United Natural Foods, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the UNFI Second Quarter Fiscal 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Steve Blomquist, Vice President, Investor Relations. Thank you. Please go ahead, sir.

Good morning, everyone. Thank you for joining us on UNFI's second quarter fiscal 2020 earnings conference call. By now, you should have received a copy of the earnings release issued earlier this morning. The press release, webcast, and a supplemental slide deck are available under the Investors section of the company's website at www.unfi.com. Joining me for today's call are Steve Spinner, our Chairman and Chief Executive Officer, Sean Griffin, our Chief Operating Officer, Chris Testa, President of UNFI, John Howard, our Chief Financial Officer, and Jill Sutton, UNFI's Chief Legal Officer. Steve and John 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 uncertainties. 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. And lastly, I'd like to point out that during today's call, management will refer to certain non-GAAP financial measures. Definitions and reconciliations to the most comparable GAAP financial measures are included in our press release. I will now turn the call over to Steve.

Thank you, Steve. Good morning, everyone, and thanks for joining us on today's second quarter call. Earlier today, we announced results for our fiscal second quarter where, as expected, both adjusted EBITDA and adjusted EPS improved sequentially compared to the first quarter. Both would have been higher had we not incurred $33 million or 44 cents per share in charges related to three very public customer bankruptcies in the quarter. But before we get further into the corner, Let me first comment on the ongoing COVID-19 preparedness and general business conditions. First, our supply chain teams have been exemplary in their execution during the last two weeks of increased demand, operating our facilities safely while meeting material increases in demand across the network. In many cases, our teams are working around the clock, seven days a week, to ensure that our retailers are providing those products most needed by very concerned consumers. At the outset of COVID-19, our category management teams identified a core group of products that would see a material lift in sales. As a result, we were well positioned to satisfy some retailer demand, which, however, exceeded even our initial expectations. Our growth related to COVID-19 has been significant. UNFI's last two weeks of sales has resembled our prior year Thanksgiving holiday week, with the difference being we, our suppliers and our customers, did not have the lead time required to adequately prepare. While we are still understanding the long-term impact of this demand, it is difficult to forecast the impact through the remainder of the year. Our response planning, food safety, and business continuity toward this crisis has positioned us to serve and protect our customers, suppliers, consumers, and associates. Third, with the effects of the last two weeks on our inventory on hand and our suppliers' ability to ramp up production, supplier fill rates have been challenged. Additionally, with many DCs now running higher than anticipated growth, Thank you for joining us. from larger chain retailers with scale as consumers have broader access to these natural brands in supermarkets, mass, and e-commerce. While these store closures represented a headwind to UNFI in the second quarter, we've already begun to see consumers in these geographies move to retailers with similar assortments that are supplied by UNFI. We see this as a sign that demand remains strong for products we supply and that consumers will find new shopping patterns to meet their needs. Consistent with our views of the industry and rationale behind the strategy we are executing that we've talked about in the past. We firmly believe that UNFI through our expansive offerings and build out the store strategy is uniquely positioned to provide the tailored food solutions our customers need to remain viable and relevant. This is what sets us apart from the competition. Let's move to the quarter. Net sales totaled $6.14 billion, flat to last year's second quarter. Within our sales channels for the quarter, you'll note that year-over-year percent changes now reflect a total company viewpoint for the first time. Sales in our largest channel, the supermarket channel, which represents slightly more than 63% of total sales, declined by 1.2%. This was a combination of lost sales, some intentional, and lower sales to existing predominantly smaller customers. Within supermarkets, the challenging macro environment is having a disproportionate impact on our smaller supermarket customers who need scale to compete. On the other hand, we're encouraged that sales to our larger supermarket customers, those with annual purchases of at least $100 million, increased approximately 5% in the quarter. Our next largest channel is Supernatural, representing approximately 19% of total sales, where sales increased 10% over last year's second quarter. This represented a sequential improvement of 180 basis points relative to Q1, driven primarily by higher sales to existing stores, as well as the addition of new locations. Sales within our independent channel fell by 6.5%, which included lost business and store closings, which I mentioned earlier. Success in our cross-selling initiatives that will drive positive future momentum include our professional services, proteins, produce, and assorted wellness categories. Lastly, our other channel saw a decrease of 6.3%, which was driven predominantly by our strategic decision to exit a portion of our military business Over the past 12 months. Last year, Sean spoke about rationalizing business where the economics just didn't make sense for UNFI, and this is one example where our profitability has increased as a result of consciously eliminating unprofitable volume. Partially offsetting the military sales decline was growth from several nontraditional customers and revenue streams that continue to expand. Looking across our business, it's clear that our larger customers, who tend to have more differentiated formats, an omni-channel presence, and the benefit of scale and diversification are doing better than smaller customers. Wholesale sales to our top 100 customers were up 4.3%. For customers 2 through 100, the increase was 2.2%. Our top 100 customers represent roughly 75% of our total volume. Our diversified customer base allows us to support the growth of our larger customers who are winning in the marketplace, many of whom are taking advantage of the broader variety of goods and services that UNFI has to offer. For some of our smaller customers, we believe our breadth of offering gives them the strongest opportunity for achieving longer-term success and we have begun executing a detailed strategy for these stores. Operationally, we're making solid progress and are close to completing two important network optimization projects that will improve efficiency, service, and capacity in several key geographies. We'll officially cease operations in our D.C. and Portland, Oregon in the third quarter, which will complete the Pacific Northwest consolidation we've spoken about for several quarters. As a result, we'll have gone from five distribution centers supporting the region down to two. Our new facility in Centralia, Washington, is performing in line with our expectations and we're pleased to be nearing completion of this multi-DC transition project. In Southern California, we're nearing completion of our second distribution center in Moreno Valley, which we expect will be operational later in our third quarter. This facility adds over one million square feet of multi-temperature capacity In addition to an automation package that will dramatically improve productivity and accuracy in each pick and slow moving environment. This project will also allow us to consolidate our Southern California produce operations into a single facility that will be able to more effectively serve this market. As we've worked through these projects, our supply chain team is delivering results. I'm pleased Thank you for joining us today. For the past 18 months, these have been available through a cost stock program, which we knew would not be a long-term sustainable solution for our customers. We have placed a curated selection of SKUs into conventional distribution centers which will be promoted, invoiced, and shipped through the same system and supply chain that these customers use today for buying their conventional items. The program will be supported with attractive pricing and promotions, category management, custom catalogs, and point of sale materials. For many customers, this will be their first foray into natural products and for others it will provide an avenue for consolidated purchasing through UNFI. We're also experiencing good growth in our professional services business as many of our natural customers are beginning to see the savings available to them. We've sold nearly 300 professional services to natural customers so far in fiscal 2020 and expect to double that number by the end of the third quarter. In one case, a long-time natural customer will save an estimated $300,000 annually on credit card processing by becoming part of our program. Let me next provide a status report on our efforts to divest retail. As you know, we've announced the sale or closure of 19 shopper stores this year in the Washington Baltimore market and are continuing to market the remaining shopper stores with several potential buyers. At CUP, we're continuing the sales process for the entire banner. At the same time, and as anticipated, we're simultaneously working to monetize the owned real estate for 15 Cove stores that represents more than 1.1 million square feet of retail space. We are currently finalizing the real estate sale, which is part of a competitive bid process that included multiple interested parties. The purchase price is approximately $170 million in gross proceeds, With market lease rates for each location, we anticipate a closing before the end of the fiscal year and will apply net proceeds of this transaction to repay outstanding debt. As mentioned, the Cub Banner sale process continues as we explore alternatives that provide the greatest value for this market-leading asset, and we currently expect this process to push out beyond fiscal 2020 and towards the end of calendar 2020. Finally, before I turn the call over to John, I want to make a few additional comments regarding COVID-19. This continues to be an evolving situation that we are, of course, watching closely. As we continue to navigate this situation, we believe that retail demand will remain elevated in the near term, especially in regions and metropolitan areas where there are escalating numbers of cases. As demand will likely remain high, Our nationwide distribution network and supply chain is prepared to take care of our customers in a timely and safe manner Our broad response plan has incorporated recommendations issued by various public and private health officials with the purpose of protecting our associates and customers as well as maintaining our high quality food safety standards With more than a year since our transformative acquisition and despite industry headwinds for the last 12 months, I'm extremely proud of our integration efforts. We've now moved beyond integration and towards execution. Our strategic pillars have taken hold and we are seeing the results. With that, let me turn the call over to John.