United Natural Foods reports solid Q4, improving free cash flow and reducing debt ahead of fiscal 2026 growth targets

Regina - Conference Operator - (00:01:11)

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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, press star, one again. I would now like to turn the conference over to Steve Blomquist, Vice President of Investor Relations. Please go ahead.

Steve Blomquist - Vice President of Investor Relations - (00:01:49)

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 have 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. everyone that comments made by management during today's call 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 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

Sandy Douglas - Chief Executive Officer - (00:03:17)

Slide six 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 from 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 reduce 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 multi year strategic plan we detailed a year ago. We're building momentum as we enter Year two 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 refresh 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 and 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 refresh strategy and multi year plan we announced last October have been steadily driving growth within this market anchored by two 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 Unified 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 underscore 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 four 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 four 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, improve 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 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 backdrop. 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 and 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 roadmap 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 six in the presentation, we are accelerating and raising the multi year objectives we previously set and announced one 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 project that 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 multi year 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 2.5 times by the end of fiscal 2026 and to further reduce this to under 2 times 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 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 two of our Refresh 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.

Matteo Tarditi - (00:16:11)

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, and our fiscal 2026 outlook. Our expectations for the new year include incremental benefits as we accelerate the execution of our multi year strategy, build upon the early success of our lean operating approach and look to achieve Our previously stated 2.5 turns leverage target in 2026 one 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. Excluding 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 with growth from both smaller and larger customers as well as the secular tailwind from increasing customer adoption of these products. Conventional segment sales declined 6%, 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 CAB 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 impact of the cyber incident in this year's fourth quarter which drove elevated shrink. The gross margin rate was 13.5% in 4Q2 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 $13 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 annual processes during fiscal 2026. We fully expect our OPEX rate to return to the pre cyber incident trends we experienced in the first three 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 the 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 a 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 compensation 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 incidents. 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 Lean 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 and 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 Andy 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. This builds on work 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 and at our upcoming Investor Day in December. If you go to slide 12 we finish 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 a 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 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 one year increase of about $1.20 per share at the midpoint and a two 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 long run growth and improving supply chain value for customers and suppliers. This includes targeted automation and technology enablement investments. We're also actioning 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 a half percent 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 I 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 a year and a half 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 - (00:28:33)

We will now begin the question and answer session. In order to ask a question, press star followed by the number one on your telephone keypad. Our first question will come from the line of John Heinbuckle with Guggenheim Securities. Please go ahead.

John Heinbuckle - Equity Analyst - (00:28:46)

Hey Sandy, I want to start with natural merchandising initiatives and capabilities Where do you see the biggest opportunity there? You know, 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 it the long tail? Is it helping them with supply? Or you know, where is it? And I guess, would that allow you to continue to grow natural in the high single digits?

Sandy Douglas - Chief Executive Officer - (00:29:19)

Good morning John. I think of it as really three 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 roadmap 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.

John Heinbuckle - Equity Analyst - (00:30:14)

All right, my follow up is right now that you guys are obviously now disclosing segment EBITDA. You know, conventionals have that half 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 have 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 five years.

Matteo Tarditi - (00:30:49)

Hey, good morning, John. Natural, as you mentioned, has 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 three 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 cost, operating expenses. And then the third element is how do we continue to embed lean into our operations and identify through lean 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 at the guidance midpoint of the guidance about 35 basis points between 26 and 25. And then with a $730 million of EBITDA direction for 2027, that would 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 playing deficiencies.

John Heinbuckle - Equity Analyst - (00:32:22)

Okay, thank you.

Operator - (00:32:25)

Our next question comes from the line of Mark Cardin with ubs. Please go ahead.

Mark Cardin - Equity Analyst - (00:32:30)

Morning. Thanks so much for taking the questions. So to start on your updated three year guidance, you're increasing 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 growth going forward? Just some more color on how you're thinking about the balance would be great. Thank you.

Sandy Douglas - Chief Executive Officer - (00:32:54)

Yeah. Hi, Mark. Our view is that as we target 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 and 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.

Mark Cardin - Equity Analyst - (00:33:46)

Okay, great.

Sandy Douglas - Chief Executive Officer - (00:33:46)

Thank you. 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? Hey, good morning, Mark. 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 listing activities and kind of leaning harder into digital coupons, retail media placements to defer share, which also supports the future value proposition of our UMN. What we consider for our outlook for fiscal 2026 is basically a immaterial step change in promotion levels. So very consistent with 2025. Great, thanks so much.

Mark Cardin - Equity Analyst - (00:34:39)

Good luck, guys. Thank you.

Kelly Banya - Equity Analyst - (00:34:42)

Our next question comes from the line of Kelly Banya with BMO Capital Markets. Please go ahead. Hi. Thanks for taking our questions. First, I just want to clarify, I think I heard the 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?

Matteo Tarditi - (00:35:20)

Yeah. Good morning, Kelly. So volume was up about 1.5% for a 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 a, 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 a 2026 EBITDA.

Kelly Banya - Equity Analyst - (00:36:11)

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 me to raise the adjusted EBITDA algorithm?

Matteo Tarditi - (00:36:28)

Clary, thanks. It's really three things, you know, 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 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 remargined the business with about $150 million. In 2025 we reduced OPEX by about 50 basis points as percentage of sales. That 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 launch in 2025 and then 26 across 27 is the focus that we're putting on indirect spend.

Scott Mishkin - Equity Analyst - (00:37:49)

Our next question will come from the line of Scott Mishkin with R5 capital. Please go ahead. Hey guys, thanks for taking my questions and thanks for all the details you. Guys are giving 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? You know, Amazon's out there creating a 3P network of grocers. So the question would be, you know, can you bundle your smaller and mid sized customers to participate in that network? Could you create a buying consortium since you guys sell a lot of the same products and you're obviously serving their Whole Foods banner and then, you know, could you include Cub in that 3P network? So I just kind of want to.

Sandy Douglas - Chief Executive Officer - (00:38:38)

Get a feel for. Do you think this relationship could grow over time? Scott? 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 mutually 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. Thanks for that, Sandy. It seems if you 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 two to three 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 and Sarasota, Florida. Between them, 400,000 incremental square feet and different automation applications in each of the two to facilitate accelerated growth in those regions. We'll continue to optimize the network as our technology roadmap takes hold, we'll develop more agility and flexibility in the network. But at this stage, our growth is well contained in our three year plan and in the outlook we provided.

Matteo Tarditi - (00:41:32)

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 head Sarasota going live with new automated technologies and also we're going to have Joliet going live in about 12 months. That brings a total count of automated DCs within our portfolio to six. 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 have opportunities to expand capacity without necessarily going too long relative to capex.

Scott Mishkin - Equity Analyst - (00:42:27)

Perfect guys, thanks.

Alex Slagle - Equity Analyst - (00:42:30)

Our next question comes from the line of Alex Slagle with Jefferies. Please go ahead. All right, thanks and congrats. I wonder if you could talk about how we should think about the balance of where the margin gains and 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 the expect the OPEX margin, the return to the levels from 1Q to 3Q levels. So just kind of curious how you're thinking about that for 26.

Matteo Tarditi - (00:43:03)

Morning Alexander. Let me walk you through the big pieces of the of the EBITDA expansion or the EBITDA growth. So if you start with a $752 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 no repeat and so re Baseline has a $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 the third element of productivity which as I was mentioning earlier on is centered on two 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 DOL are spending. So think about really these four blocks as you walk 25 to 26 is the $50 million no repeat of the cyber incident, is the exit of the unprofitable contract is the continuous programs in shrink and. Suppliers and then is the productivity actions.

Alex Slagle - Equity Analyst - (00:44:28)

Got it. And on tariff impact, I don't know. If you mentioned anything there, I know.

Sandy Douglas - Chief Executive Officer - (00:44:33)

You were talking about a moderate impact 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 that 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 them 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.

Alex Slagle - Equity Analyst - (00:45:34)

Thank you.

Operator - (00:45:37)

Our next question comes from the line of Bill Kirk with Roth Capital. Please go ahead.

Bill Kirk - Equity Analyst - (00:45:43)

Good morning everybody. 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 categories and some sizing of the one-time items you expect in fiscal 26 that weigh on the reported and obviously not on the adjusted.

Matteo Tarditi - (00:46:11)

Yeah Bill. So good morning. So the big pieces here are on the adjusted eps. What you would expect is to see the benefit of the no repeat of the $50 million or so of cyber related losses. Then the expansion on EBITDA related to the exit of the unprofitable contract ndc, the shrink and supplier benefits, supplier fund benefits and then the productivity that kind of gets you from the $0.70 of adjusted EPS 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 cost and elevated expenses that we incurred that were adjusted out of adjusted EPS and EBITDA in 2025 and ran through the reported numbers as well as when you think about the $53 million of key food termination fee, that would be a no repeat both I guess in the reported EPS in 2026. So the two big drivers between 25 and 26 in the reported numbers are the cyber related cost and the no repeat of the termination fee. I guess what I'm going for, and.

Bill Kirk - Equity Analyst - (00:47:38)

It looks like it sounds like we got some of it, is the difference between reported 2026 and adjusted 2026. So forget the 2025 one times for a second. Well, what are the one times in 2026 that are driving that difference?

Matteo Tarditi - (00:47:55)

There is severance. For instance, we continue to invest in optimization and kind of restructuring, restructuring plans. So we have, we have that, we have always a placeholder for transformation initiatives. I think that these are kind of the, you know, the big components.

Bill Kirk - Equity Analyst - (00:48:19)

Okay, thank you, Matteo. Thank you.

Leah Jordan - Equity Analyst - (00:48:23)

Our next question comes from the line of Leah Jordan with Goldman Sachs. Please go ahead. Good morning. Thank you for taking my question. 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. Thank you.

Matteo Tarditi - (00:48:48)

Good morning, Mia. So relative to the way we're thinking about growth at the midpoint of the guidance, so $31.8 billion, what we have reflected here is our focus on driving profitable revenue with a greater level of profitability and free cash flow. And this is what is driving the improvement in adjusted EBITDA growth and margin improvement. If you think about the midpoint, 31.8 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 DC network and retail optimization that again both reflect our focus on a strategic, targeted, addressable market of $90 billion. As we redefine about about a year ago what we expect within the kind of organic growth is natural to grow at a steady clip 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. That's how we updated our three year sales objectives from flat 24 to 27 to a low single digit relative to the seasonality in the year. With Thanksgiving and Christmas being two 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.

Leah Jordan - Equity Analyst - (00:50:45)

That's very helpful, thank you. Then I just wanted to follow up on services. I know Sandy, you called out a number of services you provide and the opportunity there. Just seeing if you could provide more detail there. How has engagement tracked with your customers? You know 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?

Sandy Douglas - Chief Executive Officer - (00:51:14)

Yeah, thanks Leah. I really think about services in two 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 UNFI 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 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.

Operator - (00:52:46)

Great, thank you. Our next question comes from the line of Edward Kelly with Wells Fargo. Please go ahead.

Edward Kelly - Equity Analyst - (00:52:55)

Yeah, hi morning everyone and thank you for the update. 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, you know, 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 sub segment that you think has growth roughly in sort of the mid single digit range, which I think is where a lot of, you know, sort of like industry, you know, sources would talk about that. Yeah, I think your last comment is roughly what we expect to see from an industry perspective. We're in line with that. There's two other pieces of color that we, that we would add. The, 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. 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.

Sandy Douglas - Chief Executive Officer - (00:55:00)

Just, I guess maybe along those lines, I would imagine conventional players continue to push deeper into that product offering. You know, 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 the demand trends from the conventional players there. Yeah, I think the way I 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 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. Great.

Edward Kelly - Equity Analyst - (00:56:26)

Thank you.

Operator - (00:56:28)

Our next question comes from the line of Chuck Sirankoski with North Coast Research. Please go ahead.

Chuck Sirankoski - Equity Analyst - (00:56:35)

Good morning, everyone. I want to talk about it from. The consumer's point of view again. And you mentioned that some of their spending is cautious or guarded, careful. Yet they're trying to eat in many cases more healthfully. 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?

Sandy Douglas - Chief Executive Officer - (00:57:08)

Yeah, 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 a trend to fresh, etc. 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.

Chuck Sirankoski - Equity Analyst - (00:58:19)

Putting together programs so their purchases across vendors are optimized for their.

Sandy Douglas - Chief Executive Officer - (00:58:25)

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.

Chuck Sirankoski - Equity Analyst - (00:58:48)

All right, thank you. Good luck for the new fiscal year.

Sandy Douglas - Chief Executive Officer - (00:58:51)

Thanks, Chuck.

Operator - (00:58:53)

Our last question will come from the line of William Reuter with Bank of America. Please go ahead.

William Reuter - Equity Analyst - (00:59:00)

Good morning. So I just have two. The first is the move to automation. I think you'll have six facilities. You said by later this year, when you make those investments, are those positive ROI, Return on Investment (ROI), or do you view them kind of as defensive measures that are required to make sure you continue to compete and keep your business?

Matteo Tarditi - (00:59:24)

Good morning, William. Yes, we're going to have a six automated DCs by the end of 2026. And we view them as ROI, both capacity and ROI positive investments. With that in mind, the automation investments are expensive and they are 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.

William Reuter - Equity Analyst - (01:00:36)

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?

Matteo Tarditi - (01:00:55)

William? Our priority right now, and it's been the same consistently over the last four or five quarters, is to reduce debt. 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 two and a half, I mean, it tells you that our debt should be about 1.6 to 1.7. 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.

William Reuter - Equity Analyst - (01:01:49)

Got it. That's all for me. Thank you.

Operator - (01:01:53)

And that will conclude our question and answer session and I will now turn the call back over to Sandy Douglas for any closing comments.

Sandy Douglas - Chief Executive Officer - (01:02:01)

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. Our 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'll all be able to join us for our Investor Day this coming December.

Operator - (01:03:16)

This will conclude today's call. Thank you all for joining. You may now disconnect.