Good to go? Awesome. Good morning, everybody. I am Bill Kirk, Roth's food, retail, distribution, beverages, and cannabis analyst. You're here in the consumer track. It's the blue room, where we're about to hear from United Natural Foods and CFO, Matteo Tarditi. Matteo, thank you again for joining us this year. UNFI is one of the largest food distributors in the country. They recently narrowed their focus a bit on who they wanted to service with what type of products. In December, you hosted a detailed Investor Day that outlined kinda two strategic pillars. The first was adding value to your suppliers and your retailers, and the second was improving effectiveness and efficiency. My first question for you, because profitability has already improved over the last year and a half, which of those two pillars have you progressed against the most so far?
That's great. Hey, good morning, everyone, and thanks for joining us. Bill, good morning. Before we get into the Q&A, I'd like to make a couple of, you know, quick comments. First of all, housekeeping item for those of you who are listening, please feel free to go into our website. There are a lot of information relative to our Q2 results and a number of financial schedules. Second point that I wanted to make is that we are executing with discipline our strategy. That is to say it is centered on adding value to customers and suppliers and then building a more effective and efficient business model. With that in mind, our second quarter results show that an EBITDA growth of 23% and a free cash flow growth of $50 million.
That plays very well with how we have redefined the strategy, working with our customers and suppliers in a more focused $90 billion market growing, where we see a lot of players who are pursuing a differentiated strategy, executing it, or are looking for a differentiated strategy. With that in mind, as part of our capability building, we are, first of all, enhancing customer stewardship, merchandise, supplier management, professional services and brands, but we're also injecting technology, lean and automation in our operations. Again, with the idea of building a more resilient, shared growth and a more profitable business. For the rest of the year, we're looking at delivering $685 million of EBITDA, which is our revised fiscal year 2026 EBITDA outlook.
That means that for the second half of the year, we're gonna deliver $355 million of EBITDA with equal contributions from the third and the fourth quarter. We are planning to deliver another $140 million of free cash flow, which again embeds the $350 million of EBITDA for the second half in a significant step up in our CapEx investments as part of our operating plans. Lastly, we continue to see a strong kind of new business pipeline, which is fundamental for us as we lap the results of the accretive network optimization to return to growth in 2027 and supporting the algorithm into 2028. A couple of thoughts in mind on your question.
First of all, we continue to see that the strategy to focus on $90 billion market is paying off. It's paying off because we have a lot of players in there who are growing and a lot of players who are seeking for a differentiated experience, which is exactly how we play and how our kind of company started many years ago. We believe that this is building on the foundation that we've seen in the last two years, where we grow basically, if you look at it, trailing twelve months, our top line 4% versus the baseline of 2024, and we have expanded our EBITDA by almost 50 basis points versus 2024 jumping off point.
Again, focused strategy, listening to customers and suppliers, developing new capabilities and delivering for all the communities and the shareholders. A couple of thoughts as we're thinking about how we are executing, you know, with the capabilities. Again, to recap, four capabilities in the value added creation, customer stewardship, merchandising and supplier management, professional services, digital services and brands. Then relative to becoming a more effective and efficient business model, technology, supply chain of the future, next generation supply chain, and then becoming more efficient through productivity plans. The reality is that these seven capabilities work in parallel, and we are executing them in parallel. Think about, for instance, we have improved fill rates and on-time delivery, and we're doing that while also introducing 50 new items in the brands, in the private brand space. The...
It's not that we're going in a sequence, we're working all seven capabilities at the same time, and we believe that that is absolutely fundamental to continue to support our customers and suppliers in growing and in return finding shared profitable growth, you know, for all the communities.
As you're looking at these opportunities to either add value or increase your kind of internal efficiency, how much of it would you consider like discrete items, like do it and it's done, we did it, versus part of an ongoing journey?
Yeah. Great question. It is all part of an ongoing journey, so there are certain actions that, you know, we're executing faster. If you think about the work that we've done on introducing lean and taking cost out from our operations, resulting in the 50 basis points of EBITDA expansion, these are things that, you know, we execute very, very quickly, and it's part of the controlling the controllables. Now there are certain areas where, again, the dialogue with the customers and the suppliers is fundamental, understanding what their needs are, and then deploying these capabilities to find shared profitable growth together.
Yeah. Starting with maybe network optimization, as you kind of progress through that period, how much of it is optimizing the supplier-facing relationships versus optimizing your customers, which are the retail account relationships?
Yeah. If you think about the network optimization, think about a revenue management tool. That's how we use it. First of all, we're thinking about how do we grow our network, you know, together with, you know, the customer needs. For instance, that's where we expanded, you know, our footprint in Manchester, Pennsylvania, or in Joliet, Illinois, as we recently announced, or in Sarasota. The network optimization working with customers and suppliers is not purely a consolidation tool. Now, there are situations where, again, we analyze the markets, we see that there are cash burning distribution centers that don't fit the $90 billion growing space, and with that in mind, you know, we drive consolidation.
Again, our goal every week is to study the market, study our customers, talking to them, and understanding where they're growing, and with that, invest in network to support their needs. Very often with the new facilities, in automated facilities.
Yeah.
to improve all the metric routes, safety, quality, delivery, and cost.
Where in the optimization are you in the phases of, say, planning it, communicating it with the folks who may be impacted, and then implementing it? Like, where among those phases are you?
Yeah. We as you say to me the network optimization for us is a revenue management tool. We broadly completed the first phase of the communication with our customers, and we are at different stages of the implementation. It's a journey that will continue as we continue to analyze the performance of our DCs.
Okay. I'm gonna shift a little bit to the marketplace. You know, food retail, your customers, oftentimes for better or worse, is considered to be, you know, at the mercy of Walmart, right? Largely impacted by what Walmart is up to. How does your more narrowly focused customer group compete in the marketplace and offer growth potential in what sometimes people consider a very competitive segment?
Let me first step back and think about how we define the $90 billion space.
Mm-hmm
Acknowledging that the U.S. food market is a huge $1 trillion space, right, every year. For us, it was very, very important to understand how our capabilities, you know, play and how do we find the best win-win solutions with customers and suppliers to grow together, win together, and find shared long-term, sustainable, profitable growth. With that in mind, with the redefined space, we're really working with our customers to provide a differentiated in-store customer experience, more assortments, and this is what we believe is a strong secular trend with consumers looking for a healthier, more kind of wellness-oriented kind of experience, right? With that in mind, we took the $1 trillion market, redefined it for us in $90 billion space.
When you look at that $1 trillion market, there are two things that are incredibly apparent. If you look at the last 20 years, the natural players have tripled their market share, right? It's still $30 billion, so there are a lot of opportunities there for growth, but clearly there has been triplication of the market share. Then if you look at the differentiated, independent, and regional retailers, they have more than double, you know, their market share. Again, there is a clear connection between the differentiation, the secular trend on more organic, more specialty products and what we see in the $1 trillion space. That's why we wanna continue to play there.
We have taken a very cautious decision not to go after a larger market, but to really use our 48 DCs, our seven capabilities, the technology investments to support the space.
Before we came into the room, there was a panel talking about health and wellness trends, and basically they were unanimous in saying it hasn't slowed. People are dedicating more money to that better lifestyle. You sell a lot of that type of product, a food product. Are you seeing something similar from the consumer? Has that health and wellness movement maintained its momentum?
It has. Think about our second quarter kind of reported sales that were down 2.5%, but if you normalize them with 500 basis points of headwind from the accretive network optimization strategy that grew EBITDA and free cash flow, the underlying business grew low single digit, exactly in line with the growth that we expect from the $90 billion space. That's really, really supported by, A, the continuous innovation of our customers, B, the fact that we continue to see a trend towards health and wellness, and then the capabilities that we're deploying to support the customer strategies and the secular trend.
Okay. A big focus of yours has been the lean management practices. It is in the majority of your distribution centers at this point. I might mess up the number, but say it's 36 of 48 maybe. What does it take to get those practices into, or those processes into those last DCs? What happens at the distribution center once you get this perspective and style into those DCs?
Yeah. You're correct. We're about in about 75% of our distribution centers, and we rolled out a Lean Daily Management with a very specific philosophy, which is we're not gonna make it top-down mandatory, right? That can create a lot of fake lean, which is not what we're pursuing. We're actually looking for distribution center leaders who volunteer for the program. We say across the business there is a little bit of friendly competition now to get the benefits of the lean program that have been very, very tangible. When you think about safety, quality, delivery, cost, always in this order, our injury rates has declined, our shrink has decreased by about 11%. Our fill rates and our on-time delivery has increased by 7%, and broadly, we've generated 6% of productivity. We're into very early innings, right?
Mm-hmm.
We just rolled out the Lean Daily Management tools, which basically means consistent KPIs, universal language across the DCs, a lot of very active localized problem-solving, but there are a lot of opportunities there.
Mm-hmm.
... related to being more effective and more efficient, which is really the core of what we do, you know, with the Lean program. Now, interestingly enough, there are a lot of practical examples. We've done 12 continuous improvement processes in the second quarter, and they are examples like helping with visibility and speed of seasonal items or reducing the cycle time to onboard the suppliers. It's not only the discipline of the distribution centers, but it's also how do we embed Lean and the thinking into our day-to-day kind of management of customers and suppliers.
You just gave a couple of metrics there. I think it was maybe last quarter, Sandy Douglas, CEO, said, "Opportunities ahead far exceed anything we've achieved so far." You listed fill rates are already better, throughput's better, on-time deliveries are better, shrink is better. I guess those are things that have already happened. Which of those have you know, maybe improved the most, and which of those have that greater opportunity remaining that Sandy's referencing?
Yeah. We embrace continuous improvement every day. We set the key performance indicators for safety, quality, delivery, cost, standard. If we hit a red, you know, we jump immediately into problem-solving. There is no yellow. When there is a green, we think about what is the next target. I think that we are pleased with the enthusiasm that we have created around Lean. We believe that it is a true game changer and an alternative to high and expensive investments at times.
Mm-hmm.
There are opportunities across all those metrics, right? I think that shrink, if I had to pick one, is the one where we have made a lot of progress, 2024 versus 2023, 2025 versus 2024, so we continue to reduce it. On the other metrics, there are very, very significant opportunities to do better. Again, with the dual lens of being more effective and more efficient as a business partner to our customers and suppliers.
Well, as a partner to those customers and suppliers, we can switch maybe toward the value-added elements, right? Those services that are kind of in addition to kind of the day-to-day delivery aspects. You know, if you were talking to a retail customer, what one or two kind of value-added services do you think they need to add today to be able to compete?
Yeah. We see a lot of opportunities in services, and we are actually very excited about it because first of all, services provide that day-to-day interaction with the customers, so we get a lot of feedback. We can have some very quick solutions back. It doesn't dilute the interaction to the customer on a weekly, monthly basis. First of all, there is that element of customer proximity. We think about services as a way to help our customers optimize their cost structure and be more effective, create shoppers' loyalty, and also find new revenue streams as they think about, you know, growth, right?
Think about services on one end. If you think about more efficient models, so taking cost out, is something that could be a credit card platform, or helping the customers with the equipment layout and equipment services at their stores. If you think about the growth side, this is where coupons or shelf services, you know, kind of play an important role for our customers. In our Investor Day, we showed that top customer users for us have about six services, and the average is two-three. This speaks of a meaningful opportunity to increase penetrations, whether the customer is pursuing an efficiency target or again, growth and kind of more opportunities there. The other area that we're developing inside professional services and digital services is the media network.
Yeah.
I mean, this is the ecosystem that we are creating between suppliers and shoppers. By knowing that by creating the connection between our 10,000 suppliers and the shoppers out there, we are gonna be in the middle in helping the customer understand buying patterns, a lot of analytics, et cetera. Whether it is more marketing income, more data for our customers, connection between suppliers and shoppers, we're very excited about entering this chapter. Very early stages. A lot to learn and.
Sure
A lot to develop, but an important part of our strategy.
You mentioned like the top customers having maybe six services, you know, average something like two or three. You also shared a slide a couple of months ago that in terms of sourcing, your top decile customers get 80% of their product from you, and I think on average, it was closer to, like, 50% for the group. Is that something you can bring up over time? For the people who lean less heavily on you today, how do they become in that top decile number?
Yeah. Great question. First of all, let me clarify that when we define 80% of the kind of customer penetration, what we do is that we look at the cost of goods sold of our customers, and we understand our penetration inside that cost of goods sold. As we said at Investor Day, top decile, top percentile is 80%, and then we have a lot of players in the 50% zone. What we do there is really to work with our customers to understand their needs and unpack basically their book of business. You know, in many cases, they may be using a local distributor for specialty products. Think about specialty meats, cheese, gourmet.
Just by listening to the customers and understanding what they're looking for, we are often able to match it with our own capabilities, our assortments at the distribution centers, how do we deliver for them, right? It's really a work that is rooted into understanding the customer needs, looking at their categories, understanding what we can provide, and then in the meantime, that's kind of the pull, if you want, from the customer side. The push is that we work with 10,000 suppliers to understand what is the innovation, what are the new ideas, and through that kind of push and pull, you know, we can help increase our penetration.
Let's stay on the suppliers for a second. You know, the suppliers, particularly in conventional food, have faced some, like, case volume pressure, and they have maybe for a while. Center-of-the-store-type stuff has faced a little bit of pressure. Are you seeing anything from them in terms of maybe increasing their promotional spend as a response to any of the volume weakness that they've had from the suppliers?
Yeah. We have seen some seasonal promotional increase in kind of November, December, and then the usual step-down in January. I would say there has been a little bit of an uptick, but in general, it's all kind of towards the holidays and then kind of stepping back in.
Okay.
... in January. The behavior that we've seen very consistently is very rational, so there hasn't been kind of a over-exceeding relative-
Okay.
to promotions. Relative to our kind of financial outlook, $800 million in 2028 with 65 basis points of expansion, we have not modeled an uptick in promotional levels.
Okay.
So continuing-
That's just stay as it is.
Stay as it is.
Okay.
Continue to be, you know, very, very rational as we have seen so far.
Okay. Let's talk a little bit about your retail banners. You know, you see a lot of retail concepts and customer types. What can you learn from servicing some of the best retailers in the country to implement into your Cub and Shoppers banners?
Yeah. Great question, and it goes, you know, both ways.
Mm-hmm.
First of all, our retail business is about $2 billion. It's a small part of our portfolio, and it's really focused on the Cub stores in the Minneapolis area. We recently hired a strong kind of local talent with a deep understanding of the retail business, who's also a very strong merchant, so that he can help, you know, understand the broader merchandising dynamics, you know, for our business. We really have this kind of dual process where we obviously get a lot of intelligence and a lot of information from our customers and our retailers and embed some of these learnings and these business cases into our retail business. We also use our Cub stores as a little bit of a lab for professional services, merchandising, private brands.
We use them to build a playbook that then we can share with the other retailers who are looking for a differentiated experience, building a bigger assortment.
Mm-hmm
... more fresh, and so forth and so on. The strategy and the focus right now in our retail business is really to revitalize the customer experience, revitalize the store experience, focusing on KPIs, fresh, how do we kind of strengthen our effectiveness and efficiency inside the stores. With the idea, again, of continuing to learn from the outside, but also using the Cub learnings with some of the customers who are pursuing a differentiated strategy.
Okay. On the macro side, you have an outlook for low single-digit inflation, right? Low single-digit food inflation. Some of the metrics have turned deflationary recently. There's a little PPI food deflation right now. Why do you expect pricing to remain positive?
We have obviously a lot of studies going on all the macroeconomics. For the rest of the fiscal year, so ending in July.
Mm-hmm
We see low single-digit inflation, you know, consistent with kind of what we've seen in the last six months. Our goal, and we've stated it before, is to continue to work with customers and suppliers to keep prices low, stable, and predictable. The best strategy for the industry is to keep inflation low and stable, and that's really how we continue to differentiate and build in agility, you know, the way we interact with our suppliers and work with our customers.
You have a long history of M&A. There hasn't been a lot recently. Do you have the right assets and assortment to pursue the multi-year plan? Do you have the right stuff today that you need for your multi-year plan?
Yeah. Great question. We built a free cash flow outlook with $330 million for 2026, fiscal 2026, $300 million for fiscal 2027, $300 million for fiscal 2028 that embeds high confidence principles, first of all, so multiple ways to get to the outcome, and also a lot of flexibility relative to higher investments in working capital or capital expenditures as, again, we continue to map where our customers are growing and how do we build a more effective and efficient model. We believe that we have the right footprint right now.
Mm-hmm
Always under study, as we said during the network optimization conversation. With technology investments that are gonna help us become more effective and efficient, we're opening a new automated facility in Joliet this summer. There are a lot of investments that we're making, organic investments that we're making towards supporting our customers and continue to gain share profitable growth. Our focus relative to capital allocation is to continue to deleverage. We had an expectation a year ago to be at 2.5x or less in 2027. We brought it into 2026 at the start of the fiscal year. We just updated it again to 2.3x or less with a visibility to 2x or less by the end of 2027. Inside that commitment, there are opportunities to do share buybacks, as we did
Yeah.
For instance, in January opportunistically, right? Then again, to support organic investments as we see them.
Okay. We're getting tight on time, so I guess let's end with something to round it all out. When you think about the industry, and when you think about UNFI, what aspects of the story are maybe underappreciated by the investment community?
I think that our strategy is very clear, and that's what is important for us. Starting with a focused, growing, $90 billion market, building four capabilities around adding value for customers and suppliers. In parallel, working and building and enhancing three capabilities to be more effective and efficient.
Mm-hmm.
It is also a $90 billion market that is growing LSD, a business that once we lap the accretive results of the network optimization will go back to growth in 2027 and 2028. It has got a lot of opportunities for improvement, whether it is the $4 billion non-product cost of which half is indirect cost, the professional services penetration, the Brands+ opportunities. It's just the execution of the strategy in a very consistent way while we continue to grow EBITDA, grow free cash flow, and deleverage.
I think that's absolutely perfect. Thank you, everybody, for joining us. Thank you, Matteo.
Thank you.
Thank you for being here and spending the time.
Thanks.
It's awesome. Thank you. Awesome.