Hello. My name is Ellie, and I will be your operator for today. I would like to welcome everyone to UNFI Fiscal 2024 Third Quarter Earnings Call. Please note that all participants are in listen-only mode. After the prepared remarks, we will have a question-and-answer session. It is now my pleasure to turn today's speaking over to Steve Bloomquist, Vice President, Investor Relations. Steve, please go ahead.

Good morning, everyone, and thank you for joining us on UNFI's third quarter fiscal 2024 earnings conference call. By now, you should have received a copy of the earnings release issued 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 unfi.com on the Events tab. We've also included a supplemental disclosure file in Microsoft Excel with key financial information. Joining me for today's call are Sandy Douglas, our Chief Executive Officer; and Matteo Tarditi, our President and Chief Financial Officer. Sandy and Matteo will provide a business update, after which we'll take your questions. Before we begin, I'd like to remind everyone that comments made by management during today's call may contain forward-looking statements. These forward-looking statements include plans, expectations, estimates, and projections that might involve significant risks and uncertainties. These risks are discussed in the company's earnings release and SEC filings. Actual results may differ materially from the results discussed in these forward-looking statements. And lastly, I'd like to point out that during today's call, management will refer to certain non-GAAP financial measures. Definitions and reconciliations to the most comparable GAAP financial measures are included in our press release and the end of our earnings presentation. I'd ask you to turn to Slide 6 of our presentation as I turn the call over to Sandy.

Thanks, Steve, and thank you all for joining us this morning. We delivered another quarter of results in line with our fiscal 2024 plan, and we progressed on our near-term operational and efficiency initiatives to reset profitability. We've also taken important actions to strengthen our foundation, including extending our relationship with Whole Foods through 2032 and extending the maturity of our term loan to 2031. Our ongoing Board and management-led financial review is also nearing an important milestone, which is our new multiyear strategic plan that will begin in fiscal 2025. We have benefited from the Board's engagement during this process, and we will continue the review to ensure strong guidance and oversight as we implement the plan and evaluate further opportunities to improve our capital structure and drive short- and long-term shareholder returns. Today, I will discuss our view of the industry, how it informs our go-forward strategy and some of the financial improvements we expect to generate as a result. I will also preview our new multiyear plan, which will include a disciplined resource reallocation and prioritization to enhance the drivers of customer and supplier success, including the expansion of our high-margin services portfolio, which we believe will incrementally re-margin our business and drive a significant increase in free cash flow, a reduction in our leverage and an overall strengthening of our balance sheet starting in fiscal 2025. Given our industry-leading position with a diversified product and service offering and our expansive and innovative customer base, we have a unique perspective from which to evaluate the evolving dynamics impacting food retailers, suppliers, and consumers. We've applied this perspective to analyze our business against today's operating environment, which is markedly different from three years ago when UNFI last refreshed its long-term strategy. Our analysis points to how we can…

Thank you, Sandy, and good morning, everyone. I'm pleased to join you for my first earnings call as President and CFO of UNFI. I'm excited to be here and look forward to building relationships with the UNFI investment community. Prior to joining UNFI, I spent my career at GE building lean and efficient businesses and executing turnarounds. I'm confident this experience will be valuable as we implement the new strategy Sandy just described. With that, let's dive into our Q3 results, balance sheet and cash flow update. Please turn to Slide 9. Our sales came in at $7.5 billion, which is roughly flat compared to last year's third quarter. Overall, we saw muted but improving volume performance and decelerating inflation. Unit volume started to sequentially improve during the quarter, which resulted in wholesale volumes declining by nearly 100 basis points less than in Q2. This favorable trend has continued into the fourth quarter. As anticipated, our product inflation rate slowed modestly from Q2 to approximately 2% and we continue to expect inflation to gradually decline as we move through the fourth quarter. Our retail business continue to see top-line pressure as many consumers in our retail markets remain highly price sensitive. Our team led by our new retail CEO is working with our Cub franchisees to take actions to accelerate the performance of our Cub brand, a Minneapolis St. Paul market leader. We also believe we are rapidly cycling changes in government benefits, which we expect will help improve retail comparisons. Moving to Slide 10, let's review profitability drivers in the quarter. Our gross margin rate excluding LIFO improved 30 basis points sequentially over the second quarter; it was about flat compared to the prior-year period. Within the segments, our wholesale gross margin rate increased about 10 basis points, while…

Thank you. We are now opening the floor for question-and-answer session. [Operator Instructions] Our first question comes from Leah Jordan from Goldman Sachs. Your line is now open.

Good morning, and thank you for taking my question. And thank you for the initial outlook into fiscal 2025. On that, seeing if you could provide some more detail on the working capital improvements you highlighted. What is achievable near-term to support the fiscal -- or the free cash flow outlook for next year? And then, what could take longer in your multiyear outlook? And then, just on the CapEx reduction, why does it make sense now, and how should we think about the long-term run rate? Is it that $300 million beyond '25? Thank you.

Leah, good morning. Thanks for the question. It's Matteo here. So, let me talk a little bit about how we're thinking about free cash flow for next year and then talk a little bit about the working capital question. So, Sandy mentioned $100 million of free cash flow -- positive free cash flow for 2025. You can think about that positive free cash flow in three elements. We're going to work to improve EBITDA, and we're going to give you more details as we discuss the full year 2025. We're going to reduce CapEx from $370 million to $300 million. So, we pick up $70 million tailwind on that. And then, we have a number of actions going on, on working capital. So, then specifically, I would like to talk about what we're doing on inventory. We look at inventory days on hand and compare it to the pre-COVID levels, put a number of tools that work, including lead times, flow, pool systems and identified an opportunity to reduce the inventory levels and the days on hand, I would say relatively quickly on the first step of the improvement and then going more structurally into, again, fixing all the inefficiencies that we built post-COVID to support customers and to sustain the levels that we saw in the last few years. So, expect probably some level of improvement relatively quickly on inventory, but then on the structural fixes, it is going to take time and we want to make sure that we take the time not to compromise our safety, quality, delivery cost in this order with the customers.

Great. Thank you. And for my follow-up, I just wanted to ask about the Whole Foods contract. Great to see that extension there. But just given the term was longer than typical you guys renegotiate for, can you talk about how that came about, and how we should compare it to your prior agreement? Any updates around volume commitments or profitability from here? Thank you.

Hi, Leah, it's Sandy. The way I would describe it, obviously, we don't comment on specific customer situations other than obviously the renewal is sizable, and so we issued 8-K on it. The way I would describe the relationship is extremely healthy and built on win-win, and this agreement does that. And I think both Whole Foods and we saw the opportunity to make an even stronger strategic commitment to each other. And I think we've set an exhibit in the 10-Q that's obviously got some redactions, but if you want to review it, you can find it there.

Thank you.

Our next question comes from Mark Carden from UBS. Your line is now open.

Hi. This is Sachin Verma on behalf of Mark Carden. My question is, are you still seeing much of an uptick in demand for your value-add services for independents given the challenging macro? Or are they being more cautious with their spend?

Yeah. I think, frankly, what we're seeing is stronger need for them because retailers are looking for opportunities to grow and opportunities to save money. And so, if anything, I would say demand is growing rather than receding. The value proposition is key, but that's the whole premise of pro services is that it creates value and helps our customers right away. From a strategic perspective, they're also capital light, so they drive our economics and similarly drive customer economics. So, it's a win-win and it has a pretty quick benefit for both.

Thank you. And my follow-up is, how is promotional activity trending relative to your expectations?

Promotions continue to slightly increase or gradually increase. They're a little bit below pre-pandemic levels in terms of frequency and depth, but we continue to see them increase and we expect them to continue to do that, and that's consistent with what we see industry-wide based on what some of the large retailers are reporting.

Thank you.

[Operator Instructions] Our next question comes from Eli Lapp from BMO Capital Markets. Your line is now open.

Thanks. I was wondering if you could just spend a minute going through the line item, the working capital line item from the past six months, the $165 million versus $15 million last year. Just you could give us some of the intrinsics there, that would be helpful. Thank you.

Yeah. A couple of -- so a couple of comments here, if you unpack it. So, if you bear in mind, last year, we had -- we entered a monetization program, which is broadly flat in the third quarter, but on a year-to-date basis created a benefit in 2023 versus 2024. And against that, we continue to do work on inventory. We have again some early signs of improvement in the third quarter and we're going to see more as we execute our action plans in 4Q and 2025.

Okay. Thank you.

Our next question comes from John Heinbockel from Guggenheim Partners. Your line is now open.

Hi. This is Julio Marquez on for John Heinbockel. Thanks for taking our question. So, you mentioned you had gone through the $150 million of cost reductions and also mentioned the second round. Is there any way you can maybe size that opportunity for us or maybe parse -- pick apart where that might be coming from? And then, quick follow-up on the [linear] (ph) productivity results from the Centralia automation. What's the scope of the opportunity there and for existing facilities with this new modified version? Thank you.

Sure. The way we described the cost opportunity was we achieved $150 million in run rate improvement this year, and the way we communicated the strategic planning element on that is that we saw a similar sized opportunity that we could achieve over the next few years. And there's a series of more detailed sources underneath that, that we'll communicate in the future as we finalize our targets. From a Centralia perspective, Centralia is about to come online. What we've said publicly about it is that we will get returns that are healthy relative to our cost of capital and it obviously drives efficiency. It makes growth more efficient, and it also significantly increases the quality of the customer experience.

Great. Thank you.

[Operator Instructions] Our next question comes from Andrew Wolf from C.L. King. Your line is now open.

I'd like to ask sort of an open-ended general question about automation and sort of long term obviously. What is the role of automation going to be for United Natural Foods versus sort of where you're thinking about CapEx and trying to generate free cash flow?

So Andy, the way I think about automation is linked completely to network optimization and efficiency. And our network is the largest and widest spanning network and broadest from a product line perspective in the industry. And as we implement technology and we right-size our footprint, we look for ways to use technology to drive customer service improvement and improve financial returns. Automation is not an end unto itself. It's a component of that strategy and our approach to it is to execute it in a highly disciplined way with in-depth project management. And we've learned a lot about that over the last couple of years as we've successfully or nearly successfully implemented our new project as Centralia is just about to come online.

[Operator Instructions] Our next question comes from Carla Casella from JPMorgan. Your line is now open.

[Technical Difficulty] in the slide you showed the $500 million term loan and $130 million FILO as a sub facility to the ABL. So, does the $130 million count against your availability on the ABL going forward? And can you say where availability is pro forma today?

Yeah. So, hi, thank you. It's Matteo. Thanks for the question. So, the $130 million counts in the ABL availability. And our liquidity right now is about $1.3 billion.

Okay. That's after quarter-end?

That is correct.

Okay. Awesome. And then, in your multiyear plan slide, you mentioned DC network changes to reduce fixed asset base. Does that mean you're looking at consolidating or selling or closing facilities? Or would you potentially consider sale leasebacks to reduce debt? And any sense you have there in terms of where the cap rates are today?

Yeah, thanks. This is Sandy. As part of our intensified network optimization work, we're assessing options for the most effective and efficient configuration of our DCs and how we can best profitably service our customers. Among our customer set, as I mentioned, we have by far the most expansive distribution network. And so, we see opportunities to take better advantage of economies of scale within the business and obviously more specifics to come.

Okay, great. Thanks. And just any more color you can give us in terms of the margin on the -- and maybe it helps if you give us some sense of the margin between the different businesses and where you're -- how it may differ if you're offering more services to one of your channels versus another?

Sure. The way to think about services is they're by far our highest margin segment. We issued a couple of years ago details around our services component, which was that they were about 20% to 25% of our profitability. They're not currently reported as a segment. But we see the opportunity going forward to accelerate their growth, and they have been growing and will continue to grow significantly faster than the total company.

Okay, great. Thank you.

We have reached the end of our question-and-answer session. I'd now like to hand back over to Sandy Douglas for closing remarks.

Thank you, operator. Our new multiyear plan is being finalized, and we're motivated to implement this strategy to deliver stable and defendable profit and cash flow growth, improving returns on capital and declining net leverage. We've shared with you the levers we'll be pulling to improve our short- and long-term performance, and we believe that this plan will create significant and sustainable value for our customers, suppliers and our shareholders. I'm excited to have Matteo on the team and believe the skills, experience and focus on process excellence and value creation that he brings to UNFI will help us immensely as we move into our next chapter. For our customers and suppliers, we thank you for your continued partnership and the business we do together. For the UNFI associates listening today, our thanks to each of you for everything that you do for our business, our customers, our communities and each other. And for our shareholders, we thank you for the trust you continue to place in us. Thanks again for joining us this morning. I look forward to updating you as we continue to drive progress improving our business.

Thank you for joining today's call. We hope you have a wonderful day. You may now disconnect.