Release Date: June 05, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- United Natural Foods Inc (UNFI, Financial) extended its relationship with Whole Foods through 2032, providing long-term stability.
- The company is launching a new multiyear strategic plan starting in fiscal 2025, aimed at enhancing profitability and cash flow.
- UNFI has identified a resilient segment of the industry worth over $90 billion in sales, which includes many of its existing customers.
- The company is focusing on expanding its high-margin services portfolio, which is expected to drive significant increases in free cash flow.
- UNFI has taken steps to optimize its network and reduce capital expenditure, aiming to spend approximately $300 million in fiscal 2025, down from $370 million in the current fiscal year.
Negative Points
- Sales for the third quarter were flat at $7.5 billion, indicating muted volume performance.
- The retail business continues to face top-line pressure due to price-sensitive consumers.
- Adjusted EBITDA declined by $29 million compared to the previous year, reflecting ongoing financial challenges.
- The company is still working on structural fixes to improve inventory management, which may take time to implement fully.
- Promotional activity is gradually increasing but remains below pre-pandemic levels, potentially impacting margins.
Q & A Highlights
Q: Can you provide more detail on the working capital improvements highlighted? What is achievable near term to support the free cash flow outlook for next year? And what could take longer in your multiyear outlook? Also, on the CapEx reduction, why does it make sense now, and how should we think about the long-term run rate?
A: (Giorgio Matteo, President, CFO) We are focusing on improving EBITDA, reducing CapEx from $370 million to $300 million, and taking actions on working capital, particularly inventory. We aim to reduce inventory days on hand quickly and then address structural inefficiencies built post-COVID. The CapEx reduction aligns with our strategic capital allocation priorities.
Q: Can you talk about the Whole Foods contract extension and how it compares to your prior agreement? Any updates around volume commitments or profitability?
A: (J. Alexander Douglas, CEO) The relationship with Whole Foods is extremely healthy and built on win-win principles. The extension reflects a stronger strategic commitment from both sides. Specific details are in the 10-Q exhibit, but overall, it’s a positive development for both parties.
Q: Are you still seeing much of an uptick in demand for value-added services for independents given the challenging macro environment?
A: (J. Alexander Douglas, CEO) Yes, demand for value-added services is growing as retailers look for opportunities to grow and save money. These services are capital-light and drive mutual economic benefits, making them increasingly attractive.
Q: How is promotional activity trending relative to your expectations?
A: (J. Alexander Douglas, CEO) Promotional activity is gradually increasing, though still below pre-pandemic levels. We expect this trend to continue, consistent with industry-wide observations.
Q: Can you explain the working capital line item from the past six months and the significant change compared to last year?
A: (Giorgio Matteo, President, CFO) Last year’s figures included a monetization program benefit. This year, we are seeing early signs of improvement in inventory management, which we expect to continue as we execute our action plans.
Q: Can you size the opportunity for the second round of cost reductions and provide an update on the productivity results from the Centralia automation?
A: (J. Alexander Douglas, CEO) We see a similar-sized opportunity for cost reductions as the $150 million achieved this year, to be realized over the next few years. Centralia is about to come online, and we expect healthy returns relative to our cost of capital, driving efficiency and improving customer experience.
Q: What is the long-term role of automation for United Natural Foods, especially considering your focus on CapEx and free cash flow?
A: (J. Alexander Douglas, CEO) Automation is part of our network optimization and efficiency strategy. It’s not an end unto itself but a means to improve customer service and financial returns. We execute automation projects with disciplined project management.
Q: Does the $130 million FILO count against your ABL availability, and what is your current liquidity?
A: (Giorgio Matteo, President, CFO) Yes, the $130 million counts against ABL availability. Our current liquidity is about $1.3 billion.
Q: Regarding DC network changes, are you considering consolidating, selling, or closing facilities? Would you consider sale-leasebacks to reduce debt?
A: (J. Alexander Douglas, CEO) We are assessing options for the most effective and efficient configuration of our DCs. This includes taking advantage of economies of scale within our expansive distribution network. More specifics will be provided as we finalize our plans.
Q: Can you provide more color on the margin differences between your business segments and the impact of offering more services?
A: (J. Alexander Douglas, CEO) Services are our highest margin segment, contributing about 20% to 25% of our profitability. We see significant growth opportunities in this area, which will continue to outpace the total company growth.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
