year to date, we have generated approximately $150 million of free cash flow, bringing our trailing 12 month free cash flow to about $224 million.
Matteo: We've used this free cash flow to reduce our net debt to under one point $93 billion and lowered our net leverage to three three turns which is about the 0.4 turns less than last quarter and one three turns below a year ago.
Matteo: Andy stated, we now expect it to be close to our original three year leverage target of two five turns or less about a year earlier than previously planned.
Matteo: And our continued confidence in our free cash flow generation and robust liquidity position of nearly one $5 billion early in our fiscal fourth quarter, we made a voluntary $100 million prepayment on our term loan that will save us approximately 1 million and interest expense each quarter going forward.
Matteo: Also subsequent to quarter end in late May we closed on the sale of our billings distribution center and used the net proceeds of approximately $13 million after customary fees and expenses to reduce debt.
Matteo: We're continuing to market facilities in Bismarck, and Fort Wayne and have a letter of understanding from a potential buyer for the largest building in the Fort Wayne complex.
Matteo: Looking at Slide 11, we are reiterating most of our outlook metrics with the exception of GAAP net income and GAAP EPS, which have been updated to reflect the costs and charges of our key food agreement.
Matteo: We are otherwise maintaining our outlook for net sales adjusted EBITDA free cash flow and capital investments.
Matteo: With one quarter remaining in strong performance to date in fiscal 2025.
Matteo: Would have raised our key non-GAAP financial outlook metrics, if not for the unauthorized activity on certain of our I T systems.
Matteo: As we detailed in our disclosure on this event were still working to assess impact otherwise.
Matteo: Otherwise our underlying business momentum has been accelerating as we've been executing our strategic plan and focus on driving increasing value for our customers and suppliers.
Matteo: And as a reminder, fiscal 2024 was a 53 week here with the extra week falling in last year's fourth quarter for the balance of the year, which includes only seven more weeks, we expect moderate impacts from tariffs.
Matteo: This is informed by our cross functional tariff task force, which monitors for potential impacts works to identify product alternatives pressure test scenarios inputs processes in place to maintain connectivity with suppliers and minimize disruptions to our customers. We continue to manage the situation closely flickering.
Matteo: Slide 12, we had another solid quarter and remain confident in the future trajectory for UNFI.
Matteo: We believe we have the right work streams in place to add value for our customers and suppliers, while making UNFI and more efficient and effective partner to their businesses our.
Matteo: Our efficiency initiatives and lean management programs are generating improvements to our business, while our volume trends reflect successful execution by our customers and the differentiated value of the unified brings to our industry.
Matteo: We seek to earn the trust that our partner <unk>, placing us everyday.
Matteo: We believe that our operational rigor and customer and supplier by recreation focus will serve us well as we finished fiscal 2025 and beyond.
Matteo: With that operator, please open the line for questions.
Speaker Change: Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star one on your telephone keypad to raise your hand and join the queue and if you'd like to withdraw that question Press Star. One again, we also ask that you limit yourself to one question and one follow up your first question comes from Bill Kirk.
Bill Kirk: With Roth capital. Please go ahead.
Bill Kirk: Hey, good morning, just a clarification real quick are you reiterating the guidance on the non-GAAP elements or simply not updating them I guess, there could be a distinction between the two given the be and given the comment that you would've raised otherwise so is it now.
Bill Kirk: <unk> update the non-GAAP or reiterate the non-GAAP.
Bill Kirk: Yeah, Hi, Bill it's Sandy Douglas.
Bill Kirk: Detailed answer to your question, what he's going to do in the second.
Bill Kirk: I wanted just to reiterate for everybody.
Bill Kirk: It's a little bit of the details on our incident management.
Bill Kirk: On the call.
Bill Kirk: Last Thursday, we noticed some unauthorized participants in our network and pursuant to our incident management protocol, we went into hyper analysis and awareness mode.
Bill Kirk: Late afternoon on Friday.
Bill Kirk: Early evening late afternoon, we saw enough data to suggest that.
Bill Kirk: We needed to shut our network completely down and go into hyper analysis mode, which we did.
Bill Kirk: Bringing in outside experts and again pursuant to our protocols.
Bill Kirk: Once we got the Monday morning, we let the markets know filing the data one to make sure that we're being fully transparent about what was going on in there.
Bill Kirk: As we sit here today, we're 100 hours in to the management of the situation.
Bill Kirk: And we have two focus points and this is really the whole company focus here.
Bill Kirk: That is to understand the situation and then to safely bring back our network.
Bill Kirk: When it's appropriate to do so.
Bill Kirk: Then separately work with our customers and suppliers transparently to do everything that we can possibly do to help them manage through the short term difficulty this situation creates.
Bill Kirk: Further say that to us the most important enduring matter here is how we take care of our customers and how we show up for them.
Bill Kirk: Our focus has been on that for the last 100 hours.
Bill Kirk: And that continues to be what we're working on.
Bill Kirk: With some progress.
Bill Kirk: I'll go ahead and answer your question, but I just wanted to create that context, because that sort of sets the backdrop for how we looked at guidance.
Bill Kirk: On the call. Thank you Danielle good morning, Neal So we had a strong third quarter and we had a strong performance year to date were up five 5% in sales year to date, we're at 16, 3% EBITDA and generated more than $150 million of free cash flow.
Speaker Change: Our plan was to increase the guidance as we mentioned in the remarks. However.
Speaker Change: As you heard from Sandy we are very focused on the restore the systems and then to focus on the customers and with that in mind, we left the guidance alone for now.
Speaker Change: Okay. Thank you and as a follow up.
Speaker Change: On key foods in the northeast.
Speaker Change: She'll thesis was with them as an anchor customer you can build a large facility with some extra capacity to add additional customers around it. So I guess, what what kind of diverged from that plant. When it was it was a key foods is the anchor was different than you thought it would be or the ability to add scale around key foods is maybe different than you.
Speaker Change: Thought it would be what kind of what kind of happened there that kind of went against our away from your initial plan.
Andy: Sure Bill this is Andy again.
Andy: I think the broader strategic question, which we've been looking at as a part of our three year plan is around the country.
Speaker Change: There are there opportunities to optimize our network based on either market or customer profitability and then we've taken actions as you know to make adjustments to our DC footprint around the country.
Speaker Change: And that doesn't just involve closing Dcs, but recently as you know we moved from Europe demand yesterday increased our square footage in automation in the new Manchester distribution facility, specifically to keep crude into the <unk>.
Speaker Change: I would tell the market.
Speaker Change: We simply found that the combination of operational factors post COVID-19 impacts and the details of that agreement.
Speaker Change: Were very difficult and in collaboration with key food, we determined with them the best possible scenario for everyone given the facts at hand, and the likely scenarios that emerged was to exit the relationship and the market and so we did so.
Speaker Change: In effort to optimize the results for them and for US and it was a clear choice that emerged after careful consideration of all the options. Obviously, we have associates in that market. So we make those decisions very carefully.
Speaker Change: Let me do a compliment.
Speaker Change: And Sir Sandy so we recall on the third quarter and 24 million asset impairment charge.
Speaker Change: Million dollars severance expense have.
Speaker Change: Have impacted our GAAP results.
Speaker Change: In the fourth quarter, we expect to record a $53 million contract termination fee.
Speaker Change: We pay to our key food over several months an over achievement of milestones and that will be recorded in the restructuring costs and will impact free cash flow. However, the net cash impact of the payment is materially lower because as we discontinue our operations at Allentown, we're going to get some upside proud of working capital release.
Speaker Change: As well.
Speaker Change: And a piece of the expense reduction so we projected payback period.
Speaker Change: Airbus.
Speaker Change: Your next question comes from the line of Scott and Lee skin with RFID capital. Please go ahead.
Scott Lee: Hey, guys. Thanks for thanks for taking my question I'm, sorry to hear what you are going through.
Speaker Change: So I guess first off I want to make sure I understand and getting our network back online are you actually currently shipping to customers or now.
Speaker Change: Yes, we are on a limited basis.
Speaker Change: And it depends on.
Speaker Change: Technology platform somewhere.
Speaker Change: Further along on the recovery than others.
Speaker Change: But we are partnering with customers across the country and across our formats.
Speaker Change: In various short term modes.
Speaker Change: All of their needs as best as we possibly can.
Speaker Change: And it's getting increasingly positive each day, but still work in progress.
Speaker Change: But do you think the percentage of normal share does that Oregon 30 orders that are over 15 anyway oceans Obama molecules.
Speaker Change: Yes.
Speaker Change: Customers that can shelter going to start running there.
Speaker Change: Whereas everything.
Speaker Change: Scott.
Speaker Change: The.
Speaker Change: Entire process is very good.
Speaker Change: We will go in.
Speaker Change: Yes.
Speaker Change: I would describe it as.
Speaker Change: Each day is better and we're working in a very customized way by the.
Jeff: Good morning, Jeff.
Jeff: Sure.
Speaker Change: The capability that exists.
Speaker Change: And it's.
Speaker Change: This stage highly partnering activity, but I wouldn't want to give percentages at this time, because it's changing every day.
Speaker Change: But it's obviously, it's a top priority of the company to serve our customers as best as we possibly can while we're working to as rapidly and safely as possible bring our systems back online.
Speaker Change: Are you actively facilitated the customers working with other distributors from there there.
Speaker Change: Are there any.
Speaker Change: What's your personal and whats your monetary responsibility to those customers and there is a contractual issue.
Speaker Change: <unk>, where they can actually break contracts.
Speaker Change: Yes.
Speaker Change: I think the focus right now.
Speaker Change: And I think the through line across the network is to help customers meet their needs in whatever way it can be done.
Speaker Change: And that in some cases involves help from other wholesalers in other cases.
Speaker Change: A lot of very innovative work that our teams have done to help respond as fast as our capabilities will allow but I think that.
Speaker Change: The strategic point in the middle of it is how do we work together with customers and the crisis in some ways is a defining opportunity for us in any way that we can help them meet their needs we are doing.
Speaker Change: And nothing on their ability too.
Speaker Change: And how about their ability to break contracts.
Speaker Change: Yes.
Speaker Change: This is a breach.
Speaker Change: From my perspective first of all our contracts with our customers are highly varied.
Speaker Change: And as you know they are confidential and specific.
Speaker Change: Our focus right now is less about that and more about meeting their needs today.
Speaker Change: Wouldn't be able to actually answer that question, even if I was declined to disclose it.
Speaker Change: <unk> is making sure we serve the customers and have them be able to do whatever they need to do the best they can in this environment.
Speaker Change: In parallel our focus is as quickly as possible to address the issues and ensure the systems and bringing them back up online.
Speaker Change: As you know how companies manage situations like this are defining in terms of their relationships.
Speaker Change: And we view it as that kind of momentum and we have bid.
Speaker Change: Please be transparent.
Speaker Change: Completely focused on our customers outcomes from the start.
Speaker Change: And then my final one.
Speaker Change: Okay.
Speaker Change: Margin expansion in the UK as targets issues. So I mean this can be a multi month process is that how we should look at it.
Speaker Change: Then a follow up to my follow ups is that.
Speaker Change: If you look at the equity trading.
Speaker Change: Very much appears either someone knew this was going to happen.
Speaker Change: And as the SEC involved in that and then I guess also.
Speaker Change: Why did it take you guys. So long to report it to the market.
Speaker Change: Scott.
Speaker Change: Let me.
Speaker Change: First of all declined to speculate at all regarding regulatory authorities.
Speaker Change: The first part of your question, but let me remind you the timeline.
Speaker Change: The company became aware of an unauthorized interest in our technology.
Speaker Change: Thursday.
Speaker Change: Pursuant to our entire management routines, we began hyper analysis and awareness.
Speaker Change: Diagnosing just how broad that situation was.
Speaker Change: Because of course in many cases when you. Initially said you may be inclined to think it's isolated.
Speaker Change: Hi.
Speaker Change: Late Friday afternoon, we made the decision to lock our system is down.
Speaker Change: And we filed.
Speaker Change: 8-K on Monday morning, before the market opened.
Speaker Change: So there is no way that we could have communicated any faster.
Speaker Change: And there was no trading I don't know.
Speaker Change: No.
Speaker Change: There was no open markets between the time, we locked our systems down all the time I'm actually talking about California, Jack I mean, if you look at the.
Speaker Change: The equity was dropping.
Speaker Change: Yes.
Speaker Change: The FCC Swan.
Speaker Change: I'm confident that we are engaged with all the authorities including.
Speaker Change: Relative to the cyber event reporting all that we know to the FBI.
Speaker Change: Those are all part of our protocols.
Speaker Change: Followed strictly.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of Mark Carden with UBS. Please go ahead.
Speaker Change: Thanks, So much for taking my questions guys to start can you give us a little bit of a follow up on Bill's question for key food because originally expected to be a $1 billion annualized business is this essentially where it landed and then I know you guys are pretty excited about landing. The contract. Originally was this situation unique key food or.
Speaker Change: Does it make you rethink at all how you approach larger contracts.
Speaker Change: Thanks.
Speaker Change: Mark what I would say.
Speaker Change: Relative to the individual customer is that we don't really comment specifically, obviously, we did today because of the size and scope and the history of the announcement.
Speaker Change: And actually the Allentown.
Speaker Change: But.
Speaker Change: <unk>.
Speaker Change: The broader question about our approach overall contract underwriting and analysis.
Speaker Change: I would say that today, we have a very rigorous.
Speaker Change: Process that looks at.
Speaker Change: All the factors that go into it because we pursue win win agreements.
Speaker Change: And.
Speaker Change: Our customers deserve that.
Speaker Change: And our customers to all our customers.
Speaker Change: Deserve that we don't have agreements, where we are losing money because that hurts everybody. So the rigor that matteo and his team working with our commercial leaders have put into that processes significant and ive got a lot of confidence in that I.
Speaker Change: I would also say that a whole lot, particularly in the transportation side of the New York area changed.
Speaker Change: In the Covid period, and so we made the decisions we made based on a very factual analysis of the current situation and at the end of the exploration of all options that we might have been able to pursue to turn that agreement into a positive one and following all of that.
Speaker Change: We chose to exit because it was the best decision for our shareholders and I believe that key food made the same decision for the same reason for theirs.
Speaker Change: Got it that makes sense and then as my follow up.
Speaker Change: On the cyber attack how has the customer response been so far and does it impact how you approach resources devoted to both customer retention and new business acquisition in the near to intermediate term.
Speaker Change: Essentially does new business go more to the backburner temporarily or is it some of it is balanced.
Speaker Change: Yes, that's a great question.
Speaker Change: What I would say is.
Speaker Change: And again this is anecdotal in the midst of the crisis response with.
Speaker Change: 30000 customer rooftops, but.
Speaker Change: I have daily.
Speaker Change: Personal conversations with about 15 to 20.
Speaker Change: The Ceos of our customers.
Speaker Change: And.
Speaker Change: The conversations have been extremely constructive and collaborative art.
Speaker Change: <unk> are working very hard for them to make sure that we help them get everything that we can to manage through.
Speaker Change: <unk>.
Speaker Change: My own view is that until we.
Speaker Change: Reach a point of.
Speaker Change: Functional equilibrium.
Speaker Change: Our systems are safe and operating as they should.
Speaker Change: We have to focus on existing customers and meeting their needs with every ounce of our energy and Thats what were doing.
Speaker Change: I would also caution everyone not to make assumptions about the length of the issue.
Speaker Change: That on both sides.
Speaker Change: Things that I have learned is to focus on the facts in front of you.
Speaker Change: And generally not to speculate to serve the needs of the.
Speaker Change: The process and making sure that we are safe we are diligent thorough and at the same time in parallel work very hard to solve the operational opportunities.
Speaker Change: With getting customers in the coming day.
Speaker Change: The same on the backend with our suppliers.
Speaker Change: I believe overtime how.
Speaker Change: Companies and their customers worked together in crises.
Speaker Change: Had the opportunity at least to strengthen relationships, but we'll be talking about that after it's over.
Speaker Change: Got it thanks, so much good luck guys.
Mark: Thanks Mark.
Speaker Change: As a reminder, if you would like to ask a question. Please press star one on your telephone Keypad. Your next question comes from John <unk> with Guggenheim. Please go ahead.
Speaker Change: So for both of you guys.
Speaker Change: I know you've been speeding up the rollout of lean six Sigma right you did 11 this quarter.
Speaker Change: How does it how does the breach impact that variety of basically.
Speaker Change: Whatever you've done in the fourth quarter, that's it and it slows down temporarily.
Speaker Change: And then also if you think about shrink to shrink potentially go up in the short term.
Speaker Change: Volume is down product has gone bad or too early to tell if that happens.
Speaker Change: Hey, John Good morning, and thanks for the question, Let me give me a quick recap on where we are in the early lean journey. So we're focusing on three areas first one is that decentralization for higher accountability.
Speaker Change: Is there some of the comments of references that Sandy made on how new wholesale product oriented organization is performing our prices how decentralized procurement organization is performing on reducing days on hand, while supporting a 75% growth rate.
Speaker Change: The second area is on lean Daily management I'll get there in a second on your question on the breach and Thats, where we now have.
Speaker Change: Distribution centers out of roughly 50.
Speaker Change: <unk> data management, and we see benefits across the safety quality delivery cost.
Speaker Change: Sequence and then the last piece is that waste management, which is where we have been able through a set of actions to take another 50 basis points of operating expenses.
Speaker Change: Also sales.
Speaker Change: Specifically on your on your question so throughput has been improving over the last several quarters.
Speaker Change: 5% in the third quarter.
Speaker Change: There could be a few days out disruptions, Andy say, focusing on restoring our assistance and meeting our customers' needs as much and more curated wages return.
Speaker Change: But the underlying momentum is strong we are getting a lot of engagement from the ECS on applying lean daily management, Sandy and I and the leadership team were either in Manchester last week and we so we are a prime example of how these things are working so we are encouraged by the progress.
Speaker Change: Speed bump related to these cyber incidents, but the underlying momentum is strong and will continue.
Speaker Change: And then relative to shrink obviously as part of the 100 hours.
Speaker Change: Reaction planning process with Newsy and why is the every single one of the standard hours.
Speaker Change: Look at the <unk>.
Speaker Change: Asian receipts and procurement and inventory in and fresh because of the shrink dynamic was very high up on the list. So we're responding speaking as we can in the more creative ways that we can.
Speaker Change: We don't speculate if we're not putting days out recovery through our statements, but we're moving methodically in Switzerland.
Speaker Change: Following up on that so just where do you when you look longer term.
Speaker Change: And the sort of the.
Speaker Change: The recurring benefit of lean six Sigma.
Speaker Change: So how does that sort of play out do you think you get it in an everyday scene in year, one you refine it.
Speaker Change: What do you think is the most important longer term.
Speaker Change: Contributor there.
Speaker Change: And we're just talking about labor productivity.
Speaker Change: May have asked this to you before do you think you can sustain.
Speaker Change: 3% to 5% labor productivity gains.
Speaker Change: Over many many years as this gets refined or is that optimistic.
Speaker Change: I think.
Speaker Change: We can sustain a what do we see the benefit is clearly continuing to improve the throughput.
Speaker Change: As part of the lean daily management, continuing to expand the reach into our distribution centers with a sequence of SQL D C.
Speaker Change: And then we're excited about the fourth leg that we are going to add to our lean journey, which is value stream mapping and value stream mapping as a way to complement our capex investment as a way to complement the problem solving and making solutions more sustainable so we expect to get.
Speaker Change: It's hard to fully deploy DSM.
Speaker Change: As far as seeing sustainable benefits there.
Speaker Change: Thank you.
Speaker Change: Thanks, John.
Speaker Change: Your next question comes from Jordan <unk> with Goldman Sachs. Please go ahead.
Jordan: Thank you good morning.
Jordan: Just given the termination of your relationship with key peers I wanted to see if you could just comment on how youre thinking about the conventional segment longer term and.
Speaker Change: I understand you've been focused on constrained lining your contract to drive.
Speaker Change: <unk> growth, but as Ikea driving more volume through your network should create some leverage benefits over the long term. So how do you balance this kind of streamlining to drive near term profitable improvement versus making sure you don't.
Speaker Change: Much.
Speaker Change: Gain growth longer term.
Lee: Lee This is sandy that's an excellent question, let me start at the sort of streams is strategic.
Speaker Change: Segmentation that we did a year ago.
Speaker Change: Because I think sometimes labels.
Speaker Change: Australia thinking we've identified a $90 billion addressable market that includes natural organic specialty ethnic really all retailers that are predominantly focused on the differentiation strategy and we're designing unfi's product services and programs for that customer base.
Speaker Change: Yes.
Speaker Change: We view that customer base, having done a lot of very disciplined and deep analysis to be a growth segment of the food industry going forward.
Speaker Change: And so with that design and that sort of target we've assessed our business on a DC DC basis.
Speaker Change: To evaluate where we are going to see growth, where the profit opportunities exist from a service and program perspective, and ultimately at that then goes down and works with individual customers, we'd look for ways to create win wins and we've had a lot of success on that as you know.
Speaker Change: We have provided a year ago three year sales guide of flat and this year year to date.
Speaker Change: Way ahead of that because of the success of the segmentation thinking and the work we've done with customers in the case of key food and Allentown, It's a unique situation.
Speaker Change: Largely a unique situation, where the customer and in D. C are inextricably linked and in that case, there was no way that we could see based on all the work. We've done that we can turn that situation into a profitable growth opportunity and so we made the hard decision to close the DC and we ended <unk>.
Speaker Change: Mutually decided to end the relationship.
Speaker Change: Ultimately the value gets driven by driving throughput and creating excellent returns against our capital which tend to be D. C driven.
Speaker Change: And we see opportunities to grow profitably against the $90 billion addressable segment.
Speaker Change: We're in the process of making sure that we align that shape the customer efforts that were putting into that target market into the ability to drive profitable growth and significant amounts of free cash flow to deleverage our debt and drive economics for our shareholders.
Speaker Change: Does that makes a lot of sense. Thank you and just for my follow up I Wonder if you dig into that.
Speaker Change: Great.
Speaker Change: The drivers in the quarter, a little bit to putting the recent cyber incident. Aside I mean, you still had a nice acceleration in your overall business volume growth and this is within the backdrop of macro uncertainty low consumer sentiment.
Speaker Change: So I guess what have you seen on consumer behavior have there been any big shift in which categories, they're shopping in channels and how much do you think just the shift towards more food at home has been a benefit for you this last quarter.
Speaker Change: Sure.
Speaker Change: And I will take the business.
Speaker Change: Comment as well.
Speaker Change: I think the first distinction I would draw.
Speaker Change: Is that the wholesale market is not exactly a mirror image of the retail market.
Speaker Change: We're in the <unk> products and services business and our growth is driven by.
Speaker Change: The fact that retailers.
Speaker Change: View us as being helpful to them in a various range of circumstances.
Speaker Change: And we work hard to be.
Speaker Change: Yes.
Speaker Change: Provider that they look to to help them grow their business help them shift their strategy helped to move into new markets a range of different situations in our growth reflects that some of its short term some of its long term, but our sales.
Speaker Change: Merchants are busy helping customers regardless of the situation and we've seen really strong sales results as a part of that within the consumer clear.
Speaker Change: Clearly what you hear from retailers across the market as there is.
Speaker Change: Certainly stress at the bottom end and increasing.
Speaker Change: Sort of wariness across the customer base.
Speaker Change: We're seeing really strong performance in the natural organic and specialty area, but we're also seeing good performance and differentiated.
Speaker Change: Some other really powerful in good retailers, who are doing an excellent job.
Speaker Change: It's going to continue to be we use the term dynamic in the script.
Speaker Change: We think it is we're seeing lots of innovation and finally I would remind you that we granted at most of our growth to the quality of our customer base, which is really the truth of it is the biggest driver we have great customers, who are doing incredible things in the market.
Speaker Change: Any any addition subtraction their roads.
Andy Say: Thanks, Andy I would add a couple of insights on the on the business strategy. So.
Andy Say: Unpack the seven 5% growth 400 basis points came from volume, which is the highest growth we have seen since the volumes turned positive at the end of 2020 for inflation.
Speaker Change: Well at one 5% and then we picked up about 200 basis points from positive category mix with higher dollars per case, when you think about natural and conventional dynamics of the natura is growing at a faster pace at 12%.
Speaker Change: Conventional home was up 3% it had slightly positive volumes and then the last comment is building on some of the iterations than we had in the last call even within natural when you exclude the new business is the largest customer the underlying performance is growing from 2% in Q3 percent into Q4 percent.
Speaker Change: In the third quarter. So we see we see momentum in the natural business at large.
Speaker Change: Very helpful. Thank you.
Edward Kelly: Your next question comes from Edward Kelly with Wells Fargo. Please go ahead.
Edward Kelly: Hi, good morning, guys.
Speaker Change: Good morning.
Speaker Change: Just a follow up on.
Speaker Change: At issue just.
Speaker Change: Just curious.
Speaker Change: Do you think there is anything about.
Speaker Change: UNFI that made it more susceptible to this problem.
Speaker Change: Bigger picture sort of taking a step back.
Speaker Change: Hi.
Speaker Change: Do you think it impacts at all how youre thinking about spending capex technology that type of stuff moving forward.
Speaker Change: Hi, Ed.
Speaker Change: The.
Speaker Change: An instinctive answer is no.
Speaker Change: But let me answer the question more thoughtfully than that.
Speaker Change: We have like a lot of companies a significant investment in process around the cyber area is highly dynamic and rapidly growing.
Speaker Change: Great actors out there are always looking for ways to innovate and find new ways to penetrate systems.
Speaker Change: So whether it's our maintenance routines are board oversight risk management that tracks all the way up into our governance structure.
Speaker Change: We rigorously review and invest in the size of our infrastructure and capability in the company.
Speaker Change: We use multiple different external benchmarks.
Speaker Change: Just assess ourselves and.
Speaker Change: Really hold nothing back in this area.
Speaker Change: <unk> said that we just got penetrated so we will be continuing to look at every aspect of our defense every aspect of how.
Speaker Change: Our tools are working and what may be necessary to bolster it going forward because it is clearly an area that.
Speaker Change: Requires a tremendous amount of focus from companies today that will continue.
Speaker Change: How does that affect capex going forward ultimately.
Speaker Change: Capex.
Speaker Change: As a choice and we have and will continue to prioritize cyber investment.
Speaker Change: But I don't think it changes the ultimate Big picture for you on that capital.
Speaker Change: I think it comes.
Speaker Change: <unk> needs to be both high capability and humble when it relates to cyber security and this event is just the demonstrated examples of Hawaii.
Speaker Change: Okay, and just a follow up as we think about.
Speaker Change: The mitigation efforts that you are taking at the moment.
Speaker Change: See there is the.
Speaker Change: Case volume impact associated with that but what about from a cost perspective.
Speaker Change: In terms of like trying to run the business with some capacity at this point is that and is there an added cost associated with doing that.
Speaker Change: I'm curious I mean, I know you don't have great visibility, but we're all thinking about how we should at least be modeling what's happened so far.
Speaker Change: Any impact that might be having on the cost side.
Speaker Change: Sure.
Speaker Change: And again, what I would say on this one is we are at 100 hours in.
Speaker Change: At this stage, we are taking action with one really two tracks of focus.
Speaker Change: First is to address the cyber incident to make sure we understand.
Speaker Change: That we have taken actions to.
Speaker Change: Repair improve and then get our system safely online as fast as possible and that's one track of work and were.
Speaker Change: Putting the resources that are necessary all of them to bring that to effect as soon as safely as possible and then on the other side, we are using our <unk>.
Speaker Change: Resources, and our tremendous team of sales and supply chain and procurement.
Speaker Change: Work with suppliers and customers to make their situation as good as we possibly can.
Speaker Change: Will there be elevated costs there.
Speaker Change: As a result of both of those tracks.
Speaker Change: Yes of course, there will be.
Speaker Change: How much that will be we don't know at this stage.
Speaker Change: But we believe we will be able to manage it but at this point, we're focused on those two tracks and it's too early to try to quantify that.
Speaker Change: Okay. Thanks, guys.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of Ben Wyatt with BMO capital markets. Please go ahead.
Speaker Change: Hi, This is Ben on behalf of Kelly Danielle Thanks for taking our questions.
Speaker Change: Not to belabor.
Speaker Change: For each.
Speaker Change: Anymore, but just a question going into it.
Speaker Change: Were you guys on the consolidation and updating of your IP shift and so I know a lot of that.
Speaker Change: The last cycle of inflation you commented.
Speaker Change: You have a lot of systems that impacted your visibility into the business. So where were you in that process.
Matteo: Hey, Brian Good morning, it's Matteo.
Speaker Change: Over the past couple of years, we have been focused on improving our systems and processes and as you think about.
Speaker Change: Our 300 million dollar Capex guidance.
Speaker Change: Always allocate about a third to safety and overall DC modernization about a third through technology improvements as antibody therapy.
Speaker Change: Automation, so within that envelope, we have invested in updating our systems and processes and with that increase in capabilities.
Speaker Change: We continue to modernize our net towards thinking about the recent release of the warehouse management systems I think about some of the inventory.
Speaker Change: Management applications that middle East and we continue to look at opportunities too.
Speaker Change: Methodically and with discipline and consider in ERP, but we wanted to make sure that it's clear that the fact that we have closed some kind of technology that you see in the last couple of years with a lot of system and process improvement is separate from what happened in the cyber attack.
Speaker Change: Right.
Speaker Change: Good.
Speaker Change: That's helpful and then I just wanted to.
Speaker Change: Transition to talking a little bit about service levels you guys have provided some good updates, but I am curious for the Dcs that are on your daily management compared to the D fees that are not our service levels customer retention.
Speaker Change: New business wins tracking and then on a related note to that what about the Dcs and the surrounding areas.
Speaker Change: Some of the Dcs that you have closed.
Speaker Change: <unk> customer retention and service levels.
Speaker Change: They're growing.
Brian: Brian Great question. Thank you, we see service levels, improving and being able to bank on it.
Brian: Immediate problem solving at the <unk>, where we have deployed lien debt management.
Brian: That said it doesn't mean that the other 30 or so now I'll focus on fee rates and service levels and delivery qualities, but the methodology of having teams Halloween every morning around safety quality delivery cost dashboard seen the green or the Reds and being able to John straight away to the right and active problem solver.
Brian: It is very very powerful.
Brian: So with that in mind, we've seen shrink benefits service level benefits.
Brian: Delivery quality benefits, despite would encourage about expanding the program to more and more distribution centers.
Brian: Your point the adjacent Dcs that down heavily in data management in place can also learn from the best practices of the hour. So there is a former Max out of rolling out the LTM, but that are also daily interactions and practice sharing that helps the overall network.
Brian: Relative to the to the customer retention.
Brian: When we issued a guidance about a year ago, the outflow of the three year guidance, a year ago and talk about Frac flat revenues.
Brian: It just started the network optimization plans and to date, we have closed four distribution centers. If you include the move of York into Manchester and obviously, if we announced that in time. This morning, and we could say that our ability to work with customer and find when we put forward.
Speaker Change: In stronger than we were expecting at the inception of this program and we are happy with that because of Sandy mentioned, our first goal when we see low performing distributional centers is to be able to find when we solutions with our customers and then as now we need to take different actions.
Speaker Change: Your final question comes from William Reuter with Bank of America. Please go ahead.
Speaker Change: Hi, I just have two quick ones. So the first in terms of the termination fee with key foods did I hear correctly that that was 50 353.
Speaker Change: That is correct.
Brian: Okay.
Brian: And then.
Brian: In terms of capital allocation.
Brian: You have now.
Brian: Sure.
Brian: Fed up your expectation of when Youre going to get to two five times leverage now.
Brian: Now by the end of fiscal year 2006, how are you thinking about capital allocation. When you get to that target do you think that youll change towards more shareholder friendly either share repurchases.
Brian: Larger.
Brian: Dividend or Alternatively, do you think you might kind of reduce your leverage target.
Brian: Going forward from that point.
Brian: That's a great question. So our focus is 100% on converting to free cash flow into debt reduction for now.
Brian: That's the framework, we've talked about investing $300 million in Capex every year by 1% of our topline and again the Anvil, obviously 32 safety and you see maintenance.
Brian: Third is the technology and a third into automation and then every dollar goes to a debt reduction that is the focus on demand tracked through.
Brian: The point to attribute to one five turns or less I think at that point, we will have a different conversation of where do we see the best shareholder returns.
Brian: Point, the full portfolio of more targeted investments organically in certain areas.
Brian: And about your friends buyback.
Brian: Buyback policy is all going to be on the table for now.
Brian: One and only focus is to deleverage and there is no mistake within the company.
Brian: Got it alright helpful commentary alright, thanks, a lot.
Brian: And that concludes our question and answer session and I will now turn the conference back over to Sandy Douglas for closing comments.
Sandy Douglas: Thank you operator as you heard on today's call. We are focused on diligently managing through the cyber incident, we announced yesterday morning to rapidly and safely restore our capabilities, while helping our customers with short term solutions wherever possible.
Sandy Douglas: This may be a short term incidents in the longer picture of our business, we see a defining character moment to show up for our customers in a way that reflects the challenges of the time and the character of the company that we want to be.
Sandy Douglas: Bigger picture, we continue to make solid progress towards implementing our multiyear strategy and delivering on our financial commitments both in fiscal 'twenty five and beyond.
Brian: We again delivered strong sales adjusted EBITDA and free cash flow growth compared to last year's third quarter.
Brian: We continue to gather insights and develop plans for how we can deliver even more value.
Brian: Our customers and suppliers knowing that the learnings from our past will be the drivers of success and our future.
Brian: We're committed to getting better every day and they have embraced lean management as.
Brian: As a disciplined approach to becoming more efficient and effective.
Brian: For our customers and suppliers, especially now we thank you for your continued partnership and the business we do together for.
Speaker Change: Through 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 you continue to place in us.
Brian: Thanks again for joining us this morning, I look forward to updating you. This fall on our year end call.
Speaker Change: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Yes.
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