Earnings Call
United Natural Foods Inc (UNFI)
Earnings Call Transcript - UNFI Q4 2024
Operator, Operator
Hello, and welcome to the UNFI Fiscal 2024 Q4 Earnings Call. All lines have been muted to avoid background noise. Following the speakers' comments, there will be a question-and-answer session. I would now like to hand the conference over to Mr. Steve Bloomquist, Vice President of Investor Relations. You may begin.
Steve Bloomquist, Vice President of Investor Relations
Good morning, everyone. Thank you for joining us on UNFI's fourth quarter fiscal 2024 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 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 Matteo Tarditi, our President and Chief Financial Officer. Sandy and Matteo 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 and at the end of our earnings presentation. I'd ask you to turn to Slide 6 of our presentation as I turn the call over to Sandy.
Sandy Douglas, CEO
Thanks, Steve, and thank you, everyone, for joining us this morning. As you've seen in our release, we delivered fourth quarter results that drove fiscal 2024 performance to the upper end of our previously provided outlook. This capped a year in which we significantly strengthened our foundation and built momentum as we enter fiscal 2025. During fiscal 2024, we drove strong same customer growth, extended our agreement with our largest customer until mid-2032, realized approximately $150 million in benefits from structural efficiency initiatives, significantly reduced shrink, lengthened the maturity on our term loan until 2031, and onboarded our new President and CFO, Matteo Tarditi. We are confident that our new strategy and multiyear financial objectives, informed by our ongoing Board and management-led financial review, will continue to drive accelerating performance and create sustainable value for our customers and suppliers alongside our shareholders. Today, I will go into more detail around our new strategy, business plan, and the three-year financial objectives that we expect to deliver by executing this strategy. As I outlined in our last call, our analysis of our current and potential customer base has identified a resilient portion of the industry that totals over $90 billion of wholesale sales today and includes many specialty, natural, ethnic, and conventional operators. This market segment is expected to grow at a low single-digit rate over the longer term and will likely be led by natural and specialty volumes. We are highly focused on this industry segment as it capitalizes on UNFI's strengths, including our heritage in natural and organic products, which grew around 5% in Q4 on a comparable 13-week basis compared to the prior year and are growing even faster so far in Q1. Natural customers are broadly performing strongly. Customers are also gaining value from UNFI's margin-accretive digital and professional services business. We are actively positioning ourselves to add value to our customers and suppliers through a differentiated portfolio of products, services, programs, and insights that help them both grow their businesses and succeed in a dynamic marketplace. Simultaneously, we're working to improve free cash flow by focusing on what we can control to become a more efficient organization, optimize our distribution center network, and reduce the capital intensity of our business, enabling steady deleveraging. We expect these two elements of our strategy will work together to help us generate meaningful value creation for our key stakeholders, including our shareholders. Let me take a few minutes to explain our new strategy in greater detail and provide a few early proof points around execution. I'll start with adding value. Our new strategy focuses on providing retailers with a strong value proposition, composed of an increasingly relevant portfolio of differentiated products and value-added services that help them grow profitably while offering suppliers the right go-to-market services and insights that help them grow within UNFI's large, diverse retailer network totaling over 30,000 customer locations. For example, our revamped commercial go-to-market program for suppliers is a new partnership model that aligns our mutual interest around growth and makes doing business together easier. We streamlined 15 to 20 unique fees into one and are now providing suppliers access to our enhanced data and insights. The result is more value for suppliers and ultimately more tools to help them invest and grow their brands faster and more profitably with UNFI's retailer base. We have a sizable base of suppliers, including some of the largest CPGs in North America that are now enrolled in the new go-to-market model and are already seeing early returns, faster growth, and less friction. Our value-added digital and professional services portfolio is another differentiator that will increasingly be important to both customers and suppliers, offering mutually compelling economics for them and UNFI. We continue to add offerings to our sizable services portfolio that leverage our competitive advantages through UNFI's scale, relationships, data, programs, and insights to help our retailers and suppliers more effectively meet their consumers' needs. This includes our recently launched UNFI Media Network, or UMN for short, which I described last quarter. We're seeing a lot of interest in UMN and are continuing to enroll both retailers and suppliers onto the platform. We expect to develop, continue to invest in, or partner to provide other similar capital-light services in the future, which we believe will bring value to customers and suppliers while helping us drive margin expansion. We know that bringing value to our upstream and downstream partners will continue to make UNFI an attractive partner. In parallel, the second element of our strategy is focused on shaping a more efficient distribution center network to better serve our customers and suppliers, lowering our cost structure and reducing capital intensity, which we expect will drive improving profitability, free cash flow generation, and reduced leverage. We also expect these moves will help us increase process capability, service levels, and responsiveness and enable us to strengthen our broader business, which should enhance the customer and supplier experience. Over the last few months, we've executed some of our initial work on the network and optimizing to streamline operations and consolidate volume, focused on our conventional distribution business. In our Central region, we're moving volume from our Billings and Bismarck DCs into nearby facilities. Once we close these two DCs, all Bismarck customers and most Billings customers will transition to our nearby Fargo DC, with the remainder transitioning to our commerce, Santa Fe Springs, and Centralia facilities. We own the real estate in both Billings and Bismarck and are actively marketing these properties, and we'll use the proceeds to repay debt. These moves are expected to improve the customer experience in the region by leveraging our advanced DC technology solutions, including our modern cloud warehouse management system and case scanning technology. In conjunction with our focus on employing rigorous lean management practices, emphasizing process, production, and preparation, we expect this transition to deliver better quality, service, and operational efficiency to both our customers and suppliers. In addition, our Fargo DC will provide customers with access to a broader product assortment and enable suppliers to reach more customers out of a single DC. Actions like this result in both customer and supplier benefits and help to reduce the capital intensity of our conventional network while lowering our operating costs. Importantly, we see further opportunities to streamline our supply chain footprint. We will be working to evaluate and take actions similar to what we've done in Billings and Bismarck over the next couple of years to consolidate volumes, generate operating savings, sustainably improve cash flow generation, and potentially generate cash from asset sales, all while improving the customer and supplier experience. We are extending our focus on reducing capital intensity beyond network optimization to improve the way we invest our capital. As you saw in our press release, we expect fiscal 2025 capital investments to be around $300 million, a decline of $70 million compared to fiscal 2024. This reduced intensity is being driven by a shift in spending based on asset utilization and wear and tear rather than a calendar approach where maintenance dollars get spent on a regular cadence with less focus on need. As we improve capital allocation, we will continue to prioritize safety and service levels. Additionally, we are focused on reducing our investment in working capital and are seeking to improve capabilities to return our inventory days on hand to pre-pandemic levels. We expect to reduce days on hand by around two days during fiscal 2025 and have introduced processes to manage this more efficiently on an enduring basis. To provide structure and ensure discipline, we have created a value delivery office. This group reports to Matteo and is charged with project managing and problem-solving on key initiatives and the progress being made against defined timelines and expected benefits. It is also focused on ensuring progress achieved is maintained through lean management practices and structural process improvements. Turning to Slide 7. From a financial perspective, our new strategy and three-year financial objectives are expected to result in revenue that is roughly flat as organic growth offsets the revenue impact of network optimization. We will be focused on increasing UNFI's share of the resilient $90 billion priority market segment and expect overall margin expansion over the next three years to be driven by, first, faster growth in our higher-margin natural business compared to our conventional business, partially reflecting the prioritization of products we believe will help add value for retailers, particularly in our priority market segment, as well as projected secular trends. As I mentioned earlier, our natural, organic, and specialty business is growing strongly and represents the majority of our distribution profitability. Our second margin driver relates to the benefits from our multiyear efficiency initiatives introduced on our last call, which are expected to approach a similar magnitude to the $150 million we realized in fiscal 2024. And lastly, growth from our digital and professional services, which add value to customers while carrying higher margins for UNFI. As a result, we expect our average annual adjusted EBITDA growth rate over the next three years to be in the high single-digit range. We expect adjusted EPS growth to outpace that of adjusted EBITDA as we target net leverage reduction to 2.5 turns or less by fiscal year-end 2027 and benefit from lower interest expense. This reduction in net leverage is expected to be driven by higher adjusted EBITDA as well as strong free cash flow generation, which we plan to direct towards repaying debt. Once we complete the initial execution of our planned key strategic initiatives over the next couple of years, we expect to generate annual free cash flow of well over 0.5% of net sales. In fiscal 2025, we expect to generate around $100 million in free cash flow, about $200 million better than fiscal 2024, which Matteo will discuss in more detail. These three financial objectives assume a generally stable operating backdrop. Our Board and management-led review remains ongoing. And we continue to evaluate value creation opportunities beyond this updated strategy as we execute and drive toward the improved metrics embedded in our three-year financial objectives. We reduced management layers in 2024, allowing for faster, more streamlined decision-making and improved customer and supplier experience. This includes the reorganization and reprioritization of our digital organization in the fourth quarter that integrated digital capabilities throughout the business and increased digital scalability. As we embed a lean, continuous improvement mindset in the organization, we will identify more opportunities for improved efficiency. As I stated earlier, we enter fiscal 2025 with momentum and a large stable business with significant organic growth and free cash flow generation potential through optimizing controllable variables. Our focus remains on helping our customers compete through our products, services, programs, and insights while bringing value to suppliers through the 30,000 diverse customer locations that we service. We believe this focus on adding value to customers and suppliers to sustain organic growth while also driving improving recurring free cash flow generation will result in meaningful shareholder value creation over the short and long term. We expect fiscal 2025 will be a year of delivering and deleveraging as we pursue our new strategy. With that, let me turn it over to Matteo to discuss our Q4 results, outlook, and continuous improvement and process transformation work.
Matteo Tarditi, CFO
Thank you, Sandy, and good morning, everyone. I'm glad to be here for our year-end earnings call. As Sandy mentioned, we concluded fiscal 2024 at the higher end of the revised outlook ranges shared in June for sales, adjusted EBITDA, and adjusted EPS. Today, I will offer insights into our fourth quarter performance, our year-end financial standing and capital structure, the management changes we've implemented based on lean principles, and our outlook for fiscal 2025. Let’s move on to our Q4 results. Our fourth quarter sales reached $8.2 billion, which included nearly a $600 million boost from an extra week in the quarter, as fiscal 2024 was a 53-week year for UNFI. On a comparable 13-week basis, excluding the additional week, fourth quarter sales increased about 2.1%. Our fourth quarter performance also contributed to a full year sales increase of 0.4% on a 52-week basis. In wholesale, we observed ongoing improvements in volumes alongside decreasing inflation, following the trends discussed during our third quarter call. Wholesale volumes, viewed over a trailing four-week basis compared to last year, turned positive in week 49 and continued to rise each week for the remainder of the fiscal year, concluding the year up 2%. This volume improvement was mainly driven by the natural side of our business, although conventional volumes also showed improvement, albeit at a slower rate. This trend has persisted into early fiscal 2025. At the same time, inflation has decelerated slightly to around 1.5%, and we expect it to continue to slow before stabilizing later this fiscal year. Sales in our retail segment continued to be under pressure, as many consumers in our markets remain very price-sensitive. Retail sales improved from the third quarter, but still saw a drop of slightly over 4% compared to the prior year, mainly due to lower same-store sales. Our team is implementing a strong plan aimed at enhancing both top and bottom line performance in fiscal 2025 and beyond. Our gross margin rate, excluding LIFO, was 13.5% in the fourth quarter. We have largely cycled through a period of significant year-over-year declines in procurement gains, and we expect margins to remain steady going forward. Both wholesale and retail gross margin rates improved compared to last year. The increased wholesale margin during Q4 benefitted from our focus on shrink and margin initiatives over the year, effectively offsetting our commercial investments and lower procurement gains. We are close to pre-COVID shrink levels and are working to further reduce shrink expense as part of our efficiency initiatives. Last quarter, we emphasized focusing on what we can control. In a challenging environment, we improved our overall operating expense rate by around 30 basis points compared to last year’s fourth quarter. This occurred despite a return to more normalized levels of incentive compensation, which was significantly higher than last year's fourth quarter when there was no notable incentive compensation expense. We saw continued success in reducing SG&A expenses as we streamlined our organization and achieved savings aligned with our strategic vision. The primary driver of improvement was a widespread reduction in labor expenses, partially through optimizing spans and layers, leading to a headcount reduction of about 4% since the end of last year. This also reflects benefits from the steps we’ve taken to enhance the scalability of our digital platform. Adjusted EBITDA for the fourth quarter was $143 million compared to $93 million in the same quarter last year, including an approximate $10 million benefit from the extra week, higher sales on a comparable 13-week basis, and strong performance against our near-term cost-saving initiatives. This marks our fourth consecutive quarter of sequentially higher profitability, meaning each quarter of adjusted EBITDA in fiscal 2024 surpassed the prior quarter both in dollar and rate terms, demonstrating the momentum we carry into fiscal 2025. The increased adjusted EBITDA during Q4 outweighed higher interest expense primarily due to rising average interest rates. This resulted in adjusted EPS of $0.01 for the quarter, compared to a net loss of $0.25 in the same quarter last year. Free cash flow in Q4 was $71 million, a decrease from the prior year, as higher profitability was more than offset by increased capital expenditures tied to the timing of automation payments, higher cash interest payments, and reduced benefits from changes in working capital compared to last year. The change in working capital reflects a lower utilization of our accounts receivable monetization and similar programs due to a strategic shift toward greater discipline, stronger accountability, and minimized ongoing working capital use. We plan to utilize the accounts receivable monetization program less frequently as we focus on organic free cash flow generation. The $71 million in free cash flow for Q4 allowed us to reduce net debt to below $2.1 billion and net leverage to 4.0 turns, decreasing by 0.6 turns from Q3. We remain on track with our long-term goal to reduce net leverage to below 2.5 turns by fiscal year 2027 and will continue to seek opportunities to accelerate this. Since my arrival at UNFI, we have been introducing a more detailed framework for managing and forecasting free cash flow, based on my previous experience. Historically, UNFI leaders have focused on sales and profitability; however, to better incentivize free cash flow generation, we have included this metric into the goals for our broader organization as part of our fiscal 2025 incentive planning. Improving free cash flow will be a key focus, with several meaningful controllable levers identified to help us return to significant free cash flow generation in fiscal 2025. Achieving sustainable improvements in free cash flow will depend on rigorous daily management practices and action plans, which we have already implemented to finish fiscal 2024 strongly and position ourselves well for fiscal 2025. Daily management routines are one way that lean practices are benefitting our organization. We have completed the initial phase of lean training for our senior leadership and have begun to expand this training throughout the organization. Associates will gain a clearer understanding of how daily actions and decisions impact cash flow. We will set operating metrics and goals across the company and regularly measure performance against these metrics, enabling quick corrective actions and promoting real-time learning. We aim to balance short-term cost-saving wins with long-term breakthroughs to further enhance UNFI's future success. For fiscal 2025, our objectives for the year are based on defined short- and long-term benchmarks that will advance our overall vision and drive continuous improvement across all areas of the organization. We concluded fiscal 2024 at the upper end of our earlier guidance and are determined to achieve continuous improvement in financial performance for fiscal 2025. As detailed in our press release, the guidance ranges compared to fiscal 2024 include expected sales between $30.3 billion and $30.8 billion—an increase of 0.5% at the midpoint when adjusted for last year’s additional week—and an expected adjusted EBITDA range of $520 million to $580 million, reflecting an 8% increase at the midpoint on a 52-week basis. We expect our overall adjusted EBITDA margin to increase from Q1 to Q4, with first quarter adjusted EBITDA dollars anticipated to grow in the mid-single-digits compared to the first quarter of last year. This reflects the timing of actions planned for fiscal 2025 and how they will positively impact results throughout the year. We are focused on achieving annual adjusted EBITDA margin expansion with our revised strategy, although fluctuations may occur on a quarterly basis. Our adjusted EPS is projected to fall between $0.20 and $0.80 per share, more than tripling at the midpoint when adjusted for last year’s extra week. Capital expenditures, including allocations for cloud implementation, are expected to be approximately $300 million, down from $370 million last fiscal year. Our CapEx plan entails one automation product, ongoing investments in safety, and maintenance expenses associated with usage, as well as completing our Sarasota distribution center already in progress. We anticipate generating around $100 million in free cash flow this year, which is nearly $200 million more year-over-year, and we plan to allocate this toward reducing net debt and improving our leverage. As mentioned earlier, our long-term goal is to achieve recurring free cash flow of well over 0.5% of sales. These guidance ranges are based on steady-state operations, which also applies to the longer-term metrics I mentioned earlier. We made a strategic choice to close two owned distribution centers, which we expect will yield cash, save on future operating costs, and enhance customer experience. We will continue to assess other such opportunities but have not yet factored in any additional strategic initiatives in our outlook. Our forecast for fiscal 2025 marks the beginning of a three-year business plan and financial targets. Our focus will be on executing this year to fully achieve our financial objectives and unlock the substantial value and organic growth potential present in our sizable, stable business exceeding $30 billion. We have taken significant steps to strengthen our foundation during fiscal 2024 and expect ongoing improvements in fiscal 2025, striving to be a more efficient partner to retailers and suppliers to maximize the benefits of our comprehensive product and service offerings. After being here for over five months, I am increasingly confident about our company’s future and the returns we can provide for shareholders. There are vast opportunities to create value through enhanced processes and efficiencies, which is central to my prior experience. We view fiscal 2025 as a year of delivery and deleveraging. I look forward to sharing updates on our progress. Please open the line for questions.
Operator, Operator
Your first question comes from John Heinbockel with Guggenheim. Your line is open.
John Heinbockel, Analyst
Hey, 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?
Sandy Douglas, CEO
Hi, John. Good morning. 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.
John Heinbockel, Analyst
Can you talk about the two aspects of labor productivity? First, regarding wage rate inflation, do you expect it to be around 3% to 4% or 4% to 5% in the future due to supply and demand? Secondly, how do you plan to increase productivity measured in cases per labor hour? Are you aiming to balance these two factors, and where do you see potential productivity gains exceeding wage rate inflation?
Matteo Tarditi, CFO
Yeah, 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 wage rate inflation 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 we continue then to drive productivity out of the large distribution center network. So in the mid-term and long-term, the plan is clearly to continue to offset any labor pressure from a cost standpoint with more productivity.
John Heinbockel, Analyst
Okay, thank you.
Operator, Operator
Your next question comes from the line of Leah Jordan with Goldman Sachs. Your line is open.
Leah Jordan, Analyst
Good morning. Thank you for taking my question. 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? Thank you.
Matteo Tarditi, CFO
Yes. Thank you. Good morning. 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 regarding 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 re-margin 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 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 significant improvement back to the pre-pandemic levels. Sandy, I don't know if you want to add to that?
Sandy Douglas, CEO
Yeah, I think you covered the wholesale view really well. I think the added point would be that our digital and professional services give us a margin tailwind because they create value for our customers, and they're higher margin for us. And so they're a big part of our focus, which is a big part of our go-forward margin strategy.
Leah Jordan, Analyst
Great. Thank you. And just for my follow-up, 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?
Sandy Douglas, CEO
Yeah. 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.
Leah Jordan, Analyst
Thank you.
Operator, Operator
Your next question comes from the line of Mark Carden with UBS. Your line is open.
Mark Carden, Analyst
Great. Good morning. Thanks so much for taking the questions. 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?
Sandy Douglas, CEO
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 specialties 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.
Mark Carden, Analyst
Okay. That makes sense. And then 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?
Sandy Douglas, CEO
The services business started with a traditional focus, but we have been expanding it throughout our customer base. Services are continuing to grow significantly faster than our overall business. We are very optimistic about the services sector, viewing it as an area where we can enhance capability, insight, or scale for our customers through technology or products and services that they do not resell. Generally, we assist them in aggregation and onboarding, with retail media networks being the latest example. We are noticing interest from both conventional and natural customer segments.
Mark Carden, Analyst
Great. Thanks so much and good luck guys.
Sandy Douglas, CEO
Thanks, Mark.
Operator, Operator
Your next question comes from the line of Edward Kelly with Wells Fargo. Your line is open.
Edward Kelly, Analyst
Hi, good morning guys. How are you?
Sandy Douglas, CEO
Hi, Ed.
Edward Kelly, Analyst
My first question, just as it pertains to the 2025, as we think about like the first year of this leg of multiyear high single-digit EBITDA growth, I think, but you tell us the back half of '24 and what is an improved level of EBITDA growth already kind of locks in, it seems like, a portion of that growth in '25. Is that correct?
Sandy Douglas, CEO
Ed, what I would say, and this was in Matteo's remarks, is the high single-digit compounded growth rate is the guide for the three-year plan and is also the guide for fiscal '25. We believe that it will build as the year starts. Matteo said that we expected the first quarter and the early part of the year to be mid-single-digits. And that's because the number of the BDO or productivity initiatives are being implemented in the first half, and we'll be building as we get into the second half. So, obviously, it's a multiyear story. Last year, a number of the initiatives were in very early, so they cycle through the whole year but have some benefit that come over to the new year. But think about the first half as mid-single-digits and then the second half being sort of at the upper end to get to high single-digits for the full year.
Edward Kelly, Analyst
Got it. Okay. That makes sense. And I wanted to ask you about vendor promo and the trends that you're seeing there, the impact that it's having on your customers' ability to drive better volume and then the impact that it's also having on your own P&L. Can you maybe update us there?
Sandy Douglas, CEO
Promotions are starting to make a comeback, although they are still not at pre-pandemic levels. The spending by consumer products companies differs from one to another, but overall, it is on the rise. As Matteo mentioned, we are seeing a slight improvement in units. Our suppliers are showing a continued focus on growth. This is beneficial for our company because we support these promotions, which directly aids our customer base, who also gain from this. Our merchants are dedicated to maximizing spending for our customers. Additionally, I talked about a new initiative we launched over the past year called the supplier go-to-market program. This program aims to simplify our operations by consolidating 15 to 20 fees into one and providing suppliers with data to allocate their trade dollars more effectively, particularly to assist our smaller customers who typically may not receive as much attention from suppliers. This creates new opportunities for growth and profitability for suppliers and encourages more investment in our customers.
Edward Kelly, Analyst
Okay. Thank you.
Operator, Operator
Your next question comes from the line of Andrew Wolf with CL King. Your line is open.
Andrew Wolf, Analyst
Thank you. Good morning.
Sandy Douglas, CEO
Good morning, Andy.
Andrew Wolf, Analyst
Could you provide more color on what drove the step-up in volume intra-quarter and I think you said currently? I know the press release referenced new customers and also increased penetration, just sort of maybe a lot that between those two things. And also was the increased volume kind of uniform across the customer segments? Or is it more concentrated with super natural, for example?
Sandy Douglas, CEO
So, beyond the reported segments, I won’t go into specific customers. However, we clearly saw significant acceleration in natural, organic, and specialty growth during the fourth quarter, which has continued to accelerate in the first quarter. Natural conventional has started to improve in general, but at a slower pace. The differentiating factor for us was the expansion of our work with existing customers, where we grew our collaborations with both larger and smaller customers. All three aspects contributed: broader industry factors, the success of our customers, and our expansion with certain clients.
Andrew Wolf, Analyst
Got it. Okay. That's helpful. And just probably more for Matteo. Can you just tell me how kind of square if you're running 2% or better sales at least in the quarter, and it sounds like maybe now, but you're guiding to midpoint at 0.5%. I mean is the difference all network optimization? Or is there other expectations in there for maybe volumes to settle down a little less or inflation to come down? Just trying to understand that differential.
Matteo Tarditi, CFO
Yes, that's a very good question. Thanks for asking. So a couple of thoughts here. So as we said in the script, starting in fiscal week 49, our volumes started trending favorably. And they are tracking favorably, as Sandy mentioned, primarily through the strength of the natural and specialty business. And so far, this trend has continued into the year. I think it's very early. It's only the second month of 12. But if this trend continues, it is possible that we're going to be able to outperform the midpoint of our outlook, which is why we're guiding $30.3 billion to $30.8 billion. $30.8 billion would imply 2% or so of kind of growth year-over-year, 3%, 4% on a case standpoint, on a case volume standpoint. So we're trying to have a pragmatic and conservative approach to setting the outlook. I feel comfortable with the current outlook. And we believe that this $30.3 billion to $30.8 billion midpoint reflects a dynamic market backdrop. And if we see this volume sustaining, we will continue to relook at the forecast. Now the thing that we got to bear in mind is that while again we see the volume improving, we are going to continue to look at the DC playbook and the network optimization. And so we will continue to balance what we see in terms of growth on the organic and specialty with the fact that we may see contraction in revenues coming from DC closures.
Andrew Wolf, Analyst
Okay. And is any more closures kind of contemplated in the guidance or is that still to be determined, just what you already did is in there?
Matteo Tarditi, CFO
Yes, still to be determined. So Billings and Bismarck are announced and ongoing. And then we continue to look at opportunities to serve the customers while improving our operating efficiency and cost position.
Andrew Wolf, Analyst
Thank you. Appreciate it.
Matteo Tarditi, CFO
Thank you.
Operator, Operator
Your next question comes from the line of Kelly Bania with BMO Capital Markets. Your line is open.
Kelly Bania, Analyst
Good morning, and thanks for taking our questions. Can you just help us understand the network optimization strategy a little deeper in terms of the magnitude of the sales impact that we should expect this year and in coming years? And should we presume that, that strategy impacts primarily chains or independents or both but not the supernatural channel? Can you just walk us through what the vision is there?
Sandy Douglas, CEO
Yeah. Hi, Kelly, it's Sandy. The network optimization strategy is a core part of our three-year plan. And the way to think about it is how can we optimize the footprint, the capability from a technology as well as an automation, an assortment and efficiency perspective. And we're really rationalizing a network that's been built over decades into a modern network that's fit for purpose for customers today. So it's principally focused on the conventional side of the business where a lot of the DCs have and legacy DCs are. Most of the way our natural network has been built customer-backed anyway. But it's being enabled by technology and investments we're making in regional technology and DC technology. And it's all built around the metrics of excellent customer service, returns on capital, and free cash flow. The other point I'd make is we did announce two closures. We also have announced a DC opening in Manchester, Pennsylvania, which is a significant expansion on an adjacent DC in York, which we will close. That is going to be employing all of our newest technology and will be automated sometime next spring. So there's a lot involved in the strategy. There will be a net closure of DCs to improve returns on capital but always with customer metrics first and foremost.
Kelly Bania, Analyst
Could you elaborate on customer feedback regarding the new fee structure and how this consolidated fee structure compares to competitors in the market? Additionally, what potential impacts should we consider in terms of margin volatility or seasonality related to this new structure?
Sandy Douglas, CEO
Sure. A number of facets to that question. What I would say is that you should see our fees that we're collecting from suppliers be more consistent and allow for faster action by suppliers. I'll give you an example. Suppliers who are enrolled in the program do not pay slotting fees. So once we decide together that an item is right for a DC, we get much faster with the goal of being faster or fastest to shelf. All of this strategy is designed to create value by earning retailer and supplier alignment for faster action and then to make the fee structure simpler and more consistent for suppliers and for us. From a competitive standpoint, you really need to ask our competitors. Our goal with suppliers is to be the most valuable distributor partner that they have and by doing so, help them see opportunity in our customer base and invest on it and then make the return that they're seeking so that it creates a virtuous cycle. And it's early. We'll see how it goes. We have a number of suppliers that are enrolled today. I'd say we're kind of midstream in the implementation with more to come. And we're getting plenty of feedback on ways we can make it better, and we're listening and trying to do that as we go. But over time, it should show up more like a subscription and be more about growth and earn the suppliers' dollars and allow their promotional spend and retailer spend to flow directly through to the retailers.
Kelly Bania, Analyst
Okay. That's helpful. And then just one other one for me. In terms of the professional services and digital services, I guess that means on the retail media side, can you just help us understand what percent of your customer base are engaged with some of these services today and what kind of growth you are planning in fiscal '25 and really over the next three years from these two components?
Sandy Douglas, CEO
Yeah. I'll give you a couple of ways of thinking about that. Some of our older, more analog services are highly penetrated. New services and digital services are new, and therefore, they're not penetrated highly. We're seeing strong growth in services. We saw it for the last three years, and we expect it to only accelerate going forward. And we have a curation process where effectively whatever our customers need, and I'll use retail media as an example. Retail media is going to be a $100 billion advertising business. Our customers didn't have access to it. We worked with a partner to create a facility where consumer products companies could invest into it and get the same kind of experience and returns on their investment that they have with some of the bigger players. We have a team in professional and digital services that are looking for opportunities like that to drive penetration of existing services but then to figure out what's next so that our customers don't have to wait for years to participate in things that they would need to be successful.
Operator, Operator
Your final question comes from the line of Chuck Cerankosky with Northcoast Research. Your line is open.
Chuck Cerankosky, Analyst
Good morning, everyone. We've got a repeated series of quarters here where the consumer is inflation-weary, very price sensitive, yet the United Natural management team sounds refreshingly confident about delivering and deleveraging. How sensitive to the economic environment do you think your recovery plan is?
Sandy Douglas, CEO
Chuck, super good question. I think our recovery plan is focused on helping our customers be successful and taking the controllable self-help actions in our own business to make sure that we're healthy alongside. Needs in the market are not a challenge for us, meeting them is, and then taking the actions to make sure that our cost structure is managed tightly using, as Matteo outlined, lean principles and other management disciplines to make sure we're fit for purpose for the environment. So the consumer is, as you said, very price sensitive. We're working very hard to give our customers the tools to appeal to the customer where they are. But our outlook is balanced in the environment that it's in. Obviously, inflation has lowered down from a percentage growth standpoint, but prices are still high. Value is still important. Our Brands+ program is an important initiative there. But in terms of our own profitability growth, we are focused on the things that we need to do to control the controllables. And we built some confidence based on our performance in fiscal '24.
Chuck Cerankosky, Analyst
Good. Thank you for that. And, Sandy or Matteo, could you talk about the timing of selling those two distribution centers and what amount of cash you might get from them?
Matteo Tarditi, CFO
Yeah. Good question. Thanks, Chuck. So a couple of thoughts here. We are phasing down the operations, and we are starting the marketing process for these two facilities. We're being clear with the team that we're not going to trade time for value. We do believe that there are good opportunities in the market up there. We're not going to rush into a transaction to cut economics. So we'll go through a disciplined process that we've implemented on both capital acquisitions and dispositions and provide an update as we go through the next few months. But again, we started the marketing process, positive response so far, and we'll go through that.
Chuck Cerankosky, Analyst
All right, thank you. Good luck.
Matteo Tarditi, CFO
Thank you.
Operator, Operator
This concludes the question-and-answer session. I'll turn the call to Sandy Douglas for closing remarks.
Sandy Douglas, CEO
Thank you, operator. We are focused on executing our new strategy, which, as I outlined earlier, emphasizes delivering value for customers and suppliers while simultaneously improving free cash flow and strengthening UNFI broadly. We've already taken many actions that demonstrate that we're seeking to accomplish. And I'm confident in our ability to help customers, suppliers, and in turn, UNFI grow and succeed. Matteo has been a great addition to our leadership team. His emphasis on efficiency, free cash flow, and process management is valuable as we embark on the first year of our three-year plan, which I believe will create significant and sustainable value for our customers, suppliers, associates, and shareholders. With Matteo's onboarding, our senior leadership team is complete, well aligned, and focused on driving operational improvement. The skill sets of the team are highly complementary. And it gives me confidence that we will execute our plan well. For our customers and suppliers, we thank you for your continued partnership in the business we do together. For the UNFI associates listening today, our thanks to each of you for everything that you do for our business, our customers, our communities, and each other. And for our shareholders, we thank you for the trust that you continue to place in us. Thanks again for joining us this morning. I look forward to updating you on our progress in December.
Operator, Operator
This concludes today's conference call. We thank you for joining. You may now disconnect your lines.