Release Date: October 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Delivered fourth-quarter results that drove fiscal 2024 performance to the upper end of the previously provided outlook.
- Extended agreement with the largest customer until mid-2032.
- Realized approximately $150 million in benefits from structural efficiency initiatives.
- Significantly reduced shrink and lengthened the maturity on the term loan until 2031.
- Onboarded new President and CFO, Matteo Tarditi, to strengthen leadership.
Negative Points
- Retail sales continued to see pressure with a decline of slightly more than 4% compared to the prior year.
- Inflation decelerated modestly to approximately 1.5%, with expectations for further slowing.
- Higher interest expense primarily driven by higher average interest rates.
- Free cash flow in Q4 was $71 million, a decrease from last year.
- Net leverage remains high at 4.0 turns, though it has declined from Q3.
Q & A Highlights
Q: Sandy, I wanted to start with your view on the role of conventional in the portfolio, right? Because you said most of the profitability comes from natural, and that business is growing. So the role of conventional, and I know to get to flat revenue, it means that you're probably giving up $1 billion or $1.5 billion somewhere. So there will be more closures beyond Billings and Bismarck, I assume. And do you think you managed conventional accounts out of the system in warehouses that you don't close? Is that part of this as well?
A: I think our view of our product portfolio is more broad-based in the sense that we seek to have the products that our customers need and want. What you see in our network rationalization is an effort to make sure that our supply chain is as efficient as possible and that all of the capital that we have invested is generating the best returns. Ultimately, the consumer clearly is trending towards natural and better-for-you products. So that's a big focus of ours and also part of our heritage. But at this stage, we're designed for the customers we serve. And we believe inside the addressable market we talked about, there will be material amounts of both conventional and natural products.
Q: Can you speak to -- right, there's sort of two sides of the labor productivity aspect here, right? So number one, wage rate inflation, right? Do you think that is -- is that a 3% to 4%, 4% to 5% inflation rate going forward just given supply-demand? And then the flip side of that is the productivity you can drive in cases per labor hour, right? And is the idea to offset the two? Where do you think the lean productivity gains can be in excess of your wage rate inflation?
A: Yes, John, thank you for the question. Two things. So first of all, our goal is always through productivity and throughput to more than offset the pressure from inflation. So while you are correct, without necessarily pinning down a percentage point, that we will see some pressure between renegs and inflation on labor. But our goal through lean, and we have some good proof points already is to continue to remove waste, improve the number of cases per hour and how do we continue then to drive productivity out of the large distribution center network. So in midterm, long term, the plan is clearly to continue to offset any labor pressure from a cost standpoint with more productivity.
Q: Just seeing if you could walk us through the puts and takes to gross margin in your '25 outlook. How much could vendor promotions be a tailwind in the coming year? What are you seeing there? And how should we think about procurement opportunities, given your inflation outlook for some deceleration and then stabilization?
A: Yes. Thank you. So a couple of thoughts here. First of all, on the general guidance, we're looking at kind of high single-digit growth in the long term. And we're guiding $520 million to $580 million on EBITDA with a midpoint of $550 million. Relative to gross profit, so what we expect is that, obviously, actions like shrink that have given great results and great benefits in 2024 will continue into 2025. And we also expect the pressure from mix to -- from customer mix to continue into 2025 broadly kind of balancing between these two. As Sandy mentioned, part of the DC network optimization is going to help us remargin the business. That is going to be probably through '26 and '27. But relative to 2025, so on the specific question of gross profit, we expect to see some balance between the benefits of gross profit and -- sorry, the benefit from shrink and the pressure from mix. Relative to promotions, we still don't see promotions going back to kind of the pre-pandemic levels. So for now, we have modeled some level of improvement but not kind of significant improvement back to the pre-pandemic levels.
Q: I just wanted to see if you could provide more detail on the retail segment. What demand trends are you seeing within your banners there and the competitive environment where you operate? And how important is that business to supporting your Wholesale business as well?
A: Yes. I mean our retail business, think about it as a Minnesota, Twin Cities business. It's the Cub brand. It's a market leader in the Twin Cities. It's had some challenging performance over the last couple of years. We have a new team in there that's building a new strategy, working closely with our franchisees. And we're optimistic that Cub will be a strong player for years to come, and there are a number of initiatives that are underway to improve the performance there. From a competitive standpoint, Cub is competing against the widest range of local and national players. And like many, they're pursuing differentiation strategies to improve the performance. And again, I mentioned the franchisees up there. We've got a unique structure. It's very collaborative. And I think we're increasingly constructive on the plan that's being built.
Q: So in your three-year plan, you're prioritizing natural, organic, which makes a lot of sense. Digging into what you're doing on conventionals, though, how are you thinking about the balance of growth between independent conventionals and chains over the next few years? Would you expect one to grow much faster than the other?
A: Mark, it's hard to generalize. And I'm not dodging the question. We find performance amongst our 32,000 approximate retail base to vary literally from one segment to the other based on the retailer and their positioning. What we see is, yes, the natural and organic and specialty retailers are growing faster right now. But we also see really well-positioned retailers in ethnic and other sort of specializations doing quite well as well. And some of them are one store operators who are just brilliant merchants, and others are larger. So you can find across our entire customer base winners and then those who are going to win in the future. And our job is to try to help all of them from wherever they are do better tomorrow than they did yesterday. But you'll really see winners all over the market.
Q: On your higher-margin professional services, how is traction trending for your natural and organic business? I know historically, it's been more geared towards conventional, but are you seeing any signs of a step change on that front?
A: Yeah. Well, the services business, as you said, was a -- it originated with a more conventional focus, but we've been ramping it up across our customer base. Services continue to significantly outgrow our general business. And as I mentioned earlier, we're very bullish about the services business and generally think about it is any place where we can add capability, insight or scale to customers, either technology or products and services that they don't resell. And then typically, what we do is we aggregate, we help them on board. And retail media network is the latest
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
