Good afternoon. My name is Sheryl and I will be your conference operator today. At this time, I would like to welcome everyone to the United Natural Foods Inc. Third Quarter Fiscal 2019 Conference 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. [Operator Instructions] Thank you. Steve Bloomquist, Vice President of Investor Relations, you may begin your conference.

Thank you, Sheryl and good evening everybody. We appreciate you joining us on UNFI's third quarter fiscal 2019 earnings conference call. By now you should have received a copy of the earnings release issued this afternoon. The press release the webcast and the supplemental slide deck are available under the Investors section of the company's website at www.unfi.com. Joining me for today's call are Steve Spinner, our Chairman and Chief Executive Officer; Sean Griffin, our Chief Operating Officer; Mike Zechmeister, our Chief Financial Officer; and Chris Testa, President and Chief Marketing Officer. Steve, Sean, and Mike will provide a business update, speak about our performance in the quarter, and address our fiscal 2019 outlook. We'll take your questions after management's prepared remarks conclude. Before we begin, I'd like to remind everyone that comments made by management during today's call may contain forward-looking statements. These forward-looking statements include plans, expectations, estimates, and projections that might involve significant risks and uncertainties. These risks are discussed in the company's earnings release and SEC filings. Actual results may differ materially from the results discussed in these forward-looking statements. And lastly I'd like to point out that during today's call, management will refer to certain non-GAAP financial measures. Reconciliation to the most comparable GAAP financial measures are included in the schedule included in today's press release or the press release from our March earnings call. With that, I'll turn the call over to Steve.

Thank you, Steve. Good evening everyone and thanks for joining our third quarter earnings call. I'll start with some overall comments on the quarter and our business. But before I do that, I'd like to cover some nomenclature changes which the company has adopted. We're well along the way towards integrating legacy UNFI and the acquired SUPERVALU conventional business which includes retail as well as the great private brand and professional service portfolio into one company with a singular reporting structure. Both headquarter buildings now carry the UNFI name and going forward, we will be referring to legacy UNFI as natural and SUPERVALU as conventional. Following my opening comments, Sean will provide more detail into our conventional results including our integration work. And Mike will finish with a review of our financial performance including comments on our fiscal 2019 outlook. I am truly excited about where we are and what we've accomplished. Our future is bright as we emerge as the leading North American distributor of retail products and services throughout the 50 states Canada and the Caribbean. Our priorities moving forward are simple and bringing them to life is exciting: one, to continue UNFI's core mission, values, and strategy; two, to execute financially in terms of year-over-year improvement to EBITDA, net sales, and free cash flow; three, Build out the Store, sell the entire portfolio of products and services, utilizing our new national organizations; four, deploy Thrive 2, UNFI's project to drive integration work streams and the power behind unique and exemplary experiences for our associates, customers, and suppliers; and five, to divest retail. These are the areas of focus that we believe will drive success for the new UNFI and we look forward to sharing additional color as we close out fiscal 2019 and talk to you about…

Thank you Steve and good evening everyone. Tonight I'll provide some comments on our conventional business as well as a brief update on the progress we're making on our integration journey. Overall, I'm pleased with how quickly we're bringing our two companies together, the things that we've accomplished this quarter that simplify our business and the favorable underlying gross margin and expense trends in the quarter in our conventional business. Let me first start with distribution operations as that was a big part of the change in our guidance and a topic that I spent a fair amount of time addressing in our March call. As you may recall, we've been challenged by two network realignment projects one on the East Coast in Pennsylvania and one out West in our Pacific Northwest region. These challenges led to higher labor, transportation and shrink costs. And I'm pleased to say that we've largely stabilized these operations and we're executing better. Our service levels are up and we're improving our expense metrics each period. That includes labor productivity. And in fact our operating expense as a percent of net sales was nearly 90 basis points lower in the last month of the quarter compared to the first. As Steve mentioned, we're excited to open our new Centralia Washington distribution center this summer which we expect will bring us and most importantly our customers many benefits. During the quarter our teams brought four distribution centers on to our common operating systems a critical step forward that frankly we had never endeavored before and it was tremendously well planned and executed allowing us to sunset the systems formerly used to run these facilities which simplifies our business, lowers our expense structure and continues to drive synergies. Having common systems creates operating efficiencies for UNFI as…

Thank you, Sean, and good evening, everyone. I will cover our third quarter financial performance and comment on our fiscal 2019 outlook. Let's start with our third quarter results, which again include a full quarter contribution from legacy SUPERVALU or conventional business. Q3 net sales were $5.96 billion, an increase of approximately $3.31 billion, or 125% compared to Q3 last year. The conventional business added $3.24 billion, and I'll talk about the comparability of the conventional net sales versus a year ago in a moment. Legacy UNFI's natural net sales accounted for the remainder, which equates to year-over-year growth of approximately 2.8%. In the third quarter, we experienced inflation of 1.79%, which represents the highest we've seen since Q2 of fiscal 2016. Inflation on the conventional side of the business was approximately 45 basis points higher than on the natural business. As a reminder, from a channel perspective, legacy SUPERVALU net sales are broken out into UNFI's historic channels. For Q3, the supermarket channel grew 420% versus the third quarter of last year, and represented 61.6% of total net sales. Conventional supermarket net sales were $2.97 billion in Q3, and as Sean pointed out represented a comparable decline of approximately 3.6% versus last year when conventional was not part of the UNFI business. Excluding this acquired conventional business, legacy UNFI's supermarket channel net sales would have decreased by 1.8% versus Q3 last year. Please note that a year ago SUPERVALU was a customer of UNFI in a cross-stock program. As a result, each company independently recognized the cross-stock program net sales. In the combined company, these consolidated net sales are only recognized once, and therefore, get reflected as lower net sales growth year-over-year. Adjusting last year's results for these duplicative cross-stock sales, natural supermarket channel net sales would have decreased…

Thanks, Mike. One point of clarification, GAAP EPS earnings are $1.12 for Q3 not Q2. So, earlier I spoke about our April leadership meeting and the way it brought our people closer together. One outcome from that meeting was the formalization of the five core priorities for the organization to focus on as we finish fiscal 2019 and look towards next year, which I mentioned earlier. We've communicated this to every associate so all of us are crystal clear on what is most important to us as an organization. First, we'll run our businesses with a strong focus on culture. Our journey toward operating as one company is progressing well. We've thoughtfully evaluated our people, our processes and systems and have a path forward with the best of all of these. Internally we're talking differently about the business and ourselves, which is critically important to becoming a single unified organization. And we're focused on common goals and not differences based on historical practices. Second, we'll build out the store by cross-selling our products and services. UNFI has embarked on a mission to transform food distribution and that includes aggressively selling and taking advantage of the unmatched breadth of products and services we now offer our customers. The SUPERVALU acquisition lends itself to meaningful cost synergies but the revenue opportunities are significant as well. And as Sean said on the last call, we're just getting started. And third, we'll improve our financial results and deliver on the long-term commitments we've made. We are committed to delivering on the merit and the value of this deal and I'm confident we'll hit the FY 2022 net sales adjusted EBITDA and leverage numbers we provided in January. And fourth, we'll thoughtfully and economically divest retail, which I addressed earlier. And finally, we'll continue to execute against our integration plans. Our teams are led by experienced leaders, and today, I'm really pleased with how we're performing against our internal goals and milestones. As the integration continues to evolve, we'll migrate from our focus to-date on taking out cost to a longer-term transformation that will fundamentally change the way business is done. And I look forward to updating you on our progress along the way. We provide a lot of information to you today, with a lot of great work that was done in the quarter. And with that, we're ready to take your questions.

[Operator Instructions] The first question comes from Karen Short of Barclays. Please go ahead. Your line is open.

Hi. Good evening. This is actually Renato Basanta on the line for Karen. Thanks for taking my questions. So I guess, first on your independent business at UNFI Legacy, it looks like that business saw -- it looks like the slowest growth we've seen in quite a while. So can you just touch on the health of that independent's customer? And if the slowdown is more a function of changes in volume for customers, store closures or customer losses, any color there would be helpful.

Yeah. Hi. This is Chris. I'll take that question. It's not due to customer losses. It's more due to the dynamics that Steve and Sean were talking about earlier. So new store openings are no longer 200 bps to 300 bps growth that we've seen. We are seeing store closures within that channel. It is by far the most competitive channel that's out there, as these independent channels' operators are adapting their stores to adjust to today's consumers. I'll also say those that are adjusting, there are some real bright spots in that channel. There's some double-digit growth happening within that channel with the formats that are appealing to today's consumers.

And I would also add that it's also the channel that has one of the greatest opportunities for us in terms of cross-selling. A lot of the naturals are starting to add to conventional non-food and related types of products, produce and protein and we're really at the beginning innings of that whole process. So we've seen this kind of cycle up and down before. But we're confident that with a lot of the things that we have going on internally we'll see that return.

Okay. That's helpful. And then I guess as you think about your DC network consolidation plans going forward, I think it will be helpful to hear about how you sort of safeguard against some of the issues you've faced in Pennsylvania and the Pacific Northwest. And then also given what you've learned in those regions, does that maybe necessitate a slower or maybe more patient approach to the consolidation plans that could potentially slow some of the synergy realization?

Yes. That's a good question. This is Sean. First of all, I think it's -- the issues that we've experienced in Harrisburg, Pennsylvania distribution center, and frankly in the Pacific Northwest, I think it's less about speed and how quickly the consolidation efforts are taking place than it is about planning. And we certainly have learned a lot along the way and that will inform how we go forward. I think it's important to call out that in both of these regions we're in a much, much better position this quarter today than we were on our previous call in the second quarter from expense metrics to service metrics, which of course are most important for the customer. We're well on our way through stabilization and getting to improvement. So I mean, the team has learned a lot. These things are complex. These type of consolidation activities, multiple DCs involved are complex. But we think we've got a good handle on it going forward, and we're not certainly conceding time.

And one thing I would add, because it's important, remember that Harrisburg and the Pacific Northwest had been recently acquired by SUPERVALU, and then we came along and bought SUPERVALU. So that dynamic is not going to happen again. So there was a great deal of change both in personnel and in systems and in processes, which further complicated the matters in those DCs. And so that dynamic just is not going to happen again. We got the four DCs consolidated into our legacy systems platform. We did it well and we will be careful and thoughtful as we go to execute the network optimization in the future. But the biggest difference is we just don't have that dynamic of SUPERVALU bought these DCs and then we came along and bought those. It just added a whole level of complexity that we don't have to deal with anymore.

Good point.

Okay. That's helpful. And then just last one on the supernaturals business, pretty -- I guess, pretty strong growth against solid compares. But I think those comparisons do continue to get a little tougher. So, first, just wanted to get your thoughts about growth there on a more normalized basis? What sort of baseline growth should we be thinking about heading into next year? And then secondly, just any color you can provide in terms of what's actually driving strength in that business would be helpful.

Yes. So, this is Chris again. Well, as we've mentioned in previous calls, we had some initiatives that has been really driving the growth in the supermarket -- supernatural channel, and we're starting to cycle those initiatives. And so that's why for now three quarters in a row, you've seen our growth rates slow down and we continue -- we'll continue to see the gap between our all other business and our supernatural business begin to get smaller. In other words, the growth rates will start getting a lot more closer in the out quarters.

But we haven't guided towards anything for 2020 and wouldn't do that until September.

And certainly not on a channel basis.

Yes.

Okay. Thanks. Best of luck.

Your next question comes from the line of Christopher Mandeville of Jefferies. Please go ahead. Your line is open.

Hi. This is Blake on for Chris. Thanks for taking my questions. Wanted to start out with conventional or the SBU wholesale. Could you talk about the top line growth? How was that versus your expectations in the quarter? Just talk a little bit more about that. And then did you say what the actual growth rate was year-over-year? Maybe I missed that.

Yes. Hi, Blake. This is Sean. Actually we did convey the rate, and frankly it was negative 3.6% on a prior year comparable. And so let me just talk a little bit about that. So, largely the declines are coming from the center store and specifically our independent supermarket customer center store. So there is a lot of competition at retail. I think everyone is aware of that. And customers, our customers that are investing in their formats are winning and the customers frankly that are not necessarily investing are struggling. And frankly, some of what we're seeing is really the catalyst for why we're putting our companies together. The customers that frankly are struggling in the center store, they need our help. And where they need our help is in better-for-you food. It's in differentiated food. And frankly, we bring an assortment to the game that is second to none. It's just -- it's just going to take a little time. So we're disappointed. I certainly am disappointed in the negative 3.6%, but we've got many, many customers that are winning and doing quite well.

Thanks for that. I guess building off that obviously it's a competitive environment. How is your sales pitch to these retailers on investing in your services? Because I know you talked about the cross-sell and the revenue synergies. I imagine that's part of an investment for them. They have to want to have visibility into the improvement for their growth. Can you talk about that sales process and maybe some of the solutions your adding that you're selling to them?

Yes. Sure, sure. I will and I'll allow Chris an opportunity to chime in as well. And actually, let me start with the previous question and our response as it relates to independent natural customers. When we look at cross-selling and we look at our professional service offering which is back of house payroll payment transactions et cetera, frankly we see lots of opportunity to help our independent natural customer perform and lower their cost structure. From a sales pitch perspective, Chris why don't you...

Yes. We are -- the largest opportunity that exists with those services is transitioning those services on to the natural channel. So it's a different person you're speaking to. You're speaking to payroll departments. You're speaking to accounting folks versus the grocery buyer that you're used to speaking to every day. So the sales pitch has gone well. It's a little bit longer selling cycle because it's not that same person you've been talking to every day. But we're starting to put some points on the board there because the customers are seeing the value, the monetary value that we have -- that we bring with bringing scale to those services to these smaller customers. So there's a real financial benefit to them. And once they realize that, we're starting to get some momentum going. We expect more to continue.

I would just -- lastly comment that we've reorganized our professional services organization under a head of house. We have a head of professional services. We have a selling organization that reports to him and are connected to our regional four president structure. So we've got really good alignment. We've got great content and subject matter expertise in terms of connecting with the on-the-ground boots, in the field, sales and relationship to the retailer. So momentum is building.

That's helpful. Last one was can you say how much EBITDA from discontinued operations you're going to expect in the 4Q?

Yes. This is Mike. We haven't guided specifically to the quarters and we haven't guided to discontinued operations on the year. It was important for us to provide guidance on a consolidated basis and this is really the result of the gap requirement to include many of the retail-related expenses in continuing operations. As a result of that the discontinued operations EBITDA number's larger than it would be if we had combined those expenses, for rent and for allocated retail-related expenses all into one unit. So that's why we do this as a consolidated basis and also why we didn't provide guidance separately for continued operations and discontinued operations.

Got it. Thanks so much.

Your next question comes from the line of Edward Kelly of Wells Fargo. Please go ahead. Your line is open.

Yeah, hi guys. It's Anthony Bonadio on for Ed. So just quickly to circle back on tariffs and specifically the recent announcement around Mexico, it sounds like you guys are estimating a pretty minimal impact if any. Is that right? And is there anything you can guide us around this?

Yes that's correct. It's very, very small. It's 50 basis points tops or less 50 basis points or less of our total inventory. The China exposure is primarily seasonal items and so it's nominal, not material and wouldn't have any effect really on our business.

Seasonal general merchandise. A – Steve Spinner: Yes.

Got it. That’s helpful. Thanks. And then just on customer profitability, can you just give us an update on progress there? I was kind of attempting to get a sense of how incremental this could be to margin and potential topline benefit over the next few quarters?

I'm sorry was the question around risk? Was that the premise of the question?

On your customer profitability initiative you talked about that quite a bit last quarter.

Yes, yes. So it's about inspiring discipline frankly and reaching a balance. Make no mistake that it is a competitive landscape. The terrain is competitive and frankly we have a DNA in our company around protecting our customers. And we're going to do that. However we also have a responsibility to make sure that our services balancing our cost to serve against the profitability of our entire customer base is part of the process. So I'm really not interested in getting into any specifics necessarily, but suffice to say that we are establishing threshold and inspiring a great deal of discipline in our company around balancing the value proposition that we bring to our retail customers with a level of profitability that is aren't that balanced.

Got it, really good there for now. Thanks guys.

Thank you.

Your next question comes from Rupesh Parikh of Oppenheimer. Please go ahead. Your line is open.

Good evening and thanks for taking my question. So I guess I think this question, you may not answer, but I'm going to ask anyway. So as we look at your longer-term targets that you provided at the Analyst Day, I know you're going to update it with your -- I guess later in September. But is that still intact? Or is -- or would you say that there is -- we'll have to wait for a new update for you guys in September?

Hey Rupesh, this is Mike. Yes as I mentioned as is normal course for us when we get to our September call, we'll update guidance for fiscal '20 and we'll also update our long-term guidance and provide all the commentary that goes along with it.

Okay. And then I guess the other question I had is so clearly, Steve you made a comment to increase focus on adjusted EBITDA and free cash flow and it seems like a shift away from the revenue line. So if you could just help us understand in terms of what's driving that shift and whether that's competitive driven or just any more color you can provide there?

No, I mean, I think, it's just natural that we would focus on profitability. We would just focus on EBITDA dollars and free cash. As we kind of find our way through the integration, we'll find revenue opportunities, but we're less worried about it. If you look back over the course of time, we've rarely had any problem driving our revenue numbers. And so, it doesn't mean we're not concerned about the revenue, because we think that there's a big opportunity in it, but from a disciplined perspective, we're in the business of creating value. And that is EBITDA, EPS, free cash.

Yeah. And I may just make a comment that as it relates to setting the compass north in terms of revenue, we're in the process under Chris -- Chris' leadership at reorganizing our regional sales organization, Steve described with common practices and approaches and strategies around growing revenue under region presidents. So we have very local face of the company with some real decentralized autonomous selling both out there getting it done. And frankly, we have never had more opportunity to grow our company's top line than we have today. Our pipeline both from a natural and conventional perspective are very solid, and frankly most importantly, the assortment -- the breadth of assortment that we bring to our customers in terms of solutions solving these center store issues with some customers that are not performing, we have what gets that done. So, although, we're identifying specific metrics around profitability, please don't for a second take away that we're not focused on the top line because we are every day.

Okay. Great. And then if I can slip in just one housekeeping question. So, Mike, is there any way -- so I know there are some items related to discontinued operations -- in your continuing operations. I know you have that rent expense of $11.6 million in your press release. Is there a way to understand like the total magnitude of items that are currently sitting in continuing operations?

Yeah. The retail related expenses that sit in continuing operations we referenced them earlier on a partial year basis as being approximately $80 million. You'd called out for the quarter $11.6 million. That's really specific to rent expense. That doesn't include the allocated expenses that would be retail specific. If you put those together, you're talking about $10 million -- $15 million to $20 million in the quarter. But as we get into next year and guidance for next year in September, we'll give you a better sense of what those expenses are expected to be when we divest retail, because those expenses will go away.

Okay. Great. Thank you.

Your last question comes from the line of Kelly Bania of BMO Capital Markets. Please go ahead. Your line is open.

Hi. Good evening. Thanks for fitting me in with some questions here. Just wanted to first talk about sales, because in order to reach the low end of your target which is about $21.5 billion, I think you'd need about a $400 million to $500 million acceleration in the run rate relative to where you've been for the past two quarters. And so, I'm just trying to understand if that's the message and why that would be realistic. And as we think about just where sales are tracking, can you help us understand what would kind of be organic run rate or organic rate for the quarter for SUPERVALU conventional -- the conventional side of the business?

Hey, Kelly, just for starters, I just want to remind you that fiscal 2019 for us has a 53rd week and that 53rd week occurs at the end of fourth quarter. So, against a prior fourth quarter that extra week just on a straight line basis is worth about eight percentage points of growth.

Okay. That's helpful. And then can you talk about -- just I'm trying to understand the softness. Is it more attributed to SUPERVALU or UNFI? Or would you equally attribute softness in reaching the low end to both sides of the business? Just trying to understand what's happening underneath.

Sure. Hi. Kelly. This is Sean. Well, I would say that clearly by the channel presentation of our quarter, we are seeing softness in many of the channels that we're reporting and this is with respect to specifically conventional, I mean clearly we put up a negative. We don't expect to continue putting up negatives. But that’s where the business is today. It's very competitive. I think that we've got a lot to offer our retailers, and we're going to work through what those issues are and help our retailers turn that corner, particularly around the conventional independent supermarkets.

Hi, Kelly. It's Steve. I think I would add that we're in a really interesting kind of consumer dynamic right now. The formats -- the retail formats are changing. The stores themselves are getting smaller, not bigger. The successful formats are migrating to more perimeter, more fresh, more better-for-you products. And so those stores are in a state of change. Right now, as I mentioned in my script, there's a lot of discretionary income and so, for example, the foodservice, both in terms of distributors and retail are doing fairly well. Well, if you get any kind of modification in the overall discretionary spending that will bring people back into retail and we'll have the opposite effect of what's happening today. I think e-commerce continues to have a really interesting effect as retailers continue to invest lots and lots of money in e-commerce. Less consumers from our perspective are coming into the stores, because more are buying online click and collect. But when a consumer doesn't come into the store they tend to buy less. And so there's just a lot of interesting dynamics. And it's more cyclical than it is structural and I think it will return. But right now we just have kind of the best of everything hitting us at the same time.

Okay. I'm going to wrap us up. Again, we provided you with a lot of information today. Again, I want to thank you for joining. And as you can see we're excited about what we've accomplished. More importantly, we're optimistic about the value creation associated with the new UNFI. Thanks again and have a great summer.

This concludes today's conference call. You may now disconnect.