United Natural Foods, Inc.

Good morning. My name is Audra and I will be your conference operator today. At this time, I would like to welcome everyone to the UNFI second quarter fiscal 2023 earnings call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. At this time, I would like to turn the call over to Steve Blomquist, Vice President of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us on UNFI's second quarter fiscal 2023 earnings conference call. By now, you should have received a copy of the earnings release issued this morning. The press release and earnings presentation, which management will speak to, are available under the Investors section of the company's website at at www.unfi.com. We've also included a supplemental disclosure file in Microsoft Excel with key financial information. Joining me for today's call are Sandy Douglas, our Chief Executive Officer, and John Howard, our Chief Financial Officer. Sandy and John will provide a business update after which we'll take your questions. Before we begin, I'd like to remind everyone the 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 and the end of our earnings presentation. I'd ask you to now turn to slide six of our presentation as I turn the call over to Sandy.

Thanks, Steve, and good morning, everyone. We appreciate you joining us for our second quarter call. As you've seen in our release, this was a challenging quarter for UNFI. Before I turn it over to John to share more details on our financial results and our expectations for the rest of the year, let me address our performance directly by explaining what happened, how it happened, what we're doing about it, and how it informs our strategic and operational thinking about the company going forward. During the quarter, our top-line growth remained solid, with more customers again buying more categories from UNFI. clear evidence that our differentiated offering and customer-centric strategy is starting to work. We remain committed to our longer-term objective of above-industry sales growth and positively leveraged EBITDA after we lapped the procurement gains in fiscal 22 and early fiscal 23. All in, revenue rose over 5% compared to the prior year period, achieving $7.8 billion. the highest sales quarter in our history. However, our second quarter adjusted EBITDA and adjusted EPS were well below our expectations. As a result, we are raising our sales outlook and reducing our profit expectations and withdrawing our longer-term fiscal 2024 targets. Our reduced profitability this quarter was primarily driven by a lower gross profit rate, as we did not repeat the level of significant procurement and inventory gains experienced last year. Both of these gains in the previous year came during a time of significant industry volatility, given the steep acceleration of inflation, continued disruptions in the supply chain, and operational complexities. We also continue to experience elevated operating expenses as we're investing to service our customers, while supply chains and labor markets continue to gradually normalize. I'd like to address the lack of visibility into the factors that affected our quarter. While we expected inflation to decline and the supply chain to continue to normalize, we did not fully appreciate the benefit to last year's gross profit from buying inventory in advance of supplier price increases in a sequentially rising inflationary environment. We now realize the magnitude of these benefits last year which are not repeatable in the current environment. At the time, we did not have full visibility and sufficient detail into the commercial drivers of the benefits due to legacy issues with digital infrastructure limiting real-time data, which is required to fully understand and forecast these profitability drivers. We were able to understand these issues toward the end of the quarter due to the significant intra-period volatility, which has led us to a different set of financial expectations for fiscal 2023 compared to our December earnings call. During the quarter, we began to cycle significant price increases from prior year. We're taking decisive action to mitigate these issues in the short term and then to correct them for the long term in our transformation agenda. Importantly, these issues do not point to a fundamental longer term challenge to our business. In fact, our top line growth and longer term margin structure continue to be solid and we remain optimistic about ongoing conversion of our extremely strong and growing new business pipeline. What it also means is that we have a significant opportunity to improve our efficiency and profitability and digital and physical infrastructure. Finally, we expect to see similar trends in profitability for our results for the remainder of the year as we continue to lap periods of significant benefits from procurement gains as price increase activity further decelerates. This is why we're reducing our profitability outlook. It has become increasingly clear to me in the 18 months since I joined UNFI that we need more scalable and streamlined capabilities and attendant cost structures so that we can more efficiently serve our growing customer base. To accomplish this, we've assembled a highly skilled and motivated management team to develop and execute a multifaceted transformation plan, which we reviewed with our board this quarter. This plan is focused on improving our customer and supplier experience, and addressing legacy integration and capability gaps in our digital and physical infrastructure, all intended to increase effectiveness and efficiency of our customer and supplier value propositions. Ultimately, we expect this will enable us to drive further growth, provide increasing value to our customers and suppliers, and importantly, accomplish this with structurally higher operating margins. It's still early in our transformation agenda, but we're optimistic about the improvement it will drive throughout our business. Our program is focused on four areas. First, network automation and optimization, which is designed to deliver capital and operating efficiency gains as well as customer experience improvements as we enhance our distribution network. Importantly, We also expect this will increase our network capacity and scalability, which will facilitate planned future growth. Second, commercial value creation, aimed at generating profitable revenue growth through simplification of our pricing and procurement approaches and improved visibility, transparency, and analytical insights for our customers and suppliers. Accomplishing this should make it much easier to do business with UNFI and allow us to turn 100% of our operational focus to helping our customers and suppliers win in the marketplace together. Third, digital offering enhancement. Working to fully integrate and enhance the functionality of the digital platforms we offer, including MyUnify, iUnify, and our third-party marketplace, and to expand the actionable intelligence we're able to provide through these platforms. And finally, infrastructure unification and modernization as we continue to make necessary investments in our digital infrastructure. This quarter's results serve as further support of the need for our transformation initiative. With urgency, we are working to finalize our plans. During this process, we're committed to providing the investment community with regular progress updates on the next phases of our strategic plan and a more detailed discussion in the quarters ahead. Our transformation plan reflects the combined knowledge of industry veterans and new leaders who have joined UNFI in the past 18 months. There is considerable experience across our team with these types of ambitious change-oriented agendas and technology upgrades. Given the complexity and importance of these undertakings, it has taken time to fully assess our capability gaps and to lay the foundation for us to be successful. We're excited to now have the pieces in place so we can push forward and become a unique value creator in our space. The opportunity to bring and execute this vision of much needed change at UNFI is part of what attracted me to the company. The next evolution of our strategy is all about combining the strong demand for our offerings within our $140 billion core addressable market with a more efficient and scalable cost structure, incorporating strategic investments as appropriate and where the returns are strong. We know that demonstrating sustained continuous progress is vital to creating long-term value for our shareholders. and we look forward to updating you as we embark on this multi-year improvement journey. We expect that we'll look back on this period as an inflection point in our company's history as we unlock significant value creation opportunities. Despite the volatile and challenging operating environment of the last three years that has impacted companies like ours in so many ways, we've been able to drive consistent sales and adjusted EBITDA growth as well as reduction in debt and leverage. And we believe our company is well positioned for the future. We have a unique and relevant customer value proposition as the industry leader that is resonating with our customers. And we have a team that's totally dedicated to delivering it, all of which is driving consistent top line growth. Once we're able to combine this with an improved supplier value proposition, and operating and technology capability improvements, we should be well positioned to optimize long-run profitability and returns. And with that, let me turn the call over to John.