United Natural Foods Inc. Stock

Good morning. I'm Leah Jordan, the food retail and packaged food analyst at Goldman. And it is my pleasure to introduce Sandy Douglas, Chief Executive Officer of United Natural Foods. Thank you for joining us today.

Thanks, Leah. It's good to be with everybody. And it's really a good time for us to have this conversation coming off of a really strong fiscal '26, which is the second year of our new strategic plan and a year into the 3-year period that we talked about at our Investor Day last December with strong EBITDA performance of 26% last year, right on our cash flow numbers and delevering down from a high of 4 turns a couple of years ago down to 2. It's good time to talk about the future and the opportunity that's ahead.

Absolutely. I think a lot to get in. There's been a lot of moving pieces in your story over the last couple of years. I mean just for a quick refresher to anyone newer to the UNFI story, it is a North American grocery distributor serving 30,000 locations through its network of 47 distribution centers and 230,000 SKUs across conventional, natural and specialty products. So you really do see a lot of the world of food retail and distribution.

So I think before we get into all of that, because I think your intro hit on a lot of what we want to talk to you about today. I think just to start us off, you've been the CEO of UNFI for a little over 5 years now, and it's been a very dynamic period. I mean, at the start, it was amidst COVID. We've had several bouts of inflation during that time. You're integrating an acquisition as well. And then more recently, you've done a number of initiatives to improve the business operationally that's driven a lot of the growth over the last couple of years. So as you look back over that -- you did a lot in 5 years. As you look back over that time frame, what have been some of the biggest wins and the biggest challenges?

Sure. Yes, it's true. I joined the company right in the heart of COVID. And everyone remembers the supply chain challenges, the labor challenges, the more broader crisis in our communities that were going on, but significant amount of churn leading to that period of very aggressive inflation. And during those years, along the side, there was a lot of very strong profitability for independent grocers and distributors. And as we pivoted out of that, we level set and had to stare straight in the eye what capability we had to manage in a very rapidly changing time.

For UNFI, we set our foundation. We did a bunch of work to evaluate processes and systems and skills. And I think the area that I'm most proud of is the work we've done on the leadership team. We've recruited top talent from General Electric, from Coca-Cola, our CIO is from Mars. But we've also developed an internal team that, alongside our Board, recast our strategy and focused it more directly on $90 billion of the wholesale market that represent retailers that are pursuing differentiation strategies. UNFI is really designed well for that because of our products, because of our services. We carry the full range of conventional and natural products.

And over those 2 years with additional focus and amping up the skills, we began the work of building the capabilities that would really differentiate us. And then attacking the $4 billion of cost that represent the broad supply chain for the most part and looking at ways to make it more effective and more efficient. And that's produced, over 2 years, 40% EBITDA improvement, significant free cash flow and delevering by 2x.

And I guess the way I close that out, because it was very challenging, and we had to be very direct. But the work that we've done and the team that we've built put us in really good position heading into the next year. And of course, we guided last week at high single digit coming off of 26% last year. We beat by a strong amount last year and we decided to roll that forward into this year and increase what you would have expected out of us this year from Investor Day. And then we expect to accomplish that again next year.

And if there were a through line to looking ahead, I simply would say, we're excited about the underlying growth that we've had over the last year, where we've removed the impact of the profitable optimization we've done, but the company will once again start to grow, and we expect to grow in the second half of the year. And then the opportunity for improvement, and we say this a lot internally, we haven't even really begun. I mean this is a big multi-company, many acquisitions over the years, business that's ready to significantly improve and create more value going forward.

That's great detail digging in on all that. I know you've accomplished a lot with that tremendous growth you've had over the last couple of years. And I think before we dig further into that, I just want to switch over to the consumer. This is a consumer conference, and you're really at a unique position given your intersection of retailers and suppliers. So based on what you're seeing in wholesale demand, demand across your different retail types, even in your own retail stores, what are you seeing from the consumer? Any notable shifts in behavior, maybe differences by category or income cohort? And how are you thinking about volumes?

Sure. Let me start that first by talking a little bit about how retailers are stratifying because I think, obviously, that's our first focus. And one of the myths in grocery retail is that the discounters are winning and everybody else is losing. Indeed, if you double-click on the everybody else, you find retailers that are differentiating in different ways. pure-play natural have tripled their share of retail over the last 20 years. They gained share last year. They did the year before, and I expect they'll continue.

You have ethnic retailers, other forms of grocery stores that are pursuing differentiation strategies and successfully, good trade name up here in the Northeast would be Wegmans, outstanding performer consistently over time. And there are retailers pursuing various forms of differentiation strategies around the country. And then there are retailers that are centrally positioned that have been donating share for a period of time, but many of them have set new courses for their companies, and we're working hand-in-hand with them to help them succeed and grow. And that's where our $90 billion addressable market comes. So within that frame, we see a fair amount of strain in the consumer right now, strain that comes from fuel expense, that comes from SNAP benefits.

GLP-1s for UNFI, it's a negative in the sense that it's impacting volume, but it's a positive for us because people are eating healthier food. So we're well positioned for that. But what amazes me is how retailers are responding. And inside of that segmentation I sort of went through, retailers are doing just fine. They're competing, they're winning, but they're having to meet the customer where the value is. And each of them are doing it in their own way, and we're trying to help them do it well.

That's great color. And then I think on this topic, we have to touch on inflation. You talked about the fuel expense weighing on the consumer. We're seeing a lot of dynamic movements across commodities recently. So what are you seeing in your business in terms of food inflation today? How are you planning for that into your new fiscal year? And then can you remind us how food inflation impacts your top line and gross margin just given your contract structure?

Sure. I think if I were to go to sort of the central truth about cost, our job as a representative of retailers and consumers is to try to keep costs down, particularly cost of items that are comparable between our customers and discounters. That's an area of significant focus for us, but also products that are not comparable, simply because affordability is a major issue for their customers, and that's really important.

We saw food inflation sort of moderate a little bit last year and more in sort of the longer-term 2% to 3% range. Our outlook for fiscal '27 is about the same, although it's dynamic, and we're agile to be able to sort of move where it is with an effort, as I said, to continue to manage cost.

How it affects us? When prices go up, there are opportunities for us to buy better and potentially create procurement gains for our customers and ourselves. But those are short term in nature. And so we typically plan them out of our high confidence planning just to not have some of the challenges that the company had a few years ago.

Okay. That's very helpful. And we'll continue to watch the dynamic inflationary backdrop just as you will. And I want to go back to kind of what you mentioned at the top, you've refocused on this $90 billion TAM. And really, as you've done that, we've observed a strategy shift in recent years, you've leaned into the growth opportunity on the natural side, and then you optimize conventional really around profitability and cash flow. So can you provide more detail around the drivers of that change and how you're thinking about opportunities for natural versus conventional going forward?

Sure. And this does get a little confusing. But effectively, we sell, and one of our strengths is the breadth of our portfolio of products, all the way from conventional through natural and organic. And our strategy is to deploy the assortment that every customer uses to optimize their strategy. So to a degree, we're agnostic. Now natural are slightly higher margin.

So you could say, well, you favor natural that way. Yes, but that's not our moat. Our moat is, let's make sure the customer has the products they need to run their play. Increasingly, natural and organic products are more on trend, and therefore, there's a higher level of growth there. But the very large majority of our customers buy both. And so it's a real strength to be able -- even the natural and organic customer that may want to do some dark store work and carry some conventional items to round out the basket, we're in a position to serve them.

And so ultimately, our assortment strategy is to help customers position themselves for differentiation. That will lean harder on the natural products almost by definition, because they're on trend, and much of the news in natural is innovation. And that's a capability we've been working on to help our customers not only have the best products, but also the most innovative ones.

Okay. That's very helpful because there has been a divergence in those 2 trends. But again, you play across the whole basket. And then I wanted to ask this, because we often get asked this, but are you seeing -- and it sounds like more traditional retailers lean more into the natural side and shifting those SKUs? Are they adding outright? Or is it really being led by more the natural and organic traditional grocers at this stage? Or is there an acceleration of the shift given what we're seeing in the consumer?

Yes. I think -- I would say there's a slight acceleration broadly, but the answer to your first question is both. And it really depends on the retailer's positioning. Natural retailers are doing very well. And different ones of them are a little bit focused more on one thing or another. But generally, we're seeing them grow in an above industry level, continuing their almost 3 decades of share growth.

Within full portfolio of customers, if I can call them that, there's definitely a consumer-driven shift towards natural products. And then what our organization is doing with them is trying to make sure they have the right assortment. And there are new products that get introduced every day. Some of them surprisingly will do very well in a grocery store. Others, maybe not so much, because it may be too early. So ultimately, it's fitting the products to the customer. And then do I think natural will continue to outperform more conventional products? Yes. I think the enduring health and wellness food is medicine trend is here for a long time.

Okay. That's very helpful. And then I just wanted to go back, as we're talking about top line demand, to a comment you made earlier around FY '27 guidance that you introduced last week, the return to top line growth in the back half. Can you help us understand what gives you confidence in that outlook? Any more color around the $90 billion TAM you see and how that should support the growth?

Sure. Well, background that you know, but perhaps everyone doesn't completely. We, as a part of our strategy, the previous strategy looked at $150 billion TAM, which was basically every wholesale dollar. And in the process of that, a number of decisions were made around DC deployment and customer relationships that were cash consuming, unprofitable. And we engaged 2 years ago with all of those customers. Many of them said, "Yes, I want to keep working with you. let's redo this thing." Others said, "no, I don't want to change it. I like what I got. If we're going to separate, let me go somewhere else." And we made tough decisions. We addressed our DC fleet and implemented really vigorously 2 years ago.

That led to a year where our reported sales number was below prior year. We knew it would be. We knew exactly how much we had sold those customers and what those DCs represented. And so we went into that sort of 12-month period where we said, well, underlying growth was positive, but our reported was a result of DC optimization, customer relationship management. And then we did a large project for a natural player, as they transitioned one of their categories from a set of suppliers to captive, and they asked us to handle it for them for a year. And it was a big piece of profitable business, but we knew it was going to go away. And so what we've tried to do for investors is unpack all of that. As that math proceeds to this fiscal year and we cycle all of that, we said that we will return to growth in the second half of the year. And we have confidence that we'll do that based on the math of all that, point one.

Point two, the customers that we're serving are great customers. They're doing well. So that gives us the ability to project growth. And then we have understanding about our business pipeline, which is potentially new categories with existing customers or new customers, put all that in the mix, and that's what gives us confidence to guide for growth in the second half of the year. And we're a growth company. We intend to grow with and alongside the most advantaged parts of the grocery industry. And it's much more fun to grow than it is to explain why we're not.

Yes. No, that's very clear and very helpful. And we look forward to that in the back half. And I wanted to touch on one point. You briefly talked about the new business pipeline, and I know that's something you've always had in the background. But I just wanted to spend a little bit more time if you could kind of dig into the status of it today, how it's been building, what you're seeing for existing versus new customers, and just opportunities out there?

Sure. One of the things that we did as a part of the reskilling of the company was we took a hard look at our sales organization and how to elevate and develop the most talented people, and we had plenty of really talented people, plus recruit strategically, because ultimately, in a value-added strategy where you're looking to fit an assortment and a set of services and brands to their strategy, your account management organization is really important to getting it done. And so we've built a much stronger sales force.

And when we refer to pipeline, we just have visibility that we review each week, looking at conversations with customers about different extensions, different opportunities to do more for them and then potential new customers. And we have a set of standards about which we sort of position them in the pipeline. And as they get to higher confidence, we start to talk with you all about the fact that the pipeline is strong, and that's because we expect them to start to print. The sales cycle is pretty long because you're having conversations and making sure that what solutions we're bringing forth would actually produce the ultimate impact that the customer wants, and you don't want to rush into that, but you also want to capture opportunity when it's there.

Absolutely. That's helpful color. You mentioned services, and I wanted to dig in that before we dig into other pieces of the business. It's part of your wholesale offering. It gets a little bit of airtime over the years and ebbs and flows. But I just want to get a status update on that. Where are the opportunities today? What's resonating now, what type of services? And then where are the biggest opportunities there and how you think about kind of top line versus margin contribution?

Sure. I mean our professional and digital services, each led by a different leader, are value-added services. And what I mean by that is that our pricing for the service is directly related to the value it creates. Unlike wholesale where typically, we're trying to keep our fees down. Our customers are competing in a very dynamic marketplace. They don't need us to try, nor would they tolerate us margining up just because we decided to. So we have to earn virtually every penny of margin we get.

When it comes to a service, let's say, we looked at your credit card fee program, and we said, how about this program that we could offer you based on some scale negotiation we've done with some of the credit card companies, and that saved you $100,000. We could say we think we should get $20,000 of that. Now that's nothing like our normal margins, right? But it's value we created, and it's a portion of the value that we would like to get ourselves. And so with that business model, what our services groups are doing is looking for ways whether it's to aggregate a relationship with a technology company or to find a way, particularly, let's say, a retailer is doing a complete assortment reset, we have arms and legs that can help do that reset work much faster, or we have relationships with professional services companies that we can -- help us do something that would create value and everybody shares in the cost.

So it's a much more entrepreneurial effort. It's completely in service to the customer strategy. And the areas that are most resonant are areas that save lots of money and areas that help propel the implementation of a strategy that the customer wants to pursue. And we continue to configure the portfolio of services to try to make sure we have something to serve whatever the customer is looking to do.

That's great. I want to go back to the operational improvements that you've made. We've talked about the strong growth over the last 2 years. You talked about the high confidence outlook for '27 and into '28. So it's been a tailwind. You expect it to still be a tailwind.

So I just want to -- if you can catch us up on where we are on the runway there as you've rolled out a number of initiatives. How much more optimization do you see? What are the main projects that are going to drive the growth over the next couple of years on that EBITDA margin expansion? I know specifically, you called out Lean 2.0 after you've done Lean in the past couple of years. So any color there that just -- that's a new initiative that we've heard about. And just anything around AI automation, just what are the levers that are still there for further optimization?

That's a very multifaceted question, Leah, and a good one. Matteo Tarditi, our President and Chief Operating Officer, is here today and a great example of the talent upgrade that we've done in the company. Matteo has been our Chief Financial Officer and President for the last couple of years, and he's transitioning over to be Chief Operating Officer, and his responsibility includes sales, supply chain, IT and Lean. And it's a perfect way to deepen and intensify the next chapter of our improvement agenda.

We always say effectiveness first, efficiency second. That's sort of a simple person's way of saying safety, quality, service cost, which is the Lean mantra. And Matteo is an expert in it. He's a Black Belt and Six Sigma expert. But as the CFO, he was encouraging us to implement it and driving it from his seat. And so for his development and for the benefit of our customers and our shareholders, he's now fully accountable.

So what is Lean 2.0? Lean 2.0 is we built the foundation. Now we're going to start using it. And Matteo, if you know him and you do, is very into the details and a very strong leader, and we intend to maximize the process improvement and human system benefits of Lean. Alongside that, we are and have been, for the last 2 years, implementing new technology. We have a North Star out there on the hill that we talked about at Investor Day called DC of the Future, which has modern technology, which is harmonized across our network, so that we can continue to drive steps of effectiveness and efficiency and continue to make our network unparalleled in terms of its ability to operate efficiently, to operate with high quality, to build that DC of the future.

And I guess it nets down to one thing that I think is important for investors to understand, which is this was a great company with an amazing heritage that began on the idea and conviction that people should eat healthier food and should have access to clean and really cared for food. But it was also a compendium of acquisitions that hadn't been integrated, including SUPERVALU, which we got somewhat interrupted midstream when COVID came in. So there's a lot of really powerful work going on here that for years, wanted to be done, but it just was overwhelming and COVID became so operationally demanding, it got put off. Well, we are now 2 years into implementing on a road map that will go well past what we've formally talked about in terms of outlook or multiyears.

And so the translation of that is customers have a lot to expect a management team that is completely discontent with what exists. And that $4 billion of spending with the help of Lean, with the help of technology, will continue to get more effective and efficient for years to come, and we can now start to see buckets of improvement out years. And so we kind of put it all together. You mentioned AI. The last thing I'll say about AI is a very powerful tool. We're pursuing it in 3 ways. Phase 1 is embedded in technology that we're adapting. So our procurement and inventory system has a very strong AI base and runs on AI and has delivered hundreds of millions of dollars of more efficient inventory that shows up in free cash flow improvement as well as highest customer -- higher customer fill rates.

We have a technology out there helping our drivers not turn too fast, not change lanes without a blinker, not be distracted in the cabin. Huge increase in safety, which ultimately becomes cost savings, but starts with something even happier than that. That sort of embedded in with Phase 1. Phase 2 is personal productivity, where we're starting to socialize AI tools within our environment in a very secure way to help our associates become more productive. And then the third one, which we are pursuing with a lot of discipline is dedicated use cases. And we have a strong governance system. We're meticulous about looking at the detail and making sure it's secure. But ultimately, use case improvement will be part of what we can unlock and some of that productivity I talked about out there in the future. But through those 3 pillars, we have confidence that our AI implementation will produce benefit.

A lot of great detail. And we've definitely seen it in the results with improving shrink and a number of initiatives and the team that you've built to drive all that. So that's great and great to see the runway ahead. You did mention your drivers, right? And so you do have a lot of road miles out there as you're moving these goods around the country. And then with that comes fuel and diesel costs. So that has been somewhat of a recent headwind for UNFI. And oil prices remain high today. So could you provide an update on what you're seeing there and how you're planning for fuel expenses into next year?

Sure. Generally -- and you're familiar with the concept that Matteo brought the company around high confidence planning. And what that means is that when we go out with a commitment to deliver a certain set of results, we have managed it through a process to get to what we call high confidence, which means we have multiple ways to get there. That could, if we're successful and our innovations hit, turn into a beat, but it will hopefully never turn into a miss, because there's multiple ways to get there.

Fuel is an example of something -- obviously, when we put our plan together last year, we didn't expect the increase in fuel to happen the way it did. Nobody did. But our way of managing it is through some traditional tools like hedges and our customer contracts and our supplier contracts, and that gives us a way of sort of keeping our exposure in a reasonable place. And then probably the more exciting way to address it is to use the crisis to look at ways in which we can be more efficient with customers to reduce miles.

Samsara happens to be a technology that helps with that. But that entire endeavor and looking critically with our customers, Matteo was just with one in the Southeast, looking at how we're set up to distribute to them and trying to find ways to win through shared accountability to deliver more efficiently into their network. And so a range of levers. I would never put myself as an expert to forecast what's going to happen in the fuel market, but we are in a position to manage it as it goes.

That's great. And then I wanted to touch on your retail business. It is relatively small for you guys, but you do have a few banners in some regionalized markets. So could you just talk about your recent trends there? What are you seeing in the competitive environment? And how does this segment fit into your long-term strategy?

So it's kind of stepping out to 200,000 feet. As you can appreciate, in the 3 years ago-ish, when we were going through the foundation setting and the strategy build, we had a rigorous review with our Board who are very talented and highly engaged in this. And they and we looked at all the pieces of the business and asked the question, how can we best serve a defined set of customers and a defined set of needs and how can we maximize value for our shareholders. And we looked at retail inside the conventional ecosystem and separately.

And what we concluded is based on the structure of the Cub brand in the Twin Cities. About 1/3 of the Cub business, a little less, is franchised. And all of those franchisees, virtually all of them have separate banners that they run themselves, they're all customers of ours. So what you have in the Cub ecosystem is something that's kind of unitary to that whole distribution center and how we operate in that market. So decided to be a full portfolio company. That meant we were going to be a retailer and how could we then rebuild Cub that had been somewhat adrift for 15 years.

We recruited David Best, outstanding talent. We've given him room. Last year in our high confidence model, we had the room to say to him, look, you figure out how to get customers moving again, and we'll give you the room to do that. He's been completely rebuilding his team. David grew up at General Mills and Target, worked at an independent retailer, has a long Rolodex of people who enjoyed working with him, and he has unashamedly built that team, promoted from within. Too early to say that we're making concrete progress, but we'll let our results speak for ourselves. As I mentioned at Investor Day and reinforced recently, we don't have a retail turnaround in our high confidence plan. If it happens, it will add. But I'm excited about the work he's doing and the progress he's making and look forward to reporting on it in the future.

That's great. And we saw sequential improvement in the latest quarter, which is great. I know we're nearing our chat, so I wanted to make sure we touch on this because all the operational improvement, it drove such a tremendous improvement in the free cash flow, which you mentioned earlier, and an improvement in leverage over the last few years. So with that, you're nearing your leverage target. How are you thinking about capital allocation today? How might that change once you hit your target? And then any comment on what you view around M&A and how that fits in the longer-term plans because UNFI was a consolidator historically?

Very relevant topic right now for us. We're moving into a new chapter where we're producing free cash flow every year. We're still focused on taking down that leverage. That's still in our matrix right now, and investing in the business. DC of the future will happen across the network and involve technology implementation, automation where it makes sense. And that obviously will use some capital as we go forward. Although I'd point out managerially that capital is never the restraining factor, it's the talent to do it well. And so we're focusing on making sure we have the right change management.

We just launched the DC of the Future in Joliet, Illinois. It's going to be fantastic for customers in that region, but it's bumpy as you implement all that and put all those DCs together. And so Matteo's task is to figure out how to make it less bumpy in the future. And as we go forward, the matrix of exactly how we'll think about the allocation of resources and returning to shareholders, we've been opportunistic buyers of our stock. We just had a new program for $200 million approved by the Board at the last meeting. And then on M&A, it's not out, but a lot of our opportunity and significant opportunity for years to come comes from things we can see that we can do better ourselves. Never say never, but that's how we're thinking about it, and we'll have more to say about it in the upcoming quarters.

Okay. Great. Yes. No, that's great color, and I think a great discussion of all the tremendous work you've been doing over the last several years and all the look ahead. So thank you, Sandy, for our chat today.

It was great to be with you. Thank you.

Thank you for standing by. At this time, I would like to welcome everyone to the UNFI Fourth Quarter Fiscal 2026 Earnings Call. [Operator Instructions] I would now like to turn the call over to Jeremy Perron, Senior Vice President of Investor Relations and Corporate Development. You may begin.

Good morning, and welcome to UNFI's Fourth Quarter and Full Year Fiscal 2026 Earnings Conference Call. Our earnings press release and presentation, which management will speak to, are available under the Investors section of the company's website. We've also included a supplemental disclosure file with key financial information. Joining me for today's call are Sandy Douglas, our Chief Executive Officer; and Matteo Tarditi, our President and Chief Operating Officer.

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. Additionally, Sandy and Matteo 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 the earnings presentation. Now over to Sandy.

Thank you, Jeremy, and thank you, everyone, for joining us this morning. In the fourth quarter of fiscal 2026, UNFI delivered solid results in line with our most recent outlook and completed a strong second year of our strategy to add value for customers and suppliers while becoming a more effective and efficient company.

Through consistent execution of our value creation strategy, we delivered fourth quarter adjusted EBITDA of $172 million, which contributed to full year adjusted EBITDA growth of 27% and free cash flow of $80 million in the fourth quarter and $323 million for the full year. And we reduced our year-end net leverage ratio to 2.2x, more than a full turn less than last year. At the same time, we strengthened capabilities to help our customers and suppliers grow profitably, continued improving our operating model and build momentum as we enter fiscal 2027.

Now turning to Slide 6. Let me take a few minutes to review UNFI's target addressable market, the basis for our value creation strategy. Over the past 2 decades, many of the most successful food retailers have built growth strategies centered on differentiation. While value remains critically important, many shoppers also continue to seek healthier foods, innovative products and locally relevant experiences. As a result, food retailers with differentiated value propositions have steadily gained share within the grocery industry over time. We continue to see this trend across a wide range of retailers, including natural and organic grocers as well as smaller chains and independents with unique locally relevant offerings.

These retailers are the foundation of UNFI's approximately $90 billion target addressable market, which is expected to grow in the low single digits over time. Our focus is helping these customers execute growth strategies to differentiate their shopping experiences in the marketplace and better compete with mass and discount retailers. Through a combination of our proprietary analysis and third-party research, we estimate retailers within our target addressable market grew in the low single digits and increased their combined share of the grocery industry by approximately 30 basis points compared to last year's fourth quarter.

Within this backdrop, UNFI delivered low single-digit underlying sales growth, in line with our target addressable market. As we've discussed previously, our reported sales included the impact of accretive network optimization actions and the unwind of short-term project work in our Natural Products segment, partially offset by the cycling of last year's cyber event. Excluding those factors, our underlying sales performance remained largely in line with the most consistent and growth-oriented portions of the market. Importantly, we believe our target addressable market will continue to grow because of the quality of our customer base and their alignment with enduring consumer priorities around health, innovation, quality and value.

Turning to Slide 7. Our value creation strategy is purpose-built for this part of the market and anchored on 2 priorities: adding value for customers and suppliers and becoming a more effective and efficient company. First, we're adding value for customers and suppliers by enhancing account management, merchandising and supplier support programs, innovative private brands and professional services that help our partners differentiate, compete and profitably grow.

Second, we're improving effectiveness and efficiency across the business through next-generation supply chain, technology and productivity initiatives that are steadily improving safety, quality and delivery accuracy for our partners while reducing our operating costs. Together, these strategic capabilities represent our road map to building a company that can best serve the most growth-oriented parts of our industry while supporting shared profitable growth for our customers, our suppliers and for UNFI.

Turning to Slide 8. In fiscal 2026, we made solid progress on our road map to strengthen our core capabilities while continuing to improve daily execution. This year, we launched more than 130 new private brand SKUs, including a variety of innovative health forward options. In Q4, we also refreshed one of our core seafood brands that offers a unique combination of quality and value. We've seen private brands continue to grow steadily across the industry, playing an important role in many retailers' differentiation strategies. We also continue to enhance our supplier support programs, which several of our investors saw in real time at our holiday and winter selling shows.

Most recently, we added new AI-enabled features on the UNFI Insights platform to make it easier for our suppliers to assess store-level performance, improve demand planning and achieve their goals. Throughout fiscal 2026, we also made progress towards becoming a more effective and efficient company. We continue to optimize our network to better serve our customers and suppliers over time, while investing in technology to support long-term growth. In the fourth quarter, we consolidated our Racine, Wisconsin facility and expanded our nearby Joliet, Illinois DC with full case automation, which is now in the early stages of implementation.

We also completed the rollout of our AI-powered supply chain and procurement planning platform to all DCs in our network, which is helping to steadily improve fill rates and inventory management while increasing free cash flow. In addition to technology investments, we focused equal attention on strengthening processes across our network. By year-end, we completed the initial deployment phase of lean daily management in 44 distribution centers, which is enabling ongoing improvements in our safety, quality, delivery and cost metrics. While we've made progress this year, we still see significant opportunities to continue improving our capabilities as well as our effectiveness and efficiency across the business.

The leadership updates we recently announced are another step forward in aligning our operating model more closely to our value creation strategy. Matteo's expanded role as President and Chief Operating Officer brings together our sales, supply chain, technology and lean organizations, creating stronger alignment between our customer relationships and our operational execution. We're also sharpening our focus on commercial capability building under Louis Martin's leadership. On that note, I'm pleased to officially welcome Alfredo Luchini as our new Chief Financial Officer, who is joining us on today's call. We're excited to have him on board as we continue executing our strategic priorities with strong financial discipline.

Turning to Slide 9. We've achieved significant improvement as we capped the second year of our value creation strategy with momentum continuing into fiscal '27. Over the past 2 years, we have consistently delivered on our earnings and cash flow commitments. We've grown adjusted EBITDA to over $700 million, generated substantial free cash flow and reduced net leverage from 4x in fiscal '24 to 2.2x in fiscal year '26. These results reflect the impact of our value creation strategy and the actions we've taken to improve execution, increase efficiency and strengthen the company's financial foundation. In fiscal '27, we're positioned for another year of continued progress with adjusted EBITDA up high single digits, sustained free cash flow generation and lower net leverage while returning to profitable growth.

As Matteo will detail shortly, the midpoint of our adjusted EBITDA outlook is $25 million above the targets we communicated during our 2025 Investor Day, reflecting our strong performance in fiscal 2026. Although it's early, we would expect this favorability to flow through to fiscal 2028. Importantly, we're confident in our ability to deliver long-term profitable growth within the most resilient segments of the grocery retail industry. Looking ahead, our teams remain laser-focused on helping our customers execute their differentiation strategies, supporting our suppliers' growth with these retailers and continuing to improve the service that we deliver every day.

With that, I'll turn the call over to Matteo to discuss our fourth quarter results and fiscal 2027 outlook in more detail.

Thank you, Sandy, and good morning, everyone. Our fourth quarter results reflect disciplined execution of our value creation strategy. We delivered another quarter of underlying sales growth and improved operating leverage, closing out a strong fiscal 2026 in which we generated meaningful adjusted EBITDA growth and free cash flow while improving our financial flexibility. Today, I will provide additional insight into our fourth quarter and full year results, our year-end financial position and capital structure and our outlook for fiscal 2027.

With that, let's turn to our results. Starting with Slide 11. Fourth quarter sales were over $7.6 billion, bringing full year sales to approximately $31.2 billion, in line with the updated outlook we provided in June. Fourth quarter reported sales declined by less than 1% compared to last year. Excluding our planned optimization actions, short-term project work and the impact of cycling last year's cyber event, our underlying wholesale sales grew in line with our $90 billion target addressable market. We estimate the impact of optimization was approximately 500 basis points. The impact of short-term project work was approximately 150 basis points, and last year's fourth quarter was impacted by the temporary lost sales due to last year's cyber incident.

The majority of our customers buy both natural and conventional products to support the unique go-to-market strategies in the local markets they serve. Underlying sales in our natural products segment again outperformed the broader market, reflecting strong execution and continued shopper demand for natural, organic fresh and specialty products. Meanwhile, underlying sales declined mid-single digits in the Conventional Products segment. In retail, total sales were lower by 8%, largely reflecting planned strategic store actions as we optimize our footprint and strengthen the foundation of the business. In the fourth quarter, Cub same-store sales decline improved by approximately 150 basis points from the third quarter, even after adjusting for last year's cyber impact. We are encouraged by the steady progress, though our Cub strategy is still in its early innings.

Let's move to Slide 12 to review profitability drivers in the quarter. Our gross margin rate in the fourth quarter was 13.7%, approximately 30 basis points higher compared to last year, reflecting the benefits of our optimization work and favorable customer mix. In the fourth quarter, we made some incremental investments in technology, supply chain and commercial capabilities to accelerate the expected benefits from these actions. Operating expenses came in at about 12.9% of net sales, which was in line with our expectations. While we still have significant opportunities to improve, we continue to demonstrate progress on fill rate, on-time deliveries and throughput. These gains reflect the benefits of our effectiveness and efficiency initiatives, including network optimization, investments in our next-generation supply chain and expanding lean practices across our distribution center network.

Our disciplined execution and solid expense management resulted in adjusted EBITDA of $172 million, bringing full year adjusted EBITDA to $701 million, near the top of our guidance range. Our adjusted EBITDA margin rate in the quarter was approximately 2.3% of net sales, reflecting another quarter of solid margin improvement. The strong operating performance, along with lower net interest expense from reduced net debt and refinancing activities as well as lower depreciation expense resulted in fourth quarter adjusted EPS of $0.69 and full year adjusted EPS of $2.65, above the high end of our guidance range.

Looking to Slide 13. During the fourth quarter, we continued to improve our effectiveness and efficiency by deploying new technology solutions and by further embedding lean practices across our network. As Sandy mentioned, one of the key actions we made in the quarter was relocating operations from an older distribution center in Wisconsin to an upgraded facility in Illinois, equipped with automated case pick and each pick technologies. While it is still early and we have more work to do, we expect that this move will help us more effectively serve customers and suppliers in the Midwest over time while generating operating efficiencies for UNFI. This is the latest example of our network optimization planning. We've also completed the initial deployment phase of Lean daily management to 44 distribution centers.

With Lean daily management scaling across our DC network, we delivered our fourth consecutive quarter of year-over-year improvements in fill rates, on-time deliveries and throughput. We have made steady progress, but still believe we have significant runway to continue improving upon these metrics. To do that, we plan to deploy Lean 2.0, which advances systems and processes beyond our initial implementation so we can solve more problems closer to the point of impact. Lean will continue to be an important part of my new role.

Turning to Slide 14. Our strategic and operational discipline, combined with our planned CapEx spend supported free cash flow of $80 million in the quarter, bringing our full year to $323 million, in line with our expectations and $84 million higher than fiscal 2025. This also represents the highest full year free cash flow we have delivered to date. This free cash flow helped lower our net leverage ratio to 2.2x, a 1.1 turn improvement from the end of fiscal 2025. Net debt at the end of fiscal 2026 was less than $1.6 billion for the first time since fiscal 2018. In the fourth quarter, we repurchased about 420,000 shares of our stock for approximately $21 million, bringing our total for the fiscal year to about 1.25 million shares for approximately $50 million, equating to an average price per share of $40.15.

Our 8-K this morning also stated that our Board of Directors has authorized a new $200 million share repurchase program that replaces the one that was set to expire this month. This new program and the repurchases we have made to date reflect our conviction in our long-term value creation strategy. We also took action to reduce the cost of our capital structure in the fourth quarter, repricing our term loan from SOFR plus 475 basis points to SOFR plus 400 basis points, which is expected to reduce annual interest expense by another $3 million on top of the savings generated by the refinancing of the ABL earlier in the year.

Looking at Slide 15. We finished fiscal 2026 with operating momentum. And as we look to fiscal year 2027, our guidance reflects our confidence in the continued execution of our value creation strategy. Sales are expected to be in the range of $31.2 billion to $31.8 billion, up 1% at the midpoint. This outlook reflects the remaining impact from the optimization actions we yet have to cycle. As a result, year-over-year sales are expected to decline in the first quarter before returning to profitable growth in the second half. Adjusted EBITDA is expected to be in the range of $730 million to $780 million, representing a high single-digit growth rate at the midpoint, and as Sandy mentioned, $25 million above the target we communicated at Investor Day.

The midpoint of our sales and adjusted EBITDA guidance implies year-over-year margin expansion of 10 basis points, positioning us to achieve the fiscal '28 margin rate target that we set at our Investor Day 1 year earlier than planned. This expected margin expansion is largely driven by the continued execution of initiatives already underway and the timing of their anticipated benefits. Because these benefits are expected to build throughout the year, we expect revenue and earnings growth to be slightly weighted towards the second half, with the first quarter expected to follow historical trends for adjusted EBITDA as the lowest quarter of the year.

And we expect an adjusted EPS range of $3 to $3.50 per share, representing an increase of about $0.60 per share or 23% growth at the midpoint. These ranges represent a high confidence case supported by multiple initiatives across the business to achieve these targets. Also to reiterate what Sandy stated, we presently expect adjusted EBITDA in fiscal 2028 to grow approximately 10% versus our 2027 guidance midpoint, in line with the long-term growth rate we provided at our Investor Day and implying incremental margin expansion above our long-term target.

Turning to CapEx. We expect to deploy approximately $300 million in fiscal 2027, reflecting a higher level of organic investments to advance our capabilities as well as our effectiveness and efficiency agenda. This includes targeted automation, ERP deployment and broader technology initiatives designed to simplify processes and provide better and faster insights to operate the business. We will take a methodical, paced approach to technology investments, focusing on targeted implementations first, then a broader deployment.

Our outlook for fiscal 2027 free cash flow is between $275 million and $325 million, which reflects a year-over-year step-up in capital spending, offsetting the EBITDA growth. The midpoint of $300 million is also in line with our long-term target. We also expect to reduce net debt and improve our leverage ratio to under 2x by end of fiscal 2027. From a capital allocation perspective, we will continue to prioritize organic investments and deleveraging, and we'll also evaluate opportunistic share repurchases. Overall, we remain confident in our long-term value creation strategy.

Closing on Slide 16. As we begin the new fiscal year, we remain focused on continuing to support our customers and suppliers as they execute their unique growth strategies in a dynamic operating backdrop while simultaneously delivering our financial commitments. We continue to see significant opportunities ahead to strengthen our capabilities, improve execution and create long-term value for all our stakeholders.

With that, operator, please open the line for questions.

[Operator Instructions] And your first question comes from the line of Edward Kelly with Wells Fargo.

I wanted to start on the top line. Obviously, still seeing some optimization headwinds. Could you provide a little bit more color on the 150 basis points of short-term project work? And then as we think about the upcoming year, can you help us a little bit in terms of the top line outlook by division and a little bit more on the cadence. And I'm just curious if there's any other optimization stuff that you are maybe contemplating that's not in the guide.

First, I would say the simplest way to understand the project work is that a large natural retailer asked us to help them make a strategic transition and we did some significant fresh business for them as a bridge from where they were to where they were going. This is a very appropriate use of our resources. It was profitable, and we are in the process of cycling it now having made the transition, and it's approximately 150 basis point drag on our reported sales results.

From an outlook standpoint, as Matteo said in his comments, we see 2027 as a year that will return to growth. We still continue to lap some of the optimization results that we achieved last year. And so we can quantify the headwind there, along with the tailwinds that we estimate from the success of our customer base and our target addressable market as well as our pipeline, which all are part of the mix that lead to a low single-digit guide for the year with an emphasis that growth is restored in the second half as we have pretty much fully lapped the optimization initiatives that are part of the base.

And just on where you are in terms of optimization overall, potential for further activity in the future?

Sure. DC optimization is really an initiative that we undertook to make sure that our DC fleet is designed for the future opportunity that we see in the business. And we've taken a number of actions so far. We continue to look at it to make sure that on an ongoing basis, our DCs are in the right spot with the right technology. It involves both increases in DC space, technology, new DCs as well as transitioning some DCs, sometimes merging them to make them more efficient. So the mainstream of the initiative is something that we're in the process of cycling, but we'll continue to look at it.

Your next question comes from the line of Alex Slagle with Jefferies.

Congrats on the progress. I just wanted to follow up on Ed's question a little bit more, if there's any other color sort of on the segment level. Just trying to think if like conventional and retail, I mean, can the top line start to flatten out at some point in the back half? And on the bottom line, whether you expect sort of what the contribution could look like for those 2 segments, natural versus conventional?

So first of all, we are pleased with the performance that the 2 segments delivered in 2026. So think about natural growing top line about 7% and growing EBITDA 19%, so showing strong operating leverage. And then conventional while going through an important year of accretive network optimization, growing EBITDA by more than 50%. So solid foundation to start with. When you think about 2027, we don't necessarily guide by segment, but let me give you a little bit of color. So the low single-digit growth for the top line is rooted into the customer strength, as Sandy said, the $90 billion market that continues to grow at low single digit and the commercial capabilities we're building.

And inside the low single-digit guidance, we continue to see natural organic specialty products to grow faster than the average market and the portfolio. So we expect to continue to see strength from the natural products. We continue to have our initiatives on productivity largely underway and then the return to profitable growth to compound on getting the EBITDA up 8% at the midpoint.

One final point I'd make is that ultimately, our product set is designed to serve the assortments of our customers. And so the natural evolution would be that customers are beginning to focus more on healthier, more differentiated product sets, which drives growth in natural. But our conventional products are particularly important products in many assortments. And while their year-over-year growth may be negative, the total combination adds value to customers and drives our growth proposition.

Got it. And then just on the '27, '28 targets, I mean, how do the higher fuel costs impact this outlook and just the magnitude of the incremental headwind? I know it's something we initially weren't looking at a couple of years ago when we set the plan.

Yes, Alex, we talked in kind of the 3Q, 4Q calls about a $5 million kind of net fuel impact in each quarter. And that's kind of in the high confidence mode that we always apply for our outlook, what we model for 2027. And equally importantly, if not more, is the countermeasures that we continue to deploy against fuel prices. So the first one is we have some fuel hedges in place to mitigate some of the inbound cost. Second, we have customer and supplier contractual escalations that again go through a lagging and a phasing, but they are in place to protect. And then the third one, which is the most important is the continuous focus on route optimization. So how do we continue to reduce miles per delivery and optimize routes. So the whole system benefits from lower fuel consumption besides contractual escalations and hedges.

Your next question comes from the line of Kelly Bania with BMO Capital.

Congrats on the leadership announcements. I wanted to go back again to the top line, I guess, that kind of underlying low single-digit sales growth that you noted for the quarter. Should we assume that you kind of got back 100% of the cyber incident impact in the quarter? Just trying to tighten that math up a little bit. And then as well, you mentioned in the press release onboarding of additional business from both new and existing customers. Can you share any color on the timing and magnitude and drivers for that new business?

Kelly, so the way I would describe the flow of the business is that I'll start with the pipeline. We've continued to earn bigger shares of our customers' business. It's the best kind of growth because it signals a healthy relationship and it often includes economies of scale. And so it's a real focus for us to continue to earn our customers' business, and that's a component of the outlook in terms of sales. We also have new banners, which are new relationships. And obviously, we've netted out any other changes in our customer base to be able to come to the guide.

What we've communicated today, and I think it's the best way to think about it is that the first quarter will continue to have a heavy amount of cycling from the optimization. And the second half of the year, we think we'll be fully back to growth. That gives you an idea of the staging, both of the pipeline and of the cycling of optimization. Finally, relative to the cyber event of last year, in general, we believe we've completely cycled it as we enter the first quarter. I mean there's little impacts here or there, but we worked very hard last year to manage through that in a way that was focused 100% on our customers' impact. And we did so in a way that was expedited, although it was, as everyone remembers, very challenging. And as we sit here today, we're a stronger company from a technology and security standpoint, and our customers have the benefit of that capability build. And this is solidly in the rearview mirror for them and for us.

Your next question comes from the line of Leah Jordan with Goldman Sachs.

I wanted to ask about food inflation. What are you seeing today? What is embedded within your outlook for FY '27? And then how are you thinking about forward buying opportunities in the year ahead? Because I think you have a small tailwind that you have to lap in the front half of this coming year that you gained last year.

First of all, our strategy with suppliers and throughout our supply chain is always to keep our prices low, stable and predictable. That is the best answer and the best response to the industry and for our customers. When you think about our fiscal 2027 outlook, we've embedded low single-digit assumption for inflation, recognizing though that the environment is dynamic, and it includes areas like energy, logistics, we talked about fuel. So it is consistent with the signals that we receive. And again, our focus is to continue to work with our suppliers and our operational capabilities to keep prices low.

Relative to procurement gains, what -- again, very similarly, our strategy is always to work with our suppliers to avoid inflation and to avoid price increases. And we always view procurement gains as temporary and secondary. If you think about the $150 million of EBITDA growth in 2026, very largely driven by the productivity efforts, the accretive network optimization, a very residual part was driven by procurement gains. So we may be lapping some in the first and second quarter when we had them a little bit higher. But what we embedded in our '27 outlook is low single-digit inflation and basically no reliance on procurement gains on out of pattern, let's say, procurement gains.

Okay. That's helpful. And then maybe could you provide more detail on the trends in your retail business? What are you seeing across the competitive environment in your regions? What are you seeing from the consumer? Just continues to be kind of a top line and margin headwind for you. So how are you thinking about that?

Yes, Leah, it's Sandy. The way I describe our retail initiatives is early days. David Best, our retail CEO, has his management team in place. They've developed a strategy, and they're in the early stages of implementing it. And as Matteo said in his remarks, we're seeing sequential improvement in the top line and bottom line performance. We'll have more to say about that as we get more experience. But as you know, in particular, Cub is a great learning lab for us. And the management team that's been put in place is very high quality. We work closely with our franchise partners in the Twin Cities area, and we're excited about the potential, but early days as of now.

Let me answer your second question I forgot to about competitive environment. Broadly speaking, retail is and has always been in my entire professional life, a very competitive business, and it still is. Ultimately, if you look at the way we've segmented the business, and there's one slide that's in our provided materials, we continue to see natural organic and specialty players grow and gain share. We continue to see differentiated grocery companies grow and gain share. And we continue to see discounters grow and gain share, and they each do it in their own unique way. And at UNFI, our focus is trying to help retailers wherever they're segmented, particularly those that may not have been as differentiated in the past, like Cub, for example, to really take the actions necessary to create a winning strategy for their business on value, on assortment and on unique experiences. And I think we can follow Cub as an example, and that effort goes for all our customers, and we're seeing some early results from providing that support on top of a bed of continuously improving execution.

Your next question comes from the line of John Heinbockel with Guggenheim Securities.

Sandy, I wanted to start with fill rate, up 2%. How is natural fill rate progressing? Because I know that's obviously lower than conventional. Is that growing faster? Where do you see the opportunity there? And I guess it's very hard to tell how much sales you're leaving on the table because the fill rate is not higher. But maybe you can talk to that.

Sure, John. Good insightful question. Broadly, we're seeing fill rates improve in conventional and natural at about the same rate. However, you're right, conventional fill rates are higher, and it makes sense that they are. They're fast-moving consumer goods, a lot fewer SKUs and generally, volume is more stable, and there's plenty of supply. On the natural side, with all the innovation and the slow-moving SKUs, it's a whole different ball game. But we have created an enterprise-level project on fill rate. We consider improving it to be at the top of the most important things we can do for our customers, and that includes owning them.

The ultimate position that we want to put our customers in is being in stock at really very, very high levels. And then underneath that, understanding demand, understanding ordering patterns, understanding promotions and working with suppliers to get a differentiated amount of inventory and then using technology, which we've implemented, as you know, RELEX across our system to leverage AI to make sure that we're continuing to order and fulfill in the most technology supported way. And we're making some progress, but we continue to see it as the biggest improvement opportunity we're working on, and we expect to continue to improve.

Maybe a second question. As you think about -- you break out natural and conventional, but then you have, right, the customer types that are differentiated. So when I think about conventional product sales through less or undifferentiated channels, how do you think about that? And I would guess over time, right, as conventional gets smaller and as these customer types get smaller, right, you would think that your enterprise top line would gradually strengthen. Is that fair?

Yes, I think so. The way I look at it is that customers have their own assortment strategies and what our job is, is to support that. Now the advice we're offering is a couple fold as it relates to assortment. First, on items that are comparable with discounters, we need to work together to get costs down so our customers can be competitive. Beyond that, though, there's tremendous opportunities to decomparablize and move assortments towards private labels, which is a major focus of ours as well as natural, organic and specialty, a, because they're not comparable; and b, because they're on trend. And so to some degree, we're going to force that transition in mix simply by strategy and by consumer demand. But what I'll also tell you is that approximately 90% of our customers buy at least some of both. And so I return back to how I started, which is we're in the business of selling the products our customers want to sell. But at the end of the day, the math of it is going to be what you suggested, I expect. And I believe the health and wellness trends in food are enduring and will go for a long time.

Your next question comes from the line of Mark Carden with UBS.

So to start, you walked through the competitive backdrop on the retail side of the business a bit earlier. Are you guys seeing any shift in competitive intensity on the distribution side of the business, just given the duration of some of the recent pressures that we've seen in grocery? You guys obviously have a bit more favorable exposure to your target market, but has there been any shift on either upfront money or on price in general?

Mark, I would say broadly that the wholesale industry continues to be very competitive. I think what maybe taking place is some incremental segmentation about where different players are focused, but you have to talk to the other companies to understand their strategy. I wouldn't be the right spokesperson for it. But ultimately, we operate a very efficient business with low margins and our productivity and operational improvement drives our margin expansion, not our price increases. We remain competitive, but we're focused, as we've said many times, on a subsegment of the market and particular needs and capabilities that support the strategy of customers in those segments. And that puts us, to a degree, in our own spot in the industry, although it's a very competitive industry, and we continue to sharpen our execution to make sure that our customers believe they're getting the best value for what they're trying to accomplish.

Great. That's helpful color. And then as a follow-up, you guys called out the focus on Lean 2.0. Can you walk through just how this differs from your initial deployment, where you see the most opportunity for incremental improvement and how you're planning on phasing in these changes to your DC base? Is it voluntary like the first phase? Could this be implemented more quickly? Just color there.

So pleased with the progress with the first phase. We deploy the basics of Lean daily management at 44 DCs. And really, what we saw in the last 4 quarters is green shoots of improvements in fill rates, on-time delivery, throughput, but still a very large opportunity in front of us. So we call them green shoots at the start, but there is a lot to do. When you think about 2.0, the plan here is to start going much deeper into 2 specific areas. The first one is management routines and specifically, how do we strengthen the problem-solving and daily management programs. So we spoke about the teams huddling at 7:00 a.m. at 44 DCs to look at the key performance indicators. We're going to start going much deeper into the countermeasures and how do we deploy technology, how do we deploy stronger quality, et cetera, et cetera, to problem solve.

The second area then is going to be continuous improvement, right? The Japanese word would be Kaizen, but it's how do you then take your foundation and you keep thinking about eliminating waste, improving effectiveness, improving efficiency. So the plan here is to go a little bit on the volunteering basis as we did with the 44 DCs, but we also start having a better understanding of where are the larger opportunities based on customer feedback, customer impact, suppliers, out of stock, et cetera. And so that's how we're going to prioritize. So it's going to be a little bit less of just raising your hand is a smarter way to cross check where is the biggest impact, where is the opportunity.

Mark, the one build I'd put on that is Matteo's answer to that question gives you a pretty good example of why we're optimistic about the impact he's going to make as Chief Operating Officer with sales, customer and supply chain and Lean and IT reporting to him, we're able to push that mix together and begin to take things to the next level.

Your next question comes from the line of Scott Mushkin with R5 Capital.

I have 2 questions. But before that, I just wanted to say what an incredible job you guys have done with this company over the last 2 years, and it's much appreciated. So first question is more short term. It's industry related. I mean, obviously, you guys outlined the way you can grow. But in the broad industry, it looks like we're going to have some volume pressures as GLP-1s continue to erode demand and then also building price pressures throughout the whole industry. So I was just wondering if you could kind of put UNFI in that, if that's correct and how your business performs in that environment, if that's the short-term environment?

Scott, so clearly, there are some macros that are impacting everyone. I think the largest right now is fuel prices and the reduction of food assistance or SNAP programs, and that's impacting retail. GLP-1s are also impacting volume, but there's a positive and a negative. The negative is volume goes down, the positive is that healthier food goes up. So those are the 3 macros. Ultimately, retailers respond to it differently. And our exposure is attached to how our $90 billion target addressable market retailers action against the environment they're in.

And as I mentioned earlier, broadly speaking, they're making sure that their value is right. They're making sure that their assortment is right, and then they're continuing to work on their in-store experience depending on what their strategy is. Ultimately, the environment is dynamic. And if you look at the chart we have that goes back 20, 25 years, and that certainly includes all the time that I've been in the industry, I've never seen the industry not be dynamic. There have been periods of time when the macros were particularly challenging.

But if you look at it over time, the winners win regardless of the environment. And to some degree, there's a fair amount of opportunities that companies see when things are challenging to double down on their proposition. Now I don't want to be Pollyanna. We have to work on it. We have to be efficient. We have to improve our execution. We, at UNFI, think the opportunities to improve our service to our customers are significant and enduring, and we're relentlessly focused on them, and that's particularly important in this environment.

That's great. So my second question is more of a long-term question. And obviously, you've gotten back -- you're going to be at 2x. So if you had to prioritize capital, organic growth versus M&A, buyback versus dividend over like a 3- to 5-year period, not like this year, because you're going to have free cash flow, it looks like at least a $300 million going forward. How would you structure that and think about that?

Yes. Great question, Scott. And I'm going to let Matteo carry most of this. But what I -- the first comment I'd make is we really haven't said anything about the long-term capital allocation strategy other than we're going to continue focusing on deleveraging, investing in the business to drive organic performance in a highly disciplined way and then opportunistically buying back our shares. I think the broad opportunity over time is to continue to invest capital to drive the highest possible level of customer benefit and shareholder returns. And we continue to work as a matter of strategy in a very diligent way to look at that short, medium and long term.

If we had a bias right now, I would say that it's around organic improvement simply because we see so much opportunity to do that. But that -- I wouldn't want to foreshadow the ultimate strategy other than to say that's where we are currently focused. Matteo, how would you build on that?

No, you said it perfectly, Sandy. I mean the only add I would say is that we are taking the CapEx spending for '27 to about $300 million, which, as you average the last 3 years, is kind of in line with that 1% of top line that we discussed at the Investor Day. And we keep the same high hurdle rates for returns, strong focus on safety, strong focus on technology and then to Sandy's point, developing those supply chain capabilities that are critical to become more effective and efficient. And inside that, our commitment to continue to reduce leverage and return money to shareholders.

Your next question comes from the line of Chuck Cerankosky with Northcoast Research.

Great quarter, great year. When you're talking about acquiring new business and expanding business with existing customers, what's sort of the lead time? How much spade work goes on that we don't see? And is the company's improving balance sheet helping United Natural achieve that goal?

Chuck, let me answer the second half of your question first. Our balance sheet strength and financial foundation improvement is significantly freeing up our ability to invest in a high-quality way around capability. Having said that, there's a bigger enabler beyond the dollars, which is the talent of the management team and the discipline and the focus around project management. And I actually view the second one as more important than the first, but it's nice to have them go together. That differentiation around execution and then the focus on providing the value that our customers are seeking to drive with their strategy is ultimately why we're winning business when we do. The sales cycle is as long as it takes.

Now that's -- I'm not trying to cop out. It's a long sales cycle. But I have seen customers make decisions to give us a category to work on for whatever reason, sometimes because their existing supply caved in and they need us to pick it up right away. Other times where they're continuing to evaluate categories, and it takes months of dialogue, and in a banner conversion, it could take as much as 6 to 9 months, and then you have to avoid high-volume times. It's not the best time to make a distribution change in the holidays, for example. So it's a deliberate process. It's at the speed of the customer and the basis of competition is our fit to their strategy and our execution capability.

Your next question comes from the line of Peter Saleh with BTIG.

Great. I wanted to ask on the automation that you discussed earlier in the Illinois facility. I think you shifted from Wisconsin to Illinois. Can you just talk about what prompted this change and kind of what benefits you're starting to see with some of this automation?

Peter, let me start it out to you because you may recall that automation is inside a suite of kind of capabilities and optionalities that we have to become more effective and efficient alongside with Lean, the technology investments we're making, the engineering standard and the work that we're doing there, and then there is automation. So it's part of a strategy that is all again creating multiple ways to become more effective and efficient. Specifically on the Racine to Joliet move, this is similar to what we did a couple of years ago with the York to Manchester transfer, where we basically look for ways to modernize, get into larger facilities, study the market potential and then at the point, deploy dollars to support our customer growth.

And you remember the example, York to Manchester was 50% larger, highly automated, very low if any defect rate. And that's the same playbook that we are playing with the Racine to Joliet transfer. So automated, reskilling, larger support in the market. Of course, we are into the very early innings. As with every transfer, there are a little bit of growing pains. We're very aware of that, and we're working very hard to fix them, but excited that we had another opportunity to execute network optimization in a way, expanding into modernized facility.

Understood. Okay. Just as a follow-up, are there more of these types of facilities planned in '27 or '28? Anything else on that front?

Peter, it's Sandy. What I would say is we have an exciting technology and improvement road map that goes out multiple years. For obvious reasons, we're not going public with it at this stage. But with each passing implementation, whether it's technology like RELEX or Samsara going system-wide last year, we're growing in our confidence relative to the ability to put technology and Lean and process improvement together to drive capability. And the discipline that Matteo and finance team put into evaluating each investment and to track its return gives us even more confidence to continue to press the agenda to build capability for our customers, and we have a plan to do that over the next years.

Your next question comes from the line of William Reuter with Bank of America.

So in a previous question around your capital priorities, M&A buybacks, you said we haven't really said anything at this point. We're focusing on deleveraging. I believe your target for leverage has been 2.0x what you're going to achieve by the end of this year. At that point, you'll still be doing pretty solid free cash flow. Would you consider revising your leverage target? Or should I assume that everything will just accrue towards either CapEx or alternatively share repurchases?

So we continue to generate strong cash flow. You saw the $560 million in the last couple of years, outlook for 2027 at the midpoint, $300 million. But again, reinvesting the same amount into CapEx. And for now, our focus is really to delever, go below 2x as we mentioned, and then continuing to find opportunities for organic investments with high returns and discipline. And this morning, we announced a new $200 million share buyback program. The Board approved that. So it's a combination of strong operations, strong free cash flow, continue to deleverage, reinvest into strong organic investments and then look for opportunistic ways to return money to the shareholders. And while doing that, we will continue to optimize our capital structure. We took the unsecured bonds down $150 million that generates interest savings. We refinanced the ABL with some savings. We repriced the term loan and generated savings. So it's a very comprehensive set of mechanisms to deleverage and continue to optimize the structure.

Got it. And then just my follow-up. You mentioned the headwinds in terms of optimization in the first quarter. And then, I guess, a little bit maybe still of this onetime program that resulted in some revenue. Is the underlying growth rate of the first quarter any different than your expectations for the rest of the year? Or is the difference in commentary about revenue growth 100% based upon just those items?

I think you've got it exactly. We see the underlying growth rate based on the performance of our target addressable market to be in the low single-digit area. And what makes it a little noisy is the cycling of the optimization and the project work with an individual customer.

Your last question comes from the line of Carla Casella with JPMorgan.

I'm just following up on Bill's leverage question, just digging in. With the bonds currently callable at par and you paid down $150 million, as you noted, are there any thoughts -- do you need to keep a foothold in the bond market? Or could you go more towards loans? Or on the flip side, would you go more towards bonds, which currently you're paying less cost -- your bonds are less costly than your term loans?

Carla, we continue to look at those opportunities. So the bonds will come up for full maturity at the end of calendar 2028. So it gives us a couple of years to continue to study the market. We got now the ABL and the term loan maturing in 2031. So again, that gives us a 5-year tranquility, in a way, to continue to study the market. So we'll -- under Alfredo's leadership and Sandy and all the kind of the governance that we have, we'll continue to look for opportunities to optimize our cost of interest and our capital structure. But fairly, again, early thoughts and again, pleased with what we've been able to do in the last 6 months with the bonds, term loan and ABL.

Okay. Great. And then just on the subject of M&A, what is the -- are there a lot -- are you seeing more or -- fewer or more M&A opportunities? And then on the grocery side, specifically, you talked about Cub. Would you look towards more conventional grocery just to have more, I guess, test use cases to work with in your own portfolio? Or is that something where you could move away from retail over time? Any thoughts there?

Yes, Carla, this is Sandy. I would say, broadly speaking, that our outlook contemplates a significant priority around internal capability development. We see so much opportunity to improve the effectiveness and efficiency of the $4 billion a year that we have in operating expenses that we will continue on that path and maximize the value of our capital in terms of delivering customer benefit and shareholder returns.

As it relates to M&A, obviously, we're open to it. We continue to scan and evaluate the market. But at this stage, while we have not updated our capital allocation strategy beyond the focus on deleveraging and investing in the business and opportunistic return of dollars to shareholders through buybacks, we will continue to refresh that with the Street when we're ready. But I think if there's a bias, the bias is on improving execution for our customers and delivering value to our shareholders through internal investment rather than M&A.

I will now turn the call back over to Sandy Douglas for closing remarks.

Thank you. And in closing, thank you to all of our UNFI associates for delivering a strong fiscal year '26. And many thanks to our customers and suppliers for their continued trust and partnership. We are heading into fiscal '27 with solid momentum, a stronger financial foundation and a continued focus on executing our value creation strategy. While there is still much more work to do and much improvement to capture, we remain committed, and we believe we are best positioned to help our customers and suppliers differentiate and grow profitably while continuing to improve the effectiveness and efficiency of our business. I'm confident we have the right team to advance our long-term strategy and create long-term value for our stakeholders. We look forward to updating you on our progress next quarter.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the UNFI Third Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Kristyn Farahmand, Chief Strategy Officer. Please go ahead.

Good morning, everyone. Thank you for joining us on UNFI's Third Quarter Fiscal 2026 Earnings Conference Call. As many of you may have heard, Steve Bloomquist, our Vice President of Investor Relations, and long-time leader within UNFI's finance team has moved to a part-time consulting role. Given this, I'll be leading our earnings calls going forward. We invite you to continue to reach out to Steve or any other member of our Investor Relations team as needed going forward.

By now, you should have received a copy of the earnings release from 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 on the Events tab. We've also included a supplemental disclosure file in Microsoft Excel with key financial information and our quarterly investor letter with more detail on our third quarter progress. Our letter this quarter includes a video link detailing some of our recent supply chain improvements driving increasing effectiveness and efficiency.

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 these results discussed in these forward-looking statements.

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 now ask you to turn to Slide 6 of our presentation as I turn the call over to Sandy.

Thanks, Kristyn, and thank you, everyone, for joining us this morning. In the third quarter of fiscal 2026, UNFI continued to make steady progress on our value creation strategy that's focused on adding value for our customers and suppliers and becoming a more effective and efficient company. Through disciplined execution of our strategy, we generated strong profitability and free cash flow while continuing to strengthen our balance sheet and increase our financial flexibility.

Throughout the quarter, we remain focused on helping our customers and suppliers execute their strategies in a dynamic operating environment. Our underlying top line performance reflects the continued strength and resilience of our customers, building on a long track record of consistent growth across our industry.

As you'll see on Slide 6, over the past 2 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. And 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 for our value creation strategy and defined UNFI's growing $90 billion target addressable market. What's notable is the consistency in growth across these food retailers. Differentiated formats have generally outperformed the broader market over time, reflecting a growing segment of consumers they prioritize high-quality, healthy assortments and differentiated experiences. That trend continued in the third quarter with estimated growth for these segments in aggregate, tracking in the low single-digit range despite a highly dynamic operating environment.

As we communicated at our Investor Day, our focus is on strengthening the capabilities that are supporting differentiation and growth in our industry. In the quarter, UNFI's underlying net sales performance, excluding the impact of accretive optimization was in line with the estimated low single-digit growth of our target addressable market.

Since our founding 50 years ago, we have listened closely to our customers and develop solutions to help them respond to emerging trends and business needs from high-quality natural and organic products to unique private brands and scalable services. The breadth of our product assortment, services offering and the scale of our distribution network, position us to play a meaningful role in supporting the long-term differentiation and growth within the food retail industry.

Turning to Slide 7. We're building on this foundation by strengthening our capabilities in 7 key areas: customer stewardship, merchandising and supplier support, professional and digital services, private brands, technology, next-generation supply chain and productivity. During the third quarter, we continued building and executing our plans for these capabilities, informed by our customer and supplier feedback and through cross-functional collaboration across our teams.

We also continue to invest in talent to accelerate our capabilities, including adding a new leader for our digital services business, which includes offerings designed to help our customers and suppliers operate more effectively and to strengthen shopper engagement.

In merchandising and supplier support, we rolled out a new digital marketplace called Endless Aisle, that gives retailers an easier way to access innovative emerging brands while also helping suppliers expand their reach with less friction. While it's still early, we're hearing positive feedback from partners who value the ability to test new products with greater flexibility, and we expect to continue to develop and test new solutions like this to help further support our stakeholders.

We also continue to innovate within our private brands portfolio, introducing more than 30 new SKUs. These innovations aim to help our retailers differentiate their assortments and meet growing shopper demand for nutritious choices, which consumers are increasingly gravitating towards. As we continue taking steps to improve effectiveness and efficiency, we're beginning to see early benefits from the next-generation supply chain capabilities that we're building across our network.

For example, we expanded our AI-powered supply chain and procurement planning platform to all DCs in our network and are focused on completing the supplier-facing portion of this deployment. This platform is already helping to steadily improve fill rates and inventory management while also enhancing free cash flow conversion.

We also expanded the use of our AI-powered fleet management platform, Samsara. We recently began using the platform's features including driver coaching to help strengthen drivers' safety processes, optimize routes and improve delivery execution. Year-to-date, through the end of the third quarter, our on-time deliveries increased by over 4% compared to the prior year period, while average miles per delivery has declined by nearly 5%. Additionally, we've expanded our cloud-based warehouse management system to 5 additional distribution centers, further strengthening reliability and consistency across our network.

Collectively, these investments aim to enhance service levels for our customers and suppliers over time, while strengthening effectiveness and efficiency across the UNFI network. We remain confident that our value creation strategy and disciplined execution position us well for long-term sustainable growth and shareholder returns. In addition, we are strengthening our financial flexibility as we look to reinvest in the capabilities to better serve our partners and achieve shared profitable growth with our stakeholders. And we see continued opportunities to invest in commercial and supply chain technologies that benefit our customers, our suppliers and UNFI.

As UNFI marks our 50th anniversary, our team is working to build on and accelerate the company's legacy of helping retailers differentiate and grow in a dynamic marketplace. Together, we remain committed to delivering better every day as we work to become our industry's most valued partner.

With that, let me turn it over to Matteo to share more detail on our third quarter performance.

Thank you, Sandy, and good morning, everyone. Our third quarter results reflect disciplined execution of our strategy to create value for customers and suppliers which enabled us to deliver strong profitability and free cash flow generation while further reducing net leverage. Today, I will provide additional insight into our third quarter operating results, our financial position and capital structure in our fiscal 2026 outlook.

With that, let's start with our Q3 results. Starting with Slide 9. Our third quarter sales came in at approximately $7.7 billion, a decline of 4.2% to last year, which includes an impact of approximately 450 basis points from our accretive optimization actions. This is similar to the optimization impact we reported in our second quarter results and in line with our expectations.

Our sales results also reflect an impact from the initial unwind of the short-term project work for a single customer that we have referenced before. Excluding the impact of optimization in the short-term project work, our underlying business performed in line with our estimate for our target addressable market and outperformed the overall industry.

Natural Product sales grew by over 4% which also reflected the impact from the unwind of the project-based work. We expect to fully cycle this project work in the third quarter of fiscal 2027. Underlying natural growth again outperformed the market, reflecting strong execution from our customers and continued shopper demand for natural, organic, fresh and specialty products.

Conventional product sales declined nearly 14%, primarily driven by our strategic network optimization actions. Importantly, while we report our segments according to product types, approximately 90% of our customers spending our smallest and largest customers by both conventional and natural products to support their unique go-to-market strategies in the local markets they serve. The unique value and capabilities we're building to support differentiation and key growth segments of the retail industry are helping to support our growing diversified wholesale pipeline.

As a result, as we cycle our larger optimization actions in Q1 2027 we expect that our broader wholesale business will return to sales growth next fiscal year. In retail, total sales declined by around 10%, largely due to the planned top line impact of strategic store closures as we optimize our footprint and strengthen the foundation of the business. Same-store sales declined by around 4%, reflecting a dynamic environment and a change in pharmacy backdrop. Underlying this performance, we did see some sequential improvement in Cub Foods-driven same-store sales. Our team remains focused on continuing to enhance Cub's value proposition, product assortment and shopping experience in the Minnesota market.

Moving to Slide 10. Let's review profitability drivers in the quarter. Our gross margin rate in the third quarter was 13.6%, up approximately 20 basis points year-over-year. This improvement includes the benefit from our network optimization work. We reduced operating expenses by nearly 7% compared to the prior year and operating expense rate by nearly 40 basis points to 12.4% of net sales. Importantly, we increased DC productivity by over 7%. These results reflect the benefits of our effectiveness and efficiency initiatives, including network optimization, investments in our next-generation supply chain and incremental productivity gains from the expansion of lean practices across our network.

Our disciplined execution, combined with a higher gross margin rate and reduced operating expenses resulted in adjusted EBITDA growth of nearly 17% to $183 million. Our adjusted EBITDA margin was approximately 2.4% of net sales, up around 40 basis points year-over-year. The strong growth in profitability along with lower net interest from reduced debt levels and lower depreciation expense resulted in adjusted EPS of $0.77, a meaningful increase compared to last year's $0.44.

Flipping to Slide 11. During the third quarter, we continued improving our effectiveness and efficiency through consistent progress deploying new technology solutions and further embedding lean practices. As Sandy highlighted earlier, we continue to methodically deploy new technology solutions to enhance our network and supply chain. Additionally, we have now implemented lean daily management in 40 DCs as of the end of the third quarter, an increase of 4 facilities from the prior quarter.

We believe that by coupling these deployments, we will be able to sustainably improve processes and deliver rising service levels and productivity over time. We continue to make progress on this front with fee rates, on-time deliveries and throughput increasing compared to the prior year quarter.

Turning to Slide 12. Our strategic and operational discipline delivered solid free cash flow of $54 million for the quarter, which brings our year-to-date total to $243 million, an increase of $90 million from the prior year. This free cash flow, coupled with higher adjusted EBITDA, enabled us to lower our net leverage ratio to 2.5 turns, a 0.8 turn improvement year-on-year with net debt of $1.63 billion, the lowest since fiscal 2018. This progress reinforces our confidence in achieving our longer-term deleveraging targets.

Year-to-date, through the end of May, we've also repurchased nearly 1 million shares of stock for approximately $38 million at an average price of $37.88, reflecting our conviction in the long-term value creation potential of our business and the strategy we are executing. We will continue to evaluate further opportunistic repurchases as we reinvest in our business and reduced leverage as part of our capital allocation process.

We also improved our capital structure in the third quarter. As previously noted, we utilize free cash flow and made a voluntary $150 million prepayment on our senior notes at par, which reduced the outstanding amount of this 2028 maturity to $385 million. Additionally, we refinanced our $2.53 billion asset-based lending facility, which extended its maturity to April 2031 and reduce our overall annual borrowing cost by approximately $2 million.

Looking at Slide 13. Based on our year-to-date performance and forecast for the balance of the year, we are reiterating outlook midpoints across all outlook metrics and narrowing expected ranges for net sales, net income, EPS, adjusted EBITDA and adjusted EPS. This reflects our high confidence forecasting methodology, disciplined execution of our value creation strategy as well as an evolving operating backdrop. It also includes some acceleration of profitability benefits to the third quarter. Additionally, we continue to expect investment spend to ramp as we close out fiscal 2026 to support our ongoing investments to enhance our supply chain and deliver better servicing and value for our customers and suppliers.

As highlighted on Slide 14, we have delivered another quarter of strong profitability, free cash flow generation and continued deleveraging. We continue to develop strategic capabilities to support shared long-term profitable growth for our customers, suppliers and UNFI. And we continue to advance our technology journey that is designed to simplify processes, provide better near real-time insights into the business and make us a more effective and efficient organization.

As we move into the last quarter of our fiscal year, we are focused on delivering a strong finish to fiscal 2026, continuing to support our customers and suppliers as they execute their unique growth strategies in a dynamic operating backdrop. We believe that there is a significant opportunity ahead of us as we expect to return to growth in fiscal 2027, while continuing to strengthen our capabilities and becoming even more effective and efficient partner.

With that, operator, please open the line for questions.

[Operator Instructions] And your first question comes from Ed Kelly with Wells Fargo.

This is John Parke on for Ed. I know you're starting to lap some of the project work you were doing. I guess, can we take a step back and talk about how the underlying natural organic segment is doing excluding that? And any additional color in terms of customer wins and confidence in that mid-single-digit category growth trajectory?

John, it's Sandy. Thanks for the question. The way I'd impact our sales is starting with negative 4.2% report, we have about 450 basis points of optimization actions that we took over the past year to align our portfolio of customers with the addressable market and with win-win agreements. That was planned and understood. We also have begun to fully cycle a piece of project work we did with a large customer that began, as Matteo said in his comments in the third quarter and will fully cycle that by the next year, third quarter. All that adds up to an underlying sales growth that's in line with our addressable market in the low single digits.

From a pipeline standpoint, while we're not generally specific about that, our pipeline is very strong, and it's part of the sets of puts and takes that Matteo considered when he described next year as a return to growth in fiscal '27.

And John, on natural, the sequential step down from 6 and change percent to 4% and change, again, in the mid-single digit, is really driven by 200 basis points of unwind of the project-based work. More interesting, though, if you look at the 2-year stack, you see a consistent growth in the mid-teens over the last 5 quarters. So while, again, the project-based work could create a bit of ups and downs over the last 5 quarters, 2 years stack, the growth in natural has been really strong.

Got it. That makes sense. And then I guess, what are you guys seeing from conventional customers trying to lean more into natural organic products as well as private label? I guess anything you could share on the trajectory of those trends as they lean in more.

Sure. I think the -- obviously, the strategies of retailers and the innovation across our customer base is significant, and there are many permutations. But if you were going to pull a general theme one of the main ways to differentiate is through product and assortment. And part of the work that we're doing with customers is to optimize the portfolio -- that full portfolio customers use to access their strategy and create value for their shoppers. A major lean endpoint is health and wellness and organic, which is on trend, and we expect will continue to be for a long time. And so much of the conversation that we're having with our customers as they pursue differentiation strategies is around assortment and leveraging our extensive natural, organic and specialty assortment.

Your next question comes from the line of John Heinbockel with Guggenheim Partners.

Sandy, I want to start with that chart you showed on the industry breakdown, right? And obviously, differentiated regionals are, what, 3x, 4x the size of the natural and organic. How do you look at those 2 cohorts, right, that are growing your exposure to the 2 of those? And obviously, the one is much bigger than the other. Where do you think the greater growth opportunity is between those buckets?

John, thanks for the question. Elevating a little bit. I think part of the reason for the slide is to break apart the industry, noting that 3 of the 4 segments are growing. And the $90 billion addressable market that we talk about that we have targeted is in the light green, light blue segments and that part of the blue -- the dark blue that's pursuing a differentiation strategy. And we see consistent growth in the light green as the pure play natural. You see that in some of the public names. And of course, we serve a significant percentage of that, and we see strong growth there.

The differentiated regionals continue to perform well at or above the industry. And we model this into some internal analysis that allows us to evaluate how the $90 billion addressable market is performing and how it has for many years and it's a very durable growth segment at or above industry growth rates. It was for the past 20 years. It was last year in the first 3 quarters and continues to be strong.

And so UNFI's focus is on serving the differentiated strategies. We'll participate heavily in the light green segment, the light blue and then a lot of our work is helping dark blue retailers who have strategies to push towards differentiation. And that's what makes up the growing target addressable market of $90 billion.

And then maybe the follow-up would be, you should grow faster than your TAM. I assume you agree with that. I don't know how much fast do you think you can grow than the TAM. But your thoughts on that? And then calling conventional, is that just going to be -- I know 14% is a big number this year, is that just always there's a couple of hundred basis points for the duration, whether it's warehouses being consolidated or accounts being eliminated?

So John, multiple pieces of that. The first component is we expect to perform in line with our targeted addressable market. Now there are things that could drive above performance and things that could be a slight headwind. The above performance is if we do a great job supporting that strategy, we could potentially earn more market share of customers. On the other side, if we're working, and we are, with customers that have historically not grown with that TAM, and they're pursuing a new differentiation strategy that could pull us slightly backwards. But net-net, we believe we should perform in line with the addressable market as we've discussed it.

From a managing change perspective, ultimately, we sell the products that our customers want to buy. It happens that we have historically looked at them as natural organic on one side and conventional on the other. But ultimately, our product assortment will evolve with customer and consumer needs and the technology road map that we've articulated will allow us to do that more and more efficiently as we look to drive productivity in our $4 billion of spend. So think of it as an asset that will change, but one that we can manage given the breadth of our scale and the capabilities that we're building to serve customers in a changing product environment.

Your next question comes from the line of Mark Carden with UBS.

So to start, I just wanted to touch on the health of the consumer. Have you guys seen any changes since the start of 3Q just given higher energy costs? Has demand for trade down in general picked up much? And have you seen differences in behavior there between both natural organic and [indiscernible] customers?

I think what I would say is that we generally are finding incremental pressure across the consumer base. I would say, heavily impacting the lower end of the socioeconomic level, the reduction in SNAP funding is beginning to make an impact or continuing to make an impact. Consumers continue to seek value, whether it's value from a cost and price standpoint or value in terms of quality and experience. And that's the result -- and the result of that -- if you go back to the slide that John and I were just talking about is you see growth above the industry in the discounters, and you see growth above the industry in the value-added players.

But generally, the consumer continues to look for value, and there's certainly a lot of headwinds on them as they manage the different things that they have to deal with from higher energy prices to lower snap. I would also say that from a macro standpoint, challenging times often help food away from home because there's better value and the price splits between -- or as I should say, food at home, food away from home prices are still higher than food at home. And so our customers are continuing to seize opportunities there to create unique value for consumers.

Yes, Mark, it's Matteo. Maybe a couple of additional thoughts. So the first one just to reinforce the -- on the health of the customers. When you look at the natural customers, so deeply into the [indiscernible] $90 billion market. The 2-year stack points to a mid-teens growth for 5 consecutive quarters. So when you combine that trend, the resilience of the $90 billion market, that's where we have the confidence in the return to low single-digit sales growth in 2027.

Got it. Appreciate all the color there guys. And then as a quick follow-up, you got some moving pieces in play, obviously, but as you think about 4Q and your guidance, are you assuming any underlying shifts in fuel prices? Or any benefit from tariff refunds?

Mark, so the disciplined execution of our strategy to date helped us grow EBITDA 20%, more than $90 million year-over-year and 40 basis points on average of expansion. So pleased with the performance they are rooted into the natural growth, the network optimization benefits and then the productivity journey. When we thought about the fourth quarter, in high confidence mode. We embedded the tailwinds from the natural growth, the benefits of the optimization and the continuous journey on productivity but we also embedded a couple of elements.

First is the expected pressure from fuel and transportation in this dynamic operating backdrop and then also some incremental investments in technology, supply chain and commercial capabilities in light of the accelerated benefits that we generated in Q3 versus the second half as initially expected. So we are in high-confidence mode, multiple ways to get to the outcome, balancing the strength that we've seen year-to-date and also fuel pressure and incremental investment that we want to make to get into 2027 of stronger footing.

Your next question comes from the line of Scott Mushkin with R5 Capital.

Short-term question. You guys -- you were touching on Matteo, obviously, diesel prices have gone way up. Are you already putting surcharges in on -- to your customers? And then are -- the impact seems to me could be pretty large on your margins and I'm thinking about 20 basis points this quarter and next. So I guess that's my first question.

So we're monitoring this very dynamic situation, as you can imagine, but continue to manage fuel prices through 3 important tools. The first one is that we hedge part of the fuel. The second one is that we have contractual protection to share some of the fuel pressures with our customers. Equally, if not even more importantly, we continue to optimize our transportation routes to reduce mileage so that we create the full wing-to-wing benefits in the industry.

What we modeled in the fourth quarter, given the dynamic situation, is some incremental fuel costs and kind of broader kind of transportation impacts. But also, as I mentioned, some incremental investments that keep us into the control of what we can control. So we're balancing the tailwind from the year-to-date, the incremental fuel cost the desire to make some incremental investments, but of course, we control. And so that's really our focus while working the 3 levers that I mentioned at the opening.

Is it safe to say that your adjusted EBITDA would have been at the high end of the range without fall -- without fuel or even over?

I think that the learnings in the last 3 months continues to keep us in high confidence mode, and it was the right thing to do to invest some higher fuel and transportation costs in light of the environment.

Okay. And then my second question is more longer term. I mean, obviously, you guys are growing your EBITDA very quickly. So -- and I know you have your long-term outlook out there. But as you think about some of these levers, are you able to kind of think that you're EBITDA margin and growth rate on EBITDA, adjusted EBITDA, can continue to kind of exceed your thought process? And then from a CapEx spending, I know this comes up a lot, how should we be thinking about CapEx as we go forward as maybe a percentage of sales or something like that?

Scott, thanks for the question. I think broadly speaking, and I'll let Matteo provide the detail here. But I think broadly speaking, we see the business as a growth business in line with the addressable market, focusing on helping customers differentiate. As the slide -- we talked about on Slide 6 describes earlier, there are multiple growth segments of the market. And the company is focused on serving the successful high-growth areas as well as those who are trying to get there. And we believe that market will grow in the low single digits consistently over time as it has all year this year and for the years prior. That's embedded on top of a $4 billion cost base that we believe can be optimized through lean, through technology and very disciplined investments to drive a virtuous cycle between driving customer value and customer service metrics and at the same time, driving efficiency through process and technology.

That algorithm ultimately creates the low single-digit sales growth and high single-digit EBITDA growth with reliable free cash flow generation and improved returns over time. And we are driving that and have lots of confidence in our ability to do that.

Matteo, do you want to give some more detail?

Yes, I'll add on CapEx. So if you -- Scott, if you look at the last 4 years, including the '26 guidance, we would have spent about [ $1 billion in a quarter ], which is roughly 1% of sales. And the number goes up and down depending on the timing of the automation investments and we also embedded in our operating mechanisms, usage-based maintenance versus calendar-based maintenance that obviously created a benefit as we look at the CapEx spending in '25, '26 versus '23 and '24.

But broadly, when we think about the capital allocation and how we think about organic investments, we want to continue to invest in safety, maintenance, technology and then growth and supply chain modernization, which in a given year-over-quarter may imply some automation investments in other quarters could be more focused on technology or general modernization.

If you think about the CapEx in the first 9 months of '26 versus '25, basically, when you normalize for automation payments that we were making in '25 towards implementation in '25 and '26, we're actually spending more. So we're behind the kind of 1% of sales to kind of plan for the future.

Your next question comes from the line of Kelly Bania with BMO Capital Markets.

Just wanted to clarify a little bit the expectations around Q3 and Q4 EBITDA, I think you had expected a roughly equal contribution in each quarter for EBITDA. And I think Matteo, you mentioned an acceleration of profitability drivers or benefits in the third quarter. And so I just wanted to understand what those were, and it sounds like some more investments in Q4, can you just help quantify exactly what those are and what the benefits will be?

So 3 months ago, we shared that we were expecting about $350 million for the remainder of the year with equal contributions to your point in Q3 and Q4. What we saw is that through the productivity actions, the value delivery of lean, we were able to accelerate some of the productivity benefits into the third quarter. So in a way, we deliver a little bit over our equal contributions as initially expected.

With that in mind, as we thought about the fourth quarter, we wanted to [indiscernible] 2 kind of balancing elements. The first one is the continued strength coming from natural product growth, network optimization and then the productivity journey. But then on the other side, the fuel dynamics as well as an opportunity to accelerate certain investments in technology, supply chain and commercial capabilities to continue to support our strategy while still remaining at the midpoint of our guidance at $695 million of EBITDA.

Okay. So does that pull forward impact at all the way that you think about fiscal '27 EBITDA?

No, because when we think about -- first of all, we're in middle of building our high-confidence operating case that we're going to discuss in September. But in general, what we would expect to see into 2027 is the resilience of the $90 billion market growing at low single digit to get us back into low single-digit sales growth in fiscal 2027 and then the expansion of the 7 capabilities that we discussed at the Investor Day to continue to help and the continuous value delivery office lean productivity journey to contribute to the growth in 2027. So the framework is consistent with return to growth capabilities and productivity journey.

Okay. And Matteo, can you help me understand, I think you're characterizing it as that top line was kind of in line with that low single-digit growth rate that you're looking at for your core customers ex the optimization. But I guess, looking at it, it seems closer to flat. I was just wondering if you could help walk us through that math, maybe we're missing a piece. And just also on top of that, how the network optimization impact, how that played out relative to your expectations?

Yes. So Kelly, if you start with the negative 4% and you add back first, the 450 basis points of network optimization, you get to slightly positive. And then there is an incremental headwind coming from the unwind of the project-based work in natural that we sort of quantify the 200 basis points sequential headwinds for natural. So you basically get another tens of points getting to a low single-digit normalized growth, which is in line with the market and actually with the addressable market and actually faster than the overall grocery market. I think the piece that you may be missing was the unwind of the project-based work.

Your next question comes from the line of Leah Jordan with Goldman Sachs.

I am going to build off of one of Kelly's questions around FY '27. I know it's a little early for formal guidance, but you've talked about the return of wholesale to low single-digit but maybe some more detail around the high-level puts and takes we should keep in mind around gross margin and SG&A heading into next year as we lap a lot of the optimization work and cost savings you've already done.

It's probably a bit too early relative to the specific elements, but let me offer you a framework that I think will help. So first of all, with the $695 million as a jumping off point, we got a good solid foundation into 2027. And we really look at 3 elements of the growth into the EBITDA growth into 2027. So first is the resilient $90 billion market will help us drive overall wholesale growth of low single-digit wholesale portfolio growth of low single digit restarting in 2027.

The second area is that the 4 commercial capabilities of customers stewardship, merchandising, supplier management, professional services and brands at all growing inside our portfolio.

And then the third element is the process to become more effective and efficient. So think about technology, supply chain of the future and productivity, which as Sandy said, is rooted into the projects around the $2 billion indirect cost but overall into the $4 billion of total cost, where we continue to see large opportunities with throughput, better cost optimization, et cetera.

So these are kind of the 3 big pieces into 2027.

Okay. That's helpful. And then maybe just switching gears over to inflation. Could you talk about what you're seeing in terms of food inflation today and how you think that evolves in 4Q and into FY '27?

Yes. So we have seen a low single-digit inflation year-to-date. And our forecast through the end of our fiscal year ending in early August is as well low single digit. The backdrop, as you can imagine, Leah, is very, very dynamic. And our response is really to continue to work with our suppliers and our supply chain at large to keep prices low, stable and predictable to continue to help our customers succeed in the food marketplace.

I would say that going back to the '27 question, we continue to see the combination of return to growth, the capabilities and then the control of what we can control. So productivity and lean is our kind of response to what is happening in the industry and continue to remain very committed to help our customers stay competitive in the industry.

[Operator Instructions] Your next question comes from the line of Chuck Cerankosky with Northcoast Research.

When you're looking at working capital, the last -- or actually the last 3 fiscal years, it was a source of cash and a significant source of 2 of the last 3, what are sort of the dynamics in fiscal '26 as you're lapping these big numbers and what should we expect from working capital as either a source of cash or a use of cash going forward, especially with stabilization of sales and steady increases in efficiency?

Chuck, as you can see in one of the appendix pages in the earnings materials, working capital has been a positive source of free cash flow year-to-date, and is really center on its sequence of activities. First of all, our focus has been on reducing this on hand of inventory. And it started in 2025 with the decentralization of the procurement organization. And then it expanded with the rollout of the relax planning tool, which is AI and cloud based and again, created decentralized AI-based kind of process to plan around our customers and suppliers.

The second area of focus has been to optimize our payment terms. And this is still very much ongoing and an opportunity for '27 and beyond, together with improving our billing processes continuing to try and reduce the days of collection. So a lot of levers and a lot of different ways to continue to support working capital benefits. Again, we wouldn't expect the same magnitude of benefits year-over-year as we harvested quite some good dollars in '25 and 2026. But the focus is always there to reduce the levels and continue to be very, very disciplined in the way we manage it.

Matteo, how do you feel, given economic conditions about receivables, any problem accounts out there?

We monitor them very, very closely, and we haven't seen any kind of out-of-pattern behavior. But [indiscernible] monitor.

We have time for one more question, and that question comes from Bill Reuter with Bank of America.

I just have one. On the topic of inflation, Matteo, you mentioned still expecting low single digit for the remainder of the year. I can't imagine that's not going to accelerate next year given what we've heard from food companies. If it does, do you expect that there will be benefits from forward buys? And I guess, are you beginning to participate in some of those activities, which could, I guess, increase working capital in the short term?

Yes. Should inflation sustain at or above low single digit -- first of all, we have a 60- to 90-day advanced price notice. So we have time to work with our suppliers and customers on alternatives. As we said before, we may be seeing some secondary and temporary gains in the short term, but our focus is really going to be to work with suppliers in our broad supply chain to get prices low, stable and predictable to continue to help the industry. So we're going to closely monitor it. We are learning how to model it, and we'll see what happens in a couple of months.

I would now like to turn the conference over to Sandy Douglas, CEO, for closing comments.

Thank you, operator. As we close out fiscal 2026, we're continuing to focus on the disciplined execution of our value creation strategy focused on adding value for our customers and suppliers and becoming a more effective and efficient company. As we shared today, UNFI is uniquely positioned to support a growing $90 billion target addressable market that continues to demonstrate enduring growth in the food retail industry.

Our team remains focused on strengthening capabilities to help food retailers differentiate, compete and profitably grow while helping suppliers build their brands within a diverse retail network. Importantly, it's early in the strategy, and we believe there's a long runway for continued improvement and value creation ahead of us.

To our customers and suppliers, we thank you for your continued partnership and collaboration, to the UNFI associates listening today our thanks for continuing to deliver better for our partners, our communities and each other. And to our shareholders, we thank you for the trust you continue to place in us.

Thanks again to all of you for joining us this morning. We look forward to updating everyone on our progress and our full year results in September.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.

All right. Good morning, everyone. I am Mark Carden, the North American food retail and food distribution analyst from UBS.

We are super excited to have UNFI with us today. UNFI is one of the largest grocery distributors in North America with over $31 billion in revenue in 2025. Joining us today is Matteo Tarditi, the company's Chief Financial Officer. He joined the company in early 2024, after spending more than 26 years at GE where he served as CFO for 7 business units.

Matteo, we really appreciate you spending time with us today. And with that, why don't I pass it over to you for some opening remarks, and we can dive into some questions.

Great. Thanks, Mark, and thanks for having us today, and appreciate the interest in UNFI.

So before we start, just a quick housekeeping item. For those of you who listen in, there are a number of financial schedules and detailed results from our Q2 earnings on our website. So feel free to go and access those data.

Let me start with 3 quick comments and then we get into the Q&A. So first of all, the disciplined execution of our strategy, including the network optimization, is clearly generating EBITDA expansion, cash flow generation and accelerated deleverage. So all moving to the positive direction. In the second quarter alone, we grew EBITDA by 23%. We generated more than $240 million of free cash flow. And we reduced our leverage to 2.7 turns. So good outcomes there.

The second point is that our strategy, as we described at the Investor Day, is centered on creating value for customers and suppliers and becoming a more effective and efficient business partner, which is really foundational for us, with top-class procurement and deliveries. And we're doing that by also deploying lean and technologies into our processes.

Then lastly, our pipeline, our sales pipeline is strong, and is strong both with new categories with existing customers and with new customers. And as you think about our reported results, sales declined 2.6%, but when you normalize it by the 500 basis points of network optimization headwind, which is very accretive in EBITDA and free cash flow, we actually grew about 2.5%, which is in line with our '25 through 2028 financial algorithm for top line.

So let's dive into Q&A.

All right. Let's do it. That's a very helpful start. So maybe we'll start off with the consumer. And it's -- consumer backdrop, obviously, remains pretty volatile. Broader grocery sector is running some challenges recently, both in the natural organic side of the business and especially on the conventional side of the business. What's right now your latest read on the consumer essentially and really food and on demand in general?

Yes. Mark, the operating backdrop and the commercial backdrop is very dynamic. And the way we are responding to that is to understand deeply the macro dynamics and the macroeconomic variables and make sure that we adapt very quickly to those changes, right, to continue to support our customers and suppliers in their strategies. Relative to a couple of indicators in November and December, we noticed some softening in the markets.

Obviously, January was incredibly volatile with the winter storm. So there was some pickup. But just reflecting back at our fiscal quarter, so November, December, January, we saw some modest softening in volumes. And I think that some of the other players noticed the same. The other indicator that we noticed is that the gap between food away-from-home inflation and food-at-home inflation is widening. So food away-from-home inflation is growing faster than food-at-home, which, in a way, points to a potential shift of spending to food-at-home, right, as the commercial backdrop remains volatile.

What we're doing again about it is continuing to focus on our pipeline, continuing to gain confidence in our low single-digit sales algorithm through 2028, and again, just making sure that we increase the adaptability of our business model. Think about more work that we do with merchandising, a more agile procurement organization and then the role that private brands play in a competitive and kind of volatile environment.

Got you. That's great. So maybe we'll talk a little bit about your financial algorithm, which you guys released, not too long ago, low single-digit sales growth, healthy EBITDA growth and then you get $300 million in annual free cash flow. Can you just walk us through how you arrived at these targets? And what gives you confidence that these are achievable, especially in this backdrop?

I'm going to start on your probably last word, which is confidence. And you probably heard it many times, but our approach to planning guidance and financial algorithms is high confidence, which is something that I've been using for a long time. And it's really centered on having multiple ways to deliver the desired financial outcomes, right? And they all deliver in different ways, but it is important to have multiple paths to get to your commitment.

And in that context, a few months ago at Investor Day, we actually increased our expectations for '25, '26, '28 relative to top line, growing now LSD, EBITDA growing up to $800 million by 2028, and faster deleverage, right? So the latest commitment is 2.3x or less by the end of 2026, 2x or less by the end of 2027.

So when we unpack the sales, EBITDA and free cash flow, let me start with sales, we always start with the market analysis. And we redefined our best fit relative to our strategy in a $90 billion market that has a lot of players in Natural organic specialty and also players who are differentiated or differentiating.

So that's really where the UNFI strategy and capabilities plays at best. And that market has a lot of players growing low single digit, which is how we get confidence that between the existing and developing capabilities and the variety of our Natural products, the work that we're doing on the Conventional products, LSD is our high confidence case relative to sales.

Now relative to EBITDA, our guidance is around $700 million at the midpoint in 2026, growing to $800 million in 2028. And that's really a combination of 4 things that we can explore later. But it's really growth led by Natural, and that is a big kind of self-help play with a lot of focus on productivity, accretive network optimization, how do we go after $2 billion of indirect costs, for a long time, all powered by lean.

And then on free cash flow, that we recently upgraded to $330 million for 2026 and then $300 million in '27 and '28, that gives us a lot of optionalities and flexibility, really the discipline on growing EBITDA, deleveraging that reduces the interest expense and then the work that we're doing on working capital. So how do we continue to shorten our collection days? And how do we operate better our inventory, right, having the right products that help fee rates and on-time delivery, but also bind it on time so that we have lower levels.

That's great. And then maybe within some of those elements you talked about, you've laid out some buckets that you see for margin accretion. Obviously, your 3-year EBITDA margin target builds in 65 basis points of expansion over the course of the time period at its midpoint.

Within some of those initiatives you talked about, you talked about lean, you talked about network optimization, you talked about indirect spend. Where do you see the biggest buckets of opportunity in really achieving that degree of margin expansion?

Yes. So we have a commitment to expand our EBITDA by 65 basis points, to your point, as we go to $800 million in 2028. And we should really think about that EBITDA growth in 4 drivers. And then obviously, we kept a fifth element for investments and how do we support these capabilities, right?

So the first one is growth. We have an LSD algorithm through 2028, and it's really led by our Natural products. And in this context, again, the Natural organic specialty and differentiating players are all kind of delivering well and following our strategy. So we are very, very encouraged by what we've seen. Even in the second quarter, we're again excluding the network optimization, we grew low single digits.

The second element is what we call the value-added capabilities. So think about how merchandising, professional services, private brands, suppliers management all play a very critical role to make our customers and suppliers successful and competitive, but internal, so find new revenue streams and new profit streams for UNFI.

The third one, that is by design the most controllable, is productivity. And we've been on a journey in the last 24 months to eliminate waste -- sorry, through the help of lean, and also to decentralize our model for more empowerment and more accountability. And if you look at our results in the first 6 months of 2026, our operating expenses were down 30 basis points, which again speaks of both the power of the network optimization and the productivity program.

And then lastly is how do we continue to build a more effective and efficient supply chain organization. That's where we infuse technology, that's where we work on better throughput with the benefits of automation.

Now to support these 4 pillars, we also allocated investments, right? We allocated dollars for investment, that we are toll-gating very, very carefully though to the success of these initiatives. So these are not blank allowances that we distribute every month, but these are toll-gated to the success of those initiatives.

And I think that to your second part of the question, the component that has got probably the highest confidence: growth is definitely one; productivity i's definitely one, that is very much in control. But we're also encouraged by the work that we're doing relative to the new capabilities and the supply chain.

Great. Maybe we'll pivot to your addressable market overall. So you alluded to a $60 billion addressable market on the Natural and organic side. You've got a $30 billion opportunity in Conventional. In total, the $90 billion though is a step-down from the $140 billion subsegment of the market that you used to target back prior to when you rolled out your new strategy.

Can you talk about the decision to narrow your focus? What was in that $50 billion that you moved away from, and where you really see the biggest opportunities for growth and differentiation within the customer set?

That's great, Mark. So we studied our markets very, very carefully a couple of years ago, and we had a review with the management team and the Board, and really defined that the best deployment of the UNFI strategy of creating value and being more effective and efficient is with Natural organic specialty multicultural players and then players that are interested in a differentiated, differentiating experience.

And that's how we redefined and sharpened our focus on a $90 billion market, that, to your point, has got about 2/3 of Natural products in it and 1/3 of Conventional products. That redefinition of the market really allowed us then to focus on what are the core capabilities that we have and we need to develop in order to drive share profitable growth with our customers.

And so in that direction, areas like merchandising or professional services or private brands and then the technology deployments and the supply chain of the future, as we call it, are all geared to support that $90 billion space, and find a lot of opportunities with them.

We've also listened very carefully to our customers, as Sandy mentioned in his remarks. And we see a lot of positive feedback and encouraging feedback on how this strategy is working.

Now the environment is volatile, as we say it, but we're really deploying a strategy that is working for the customers and for us, as we saw in our results.

Great. So just as you think about your Conventional customers. When you think about what they've been doing in Natural organic over the course of the past 10-plus years, we've seen a steady increase in penetration within those categories.

Do you think that there's still as much of a growth opportunity within your Conventional retailers for Natural organic products? Do you think that, that opportunity is starting to fade a bit? Are they getting closer to maturity in that category? How do you think about the growth outlook for that customer in particular?

Mark, I'm going to start at 100,000 feet first because I think it's important that we explain a little bit how we operate the company, which is by Natural products and Conventional products just by how the DCs are organized and the procurement organizations and our systems, but also the fact that we really have one phase to our customers, right?

And so they -- we have Natural customers that buy Natural products, but we have a lot of differentiating customers that buy both. So they start with a foundation of Conventional products and then are very active in the experience of differentiating their shelves and differentiating their product assortments.

And the reason why this is important is that one of the schedules that we have posted, I think, last night shows that if you look at the last 2 decades, in a $1 trillion grocery market, pure natural players have grown their market share 3x, from 1% to 3%. Differentiating retailers have grown their -- doubled their market share, basically, right? The mass players have more than doubled their market share. So you know where I'm going. The squeeze has been with the other grocers, right?

And that's why that ability to provide support for a differentiating experience keeps many, many players in the game, and that's exactly how we play. Support the pure natural players, support the differentiating players.

Now underlying these assumptions and this explanation is what we saw in the second quarter. So negative reported growth, 2.6%, 500 basis points of network optimization headwind that though translated into 23% of higher EBITDA and strong free cash flow, and the rest of the business grew basically 2.5%, which is very much in line with how the $90 billion market is growing at LSD.

So that's how -- I think it is an important difference because we report the segments as Natural and Conventional. We operate them as such, but the face to the customer has to be one integrated.

Makes sense. Maybe we'll -- let's step to food inflation for a second just because that's obviously a very in-discussion topic. So there's been a lot of puts and takes there. For a little while there was talking about disinflation, there was talk about some of the lapping of higher egg prices from the year ago period.

But at the same time, there's other changes at play, shifting tariff backdrop. There's obviously the situation in the Middle East. How are you thinking about the food inflationary backdrop, really and where it goes from here?

Yes. I'm going to start getting at 100,000 feet and then we dive into a couple of indicators here. So our response to inflation is always to work with our suppliers in our supply chain organization to make sure that prices stay low, stable and predictable, which is the best strategy to keep our customers competitive and make sure that we support them in their strategies.

So every time there is inflation, our first reaction, our first muscle goes into, okay, how can we differentiate our offering, how do we make sure that again we don't create pressure downstream? And how can we think about alternatives like private brands that create non-comparability of items, but also competitive value for consumers and our customers?

Now specifically to a couple of indicators. The first one is we are modeling inflation for the rest of our fiscal year that runs through July of 2026 as low single digit. It is in line with what we have seen in the first 6 months of the year and in line with what our indicators are predicting and signaling. And again, our play here is, against a low single-digit inflation, how do we help our customers remain competitive?

The other point that is probably top of mind for many of us and many of you is what could be an impact of the Iran crisis and the oil crisis and everything that is happening out there. So obviously, we're all seeing fuel prices increasing, right?

We have a hedging strategy in place for several gallons that we utilize in our operations. And then we also have contractual protection to basically pass on to our customers any fuel increase and any fuel surcharge. So that has been kind of the initial monitoring and the initial response to what is happening, and much more, obviously, to study and monitor as we go forward.

Got you. That's helpful. So just shifting over to the competitive backdrop a bit, obviously been some shifts in your space with 2 of your largest competitors in the Conventional side combining forces.

How are you thinking overall about the health and the competitiveness of the industry today both on the Conventional side of the business and also in the Natural organic side of the business, more from a distribution standpoint than a retailer standpoint?

Mark, what I would say is that our environment has always been very competitive. So I think that the recent activities and the recent dynamics are no exception in a way. So our mission here and our strategy is to remain very, very adaptable. So as the market and the area stay competitive is how do we find ways to differentiate, and A, through the value creation, helping customers grow and be successful, and we then share profitable growth.

And then, how do we continue to be the reference in the industry relative to procurement and delivery? So how do we continue to be more effective and more efficient relative to our operating model? So that's kind of our game here.

The $90 billion market with, again, natural organic and specialty, obviously, offers many, many ways to do it. We're again encouraged by the low single-digit growth that we have modeled and by the strong pipeline that we have here. So our strategy is really trying to differentiate the way UNFI interacts with customers and then how our customers can provide a differentiated experience to their consumers.

Great. Lean. It's been something that's been near and dear to you, I know. You guys now have lean daily management deployed across 36 of your distribution centers.

A couple more added this past quarter. Just as you continue to deploy lean to incremental distribution centers, how have returns been trending? Maybe I'll break it into 2, and we'll start with that part.

So we introduced lean a couple of years ago, and lean is really 3 principles. So one is going after waste in a very methodical way. And we have a lot of processes. We have a lot of practices and how do you go after waste. The second is how do you create a culture of methodical problem solving, where you have center KPIs, red scores comes up, problem solving operates very quickly and in a very decentralized fashion.

And then there is a third leg, which is the continuous improvement, right? So once you are after waste, once you're after a set of KPIs, how do you drive a culture of continuous improvement. And we are pleased with the results of the early innings, as I keep calling it, even if I'm not a baseball expert of the lean deployment. So think about 36 distribution centers that were not -- and I emphasize were not mandated lean.

I mean the lean program at UNFI is a voluntary program where we want enthusiastic practitioners to recognize the value that lean can create and adopt the program. And what we're seeing in the first 36 DCs is that safety, quality, delivery and cost KPIs or metrics always in that order are improving. Now I would say we're still early innings, right?

So we've seen productivity improvement of 6% to 7%. We've seen safety improvements. Obviously, our fee rates are better than they were a year ago or 2 years ago, but very early innings. I mean it's now a matter of going deep into the processes, going deep into the distribution centers and again, create that constant culture of immediate problem solving and then continuous improvement.

Got you. You hit an interesting point there, you mentioned that essentially it's voluntary for the distribution centers. They aren't mandated to go into lean. What's been key in really helping you encourage more and more distribution centers to get on to lean?

I think as you -- that's a great question. As you would expect, there is a lot of cross-communication in between distribution centers and you create a healthy lean competition in a way between the centers. So once the word spreads that, hey, we're doing -- measuring 6 KPIs and we see improvement in safety, we see improvement in on-time delivery, we see improvement in fee rates, people develop curiosity and say, well, let's go and explore it.

And that's when we deploy these SWOT teams that go out for 5 days religiously and implement the program and then come back and audit them and help them get to the next level. We are very encouraged by the -- I would say, the energy and the enthusiasm that we've seen around lean, super early days of the kind of the implementation.

And we recently onboarded a lean veteran, Scott Moran, who played for more than 30 years in the lean space -- so we are excited about what he's going to help us do now with his expertise, right, in the business.

Great. So somewhat related, you guys are implementing RELEX to really help to modernize your supply chain, improve inventory management. Maybe can you walk through a bit how this fits in with a lean mindset, some of the improvements you tend to see when you do implement it and then the time frame for really having it across the entire business?

Yes. That's a great question. RELEX and technology in general and lean relative to process mapping and waste elimination need to go hand in hand. I mean no offense to ERP deployments or big technology deployments. But unless you start with some process redesign and deep understanding of how the organization works, technology in itself cannot solve the issues, right?

I view technology as a clear accelerator of benefits and improvements, but not per se the therapy. So the way we have implemented RELEX, which is this AI cloud-based kind of inventory management tool is we started with, first, decentralizing the procurement organization. So we now have small teams at each distribution center who can read the demand signal and can operate the procurement strategy very, very quickly.

They don't need to go 3 levels up to Providence and then 3 levels down, right, to determine what to buy. Then we did a lot of value stream mapping or process mapping to understand how the flows work, right, on the demand signal and the source and procurement organization. And at that point, we deployed RELEX. And we deployed it at the Natural distribution centers, along with some of the lean daily management.

And now we're in the process of deploying RELEX in the Conventional distribution centers and will be mostly completed by the end of fiscal 2026, which has helped us in a couple of areas at Altitude. The first one is buying the right products. That's fundamental for fee rates and on-time delivery and then buy the products when you need them, not weeks and weeks in advance, and that has helped with better inventory management and better free cash flow, lower leverage.

Another subject just as we continue to get some of the efficiencies that you guys are putting into the organization is just the subject of warehouse automation. Just where do you think that stands today? I know you guys have made some early efforts on doing some automation within your distribution centers.

And as you think going forward, does it make more sense to retrofit existing distribution centers? Do you need to build more new distribution centers and replace old ones? Just how do you think about that balance?

Great. Great question. So let me start by saying that automation is one of the many tools we're deploying to be more effective and more efficient, but it's not the only tool because automation works incredibly well in kind of growth markets, kind of growing DCs. But as you know, these are expensive and very committal investments.

So you want to deploy them where you see a lot of potential and not just the need for some productivity or some operational fits in. But with that in mind, I mean, it is one of the important tools in our strategy. We have broadly implemented automation at about 7 distribution centers, different generations of automation, 2 or 3 very, very recent, very, very modern and some, again, variety of automation technologies.

But in general, we clearly see benefits relative to higher safety, right, and then obviously, quality delivery and cost. What I would say is that, again, it fits well a revenue management strategy as well. So when you see a lot of growth potential, when you see the ability to either retrofit the facility or to your point, build a new one, which is what we have done in Manchester and in Sarasota, Florida, the potential is clearly there, right?

I mean I think we talked about the Manchester facility basically delivering from the automation system more than 350,000 cases every week with basically no defects, right? I mean that is a very, very encouraging sign of what automation can do once you do the right process mapping and once you have the growth potential of the distribution center, which is a proxy for the growth potential of the market.

Great. And then pivoting over to private label. It's a subject at your Analyst Day, you guys talked about the significant opportunity in private label, especially on the Natural organic side, which I believe you said the Conventional is 4x what it is in natural organic today.

Maybe could you provide some of your -- some examples of your work on private label and some of the efforts to really get that penetration gap between the 2 to maybe narrow a bit?

Yes. So private labels play a very important role in our strategy. That's why we highlighted them as one of the 4 capabilities that we're deploying for value creation to customers and suppliers. And really think about private labels in 2 areas. One is creating that known comparability of items for our customers and the shoppers.

So it creates new assortments, different products that are quite helpful in the strategy of growing and remaining competitive. And then the second part is obviously more value for the dollar that you spend, right? So in times of high competition, inflation, private labels are clearly a great area to deploy and to continue to grow. At the Investor Day, we did highlight that the Natural brands are about 1/4 of penetration compared to the Conventional brands.

And that's a big area of opportunity for both principles. So think about having more non-comparable items on the shelves through private labels and then also offering the consumers more value for the dollar that they spend. So we're putting a lot of focus on the brands, on the private brands. We have a strong portfolio, but we want to expand it.

And very recently, we added 50 new private brands to the portfolio. And think about a couple of easy and great examples, Banana Water or Healthy Snacks. I mean these are things that can be deployed very, very quickly and again, help non-comparability and value for the dollar.

Banana Water is great. I mean you guys had at the Analyst Day.

I'm glad you liked it.

On -- a part of the business that sometimes gets overshadowed a bit, and it is smaller, but it still does play a key role for you is retail. Cub is a market share leader in Minneapolis. You guys recently appointed a new CEO to oversee that organization, a bit of a turnaround.

And so just given that, what does keep you interested in holding on to that retail operation? And where do you see the biggest opportunities for Cub to really kind of take it to the next level going forward?

Yes. To your point, Mark, Cub is the market leader in the Minneapolis area. There is a long successful legacy from our CA business. So there is a lot of attachment to it. And it is also an important part of our kind of broader wholesale business because we operate directly Cub, but we also have franchising agreements with many, many players who operate Cub banners but also their own kind of banners.

So it is quite an interesting network for us in the area. We are thrilled to have David Best leading the retail business. David is super known talent within the industry. He's local. So he understands well the markets and the -- again, the value of the Cub brand. He's building a really strong team around him. And he's working on the right fundamentals. I mean, how do we revitalize the brands, how do we go back to the fundamentals of CA, while obviously continuing to find ways to differentiate the experience.

So how do we make sure that CA goes quickly into that differentiating pool of kind of customers and players in the industry that I was describing early on. The other thing is that CA is obviously back to that point, is a little bit of a lag for us, right?

I mean, seeing how private brands, professional services, merchandising, differentiating experience play in Cub then allows us to build a broader playbook for the many, many players who want to be in the $90 billion market and want to offer that differentiated experience.

So I just want to also reinforce -- I don't want to be the boring CFO on stage. But as we think about the 2028 kind of guidance, the $800 million of EBITDA in the past to that, we have not modeled a retail financial turnaround, right? So we want to give David and the team the time and the space to fix the fundamentals and bring Cub back to where it should be.

That makes sense. Another subject network optimization has been big for you guys over the course of the past few years. You guys are focused on creating a more efficient footprint. And also, you guys have moved away from some customers where it just didn't necessarily make sense from a mutual standpoint to working with them going forward.

It sounds like this is now largely complete as of your last earnings call. Can you walk through just how your updated distribution center footprint and your updated your up-to-date customer base really how this best positions you for the longer term?

Yes. So I would say, again, starting at altitude, the network optimization is a good proxy for revenue management. So the way we look at network optimization is really let's understand the markets, let's understand the customer portfolio that we have and then get into actions.

And it starts with a basically weekly review of our distribution centers at the CEO and CFO level, complemented by, again, a weekly review, as you would expect, of market and pipeline. And it has provided 2 very important results in the last 18 months.

First, it has enabled us to make a confident decision to open 2 new highly automated distribution center, one in Manchester, Pennsylvania, the other one in Sarasota, Florida, both highly automated and there is more coming, right, because of that, again, weekly review of where should we grow, where is the opportunity, how does the $90 billion market play.

Then the second part is that we closed 5 distribution centers in the conventional space, but always with the principle in mind to have win-win conversation with our customers first. We're not in the business of closing distribution centers to exit customers, right? So we had opportunities to consolidate. We had a lot of dialogues with our customers to see if there was a win-win solution.

And in many, many cases, as demonstrated by the 5% growth rate in 2025, the conversations were successful. In other situations, like Allentown, they were not, right? And they are translating into the 2026 -- fiscal 2026, 500 basis points headwind in the top line, while, again, the fundamentals of the LSD for '27, '28 remain in place. So it's really a revenue management tool that can go into both directions.

With the common denominator being let's make sure that we find win-win solutions with customers and then whichever decision we make has to be EBITDA free cash flow accretive and helping us with the deleverage.

Great. Moving on to value-added services. Obviously, this is a high-margin part of the business, expected to grow pretty rapidly over the course of the next few years. To date, what kinds of customers have been most receptive to your value-added services? Maybe we'll start with Admiral.

Yes. This is where my -- maybe my industrial background comes out because I'm a big fan of services businesses. And they all start with the proximity and the feedback that you create with the customers. I mean you're out there every day, right? The touch point is daily. So first of all, a services business creates the intimacy and proximity with the customer that is fundamental to our model.

And then it creates another couple of very important benefits. I mean it helps customers reduce their operating costs, think about implementing credit card platforms or new ways to grow the business, planograms, how do you think about your shelves and many, many more things that we do. So there are 3 very fundamental pieces of our professional services. A lot of opportunities here, right?

I think that by intensifying the dialogues with the customers in both natural products, Conventional products, and this is where services almost become agnostic of how you run the company, right? It's really the face to the customer, but a lot of dialogues with them and a lot of opportunities because as you may remember from the Investor Day, on average, our customers use 2 to 3 services -- and there are many customers who use up to 6, right?

And we actually don't know if 6 is what the definition of what good looks like is or it could be even more in a way. So I think that there is a lot of work going on, really going through customer by customer, what are they interested in?

What is -- are they looking for a cost solution? Are they looking for a revenue solution, knowing that both answers in turn, help us grow services that is highly accretive, right, in our gross profit and our EBITDA. So more work to do there, but a great capability that we're focusing on.

And do you see many differences just between the Natural organic customers, which I believe have historically taken on less services, but of course, it also used to be or originated from the SUPERVALU organization and so origin in the conventional side.

Just as you think about the number of services that a conventional customer typically uses versus Natural organic, how do you get that Natural organic number?

Yes, that's a great question. That's where the voice of the customer, and this is where the dialogues, the intensity on the interaction plays a huge role.

Instead of having us making a set of assumptions on kind of what are they interested in is where you got to go out and talk to them. I always say dropping a lot of business cards. I don't know if we print them anymore, but it's just having a very high frequency of dialogues with our customers.

And then another opportunity within services is retail media. Obviously, you guys have a unique viewpoint just in terms of your touch points with independents with smaller chains that might not be able to do this on your own.

How do you think about the overall opportunity with retail media over time? And then also, there's been some changes in how customers are seeking out products. We've seen the rise of Gen AI and just how that interplays with how you think about retail media going forward.

Another important part of our strategy. I mean, there is no doubt that the digital channels are growing in the industry. And so even if we are maybe one step remoting away from the day-to-day usage of customers and consumers of the digital platforms, but we need to be very much part of it. And as you think about, we can play a very important role because we are one step away from the suppliers, one step away from the customers.

So we can really continue to play a digital integration role in that direction. So we are working with suppliers. We're working with technology partners. Obviously, between Cub, that is the immediate feedback, right, one phone call away and then the many, many customers that we support, we're gathering a lot of intelligence on how to make it successful. But it is an important part of our strategy.

Now again, the boring CFO here wants to remark that it's not one of the critical value creators or let's say, financial elements in our 2028 guidance. So we will view that as upside.

Got you. That's great. Artificial intelligence, obviously, a big topic in the space. Just broad high-level thoughts on where you see the biggest opportunities for deployment of artificial intelligence across UNFI. We talked about some of them earlier in the conversation, but just near term and call it medium term, how do you see...

We -- I think we're all humbling studying and we're all learning kind of the potential of artificial intelligence. We like business cases.

And I think that RELEX, for instance, was a business case of how artificial intelligence removes the variability from the demand forecast and procurement decisions, right, by having a powerful AI brain that is just taking a lot of data and eliminate the manual input into the process, we're seeing very big results.

And I think that that's where the value creation of AI is inside UNFI. Obviously, we're going to continue to study opportunities to eliminate waste is the core of lean and AI can be one of the enablers of that. But we're really, really starting and building small business cases to see how can we scale them, how can we find more kind of RELEX type of examples.

Fantastic. And then we're coming pretty close to time, but any closing thoughts on just what you think might be most misunderstood today about the UNFI story?

I think that a couple of thoughts here. First of all, just reemphasizing the consistency and the focus of our strategy. It's 2 elements. It's creating value for customers and suppliers and it is becoming a more effective and efficient business partner, which is really foundational for us and then expands into the value creation.

We are executing well on our strategy, right? So the EBITDA growth rate in the first half is strong. The free cash flow generation in the first half is strong, and that continues to build high confidence for our guidance in 2026 and then '27 and '28. The other part is that the capital allocation question is always out there.

Our focus right now is to deleverage to our commitment, so 2.3 turns or less by the end of '26 and then getting to 2x or less by the end of '27. But when you think about $330 million of cash generation in '26, about $300 million in '27 and '28, that speaks of a lot of flexibility, right? In the high confidence context speaks of flexibility.

So whether it's more working capital investment to support growth, more capital investments to support growth, technology, safety or maybe more opportunistic decisions on share buyback as we did in the second quarter. It's all out there, right? It's all dry powder and flexibility that we want to keep.

Okay. Well, Matteo, this has been great. Thanks so much for joining us today. Thanks to everyone who's listened in, and I hope you all have a great day.

Thank you so much. Appreciate it.

Thank you for standing by. At this time, I would like to welcome everyone to the UNFI Second Quarter Fiscal 2026 Earnings Call. [Operator Instructions] I would now like to turn the call over to Steve Bloomquist, Vice President of Investor Relations. You may begin.

Good morning, everyone, and thank you for joining us on UNFI's Second Quarter Fiscal 2026 Earnings Conference Call. By now, you should have received a copy of the earnings release from 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.

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 now ask you to turn to Slide 6 of our presentation as I turn the call over to Sandy.

Thanks, Steve, and thank you, everyone, for joining us this morning. In the second quarter of fiscal 2026, UNFI continued to advance our value creation strategy, focused on achieving shared, profitable growth with our customers and suppliers. Through our team's disciplined execution of this strategy, including our accretive optimization actions, profitability and free cash flow are growing ahead of our expectations enabling us to further strengthen our balance sheet and increase our financial flexibility.

During our Investor Day in December, we outlined the strategic capabilities we're building to add value for our customers and suppliers and to become a more effective and efficient company. These include enhancements in customer stewardship merchandising and supplier support, professional and digital services, private brands, technology, supply chain and productivity. With our operational rigor and lean mindset as a foundation, we're executing management and reporting routines against each of these capabilities and are delivering continuous improvement and accountability throughout the organization.

Let me take a moment to highlight a few examples from the second quarter. First, as a part of our focus on building a next-generation supply chain, to serve our partners more effectively and efficiently. We're continuing to expand [ Relax ], an AI-powered supply chain planning platform across our entire network. Roughly another dozen distribution centers are expected to go live next week, and we expect we will complete our implementation by fiscal year-end. As our [ Relaxed ] implementation progresses, it's helping us to improve customer service, fill rates and inventory management, which is in turn improving our free cash flow.

We're also focused on growing our private brands assortment to help our customers differentiate and create value for their shoppers. This fiscal year to date, we've launched nearly 50 new private label SKUs and that lean into innovation and emerging shopper trends from health and wellness to value and convenience. While it's still early, we're encouraged by the early adoption of these new products. These new products and thousands more from our broad supplier network were on display at our spring and summer selling shows in Long Beach, California and in Orlando, Florida which collectively brought nearly 7,000 customers and suppliers together to plan for the upcoming selling season.

At the shows, members of our leadership team and I spent time with our partners, listened to their feedback, sought to understand their roadblocks and discuss how we can help them execute their unique strategies. These discussions help to ensure alignment that we're investing in the right talent and building the appropriate capabilities to support shared profitable growth for our customers, our suppliers and in turn, for UNFI. The progress we're making across our strategic priorities is directly translating into our second quarter results.

Overall, our second quarter performance reflects the resilience of our customers, our sharpened focus on a growing $90 billion target addressable market and the strong execution of our strategy, including the successful completion of our network optimization plans. Adjusted EBITDA and free cash flow grew 23% and 26%, respectively. This enabled us to continue deleveraging with net leverage down 1 turn from the prior year quarter to 2.7 turns. In line with our strategy, we have been accelerating our optimization initiatives. These efforts benefited our profitability and free cash flow and have temporarily negatively impacted our sales growth by nearly 500 basis points, primarily driven by the consolidation of our Allentown facility completed last quarter.

During the second quarter, the large majority of our customer base continued to grow in a dynamic environment despite some softness in food retail. Excluding the impact of optimization, UNFI's wholesale sales grew in line with our target addressable markets estimated low single-digit growth rate this quarter. Though we will always review opportunities to improve the effectiveness and efficiency of our network. We've now completed the initial planned customer conversations and are in various stages of implementation. With these plans now realized, coupled with our strong new business pipeline, we expect that the cycling of larger optimization actions in Q1 2027 will allow our business to return to growth in fiscal 2027. We remain confident in our long-term expectation to deliver low single-digit average sales growth for fiscal 2026 through fiscal 2028.

As we continue to focus on best serving our target addressable market, we expect grocers focused on differentiation to be the primary source of sustained long-term growth within our industry. We believe our heritage and natural, organic and specialty products, along with the additional capabilities we are building can help these resilient retailers deliver compelling value, differentiated products and enhanced shopping experiences that will set them apart from mass and discount retailers and support sustainable, profitable growth moving forward.

In summary, the strong execution of our strategy is delivering results and has improved profitability and free cash flow ahead of our expectations. We continue to strengthen our balance sheet and enhance our financial flexibility, which in turn supports our ability to invest in growth and create long-term share value for our stakeholders. This progress is reflected in our updated outlook for the year, which Matteo will discuss shortly.

As UNFI marks its 50th anniversary in 2026, our team is poised to build on and accelerate the company's legacy of connecting grocery retailers to food retailing's most innovative products and shopping experiences. We remain laser-focused on becoming our industry's most valued partner by helping retailers and suppliers drive profitable growth for themselves and for UNFI.

With that, let me turn it over to Matteo for more detail about our second quarter performance and updated financial outlook.

Thank you, Sandy, and good morning, everyone. Our second quarter results reflect our focus on building capabilities to create more value for our customers and suppliers while continuing to improve profitability and free cash flow and further reduce leverage. We're also updating our annual outlook based on our year-to-date performance and our current view of the rest of the year.

Today, I will provide additional insight into our second quarter operating results, our financial position and capital structure and our fiscal 2026 outlook. With that, let's start with our Q2 results.

If you go to Slide 8, our second quarter sales came in at nearly $8 billion, a decline of 2.6% to last year and includes an impact of nearly 500 basis points from our accretive optimization actions. These results also reflect inflation, favorable mix and sequentially weaker underlying food retail trends partially driven by a snap uncertainty, weather-related volatility and a dynamic operating backdrop. Excluding the impacts of planned optimization, our overall business outperformed the market and performed in line with our target addressable market.

Natural Product sales grew 7%, again outperforming the market, driven by continued shopper demand for natural, organic and specialty products and strong execution from our customers. We also saw benefits from short-term project work, portions of which we expect will wind down during the second half of fiscal 2026. Conventional Product sales declined 12%, with the primary driver, again, being our strategic network optimization. The majority of this was the result of our planned exit from the Allentown distribution center. As a reminder, we expect the cycling of larger optimization actions in Q1 2027 will allow our business to return to growth in fiscal 2027, and we remain confident in our longer-term expectations to deliver low single-digit average sales growth from fiscal 2026 through fiscal 2028.

In retail, total sales fell 8% largely due to strategic store closures, the retail team has completed to optimize its footprint and strengthen the foundation of the business for the future. Same-store sales improved sequentially by 100 basis points declining by 2% during the quarter compared to 3% last quarter. And as discussed at our Investor Day, our team remains focused on continuing to enhance [ CAP's ] value proposition product assortment and shopping experience in the Minneapolis market.

Moving to Slide 9. Let's review profitability drivers in the quarter. Our gross margin rate in the second quarter was 13.2% up 10 basis points versus last year's second quarter. This includes benefits from our optimization work as well as a modestly higher level of procurement gains. These were partially offset by a lower margin rate of retail, driven in part by pharmacy product mix shift. Operating expenses improved compared to the prior year reflecting a decline of nearly 6% compared to the prior year and a 40 basis point reduction in our operating expense rate to 12.2% of net sales. Importantly, we increased DC productivity by over 6%. This performance reflects ongoing benefits from our effectiveness and efficiency initiatives including multiple projects overseen by our value delivery office, network optimization, automation and incremental productivity gains from lean daily management as it continues to expand across our network.

Our disciplined execution, including our focus on capability building, a higher gross margin rate and reduced operating expenses drove adjusted EBITDA growth of over 23% to $179 million. On a rate basis, adjusted EBITDA was 2.3% of net sales, up about 50 basis points year-over-year. The strong growth in profitability along with lower net interest from reduced debt levels and lower depreciation expense resulted in adjusted EPS of $0.62, a meaningful increase compared to last year's $0.22.

Flipping to Slide 10. Our second quarter results reflect the continued strengthening of lean practices across the organization, driving measurable gains in safety, quality, delivery and cost. We have now implemented lean daily management team 36 DCs as of the end of the second quarter, a sequential increase of 2 facilities from Q1. We are actively working to improve distribution center effectiveness and efficiency while further eliminating waste, and we continue to see significant short-, medium- and long-term opportunities to do so.

Beyond our DCs, we're also focused on extending lean practices across the broader organization. Our lean team helped conduct 12 process improvement workshops over the last quarter. Their work included improving the seasonal item buying process, reducing new customer onboarding time and improving out of top product rates. These efforts as well as the broader adoption of a lean mindset are continuing to drive tangible improvements across our business. Since the prior year quarter, across the enterprise, we have reduced shrink by over 11%, while throughput and on-time deliveries have both increased nearly 7% each. And importantly, while we have made meaningful progress on lean implementations, we are still in the early stages of our lean transformation and believe there is a significant value to be unlocked for customers, suppliers, associates and shareholders as we continue our lean journey in the months and years ahead.

Turning to Slide 11. The strategic and operational discipline, combined with more efficient capital investment and working capital use enabled us to increase quarterly free cash flow by $50 million to $243 million. The strong free cash flow performance in Q2, coupled with a higher adjusted EBITDA enabled us to reduce net debt to its lowest level since fiscal 2018 and to lower our net leverage ratio to 2.7x. It have turned sequential improvement compared to Q1 and a full turn improvement over the past 12 months.

Given the progress we have already made in our higher outlook for profitability and free cash flow, we are confident that we will continue to deleverage in line with our multiyear targets. We also repurchased nearly 750,000 shares of stock for approximately $25 million at an average price of $33.66. This reflects our conviction in the long-term value creation potential of our business, and we expect to make further opportunistic repurchases as we continue to reduce leverage as part of our capital allocation process. In support of this, after the end of the second quarter, we made a voluntary $115 million prepayment on our senior notes at par, which reduced the outstanding amount of the 2028 maturity to $385 million. This is expected to reduce annualized net interest expense by over $2 million.

Looking at Slide 12. Based on our year-to-date performance and forecast for the balance of the year, we are updating our full year outlook for each of our financial metrics as follows: we are lowering our expectations for full year sales to a new range of $31 billion to $31.4 billion which represents a 1.9% reduction at the midpoint. This new range reflects optimization work that is ahead of schedule as well as some deceleration in food retail sales trends within a backdrop that remains highly dynamic, as I described earlier. Additionally, while our new business pipeline is strong, we expect these opportunities will be more meaningful contributors to next fiscal year sales. As we described earlier, we expect that this new business pipeline, combined with the cycling of larger optimization actions in Q1 2027 will allow our business to return to growth in fiscal 2027.

We are increasing our full year outlook for both adjusted EBITDA and adjusted EPS. Our updated expectation for adjusted EBITDA is $680 million to $710 million, a $30 million increase at the midpoint. The new midpoint represents about a 26% increase compared to fiscal 2025, with an implied margin rate expansion of around 50 basis points. The updated range for adjusted EPS is now $2.30 to $2.70 per share, which incorporates the revised range for adjusted EBITDA as well as updated estimates for both depreciation and interest expense. We're also maintaining our full year outlook for capital spending at $250 million. We expect second half investment to further accelerate based on the anticipated timing of capital projects including our ERP implementation and automation.

Finally, we are increasing our free cash flow expectation to approximately $330 million. For the full year, based on our year-to-date performance in our increased profitability expectations. As a result of our higher adjusted EBITDA and free cash flow expectations we also anticipate we will be well below our previous year-end net leverage target of 2.5 turns and now expect to be around 2.3 turns at year-end. This updated outlook reflects our confidence in our ability to deliver our plan and to continue to create value for our customers, suppliers, associates and shareholders.

As highlighted on Slide 13, we have delivered a solid first half of the year, driven by the strength of our customers and improving operational effectiveness and efficiency through lean methodical technology investments and network optimization. Our updated year-end net leverage expectation embeds higher adjusted EBITDA and free cash flow reflects the strong execution of our value creation strategy. As we move into the second half of the fiscal year, we are focused on building the capabilities that we believe will help our customers and suppliers better execute their strategies while making UNFI a more effective and efficient business partner.

With that, operator, please open the line for questions.

[Operator Instructions] And your first question comes from the line of Kelly Bania with BMO Capital Markets.

This is Ben Wood on for Kelly. Just wanted to start on the Conventional side, I know you guys called out a 5% headwind from network optimization. That looks like a little bit of an acceleration from the first quarter. I know the majority of it, it seems like it's the Allentown exit. I believe that was planned at 3% headwind to top line. Is that still the right way to think about it? I'm just trying to understand if more work was done or is there something particular about the quarterly cadence that I'm missing?

Yes, on -- so on the Conventional front, think about the 500 basis points being significantly higher as an impact because 500 basis points of optimization headwind is on the total Natural plus Conventional. And on a Conventional basis, it's more impactful. So the majority of the decline, the 12% decline in Conventional was driven by the accretive network optimization that offer them benefits, as you noticed on the EBITDA growth of almost 40% in Conventional in the first half of the year.

Relative to the 2 elements of the accelerated optimization we exited the Allentown facility at a faster pace than we anticipated and released some accretive benefits in the first quarter. And also, as we started executing the second quarter, in a net of optimization with customers, but also some win-win retention. We have further opportunities to drive accretive network optimization inside Conventional. That's kind of what is reflected in the 500 basis points of second quarter headwind but also in the 24% of EBITDA growth in the first half of the year.

That's helpful. And then just staying on the Conventional side as a follow-up. If we peel away the network optimization, it looks like kind of the underlying business may have improved towards lower single-digit declines versus maybe low to mid-single-digit declines in Q1. And it seems like based on your retail comp disclosures, that's in line with what you thought at the retail business. But wondering if you could expand on maybe what's driving that improvement? Is it better volume? Is it prices? And then just any details you can share about the current operating environment that you're seeing on the conventional side. I know you called out snap headwinds and maybe some weather. But it seems like underlying trends got maybe a little bit better this quarter.

Let me elevate for a moment because you are picking up an important trend in our business. So if you normalize the 2.5% sales decline with the 500 basis points of network optimization we actually saw low single-digit growth in the product business, which is in line with the $90 billion target market and reflective of how many of our customers have performed.

Relative to then the double-click into Conventional and Natural. So Natural grew 7%, so enduring strong trends in the Natural Products. And relative to the Conventional Products, if you remove call it, 800, 900 basis points of the network optimization impact, the decline was in the low single digit. So stable to kind of what we've seen in the first quarter, a little bit of help from inflation and then volume declines, call them in the [ MSD ] range.

I think one other thing to throw on top of that is that over 90% of our customers buy natural or both Natural and Conventional Products. And that's core to our strategy to help them differentiate and why our target addressable market is growing and why our customer base excluding the optimization efforts, which are accretive to profitability and were planned are driving consistent growth, consistent with our long-term plan.

Your next question comes from the line of John Heinbockel with Guggenheim.

I want to start first. You talked about the pipeline. So what -- can you dive into that a little bit, when you think about Conventional versus Natural and is it new accounts, new categories. So what does that composition look like? And then when you talked about low single-digit CAGR, right, '26 to '28. So I take that -- tell me if I'm wrong, you take that to be the CAGR, meaning the out years will grow closer to 4% than what we're seeing -- obviously, we're seeing a decline this year, but the real out-year number is more in that 4% range? Or is that wrong?

John, I'll let Matteo characterize the modeling relative to our long-term growth algorithm. But the answer to the first part of your question on pipeline as usual, it's a combination of things. The majority is incremental categories with existing customers, which continues to be the most profitable way to expand and as I've said before, it's my favorite kind of growth because it reflects a healthy relationship where we're already adding value and where we're being given more work to do. There are brand-new relationships as well but the large majority of our pipeline is growth with existing customers. And the tail on the out-year modeling?

Yes, John. So when you think about the agreement through 2028. That is an LSD that will get us from [ $25 billion, $31.8 billion ] to roughly $33 billion by 2028. So embedded in that, there is LSD that is going to get us in '27 and '28 to approximately $33 billion of sales in the -- by 2028 to our outlook.

Okay. And maybe the follow-up, productivity, right? So that was up 6%, which I think is above what you would characterize as sustainable. I think maybe this may be wrong, but like 3 to 5 is fair. So maybe touch on that and then if a lot of this growth is new categories, right? So you would think cases per mile driven. Is that now going to be a big contributor to productivity gains?

Yes. So first of all, John, we are pleased with the margin improvement that we've seen in the first half. The EBITDA growth of 24% in the first half it also embeds 45 basis points or so of margin expansion. Some coming from natural growth and gross profit expansion, but a lot of it coming from the OpEx controls and improvements that we established in the last 18 months. So think about throughput through automation, think about the value of the productivity projects through value delivery office and many more things that we're doing through our lean and the indirect cost spending. So we're pleased with the progress. It is a little bit higher than we were expecting.

As again, we realized faster benefits from the network optimization and we also continue to have a very rich pipeline of cost initiatives, including the $2 billion of indirect expenses that we are methodically analyzing both with lean methodology as well as the support of our supply chain team.

Relative to the question on the cost per case, that is obviously a metric that we track very, very closely. And again, initiatives like lean, automation, relax, the new routes that we continue to identify with the route team are all contributing to that productivity. So we are encouraged with what we've seen in the first half is exactly in line with what we've been saying for some time that we continue through lean and methodologies to find many opportunities to become more effective and more efficient to support our customers and drive share profitable growth together.

And John, Matteo said at the end, the one simple through line that I'd like to reinforce, which is as he leads the implementation of lean in the company, lean starts with safety goes to quality and delivery and then delivers cost and it creates a virtuous cycle. Our fill rates are higher than they were last year, higher than they were 2 years ago. Our on time continues to improve. Our shrink is down and so a lot of the productivity, we always say effectiveness before efficiency as a theme to make sure that the strategy is robust for customer benefit and then creates a virtuous cycle of improvement. And that's the early days results we're achieving and the significant opportunity that we see ahead through the strategic plan, but beyond actually.

Your next question comes from the line of Mark Carden with UBS Financial.

This is [ Matthew Rothway ] on for Mark Carden. So I was wondering if you could help us understand to what degree natural was helped by project work in the quarter versus more kind of underlying growth in the category. Would you say underlying growth was more in the low single-digit range or mid-single digit?

Yes. Matthew, so as we said before, in 2025, we started ramping some project-based business inside the Natural business. The Natural Product business that ramped very, very quickly in the second half of 2025. And as the customer completes their strategies is going to start winding down in the second half of 2026. So what I would say is that in the 7% performance in the second quarter following the roughly 11% growth in the first quarter, there is really the enduring dynamic of the natural organic specialty products. And then what we would expect in the second half is to see a little bit of the impact of the wind down of the project-based business while, again, the underlying fundamentals though, of the Natural Products remain strong.

Great. Very helpful. And then as a follow-up, to what extent are potential headwinds from snap factored into your lower guidance?

Probably speaking, when there are changes to the government assistant programs like snap, consumers tend to adjust their overall budget to preserve spending on food and kind of grocery staples. And our experience has been that footed home demand remains resilient as households tend to prioritize essential items. So as we thought about the guidance for the remainder of the year and then the algorithm through 2028, we're monitoring snap. We think that the impact is manageable and again, it's been fully embedded into our rest of the year outlook and '27, '28 algorithm.

Your next question comes from the line of Leah Jordan with Goldman Sachs.

So you continue to make nice progress on free cash flow, which is great to see. But given this is a multiyear process, just seeing if you could get us cut up on where we are in the journey. What's been done and as we look to kind of the back half and into '27, what are the next biggest drivers we should be looking for, especially within working capital?

So we are pleased with the first half performance. We generated almost $190 million of free cash flow in the first 6 months, which is up $150 million year-over-year and when you think about the drivers, obviously, we increased EBITDA by 24% in the first 6 months. We continue to work on reducing the days of sales outstanding our receivables while capitalizing on the work that we've done on inventory with the decentralized procurement organization, the printer benefits in 2025 and is now complemented by the [ Realex ] rollout. So we have now an AI cloud-based inventory system that with the demand signals much, much faster and more effectively has been implemented in our Natural DCs, and we are on the way to implement it in the Conventional Product this is being done with the process by the end of the year.

So the combination of more EBITDA, more disciplined working capital management and then deleveraging the reduced the interest expense have all been favorable in our journey to deleverage to 2.2 turns, I would say, by the end of 2027.

Looking ahead. So first of all, relative to the second half of the year, we would expect a similar level of EBITDA when you think about the flows implied in the [ $695 million ], there are about [ $315 ] million but we're going to step up the CapEx spending significantly. We had sales growth in the first half once you normalize for the automation investments that we had in first half of '25 and we have a number of safety, maintenance, technology and supply chain priorities for the second half. So we would expect the EBITDA similar to the second level -- to the first level, sorry, to be offset by the higher CapEx spending.

And then relative to the look forward in '27 and '28 when our guidance is about $300 million of free cash flow we should expect to continue to see EBITDA growth. The current guidance is 730 of EBITDA for '27, 800 for '28. Continue to do work on the leverage reduction, which is going to give us tailwinds from an interest expense. And then we're keeping optionalities relative to working capital support and CapEx. And that's all territory of high confidence because we want to have multiple ways to get there and have flexibility relative to working capital investment and CapEx.

That was really helpful detail. Maybe just one quick follow-up related to a comment you guys made in an earlier question. So a low single-digit volume decline you called out for the conventional and your underlying core business there. Just any major call outs on a product category or retailer drive type that's kind of driving that. And I guess a bigger question also is we continue to hear about retailers getting more efficient with their own inventory management due to AI and automation. So how do you think that could be impacting your volume trends over time as well?

Leah, good question. I think I would try to separate the landscape into a couple of buckets. The first and most obvious point is that our customers virtually all of them are buying Natural and Conventional Products from us. And where we see customers performing well is when they're fairly deeply into a differentiation strategy that combines competitive costs with unique products and unique experiences. And you can think of retailers around the country that play that strategy very well. And broadly speaking, you've obviously got the pure natural players but within the all other, there are a number of retailers, including [ club ], for example, that are working on a differentiation strategy that includes products and experiences while still staying competitive on price. And those retailers tend to perform better and their sequential performance is better. And our entire strategy is set up to help them.

And so there's a lot of things going on in the marketplace that make it dynamic. What we are working on feverishly with our customers is helping them drive the kinds of strategic transformation that works for them and makes them part of the durable and long-term growing part of the industry, which is substantial.

As it relates to inventory, other than some early discussions that we're having with customers about how technology can work across our supply chain with them with [ Relaxed ] products in retail and [ Relaxed ] products in wholesale, we're not seeing a meaningful change in their inventory, at least broadly speaking.

Your next question comes from the line of Bill Kirk with ROTH Capital Partners.

Since your Investor Day, the amount of vendor-funded promotion seems to have increased. I guess, first, are you seeing more of this activity from the manufacturers? And has the increased activity skewed toward any particular category?

And then second, where your expectation maybe for inflation or possible deflation, where it may have changed. How much would you call your change in outlook for inflation commodities driven versus manufacturer-driven?

So what we saw relative to a vendor promotions is that brands are being way more selective with their dollars shifting toward peak holiday moments and proven channels. What we see that they're pulling back where the ROI is uncertain, which is why promotional activity feels somewhat inconsistent across customers.

As we consider our outlook for fiscal 2026 and our revised guidance, we have not assumed a material step change in promotional levels. And what we saw is that promotions increased in November and December to kind of post pandemic highs as manufacturer leans into holidays but kind of tending up elsewhere. So we've seen a step down in January, which is in line with historic patterns. So that's on the vendor promotion.

Relative to inflation, right now, we have modeled low single digits for the remainder of the year, which is again, in line with our prior guidance. Our goal is always to work with suppliers to keep prices low, stable and predictable, which is the best cure for the industry. And while we may have seen some very transient and secondary procurement gains coming from inflation, again, our goal is to always keep it low and predictable, taking advantage of the pre-notice that we get from our suppliers and then working with them and the customers to make it as stable as we can.

Sandy, anything you would add?

Yes. I think, Bill, strategically, again, elevating a bit here. I think our focus with suppliers going forward is to continue to look for ways to make promotional spending more effective and more enduring around key price points. I would call it priority 1a for our particularly our conventional product merchandising is to help our retailers be more and more competitive, particularly on key items, and we'll be watching our progress there. That could take the form of a very long-term promotion as opposed to a price reduction. But net-net, it ends up creating more value at the shelf, which a lot of our customers are focused on.

Understood. And if I could sneak one more in, Matteo, you talked about the share repurchases made in the quarter. You've had that program, I think, since 2022, but it was the first time that you've used it since fiscal '23, I believe., So how would you expect to use this program going forward? And what does it say about your outlook and visibility and you used the word predictability that you're here using the repurchase program again?

Yes, Bill, our main priority continues to be debt reduction and deleveraging. So we have again lowered our year-end expectation now for net leverage up to 2.3x from 2.5x before, and we continue to remain confident in reducing our net leverage to below 2x by year-end of fiscal '27.

Now we also continue to have high confidence in our value creation strategy. And so as we saw overperformance relative to cash, driven by EBITDA and better working capital management we thought that there was an opportunity to utilize part of the -- what was by the end about $140 million share buyback basket, which is now about $110 million and lock in some buybacks at $33.66 on average. And as you think about how we thought about the second half with an implied free cash flow of $140 million. First, we want to hit our target of 2.3x of leverage or less. Second, remain in high continent territory while we do that, but also maintain flexibility for either faster deleverage, more organic investments or possibly some opportunistic share buybacks.

Your next question comes from the line of Scott Mushkin with R5 Capital.

So I just wanted to kind of talk a little bit more philosophically on a long-term basis, thinking about how -- kind of where the company was before the acquisition on EBITDA margins? Those were over 3. And obviously, [ SUPERVALU ] brought those down and the traditional channel seems to have a lower margin historically. But I was just wondering philosophically, is there a cap on EBITDA margins at some point below 3? Or is that -- or do you guys think with all the efficiencies you can drive out of this business, thinking of EBITDA margins being able to continue to go up after your -- the '28 area is something we should consider?

Scott, a good question. I think of it in the following way. The lean methodology has us think about metrics together, starting with safety, quality, service and then cost. And we invest over $4 billion a year of cost in serving our customers. We see significant opportunities to improve all of those metrics. And with each additional improvement we see more opportunities. And so no, we do not see a cap on the ability to improve quality or service or safety. And in the process of doing that, we're able to improve efficiency because process -- robust processes and the successful use of technology to improve them opens up road maps of opportunity ahead.

What we won't do is seek to expand margins at our customers' expense. In fact, we view this as an accretive model with lots of opportunity for growth in the future. So I'll boil it down in this way. We've communicated an outlook for 3 years that includes margin expansion that includes growth includes improving returns on invested capital and free cash flow. As we look past that time frame, and Matteo and I talk about this all the time, we still think we'll be using words like early innings when we leave '28, that the opportunity feeds the opportunity and because of the marketing focus on the more durable, differentiated target market, we think there's going to be opportunity in large amounts in the marketplace for us to continue to help customers and then the rest of it flows from there.

And Sandy, what I would add is that in the outlook algorithm, we talked about 65 basis points of EBITDA expansion from '25 to 2028, we're pleased with what we've seen in the first half, where we had almost 50 basis points of expansion through natural growth, gross margin actions and any large productivity play.

And the biggest -- one of the biggest drivers to gross margin was continued reduction of shrink, which is once again a process improvement that absolutely helps. So the shrink is not a value to anyone. It's pure waste.

All right. That's great insight. I appreciate the thorough answer. My second question revolves around the Conventional business. And again, it's more philosophical than it is here and now. Do you envision the Conventional business being able to be flat volumes eventually? And I'm talking about volumes not with the inflation, but just volumes being flat without making M&A, just like the business would end up being flat volumes. And how do you get there?

Scott, I think let's separate our business, which is a B2B business from the industries business, which is a B2C business. I believe that the trends towards healthier eating are enduring and will sustain. It's the right science, there's emerging consensus and it's increasingly being democratized by good value in the marketplace.

From a, you on a buy perspective, I think we're in a really good position to help retailers maximize that trend from wherever they sit today in the spectrum. So the kind of right answer I'd give you is, I'm not sure, but we'll be growing our volume with the products that we offer, and we'll have the products that are viable for growing volume because that's where the demand is, and that's what our job is.

Beyond that, I'm not sure. Each customer interestingly enough, has a unique set of product requirements that are serving different opportunities. And while we don't discuss individual customers here, some really interesting things are happening with conventional products in places that you wouldn't have necessarily expected as players who are looking to build their basket or build their customer base for their various platforms. So I don't know the headline answer to your question, but I don't think it matters particularly to UNFI. We're going to make sure we have the right products, and they'll continue to mix out based on the strategies of our customers and consumer demand.

So my interpretation of that, Sandy, and I'll yield is that in aggregate, and you've told us this before, I think, not to just kind of look at your business necessarily in one segment or the other. But in aggregate, we should think about volumes growing once we're through this period.

I believe the public comments we've made, and Matteo said this earlier, is that we expect the company sales to return to growth next year. And we expect to achieve our 3-year sales guide at midpoint, which is about $33 billion and that we have confidence in doing that. What I would say beyond that is we're always looking for ways to help our customers more and to grow our customer base. And that will continue. But the guidance is as it is, and we remain confident in it.

Your next question comes from the line of Krisztina Katai with Deutsche Bank.

This is [ Jessica Taylor ] on for Krisztina. I just wanted to ask specifically about your value-add services and how you're thinking about how those contribute to your margin expansion, specifically as you line it up with the different business channels.

Yes, Jessica. The professional and digital services group continues to grow faster than the company. And we are always looking at services that will either help our customers save money work with the industry more efficiently and hopefully grow faster. A lot of our focus of late has been on digital services to help customers use technology. And obviously, the services that our customers use depend on where they are in the marketplace. But we continue to view this as an important part of our offering. It tends to be more profitable for us because the value added is defined. And so therefore, we're helping customers get value that they wouldn't be able to get otherwise. And we continue to invest time and energy on talent and new platforms to find new ways to continue to make our customers more competitive.

And then just as a quick follow-up. Can you talk a little bit about how much less you think you have in terms of shrink improvement?

We made a significant improvement on shrink. If you think about '23, '24, '25 and even in the first half of '26 and it's really been type methodology with the supply chain and the procurement teams mapping wing to wing, how we were buying, how we were managing inventory, improving the demand signal and that has created a very significant profit improvement for us in gross profit in the last 3 years, including a support to the gross profit expansion in the first half of 2026.

For us, the journey on productivity shrink, waste elimination is never ending. So we are never satisfied. We recognize that right now we have significantly reduced the shrink levels and there is probably level of structural shrink when you're managing $30 billion of wholesale revenues. But with that in mind, we continue to do process mapping and managing inventory levels better that, in turn, help us reduce shrink. So we are not giving up on the shrink improvement from now on. It'll still be a contributor to a lesser extent, but a contributor to our margin expansion. Again, our goal right now is 2.4% through 2028 and we're roughly at [ $2.25 ] as we close the first half of the year.

Your next question comes from the line of Alex Slagle with Jefferies.

I wanted to ask on the rising diesel cost and if you could offer any historical perspective on how much you hedge or forward buy kind of how that passes through fuel surcharges and what we should think about...

Alex, as you can imagine, this is quite a dynamic situation, but we have assessed and we believe it is manageable. So relative to the impact of the change in fuel prices to the business. We have a number of tools to manage fuel cost. Firstly, with fuel hedges as well as then share in our fuel price changes with our customers per our contract. It is very, very early on, as you can imagine. But again, the early assessment when we look at the combination of hedges and contractual protection, we feel that is very manageable and embedded in our second half outlook and guidance for '27, '28.

Great. And private brand execution, you kind of noted a ramp-up with some incremental new products. What kind of progress should we expect over the next a year or 2? Or what milestones should we look for next just to see the progress in getting the private brand growth accelerating?

Yes. I think broadly speaking, we view the private brand portfolio as an important part of the differentiation strategies that we provide to customers. As I mentioned in the script, we had some significant new item activity so far this year, including some pretty hot new products, and we're excited about that. We have a new leader in running our brand portfolio and I think, broadly speaking, you should expect to see our brands portfolio grow faster than our total business. That's been our strategy and it continues to be. But we're also focusing incrementally on innovation to help drive the good, better, best positioning of our brands in the marketplace and further capturing the opportunity in the natural segment to improve our brand performance and continue to serve customers where they are with the products that will help them decomparablize their assortment versus some of the mass discounters, et cetera.

This concludes today's question-and-answer session. I will now turn the call back to Sandy Douglas for closing remarks.

Thank you, operator. As you heard today, we remain focused on executing our value creation strategy to add value for our customers and suppliers and become a more effective and efficient company. As we marked 50 years in business, and look ahead to realize our purpose of better food and helping to create a better future for our stakeholders. We're committed to building the capabilities that will help our partners differentiate, compete and achieve shared profitable growth. With a long runway of improvement opportunities still ahead of us, we are well positioned to create long-term sustainable value for all of our key stakeholders, including our shareholders.

To our customers and suppliers, we thank you for your continued partnership and collaboration. To the UNFI associates listening today, our thanks for continuing to deliver better for our partners, our communities and each other. And to our shareholders, we thank you for the trust you continue to place in us. Thanks again for joining us this morning, and we look forward to updating everyone on our progress this summer.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Welcome, and thank you for joining us for the UNFI Investor Day. Please welcome to the stage, Steve Bloomquist, Vice President, Investor Relations.

Good morning to everyone here in the room with us as well as those that are watching virtually. Welcome to our 2025 Investor Day. We're glad you're here with us, and we're excited to provide you with an update on our long-term value creation strategy and our business outlook.

Before we get started, let me remind you of a few things. First, during today's event, management will be making forward-looking statements. These statements involve risks and uncertainties and such risks are discussed in our SEC filings. Second, management will refer to certain non-GAAP financial measures. Definitions and reconciliations to the most comparable GAAP financial measures are included at the end of our presentation, which is available at unfi.com under the Investor section.

Now here's a brief look at today's agenda, where you'll hear from our Chief Executive Sandy Douglas and several members of our senior management team, and how we're advancing our strategy and capabilities to drive long-term, profitable growth and shareholder value.

Finally, I would ask those of you here in the room with us today to turn your phones to silent mode if you haven't already done so. Now to get the day started, before we welcome Sandy to the stage, let's roll a brief video.

[Presentation]

Good morning. Thank you all so much for joining us today. It's great to be with members of our investor community here live in New York and also online, and we appreciate everybody taking the time to be with us today. It's been a few years since UNFI hosted an Investor Day, and a lot has changed for us and the broader food retail industry. Today, we want to take the opportunity to connect with those who have been following UNFI for a long period of time and with those who may be newer to the story.

We'll share how we're advancing our strategy and building differentiated capabilities to help our customers and our suppliers more effectively compete in the marketplace. In parallel, we'll demonstrate how we're taking action to improve effectiveness and efficiency across our company and how the entire strategy creates value for our stakeholders, especially our shareholders.

At UNFI, we're guided by a simple purpose. To bring better food to more people and in turn, to create a better future for the businesses and communities that we serve. This purpose honors our heritage and our opportunity. It encompasses what we've always done best, dating back to the company's founding in 1976, when Michael Funk sold organic produce out of the back of his Volkswagen van in Northern California.

Through the years, UNFI has evolved into a company that delivers much more than better food. We also strive to help create a better future by helping our customers differentiate, compete and profitably grow. By helping our suppliers build stronger, more resilient brands and by helping our associates learn and grow and develop fulfilling careers and by helping our community partners increase access to quality food. And we believe this all comes together to unlock significant short, medium and long-term value for our shareholders.

So let me unpack more about what we'll cover today. You'll see UNFI's road map towards our aspiration of becoming the most valued partner to grocery retailers and suppliers in the most attractive segments of the market. We'll share how UNFI is working to improve value for our customers and suppliers through competitively priced and differentiated products, programs, insights and services that help them more effectively compete. You'll hear how UNFI is transforming into a more effective and efficient company through a combination of people, processes and technology.

And you'll get to meet our experienced leadership team that is delivering results, strengthening our capabilities and developing the next generation of talent for the future. And finally, we'll introduce new financial commitments through fiscal 2028, including our low single-digit top line growth and low double-digit adjusted EBITDA growth, on an average annual basis while delivering $300 million in annual free cash flow. We believe that all of this will lead us to long-term profitable growth with our partners and consistent operating leverage for our business.

Our success ultimately depends on the strength of UNFI's talented team. Later this morning, our Chief Human Resource Officer, Danielle Benedict, will highlight how we've built our leadership team to include a mix of homegrown talent and industry experts who are developing the next generation of capabilities to support our customers, suppliers and associates. We're excited for you to get to know these leaders and the teams behind our company's continued transformation.

I think it's important to place all of this in context of where we've come from. For nearly 50 years, UNFI has grown alongside the food retail industry leading innovation to make higher quality food accessible in more places. Founded in 1976, from a passion for natural and organic food, the company grew by listening to customers' needs, developing solutions and scaling rapidly to serve tens of thousands of retailers and manufacturers.

As more people embraced healthy food, UNFI's growth accelerated from the late '80s to the mid-90s, culminating in 1996 when we became America's first scaled national distributor of natural products and went public. Over the next 2 decades, we expanded our network to help scale natural, organic and conventional food companies with the 2018 acquisition of SUPERVALU, we combined our expertise in natural and organic products with full service conventional distribution, which brought the company more great customers to serve and new opportunities to help them profitably grow along with a strong portfolio of new professional services and private brands.

In 2021, I joined UNFI as CEO. And together with our senior management team, we've been focused on transforming the company for the future. Last year, we introduced a renewed purpose destination and multiyear strategy that the entire organization is now executing with increasing excellence every day. To summarize, we were the first to scale distribution of natural, organic and specialty products, bringing better food to more communities. And now we're accelerating a new era of growth rooted in what we do well today and really importantly, what we can do even better tomorrow.

Today, we're focused on creating value across 3 unique segments of the business. First, our Natural Products segment. This segment accounts for nearly half of our sales and over 70% of our EBITDA, driven in part by steadily growing consumer demand for health and wellness products, which are proving resilient across economic cycles. Next, our conventional products segment. This segment distributes leading well-known brands that many shoppers know and love. It accounts for 44% of our sales today and nearly 30% of our profitability. And finally, our retail segment. The smallest portion of our business includes 2 retail banners, Cub in the Midwest and Shoppers in the Mid-Atlantic.

Cub is the grocery retail market leader in the second largest metro area in the Midwest, Minneapolis St. Paul. And we see more opportunity to improve this segment, which also serves as a test and learn hub for UNFI's brand insights and services. In fiscal 2025, our company generated just under $32 billion in annual revenue and over $550 million of adjusted EBITDA at a 1.7% margin. We operate 49 strategically located distribution centers with a collective 28 million square feet of warehouse space to support our customers and our suppliers' growth. With a team of more than 25,000 associates, we deliver about 230,000 unique products to over 30,000 retail locations, covering over 90% of the population of the United States and Canada.

About 2 years ago, we began conducting and have now completed a comprehensive board-led financial review of our target market, our approach to driving long-term profitable growth as we go forward. And as a result, we've sharpened our strategic focus on a growing $90 billion target market that includes many natural, organic, specialty multicultural and community-focused grocery retailers who can benefit from and value the differentiated products, programs and services that we offer today and are building for the future. We expect our target market to continue to grow in the low single digits annually driven by lasting consumer priorities around health and wellness, personalization, customization, convenience and value.

Within our target market, approximately 2/3 of it or $16 billion is being driven by the sustained growth of natural, organic and specialty products and the strength of our customer base that focuses on these categories. We expect the sales contribution from the conventional product segment to be stable, and that's the other $30 billion of the target market. And when we look at this target market by retailer type, we see opportunities with a diverse range of retailers who want to further differentiate themselves, including premium, natural and organic, traditional, multicultural and community-focused retailers, each of which has meaningful growth potential along a differentiation strategy.

Now make no mistake, we recognize that grocery retailers are navigating an increasingly dynamic marketplace with fierce competition for mass retailers and discounters. To win in this environment, we believe grocery retailers need more than a distribution partner. They need a scaled growth partner that can help them meet the challenges of today and tomorrow. That's the core focus of UNFI's value creation strategy at scale. Our strategy has 2 components: adding value for our customers and suppliers and becoming an ever more effective and efficient company.

First, we're focused on adding value for differentiating retailers by bringing them unique competitively priced products, merchandising programs, private brands and digital and professional services to choose from that fit their strategy and help them compete effectively and grow profitably. In turn, we aim to add value for our suppliers by helping them expand their reach beyond the mass and discount retailers to build stronger, more resilient brands. After a 30-year career in the CPG industry, I've seen firsthand the importance of building strong brands in a highly diversified retail environments. Together, we can help retailers win with the better, different and special brands their shoppers want. And we can help suppliers build enduring brand equity that simply cannot be achieved with a narrow channel mix.

The second component of our strategy is focused on becoming a more effective and efficient company, which you'll hear our colleagues talk about throughout the day. Each of the components of our strategy has multiple benefits. They enable us to better serve our customers and suppliers while also reducing operating costs to support investment and returns for our shareholders. Ultimately, by executing our strategy, we can create a win-win dynamic where our retailers and our suppliers grow faster, they generate higher profitability, and we do too. Over the past 18 months, we've gained even greater confidence and conviction in our strategy and in our execution. But we still have much work to do and much more opportunity ahead.

Today, we're going to highlight capabilities that we believe will strengthen UNFI's competitive advantage and our ability to help our customers and suppliers grow. The first 4 are focused on adding more value. Customer stewardship. We're revamping our commercial organization to better understand each customer's unique strategy and to enhance our ability to provide tailored account level execution. Merchandising and supplier support. We're focused on building the largest, most innovative and growth-oriented assortment while driving competitive pricing and merchandising programs designed to help each retailer win. We're also working to provide a simpler and better experience for suppliers so that we can become their best partner to build their brands.

Professional and digital services, we're leaning into our unique ability to help our customers beyond their core wholesale needs with scalable services that help them save money, operate more effectively, build shopper loyalty and drive profitable growth. And private brands, we continue to build, enhance and innovate. Our best-in-class customizable private brands programs, which are a key source of differentiation for retailers today.

Next, we'll focus on 3 capabilities to drive greater effectiveness and efficiency. Technology and innovation. We're driving a step change in digital capabilities by focusing on improving simplicity, performance, and efficiency for UNFI and our stakeholders. This includes solutions that help our customers meet the digital challenges that they face while also enhancing operational effectiveness and efficiency at UNFI. Next-generation supply chain, we're continuing to invest in solutions that empower our people, strengthen our processes and leverage advanced technologies to better serve our customers and suppliers while reducing operating costs. Productivity, we're maximizing productivity by streamlining SG&A in our corporate functions, eliminating waste in our operations and driving strategic transformation initiatives. And we see significantly more opportunity in this area for years to come.

Our leadership team will share more detail on these capabilities today, many of which are already well underway. As you've seen, we're well positioned in a market with significant potential. The reality is that in the past, we've not always delivered on our full potential. And that's why our strengthened leadership team has spent the last few years sharpening our priorities, accelerating industry-leading capabilities and improving execution across the business. In the first year of our multiyear strategy, we delivered on each of the commitments we made to our shareholders. We finished fiscal 2025 at or above our initial outlook for net sales, adjusted EBITDA and free cash flow. We reduced our leverage ratio from 4x to 3.3x, with net debt at the lowest level since 2018.

We brought lean practices into a business that had not yet benefited from the discipline that this practice brings, and we raised and accelerated our 3-year financial objectives for net sales, adjusted EBITDA and free cash flow. And because of this, we expect to realize our previous net leverage reduction goal about a year ahead of schedule. We're proud of the progress we've made, but we believe the opportunities ahead far exceed anything that we've achieved so far. Anchored on our strong performance in fiscal 2025. Today, we're introducing our next 3-year financial plan through fiscal 2028.

Our proven strategy, combined with our vibrant, diversified customer base, and strong operational execution, give us confidence in the financial performance we can continue to deliver over the long term. We expect net sales to grow in the low single digits on average over this period. This reflects continued growth with new and existing customers, strong customer retention and sustained growth within the natural, organic, specialty and fresh products segment.

In addition, we expect average annual adjusted EBITDA growth from fiscal 2025 to fiscal 2028 to be in the low double-digit range. Our updated multiyear objectives imply that we will deliver adjusted EBITDA of around $800 million in fiscal 2028 at an approximate adjusted EBITDA margin of 2.4%. Implying the improvement of approximately 65 basis points versus fiscal 2025.

This higher profitability as well as our continued focus on optimizing capital investments is expected to generate around $300 million of free cash flow annually through fiscal 2028. Combining our higher adjusted EBITDA and consistent free cash flow, we expect to reduce net leverage to less than 2.5x by the end of fiscal 2026 and to further reduce this to under 2x by the end of fiscal 2027. As we reduce our debt levels and improve profitability, we expect adjusted EPS will continue to grow faster than adjusted EBITDA. I've described our strong foundation, our growing target market, our value creation, strategy at scale and our improving operational execution, all of which gives us confidence in our long-term aspiration to become our industry's most valued partner.

By continuing to successfully execute our strategy, we believe we will drive sustained revenue growth, consistent operating leverage and strong cash generation. As I've said, we're proud of what we've accomplished so far, but we have greater conviction about the incredible opportunity we have over the next 3 years and well beyond. We believe that UNFI is a good company but it's on its way to becoming a great company with its best days still to come. I've shared my reasons to believe in UNFI, but chief among them is the talented, energized team that is leading our company into its next chapter of success. And I'm thrilled for you to meet and hear from many of them today.

So on behalf of all of us, thank you again for your investment, for your trust and for the time you're spending with our team this morning. And with that, I'll turn it over to our President and Chief Financial Officer; Matteo Tarditi, who will talk about how we're translating strategy into specific capabilities and actions to help our customers, suppliers and UNFI win. Matteo?

Thank you, Sandy, and thank you to everyone joining us in person and virtually today. Today, we will be focusing on the strategic capabilities that we're building to create incremental value for our customers and suppliers and for UNFI. We believe that by combining the strengthening capabilities and scale with our extensive network and industry relationships, our natural and organic heritage and strong operational foundation, we can create sustainable, profitable growth and shareholder value.

As Sandy just described, the strategy we introduced a little over a year ago has 2 key elements: adding value for customers and suppliers and improving our effectiveness and efficiency to drive increased free cash flow. And each of the capabilities we are building support at least one of these 2 pillars. Within the adding value pillar, there are 4 capabilities were accelerating that we believe will help customers and suppliers more effectively compete in the highly dynamic [ food ] retail marketplace. These initiatives are focused on enhancing customer value, merchandising and supplier support, professional and digital services and private brands. And importantly, we expect this enhanced capabilities to clearly differentiate within our industry.

Let's begin with the customer, which is at the center of how we deliver value to our industry. Here, we work with our customers to help them achieve their unique goals by bringing them tailored solutions rooted in data-driven insights and our scale commercial expertise. How can we help our customers to solve their unique problems and bring more shoppers into their stores. Answering that question drives UNFI profitable growth. We have reorganized into product-oriented teams, recognizing that our retail customers aim to provide a distinctive assortment with compelling value that attracts a loyal shopper base. And we're continuing to invest in our customer-facing associates to help strengthen our relationships.

As you'll hear from Louis later today, we are revamping our customer go-to-market programs to better tailor our offerings to the diverse retailers that we serve. Think about the needs of an urban-located premium retailer are different from those of a multi grocer or natural and organic retailer. And so we're working to bring tailored solutions to customers now with no 2 stores serve the exact same shoppers or compete with the same competitive set. Serving 30,000-plus locations provide us data that we convert to insights that we use to inform and help customers operate more effectively.

Another key change we made in the past 18 months is that our commercial contracting process is more collaborative, discipline and meant to create and maintain win-win relationships built upon share profitable growth. We know it is critical that we help our customers more effectively compete over the longer term for both their success and ours. And the growth we are seeing within key parts of our customer base demonstrates how our focus on strengthening these partnerships is driving value, differentiation and supporting shared profitable growth. We are seeing growth among larger and smaller customers, particularly within our natural product business, and we want to build on this progress. We want to ensure we're doing everything we can to support the long-term growth strategies of each of the unique retailers that we serve.

Second, capability, merchandising and supplier support. It is critical for our customers, improving merchandising capability and simplifying the supplier experience to be the best partner for their growth. Our retailer partners work hard to provide their shoppers with compelling value and a unique assortment. Our broad differentiated assortment and data-driven merchandising capabilities are core to helping customers build a unique set of products that delight their shoppers at competitive price points. And we'll be focused on continually upgrading and refreshing our assortment, so retailers can offer their shoppers innovative in demand items and give them the insights to position them effectively.

And we will be working to keep them as competitive on price as we can knowing that our 30,000-plus locations provide a great path for CPG companies who want to profitably grow and optimize long-term brand positioning. Excellent merchandising requires a leading assortment and working with established and emerging brands. Just as we compete with our customers, we compete for our suppliers. We are continuously striving to be easier to do business with and be the best partner to grow your brand. As an example, as part of our simplified supplier go-to-market program introduced over the last couple of years, we began providing a platform called UNFI Insights that provide sales, inventory and category data to help suppliers make strategic decisions to optimize their performance and brand positioning within our retailer network.

Enhancing the supplier experience has also been an early focus of our lean initiatives. As a result of a successful continuous improvement event, we've been able to reduce the time to set up a new item by about 50% and see significant opportunity to further improve. And lastly, innovation has always been important to this industry, and we are committed to supporting growing categories, brands and suppliers. We want to identify them, bring them to the market faster and give the suppliers the tools to manage their growth. So having the right access to a diverse slate of brands, including emerging brands, is key to enhancing the differentiation we can help offer our customers.

One example of how we develop this brand's relationship is through regional spark events, which are smaller selling shows designed to help spotlight new brands. The smaller format shows give emerging brands the opportunity to showcase their product to a more targeted set of retailers, driving awareness and incremental sales. And combined, these initiatives help the entire supply chain and our broader industry work better together in a win-win-win collaboration.

The third capability is professional and digital services. We see these as a great way to support our customers and help them leverage our scale to reduce cost and grow sales all while increasing loyalty and deepening our relationships. We have a core set of services based on the most common activities in store. Think of accepting credit cards or coupons for which we have programs to lower cost and make operations simpler for our customers. These are higher-margin businesses for us that can have a significant impact on our customers' performance. And we're working to add new services as the market evolves in areas such as our relatively new UNFI media network or electronic shelf tags. These services support our customers across their operations and P&L in 3 ways.

First, we're helping them lower cost. For example, for our payment services, we're able to a offer lower processing fees and streamline back-office work, savings that go straight to the customer bottom line. Today, we save our customers tens of millions of dollars annually on credit card payments. Second, we're helping drive their core revenue. Programs like loyalty and rewards help retailers build repeat traffic, while our planogram and merchandising support improve shelf productivity and ensure the right products are in the right place to sell. And third, we're opening up new revenue opportunities. Our digital media and retail media programs connect suppliers directly with shoppers creating new marketing income streams and helping retailers better monetize their shelf and digital space.

We have the opportunity to significantly increase the penetration of our services. Today, the average customer who utilizes UNFI for services uses an average of 2 to 3 services, while our top service customers average around 6. And so this represents a significant growth opportunity to create mutual value, strengthened customer partnership and drive higher profitability through deeper service adoption, all while helping our customers with above priorities of lower cost and more sales. Overall, we want to help our customers operate smarter, grow faster and ultimately drive more profitable growth for them and for UNFI.

The fourth capability under adding value is private brands. And this is a win-win opportunity that we have to increase penetration of our private products, items available only in UNFI stores. Our $1 billion plus private brands program has been streamlined and is poised for innovation and reacceleration. Today, you can see the private brand penetration for conventional is roughly 4x that of our natural business where private brands are less mature broadly. This means we have a compelling opportunity to grow private brands over time, especially with our higher growth in natural business and help our retail base deliver more value to their shoppers.

Because of this, we expect our private brands to grow in the mid-single-digit range over our planning period. And to do that, we are focused on innovation and bringing sought after new products to market, creating tailored portfolios that sync up with each customer store and rigorously managing our sourcing to ensure quality, service and cost expectations are met. As you know, these items are designed to deliver strong value to shoppers while offering more attractive margins to both our customers and UNFI. And it's our job to demonstrate the value these products bring to our customers. Our private brand teams continue to develop a private offering that resonates with customers and their shoppers.

So taken together, high-margin brands and services contributed around 1/4 of our total company adjusted EBITDA and we believe there is an opportunity to continue to drive this higher as we seek to increase penetration across both areas. Now let's spend a moment on how we're becoming more effective and efficient. These capabilities also help our customers and suppliers by improving our day-to-day operations and ease doing business with UNFI, support profit improvement and free cash flow generation. We're becoming more effective and efficient by strengthening our technology and innovation platforms by advancing the supply chain of the future and by increasing productivity, including optimizing our cost structure.

We're continuing to improve our foundation and capabilities to help upstream and downstream partners succeed, building on the progress we've made over the last years. And a big part of who we are is our distribution center network. Our 49 distribution centers or DCs spend from coast to coast, and our network scale is a competitive advantage for us and our business partners. As you can see on the chart, we've been improving fill rates and on-time deliveries, and we are continuing to drive further improvements to get customers what they order, when they expect it.

As we work to continue improving fill rates, we recently introduced Relex across about half of our supply chain network. Relex is a software-based AI-enabled supply chain solution that helps with demand planning and replenishment driving better inventory management and helping optimize inventories. Where implemented, we're beginning to see more improvement in our fill rates and more efficient management of inventory levels. which is helping drive higher customer service levels and better free cash flow generation. Given this early progress, we're planning to continue roll out to the balance of the DCs in fiscal '26.

Now to give you a better sense of this tool, let's watch a short video featuring our Head of Procurement Organization, Scott Rochwarg. Please play the video.

The Relex platform is a leading supply chain platform that's really modernizing the way we do procurement and supply chain at UNFI. The AI and machine learning that's built into the forecasting algorithms really help to drive better inventory levels at the right time for our customers, improving their overall fill rates. We're going to start to be able to share forecasts that are more accurate with our supplier community which allows them to improve fill rates to UNFI as well as our inbound on-time performance. Relex is also a big unlock for our days on hand and our free cash flow initiatives at UNFI. All the same things that help improve our fill rates also help improve our inventory levels, improve forecast accuracy, better time demand to our actual inventory levels and future purchase orders allows us to enhance not only fill rates, but at the same time, draw down our inventory days on hand and improve the inventory turns in our distribution centers.

What an exciting solution for all our stakeholders. Now as we look forward, we're working to continue to transform our supply chain in ways that are fundamental to our strategy of bringing value to customers and suppliers. We're investing in innovation and technology including AI power solutions to make us better in many areas. New tools and processes help us better forecast demand, which allows us to be better at procurement. We have talked before about the use of automation investments that improve customer experience in many ways while adding capacity, improving service levels and creating efficiencies in our DCs and we're coupling these targeted automation investments with increasing deployment of lean management to drive process improvement. We believe implementing automation and lean alongside each other magnifies and complements the benefits of each.

With lean daily management now in over half of our warehouses, we're reaping quantifiable benefits to safety, quality, delivery and cost from unleashing the collective power of all team members to solve problems and drive continuous improvement in our network. We've also developed a more rigorous approval process for capital investments and plan to maintain this discipline in the future. Projects are scrutinized from a broader perspective, and double-digit hurdle rates are being applied for investments, while maintenance is now used based versus calendar based, all leading to more productive overall capital spending. Coupling this discipline with our network optimization is enabling us to more effectively deploy our capital spend. In our fiscal 2026 capital investment outlook, spend per DC is expected to grow.

The goal of this investment in our broader capital allocation strategy is to improve service levels, maintain our skilled asset base and solidify our future growth while improving return on invested capital. During fiscal '25, return on invested capital rose nearly 100 basis points and is on track to rise another 200 basis points in fiscal '26. Importantly, there is still significant opportunity ahead. As we continue to transform our supply chain network through these targeted actions, we are seeing improved operational and financial outcomes. For example, we've driven sustained improvements in both throughput and shrink and are confident that continued execution of our plan will unlock additional efficiency gains, strengthen our cost position and enhance returns across the network.

Next, we are using technology and innovation to drive forward. First, we're focused on simplifying our business to enhance resiliency and streamline interaction with our partners, and that includes the technology and digital interfaces that power much of what we do. Second, we're improving performance through digital platforms that help support growth and bring increasing level of benefits to associates, suppliers and customers to help them make better and faster decisions. And third, we're also using technology to enhance our effectiveness and efficiency. This includes the launch of a new ERP system to simplify our tech stack and to modernize our ability to use and generate valuable real-time data. Complementing all this, we also began deploying AI power tools to enhance our analytical capabilities.

The third and final area under effectiveness and efficiency is productivity which means using the resources we have to do more. We've been driving down our OpEx as a percentage of sales, and we plan to continue this journey. A few of the levers we're using are lean daily management, which I'll review in a moment, working to lower our indirect cost and taking a critical look at our processes to eliminate steps, waste and cost. And this builds on the progress we've made in fiscal '24 and '25 by streamlining our organization by reducing layers to increase the adaptability and the responsiveness of our business.

We've also established our value delivery office. A cross-functional team tasked with overseeing and driving accountability across 10 key strategic projects every year, all meant to improve effectiveness for our customers and make us more productive and efficient as an organization. This office was developed when we kicked off our multiyear strategy in fiscal 2024, and we have a long runway of value-creating projects to tackle with this team.

So now I want to frame up our lean transformation. One that we believe is accelerating. Lean is a way of thinking and a way of working that at its core, revolves around problem solving and continuous improvement to help drive value for customers and in turn, for UNFI. Lean daily management is driving safety, quality, delivery and cost improvements that will improve our execution and drive lasting culture change. Our journey started in 2024 when foundation was laid and a small team was formed. We've been scaling lean over the past 12 months and have educated senior leaders and developed employee practitioners to act as coaches and ensure we are applying lean consistently in our day-to-day decision-making. We've also implemented a standardized lean operating model with 34 DCs. And we plan to continue the rollout and broaden adoption as we move through this fiscal year to drive the highest possible impact.

We have more recently accelerated the use of continuous improvement events to solve specific problems identified by customers, suppliers and leaders using the collective resources across the organization to drive improvement. I have to say I'm pleased with the progress we've made today and how the organization has embraced lean to solve problems and take actions to course correct in real time. Lean is driving lasting change to an already strong collaborative service first culture. And with lean, we expect to drive meaningful impact, including stronger customer relationships, improvement in safety, quality, delivery and cost, working capital and free cash flow and expanded operating margins. So now the best way we know how to deploy lean is to go to a distribution center where the work is done.

Let's look at one of our DCs that was an early adopter of lean daily management. The leaders at this facility adopted lean daily management, or LDM, in December 2024, exactly a year ago. The core aspect of LDM is the daily review of key operational metrics that underpin safety, quality, delivery and cost or SQDC. Imagine each day, a group of these leaders reviewing metrics for these areas and evaluating whether they are on target or not. Using a standardized dashboard that shows metrics over time on target as green and those below target as red. And this data review of the data enables our DC teams to make real-time changes to continuously improve operations. And as you can imagine, in the spirit of continuous improvement, if a team is consistently meeting or exceeding their targets, we raise them. And this ensures we drive greater improvement across the areas that really matter.

In just a year, we have seen significant progress since the adoption of lean daily management at our DCs. This DC's throughput, so how many cases we can move through the DC is up 9%, and on-time deliveries are up 3%. And at the same time, shrink is down over 16%. And importantly, success in lean daily management also encourages collaboration and creates a better working environment, which benefits us through lower turnover. We see significant opportunity to drive further improvement across our supply chain as we bring LDM to more of our DCs. And as we see the DCs extend their track records practicing LDM.

Before I turn it over to my colleague, Danielle, I want to reiterate the capabilities you'll hear us focus on today that support continued execution of our long-term strategy and value creation. These capabilities are central to adding value to customers and suppliers while becoming a more effective and efficient organization, which we expect will drive profitable growth and free cash flow and ultimately, continued shareholder value creation.

Now let me turn the floor over to Danielle Benedict, our Chief Human Resources Officer, to discuss the initiatives we're executing to maintain and build our strong talent base.

Good morning, everyone. I'm excited to be here and talk about how we attract, develop and empower talent to drive UNFI's next generation of growth. We see our team as our #1 differentiator at UNFI. Over the past few years, we've been deeply focused on building a strong management team in cultivating the next generation of leaders to transform the business and execute our strategy. As Sandy shared, our purpose is to deliver better food and create a better future for everyone we serve. That purpose is deeply tied to our culture. For 50 years, UNFI associates have taken pride in delivering better food to more communities. While our business has evolved, our passion for serving customers and suppliers remain strong. It's what fuels our high-performing culture and attract the industry's most talented leaders to our company.

We're creating a culture of leaders who model 3 core values: Better every day. We aim to stay curious, challenge the status quo and continuously learn; Do the right thing. We put the safety, security and well-being of our people and partners first in everything we do and win together. We work together as one team holding each other accountable to our commitments and delivering on our promises. Our purpose and values have been foundational to our strong performance over the past few years, and we see even more opportunity ahead. Now I'm proud to introduce UNFI's senior leadership team, a blend of long-tenured talent and strategic external hires with deep experience in transformation, growth in customer-centric industries.

Let me take a moment to briefly review their unique backgrounds and experiences. Our CEO, Sandy Douglas, is a 30-plus year CPG veteran who brings a unique understanding of what brands and retailers need to succeed in a dynamic marketplace.

Matteo Tarditi, our President and Chief Financial Officer, joined UNFI in 2024. He brings 25 years of financial leadership expertise from GE, where he served as CFO for 7 different business units around the world. As a Lean Six Sigma Black Belt, he successfully drove transformation and increased productivity across the enterprise.

Mark Bushway, our President of Natural Products and Chief Supply Chain Officer, built his career in food wholesale from the ground up starting in distribution center and later joining UNFI in 2003 as an operations manager. Today, his hands-on leadership style, drive deep associate engagement and operational excellence.

Louis Martin, our President of Conventional Grocery Products and Chief Commercial Officer, joined UNFI in 2022. He began his career as a commodities trader, and brings retail-focused CPG expertise and strategic consulting experience from McKenzie & Company.

David Best, our CEO of Retail, joined UNFI this summer, bringing retail experience from Target and CPG experience from General Mills. His Minnesota roots and personal connection to our Cub banner make him uniquely suited to strengthen our retail segment as we go forward.

Mario Maffei, our Chief Information Officer, joined UNFI in 2023, following a 24-year career at Mars Inc. During this tenure, he spearheaded global IT system integrations automation and AI initiatives that transformed associate and customer experiences.

Mahrukh Hussain, General Counsel and Corporate Secretary, joined UNFI in 2022. She brings extensive legal expertise from nearly 22 years at the McDonald's Corporation, where she served as General Counsel in global, international and regional roles.

Matt Echols, our Chief Corporate Affairs Officer, joined UNFI in 2022 with nearly 25 years of CPG experience. He has led corporate affairs functions in both North America and Asia Pacific.

And finally, a little about me. I've spent about 25 years in HR and started my food industry career at Dunkin' Brands. I've been here with UNFI for 12 years and have served as CHRO since 2017. It's been an amazing journey, and I'm excited for the future.

UNFI's ambitious destination, attracted many of us here from other high-performing companies. And now we're all collectively focused on helping our customers, our suppliers and our associates win together. Our leadership team is hiring and developing the right people to accelerate capability building across the enterprise. Sandy and Matteo covered these capabilities earlier today, which focus on adding more value for our customers and suppliers and improving effectiveness and efficiency across UNFI. Behind this work is a committed talented group of next-generation leaders. I'm excited to share how we're enhancing these capabilities from customer stewardship to merchandising, to services and to data and insights.

So now let's hear directly from a few of our next-generation leaders, Kelly, JJ, Simon and Tyler on how they are bringing these capabilities to life. Roll the video, please.

[Presentation]

Talent development doesn't stop at hiring. It's also about continuous learning. Building on Matteo's overview on lean daily management in our distribution centers were teaching leaders to apply lean principles across the enterprise, creating the culture of empowerment, curiosity and growth. We've also invested in high-impact leadership programs focused on commercial and operational excellence. Through initiatives like UNFI Elevate, and leaders in supply chain, we're equipping leaders to build high-performing teams that deliver more value to our partners.

Next, you'll hear from UNFI leaders like Belinda, Ron and Ria, who have grown through these programs, making a difference for their teams and the businesses they serve. Let's roll the next video, please.

[Presentation]

As we build talent and capabilities, we've also been streamlining our structure for speed and impact. We've reduced layers and key functions, empowering faster decision-making. And we've launched the value delivery office led by Matteo Tarditi to drive strategic initiatives, operating discipline and accountability. This helped us deliver a significant EBITDA improvement in fiscal 2025. Bringing it full circle, we'll continue to recruit and developing talent who live our values, better every day, do the right thing and win together. These simple and clear values guide everything we do and keep our entire team aligned.

In closing, to build on what Sandy shared earlier, our team is our #1 reason to believe that UNFI's future is bright. Together, we're developing the talent and the capabilities to become our industry's most valued partner. Thank you.

And next, I'll turn it back over to our CEO, Sandy Douglas, along with our President and CEO of retail, David Best. Please give the team a few minutes to set up the stage. Have a great day. Thank you.

So good morning again, everybody. Kind of coming from Danielle's team about talent, we had the opportunity this summer to grab one of the industry's rising stars as a retailer and a merchant and somebody who could really strengthen a key component of our business, which is merchandising services and obviously, our retail business, and that's David Best. And it's totally unfair because he's only been here for 3 months. But I just thought you all would get a kick out of hearing from him in a kind of an informal fireside chat format.

And David, as I think about your depth of retail experience and proven record of success, I'm interested in sort of what you saw, you're Minnesota native, you love Cub, but you've got extensive experience and could have worked anywhere. So talk a little bit about why you joined UNFI and sort of what's your early take?

Yes. No. I mean I'm thrilled to be here. And I've spent my life in food and retail, so between stints at Target, General Mills as well as running an independent grocer. And one of the things I've long -- of course, now Cub is my hometown grocer. So it's a deep passion project for me. But one of the things I've long felt is all the headlines are about how these big mass players are gaining share in food, and that's true. But what's often underreported is the fact that there's lots of differentiating unique retailers out there also winning and breaking through in the marketplace. And part of what gets me excited about being with UNFI and being here specifically leading our retail businesses, we have the opportunity to do that here at Cub Foods and to really break through and be one of those retailers.

And so it's early days yet, but we're really focused on a couple of key things. We call it with the team going back and relearning our ABC. So A, is for anchor on the shopper. B is for bold and distinct assortment and merchandising. And C is for clear value. And now this may not sound super fancy or different. But the reality is, is that there's magic when it all comes together and is executed consistently every single day by a team that cares. And so we have the opportunity to do this at Cub and truly make it a local distinct retailer that can win and dominate in its market.

Yes. Well, and we believe that, too. And for investors, the Cub turnaround is not part of our projections. It's a plan plus initiative. It's something that, as David succeeds, we'll generate incremental value for the business. But there's a bigger idea in this, which is the importance of what he just said more broadly across our customer base. And so before we talk about the more broad impact on our customer base and the role that you and your team could play in helping all of us help all of our community. Let's talk a little bit about transformation and innovation and how you would describe your leadership approach to that as you begin to engage to get the Cub brand back on a winning trajectory?

Yes. No. And I think it's a great question. And I want to go back to what Danielle said. She illustrated, and I think you'll all see is what a talented team we have here at UNFI as a whole. And it's really cool to be part of that. We moved very quickly in retail to make sure we build the right team of both internal experts as well as key external hires. And we're starting to hit the ground running. But I'll say this, is, a lot has changed in food retail over time. But one of the things that hasn't changed is that we're a people business at its core. And I firmly believe that great culture drives great results. And so a lot of what we've been talking about as a new leadership team is what are the types of behaviors we want to coach into our team to help really drive and accelerate this transformation.

So it breaks down for us as being bold. And I do think that in our industry, fortune favors those that are bold and really working hard to break through with the customer. The second thing is really around making sure that we're curious. The environment is changing quickly. We've got to make sure we're focused on our shopper, what do they need, how do we raise our bar every single day. That's one of our UNFI values. The third thing is really around adaptability. And I do think this is where independent grocers in particular, can win. The market is -- it's always been changing. It's going to continue to change. But the reality is that if we can adjust faster than our competition, I really do think that can be part of our recipe for success here.

As I listen to you, it excites me because over 40-plus years in this industry, I have called on so many merchants, and I've seen some amazing ones and seeing how they how they bring analysis and creativity and curiosity and then they invent things. I've had the opportunity to spend a lot of time with Danny Wegman over the years, and he talks about merchandising as the process of bringing relevant things to market that were previously unavailable. And he speaks simply, but there's nothing simple about that. But as I listen to you and I put you on the spot here, your Thanksgiving week, you were in how many Cub stores?

I think I was in 40 stores in just a handful of days. So I was out with our team and our customer, our shopper during our biggest week of the year.

And you weren't alone. You had your new team with you?

Yes. And we're getting ready to do it again for Christmas here. So we've got to get as close as possible to -- Matteo talked about this with lean daily management get as close as possible to the work and to the shopper. And that's a big part of the culture that we're building as well.

And then the last thing I would say about this is David attracts talent. There's talent calling him going, "I want to be on your team." And you had 4 new senior-level merchandising hires in your first 3 months. So I'm excited to see what he can do and let's take one more look at a broader question, though.

So imagine we start to hit on all cylinders at Cub, which I know we will. We're going to be learning a lot. We'll be hearing later from Louis Martin to talk about conventional and some of the capabilities for customers. But think about what your thoughts are about the broader industry and the talent you're bringing in and how we can strengthen our own company from your experience.

Yes. I mean it's a great question, and it's something that I really think will be part of our secret sauce for retail is our collaboration upstream with our value chain. And between Louis, Mark and I, we're kind of all joined at the hip here as we work to learn really together. And let me give you an example of that. I mentioned earlier the C in our ABCs is clear value. And we had done some work with our shopper and done some research to really realize we lost our way there. And so we wanted to make a very quick impact going into the holiday season.

And so we started with our UNFI private brand items and pick core staple items like milk, eggs, flour, butter, all under our brands and really double down on making sure we offer really strong everyday value and paired that with both really strong in-store and online merchandising and to make sure it could show up to the customer, the shopper that was in the store. But what's important about this story is I've been doing this for a while. And you can't just put something in the store and hope people find it. You've got to work hard to make sure you break through.

And we use UNFI's media network specifically to target our lapsed shoppers as well as our most value-seeking shoppers. So it's early days yet, but we're starting to see our transaction count and our unit counts grow specifically with those cohorts as we let them know, there's something new and exciting to come check out in store. And so as we do this, we're working hard to make sure we're sharing back all those learnings really across the whole UNFI ecosystem to wherever there's a playbook that can be applied to other retailers that we take the opportunity to do that.

And what's another neat thing about this, and this is not something most folks know, is that the Cub brand is made up of company stores and franchisees and the franchisees not only own Cub stores, but they also own other banners. I think that ecosystem Cub plus the related franchisees and banners is the majority of our Hopkins DC. And so there's a lot of learning going on across that as David and his team begin to find things that work and use our tools in new and better ways. So really excited to have you on the team, excited to see what happens, some planned plus value in the next few years. No pressure, only 90 days in.

But I think what we're going to do now is take a 10-minute break, give everybody a chance to stretch and for those online as well, and we'll start up again in about 10 minutes. Thanks, everybody.

[Break]

Good morning, everyone. My name is Louis Martin, and it's a pleasure to be with all of you here today, for those of you here in person as well as those of you listening in online, thank you for joining us. You've already heard from Sandy about our broader strategic direction. You also heard from Matteo about the operational road map that is translating our strategy into results. So now what I'd like to do is take a few moments to share how UNFI connects those 2 worlds together every day through our commercial capabilities.

From customer stewardship and merchandising and supplier support, to professional services and digital services and private brands, we are accelerating our capabilities to help both customers and suppliers win in this competitive environment. At UNFI, helping retailers create compelling value and differentiation isn't just a concept. It's at the heart of what we do. And we understand that in today's grocery landscape, where consumer habits are evolving faster than ever standing out is everything, and our role is to help our partners do exactly that.

The success of UNFI and our partners is linked. We partner with customers to bring them competitive prices, unique product assortments and innovative merchandising programs and services that help them stand out and create separation from mass retailers. We then partner with suppliers to offer simplified experiences, go-to-market programs and insights that help them build their brands and accelerate growth within a diverse network of retailers.

At UNFI, we think about every day, how can we better serve our customers. So let me share more on who they are and how we are working to help them achieve their unique goals. For independent grocery retailers, it's often more than just about price or convenience alone. Compelling value is required, but so is delivering an experience that reflects the needs of the communities that they serve whether that's health and wellness, multicultural authenticity, sustainability or premium quality. Our customers care deeply about the products that they carry. And so we have reoriented the way we engage with customers into product-oriented customer teams to ensure that they receive the expertise on both the natural and conventional products that they seek.

We have lined up our cross-functional merchandising analytics and operations team to directly engage with and support our customers with a tailored personalized approach to help them drive higher growth across all categories. And today, we are combining our experience and relationships with enhanced data-driven insights to understand each customer's goals and strategies and the growth and financial outcomes that they are pursuing. Ours is not a cookie-cutter approach. It's not a cookie-cutter service model. It's a collaborative growth partnership model that aims to support win-win outcomes for us and our retail partners. This is how we help retailers drive value in different differentiation, which in turn enables profitable growth, both for them and for UNFI.

Now as Matteo highlighted earlier, Today, our average share is about 50% of each of customers' total consumer COGS spend. But for our top decile customers, it is over 80%. And this presents for us a significant opportunity to deepen relationships that support our share goals for profitable growth. Now I could sit here and just describe how we help our customers execute their unique strategies. But rather than hearing from me, I'd like for you to hear from a few of them directly. So let's roll the tape.

[Presentation]

What you just heard and saw represents diverse types of retailers from a family-owned specialty chain like Heinen's to multicultural grocers like Vallarta to local natural food pioneers like Healthy Living. Each of these operate in a unique market but they all share one thing in common. They are successfully growing in this market by delivering a strong value proposition and differentiation, and our customer-centric sales model helps enable this growth. And sometimes that will mean helping a multicultural grocer access the best ethnic and international products in the market.

Sometimes it means partnering with a natural retailer to help them refine store layouts or launch a new private brand strategy. And in all cases, we're using our data-driven insights to help our customers capitalize on the fastest-growing brands and products. And for all of them, our goal is the same: support our customers in their growth journey and make UNFI the easiest, most responsive and most innovative partner to work with.

Now let's turn to the other side of the equation, merchandising and supplier support. Our broad differentiated assortment and merchandising capabilities are core to helping customers build a unique set of products that delight their shoppers at competitive price points and we can enable this growth by providing data-driven insights and simplified experiences for our suppliers. From an assortment standpoint, we have a strong history of delivering items that cover every grocery category and product type, be they natural or conventional, large or small, or fresh and non-fresh.

But as we look ahead, we see even greater opportunities, not just to provide a wide and diverse assortment but to also offer innovative merchandising programs that deliver both competitive pricing and differentiation across growing categories, regions and stores. Our assortment of about 230,000 SKUs from approximately 10,000 suppliers, covers the core brands that consumers know and love as well as innovative and emerging natural, organic, specialty and fresh products that continue to gain share in this market. This broad assortment allows us to work with our retail partners to help them build the most relevant, distinctive and profitable product sets for their stores, whether they're focused on natural innovation, value-driven essentials or premium items.

That said, over the past year, we've begun to reposition our merchandising organization to create value beyond just assortment by leveraging data, analytics and market-tested insights to achieve higher levels of price competitiveness and to become the authority in innovative merchandising programs. But what does this mean in practice? Well, it means that we start by collaborating with our suppliers to offer our customers a compelling and competitive core assortment that delivers a strong value proposition on key items. We then help our retail partners differentiate further with unique and locally relevant products supported by innovative merchandising programs that not only create value on the shelf but support an enhanced shopping experience in the store for consumers.

For those customers with a broader set of conventional products, this may come to life through the activation of merchandising programs that more heavily emphasize value and the shoppers' trusted experience with key brands and products. For customers with a broader set of natural products, our merchandising programs may in turn lean in more on innovative new-to-market and locally relevant qualities of the products on display. And with our national scale, we can move quickly and with agility to leverage our learnings across all the markets and provide our customers wherever they may be with the best options to activate and grow their preferred brand set across their stores.

For suppliers, our goal is simple. We want to be the easiest and most effective partner for them to access an increasingly attractive set of differentiated retailers and their shoppers. We help suppliers grow by delivering data-driven insights through the UNFI Insights platform, offering tailored go-to-market growth programs that address unique brand needs and by simplifying our processes to decrease time to shelf and help suppliers scale their brands faster. And this approach enables us to offer unique benefits to all suppliers from the largest CPG company to the smallest start-up. All of these companies desire broad reach, easy processes and support to drive growth.

Let me give you 2 examples of this. We're helping larger brands like Califia Farms drive both unit and dollar growth through targeted placement and data-driven merchandising. And we're also investing in the next generation of innovators which are growing at and above average rate, as Matteo described earlier. Through customized programs such as UNFI Up Next, we help small emerging brands like Painterland Sisters access resources, relationships and data that they need to grow faster within our retailer network. But again, I could talk about it, but I'd rather you hear directly from both of these suppliers. So let's roll the video.

[Presentation]

These examples are powerful reminders that partnering with UNFI can help everyone win. Retailers receive competitively priced, differentiated products and innovative merchandising product programs that help them drive shopper engagement and sales growth. Shoppers and stores discover authentic exciting brands that reflects their needs and values and suppliers build the brand equity that they seek for sustainable growth.

As we look forward, we are continuing to strengthen our supplier experience through faster onboarding, better analytics and richer insights to make partnering with UNFI as seamless and impactful as possible. We want to be the growth partner of choice for every brand that wants to win in grocery.

Beyond product assortment and innovative merchandising, we also help customers win by providing services that help them make their store operations stronger, smarter and more profitable. Our professional and digital services portfolio is one of the most exciting growth opportunities across our business. As you heard earlier, across customers that use our services, the average number is 2 to 3 compared to the highest use customers who average around 6. So we have a clear growth opportunity. We deliver solid value in this space today and are focused on continuing to drive penetration of our current services portfolio while developing new and relevant services that meet our customers' evolving needs.

We think about our service offerings in 3 tiers. One, base services. These are the foundation of doing business with UNFI. So think about ordering, pricing and data exchange tools that simplify day-to-day operations. Two, premium services. These are value-enhancing offerings like payments processing, coupon management, planogram designs, all which save time and money and deliver value. And three, digital services. New and next-generation capabilities like UNFI, media network, digital coupons, e-commerce all which directly accelerate retail sales and help our customers compete in today's evolving digital marketplace.

Now I'd like to highlight how we provide our full set of service offerings to our retail partner Niemann's. As you can see here on the slide, Niemann's has approximately 100 retail locations under several banners in the Midwest, and they leverage a broad set of UNFI services on top of our base services, to support their business. Some of our services, including payments and equipment purchases, help them lower the cost of running their stores. Other services, including coupon processing and shelf services, are helping them drive loyalty and an improved shopper experience at the shelf. And importantly, they are leveraging our digital services to help drive incremental revenue including them being one of our early adopters of the UNFI Media Network.

While we have consistently grown our services business in the recent years, we continue to see opportunities to accelerate this growth, strengthen customer partnerships and drive higher profitability through deeper service adoption. And we're focused on doing this by leveraging better data visibility, ensuring we bring our full relevant service offering to our customers and driving customer specific value propositions. We're also focused on expanding our digital services solutions, leveraging AI and automated tools. For example, through our electronic shelf labels and dynamic pricing tools, we can enable real-time visibility and promotional flexibility at scale. And through our UNFI media network, we help suppliers gain targeted reach, closed-loop measurement and access to high-value audiences, putting their brands in front of consumers at the point of purchase, whether it's across website, apps or in-store.

As we look to the future, we continue to curate this digital portfolio with intention. We want to make sure that every tool platform and data solution we launch creates value for our customers and helps them stay ahead of the digital wave. By bringing together retail media, analytics, loyalty and e-commerce into one connected ecosystem, UNFI can help retailers and suppliers lead in an ever-increasing digital marketplace and capture new growth where technology and consumer engagement intersect. We believe we are uniquely positioned to deliver a win-win-win value for our customers and for UNFI in this space.

Let me now turn to private brands. These brands are one of the most important levers retailers can use to drive profitable growth, and shoppers are seeking the quality and value provided by private brands. These brands help retailers compete more effectively, improve margins and build long-lasting shopper loyalty. Now through our scale, we're able to see what works across thousands of stores and hundreds of categories.

And we use that insight to create tailored private brand programs that reflect each retailer's specific growth strategy and help them meet their shoppers' preferences. We are focused on expanding our in-store presence across both natural and conventional product segments, ensuring that our private brand offerings create value wherever our customers compete. And we believe that our potential sales penetration in our addressable market can move higher, as you can see here and as you heard from Matteo earlier.

Over 20% of U.S. grocery sales today are private brands and they're gaining share on the shelf. Our private brand portfolio is built to complement our customers' assortments. It combines scale, data-driven insights and merchandising expertise. Three things that uniquely position UNFI to help our partners succeed. And each of our brands serves a distinct purpose from value-oriented everyday staples to premium attribute-driven innovations. That clarity provides retailers with flexibility to design private portfolios that fit their competitive positioning, whether they're focused on affordability or sustainability. And we're not standing still. We are continuing to invest in innovation, reformulation and packaging redesigns that bring more modern relevance to each and every category we serve.

Now for those of you here in the room, when you're on break, you maybe saw some of those products outside in the lobby. So if you haven't had a chance to sample our essential everyday or wild harvest products, I think you have a tote bag that came with your seat. Feel free to fill it up with some of those brands, and I encourage you to try them. They are delicious examples of the quality and innovation that define our brands plus portfolio. So now let's hear from one of our customers about how our private brands are boosting their growth. Please roll the video.

[Presentation]

Private brands deliver yet another win-win-win. Retailers gain margin and loyalty, suppliers see category expansion and shoppers benefit from better products at a better value. We are confident that our continued focus on innovation and differentiation in Brands+ will remain a core growth driver in the years ahead. Across everything I've shared today, I hope you've heard a consistent theme and that is that our focus on delivering a compelling proposition that is driven by value and differentiation. We are working to partner with retailers to help them stand out and grow through competitive pricing, unique product assortments and innovative merchandising expertise. We are helping suppliers to scale their reach, build brand equity and accelerate innovation. And through our services and Brands+ offerings, we are helping our partners operate more effectively and create more value for their shoppers.

Our commercial capabilities are strong. Our partnerships are deep and our opportunities across categories, brands and services are greater than ever before. But we also recognize there is a lot of work to do. And that is in this ever-evolving commercial landscape, it's incumbent on us to get better each and every day, and we are humbled by both the challenges and the opportunities that lay ahead. And I can tell you that our team is committed to building a UNFI that helps all of our customers and suppliers win together.

Thank you again for your time. And now I'll turn it over to our Chief Information Officer, Mario Maffei.

Good morning. It's great to be with everyone today. You've heard a few of my colleagues talk about the capabilities we're building to create more value, effectiveness and efficiency for our customers, suppliers and company. Today, I'm excited to talk to you about how we're accelerating our technology capabilities for the benefit of all of our stakeholders.

At UNFI, our technology strategy is designed to enable better business outcomes. We're focused on 3 key priorities. The first is simplicity. We're building a resilient, frictionless technology ecosystem with security at the core of everything we do. The second is performance. We're using technology to improve service levels and help our customers meet the digital challenges they face. And lastly, underpinning all of this is effectiveness and efficiency. We're creating a modern, integrated technology foundation to improve speed and business outcomes.

We operate a large and complex supply chain with 49 distribution centers running virtually 7 days a week, 24 hours a day, moving nearly 3 million cases a day. And today, we use more than 475 different systems to run our business. To secure, maintain and advance an architecture at this scale, simplicity is critical. That's why we're focused on reducing our total number of systems. So we can create a frictionless, simplified experience for our customers, suppliers and associates. This allows us to create and realize more value for every dollar we invest in technology, which, in turn, allows us to continue investing in next-generation capabilities.

Our infrastructure is critical to the businesses and communities we serve. It needs to be resilient, adaptable and scalable in support of our business strategy and we're investing with this in mind. The capabilities we can deliver through technology are a differentiator for UNFI, and we plan to grow this advantage to help our customers and suppliers more effectively compete in the marketplace. We're implementing several industry-leading technology platforms to do just that and with many of these solutions well underway. We've deployed Samsara's connected operations platform across our transformation fleet. And this is giving us greater visibility into our operations. We're now working to use that platform's real-time data and insights to improve driver safety and on-time delivery for our customers.

You heard Matteo mentioned Relex, a predictive purchasing platform that makes inventory management more efficient. We're about halfway through this deployment, and we're already seeing this technology improve service levels for our customers while improving working capital efficiencies. Next, we have Manhattan Active, a cloud-native warehouse management system that helps us to seamlessly orchestrate workflows in our distribution centers. So far, we've driven hundreds of thousands of dollars in efficiency across the 4 DCs that have gone live to date. With the remaining network, we have a long runway to deliver more effectiveness and efficiency with each deployment.

Finally, we began our journey to implement a strengthened technology foundation on SAP. This will allow us to significantly reduce the number of systems used to operate our network and, in turn, substantially reduce operating costs. It's early days. But with our recent successful go live of the SAP master data platform, our confidence is growing that we can effectively implement this technology across our network. Through these platforms, we're unlocking access to the data and insights that will most benefit our customers, suppliers and associates. We're implementing technologies that do more than just show us what's happening today. They will allow us to continuously improve our operations and the economics of our business over time.

I'd like to show you just one example of a capability we're preparing to pilot called UNFI Endless Aisle. It's an example of how we can use technology solutions to add more value and drive simplicity for our customers and suppliers. Let's roll the video.

[Presentation]

So exciting. So I've shared technologies we're already deploying or have deployed. As we look further out, we're beginning to see another wave of opportunity that we can connect those technologies that we're deploying with powerful artificial intelligence and analytics solutions. We see 3 key opportunities emerging. The first is embedding intelligence into how we operate our business. The potential for AI is immense, but it's costly, and there are risks. We mentioned how we're already using proven intelligence embedded into applications like Relex and Samsara to drive performance. We've also begun exploring intelligent agentic solutions that can make it easier for our customers to do business with UNFI. For example, leveraging AI to buy smarter and grow their business faster.

Next, automation. We believe process automation can drive a step change in quality, throughput and speed to market. We have thousands of touch points within our supply chain and many still rely on paper trails and manual actions. We're working on ways to digitize and optimize common documents like a bill of lading, which will increase visibility and automate time-consuming manual work. This is just one example of the many examples we can digitize and automate in our business in the future. Then predictive capabilities. As we drive process automation and intelligence, we're seeing this open up the ability to use predictive technologies. In the future, predictive insights and processes may allow us to achieve greater business-to-business integrations between customers and suppliers, fueling more profitable growth for all of us.

Through a strategic combination of third-party partnerships and internally developed capabilities, we've seen early successes that are increasing our confidence and we're in the beginning stages of using intelligence and automation solutions with our internal processes, and we're now starting to explore developing solutions to help our customers successfully manage the increasingly competitive and technology-driven marketplace. This will be a phased journey, and we believe we're taking the right actions at the right pace to ensure technology not only enables but also accelerate our performance for many years to come.

I'd like to just recap the key points I've shared today. We're building a resilient frictionless technology ecosystem with security at the core to add value for our partners and improve our effectiveness and efficiency. With significant upside ahead of us, we believe better technology will be a foundational element of how we deliver better food and create a better future.

Thank you. And now I'll hand it over to our President of Natural Products and Chief Supply Chain Officer, Mark Bushway.

Good morning. It's great to be here with you. Today, we've heard how UNFI is focused on becoming a stronger partner for our customers and suppliers. And you've heard how effectiveness and efficiency help us serve their needs better. Our supply chain is foundational to delivering on these goals. Over the next few minutes, I'll cover 3 things: our approach to driving value, effectiveness and efficiency across our supply chain, the progress we've made in the past 24 months and what's next. The initiatives that we believe will improve service for our partners while generating consistent leverage and free cash flow for our business.

Now our supply chain is the engine that drives our strategy. It enables better service, lower costs and stronger partnerships. When we improve service, reduce costs and create more value for both sides of the supply chain, it translates directly into higher sales and profits for our customers. For UNFI, we see better working capital, lower operating expense as a percent of net sales and stronger cash generation. Our supply chain priorities are threefold. Safety. It's always first. We work to protect our people ensure their stability. Effectiveness, delivering the right product in the right quantity at the right time. And efficiency, optimizing our operations, improving our service and reducing costs. These 3 pillars reinforce each other. They're the foundation of our performance and the lens through, we make our decisions in supply chain every day. It all starts with ensuring our associates get home safe every day and that the food we move arrive safely to the communities we serve.

So let's take a moment to hear more from UNFI safety leader, Tehzin Chadwick.

We are building a world-class safety management system that is rooted in shared responsibility and a strong culture to protect our associates, the communities in which we serve and to really drive operational excellence. Our customers and our suppliers expect us to keep their products and the reputation safe. We do that by anticipating risks before they occur. Everything from maintaining our supplier management program to ensuring that our facilities are clean and temperature-controlled to transporting the food safely to our consumers needs to all happen with safety top of mind. We always stay ahead of it so that our partners can really focus on growing their business. It's a real differentiator. Safety is not just about a compliance check box but becoming a value-added portion of our organization that helps to deliver on sustainable long-term growth.

Great. Over the past 24 months, we've made real progress through disciplined execution. We track effectiveness through fill rates and on-time delivery. For efficiency, some of the metrics we focus on include throughput and shrink as a percent of net sales. We've improved across all 4 metrics through a few specific actions. Implementing lean daily management which drives frontline problem solving. We also decentralized procurement to bring buying teams closer to our customers. Then we finally did optimizing our DC network for capacity productivity and a healthy return on investment capital while rolling out some of those new technologies Mario just talked about. These actions of improving service levels for our customers and suppliers, and they're translating into better working capital, stronger operating leverage and more free cash flow.

One area where we've made real progress is what we call network optimization. For example, in the Northeast, we transformed our network by consolidating unit pick items from our natural DCs into 1 automated hub in Carlisle, Pennsylvania. Carlisle now distributes a broader assortment to the Northeast market and ensuring customers receive their full case and unit picked items together for their natural and conventional products. Through these changes, we're working to give customers a more complete order with improved service level and accuracy while lowering our handling costs and increasing network capacity. In addition, we replaced our facility in York, Pennsylvania with a larger state-of-the-art facility built for growth in Manchester, Pennsylvania, adding full case automation.

These changes have service levels, increased throughput, enhanced fulfillment capabilities and stronger asset usage while reducing complexity and costs. You've heard from Mario about some of the technologies we're now deploying in our supply chain. As he noted, we're taking a disciplined test, learning rollout approach to ensure service levels remain strong as we scale. Now I want to spend a moment highlighting some of these early impacts these technologies are making on our service levels and our results. With the deployment of Samsara's connected operations platform, we've started tracking our truck routes and customer deliveries in real time. We've already used this data to improve driver safety by 37% to date. And now we're beginning to use the insights to improve on-time deliveries to our customers.

With the deployment of Relex, we've improved service levels while reducing inventory days on hand by half to a full day across the DCs that it has been implemented in so far with more opportunity ahead. In summary, we're seeing that advanced technology and disciplined processes are powerful when they're paired together. As we combine our automation solutions with our new lean process, we're empowering our associates to drive everyday improvements to the metrics that matter most and we're just getting started.

Now to be clear, we're not satisfied yet because we know we can be even more effective and efficient. One of my mantras I tell my operators is the rent is due every day. It's our way of reminding ourselves that we have to earn trust from our customers, our suppliers and our associates, 365 days a year. So what's next? As we look ahead, we see opportunity to expand our automation into more DCs, continue to scale our AI-driven forecasting and replenishment tools, optimize our network to support growth and improve returns on invested capital and continue to embed lean daily management into all of our DCs. Each of these initiatives has multiple benefits. It strengthened service reliability for our partners, while lowering costs and supporting our long-term margin cash flow and cash flow goals.

Now we're building distribution centers of the future driven by empowered people, disciplined processes and advanced technology. Now I'd like to share a video that brings the vision to life through the voices of several UNFI associates who are making it happen every day. Please roll the video.

[Presentation]

Enjoy watching our employees in action inside of our distribution centers. We're confident in our path. Every step strengthens our commitment to safety, effectiveness and efficiency. And ultimately, it fuels the ability to create long-term value for everyone we serve. Now I'm going to turn it back over to Matteo.

Thank you, Mark. What an exciting future you just described for our supply chain. So you heard a lot from the leadership team today, and I want to bring it all together in terms of how our strategies and capabilities will be reflected in our financial outlook. Let me start off with a few key messages.

First of all, we made good progress in executing on our strategy and have accelerated our expectation toward long-term goals.

Two, discipline is a key focus as we scale in and we work to become more effective and efficient across the organization so we can best serve customers and suppliers.

Third, today, we're introducing financial targets through fiscal '28 that demonstrate UNFI's strengthening financial profile with solid growth, improved operating leverage and profitability and continued strong free cash flow generation.

And fourth, we expect to continue to strengthen our financial position, prioritizing reducing debt and leverage to get us under 2x while investing for the future. Our team is focused on delivering our commitments and we have a clear path to creating value for our shareholders today and tomorrow.

When we look at our prior financial targets, successfully executing our strategy, to [ date ] has enabled us to raise and accelerate multiyear financial objective for several key metrics as we detailed on our fourth quarter earnings call and reiterated last week. If we look across these metrics, from fiscal '24 to fiscal '27, net sales is now expected to grow at a low single-digit rate versus flat in our initial expectations. In fiscal 2027, adjusted EBITDA is expected to be around $730 million, approximately $80 million higher than our initial objective.

Free cash flow expectations are about $150 million higher for fiscal '26 and '27 at $300 million annually. And because of the stronger profitability and free cash flow, we expect to reduce net leverage to 2x by year-end fiscal '27, which is about a year earlier than our prior expectations. We've built a track record of delivering our financial commitments and we continue to take a disciplined approach to develop high confidence plans when multiple pass for achievement, which has been enabling us to consistently meet or exceed our targets.

Now turning to our updated value creation framework. We're introducing financial targets through fiscal '28. And we expect sales to grow in the low single-digit range from fiscal '25 through fiscal '28 driven by higher growth in Natural. We expect adjusted EBITDA to grow in the low double-digit range as we become more effective and efficient and deliver operating leverage on incremental sales resulting in around 65 basis points adjusted EBITDA margin expansion from fiscal '25 through fiscal '28. And this will bring our fiscal '28 adjusted EBITDA margin to more than 2.4%.

We expect free cash flow to be roughly $300 million per year on average. And combining the above, we anticipate net leverage to be below 2x and remain there through fiscal '28. We believe these targets are achievable and reflect a high confidence case where we have multiple levers within our control to achieve our financial objectives. And beyond fiscal '28 in a highly dynamic industry we envision significant further opportunities to improve the value we create for customers and suppliers. And we believe that our ability to leverage our talented team, lean processes and emerging technology will continue to drive growth and operating margin expansion.

Let's now take a closer look at our single -- low single-digit multi-average growth rate for sales. Natural is expected to grow above the company average as we seek to an increase in business with new and existing customers and continue to do other project-based work for them. To support this growth, we have been adding capacity to our natural network and investing in automation to help deliver cost-effective growth and more benefit to our retailers.

As you all know, some part of the food retail market have faced secular pressure, and we're working to deliver value, products, services and insights to help them differentiate, compete and profitably grow. And as we work to deliver this, we have also been taking action to optimize the portfolio to ensure we have the right long-term network capabilities to serve our customers where and how they need service.

We're also working to restore our retail business, and we're optimistic that David Best with his local market knowledge and commercial expertise, will develop the right strategy to improve the competitiveness and performance of our stores. And as he does this, we expect this could provide us with a good playbook to help other customers that we serve.

Underlying the path of these 3 operating segments is continued growth in our private brands and services business and enhanced merchandising capabilities. As we have discussed today, we're focused on enhancing these offerings to help our retailers more effectively differentiate and compete. Let's review how we expect to grow from roughly $550 million in adjusted EBITDA in fiscal '25 to approximately $800 million in fiscal '28. We have clear profitability drivers underlying our expectations that give us high confidence in our ability to deliver this target.

Let's start with organic growth in our wholesale business. We expect this will be led by incremental natural organic and specialty product sales gains while leveraging fixed costs. Next, we project an increasing contribution from the value-added capabilities that we described today, particularly through increasing services and brand penetrations. Then higher productivity, supported by our operational discipline, managing the organizational structure and benefits from technology enhancements, all underpinned by a lean mindset, driving lasting changes across UNFI, including our specific fiscal '26 focus on managing indirect spend.

And finally, supply chain effectiveness and efficiency outcomes that will be driven by ongoing network improvements and by efficiency gains from technology advancements such as automation. Now we plan that part of these positive adjusted EBITDA drivers will fund investments made in safety, labor and capabilities to support our growth and transformation efforts.

And finally, we are not assuming any elevated procurement gains or insurance proceeds in our financial outlook. So taken together, this road map is expected to help us generate around 65 basis points of adjusted EBITDA margin expansion and deliver roughly $800 million in adjusted EBITDA by the end of fiscal '28, implying a low double-digit growth rate over 3 years.

Now let's spend a moment on how we are improving the efficiency of our supply chain. DC productivity measure as throughput is a key metric that will help us define how we continue to modernize and optimize our supply chain. And we have multiple initiatives in place to deliver the improvement we are targeting in fiscal '26 and beyond.

And these initiatives include: first, higher accuracy, speed and service levels from DCs through better training; two, improved inventory management, so our warehouses are not overstocked with product or lacking the items that customers order; three, more rigorous implementation of standard operating procedures. So everybody is working out of the same playbook, including lean daily management to create buy-in from the teams that are closest to what we do and can create solutions in real time that help us continuously improve.

And lastly, as both Mary and Mark highlighted, we also have a long runway to realize benefits from our methodical technology deployments. During fiscal '25, we improved throughput around 5% from fiscal '24. And based on our operating plan for fiscal '26, we expect throughput to be up another 8% versus fiscal 2025.

Now as we continue to become more effective and efficient company, we are working to eliminate waste, which is reflected in our P&L within both gross margin and operating expenses. Over the last 2 years, we have taken a programmatic approach to reducing OpEx as a percentage of sales, focused on reducing structural cost, and we expect to drive greater improvement in fiscal '26 and beyond. Our plan from fiscal '26 to fiscal '28 envisions reducing our OpEx rate at a similar magnitude to the reduction we expect from fiscal '24 to fiscal '26. And our programmatic approach consists of 3 key areas of focus.

First, organizational efficiency. We remain focused on simplifying and optimizing our organization to enhance adaptability and responsiveness to support customers and suppliers and improve profitability. We believe there is an opportunity to continue to thoughtfully optimize our organization, building on the sustained workforce efficiency improvements we made over the last 2 years.

Second, we established our value delivery office at the beginning of fiscal '25. This is a small cross-functional team focused on executing strategic projects to help support operational quality and discipline and drive margin improvement. Between fiscal '25 and '26, this team is expected to deliver over $100 million of adjusted EBITDA improvement across functional SG&A efficiency and network optimization. This network optimization has been proceeding ahead of our initial expectations with short paybacks on the restructuring charges we have incurred to realize this profitability improvement.

And lastly, productivity. Increasing productivity comes in many forms, including network optimization and lean daily management. And we made strong progress on both and believe we have a long horizon to drive sustained productivity increase. So let's look at indirect spend. We continue to see significant opportunity to more efficiently manage our broader OpEx cost base of roughly $4 billion, and we are particularly focused on the opportunity to reduce indirect spending, which represents about half of total OpEx.

So indirect spend includes expenses incurred as part of operations, but not directly related to the products and services that we sell to our customers. So think about areas as freight and transportation, facilities, technology and telecom and other third-party services. These are areas we plan to optimize through better purchasing, competitive bidding for many items and services and as you would expect, tighter spending controls. This is a major focus area of our value delivery office this year and is expected to extend into fiscal 2027.

Free cash flow. Based on our improved adjusted EBITDA growth trajectory and the net leverage reduction, we expect to improve free cash flow to a $300 million annual level. This bridge shows the multiple levers we have used and will continue to use to drive free cash flow, starting with fiscal '25 as the base. We expect higher adjusted EBITDA and lower interest costs as we continue to reduce debt to help drive the roughly $60 million increase in annual free cash flow generation that we are projecting.

Our plan also includes working capital investments to support safety, top line growth and higher cash taxes resulting from improved profitability. It also reflects continued capital investments to help deliver strengthening service levels, a well-maintained network and future growth. As I highlighted earlier, as we've optimized our network, we've also been able to refocus our capital investment, which, coupled with our disciplined underwriting process has resulted in lower total investment levels, but also rising investments on a DC level basis.

So all in, we expect to drive free cash flow generation of approximately $300 million annually from fiscal '26 through fiscal '28. And this means our cumulative free cash flow from fiscal '26 to fiscal '28 is projected to be around $900 million.

Now turning to our financial priorities. We will leverage our sustained improved free cash flow generation to continue to reinvest in our business while steadily reducing leverage and financing to strengthen our capital structure. Lower net debt, combined with rising profitability is expected to reduce net leverage to or below 2x by year-end fiscal '27.

Reinvesting in our core business will continue to be a focus on an enduring basis to further strengthen the value we bring to our customers and suppliers and solidify our profitable long-run growth trajectory. So taking this all together, I hope you see what I see. We have a great deal of momentum and are confident in our strategy and where we are headed. We have made significant progress executing our strategy and materially accelerated our progress.

Operating discipline remains our core focus as we build enhanced capabilities, and we're applying lean daily management to enhance effectiveness and efficiency, which is helping to also expand margins and free cash flow generation. Our fiscal '25 to fiscal '28 positions us well to deliver operating leverage with adjusted EBITDA expected to grow to approximately $800 million by fiscal '28.

And importantly, we have multiple ways to achieve these financial objectives. Sustaining free cash flow and reducing net leverage to under 2 turns by year-end fiscal '27 remain a top priority and will strengthen our financial position, allowing us to reinvest in the business, creating then a virtuous cycle of value creation going forward.

And finally, as we think about the high confidence plan that we have detailed today, we have a long path of value creation for our stakeholders, including our shareholders well beyond fiscal '28. So we hope that you found the information shared helpful. We know that you're all very busy, and we are grateful to have had the opportunity to bring our story to all of you.

And with that, let's take a few moments to set up our Q&A and welcome CEO, Sandy Douglas and the rest of the UNFI senior management team to stage.

Good morning. Thanks again for joining us today. My name is Kristyn Farahmand and I'm Chief Strategy Officer of UNFI. I'll be moderating today's Q&A session with our senior leadership team. [Operator Instructions]

With that, let's dive into Q&A. All right. Let's go to John first.

John Heinbockel, Guggenheim. So I want to dive into that wallet share opportunity, right, 25, 30 percentage points. How does that look across natural and conventional or just the customer base in general? How do you think about attacking that, right? What you need to prove, right, to customers, right, to get more wallet share?

And then lastly, when I think about that drop size benefit, is it unfair to think about -- I don't know if it's a 2x or a 3x incremental margin on that drop size, it depends what they buy, but it's probably got to be at least 2x, if not higher.

Thanks, John. And I'll get some help from Louis on this and also from Matteo on the operating margin benefit.

I think broadly, the wallet share opportunity is similar in natural and conventional. Effectively, what it is, is categories that we don't serve or do serve in the case of the 80% version. In the 80% scenario, you've got direct store delivered products that we wouldn't touch. So that's about the roof. But a lot of our growth over the last few years in terms of new business has come from doing more for existing customers. And as we've said before, which was the premise of the last part of your question, the operating benefits, if, in fact, we can deliver on the same truck is significant. And the other thing is it just -- it's an indication of the health of the relationship. So it's really good growth.

Now we obviously have an active pipeline of new banners as well. But from our standpoint, the question is based on the fact that it's probably the most profitable growth we can have. And it is when you don't consider services and brands, which are particularly profitable expansion items.

Louis, anything you want to add?

Yes, I would just build on that. I agree completely with Sandy. And as you think about the opportunity that we have to serve some customers with more categories that we don't serve today, part of that is leveraging the capabilities and insights to be able to bring the data to the retailers and share with them how participation in these categories and our ability to bring them those suppliers that best fit those needs of those categories helps enhance their growth strategy.

And then certainly, our participation with brands as we see further penetration in our brands portfolio, that helps enhance the total wholesale percentage of categories that we're serving with natural and conventional product basis.

One other point before I go to Matteo on the financials of your question. We'll never get to 80% with every customer. Retailers, particularly the retailers that we're segmented to serve are going to be very, very active around local sourcing and other innovative products. And what we're going to be doing alongside them is seeing if we can add value to that process. Where we can, great opportunity. Where we can't, we move on to the next thing because their success ultimately is what we're in the business to support even when it doesn't include distribution for us. Anything on operating margin?

Yes, John, on the operating margin, when you think about the 65 basis points of expansion through fiscal '28, operating expenses are a very, very important part of that progression. And within the operating expenses, we talked about productivity and all the actions that we're taking there, but there is also the operating leverage that growth in natural and growth in those categories will drive.

All right. Let's go to Kelly, please.

Kelly Bania from BMO Capital. I think, Matteo, maybe you gave the example of the lean daily management example. I think that was a West Coast facility. But could you just talk a little bit more about how broad the rest of the DCs line up with those metrics? Was that kind of an average lean daily management example? Or is there a lot of variance depending on how they are, what type of facility? Maybe we could just go deeper into that lean daily management and the benefits from that.

Yes. And I'll ask maybe Mark also to add some perspective, Kelly. So within the 34 DCs that are on lean daily management, as you would expect, there are different stages of maturity and progress. But the exciting news is that now we have 34 of the 49 that every day measure their effectiveness and efficiency the same way that helps all of us detect opportunities and pressure points and get into a problem solving. So at altitude, when you sum it all up, we talk about a throughput improvement of 8% to come and lean daily management is clearly helping that.

Shrink has been a positive trend in the last 24 months plus. And so that's another area where lean data management is helping and then on the fee rates and on-time deliveries, we've also seen how their ability to go into problem solving in real time is detecting the friction points and the unhappiness from the customers and allow us to jump to solutions. But Mark, anything you'd like to add?

The only add I would put on is, as we said, we're in different stages of it. And as the teams on the floor learn the process of lean, we continue to see the enhancements of it by DC by DC by different stages. So we're in the middle of it, and we're going to continue to roll it out, but we're excited for what we can see for the future.

Matteo, unfair qualitative question here, but where are we in this journey? Are we very early just early, medium, we've captured most of it or near the end.

I know literally about baseball, but I know the expression. So I would say early innings.

I would completely agree. I think it is a journey and it is very early, even in the DCs that we've said are implemented, even in that DC that we use, which had good metrics from the first year.

All right. Let's go to Mark, please.

Mark Carden from UBS. So I wanted to touch on some of the value-added services. You guys mentioned about 1/4 of the EBITDA today is coming from the value-added services. How are you guys progressing with adding more of your natural organic customers to your value-added mix? I still over-indexed to conventional today? And just how should we think about retail media's contribution to the growth over the course of the next 3 years?

So Mark, why don't you talk a little bit about the sales process that you and J&J are going through to sell services to natural customers? And then Louis, maybe you can take the broader strategic perspective.

Yes. For the services part for the natural customers, we talked about getting out and being able to have conversations on -- if we're going into Spark events, is that what you're talking about?

Yes. So with our Spark events, being able to get our customers and our suppliers together, small customers, local suppliers and being able to have that conversation with each other and be able to sell them on the processes that we're working on as well as sell them services in that more dynamic area where we have 50 or 60 suppliers with a bunch of customers in one area, and we can really talk to those small customers about the services we can provide them. So -- and we're seeing a lot of -- we're in the early innings of that as well, and we've got more of them coming in the back half of the year.

Louis?

Yes. I think more broadly, strategically, the way I would think about how we're focused on advancing that penetration opportunity is to really make sure that what we're doing is tailoring what we're bringing from a services or brand perspective to each of the customers with a set of services that actually meets their specific needs. The way -- the services that a small natural customer needs are going to be different than that, which we offer some of the larger conventional product-based customers.

And so part of it is understanding exactly what services we're offering to each type of profile of retailer that we see today and where we see value being created with a service with one profile, how can we scale that to other retailer customers in other regions and other parts of the country that would benefit from that same level of scale that they just can't capture on their own.

And then the same thing would apply, I think, strategically as we think about retail media. We have been learning our way through that as we are also in early days in that process. But what we've learned is that different retailers have different technology capability to integrate.

And thus, we need to tailor how we offer our retail media services to them, whether it's an on-site type of retail media, more off-site advertising or in some cases, it's just partnering with -- like David mentioned earlier, trying to find ways to target specific shoppers and provide abilities to have kind of closed-loop data that allows our retailers to see the results of their investment in a way that they wouldn't be able to just through their own independent tech stacks. And so there is not a single retail media offering. There is a variety of those capabilities as well as how we think about the broader Pro services growth.

Kind of the punchline on that is, I guess, 3 years ago, when we last quantified what services and brands represented as a percent of EBITDA, it was about 22%. I heard Matteo just say 25%, and we continue to expect to grow those at a faster rate than our total business across a wide range of levers.

The other example, you saw Ben Naman from Natural Co-op Grocers talk about Field Day, and they're a very large customer of ours, and he absolutely believes he owns that brand. And so the level of engagement that's possible is very high, and there's an awful lot of opportunity for other customers along the path. So financial punchline is continuing to grow its share of our profitability at accretive margins and growing ahead of the company.

Can we go to Peter, please?

Peter Saleh, BTIG. Just going back to the conversation around lean management. I appreciate that we're in the early innings. What is the governor of faster implementation of lean management across the rest of the DCs?

And can you talk about -- is this directly linked to the compensation of the employees at that DC? Meaning how do you incentivize them to hit these targets and move on to the next level?

I'll take the first pass and then Mark I love you to talk about the compensation mechanisms at the DCs and the incentives. So we go through a process where we want to test the DC readiness to implement LDM. So this is not a corporate-driven pushdown initiative, but it's really a way of working and thinking. And with that, we test if the DCs have enough processes, leadership engagement, time sometimes, right, to go through a change management process like LDM.

That's why Peter, we never set a goal to be at 49 by end of fiscal '26 because we know that we would start embracing the very vicious idea of fake lean. We don't want people to do LDM because I like it or Sandy likes it or Mark likes it, but because they see the value of doing that in improving effectiveness and efficiency.

So we could be at 49 by a certain point in the next 12 months. We could be at 49 in the next 24 months. It all depends on how gray and excited the local teams are to do LDM. Mark, do you want to comment on how you.

Yes, just to tee off that a little bit and give a little bit more is we want to be very structured on how we're doing it, and we do a circle back also to that DC to make sure it's implemented the way we said like said, it's not my idea. We want to make sure we have the buy-in of the distribution centers. People inside the distribution center talk about incentives is that they're very competitive.

So all you need to do is put a red or a green up on the board, and they're very into trying to achieve those goals. And as we say, we continue to raise that bar. And it's not us, it's not meaning me. I don't call them and say, "Hey, you're green, push it up." they want to push the bar up. And once they do that, we know we've got lean management starting to work inside the DC, right? Because they're wanting to lift the bar, and we continue to push on that inside of our distribution centers.

Danielle, do you want to comment at all about how we compensate supply chain leaders?

Sure. It differentiates -- it's different between supervisors and general managers in the distribution center down to our forklift operators. So we have safety in most of our programs. We have unit-based incentives for some of our selectors, on-time delivery rates for our drivers, OpEx for our general managers. So it really differs across the organization, I would say, throughput and our unit-based incentives are specifically what you asked around compensation, and those do exist in most of our DCs that have those monitored. Mark, do you know how many DCs we have unit-based incentives in?

We have it in all of our natural DCs at this point.

So generally tied to the metrics you see on the board.

Can we go to Scott, please?

Thanks guys for this. It was great. So Scott Mushkin, R5 Capital. Sorry about that. Kind of a little bit of the elephant in the room. I'm going to probably to Matteo. The accounting has kind of come under some scrutiny and some reports that are out circulating.

I just wanted to know if you guys had any thoughts about that. I think it was on the accounts receivable. People are talking about CapEx a little bit. I don't know if you have any thoughts you want to share with the audience on some of those negative reports. I mean, strangely enough, the stock has gone off today, actually.

Yes. I would say without doing a rebuttal, right, it would not be our policy or our style. But a couple of thoughts here. So on capital investments, first of all, we spent about $1 billion when you add up '23, '24, '25, and it is the usual envelope that we described of about 1/3 in safety and maintenance, about 1/3 in technology and 1/3 in automation and general modernization with dollars that could pour from a bucket to the other depending on a given year. But at altitude, $1 billion split in this way.

On the depreciation comment and the reinvestment ratio, we booked about $240 million of depreciation last year. We spent $240 million of CapEx. So the reinvestment ratio of 1 is consistent with the framework of approximately 1% of top line that we have put out there. It's embedded in our financial outlook. It's embedded at $300 million sustained free cash flow through 2028.

And then on receivables, in 2023, we added an AR monetization facility to our financial structure. And it's a facility that has a cost that is very competitive and in line with the cheapest one in our tower, which is the ABL. So obviously, as we said in the remarks, we plan to reduce our net debt and financing structure.

And we've been working to remove customers from the AR monetization program that otherwise would grow as the customer grows because it's not a buy invoice factoring program, it's by a customer AR monetization program. But again, in the spirit of strengthening our balance sheet, our actions are focused on both reducing net debt and the AR monetization program.

And Matteo, just from an EBITDA adjustment perspective, company has been in a significant transformation phase. How would you comment on our policies around that?

I would say short paybacks. I mean we have seen the benefits of the network optimization efforts, the related restructuring, the cost to reduce layers in our organization with very quick paybacks. I mean we've been expanding margins consistently. We have a high confidence path to get to $800 million. So they all go through the scrutiny of high-impact, fast paybacks.

And I would just say very, very broadly, our eyes are very much on the long-term value we're creating in this company, and we apply a lot of discipline to the processes that are related to some of those questions and for obvious reasons. Ultimately, free cash flow is a very important metric, and it really doesn't -- it doesn't mislead. And the growth in it and the sustainable outlook for it continues to be one of the most important value drivers in the company.

I have a follow-up. I think I have a follow-up. But thank you for offering all that clarity. My follow-up is actually on the retail, more a little positive here.

Sandy, I think you said it's not -- or have said it's not in your projections. But I'm sure it's in your compensation goals. So I was wondering if you could share what you think that in '28, what EBITDA could that business throw off if you're successful?

Sure, Scott. And I'm going to give him some air cover here. It very much will be, but his 3-year plan is in progress. And one of the things that David and I agree with is when you're approaching a turnaround and you have a high ambition, you want to under constrain the problem and focus on the things that matter the most.

And so he is in the process, day 1 stores, engaging associates, letting everyone know how we really do believe in Cub, the inspiration of our franchisees, some of the early progress and just the way the network is starting to come together creates the opportunity to think in a different way about Cub. He will be working on that plan over the next few months, and we'll be in a position to be more articulate about it.

But at this stage, I would just say we're excited about what he can do, but we haven't quantified it yet. So it wouldn't be appropriate really. I'm happy for you to make any comment you want. There's no numbers.

No. I mean the ambition is there, and you heard us talk about that. So we know what success looks like. We're going to be laser-focused on building a great plan to get there and look forward to sharing more as it comes together.

Getting the right people.

But as I did say, in terms of the outlook we provided, it's not embedded in it. And it's not necessary to assume success for that in order to have confidence in what we outlined for the Street today.

Can we go to Bill, please?

Bill Kirk, ROTH Capital Partners. As you focus on like the better-for-you and the more specialty assortment, you move away from some of the largest promotional dollar buckets from manufacturers.

So how do you balance those focus and assortment consideration versus the promotional dollars that some of the conventional manufacturers would be sending?

Sure. It's a super good question. I wouldn't describe it as a shift in focus. It's more an analytical point that we think natural and organic are going to grow faster than the more kind of conventional products. I would expect -- and this is a crystal ball, but I would expect that the brand manufacturers and the conventional brands are going to be digging in for more growth.

And to the extent that we can, with the new merchandising muscle that we're building, create programming that's accessible to retailers that are selling those products, we're going to be very aggressive about it. We just in communicating an outlook for 3 years, believe that natural organic and specialty will grow ahead of the company average kind of mid-single digit and conventional will be more stable.

Can we go to Tim, please?

So I apologize for stealing thunder from the 2026 Investor Day. But -- so here's my question. You have $1.9 billion of net debt. Your high confidence free cash flow plan for this year is $350 million for Q2 through Q4. So you $1.55 billion. So by my math, you need another $100 million if you deliver your high confidence EBITDA for '27 to get to your net debt target. So capital allocation is a very easy decision this year. There's -- you still have $382 million of term loan. It's high single digit, and you don't want that. So that's easy, right?

But at the end of this year, I would assume by the end of this year, the term loan is gone, you'll flex the ABL a little bit to take out the last $30 million or $40 million. And then you have a tricky capital allocation decision for '26 calendar fiscal '27. So I just wanted to tee up that question of what do you do with the cash, I guess, with the notion that you've just painted a normalized free cash flow yield, which in this year, it's not necessarily normalized because there's a huge contribution from working capital. But at the end of your plan, it is normalized and most stocks don't usually trade at a 15% free cash flow yield. So with all of that preamble, I'd like to hear about the upcoming capital allocation decision.

Well, Tim, there is a lot there, but let me share a couple of thoughts. So first of all, we really think first in terms of cash flow from operations. And then within the cash flow from operations, we decide every year based on safety maintenance needs and then technology and growth investments, the last 2 leading to hurdle the double-digit rate, how much do we want to spend and how much can we execute, right? Both questions being very important. Once we define the envelope, then yes, we get to the free cash flow $300 million sustained through 2028.

And right now, the way we're thinking is staying focused on deleveraging in the broad definition back to Scott's question. So net debt, but also looking at other financial structure that we put in place. And then by the time we get there, we'll know what are the different optionalities between more organic growth, more organic investments versus alternatives to return cash to shareholders. But it's like going almost in 2 steps. Let's get first to the 2.5 and the 2x and sustain and then give us the time to decide how we want to deploy that extra capital. Sandy, anything you would add?

Yes. I mean the operator in me wants to reinforce something that I have believed for a long time and believe even more now, and I think we evidenced today, which is that actually capital dollars are not the scarcest resource. It's the quality of talent and capacity to execute well. And one of the things I think this company is starting to demonstrate is that we're building some significant strength around execution. And so pacing becomes a function of that, maybe even more so than dollars that you might put against the next initiative. That's the operator in me.

The CEO in me says, listen, we think the opportunity to get to our future best has years and years ahead. The challenges that our customers face in the marketplace require UNFI and our competitors to step up. And we see that bar raising and we're ready to meet the challenge in what I think will be a very competitive way.

On the other side, we have $4 billion of spend. And the notion that we would ever tap out the ability to make that more effective and efficient is not -- that's not a concept that we understand. So we will invest capital to get superior returns to ensure safety and quality. And then as we evolve and the capital structure changes, we'll do whatever it takes to maximize shareholder value consistent with those other priorities in balance. The long runway is the net effect of that.

Can we go next to Leah, please?

Yes, Leah Jordan, Goldman Sachs. Thank you for doing this today. This has been great. Just seeing if you could provide more detail on the growth drivers for the natural business. How much is reliant on new and innovative products versus core SKUs in the category?

What's going to drive the outsized growth there? And then on the wallet share opportunity in natural, how much of it is maybe retailers that haven't focused on the category, increasing our focus there, just given the high customer demand? Like how much of it is that versus where you're already doing more with who you're doing with today?

Yes. Super set of questions there. It's almost a brand management question relative to the category. Is it -- and the first answer would be new products are going to continue to drive growth. It's very much an innovation and discovery ethos in the natural, organic and specialty. If you go out to Expo West in the first quarter, and there's 100,000 people there looking at all the new products.

It's why the endless aisle technology initiative that we showed you a video on is important because those items deserve sunshine, but they don't necessarily deserve a slot in the DC yet. And so discovery and forging, which is a key merchandising muscle in natural and organic, we now have a way to activate that and to make that possible for customers. So a good bit of growth is new. There'll be a lot of energy and continuing energy.

The second component is there's going to continue to be growth with consumers adopting healthier and better-for-you products. We think that is a secular tailwind that will last for a while. That will show up in vertical growth of the pure-play natural retailers, and it will show up in our more conventional customers assorting in incremental ways.

I mean we think one of the big opportunities for Cub is to really strengthen the natural organic and specialty assortment, for example. So there's multiple ways for us to perform into those trends with the industry. And then to the extent that we can serve it better than others, perhaps we can grow a little faster. But in our algorithm, we put sort of industry outlook in terms of sales.

Could we go to the gentleman in the back, this will be our last question.

All right. Alex Slagle from Jefferies. A question on retail media networks and grocery in the industry overall, sort of kind of wondering how big this is right now, how fast it's growing, where UNFI sits in that spectrum at this point and kind of what you see on the path ahead?

Yes. So we don't obviously talk about the customers or disclose the size of the partnerships that we have, but it is a significantly important portion of how shoppers are shopping. So I would say it's less around the size of retail media and more the size of where shoppers are making their choices around purchasing and where they're seeing the promotions that activate those purchase actions.

So our position has been to make sure that where there is an opportunity for us to bring scale and technology to those customers that don't have the innate ability to do it themselves, and partner that with suppliers who are trying to bring their products into this ecosystem of retailers that we serve that are unique and special.

Those are the connection points that we're trying to make. And so the focus is around the value we create, not necessarily the number of store counts that we generate with it. But that leads to what I said earlier, which is understanding that there's different components.

Retail media is not just one brush. There are different ways to access that, whether it's pure on-site technology that's being used, off-site, which is very different in its nature or even simply activating, as we talked about earlier, targeted consumer search so that you're able to bring products and/or programs to those consumers in a more targeted way.

And right now, we have a core set of retailers that rely on us to bring that scale to them and access to that revenue stream that they otherwise, frankly, would not have the capability or the financial ability to build that stack for themselves.

And Alex, I guess one way to help you all think about what role we play is that we're out there with a kind of a vision of a digitally enabled store, looking for technology providers that may be best-in-class and then creating scale in terms of building partnerships with them and then helping them onboard with our retail system.

And so we're kind of in the middle of the marketplace there, trying to help independents move faster down that path so that they can be as competitive as possible. And again, we see that as a solid part of the growth of our services portfolio going forward.

So Kristyn, that was our last question.

That was. Before I turn it over to Sandy for some closing remarks, I just want to remind everyone, please fill your tote bag on the way out with the products and the lobby. And also, we'll be hosting a lunch afterwards for everyone attending in person to continue the conversation and to get to know some of our other team members.

I'll turn it back to Sandy.

Thank you. And as we conclude today, I want to leave you with a brief summary of what we've covered and most importantly, where we're going. The strategy, we think, is clear. We're focused on adding value to customers and suppliers. And whatever challenges that, that faces, we have an ambition to do that at very high levels going forward in very different ways that we've gone through today. And at the same time, continue a relentless pursuit of effectiveness and efficiency. We've made some progress. You can see that in our performance over the last couple of years, but we see even more opportunity in the 3-year period we focused on here, but well beyond that for this company to continue to get better and to create more value, more effectiveness and more efficiency. And it's needed. It's needed by our customer base. It's relevant, and we're focused on doing it.

I think another point I would make about the marketplace, though, and we tried to show this today is there are a lot of retailers out there in the all other that are doing very well. And we're designing ourselves to add value to them. So it's not a big red ocean out there and just 4 winners. There's a whole lot of retailers that are doing extremely well, and we're designing ourselves to be helpful to them. And to the extent that we have customers who are not doing as well today, but they want to do well tomorrow, where we have massive energy for that process as well, including a company-owned one we use as an example today.

We believe our focused strategy and operational plan will lead to long-term profitable growth, operating leverage for the business. And based on the solid foundation that we built, we're excited about our high confidence plan for the next 3 years, low single-digit annual top line growth, double-digit average annual adjusted EBITDA growth and strong annual free cash flow. I guess my #1 reason why I'm so confident about all that we've learned, the team that we've built, the progress that we've made and the opportunity we have ahead is this group of people and many of them over there.

We have an amazing team, and it is a competitive advantage, I believe. And I think a lot -- we talked earlier about being what we believe is a good company today. We do think we're a good company. But we think we can build a great company, a great company as defined by our customers, by our suppliers, by the communities where we operate and by our shareholders. And we continue to be committed to delivering that.

We're proud of what we've accomplished so far, but even more energized about what we have ahead. So on behalf of everybody at UNFI, thanks so much for investing your time with us today. We appreciate it. We appreciate your investments, and we look forward to reporting out to you in March. So have a happy and healthy holiday season, everyone, both here in New York and out there on the web. Thanks, everyone.

Thank you for standing by, and welcome to the UNFI First Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions]. I'd now like to turn the call over to Steve Bloomquist, Vice President of Investor Relations. You may begin.

Good morning, everyone, and thank you for joining us on UNFI's First Quarter Fiscal 2026 Earnings Conference Call. By now you should have received a copy of the earnings release from 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 the 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. 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 now ask you to turn to Slide 6 of our presentation as I turn the call over to Sandy.

Thanks, Steve, and thank you, everyone, for joining us this morning. In the first quarter of fiscal 2026, UNFI delivered solid results, including adjusted EBITDA and free cash flow meaningfully above prior year levels, while net leverage declined approximately 1 turn compared to the prior year quarter.

Importantly, we delivered these results amidst an operating environment that remains highly dynamic. Our first quarter net sales performance was driven by sustained natural and organic product growth, new business projects and strong retail execution across our customer base. Positive sales in our Natural Products segment largely offset declines in our Conventional Products segment, consistent with our expectations as part of our accelerated network optimization efforts, most notably at Allentown, which have proceeded ahead of schedule.

As we improve our network, we're focused on continuing to improve service levels for our customers and suppliers in a growing $90 billion target market and on further increasing our long-term profitability. Our adjusted EBITDA growth in the first quarter continued to be driven by improving execution, effectiveness and efficiency across the business. This reflects actions taken within our Value Delivery Office to help support gross margins as well as continued progress managing shrink.

Free cash flow results improved by over $100 million compared to last year's first quarter, even as we took necessary steps to stock up on the inventory our customers need in advance of a high-volume holiday selling season that is now well underway. This performance enabled us to both improve fill rates and reduce net leverage sequentially compared to the end of fiscal 2025 and from prior year levels.

As a result of our solid Q1 performance, we're firmly on track to achieve our full year outlook, and we remain focused on executing our strategy, adding value for our customers and suppliers while becoming a more effective and efficient company. During the first quarter, we continued to make progress in both areas. I'll start with how we're adding value for our customers and suppliers.

At UNFI, we aim to do more than safely receive store and transport food. We're working to bring our customers the products, insights, programs and services that will help them execute their strategies and successfully differentiate themselves in a highly competitive environment. We know this environment is increasingly challenging, especially for traditional grocers. This is why we aren't stopping with what we can do for our customers and suppliers today. We're focused on what we can do to help them succeed for years to come. Our Commercial organization is working to revamp and strengthen our merchandising capabilities as a competitive advantage for our customers, because we believe tailored merchandising and competitive pricing on key items is critical to helping retailers more effectively differentiate and compete. This focus also helps our suppliers successfully build their brands across the diversified 30,000-plus retail locations that we serve.

A critical part of our broader merchandising capability is supported by our private brands portfolio. During the quarter, we appointed a new leader for this business with deep knowledge of how private brands can help retailers differentiate and drive value for consumers. We also continued taking action to improve the experience for independent customers and emerging suppliers who are critical to the vitality of our industry. In fact, an early focus of our lean management Kaizen workshops has been to troubleshoot some of the areas that buyers have told us are important to them, such as time-to-shelf. Following a recent Kaizen continuous improvement workshop, we took swift action to improve item setup forms and processes to streamline the new items that are processed. This type of action not only directly helps our suppliers but also our customers by ensuring that they get access to innovative products that their shoppers want.

Turning to our focus on improving effectiveness and efficiency. In the first quarter, we took additional steps on our operational road map to pair advanced supply chain technologies with processes and capabilities that empower UNFI associates to champion operational excellence. We recently deployed the supply chain technology Relex across about half of our distribution network, with the second half expected to be completed by fiscal year-end. This solution is helping us partner with our customers and suppliers to make smarter procurement decisions by using an AI-based platform, predict demand, avoid waste and reduce out of stocks. It is helping to deliver improved fill rates and inventory effectiveness as we expected, and we anticipate further benefits as we complete the rollout this year.

At the same time, we continue to scale lean daily management across our Distribution Network with 34 DCs now on-boarded through first quarter's end. In these DCs, we continue to see encouraging improvements in our KPIs for safety, quality, delivery and cost, all as a result of empowering our associates to see and solve problems faster and more effectively. Together, Relex and Lean are driving effectiveness and efficiency across our network. Our customer fill rates have improved and are now trending above fiscal 2024 and 2025 levels on average. We still have work to do, but we see even more opportunities to improve as we continue to scale these initiatives in the months ahead.

During the first quarter, we also continued to optimize our network following the actions we took last fiscal year to streamline parts of our footprint while also strategically investing to support future growth. These actions were completed at an accelerated pace relative to our initial expectations. Our optimization efforts are enabling us to serve customers and suppliers through strategically located facilities with broad assortments while removing redundant and wasteful costs. These actions have enabled us to continue to make network improvements and contributed meaningfully to our improved results.

During the first quarter, we ramped operations at our new automated Natural Product distribution center in Sarasota, Florida, which is expected to help address strong demand in that area. By combining the power of an optimized portfolio with the right mix of technology, processes and people, we are building a more responsive and resilient supply chain to support customer and supplier needs today and into the future.

At next week's Investor Day, we'll provide a closer look at the key capabilities that we're building to add more value for customers and suppliers and continue to drive effectiveness and efficiency across our business. We also look forward to giving everyone a chance to hear directly from several of the talented UNFI leaders who are leading this important work.

Together, all of us at UNFI remain focused on becoming the food retail industry's most valued partner. Our first quarter performance reinforces our confidence in our ability to continue to create sustainable long-term value for our customers, suppliers, associates and shareholders. With that, let me turn it over to Matteo to provide more detail about our first quarter performance. Matteo?

Thank you, Sandy, and good morning, everyone. Our first quarter results reflect our focus on building capabilities to better support our customers while simultaneously improving profitability and free cash flow, resulting in meaningful progress on our de-leveraging efforts. We're also affirming our annual outlook for all key financial metrics. Today, I will provide additional insight into our first quarter results, our financial position and capital structure and our fiscal 2026 outlook. With that, let's review our Q1 results.

Starting with Slide 8. Our first quarter sales came in at $7.8 billion, roughly flat to last year. This includes Natural segment growth of 11% and reflecting strong unit growth, which outperformed the market. This growth, as Sandy mentioned, was driven by the performance of our customers, some new business products for existing customers as well as the continued secular strength in our Natural, Organic and Specialty products.

In Conventional, as we anticipated and previously discussed, sales declined about 12% primarily driven by our accretive transition out of our Allentown Distribution Center, which was completed ahead of our expectations. While this move pressure the top line it supports improved profitability and free cash flow. Overall, wholesale inflation was about 3%. Unit volumes declined about 5%, driven primarily by network optimization and mix was positive during the quarter. In retail, total sales fell 5% in the quarter, partly due to store closures over the past 12 months, reflecting our strategic decision to strengthen the store network improve future free cash flow. Same-store sales declined 3%, but we are optimistic about the impact that David Best and the strengthened leadership team will have on this business.

Moving to Slide 9, let's review profitability drivers in the quarter. Our gross margin rate in the first quarter was 13.4%, up 20 basis points versus the prior year quarter. This rate represents continued progress and execution to optimize our portfolio, our event supplier programs and higher levels of temporary procurement gains resulting from vendor price increases. Our operating expense rate was 12.7% of net sales compared to 12.9% last year. This improvement reflects the benefit of our effectiveness and efficiency initiatives driven by our value delivery office, network optimization, including continued strategic automation investments and acceleration of lean daily management across UNFI.

In addition, throughput, a key indicator of supply chain productivity measured by cases moving through the DCs over an hour increased by over 2% compared to last year's first quarter and by nearly 10% from Q1 2024.

Adjusted EBITDA for the first quarter was $167 million, up nearly 25% year-over-year. On a rate basis, adjusted EBITDA was 2.1% of net sales up 40 basis points year-over-year. All in, adjusted EPS for Q1 was $0.56 compared to $0.16 last year. This was driven by higher profitability including the benefit of lower net interest and depreciation expense, partially offset by a higher tax rate.

Turning to Slide 10. Free cash flow in Q1 was a use of $54 million which was an improvement of about $105 million compared to last year's first quarter. This was the result of higher adjusted EBITDA, more efficient working capital investment and lower levels of year-over-year capital spending. We continue to expect capital investments to accelerate as we move further into the year based on the expected project schedule. The free cash flow performance in Q1, coupled with the higher adjusted EBITDA enabled us to lower our net leverage ratio sequentially to 3.2x and by 1 full turn compared to this time last year.

Historically, we have seen net leverage increase as we move from Q4 to Q1, and build inventory heading into the holiday season. However, our focus on customer service, combined with improved procurement processes and early benefits of Relex have led to higher average fee rates, while we continue to reduce net leverage. With

the strong first quarter performance, we remain confident that we will further reduce net leverage to our target of below 2.5x by the end of the fiscal year as we enter the seasonally higher free cash flow generation quarters. Flipping to Slide 11. We continue to deepen lean practices to drive benefits across safety, quality, delivery and cost. We have now implemented a lean daily management in 34 DCs as of the end of the first quarter, a sequential increase of 6 facilities in the quarter. We're actively working to eliminate waste and improve distribution center effectiveness and efficiency, all driven by our strategy of adding value to our customers and suppliers.

As Sandy stated, we continue to focus on building enhanced capabilities including customer stewardship, merchandising, supply chain and technology. This builds on work done over the past few years to better understand the needs of all customers and suppliers, and will be an important part of the content at the next week's Investor Day. Looking at Slide 12. Our performance in Q1 keeps us solidly on track to deliver our full year outlook for fiscal 2026.

To review, our guidance ranges and increases compared to fiscal 2025 include sales of $31.6 billion to $32 billion. This includes the year-over-year loss of sales from our transition out of Allentown which will improve profitability and free cash flow but suppress the growth in consolidated net sales by about 3%. Adjusted EBITDA of $630 million to $700 million, representing a year-over-year increase of about 20% and an average annual growth rate of close to 15% at the midpoint relative to our reported fiscal 2024 results. This implies about 35 basis points of margin expansion at the midpoint of our outlook.

With an adjusted EPS range of $1.50 to $2.30 per share an increase of about $1.20 per share at the midpoint compared to last year. Our outlook for capital spending remains at $250 million reflecting our focus on safety, modernization and continued prioritization of investment for growth. Finally, our free cash flow expectations remains at approximately $300 million. We will continue to prioritize reducing net debt to improve our net leverage ratio to 2.5x or less by year-end. While it's still early in the year, we remain confident in delivering our plan as we move through the balance of fiscal 2026.

As highlighted on Slide 13, the strength of our customers and a focus on continuing to improve execution across our operations, including the benefit from lean and our network optimization efforts have led to a solid start to fiscal 2026. We are encouraged by our sustained progress on improving free cash flow and de-leveraging our balance sheet with our net leverage ratio decreasing by 1 turn versus this time last year. We remain committed to our strategy of adding value to our customers and suppliers while making UNFI more effective and efficient as a business partner.

As we suggested on our last call, our goal this fiscal year is to accelerate the momentum, and we are on a path of doing just that. We look forward to sharing more with you at next week's Investor Day. With that, operator, please open the line for questions.

[Operator Instructions] Your first question today comes from the line of John Heinbockel from Guggenheim.

Sandy, two related questions on natural growth, right? So growing 10%, markets growing, right, maybe mid-single digit. So can you talk to drop size right, or new account distribution versus existing growth. Is that sort of a 50-50 split by drop size up mid-single digit as well? And then you also mentioned fill rates. I know the fill rates in Natural are not where they need to be. Some of that structural, but how big of an opportunity is that?

Yes. I think, John, I would say the general trend in our drop sizes have been positive, largely because a lot of growth has happened with some of our larger customers who are at the same time, and this is the premise of your question, giving us more to do. I think as that dynamic happens, obviously, that makes us more efficient down through the line. But at the heart of it, it's strong growth, and it drops to EBITDA.

And the the fill rate issue?

Yes, fill rate has been solid and we're very heartened by it actually. We've taken a number of steps to improve fill rate. It's obviously a key metric to our customers. And between the reintroduction of technology and the new implementation of Relex on a [indiscernible] of lean daily management and then driven by a more localized management structure that was put in place a couple of years ago is giving a sequential improvement in fill rates '25 versus '24 and then this year '26 versus '25. And we continue to see opportunity to improve in that area, and it's an area that's very important to us and to our customers.

And then my quick follow-up is if i look at EBITDA margin in the Conventional business, right? So this quarter, it's up over 100 -- or almost 100 basis points, right, north of 2%. How do you look at the potential of that business, right? It may not grow, but how much more profitable can it be?

Yes, John. If you think about conventionally in Q1, the EBITDA reflected the benefit of the accretive network optimization, the supplier programs and then a little bit of temporary procurement gains that again, we continue to view as secondary and temporary to our strategy. The Conventional outlook for adjusted EBITDA for the rest of the year largely reflects the network optimization, the growth of the suppliers' funds, the continuous work that we do on Shrink. And then the initiatives that we have deployed between Lean Daily Management and Indirect Cost Management, all kind of helping on the operating expenses and the leverage. So Q1 may be a little bit heightened by some temporary procurement gains. But in general, our strategy remains consistent of creating new capabilities to keep our customers competitive, merchandising, professional services brands while working the benefits of the network optimization and the Lean Daily Management and indirect cost actions.

John, just one sort of strategic overlay there around EBITDA margin. As we look ahead, our view is that the opportunities and in fact, the mandate to create value for customers in this environment is a very long-term opportunity for us to continue to get better, whether that's execution, whether it's services, whether it's programs, whether it's merchandising. And then if you look at our cost base, we have a huge amount of costs related to what we do, and we see a very long runway of continuous improvement opportunity there. So we would expect EBITDA margins to continue to edge up in the effectiveness and efficiency areas as well.

Your next question comes from the line of Ed Kelly from Wells Fargo.

This is John Park on for Ed. I guess just kind of given the gross margin strength in the quarter, can you kind of talk about the sustainability of that? Maybe parsed out like how big of a benefit the network optimization efforts were in Q1?

Yes. The gross margin rate -- like for the quarter was at 13.6% versus last year of 13.3%. So we were up about 30 basis points. The key drivers within the gross profit growth, obviously, we had a strong natural growth that brings gross profit and operating leverage based on their efficient business model. We had supplier funds and shrink continuing to help and accrete within the gross profit then we had some level of procurement gains that again, we continue to view as temporary and secondary, both in our financial construction and in the strategic partnership with our suppliers.

The EBITDA of $167 million. If you consider the large driver of productivity, the growth in natural is basically a fair presentation of the quarter in our run rate. So you can think about the $167 million as a normalized kind of EBITDA for the quarter, even if we had temporary procurement gains in a $32 billion business in a given quarter, you have a number of puts and takes. So the $167 million is a good kind of recurring run rate that we plan to to sustain. And then relative to incremental opportunities for gross profit, the capabilities that we're going to discuss next week at the Investor Day between merchandising, professional digital services, brands all help keeping our customers competitive, strengthening the relationship with our suppliers, but also helping on mix, which is an important component of our gross profit.

Got it. And then just kind of switching gears a little bit. Can you talk about the competitive environment at retail for both Conventional and Natural. And are you seeing any changes out there more recently?

At 200,000 feet, one of the fun things about being in our seat in the industry is we get to see a lot of retailers work their magic. And this is no exception at this time. I mean clearly, given the stress that a significant percentage of the consumer base is feeling right now. Discount is very competitive and compelling, but that has stimulated a lot of innovation in Retail, and we see it across our customer base, whether it's in the pure-play Natural and Organic folks or customers who are beginning to rethink what they do, continue to bring different better and special offers in their market, community-based retailers, multicultural focused retailers.

And if you took the part of the industry that's innovating and differentiating and winning, they're growing very strongly. And so it really is a market by market, customer by customer, strategic and operational battle. And there's lots of winners. There are people that are challenged as well. And I think from our end, at least, we're busy trying to figure out how to help them win. And -- but it's very competitive out there, but that's creating a lot of innovation, and we continue to view the broader industry is very healthy.

Your next question comes from the line of Mark Carden from UBS.

So you continue to generate quite strong growth in Natural Organic. How would Conventional have shaken out ex the Allentown transition? It sounds like the impact there may have been more than expected just given you completed it ahead of your expectations? And then what are you seeing with respect to the health of the consumer in both your Natural and Organic segments for the business?

Mark. Yes, what I would say is the lion's share of our weakness in Conventional is because of network optimization. Obviously, the Allentown exit is the largest factor there, but there's been other tweaking across the country. Beyond that in conventional, there's it's been a bumpy quarter for the consumer with the shutdown, creating general sentiment challenges with SNAP delayed for a while, created some issues in those weeks. And now retailers are coming back as that all comes back online. So very competitive and conventional and it sets up a mandate for us. It's the principal kind of north star of our merchandising reboot is to figure out how to get our customers in a place where they can be competitive in any scenario.

And then in the Natural environment, obviously, been very strong growth in that segment across the different retailers, the largest of which all are our customers, and we're getting the opportunity to serve them. We continue to believe over the long term that the natural business as an industry is a mid-single-digit grower, and we hope to be able to compete and support the retailers that are competing in that environment.

That's great. And then as a follow-up, just at this stage, have you guys seen much incremental customer attrition following the cyber attack? You guys seem to be weathering it quite well last quarter. Just how was it compared to what you may have expected at the time of your last quarter call?

Yes, Mark, I don't think it's any different. My answer would be exactly the same as I answered it last quarter. We had one Southern customer that joined us, and we had one Upper Midwest customer leave us. But the -- I think the core answer is that we and our entire network, our sales, our merchandising, our supply chain teams are busy serving customers as well as they possibly can. And we continue to to manage through a couple of situations there.

But as far as customer retention, we've been extremely fortunate and we're working very, very hard to earn that. And and hope to continue to be the best choice for customers going forward.

Our next question comes from the line of Kelly Bania from BMO Capital Markets.

Matteo, just a follow-up first on the procurement gains, I guess that helped Q1 a little bit. But if I heard you right, that's -- there's nothing there in the plan going forward. So wondering if you could just confirm I heard that right? And then can you help us understand did those procurement gains drive some upside to your plan, your internal plan for the quarter? And was that specific to any categories that you can help us just understand what was happening there?

Kelly. So answering the first part of your question, we have not modeled any procurement gains in our 2026 or 2027 outlook. So we continue to describe those as temporary and secondary. They happened in the first quarter, but as I was saying before, in a given quarter, we had puts and takes. And so some of the upside from the procurement games were offset by other dynamics. In relative to kind of how we are thinking about the procurement gains, our strategy is always to work with the suppliers and build a strong relationship with them, making sure that through that kind of strategic partnership, we keep our customers competitive, keep our prices low, stable and predictable.

So we don't rely on procurement gains in order to achieve our financial targets. And again, we continue to do them as temporary. Relative to specific categories has been a little bit of a combination of many. You can imagine, partly related to tariffs, partly related to kind of the general inflation that is still in the 2.5% to 3% range. So modestly up versus 2025.

Okay. That's very helpful. Now I was also wondering if I just ask a couple of questions about top line on the two sides of the Wholesale business. So first, on Conventional, I guess, excluding the optimization, it looks like sales were down in the mid-single-digit range. You called out some of the factors, I guess, going on during the quarter. But I guess, can you continue to hit your targets with that magnitude of kind of core sales pressure in Conventional? And are you seeing or hearing suppliers in those categories becoming more promotional to help maybe drive some volume in those categories?

Yes. Kelly, this is Sandy. What I would say is the general environment in Conventional get out of our optimization, which is the large majority of our decline, by the way. So more of the decline that I think your question framed. But be that as it may. There is pressure in Conventional and it seemed broadly and the major source of that pressure comes from the consumer situation the bumpiness with SNAP and then the efficacy of a discount positioning in that environment. And so retailers are responding to that in obviously different ways.

But if you were to draw broad themes, it's to respond by getting more competitive on key value items to start for sure. Secondly, it's to look at product assortments and seek to innovate in a way that fits the retailers positioning and minimizes comparability. And then the third area is kind of the secret sauce of the Retailer, whether it's food service or customer service or community or local sourcing or whatever it might be. And you can see evidence of that formula working in Conventional across the country, just think of the retailers that might fit that, many of whom are customers of ours in one way or another. So we see a great opportunity to try to continue to help retailers break that code and manage through the kind of consumer stress which as it abates, we'll continue to favor them, particularly those who've executed that formula well in their businesses.

Sandy. Can I just also ask about the Natural side and obviously, very strong there. Just wondering if you could comment a little bit more about how widespread that growth is? You talked about getting kind of more business with large customers. But are you seeing kind of more broad-based adoption of natural and organic? Because there has been some some signs of a slowdown. It seems like you have a different point of view there. So wondering if you could just elaborate.

Sure. I think -- very much like the Conventional business. It's a retailer-by-retailer story. Our business, as you know, is slightly different than just a pure mirror of retail. We we also do project work. We do market entry services as an example of project work. And so sometimes we have business in a particular channel or with a given customer that might be temporary as they make a strategic transition in their business. So if you look at our report, you'll see strong growth. You'll see a number of customers performing very well. You see a component of it that is project related, where we're helping customers execute against short-term initiatives. And then you'll see the ongoing secular health of the Natural, Organic and Specialty categories.

The way we think about it is that the category based on the same information you all have. Looks like it's a mid-single-digit grower. And we'd like to believe that we'll punch our weight strongly in that industry going forward. But certainly, our performance in the last quarter and over the last 1.5 years or so because of the project work we've been doing has been very strong.

Kelly, Sandy, let me maybe after two or three questions on sales, [indiscernible] up and say a couple of words on how we're thinking about the sales outlook. So in Q1, sales were roughly flat compared to the prior year. And the midpoint of our outlook $31.6 billion to $32 billion is also flat. So Q1 has been consistent with the outlook. The outlook reflects the expectation that the underlying natural growth for the year will be similar to the long-term industry average, which is [ MSE ].

Now when we think about the rest of the year into doing conventional will have the full top line impact as well as the full adjusted EBITDA benefits of the Allenton [indiscernible] billings and [indiscernible] optimizations, versus Q2 '25 when we were just in the early innings of the network optimization. When we think about the third quarter, we will be ramping down some of the critical customer project base, that we started 12 months ago, but then we know it also can ramp up very quickly and that is part of the solution that we offer to our customers and how we create value.

And then in the fourth quarter, obviously, you have an easier comp as we will have the [indiscernible] repeat tailwind of the $400 million of cyber-related losses. So it is a full year framework. We don't guide by quarter, but wanted to offer a little bit of helicopter view on how we're thinking about the next 9 months through that kind of framework of flat to midpoint.

Your next question comes from the line of Chuck Cerankosky from Northcoast Research.

As we look at the margin improvement going forward that we anticipate, what's left realistically left in the Shrink area and where might that come from? Is it lower inventories leading to less spoilage, less breakage, but can you talk about that in some detail, please?

So on margins, the current outlook calls for 35 basis points of margin expansion in 2026. And then if you think about '24 through '27, it's about 60 basis points of margin expansion. And that is really rooted into large productivity programs, the benefit of the network optimization, the supplier programs then there is still a contribution from Shrink.

Now as you think about '25 to '24, shrink was a very important contributor -- in the end, our goal is to continue to improve and eliminate waste. I mean it's a main principle of Lean that is now at 34 of 49 distribution centers. So there will be a relentless effort on reducing Shrink. We closed pretty well at the end of the first quarter. We are pleased with the progress. So we'll probably see less of a large-dollar contribution compared to other productivity programs and some of the capabilities that will help on mix. But our focus on eliminating waste and inventory-related waste will continue for a very long time.

Your next question comes from the line of Leah Jordan from Goldman Sachs.

Sandy, you talked about new business projects in the prepared remarks, and it sounds like you're doing more with your largest customer. So just, if we could get an update on your new business pipeline? What are the opportunities between new versus existing at this point? And then I think ultimately, more importantly, how do you view the competitive environment for winning new business across wholesale? What are the differences here between Conventional versus Natural in the current landscape?

Sure. Let me comment on projects and then just to make sure that I'm being precise in the way I'm defining them and distinguishing them from general pipeline-type either expansion with an existing customer or a new customer.

The way we talk about projects is imagine a retailer is moving into a new region, and they're building a DC. They might hire us to be their distribution for a couple of years. That's a project. We know it's a beginning, and we know it's an end, and we're happy to facilitate their strategy and happy to earn that business, assuming it's profitable, that we would call that a project, whereas a customer might hire us to start to handle their culinary or a different category that we haven't carried before. That would be pipeline and obviously, a new banner would be a pipeline expansion.

So just getting the definitions right. From our perspective, the pipeline is strong on both Natural and Conventional. What I would say to you that enhanced is we have a very disciplined review process where we assess all of those programs and deals for profitability for sustainability, for operational sensitivity and for value for the customer, and we're very disciplined. We do not pursue business for business sake. That's what our network optimization is unwinding right now. So there's a a highly disciplined underwriting process that our Presidents and Matteo very carefully review. But pipelines are strong in both sides.

Our basis of competition typically is when it's a product, a service or a program that helps the customer differentiate as opposed to price for price sake. We have to be very competitive, make no mistake, our customers expect that, but we try to bring a whole package and that it allows for us to have a win-win and it fit the customer because of things -- some of the things that we can do, we do better. And we're continuing to work as we'll explain next week at Investor Day. We see a significant opportunity to continue to improve the offer and we'll be talking about that next week.

That's very helpful. And then one thing that stood out in the deck, you really were highlighting a refocused effort it seemed on private label. There seems to be new leadership there. Just seeing if you can provide more detail on your updated strategy, what are the opportunities in Natural versus Conventional for that category? What are the points of differentiation you're providing? And I don't think we've had an update, where are percent of sales on private label today as well?

Okay. Thanks, Leah. Yes, I mean, broadly speaking, you all see it. Natural brands are strong and strengthening relative to the whole store for consumer value reasons. But increasingly, there's opportunities to build them across good, better and best, so all 3 tiers. We did strengthen our leadership there with a veteran of private brands from another wholesaler who -- she's absolutely outstanding and we're thrilled to have her join the team. We see a significant opportunity to increase penetration here. This is not our penetration of private brands is not at industry levels, and we see it as an opportunity for growth and an opportunity to create more value for customers. And so we're very focused on achieving it, and it's a long-term opportunity.

Again, I'll say this a few times today, but we'll talk more about it next week. So -- but that's the long and short of it. It's a great opportunity across good, better and best, and we're working on all three.

The other thing that I would say for a little more color is the portfolio of private brands is segmented. It's not the same portfolio going into a traditional grocery store as it is to a natural store. So there's opportunities on both sides.

Your next question comes from the line of Scott Mushkin from R5 Capital.

So I wanted to -- we've been spending a lot of time on sales. And I think the reason is as you guys, especially on the Organic, Natural Organic side surprised the heck out of a lot of people. So it seems like the incremental growth is organic growth with your -- what the industry is doing, and I think we all have seen it slow across even your customers. More store openings, winning more business, and I think you've talked about incremental projects. So taking the other side of the sales slowdown idea -- if the industry accelerates -- again. Could we expect your business to accelerate?

So Scott, I'm going to paraphrase the question because we lost you for a couple of seconds there. You were commenting that you'd seen the industry slow down and you're wondering if our our sales would accelerate if it accelerated. Do you want to rephrase that one more time?

Yes. I mean, I guess what I'd say is we've seen some of your customers slow down their organic growth or comp your business moved, I think, higher surprised us. Surprised The Street. So what I was wondering is taking the other side of it, can we actually see your sales accelerate in natural organic if the growth rate returns to some of these customers on a comp basis?

Yes. So let's try to look at the pieces. We don't give guidance by division. But what we said earlier is that our external analysis points to kind of mid-single-digit growth in the Natural, Organic and Specialty categories. Then how I might look at that, if I was trying to think about UNFI's growth is how would UNFI's customers tend to perform against that average, and how effective is UNFI are doing more to serve those customers or gaining more customers.

But from a print of plus 10%, which has a significant amount of project work that will annualize in the next couple months, you can develop your own forecast. What we would say about our business is we continue to expect to compete and perform strongly in those categories.

All right. Perfect. And then the other question is turning now towards the Conventional side. I think, Sandy, you mentioned that it's gotten tougher. We see that. Our research is seeing that. But that also is spurring more promos for manufacturers -- so just walk us out like 6 to 12 months and say the industry continues, the Conventional side continues to deteriorate from a competitive standpoint, how does that impact your business? I mean, obviously, it would slow the sales a little bit. But overall, how does that impact your business, if we kind of take the line down and continue to take it down in the competitive environment deteriorates further?

Scott, first, let's talk about the pieces of the industry because I think this is really important. It is a well-documented, well talked about fact that the biggest four hadn't taken share for decades in the so-called Conventional part of the industry. What doesn't get talked about, though, is there aren't only two piles of customers in that segment. There's many piles. And if you take a third pile and say, I'm going to put the innovative retailers who've been aggressive in keeping their center store costs down that have innovative relative to assortment and avoiding unnecessary comparability with the [ big four ] and then have their own secret sauce, whether it's food service, prepared food, great customer service, local associates, whatever it might be. And you put that group in a pile, they're outperforming everybody.

And our strategic work is, first and foremost, to try to be the partner of choice for that pile. That's why we took our addressable market from $150 billion down to $90 billion as we just said, we're probably not going to be good at folks that are just trying to find the drayage partner to try to do it [indiscernible] out on price alone. We got to be sharp on price, but we've got to be good in helping customers implement it more, let's call it, differentiated strategy. So I would encourage everybody to look at the industry in a more segmented way.

The next comment I'd make relative to promotions, and this is the commentary about merchandising. We're going to talk about this a little bit next week. But we actually think that, as I mentioned when I went through that set of things that we're seeing the [indiscernible], that wholesale supported retailers need more help and need to work together with their wholesaler to negotiate better costs relative to EDLP. It's not just promotional dollars. That game is not working very effectively for a lot of people. That's not say it doesn't work for anybody. But -- so our merchandising effort now is going to work backwards from the shelf and say, what conditions have to be there so that our customers have a credible center of the store? And what programming is there for that suppliers who might want to invest in because they do with the big four, how can we get them to invest through to help and continue to build a robust supermarket channel.

So lots of work going on there, but macro trends are macro trends, but within them, there are winners, and it's a sizable chunk, and that's a lot of what's on our work desk right now, some of which we'll be able to give updates on work and progress updates next week in New York.

Perfect. And just to clarify, it was a great answer. But -- so I guess your expectations that the industry continues to deteriorate, you guys should be okay. Is that a good summation of what you just said to me?

Well, I don't want to accept the premise. I believe that in tough times, people that partner with an industry have to step up. That's as far as I'll go in my crystal ball.

And your final question today comes from the line of Peter Saleh from BTIG.

Great. I just had one question on capital allocation. I know you're at 3.2 turns now on leverage, and that's down pretty substantially from last year. And well on your way to 2.5 turns by the end of this year. So how should we be thinking about modeling out your capital allocation strategy capital returns going forward? When you get to 2.5x, will you continue to focus on de-leveraging? Or should we consider more capital returns to shareholders? How do we think about that going forward?

Peter. So 2026, our goal is to de-leverage to 2.5x or lower, and in the last earnings call, we also affirmed that in 2027, we want to de-leverage to 2 turns or less. So our capital allocation and our application of the free cash flow that we generate remains solely focused on de-leveraging and reducing debt. If you think about the outperformance in the quarter, we improved by about $100 million year-over-year combination of better EBITDA and better working capital management. For the rest of the year, we continue to see the EBITDA at the midpoint, obviously, accreting more than $100 million for the full year. And then that implied math to be at 2.5x would be basically free cash flow performance closer to $225 million, $250 million, and we have an outlook at $300 million. So there is clearly multiple ways to achieve the 2.5 turns and less. And the same carries over into 2027 where, again, we plan to print another $65 million of EBITDA as the current outlook and generate another $300 million of free cash flow.

The only comment that I wanted to make is that in the first quarter is CapEx was low by design. In the end, we focused on regular maintenance and some of the technology investments, but we have a very tight monthly [indiscernible] committee with the business president that review both the new projects but also the cadence of spending. So within the $250 million outlook, we still have all the projects and all the schedule lined up to consume that envelope in the usual three partition of maintenance and modernization, safety, technology and then automation and growth investments.

And that concludes our question-and-answer session. I will now turn the call back over to Sandy Douglas for closing remarks.

Thank you, operator. We remain focused on executing our strategy to add value for our customers and suppliers while becoming a more effective and efficient company. As we continue to strengthen our operational execution, we're steadily improving our service levels, profitability, free cash flow and capital structure. We have a long runway of opportunity to continue improving in these areas while building capabilities to help our customers and suppliers differentiate, compete and grow profitably in a dynamic marketplace.

We look forward to providing more details on our journey to create long-term shared value for all our stakeholders at our Investor Day next week. To our customers and suppliers, we thank you for your continued partnership, collaboration and support. We look forward to serving you during this busy holiday season. To the UNFI associates listening today are thanks for all that you continue to do for our customers, our suppliers, our communities and each other. And to our shareholders, we thank for the trust you continue to place in us. Thanks again for joining us this morning. We look forward to updating everyone on our progress, and I hope you'll join us at our Investor Day next week.

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the UNFI Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Steve Bloomquist, Vice President of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us for UNFI's Fourth Quarter Fiscal 2025 Earnings Conference Call. By now, you should have received a copy of the earnings release from 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 will 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.

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 now ask you to turn to Slide 6 of our presentation as I turn the call over to Sandy.

Thanks, Steve, and thank you, everyone, for joining us this morning. UNFI delivered solid fourth quarter results that drove fiscal 2025 performance in line with our previously provided outlook ranges for net sales and adjusted EBITDA and above our outlook for free cash flow. Notably, our strong free cash flow generation enabled us to reduce net debt to around $1.8 billion, the lowest level since the end of fiscal 2018 and reduced net leverage by 0.7 turns compared to last year.

Our fiscal 2025 results reflect the strength and resiliency of our customer base, combined with disciplined execution against the multiyear strategic plan we detailed a year ago. We're building momentum as we enter year 2 of our strategic plan. We're increasingly confident in our trajectory and in our ability to create sustainable long-term value for our customers, suppliers, associates and shareholders.

With that backdrop, I want to take a few minutes to walk through the progress that we've made in the first year of our refreshed strategy as well as the opportunities ahead to further accelerate our performance. At UNFI, we aspire to become the food industry's most valued partner by bringing innovative products, programs and services designed to help retailers and suppliers profitably grow their businesses and ours.

We believe that UNFI's scale heritage in enduring high-growth categories like natural, organic and specialty products, our merchandising programs, private brands and our value-added services make us uniquely suited to help retailers differentiate and compete in a dynamic marketplace. And as a result, we are building significant capabilities to help our suppliers build their brands and accelerate their growth within our diverse retailer network.

Based on these core strengths, we believe that we are well positioned to drive profitable growth within a growing $90 billion target addressable market that includes many natural organic, specialty, multicultural and conventional grocery retailers, all of whom can benefit from our differentiated products, programs, insights and services today and in the future.

As expected, the refreshed strategy and multiyear plan we announced last October have been steadily driving growth within this market, anchored by 2 primary focus areas: creating more value for customers and suppliers and becoming a more effective and efficient business. Over the past year, we've made meaningful progress in both areas, starting with our focus on adding value for customers and suppliers. fiscal 2025, we grew our business with both existing and new customers by providing customized product, supply chain and programmatic solutions for customers to meet their short- and long-term needs.

At the same time, we're taking action to improve our category merchandising and account management capabilities by realigning our sales and merchandising teams to better meet the unique needs of the customers and suppliers they serve across the natural, organic, specialty fresh and conventional product sets.

We also continue to expand our digital and professional services, which create deeper and stronger customer relationships and range from credit card processing, shelf management and store remodeling to digital solutions like the UNFI Media Network and electronic shelf labels. Some of our long-standing customers increased their business with us to add these services last year, helping them save money, operate more efficiently and compete more effectively.

For suppliers, we continue to roll out our revamped commercial go-to-market program which streamlines fees and adds access to proprietary insights that help them build and profitably grow their brands within our retail network. We also created a dedicated cross-functional team that has been building new and improving existing processes to enhance the supplier experience. Together, these efforts [indiscernible] our commitment to create meaningful value for both our customers and suppliers while strengthening our own market position for the future.

Next, I'll focus on our progress towards becoming a more effective and efficient company, which has been driven by 4 components: network optimization, cost efficiency, working capital management and reducing capital intensity. Over the past few quarters, we've outlined our efforts to optimize our distribution network to better serve customers and suppliers over the long term.

During fiscal 2025, we consolidated volumes from 4 distribution centers into larger, more modern facilities with broader assortments to benefit customers in these regions. These actions will also further improve our network profitability in fiscal 2026. In parallel, we've optimized capacity and enhanced capabilities across our network. This includes strategic investments in automation and approximately 400,000 incremental square feet in Manchester, Pennsylvania and Sarasota, Florida, which should enable growth in both regions, improved product restocking speed and order accuracy over time while reducing our operating costs.

To further improve our service levels, we've deployed Lean Daily Management in 28 of our 52 distribution centers through the end of fiscal 2025, which is strengthening our performance across safety, quality, delivery and cost metrics. We continue to embed lean management routines across our organization and create greater accountability through real-time tracking of key performance metrics, from adding new capabilities to embedding lean processes across our operations, we're building a more responsive and resilient supply chain that is well positioned to support customer needs across a range of macro and competitive backdrops.

Our nimble solutions-oriented approach helped us drive above-industry growth in fiscal 2025 and we expect to continue building on this strength in the year ahead. In fiscal 2025, we improved free cash flow by reducing capital intensity and strengthening our working capital management processes. Rigorous prioritization helped drive our approximately $130 million reduction in capital investment spend during the fiscal year. We also reduced inventory days on hand to pre-COVID levels, while working to improve fill rates for our customers.

Finally, we've continued to optimize spending through disciplined SG&A cost management across the enterprise. This included streamlining our processes and corporate support structure to enable key business functions to serve our customers and suppliers more quickly, effectively and cost efficiently, which resulted in an approximate 30 basis point reduction in full year operating expenses as a percentage of sales.

In fiscal 2026, we expect to continue to make progress in each of these areas while also focusing on capability building and incremental initiatives to accelerate long-term profitable growth. For example, we see a meaningful opportunity to improve the experience for independent customers and emerging innovative suppliers who are critical to the vitality of our industry. We will also make our portfolio of value-added services more accessible to these operators.

In terms of driving greater effectiveness and efficiency, we're focused on building a strategic road map for technology investments and streamlining more of our internal processes to drive even greater adaptability as well as margin and free cash flow benefits.

Turning to our fiscal 2026 outlook, which Matteo will provide more detail on shortly, we are confident in our continued execution of our strategy, and ability to deliver another year of profitable growth while further strengthening our balance sheet.

Looking ahead and turning to Page 6 of the presentation. We are accelerating and raising the multiyear objectives we previously set and announced 1 year ago for the fiscal 2025 to fiscal 2027 period. We now expect net sales to grow in the low single digits on average from fiscal 2024 to 2027, which compares to our previous expectation for fiscal 2027 net sales to be roughly flat to fiscal 2024.

This reflects better than projected organic growth driven by growing customers as well as new customers, new categories with existing customers, customer retention and growth within natural organic, specialty and fresh products, which is supported by enduring consumer tailwinds towards health, wellness and differentiated products. In addition, we now expect average annual adjusted EBITDA growth from fiscal 2024 to fiscal 2027 to be well above our prior expectations and projected the growth for this period will be in the low double-digit range, with adjusted EBITDA margin growing by almost 40 basis points in fiscal 2026.

Our updated multiyear objectives imply that we will deliver adjusted EBITDA of over $730 million in fiscal 2027. This higher profitability as well as our continued focus on optimizing capital investments and achieving pre-COVID levels of working capital is expected to generate free cash flow of around $300 million in both fiscal 2026 and fiscal 2027, roughly double the expectations that we communicated a year ago.

Combining our higher adjusted EBITDA and free cash flow generation, we expect to reduce net leverage to around 2.5x by the end of fiscal 2026 and to further reduce this to under 2x by the end of fiscal 2027. As we reduce our debt levels and interest expense and improve profitability, we expect adjusted EPS will continue to grow faster than adjusted EBITDA.

In summary, despite the unexpected challenges we faced as we navigated the cyber incident with our customers and suppliers in the fourth quarter of fiscal 2025, we continue to maintain our underlying business momentum through strong partnerships and a collaborative solutions-oriented culture. I'd be remiss if I didn't once again thank all of our customers and suppliers for their partnership and resilience during a challenging time. We learned a lot, and we're putting our learnings into action, as we focus on helping our customer and supplier community execute their strategies during the upcoming holiday selling season and beyond.

Now a month into year 2 of our refreshed strategy, we are focused on accelerating our momentum by building on UNFI's unique ability to provide differentiated products, services and well-scaled supply chain solutions that help our customers and suppliers grow profitably. We look forward to discussing our path to long-term value creation in greater detail at our Investor Day in December.

We are grateful to our customers and our suppliers for their continued partnership and the UNFI associates for delivering on our commitments over the past year. we still believe our future value creation opportunities far exceed what we've achieved so far. With that, let me turn it over to Matteo to provide more detail about our financial performance and our fiscal 2026 outlook.

Thank you, Sandy, and good morning, everyone. As Sandy stated, we finished fiscal 2025, in line with the revised outlook ranges we provided in July during our business update call for sales adjusted EBITDA and adjusted EPS, while we outperformed our free cash flow target. Today, I will provide additional insight into our fourth quarter results, our year-end financial position and capital structure in our fiscal 2026 outlook.

Our expectations for the new year include incremental benefits as we accelerate the execution of our multiyear strategy built upon the early success of our lean operating approach and look to achieve our previously stated 2.5 turns leverage target in 2026, 1 year ahead, our initial plans.

With that, let's review our Q4 results. If you look at Slide 8, our fourth quarter sales came in at $7.7 billion compared to $8.2 billion last year. Including the $582 million benefit from the extra week in last year's fourth quarter, net sales grew by 1.6%. This growth rate reflects a volume decline of around 3%, driven by the lost revenues from the cyber incident, which was more than offset by inflation of about 2% and positive product mix. The sales growth rate also includes an estimated impact of 5% from the cyber incident.

Our natural segment growth of 9% on a comparable 13-week basis again outperformed the market. We grow from both smaller and larger customers as well as the secular tailwind from increasing customer adoption of these products. Commercial segment sales declined 6% and partially reflecting the lapping of a large new customer addition and the beginning of the optimization and accretive transition out of Allentown.

For the full year on a comparable 52-week basis, net sales rose 4.6%, volumes grew 1.4%, inflation was about 1.8% and a favorable mix shift accounted for the balance. Notably, full year volume growth outperformed Nielsen's industry benchmarks. This was largely the result of the strength of our customer base, including the benefit of new business with existing customers and the onboarding of new customers. In retail, sales fell 1.7% in the quarter on a 13-week comparable basis.

We believe that absent the cyber incident, total sales would have been positive as would [ ID sales ] at Cub. Our new retail CEO, [ David Best], started at the beginning of the new fiscal year. David is focused on working with our retail team to improve the customer experience, store traffic and operations and financial results. We are confident that under David's leadership and with his deep knowledge of the local market that Cub serves, we can enhance our offering while deepening our franchisee partnerships to drive improved performance.

Moving to Slide 9. Let's review profitability drivers in the quarter. Our gross margin rate in the fourth quarter was 13.4%, which compares to 13.7% in the prior year quarter. Excluding LIFO in both years and the impact of the cyber incident in this year's fourth quarter, which drove a bit of shrink, the gross margin rate was 13.5% in the fourth quarter of both years, represented the highest quarterly rate this fiscal year.

This performance reflects another solid quarter in managing shrink, the further benefits from our supplier programs and early progress with incremental win-win value creation solutions with customers.

Gross profit dollars on a comparable 13-week basis increased about $30 million resulting from the 1.6% increase in sales for the same period. Our operating expense rate was 13.6% of the net sales compared to 13.2% last year. The higher rate is largely attributable to the deleveraging impact on fixed cost of the estimated $400 million in lost sales as well as our meaningful investment in servicing our customers during the cyber incident which included additional overtime and other expenses from manual processes.

During fiscal 2026, we fully expect our OpEx rate to return to the pre-cyber incident trends we experienced in the first 3 quarters of fiscal 2025, and believe the benefit of lean initiatives will continue to deliver better throughput and supply chain efficiency over time, supporting an improved customer experience.

Adjusted EBITDA for the fourth quarter was $116 million compared to $133 million in last year's fourth quarter, excluding the additional week in fiscal 2024. This brought full year adjusted EBITDA to $552 million, slightly above the midpoint of the outlook we provided on July business update call as well as our original outlook provided 1 year ago. All in, we estimate that this cyber incident impacted adjusted EBITDA by approximately $50 million in the quarter, which means our full year estimate adjusted EBITDA would have been roughly $600 million. Adjusted EPS for Q4 was a loss of $0.11, bringing full year adjusted EPS to $0.71, also above the midpoint of our most recent guidance.

Turning to Slide 10. Free cash flow in Q4 was $86 million. This brought full year free cash flow to around $240 million compared to an approximate $90 million use of cash in fiscal 2024. This roughly $330 million improvement was largely the result of the work accomplished throughout the year to better forecast and manage the drivers of free cash flow, particularly returning inventory toward pre-COVID levels as well as the addition of free cash flow as an incentive compensate metric to drive focus and alignment within our organization.

The free cash flow generated in Q4 enabled us to maintain leverage sequentially at 3.3 turns despite the reduced level of trailing 12-month adjusted EBITDA resulting from the cyber incident. Importantly, we reduced net leverage by around 0.7 turns from the end of last fiscal year. Net debt also fell to just above $1.8 billion, the lowest level since 2018.

Flipping to Slide 11. We continue to deepen lean practices to drive benefits across safety, quality, delivery and cost. We implemented Lean Daily Management in 28 distribution centers as of the end of the fiscal year, which was a key driver of our operating efficiency and throughput improvement in fiscal 2025. We are actively increasing deployment of lean daily management throughout our distribution network and expect to drive further improvement to supply chain effectiveness and efficiency in fiscal 2026.

Our leading initiatives in fiscal 2026 also include eliminating waste and optimizing and digitizing processes to improve distribution center performance. Our value delivery office will also continue to generate further incremental savings with an emphasis this year on indirect spending. This relates to equipment and services not for retail, it makes up a meaningful portion of our roughly $4 billion annual operating spend. Additionally, we see further opportunities to improve the supplier experience as well as working capital efficiency and free cash flow generation by aligning and streamlining billing processes and payment standards.

Simultaneously, we continue to refine and optimize our organizational structure to deliver even higher service levels and productivity. All these controllable actions should more than offset planned merit and other customary operating cost increases.

As Sandy highlighted earlier, we will also be focused on building enhanced capabilities within merchandising, revenue growth management and technology as well as making specific investments to the independent customers and emerging supplier experience. These builds [indiscernible] done over the past few years to better understand the needs of all customers and suppliers. These capabilities are expected to enhance our longer-term growth trajectory and margin potential and we plan to provide more detail on these initiatives at our upcoming Investor Day in December.

If you go to Slide 12, we finished fiscal 2025 with operating momentum and a high degree of conviction in our strategy. We remain focused on creating value for our customers and suppliers while becoming more effective and efficient as a business partner. As outlined in our press release, the guidance ranges and increases compared to fiscal 2025, include the following: sales that are expected to be in the range of $31.6 billion to $32 billion.

As a reminder, this includes the top line impact from the optimization and accretive transition out of Allentown within our conventional segment. This transition is expected to reduce our consolidated net sales growth rate by about 3% while improving our profitability and recurring free cash flow, an expected range for adjusted EBITDA of $630 million to $700 million, representing a year-over-year increase of about 20% at an average annual growth rate of close to 15% at the midpoint relative to our reported fiscal 2024 results.

Using the midpoints for each of these ranges, we do expect to see year-over-year margin expansion, largely driven by the various initiatives we have planned for the year and their anticipated contribution. And finally, an adjusted EPS range of $1.50 to $2.30 per share, a 1-year increase of about $1.20 per share at the midpoint and a 2-year increase of $1.75.

Our outlook for capital spending, including cloud implementation spend, is around $250 million. Our CapEx plans reflect our focus on safety, modernization and continued prioritization. We always evaluate opportunities to reinvest some of the benefits of this prioritization to support the long-run growth and improving supply chain value for customers and suppliers. This includes targeted automation and technology enablement investments.

We're also [ action ] in our fiscal 2026 plan to generate approximately $300 million in free cash flow in fiscal 2026. We will continue to prioritize reducing net debt to improve our leverage to approximately 2.5 turns or less by year-end. This exceeds our prior stated long-term goal of generating recurring free cash flow of well over 0.5% of sales. Like the initial outlook we provided for last fiscal year, we believe these ranges represent a high confidence case with multiple ways to achieve these targets.

As highlighted on Slide 13, we made solid progress in fiscal 2025 to create incremental value for our customers and suppliers while taking actions to become a more effective and efficient business. We fully expect this momentum to continue in the new fiscal year as we further execute on our strategy.

Having been here for about 1.5 years now, I'm even more confident about the future of UNFI and the value we can generate for our shareholders. After a successful fiscal '25 of delivering and deleveraging, we are committed to accelerating the momentum we've built and again, delivering our outlook in fiscal 2026. With that, operator, please open the line for questions.

[Operator Instructions] Our first question will come from the line of John Heinbockel with Guggenheim Securities.

Sandy, do you want to start with natural merchandising initiatives, capabilities? Where do you see the biggest opportunity there? Is it -- obviously, the long tail is where the innovation is. But those guys don't have manufacturing capabilities. So there's some limitation on supply. Is -- is it the long tail? Is it helping them with supply? Or where is it? And I guess, would that allow you to continue to grow natural in the high single digits?

I think of it as really 3 pieces depending on the customer segment. First, as you suggest, innovation is very important to natural retailers who are positioned that way. And so a lot of the merchandising work we're doing there is to simplify the experience for emerging suppliers and to facilitate more innovation through multiple platforms to our customers.

On the more conventionally positioned side, our natural agenda is more about the road map to deepen their involvement in the categories. And depending on the region of the country and the development of the categories, we manage that specifically on a customer-by-customer basis. I think the punchline is that we think there's a significant opportunity for UNFI to help our customers merchandise their products and be more successful regardless of their positioning.

All right. Then my follow-up is right now that you guys are obviously now disclosing segment EBITDA. Conventionals have that -- have the margin of natural. So I wonder, when you look at that margin, what's the opportunity to improve conventional profitability? Can it be meaningfully improved, I guess, and I don't know if you got an idea as to where or is it more -- look, that's just structural and we need to shrink that business thoughtfully over the next 5 years?

So natural, as you mentioned, has a higher profitability and historically had a higher margin profile due to the specialized and differentiated product assortments as well as their ability to -- or our ability to have higher operating leverage on warehousing and transportation cost just based on the network and the composition of the business.

Now across both segments, we are focused on driving greater profitability with a focus on 3 areas. I mean, the first one is to improve product and service mix. The second one is to continue to drive greater efficiency, so shrink indirect costs, operating expenses. And then the third element is how do we continue to embed lean into our operations and identify it through lean in ways to be both more effective and more efficient.

So if you think about the margin trajectory, we grew about 10 basis points, '25 to '24 with the headwind from the cyber incident. We're growing the guidance, we pointed the guidance about 35 basis points between '26 and '25 and then with the $730 million of EBITDA direction for 2027, that will be about 60 basis points of margin expansion versus 2024.

So we're working all the levers, balancing -- creating customer value for customers and suppliers becoming a more effective business partner and then planned efficiencies.

Our next question comes from the line of Mark Carden with UBS.

So to start on your updated 3-year guidance, you're boosting your sales growth expectations to low single-digit range. And you talked a bit about the stronger-than-anticipated organic growth. Are you guys -- any shifts to how you're approaching planned customer attrition or any assumptions for new account growth going forward? Just some more color on how you're thinking about the balance would be great.

Mark, our view is that as we migrate to our addressable market of $90 billion, we've done some optimization, particularly in the conventional side, which has been a headwind to overall growth. But beyond that, inside the addressable market, we've seen solid growth in our customer file, both from a new customer and expanding categories with existing customer perspective. And I'd say the thing that's changed is the organic tailwind in natural organic and higher levels of customer file growth and customer retention. And our strategy on the whole for the various segments hasn't changed at all. We're just performing slightly better than we expected when we originally guided last year.

Okay. Great. And then just in terms of the current backdrop, are you guys seeing any shifts to the industry promotional backdrop? And just how is that shaping up relative to your expectations with all the unevenness in the consumer backdrop?

We see the promotion cadence edging up, but it remains very disciplined. So the share of volume sold on deal is still running below 2019. We see selectively at least in activities and kind of leaning harder into digital coupons, retail media placements, deferred share, which also supports the future value proposition of our [ UM]. What we consider for our outlook for fiscal 2026 is basically an immaterial step change in promotion levels. So very consistent with 2025.

Our next question comes from the line of Kelly Bania with BMO Capital Markets.

First, I just want to clarify, I think I heard volume metrics that you gave. Are we right to assume that volumes would have been about positive 2% excluding the cyber incident in the quarter? And just -- can you clarify how that would look across the channels, just assuming the incident was kind of equally distributed across the channels. Is that a fair assumption?

So volume was up about 1.5% for full year in 2025. And as you can imagine, with Natural being up high single digits and then on a reported basis with the cyber headwind conventional being flattish year-over-year, volumes were clearly more skewed towards natural than conventional.

So overall, the cyber impact was probably a little bit heavier on the conventional front. Our ability to recover through some of the many, many processes where we activated was quicker in natural. And so with that, we had probably a little bit more of an impact in conventional. You'll see it also as we think about year-on-year kind of tailwinds into 2020 EBITDA.

Okay. That's helpful. And I guess as we just kind of step back and think about the updated algorithm over the next few years here, what is the biggest contributing factor that is leading to raise the adjusted EBITDA algorithm?

Kelly, it's really 3 things. First one is we were modeling a year ago to be flat in terms of top line growth. And now we are seeing low single digits through the combination of a strong resilient natural business and also our ability to retain more customers as part of the network optimization.

The second element is the continuous progress with shrink reduction and the suppliers' programs. These are have been both positive in '24 and '25, and we continue to see the trend into 2026 with tight daily management. And then the third area is really the productivity effort. So if you recall, in 2024, we remargin the business with about $150 million. In 2025, we reduced OpEx by about 50 basis points as a percentage of sales than on $30 billion is about $150 million. And the journey continues into '26 and '27. 26 is going to be a full year realization of the actions that we launched in 2025. And then 26 across 27 is the focus that we're putting on indirect spend.

Our next question will come from the line of Scott Mushkin with R5 Capital.

Thanks for all the details you guys have given on the company. It's really helpful.

So my question is really strategic and it really has to do with the relationship with Amazon and is there any way to make it more symbiotic? Amazon is out there, creating a 3P network of grocers. So the question would be, can you bundle your smaller and midsized customers to participate in that network? Could you create a buying consortium since you guys sell a lot of the same products and serving their Whole Foods banner? And then could you put Cub into that 3P network? So I just kind of want to get a feel for do you think this relationship could grow over time?

Scott, it's Sandy. As you know, we have a policy not to comment on specific customers and we'll continue to live by that policy in this answer. What I would say, though, broadly, is that, particularly with our enterprise accounts, we develop a very customized and tailored strategy of creating value for and with them and that would include the widest possible range of values that we could usually agree to pursue.

And I think you can be assured that, that would include the customer you mentioned as a high priority for us. I would say, in parallel, though, that we are working on a segmented basis to improve our ability to grow profitably and to help customers of all sizes, in particular, small independents that are very agile and innovative, both from a wholesale supply standpoint and also for our suppliers. So think of it as a segmented approach with a range of enterprise value drivers up to and including our largest customer and then ranging down through the segments to independents as well.

And it seems if you've teamed up, you could really help those smaller players over time. The second question is, obviously, you've been rationalizing distribution and automating. Making it more efficient. If your volumes came in much stronger than you're anticipating over the next 2 to 3 years, walk us through whether you would need significant capital investment and facility expansion.

Sure. I guess the best way to describe that is that we have been both rationalizing to optimize distribution centers and expanding and growing. Most recently, as we mentioned in our prepared remarks, in natural, we opened a new DC in Manchester, Pennsylvania that's an automated DC and then we opened a new DC in Sarasota, Florida, between them 400,000 incremental square feet and different automation applications in each of the 2 to facilitate accelerated growth in those regions. We'll continue to optimize the network as our technology road map takes hold, we'll develop more agility and flexibility in the network. But at this stage, our growth is well contained in our 3-year plan and then the outlook we've provided.

And if I can add a couple of thoughts here also. Scott, in the $250 million capital investment that we have for 2026 and beyond, we always assign a portion of that to automation and modernization. So as Sandy mentioned, we're going to have Sarasota going live with new automated technologies and also we're going to have [indiscernible] going live in about 12 months. That brings the total count of automated DCs within our portfolio to 6.

And then we're also using lean not only as a way to improve safety and improve quality and delivery and cost, but also as ways to optimize our layout and create more capacity. So when you put both the $250 million envelope to work and a lean lens on our processes, we had opportunities to expand capacity without necessarily going too long relative to CapEx.

Our next question comes from the line of Alex Slagle with Jefferies.

Congrats. I wonder if you could talk about how we should think about the balance of where the margin gains flow through in '26 would kind of come? I would imagine there'd be more of it on the OpEx side, net-net. But I think you mentioned you expect the OpEx margin, the return at the levels from 1Q to 3Q levels. So just kind of curious how you're thinking about that for '26.

Alexander, let me walk you through the big pieces of the EBITDA expansion on the EBITDA growth. So if you start with $552 million of adjusted EBITDA for '25 as a jumping off point, then we would add the $50 million of the cyber incident related losses that are not repeat. And so rebase line is at $600 million for 2025.

From there, there is a EBITDA accretion from the exit of an unprofitable customer and distribution center that builds on the $600 million. There is the continuous progress on shrink and suppliers' funds. And then there is a third element of productivity, which, as I was mentioning earlier on, is center on 2 areas. One is the full year realization of the 2025 actions. And the second area is really as we go and continue to deploy lean, finding more throughput opportunities and then going after the indirect spend, which is a meaningful portion of the $4 billion spending.

So think about really these 4 blocks as you walk, '25 to '26 is the $50 million non-repeat of cyber is the exit of the unprofitable contract is the continuous programs in shrink and suppliers and then is the productivity actions.

Got it. And on tariff impact. I don't know if you mentioned anything there. I know you were talking about a moderate impact you thought, but what's the backdrop look like at this point now? Are there any unknowns that you're working through?

Alex, I guess our view on tariffs, while it's still fairly dynamic. We're very closely partnering with suppliers and customers to help all of them navigate and compete across the various segments where they're operating. We have a cross-functional task force monitoring the new development scenario planning with customers and providing product alternatives that were necessary.

And ultimately, I think the key theme is to work as hard as we possibly can to help our customers keep prices as low as possible, which we believe will help us and then drive sustainable and profitable long-term growth. At this stage, we're being able to manage it in a very agile way and continue to expect to do so.

Our next question comes from the line of Bill Kirk with ROTH Capital.

So I don't think I saw a reconciliation for reported EPS and the adjusted EPS guide for fiscal '26. And I guess, given the delta is pretty large, could you help us by maybe giving some buckets and some sizing of the onetimes that you expect in fiscal '26 that weigh on the reported and obviously not on the adjusted?

Yes, so the big pieces here are on the adjusted EPS what you would expect is to see the benefit of the non-repeat of the $50 million or so of cyber-related losses then the expansion on EBITDA related to the exit of the unprofitable contract and you see the shrink and supplier benefits, supplier benefits and then the productivity. That kind of gets you from the $0.70 of adjusted EBITDA in 2025 to the midpoint, call it, $1.90 in 2026.

Now relative to the reported over and above those, I mean, we would have the $25 million or so of cyber-related remediation costs and elevated expenses that we incurred that were adjusted out of adjusted EPS and EBITDA in 2025 that ran through the reported numbers, as well as when you think about the $53 million of key [ food ] termination fee, that would be in no repeat both -- or I guess, in the reported EPS in 2026. So the 2 big drivers between '25 and '26 in the reported numbers are the cyber related costs and the no repeat of the termination fee.

I guess what I'm going forward, it looks like -- it sounds like we got some of it is the difference between reported 2026 and adjusted 2026. So forget the 2025 onetime for a second, what are the onetimes in 2026 that are driving that difference?

There is severance. For instance, we continue to invest in kind of optimization and kind of restructuring plan. So we have that. We have always a placeholder for transformation initiatives. I think that these are kind of the big components.

Our next question comes from the line of Leah Jordan with Goldman Sachs.

Just seeing if you could provide a little bit more detail on your sales outlook for '26. And just a cadence throughout the year and how you're thinking about volumes versus inflation, that would be helpful.

Relative to the way we're thinking about growth at the midpoint of the guidance, to $31.8 billion, what we have reflected here is our focus on driving profitable revenue with greater level of profitability and free cash flow and this is what is driving the improvement in adjusted EBITDA on margin improvement.

If you think about the midpoint, $31.8 million is roughly flat versus 2025 and includes the organic sales growth that is led by our natural business that is also enjoying a kind of secular tailwind and then this growth is offset by the impact of our distinct work and retail optimization. But again, both reflects our focus on a strategic targeted addressable market of $90 billion as we redefined about a year ago.

What we expect within the kind of organic growth is natural to grow at a [indiscernible] 30 feet on an enduring long lasting basis with our focus in conventional, be more on optimizing our portfolio and continuing to find win-win opportunities with our customers. So that's how we updated our 3-year sales objectives from flat '24 to '27 to low single digits.

Relative to the seasonality in the year with Thanksgiving and Christmas being 2 holidays falling in the second quarter. We would always expect revenues to be higher in the second quarter and being the highest point in the year. And then, again, relative to seasonality, I think the other point that is relevant in terms of modeling is we tend to build inventory in the first quarter and the first half of the year. So we would expect some cash usage in the first quarter and kind of in the first part of the year and then rebalancing in the second part.

That's very helpful. Then I just wanted to follow up on services. I know Sandy, you called out a number of services you provide and all the opportunity there. Just if you could provide more detail there. How has engagement tracked with your customers, the uptick there, which services are you seeing today? And what are the biggest opportunities long term? And how should we think about any impact to top line growth versus more of a margin tailwind?

Yes. Thanks, Leah. I really think about services in 2 buckets. One are the services that tend to flow with sales, whether they be retail merchandising, store design, equipment and those are sort of the legacy services that we've built and then the more value-added sort of elective services like credit card processing scale, or some of our new digital services, whether that be the UN Retail Media Network or digital shelf tags and other innovation that we're working with various vendors on.

And I think we can continue to expect a steady growth of the more basic services and then where we see the biggest opportunity is in the digital services and helping suppliers navigate our customer base and helping our customer base do the research and the homework to understand which digital applications are best for them and then connecting the dots for everybody to accelerate growth and make everyone more competitive, more efficient and more successful. And there's a whole lot of opportunity there given the wide range of innovation that's happening in the digital marketplace, and we see a significant value add for UNFI there.

Our next question comes from the line of Edward Kelly with Wells Fargo.

I wanted to touch on the secular growth sort of tailwind that you've mentioned in natural organic industry or natural segment. It seems like last year, there was some real acceleration in the industry and we're lapping that now. I'm kind of curious as to how you're sort of thinking about that?

Are we entering somewhat of an air pocket because of that comparison where growth might be a little bit slower than what it might normally be for the industry there. And then longer term, sort of over time, is this still a subsegment that you think has growth roughly in sort of the mid-single-digit range, which I think is where a lot of sort of like industry sources would talk about that.

I think your last comment is roughly what we expect to see from an industry perspective. We're in line with that. There's 2 other pieces of color that we would add. The first one is that we think it's an enduring trend. We think regardless of the economy, there's a significant uptick in mindful eating, healthy eating, wellness in general and that traverses economic segments to a degree.

So we think that it's a very durable tailwind. The second piece of color I would mention is remember that our business is not exactly a mirror of the retail segment. We earn business by serving the needs of retailers who traverse the natural position retailers as well as conventional because they're also focused on growing their natural business. And so we continue to view that as a strong growth area of the business. And we continue to view conventional with differentiated retailers to be a durable segment as well. So that's how we kind of think about it.

Great. And just, I guess, maybe along those lines, I would imagine conventional players continue to push deeper into that product offering. Has the landscape more recently in the tailwinds just really driven more of a desire from that customer base to push down that road. I would imagine that, that's obviously incremental margin for you. I'm just kind of curious as to what you're seeing sort of underneath of demand trends from the conventional players there?

Yes. I think the way I'd describe that is it obviously varies. The conventional market is almost an oversimplified term. Retailers range in positioning and strategy widely from multicultural to value-added and all the way across to your neighborhood supermarket. My own view is that natural and organic and wellness products are an important component of any retailer's assortment, but it's going to vary depending on the positioning, how important that is to them.

I do think and I continue to believe that the pure-play natural retailers have a significant advantage because of the way they compete but we're in the business of helping our customers succeed, and we're going to meet them where they are with their strategy and the development of their business.

Our next question comes from the line of Chuck Cerankosky with Northcoast Research.

I want to talk about it from consumers point of view again. And you mentioned that some of the spending is cautious regarded careful [indiscernible] in many cases, more healthily. How are they approaching their market basket in terms of branded products, fresh products, private label? And how does that influence UNFI's operations, especially as you approach product suppliers?

Yes. Thanks, Chuck. I think, again, you're going to get a segmented answer here. consumers generally are eating more healthily and that applies to the various categories and it results in accelerated growth in natural and organic and trend to fresh, et cetera. But the guarded piece is the other side of the coin. And one of the areas that we're extremely focused on for our customers is working on the overall cost picture for them so that they can compete more effectively against discounters.

So it's a full grocery basket, and it varies by consumer and by retailer positioning. But I would say cost matters in every category and then having the right assortment and product set for the retailer strategy is the other piece to maximize growth.

So you're working with them almost by vendor or putting together programs to their purchases across vendors are optimized for their style of business and volume of purchases?

Yes. And what I would say is we are investing in our capability to get better and better at that. We think there's a long runway of opportunity to improve our merchandising capability to meet customers where they are, and it's a major priority for us.

Our last question will come from the line of William Reuter with Bank of America.

So I just have 2. The first is the move to automation. I think you'll have 6 facilities you said by later this year. When you make those investments, are those positive ROI return on capital investments? Or do you view them kind of as defensive measures that are required to make sure you continue to compete and keep your business?

Yes, we're going to have 6 automated DCs by the end of 2026. And we view them as both capacity and ROI positive investments. With that in mind, the automation investments are expensive and they are kind of long-term returns, but we always do them as ways to increase capacity, improve our effectiveness and improve our efficiency sort of in this order, right?

So we always keep customers and suppliers front and center as we think about how do we serve them better, how do we become more effective and then how do we realize the throughput benefits of automation, with the overarching principle also that automation helps a lot in our safety goals, which is the first priority. So they are expensive. We model them in our $250 million or so of CapEx budget for 2026. And we also view lean as I was mentioning a couple of questions ago, as a good alternative to continue to improve capacity, safety and efficiency.

Got it. And then just secondarily, on leverage, you're now going to reach your target by the end of the year or a year earlier than expected. How is this going to impact your capital allocation? I guess, would you consider acquisitions at that point? Would you consider share repurchases? What are your thoughts?

William, our priority right now has been the same consistently over the last 4, 5 quarters is to reduce that we have multiple ways to achieve the 2.5 turns or less in 2026 and below 2 turns in 2027. If you think about the midpoint of the guidance at $665 million of EBITDA times 2.5, I mean it tells you that our debt should be about $1.6 billion to $1.7 billion and with $300 million of free cash flow guidance for '26 will be below $1.6 billion, right?

So we have multiple ways to get there, which continues to embrace our philosophy and our belief of high confidence plans and there will be more that we can talk about as we achieve those targets. But for now, that's a priority.

That will conclude our question-and-answer session. And I will now turn the call back over to Sandy Douglas for any closing comments.

Thank you, operator. During fiscal 2026, we will be focused on accelerating momentum and continuing to add value for customers and suppliers while becoming a more effective and efficient partner as we execute the second year of our refresh strategy. We expect this to drive increasing profitability and free cash flow and to further strengthen our capital structure.

We are also continuing to grow capabilities to help our customers and our suppliers compete and grow profitably in a dynamic marketplace with the ultimate goal of becoming the most valued partner to the vibrant diversified food retailing industry.

For our customers and suppliers, we thank you for your continued partnership collaboration and support for the UNFI associates listening today are thanks to each of you for everything that you do for our customers, our suppliers, our communities and each other. And for our shareholders, we thank you for the trust you continue to place in us.

Thanks again for everybody joining this morning. We look forward to updating you on our progress through the year. And we hope that you all will be able to join us for our Investor Day at this coming December.

This will conclude today's call. Thank you all for joining. You may now disconnect.