United Natural Foods, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the UNFI third 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 the session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to Mr. Steve Blomquist, Vice President, Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us on UNFI's third 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 under the Events tab. Joining me for today's call are Steve Spinner, our Chairman and Chief Executive Officer, John Howard, our Chief Financial Officer, Chris Testa, President of UNFI, and Eric Dorn, our Chief Operating 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, and good morning, everyone. There's a lot to talk about this morning. UNFI quarterly results, how we're continuing to navigate the COVID-19 pandemic, and the strategy and plans we're preparing for a new fiscal year. But before we do that, let me say this. We stand proudly with the Black community in solidarity to address the system of systemic racism in America and the most important work of ending these injustices once and for all. We believe black lives matter. As you know, over the past several weeks, we've seen firsthand the horrors of George Floyd's murder in one of our largest markets and home to one of our corporate headquarters, Minneapolis. And in the aftermath and protests that occurred in other major U.S. cities, the loss of life, any life, is upsetting when it's preventable It's even more difficult to accept. Unfortunately, this entire event, again, spotlights the harsh reality. Racial injustice, specifically toward black American men and women, punctuates the inequity in our country. At UNFI, we expect diversity and inclusion to be at the core of our DNA in the people we employ, how we conduct our business, and in our essential role supporting grocery retailers everywhere. We expect it to be at the core, but we would be misguided to tell you we are doing this perfectly today. We can and must and will do more. These systemic problems of humanity will not go away until we confront them head on. That starts with speaking up, listening, acknowledging, and empathy to understand. And right now we're listening, learning, and holding ongoing conversations with our associates to provide them with a chance to be heard, to share ideas or concerns, and an opportunity to offer honest feedback and suggestions. We've held several of these community conversations with associates over the last week, and we'll be holding more in the coming days and weeks. Feedback from these sessions will help inform many of the actions we take. At the core of our efforts will be our value of doing the right thing, which on the surface is really simple. Treat others the way they want to be treated, with respect, decency, and fairness. But we know it's not that simple. As such, UNFI will be investing more resources into our diversity efforts. will place greater focus on and generate new initiatives to support our education, training, hiring, promoting, recruiting, and retention efforts. We'll look to align support within our associations and support coalition opportunities wherever we can to help drive meaningful change. We're forming action teams to ensure we don't lose sight of this goal, eliminate racism, and foster greater opportunities for black men and women at UNFI and in America. We're creating specific, measurable metrics for each of these efforts to hold ourselves accountable. We will also work harder to get to know each other better. This will be at the core of what we do. We're going to do our part. We will make change happen. and our pledge is to continue evolving and foster an inclusive culture of equality to create a better UNFI from the inside out and to demonstrate how we can all do better, not through talk, but through action. Before we discuss our third quarter results, I wanted to first offer my sincere thoughts and prayers to all of those affected by the COVID-19 pandemic and my gratitude and appreciation to our nation's healthcare professionals, first responders, essential workers, including all the incredible UNFI associates who have done amazing work during these unprecedented times. Their safety and well-being has been and will always be at the forefront of everything we do. I am so proud that UNFI was one of the first companies to adopt a $2 per hour temporary state of emergency bonus for our direct labor associates, that we provided tremendous flexibility towards attendance policies and productivity expectations during the most impacted times of the outbreak, and that the safety and sanitation measures we've taken in our distribution centers and retail stores have kept our associates safe. In addition to supporting our associates, UNFI has now donated more than 6 million pounds, equal to an estimated 150 truckloads of food and essential items to food banks across the country. And we've committed over $1 million to philanthropic organizations, helping those impacted by the pandemic, in addition to the funds previously committed through the UNFI Foundation. and information about the foundation can be found at unififoundation.org. COVID-19 has changed everyone's life and radically altered where and how food is purchased and consumed. At the time of our last earning calls in March, more than 50% of dollars spent on food went toward consumption outside the home, including full and limited service restaurants, hotels, recreational attractions, in schools and colleges. Fast forward three months and the landscape is dramatically different. As we all know, there has been a significant shift towards food consumed at home, with some estimates placing the potential shift this calendar year at approximately $100 billion. As you know, we pre-released third quarter results on May 12th and issued a complete financial statement earlier today which were substantially unchanged from last month. Our third quarter results reflect the demand shift I spoke to. In March, midway through the quarter, we saw a significant jump in demand as consumers began loading their pantries with outsized purchases of items such as toilet paper, sanitizers, pasta, and canned soup. While our third quarter results did benefit from this pantry loading, Net sales continued to increase at a double-digit pace over the remaining weeks of the third quarter, and this trend has continued into the early stages of the fourth quarter as well. Through the first four weeks of the quarter, wholesale net sales were up roughly 11% compared to the same period last year. These results demonstrate the power of our business model and our success building out the store. We experienced strong double-digit growth throughout our portfolio and are on track for over $175 million in cross-selling revenue this year as our customers continue to recognize the benefits of consolidating purchases with UNFI and our industry-leading 250,000-item SKU count. Today, we provide real value through industry-leading capabilities across all categories, including produce, protein, general merchandise, health and beauty, services, so much more, all with the benefit of scale. Another point that differentiates UNFI and contributed to our strong sales growth was the performance of our Brands Plus business, where sales were up 26% for the quarter compared to last year. During recessionary periods, Consumers are more likely to turn to private brands to stretch their food dollars. And we believe that our selection of conventional and better-for-you products, which represent more than a $2 billion business on its own at retail, is unmatched in the industry. This is supported by Nielsen data that shows March and April growth rates for UNFI's private brands has been consistently higher growth rates and other retailer-owned private brand programs across the U.S. We've seen great success with our essential everyday, wild harvest, and field day brands where our growth rates in many key categories have been double or triple that of the category total, with examples including soup, frozen vegetables, and household paper products. Overall, the progress we've made On our build-out-the-store strategy and our initial cross-selling success has fundamentally changed the relationship we have with many of our customers, who more than ever look to unify scale and variety to help them best meet the needs of their shoppers. Our 12% sales growth in the third quarter includes the impact of headwinds from lower inbound fill rates, as suppliers across multiple product categories were unable to meet the significant increase in demand in the quarter. And while we do expect fill rates to gradually improve as we move through the fourth quarter, we do not expect them to return to pre-COVID levels until fiscal 2021. Our unmatched size, scale, and geographic footprint allowed us to support the strong increase in sales with our existing infrastructure. driving fixed operating and administrative cost leverage to increase our adjusted EBITDA margin from continuing operations by nearly 25 basis points. Our $222 million in adjusted EBITDA included approximately $25 million in COVID-19 related costs for safety protocols, procedures, additional third-party labor support to handle the increased volumes, as well as pandemic-related incentive payments to frontline associates. Our synergy and integration initiatives also contributed to our strong results this quarter. Unify is also investing in a variety of ways for anticipated future growth. We're midstream on updating our ordering technology and customer portal, which will make it easier for our customers to interface with us for promotions, ordering, billing, and other aspects of our relationship. We've also seen a dramatic uptick in customer inquiries for our turnkey e-commerce solution for brick and mortar stores, likely driven by data that suggests more than 40% of recent online grocery users were first-time shoppers. Our offering leverages the historical e-commerce platform investments we've made that can have a customer up and running with a variety of web and mobile device offerings in a relatively short time, which is attractive for those customers looking to now provide an online offering to their consumers. We believe our investments to date have positioned us to deliver continued growth in the e-commerce space. We're also continuing to invest in optimizing our distribution center network, including automation where appropriate. Let me talk about our retail banners, Cub and Shoppers. Last month, given the state of the M&A markets, I said we'll likely be running some shopper stores for an additional period of time, and that same thinking applies to Cub. As an interim step, we're in the process of separating Cubs from UNFI, which means Cub will operate more as a freestanding entity than it does today, with its own dedicated resources Once the separation is complete. Historically, we've supported CUB with shared resources that include associates splitting their time between CUB and other parts of the business. This should accelerate the diligence period and allow for a more streamlined process when we market these banners for sale. We've also decided to take a pause on the sale leaseback of CUB's own properties. To maximize the value of the banner, including its own real estate, we've pushed these potential transactions 24 or so months into the future. As a result, beginning in the fourth quarter, we'll move Cub and certain shopper stores into continuing operations, which John will discuss shortly. As I mentioned earlier, sales to date in our fourth quarter remain strong, and we believe people will continue to eat more at home and they did six months ago for several reasons which should drive favorable trends for UNFI. First, beyond the question of are restaurants open and am I allowed to eat out is the question do I feel comfortable doing so? We believe there is and will continue to be a degree of hesitation for eating at traditional sit-down restaurants. A recent survey by Piper Sandler found roughly two-thirds of respondents plan to cook more at home post-COVID with an average of more than four additional meals per week. Second, we expect we could see a recession last for 12 to 24 months, and UNFI has historically done well during recessionary periods. Our Brands Plus business should continue to perform well given the lower price point and differentiated value of these products. Third, Many businesses have announced extended work-from-home plans, meaning many of us will continue to eat more meals prepared in our own kitchens as we work where we sleep. And finally, our customers, both new and old, have responded to our new business model, combining natural and conventional with new opportunities and the strongest pipeline we've had in years. We are one company providing retailers with the most sophisticated services The broadest product offering in an unmatched network of distribution centers. Let me summarize the importance of our third quarter results and updated outlook for fiscal 2020 and provide some thoughts on fiscal 2021. Sales in the third quarter grew to $6.7 billion, up 12% versus the prior year. Adjusted EBITDA was $222 million, up 32% versus last year's third quarter. Adjusted EPS was $1.40, up 130%, or 79 cents versus last year's third quarter. And based on the trends, we believe the momentum will continue and fiscal 2021 will be better across these key metrics. We've also paid down over $300 million of net debt and closed the quarter with $1.2 billion of liquidity. We are continuing to review our fiscal 2021 budgets and look forward to providing more detail in September. Our 25,000 associates, and especially those working on the front lines, are incredible. Since COVID first appeared, we've remained open We've protected our teams. We've paid our frontline associates incentives with more flexible programs, and we've hired over 3,000 new team members. This work has been and continues to be truly remarkable. We expect to finish the year with a strong fourth quarter, as reflected in our RAISE guidance for adjusted EBITDA as well as adjusted EPS. With that, Let me turn the call over to John.