United Natural Foods, Inc. Q3 FY2025 earnings call

• IT System Security: Became aware of unauthorized activity on IT systems on June 5, activated incident response plan, implemented containment measures, working with third-party cybersecurity professionals, and implementing workarounds for operations.
• Q3 Results: Solid quarter with sales growth above industry benchmark, adjusted EBITDA growth higher than sales, highest adjusted EBITDA margin in 2 years. Free cash flow improved, reducing net leverage by 1.3 turns compared to Q3 2024.
• Strategic Plan: Focus on creating value for customers/suppliers, improving processes, technology, and operational efficiency. Progress on 4 foundational initiatives: network optimization, reducing capital spending, optimizing cost structure, and increasing working capital efficiency.
• Lean Daily Management: Implemented in 20 of 52 distribution centers, seeing improvements in safety, quality, delivery, and cost.
• Key Food Agreement: Mutual agreement to end Northeastern distribution agreement, exiting unprofitable relationship, and optimizing Northeast DC network by closing Allentown facility.

In Q3, Wholesale Natural Products sales increased by 12% compared to Q3 2024, contributing to the overall sales growth. Wholesale Conventional Products were up close to 3%. Total Wholesale sales grew by 7.5% to nearly $8.1 billion. Unit volumes across Wholesale were up about 4%, outperforming industry benchmarks. Retail business sales were slightly up, with same-store sales up 1.5%. Wholesale gross profit dollars net of operating costs were up $33 million, but consolidated gross margin rate (excluding LIFO) declined 30 basis points to 13.4% of net sales. Retail gross margin rate was flat.

• Reiterating most outlook metrics except GAAP net income and EPS due to Key Food agreement costs. Maintaining net sales, adjusted EBITDA, free cash flow, and capital investments outlooks. Originally planned to raise non-GAAP metrics but paused due to IT incident. Expect moderate tariff impacts in remaining weeks of fiscal 2025.
• Expect to reach net leverage of nearly 2.5 turns by end of fiscal 2026, about a year earlier than previous plan.

• Cyber Incident: Unauthorized activity on IT systems on June 5, ongoing assessment, mitigation, and remediation with third-party experts. Potential impact on business operations and financial/operational risks.

Q: Clarification on guidance reiteration vs update.

A: Sandy and Matteo explain guidance left unchanged due to focus on IT system restoration and customer support.

Q: Key Foods Northeast exit reason.

A: Sandy explains optimization of network based on market/customer profitability led to exiting unprofitable relationship with Key Food.

Q: Impact of cyber incident on Lean Six Sigma rollout and shrink.

A: Giorgio Tarditi says underlying momentum strong, VSM to be deployed, shrink managed through prioritization.

Q: Conventional segment longer term balance.

A: Sandy discusses focus on $90B addressable market, strategic segmentation, balancing near-term profitability and long-term growth.

Q: Cyber incident impact on CapEx and costs.

A: James Alexander Miller Douglas says cyber investment prioritized, elevated costs due to mitigation efforts but not quantified yet.

Q: Key Food termination fee and capital allocation.

A: Matteo confirms $53M termination fee, focus on debt reduction until reaching 2.5x leverage target, then reassess shareholder returns.