Good morning, everyone, and thank you for joining us at Oppenheimer's 26th Annual Consumer Growth and E-Commerce Conference. My name is Rupesh Parikh. I'm the Senior Food, Grocery, and Consumer Products Analyst here at Oppenheimer. I'm pleased to introduce our next presenting company, United Natural Foods. We're excited to have joining us today Sandy Douglas, CEO. The format of today's session will be a fireside chat, going through a number of questions we've prepared. So let's get started. So, Sandy, I'll first turn it over to you.

Thanks, Rupesh, and thank you for hosting us today. Before we start, one quick housekeeping item. Listeners can learn more about our financial results and find reconciliations to the non-GAAP metrics that I referenced today, as well as information on risks that may impact any forward-looking statements on the Investor Relations page of our website. As we discussed yesterday on our Q3 call, we continue to make steady progress on our value creation strategy, which is focused on adding value for our customers and suppliers and becoming a more effective and efficient company. During the third quarter, through disciplined execution of our strategy, we generated underlying sales growth, adjusted EBITDA growth of nearly 17%, and free cash flow generation of $240 million year-to-date. That progress is enabling us to continue strengthening our financial position. Since introducing our refresh strategy at the end of fiscal 2024, We've generated over $550 million of free cash flow, net leverage has declined 2.1 turns, and we've repurchased nearly a million shares of our stock. As we consider our overall value creation strategy, it's important to understand the evolution of the grocery retail industry. Over the past two decades, differentiated regional and independent grocers have steadily gained share, roughly doubling their position in the approximately $1 trillion U.S. grocery retail market, where each incremental share point is equal to $10 billion of retail sales. Natural and organic retailers have tripled their share over the same period. Beyond these groups, many multicultural and neighborhood grocers are also well-positioned to deliver enduring growth by offering a unique value proposition to the communities they serve. Retailers pursuing differentiation are the basis of our value creation strategy and define UNFI's growing $90 billion target addressable market. We already partner with many of these retailers and believe that we are uniquely positioned to provide the breadth of product lines, the programs and insights and services to help them successfully execute their differentiation strategies and achieve shared and profitable growth. We continue to develop and strengthen our capabilities to help customers differentiate and compete more effectively. These efforts build on the breadth of our assortment, our private brands, our professional and digital services, supported by the scale of our distribution network, which reaches more than 90% of the population across the United States and Canada. Our new business pipeline is strong, diverse, and growing, and we continue to execute our strategy. As we begin to cycle accretive optimization actions that we've taken earlier this fiscal year, we expect both new and existing customers to contribute to a return to reported top-line growth in fiscal 2027. In the near term, we're focused on finishing fiscal 2026 on a strong note while we work to become our industry's most valued partner to create sustained value for all of our stakeholders. And with that, Rupesh, I'll turn it over to you.

Thanks, Andy. Thanks for the overview. So to kick it off, I was hoping you could provide an update on what you're seeing across the consumer landscape. So curious, have you observed any noticeable shifts and consumer behavior lately?

We're always carefully monitoring underlying macro environments, as you would expect. So, we definitely see some things moving around, and we continue to adapt as customers and suppliers' needs change and as they respond to market conditions. While the consumer is certainly contending with a dynamic backdrop, and we see headwinds from GLP-1s, reduced immigration, from fuel prices, from SNAP investments declining, and there's a lot of stress in the lower levels of the consumer base. They continue to seek health and wellness attributes at all levels of the economy and they respond very well to differentiated value, whether that's value in the form of price or value in the form of product and experience. Our focus in that environment is to double down on our merchandising capabilities, to work to try to make sure that our customers have good value, particularly on comparable items that they sell, that the discounters also sell, and then work also on assortment to decomparabilize and move towards health and wellness, which is a clear and enduring trend in the industry. Final comment I'd make is we serve a diverse base of 30,000 customer locations, and their response to the environment is what we focus on, and we're working hard to help them respond to everything as it changes, and certainly there's been a lot of change lately.

Great. In another area, we get a lot of investor questions just on fuel. Could you also talk a little bit about your fuel exposure?

Sure. In the quarter, in the third quarter, our incremental fuel expense represented a headwind of around $5 million, and we expect that to occur again in the fourth quarter. We have a number of tools to manage fuel costs, including fuel hedges, as well as sharing fuel price changes with our customers per our contracts. Our hedges provided protection in real time, and we continue to manage them vigorously in the environment. Our sharing costs around our contracts, usually there's a little bit of lag there as the fuel prices go up, but that all works out in the end as we work with our customers to try to manage fuel and at the same time share the costs. But it adds up to about $5 million of impact in the third, and we expect again in the fourth quarter. As we highlighted in our earnings call, we're also expanding the use of AI-powered fleet management technology that helps us optimize routes, and year-to-date, we've actually reduced average miles per delivery by 5%, which is an enduring benefit and helps us create real shared savings for both us and our customers.

Great. Another area that's come up throughout our conference is just inflation. So with increasing concerns out there on the food inflation front. Can you remind us what you are seeing on the inflation front and then what your expectations are going forward?

Yeah. I mean, inflation has kind of remained in the low single-digit range in the third quarter, and it really depends on the product line. I mean, categories like beef, fresh produce, coffee, cooking oils, cocoa are up, and then we've seen deflation in eggs, dairy, and baby food, and all that comes back together to go to kind of low single digit. An important sort of cross vector is the restaurant pricing has been outpacing grocery pricing since early in 2023. And we continue to believe that the relative affordability of at-home food consumption is supportive, even in a slightly incrementally inflationary environment. As we look ahead, we get 90 days notice when a supplier wants to take their prices up in most categories, and they're still holding their fire a little bit at this stage. So I'd have to speculate. Obviously, we're seeing what you're seeing, but as we look ahead to next year, we're taking a conservative approach. It's very important for us to help our customers get value. And so when a supplier comes forward with a cost increase, we're working hard to make sure that the totality of their spending allows our customers to be as competitive as possible if the supplier expects us to carry an item that's also carried by discount mass and club.

And then for UNFI itself, how has your team historically managed through periods of high inflation historically?

Yeah, well, I mentioned the focus on trying to make sure that we're bringing value to our customers. That's at the core. You can't carry the same item that someone else is carrying for a lot less and not be hurt by that comparison.

And so all the work that we've done says that our industry works pretty well with low single-digit inflation. And anything higher than that is usually a symptom of other root causes that generally raise our cost structure or raise the cost structure of our customers.

And so, we're actively trying to work in inflationary environments to provide alternatives, to manage it, to make sure the cross-channel is fair, and to find solutions that help our customers navigate. Ultimately, we're in the business. We're a B2B business that serves a B2C industry, and we focus on ways to help our customers succeed in all environments.

Great. That's helpful, caller. You also noticed some softness in volumes across the industry in Q2. How do you think about volume growth for the remainder of the year?

Yeah.

I mean, we've seen, as you add, the broader industry that we serve has seen volumes sort of decline a little bit over the past couple quarters. The headwinds that I described earlier, GLP-1, which is a volume headwind for the industry, it's actually a tailwind for health and wellness products. So, you know, nothing's all the same for everybody. But the reduction in food stamp investment is definitely impacting consumers. The cost of fuel since the war in Iran started has definitely impacted consumers. And so there are real headwinds.

For us, we continue to see significant stratification between the differentiated natural pure players.

Their run rate may be down a little bit, but their 4% growth that we reported in the third quarter, which included a 200 basis point headwind as we lapped a particular project we did for one retailer last year in the meat category continue to be very healthy.

And the retailers that are successfully executing are performing very well. We developed an internal analytical tool that analyzes our $90 billion addressable market and how it's performing every quarter.

And it continues to grow and grow in line to slightly above the industry.

So some of the Deadwinds are transitory. Some of them, like immigration, may stay suppressed for a while. But ultimately, food is food, and food at home is the most competitive and most valuable.

And we expect the industry to continue to grow, and hopefully we can work with the folks that are leading that growth.

Great. That's helpful, caller. Now turning to the competitive backdrop, have you observed any notable changes in the competitive landscape lately?

That question is a boil-the-ocean question, and it's a good one. I think the way I'd come at it, though, Rupesh, is that our customer base includes over 30,000 locations. It's broad. It's diverse. It includes many natural, organic, and specialty, multicultural, community-focused grocery retailers. And the majority of them are pursuing differentiation strategies of one kind or another that start with their assortment. And the focus of differentiation is really the subset of the market that UNFI is designed for and designing itself for. And that's how we believe we can help our customers create value and how we can deliver our multi-year targets. As I shared in the call yesterday, we had a slide. It was slide six of our presentation. It's in our materials. I think to some degree, people who look at the industry have oversimplified it and said, well, the discounters are grabbing share and everybody else is losing it. Well, that's a true statement. But if you break it into four pieces, the discounters are gaining share, The differentiated regional and local are gaining share. The purely natural are gaining share. And the non-differentiated sort of stand-in-the-middle retailers are losing share. And that environment is still true. A third quarter, we, as I said earlier, built a tool to be able to measure it. Ultimately, we see competition at retail being about differentiation. And on one end, barbell and then discounting on the other end. And UNFI is obviously focused on the differentiated customers that would value the broad assortment and the various products, services, brands, and private brands that we built. I would also say that relative to competition within our industry, there's increasing segmentation. implementation. And so, our competitors are very good, and we have to be at the top of our game for that to succeed against them, but even more importantly, to serve our customers.

Great. And I now wanted to jump to consumer trends. So, with the proliferation of GLP-1 and the Maha headlines that continue to garner a lot of attention out there, there's really a big focus on health and wellness across the industry, with many players concentrating on protein, fiber, etc. So are you seeing momentum in these types of categories? I'm also curious what you see as other big consumer trends driving your business going forward.

Sure. So we do continue to see strong momentum behind health, wellness, and nutrition. And the shopping behaviors that come at that come from that as consumers increasingly focus on protein, on fiber, on ingredient transparency, functional benefits, and overall food quality. One trend that we continue to see across both emerging and established brands is innovation increasingly centered around simplification, cleaner ingredient labels, fewer additives, and products positioned around recognizable nutritional benefits. I went through the list a minute ago. While GLP-1 adoption is part of the conversation, we believe that the broader trend is larger, more structural, and more enduring, reflecting consumer interest and a very wide consensus that eating healthier is simply good for you. And it can be very healthy and tasty and ultimately create wellness and enjoyment. And so I think those trends will last. At the same time, right as that's happening, consumers are becoming increasingly selective about how they spend money, which is reinforcing their demand for products and retailers with clearer value propositions, whether that's health, benefits, convenience, functionality, or trusted ingredients. And we continue to see resilience in better-for-you-fresh type products, but it's a really competitive game. And ultimately, innovation will continue to play a big role in growth, as will marketing and traditional brand building. But the simplest prediction that I can make is the non-differentiated are going to do poorly.

Okay, great. So now I'd like to cover some more UNFI-specific questions. So sticking on the topic of merchandising and trends, year-to-date, UNFI has launched nearly 50 new private label SKUs. Can you walk us through some of your key efforts on the private label front? How have your new products performed versus your initial expectations? And then are there any specific trends or category that your team is leading into here?

Sure. So strategically, we view our private brands portfolio as an important tool that helps customers compete more effectively, differentiate, improve margins, and build lasting shopper loyalty. And that offering is a differentiator for us with them. We expect to continue to innovate. All the trends that I described in your consumer question are front and center for our brands group. We introduce new products for consumers who are looking for healthier choices that are seeking to achieve their wellness goals, but we're trying to do it at very affordable price points. For example, we introduced several flavors of instant oatmeal with protein, as well as some fun desserts, frozen fruits, some with a little chocolate on them as treats. Other new items have been all about the emphasis on fiber. As we highlighted during investment today, We believe that there's a significant opportunity to expand our private brand's portfolio and drive penetration. We believe, broadly speaking, that customers have an opportunity to multiply their penetration as a part of a decomparabilization strategy of assortment versus the discounters, and private brands will play a big role in it.

Okay, great. I'll switch you to another topic. So your natural portfolio has shown healthy growth in recent quarters, while the conventional portfolio stripping out the network optimization has grown at a slower rate. So it's very much mirrors what we've seen in recent quarters industry-wide with growth, especially players, as well as mass and club and legacy conventionals have struggled. So a couple of questions here. First, as you look at the retail landscape in different channels, can you discuss what is separating the food retailers that are gaining share versus those that are struggling? And then what do you think are some of the differentiating factors here?

Sure. So it won't surprise you. The word differentiation is the key issue. And obviously relevant and compelling and engaging differentiation. Offering consumers or shoppers something unique in the store and helping retailers create compelling value and experience through product, through service, through environment is really at the heart of what the winners are doing. and they all come at it differently. Some of the key factors for success are competitive prices. When you pick an item that you're going to carry and it's going to be the same one in the discounters, you've got to be sharp. Otherwise, you've got a flashing sign there that says we're uncompetitive. And that's something we have to work on with them. And we have action and different things going on there. Product assortment is huge. And there's really an opportunity to be more ambitious and creative there, both with brands as well as private labels. And we're engaged with our merchandising team to raise our game to help our customers act on that opportunity because we've got the products, both the legacy products and the new products, to kind of work the pivot to fit the customer's individual strategy. And then finally, the profitable growth that customers have to achieve as a result, we're building a set of seven key capabilities that will help our team deploy to help customers deliver and to make sure we're doing so effectively and efficiently so we can deliver value to our shareholders at the same time.

Great. Then I'd also love to hear what you see as Unify's biggest growth opportunities in both the natural and conventional segments from here.

So we continue to believe that we will deliver sustained top-line growth in line with the low single digits of our $90 billion target addressable market. And we believe the breadth of our assortment, spanning natural and conventional products, provides a unique value proposition for UNFI in the marketplace that can help retailers and industry growth. As we provide a high-confidence plan, and we did so at our investor day with a three-year algorithm of low single-digit sales growth, high single-digit EBITDA growth, and consistent free cash flow while we deleveraged. We're approximately $30 million ahead after year one, and we'll be very consistent with that. We don't model share growth because we actually believe that we need to serve and earn and deliver for customers. And if more of them reward us with more of their business or new banners choose us, that will be incremental to our service of our existing customers. But our commitment to you is around 1%, which is what we believe they will grow. So it's a share-neutral algorithm. We expect that natural products will continue to be an enduring growth. I've talked about that. Our expertise and breadth and scale in those categories are a huge opportunity for us to help customers make the most out of that capability. and that in turn will give them a virtuous cycle which creates opportunity for us to serve more of them and more of their current needs. Our key commercial capabilities are customer stewardship, merchandising, professional and digital services and private brands and all of those are opportunities for us to add more value and we think if we add distinct and unique value The rest of it will take care of itself.

That's a good segue into my next question. Just in terms of your new business pipeline, so in March, your team was very bullish on what you're seeing there. So can you just talk about what you're seeing right now on this front in terms of new business in terms of the pipeline?

Yeah, I'm happy to. The sales cycle in our industry is very long. It's a very intimate decision to pick who your wholesale partner is going to be and requires a lot of analysis. And I've said before publicly that the greatest win for us is when an existing customer gives us something new to do. A, the economics of it are better logistically. B, it shows that we have a healthy relationship and they want to trust more. So our pipeline includes a lot of those types of opportunities. And we have an idea as to how they play out in terms of our implementation schedules, but customers' needs change. But when we say that our pipeline is strong and growing, that's what we're talking about. The other kind is when a banner that's currently with a competitor comes to us. And also, in that case, we're also talking with folks that may or may not have needs that we might be able to meet better. But what I would say, having now done this for five years, the pipeline is strong, and I think will be a source of a tailwind for us as we go forward.

That's great. Switching gears to productivity, your team has recently talked about a few key initiatives, such as your lean daily management practices and a focus on indirect costs. Can you briefly walk us through how each initiative is performing versus expectations, and can you provide a sense of how much runway is left? Sure.

So we say in our sort of headline statement that we're focused on becoming a more effective and efficient organization. And we choose the order of those words intentionally because we do not seek efficiency at our customers' cost. We seek efficiency and effectiveness because we believe, based on technology and lean principles, et cetera, that they go together. Quality and efficiency are in a virtuous cycle. They don't fight with each other. And so that's our strategy. You mentioned two initiatives, lean daily management and looking at indirect costs. Lean is kind of the human system underneath a set of significant initiatives around technology, automation, and I'll come to the indirect cost opportunity that we're working on now. We implemented a value delivery office inside the CFO's remit, and that's basically a project management system that drives productivity and drives capability, and Lean is the main human system, as I mentioned. It's now an initial implementation in 80% of our DCs, and you see early indicators in our metrics around safety, quality, delivery, and cost, all of which drives the quality side and the efficiency side. But I would describe that as very early innings. Our folks are just beginning to learn about lean. And as you know, from talking to our CFO, who's a Six Sigma black belt, he has conviction on it. And we have a long runway ahead to mature the capability in the supply chain and then across the company. Having said that, we're getting some early wins. There's a process called Kaizen Workshops, which is basically process mapping and process improvement and dynamic problem solving. And we're working on some key processes that are not working the way we would like them to. And generally, UNFI is a process immature company. So there's a ton of runway here. Indirect spending, you mentioned that. It's half of our $4 billion of annual OPEX. And it's directly related to the products and services that we don't sell to customers. It's all the rest of the things we need to do what we do. And it's a major initiative of the Value Delivery Office. We scoped it, been working on it. We typically run project management through a cycle that would mature the project towards the end of the fiscal, and then it would be part of the go-forward plan. It's how we build up our high-confidence plan. And generally, I'd say, and maybe leave you with this attitudinally, we have a very rigorous review with our board around strategy and opportunity and looking forward. And $4 billion of cost is in an early stage maturity process, technology, all of that is a significant opportunity. And we see meaningful opportunity for years to come in it. And we're building a very talented team of people that's capable of accessing that opportunity. So hopefully that answers your question. I could have just said yes.

I could have just said yes. That's a lot of great colors. So I think that fits well into my next question. So network optimization. Can you provide an update on where you are in the network optimization process? And then have there been any surprises to date? Yeah.

So, what I would say is that network optimization is a big rock in revenue management. If you used an analogy, it would be like an airline, Delta deciding to go to New York. It's a big decision. There's a lot of capital involved. And so is to close one. or to increase capacity of one. But it's based on the kind of market analysis that big investments are made based on the discipline of that analysis. Then, obviously, you begin to think about the capacity and where it's going, and then ultimately, under Mateo's leadership, we've implemented a very disciplined underwriting process as we approve individual customer partnerships. And there was a lot of low-hanging fruit in network optimization that we took action on as a part of this strategy. But we, on a biweekly basis, review the D.C. fleet. And it doesn't mean we make decisions every two weeks. We don't. But we're constantly thinking about it in the context of the business that we're trying to build. And it's a source of value. It will always be a source of value. But not at the pace that we've seen until there's technology breakthroughs, which are on our roadmap, that would do things like move the company to a single ERP. Then we can optimize again with a different framework. So when I said that there's a long runway of opportunity for greater productivity, I was referring, obviously, to this as well.

Okay, great. Okay, so now to wrap up in the last few minutes, a financial question. I can't conclude without a financial question. So your algorithm through 2028 calls for a low single-digit average sales growth and low double-digit average EBITDA growth with sales return to growth in FY27. What gives your team confidence that you'll deliver on both your top and bottom-line metrics?

Sure. I guess the way I'd answer that, Rupesh, is that we have built a very disciplined process for what we call high-confidence planning. And what high-confidence planning means is that we develop the strategy on an opportunity basis, and then we move backwards into detailed planning, and we come across that the way other companies do, I'm sure, which is to assess it versus our capacity, likelihood of success, and relevance to the most important stakeholders we have. And based on that, we build an internal plan that is more ambitious than anything we would communicate externally. And we then sort of back down, and Mateo likes to talk about it as 80% likely level. We get to 80% likely level, and that turns into guidance. And if everything works, we're going to beat. but we have room for some things not to work or something else to surprise us or whatever happens so that we feel like we can reliably deliver on the algorithm that we communicate to you. And for the last two plus years, we've done that very consistently. And we have confidence that we're getting better at this, and I think investors can have confidence that that's our discipline process, and they can also have confidence that we're aiming higher and that we intend to sustainably perform. Great. So, thank you, Sandy, and the Unified Management Team for joining us today.

Thank you. Good to be with you.