United Natural Foods, Inc. (UNFI) Q4 2026 Earnings Call Transcript

Operator: Welcome everyone to the UNFI Fourth Quarter Fiscal 26 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Today, we ask that you limit your questions to 1 question and 1 follow-up. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question. Thank you. I would now like to turn the call over to Jeremy Perrone, Senior Vice President of Investor Relations and Corporate Development. You may begin.

Analyst: Good morning, and welcome to UNFI's Fourth Quarter and Full Year Fiscal 26 Earnings Conference Call. Our earnings press release and presentation which management will speak to, are available under the investor section of the company's website. We have also included a supplemental disclosure file with key financial 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 would 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.

James Alexander Miller Douglas Jr.: Thank you, Jeremy, and thank you everyone for joining us this morning. In the fourth quarter of fiscal 26, 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 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 built momentum. As we enter fiscal 27. 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 have discussed previously, our reported sales included the impact of accretive network optimization actions and the unwind of short term project work in our natural product 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 are 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 grow profitably. Second, we are 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 26, 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 1 of our core seafood brands, that offers a unique combination of quality and value. We have 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 26, we also made progress towards becoming a more effective and efficient company. We continued 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 in 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 to 44 distribution centers, which is enabling ongoing improvements in our safety quality, delivery, cost metrics. While we have 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 are also sharpening our focus on commercial capability building, under Louis Martin's leadership. On that note, I am pleased to officially welcome Alfredo Luchini, as our new chief financial officer who is joining us on today's call. We are excited to have him on board as we continue executing our strategic priorities with strong financial discipline. Turning to slide 9. We have achieved significant improvement. As we cap 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 have grown adjusted EBITDA to over $700 million, generated substantial free cash flow, and reduced net leverage from 4 times fiscal 24 to 2.2 times in fiscal year 26. These results reflect the impact of our value creation strategy and the actions we have taken to improve execution increase efficiency, and strengthen the company's financial foundation. In fiscal 27, we are 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 25 investor day. Reflecting our strong performance in fiscal 26. Although it is early, we would expect this favorability to flow through to fiscal 28. Importantly, we are 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 their own differentiation strategies. Supporting our suppliers' growth, with these retailers and continuing to improve the service that we deliver every day. With that, I will turn the call over to Matteo to discuss our fourth quarter results and fiscal 27 outlook in more detail.

Giorgio Tarditi: 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 26. 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, our outlook for fiscal 27. 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. 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 product 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 product 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, CABP same store sales decline improved by approximately 100 basis points from the third quarter even after adjusting for last year's cyber impact. We are encouraged by the steady progress. Though our 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, 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 initiative. 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, continued to improve our effectiveness and efficiency by deploying new technology solutions and by further embedding lean practices across our network. As Sandy mentioned, 1 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 heat 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 Unifi. This is the latest example of our network optimization planning. We have 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 Leah 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 up our full year total to $323 million. In line with our expectations and $84 million higher than fiscal 25. 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 25. Net debt at the end of fiscal 26 was less than $1.6 billion for the first time since fiscal 38. In the fourth quarter, we repurchased about 420 thousand 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 $100 million share repurchase program that replaces the 1 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 26 with operating momentum as we look to fiscal year 27, our guidance reflects our confidence in the continued execution of our value creation strategy. James are expected to be in the range of $31.2 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 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, expect revenue and earnings growth to be slightly weighted toward 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 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 28 to grow approximately 10% versus our 2027 guidance mid point. 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 27. Reflecting a higher level of organic investments to advance our capabilities well as our effectiveness and efficiency agenda. This includes targeted automation, ERP deployment, and broader technology initiatives designed to simplify processes and provide better, 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 27 free cash flow between $275 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 27. From a capital allocation perspective, we will continue to prioritize organic investments and deleveraging we will 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: And your first question comes from the line of Edward Kelly with Wells Fargo. Please go ahead.

Edward Kelly: Hi. Good morning, guys. I wanted to start on the top line. Obviously, still seeing some optimization headwinds. Could you provide a little bit more color on 150 basis points of short term project work? And then as we think about, you know, 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 am just curious if there is any other optimization stuff that you are maybe contemplating that is not in the guide.

James Alexander Miller Douglas Jr.: Good morning, Edward. First, I would say 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 is approximately a 150 basis point drag on our reported sales results. From a 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 you know, where you are in terms of optimization overall, potential for further activity in the future. Sure. DC optimization is really a 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 have 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 are in the process of cycling. But we will continue to look at it. Great. Thanks, guys.

Operator: Your next question comes from the line of Alex Slagle with Jefferies. Please go ahead.

Alex Slagle: Congrats on the progress. If you wanted to follow-up on Edward's question a little bit more. If there is any other color sort of on the segment level. Just trying to think if like, conventional and retail, I mean, with the 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?

Giorgio Tarditi: Hey. Good morning, Alexander. So, first of all, we are pleased with the performance that the 2 segments deliver in 2026. So think about natural growing top line about 7% and growing EBITDA 19%, so showing stronger breaking leverage. And then conventional was 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 do not 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 trends, extended stay, the $90 billion market that continues to grow at low single digit. And the commercial capabilities we are building. And inside the low single digit guidance, continue to see natural organic specialty products to grow faster than the than the average market in the portfolio. So would 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 8% at the midpoint.

James Alexander Miller Douglas Jr.: 1 final point I would 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 add value to customers and drives our growth proposition. Got it. Thank you.

Giorgio Tarditi: And then just on the 2027-2028 targets, I mean, do the higher fuel costs impact this outlook? And just the magnitude of the incremental headwind? I know it is something we initially were not looking at years ago when we set the plan. Leah, Alexander, we talked in kind of the Q3 for 2 calls, about a $5 million kind of net fuel impact in each quarter. And that is 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 1 is we have some fuel hedges in place to mitigate some of the inbound costs Second, we have customer and supplier contractual escalations that, again, go through a lagging and a phasing, but they are in place to protect then the third 1, which is the most important, is a 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.

James Alexander Miller Douglas Jr.: Great. Thank you.

Operator: Next question comes from the line of Kelly Bania with BMO Capital. Please go ahead.

Kelly Bania: Good morning, and thanks for taking our questions, and congrats on the leadership announcements. Wanted to go back again to the 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 and from both new and existing customers Can you share any color on the timing and magnitude and drivers that new business?

James Alexander Miller Douglas Jr.: Hi, Kelly. So the way I would describe the flow of the business is that I will start with the pipeline. We have continued to earn bigger shares of our customer's business. it is the best kind of growth. Because it signals a healthy relationship and it often includes economies of scale. And so it is a real focus for us to continue to earn our customers' business. And that is a component of the outlook in terms of sales. We also have new banners, which are new relationships. And, obviously, we have netted out any other changes in our customer base to be able to come to the guy What we have communicated today, and I think it is the best way to think about it, is the first quarter will continue to have a heavy amount of cycling from the optimization And the second half of the year, we think, will 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 have complete cycled it as we enter the first quarter I mean, there is 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 are a stronger company from a technology and security standpoint. And our customers, have the benefit of that capability build. And all it is this is solidly in the rearview mirror for them and for us.

Operator: Your next question comes from the line of Leah Jordan with Goldman Sachs. Please go ahead.

Leah Jordan: Hi, good morning. Thank you for taking our question. I wanted to ask about food inflation What are you seeing today? What is embedded within your outlook for FY 2027? And then how are you thinking about for 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 of this coming year that you gained last year? Thank you.

Giorgio Tarditi: Hey. Good morning, Leah, First of all, our strategy with suppliers and through our supply chain is always to keep our prices low, stable, and predictable That is the best answer and the best response to, you know, to the industry and for our customers. When you think about our fiscal 27 outlook, we have embedded low single digit assumption for inflation, recognizing though the environment is dynamic, and it includes, you know, areas like energy, logistics, 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 2027 outlook is low single digit inflation and basically no reliance on procurement gains. On out of pattern, let's say, procurement gains. Okay. that is helpful. Thank you.

James Alexander Miller Douglas Jr.: 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 continue to be kind of a top line and margin for you. So how are you thinking about that? Leah, it is Sandy. The way I describe our retail initiatives is early days. David Best, our retail CEO, has his management team in place. They developed a strategy, and they are in the early stages of implementing it. And as Matteo said in his remarks, we are seeing a sequential improvement in the top line and bottom line performance. We will 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 is been put in place is very high quality. We work closely with our franchise partners in the Twin Cities area, and we are excited about the potential but early days as of now. Okay. Thank you. 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 segmented the business and there is 1 in a slide that is 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 are 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 are seeing some early results from providing that support on top of a bed of continuously improving execution. Thank you, Sandy. Great color.

Operator: Your next question comes from the line of John Heinbockel with Guggenheim Securities. Please go ahead.

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

James Alexander Miller Douglas Jr.: Sure, John. Good. Insightful question. Broadly, we are seeing fill rates improve in conventional and natural at about the same rate. However, you are right. Conventional fill rates are higher, and it makes sense that they are. They are fast moving consumer goods. Lots fewer SKUs, and generally, volume is more stable. And there is plenty of supply. On the natural side, with all the innovation and the slow moving SKUs, it is a whole different ballgame. But we have created a 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 wanna 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 some suppliers to get a differentiated amount of inventory and then using technology which we have implemented, as you know, RELEX across our system, to leverage AI to make sure that we are continuing to order and fulfill in the most technology supported way. And we are making some progress, but we continue to see it the biggest improvement opportunity we are working on and we expect to continue to improve. Maybe a second question. If you think about you break out natural and conventional but then you have, right, the customer types that are differentiated. When I think about conventional product sales through less or undifferentiated channels, How do you think about that And I 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? I think so. I the way I look at it is that customers have their own assortment strategies and what our job is to support that. Now the advice we are 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 cost down. So competitive so our customers can be competitive. Beyond that, though, there is tremendous opportunities to decompress and move assortments towards private labels, which is a major focus of ours. As well as natural, organic, and specialty, A, because they are not comparable, and b, because they are on trend. And so to some degree, we are gonna force that transition and mix simply by strategy and by consumer demand. But what I will also tell you is that approximately 90% of our customers buy at least some of both. And so I returned back to how I started, which was we are in the business of selling the products our customers wanna sell. But at the end of the day, the math of it is gonna 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. Thank you.

Operator: Your next question comes from the line of Mark Carden with UBS. Please go ahead.

Mark Carden: Good morning. Thanks so much for taking the questions. 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 have seen in grocery? Guys obviously have a bit more, you know, favorable exposure with your target market. But has there been any shift on either upfront money or on price in general? Thanks.

James Alexander Miller Douglas Jr.: Mark, I would say broadly that the wholesale industry can continues to be very competitive. I think what may be 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 would not 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 are focused as we 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 is a very competitive industry, and we continue to sharpen our execution to make sure that our customers believe they are getting the best value for what they are trying to accomplish. Great. that is helpful color.

Giorgio Tarditi: And then as a 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 are planning on phasing in these changes to your DC base. Is it voluntary, like, the first phase? Will it be implemented more quickly? Just color there. Thanks. Good morning, Mark. 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 to the start, but there is a lot to do. You think about 2 point 0, the plan here is to start going much deeper into 2 specific areas. The first 1 is management routines and, specifically, how do we strengthen the problem solving and data management programs? So we spoke about teams huddling at 7 a.m. at 44 DC to look at the key performance indicators. Gonna start going much deeper into the countermeasures and how do we deploy psychology, how do we deploy stronger quality, etcetera, etcetera. To problem solve. The second area then is gonna be continuous improvement. Right? The Japanese word would be kaizen, but it is 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 what are the larger opportunities based on customer feedback, customer impact, suppliers, out of stock, etcetera. And so that is how we are going to prioritize. So it is gonna be a little bit less of just raising your hand; it is a smarter way to cross check where is the biggest impact, and where is the opportunity.

James Alexander Miller Douglas Jr.: Mark, the 1 build I put on that is Matteo's answer to that question gives you a pretty good example of why we are optimistic. About the impact he is gonna make as chief operating officer with sales, customer, and supply chain. And lean and IT reporting to him we are able to push that mix together and begin to take things to the next level. Great. Thanks so much, and good luck, guys.

Operator: Next question comes from the line of Scott Mushkin with R5 Capital. Please go ahead.

Scott Mushkin: Thanks, guys. 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 know, it is much appreciated. So first question is more short term. it is industry related. I mean, obviously, you guys outlined the, you know, the way you can grow. But in the broad it looks like we are gonna have some volume pressures as GLP ones continue to erode, demand and then also building price pressures throughout the whole industry. So I was just wondering if you could kinda put UNFI in that if that is correct. And how, you know, how your business performs in that environment, if that is the short term environment.

James Alexander Miller Douglas Jr.: 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 is impacting retail. GLP ones are also impacting volume, but they there is 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 are in. And as I mentioned earlier, broadly speaking, they are making sure that their value is right They are making sure that their assortment is right. And then they are 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 25 years, and that certainly includes all the time that I have been in the industry. I have 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 is a fair amount of opportunities that companies see when things are challenging to double down on their proposition. Now I do not wanna 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 are relentlessly focused on them and that is particularly important in this environment. that is great. So my second question is more of a long term question. And obviously, you have gotten back you are going to be at 2x. So if you had to prioritize capital, organic growth versus M&A, buybacks versus dividends, you know, over, like, a 3- to 5-year period, not, like, this year, you are gonna have you know, free cash flow in, looks like, at least $300 million you know, going forward. How would you structure that and think about that? Great question, Scott. I am and I am gonna let Matteo carry most of this But what I the first comment I would make is we really have not said anything about the long term capital allocation strategy other than we are gonna 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 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 is around organic improvement. Simply because we see so much opportunity to do that. But that I would not wanna foreshadow the ultimate strategy other than to say that is where we are currently focused. Matteo, how would you build on that?

Giorgio Tarditi: No. You said it perfectly Sandy, I mean, the only add I would say is that we are taking the CapEx spending for 2027 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, you know, our commitment to continue to reduce leverage and return money to shareholders. All right, guys. Thank you very much. Thanks, Scott.

Operator: Your next question comes from the line of Charles Cerankosky with Northcoast Research. Please go ahead.

Chuck Cerankosky: Good morning, everyone. Great quarter, great year. When you are talking about acquiring new business and expanding business, with existing customers, what is sort of the lead time? How much spade work goes on that we do not see? And is the company's improving balance sheet helping United Natural achieve that goal?

James Alexander Miller Douglas Jr.: Hey, Chuck. Let me ask the 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 is 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 1 as more important than the first, but it is 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 are winning business when we do. The sales cycle is as long as it takes Now and that said, I am not trying to cop out. it is 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 are continuing to evaluate categories and it takes a you know, 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 is not the best time to make a distribution change in the holidays, for example. So it is a deliberate process. it is at the speed of the customer. And the basis of competition is our fit to their strategy and our execution capability. Alright. Thank you, and good luck for fiscal 27. Thanks, Chuck. Bye.

Operator: Your next question comes from the line of Peter Saleh with BTIG. Please go ahead.

Peter Saleh: Great. Thanks for taking the question. I wanted to ask on the 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 what benefits you are you are starting to see with some of this automation?

Giorgio Tarditi: Hey. Good morning, Peter. Let me let me start it out with you because you may recall that automation is inside a suite of kind of capabilities and functionalities that we have to become more effective and efficient alongside with lean the technology investments we are making, the engineering standard and the work that we are doing there, and then there is there is automation. So it is it is 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 Chester 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 of York to Manchester was 50% larger highly automated, very low advantage effect rate, and that is 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 are very aware of that, and we are 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.

James Alexander Miller Douglas Jr.: Just as a follow-up, is are there more of these types of facilities planned in 2027 or 2028? Anything else on that front? Peter, Sandy, I what I would say is we have an exciting technology and improvement road map that goes out multiple years. For obvious reasons, we are not going public with it at this stage. But with each passing implementation, whether it is technology like RELEX or Samsara going system wide last year, we are 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 the 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. We have a plan to do that over the next years. Great. Thank you very much.

Operator: Next question comes from the line of William Reuter with Bank of America. Please go ahead.

William Reuter: So in a previous question around your capital priorities, M and A buybacks, you said we have not really said anything at this point. We are focusing on deleveraging. I believe your target for leverage has been 2.0 times, which you are gonna achieve by the end of this year. That point, you will 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?

Giorgio Tarditi: Hey. Good morning, William. So we continue to generate strong cash flow. You saw the $500 million in the last couple of years, outlook for 2027 at the midpoint, $300 million. Well, again, reinvesting same amount into CapEx. And for now, our focus is really to delever, go below 2 times as we mentioned. 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 is it is a combination of strong operations, strong free cash flow, continue to deleverage, reinvest into a strong organic investment, 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 generate interest savings. We refinance the ABL with some savings. We reprice the term loan and generate the savings. So it is a very comprehensive set of mechanisms to deleverage and continue to optimize the structure. Got it.

William Reuter: Then just my follow-up. You know, you mentioned the headwinds in terms of optimization in the first quarter. And then, I guess, a little bit maybe still this 1-time 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.

James Alexander Miller Douglas Jr.: I think you have 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 the what makes it a little noisy is the cycling of the optimization and the project work with an individual customer. Got it. Alright. that is all for me. Thank you. Thanks, William.

Operator: Your last question comes from the line of Carla Casella with JPMorgan. Please go ahead.

Carla Casella: Hi. I am just following up on Bill's question on leverage, 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 are paying less cost, your bonds are less costly than your term loans.

Giorgio Tarditi: Morning, Carla. We continue to look at those opportunities. So the bonds will come up for, you know, 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 you know, tranquility in a way to continue to study the market. So we will you know, under Alfredo's leadership and Sandy and all the kind of the governance that we have, we will continue to look for opportunities to optimize our cost of interest and our capital structure. By fairly again, early thoughts and, again, pleased with what we have been able to do in the last 6 months, you know, with the bond, term loan, and ABL. Okay. Great.

Carla Casella: And then just on the on the subject of M and A, what is the are there a lot are you seeing more or fewer or more M and A opportunities? And then on the grocery side, specifically, you talked about Cub. Is you know, 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?

James Alexander Miller Douglas Jr.: Hi, 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 and in terms of delivering customer benefit and shareholder returns. As it relates to m and a, obviously, we are open to it. We continue to scan and evaluate the market. But at this stage, if 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 are ready But I think if there is a bias, the bias is on improving execution for our customers and delivering value to our shareholders, through internal investment rather than m and a. Great. Thank you.

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

James Alexander Miller Douglas Jr.: 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 am 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.

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