Operator: Ladies and gentlemen, thank you for standing by and welcome to the UNFI First Quarter Earnings Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session and instructions will follow at that time. [Operator Instructions]. I would now like to hand the call over to your speaker for today, Mr.

Steve Bloomquist, Vice President of Investor Relations. Please go ahead, sir.

Steve Bloomquist: Good afternoon, everyone. Thank you for joining us on UNFI's first quarter fiscal 2020 earnings conference call. By now, you should have received a copy of the earnings release issued earlier this morning.

The press release, webcast and a 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; Chris Testa, President of UNFI; and John Howard, our Interim Chief Financial Officer. Steve and John will provide a business update, after which we will 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. I will now turn the call over to Steve.

Steve Spinner: Thank you, Steve.

Good evening, everyone, and thanks for joining us on today's first quarter call. These are truly exciting times. In the week before Thanksgiving, UNFI hit a record day in terms of cases and volume, moving approximately 5 million cases representing more than $100 million in sales on a single day, and we did it with a high level of service and strong on-time delivery performance despite challenging weather in much of the United States. In early August, we entered the new fiscal year operating an unmatched distribution network that carries the broadest variety of products and services in our industry, providing our customers access to more than 250,000 SKUs and critical retail services needed to run their operations. Our new sales structure enables cross-selling by creating a singular organization responsible for the entire portfolio.

The cross-sell wins to-date represent a meaningful portion of total revenue growth, and I am really pleased with the progress we're making. Our business model is providing UNFI with truly distinct competitive advantages for our customers and our company, and with our learnings from the last year and our focus on driving the business forward, we are confident in UNFI's positioning today and for the future. Net sales totaled $6.02 billion, an increase of $3.2 billion over last year, including an incremental $3.1 billion from conventional, which was included for only one week last year. Legacy UNFI net sales increased 2.8% over last year, the same year-over-year growth as the prior two quarters led by the supernatural channel, where year-over-year sales increased 8.2%. The year-over-year growth in our supernatural channel has moderated relative to prior quarters as we’ve cycled some of the supernatural initiatives we've previously discussed, most notably the expansion of our wellness category.

We're pleased with sales in our largest channel, the supermarket channel, where quarterly trends excluding conventional had been improving and have now turned positive, driven by both higher volumes with existing customers as well as the addition of new customers on the natural side of our business. Our larger customers continue to outpace the balance of our business as wholesale sales to our top 25 customers increased 5.4%. Excluding our largest customer, wholesale sales at the next 24 customers increased by 4.1%, driven by formats that resonate with their shoppers. And I'd also like to note that seven of our top eight customers now use UNFI as both their primary natural and conventional distributor. Operationally, we made good progress this quarter on several distribution center network projects designed to improve efficiency, service, and capacity in several key geographies.

In the first quarter, we discontinued operations in three distribution centers in the Pacific Northwest. And we're close to finalizing the consolidation of five distribution centers into the new distribution center in Centralia, Washington; and our expanded distribution center in Ridgefield, Washington. In Northern California, we're consolidating our dedicated wellness distribution center in Auburn, California, into our Gilroy, California operation. Finally, further down the West Coast in Moreno Valley, California, we're adding approximately 1.2 million square feet of multi-temperature capacity to position UNFI for growth in the highly attractive Southern California market, where we see strong growth potential from both adding new customers as well as expanding our offering to existing customers. During the quarter, we incurred an estimated $7 million in costs to consolidate these markets.

Investments we are making in the future, which will make us the best positioned wholesaler in the growing California market with an incredible array of products fully representing our built out store. As we’ve worked through the period of transitioning these warehouses and bringing others online, we've seen solid improvement in key operational and service metrics. Most of these projects include some level of automation that more efficiently handles slower moving SKUs. With significantly higher throughputs and higher service levels, we can improve the customer experience while lowering our cost to serve. We're pleased with how these projects are progressing and the value their completion will bring to UNFI.

We did incur some higher operating costs this quarter, which I mentioned, as we ramped up hiring and training for our startup and transitioning distribution center costs we expect will decline going forward. From a marketing perspective, as I stated earlier, this was the first quarter that our combined sales organization was in place, and we began to see the promise of cross-selling legacy portfolios into our existing customer base. We expect larger wins will come as we leverage longstanding relationships in our newly combined product portfolio. In the quarter, we experienced a significant uptick of professional services into our existing natural base and the seeding of natural or organic products into our conventional customers. As a reminder, our professional services business includes payment processing, data-driven shelf management, and retail store design and construction.

Cross-selling consists of effectively mining our data to identify product and category voids. We continue to believe that we have a large opportunity for selling fast moving natural products into conventional and faster moving conventional SKUs as appropriate into natural stores. With a single national sales force and added technology to assist our team, we can identify these material wins for UNFI while providing a much needed point of differentiation for our customers. Consumer preferences have evolved and our assortment is able to meet those changing eating habits. We're partnering with our customers on opportunities so that they can keep their assortments current, relevant, and in tune with the market, which is good for them and good for us.

Our suppliers clearly recognize these opportunities and are embracing our efforts to expand distribution of their products. We’ll use a similar approach where appropriate as we pursue new business opportunities. As I noted earlier, our geographic footprint, industry-leading product variety, and our scale are competitive differentiators, and our team is focused on showing customers how UNFI’s offering will benefit their business. As we've moved into fiscal 2020, we're now in a place where we're focusing on creating a sustainable and solution-based supply chain platform and talking less about integration. We are now operating as one UNFI.

That's how we think about our business. That's how we discuss and develop our plans and strategy. And that's how we present ourselves to our customers, suppliers,l and other key constituents. UNFI is known in the natural space as being an innovative pioneer, and we're focused on maintaining that identity while looking to further expand our broader customer base. There is clearly a lot happening at UNFI, and I'm pleased to say that through it all, our operating and service metrics are improving, fill rates in our wholesale business have improved by about 90 basis points compared to last year's Q1, warehouse productivity, on-time deliveries, and inventory days on hand are all better than a year ago, a sign of the many enhancements we've made to our network.

As we continue to build and refine our future operating model, most of our future incremental synergies will come as a result of either moving on to common systems, or further optimizing our distribution center network. These are more long tailed in nature compared to much of the cost reductions and synergies we’ve realized to-date. We continue to be comfortable and expect to achieve the overall synergy targets we've previously communicated. Working capital continues to be an important element of how we manage the business and our capital structure. We continually evaluate our working capital position and manage our balance sheet towards paying down debt.

Finally, let me provide a status report on our efforts to divest retail. As you saw in our press release last week, we've reached agreement with three buyers to sell 13 Shoppers stores in the Washington, Baltimore market. We also announced that four additional stores will be closed. We're continuing to market the remaining Shoppers stores with several potential buyers. At Cub, we're continuing to market the banner in its entirety, have given management presentations to interested parties and the process is moving forward.

Let me now turn the call over to John Howard, our Interim Chief Financial Officer. As you know, John has served as the Interim Chief Financial Officer since August. And as an update, we're finalizing the search process that includes both internal and external candidates, and expect to have that complete in the next 30 days. John?

John Howard: Thank you, Steve. And good morning, everyone.

I will cover our first quarter financial performance, balance sheet, capital structure and fiscal 2020 outlook. Let's start with our 13 week first quarter results were net sales totaled $6.02 billion, including an incremental $3.1 billion from SUPERVALU for its inclusion for the entire quarter this year compared to one week and last year's first quarter. Steve commented on performance by sales channel, so I'll move to gross margin, which as expected, was down 157 basis points compared to the same period last year, as a result of adding an additional 12 weeks of SUPERVALU to this year's first quarter results. Excluding SUPERVALU, gross margin was flat to last year. We managed freight expenses and inventory acquisition costs and executed well on certain supplier programs to offset margin rate dilution from the impact of the supernatural growth this quarter.

Inflation in the first quarter was 1.6%, largely unchanged from the fourth quarter. First quarter adjusted operating expense as a percent of net sales decreased 8 basis points from last year's first quarter as the mix impact of adding SUPERVALU, which operates at a lower expense rate, and a strong focus on managing expenses was partially offset by higher depreciation and amortization expense. Within our DCs, operating expense improved compared to last year, but was slightly higher than anticipated mainly due to costs associated with starting up and decommissioning several DCs as Steve mentioned earlier. We expect our operating expense rate to improve as we move closer to completing these projects and more fully realize the underlying benefits. First quarter consolidated adjusted EBITDA was $122 million, up from last year's $86 million.

As Steve said this was largely in line with our expectations for the quarter and we remain confident about achieving our full year guidance for adjusted EBITDA and adjusted EPS. Net interest expense in Q1 was $49.5 million and our average borrowing rate for the quarter was approximately 6.1%. Q1 adjusted earnings per share was $0.12, which excluded the

following items: First, we recorded non-cash goodwill and asset impairment charges of $7.99 per share, partially the result of our recent market cap. This charge eliminates substantially all remaining goodwill. Second, we incurred restructuring, acquisition and integration related expenses of $0.27 per share.

Third, we took charges of $0.24 per share related to notes receivable deemed uncollectible due to customer store closures. These notes were originally issued by SUPERVALU or businesses acquired by SUPERVALU to finance the purchase of stores by customers, which is no longer part of the consolidated operating business model. Finally, we had an additional cumulative $0.12 in expense for depreciation and interest on surplus properties, legal reserve charges and store closures within disc ops. Together with the tax treatment on these items and the GAAP tax rate, these totaled $7.33 per share, which when included in our GAAP results would bring GAAP EPS to a loss of $7.21 per share. Our balance sheet now reflects the impact of adopting lease accounting standard, ASC 842 which brings approximately $1 billion of operating lease right of use assets under our balance sheet with offsets on the liability side, which I previewed during our last call.

It also included the final fair value allocation of the acquired SUPERVALU net assets. Capital expenditures for the quarter totaled $41 million or approximately 68 basis points as a percent of net sales with the largest spending going towards completing the Pacific Northwest consolidation Steve mentioned. Total outstanding balance sheet debt and capital lease obligations at the end of Q1, net of cash and cash equivalents, and excluding operating lease obligations, was $3.11 billion, an increase of $118 million compared to our year end net debt balance and consistent with our expectations. The increase reflects the typical seasonal build in working capital related to servicing our customers during the November and December holiday selling period, which as Steve stated, we expect will largely reverse in the second quarter as working capital returns to more normalized levels. Our net debt balance has been reduced by about $45 million for certain previously reported capital leases that are required to be included within operating leases under the new lease accounting standard.

And finally, early in the second quarter, we continued derisking our corporate single-employer pension plan through a lump sum offer program. As a result, we reduced the number of plan participants by approximately 30% and our gross obligation by a similar rate, utilizing $664 million from plan assets. We improved the funded status of the plan without UNFI having to make any cash contributions and we lowered the present value of future estimated PBGC premiums and plan administrative costs paid from the plan by about $7 million. We expect to take a $10 million non-cash U.S. GAAP charge in the second quarter as a result of this lump sum program, but we're pleased with the overall outcome.

Turning to our full year outlook for fiscal 2020. I'm pleased to reaffirm the ranges we provided in October for net sales, which is $23.5 billion to $24.3 billion; adjusted EBITDA, which is $560 million to $600 million; and adjusted EPS, which is $1.22 to $1.76 per share. We planned profitability in the first quarter to be the lowest of the year, we anticipate a stronger second quarter with a holiday selling season upon us and we expect cost synergies to continue to build and to see improvement in operating expenses as we begin to realize the productivity benefits from our DC projects. We're also optimistic about sales trends. All of which gives us confidence in our full year adjusted EBITDA range.

As a reminder, the adjusted EBITDA and adjusted EPS guidance includes a full year contribution from Cub. Should we divest that banner prior to year end, we'll provide an update at the appropriate time. As Steve stated, last Friday, we announced the sale of 13 Shoppers stores and the closure of 4 additional stores. Our 8-K filed at same day outlined $32 million to $42 million in charges we expect to take as a result of these transactions. The three buyers will not be operating the stores under the Shoppers name, and we're continuing to market the remaining Shoppers stores as well as Cub.

We continue to prioritize debt pay down and expect to reduce net outstanding debt by $200 million to $300 million in fiscal 2020 with a combination of cash generated from operations including working capital improvement, and asset sales, including the divestiture of both Shoppers and Cub. Included in this total are proceeds from the sale of owned real estate including the Tacoma Distribution Center, as well as several other non-operating properties that have been sold or expected to be sold this fiscal year. We regularly evaluate our capital spending plans and expect full year capital spending to come in at approximately 1% of net sales. Overall, we're pleased with the first quarter and are optimistic for the balance of the year. With that, let me turn the call back to Steve.

Steve Spinner : Thanks, John. Overall, we're pleased with the start to fiscal 2020. While fiscal 2019 was a humbling year for us and we clearly did not perform as we expected to, we learned a great deal and achieved significant milestones in integrating the UNFI and SUPERVALU businesses. We entered fiscal 2020 in a stronger position and are focused on improving our supply chain operations. John provided an overview of margins and operating expense in the quarter, and our teams are doing an outstanding job managing both.

We know that to drive future profitability, we need to take advantage of and execute upon opportunities to expand margins and lower costs. As John said, we offset natural margin dilution in the quarter, and believe we have multiple sources available to us to strengthen margins, with work streams currently in progress. As we move forward, we have the right strategy in place for UNFI to capitalize on the shifts in our industry over the near-term and the long-term. We continue to believe that UNFI is the best positioned natural and conventional food wholesaler that has what it takes to sustainably grow the top and bottom lines over the long-term in the evolving macro environment. And our entire team is focused on executing, as we continue through the holiday season, and the balance of fiscal 2020.

We remain confident that we will achieve the low-single-digit sales growth guidance we provided on our last call for fiscal 2021 and beyond, which equates to around $500 million to $700 million annually. We foresee this coming from several areas, including cross-selling to our existing customers, including the build out of relationships historically focused on natural that are now creating opportunities for conventional contracts; adding new customers, who will be attracted to UNFI's unmatched product variety and service offerings, which provide a strong incentive to choose us as their supplier; our strength and wellness categories, which is on trend with today's focus around better food and healthier lifestyles. Private brands or what we call Brands Plus where we believe we have the best and most comprehensive lineup amongst any of our wholesale peers, Brands Plus is a $1 billion revenue business for us, a clear differentiator for UNFI, and an area that we believe we can continue to grow; and channel expansion, whereby UNFI explores all opportunities for growth, including expansion into adjacent customer channels. Not unlike more traditional supermarkets and natural stores, we believe these related businesses will get the same benefits and have the same incentive to partner with UNFI. In wrapping things up, we are optimistic about our future and we're only getting started on many of the things we've talked about this morning that will drive our company forward in 2020 and beyond.

With the New Year, our teams are excited. They're energized and they're focused on creating a better UNFI for our customers, shareholders, associates and the communities where we operate. We look forward to updating you on our progress along the way. We'll now take your questions.

Operator: [Operator Instructions].

And your first question comes from the line of Rupesh Parikh with Oppenheimer. Rupesh Parikh : So Steve, I want to follow up on your comments by channel. I was hoping to get more color in terms of what you're seeing from independents, and it appears that the trend softened this quarter, and I was also curious if you look at whether your supermarket channel or independents, where you're seeing more of the cross-selling wins?

Steve Spinner: Hi, Rupesh. It's Steve. We're just checking on the independent growth during the quarter.

On the supermarket side, we did have some new business that came on during the quarter. And I think that probably represents the largest portion of the growth in the quarter. I think independents have been relatively flat. I think that it looks like they were a little bit down in the quarter, and I think this is the channel that's struggling, and this is the place where we can really help them using the professional services that we now have that I talked about in the script. The cross-selling opportunities, but sometimes it's a tough sell, and the days of just a flat margin at retail for the independents are over.

They have to be more willing to take in more of the perimeter and fresh products that maybe a couple years ago they didn't have to. They're not going to be competitive on kind of the name, brand, and natural items that are mainstream throughout every other channel including mass. And so, a lot of time, we're the only wholesaler in the U.S. with a huge sales force that's been trained to help the independent. And so, I think at some point we'll get some positive momentum in the independents because they are a little bit like -- their growth is a little bit like a roller coaster.

If you look back over time, these folks have a lot invested in making their business profitable, because they're supporting their families. And so, they have to figure it out, and we have to help them do that and we will. And so, I expect that at some point, flat to slightly negative return . Rupesh Parikh : And then I guess on -- yes go ahead, sorry.

Chris Testa: And you also asked about some of the cross-selling, well, this is Chris.

It's really happening across the independents and the supermarket channels. So, if you think about the legacy conventional business, which is majority supermarkets, those are the folks that are now selling our top-selling natural items that we’ve begun to seed in there. And on the other side, if you think of the natural independents, that's where we're starting to sell meat, professional services, and a very small selection of the conventional items. So, it's really happening on indes and supers.

Steve Spinner: And just from a consolidated perspective, the good news is that we now have a really diverse customer base.

And so, if we have one that's slightly negative, we obviously have one or more that’s positive. And so, we're a little bit more immune today from volatility in any one particular channel. Rupesh Parikh : Okay. Great. And then one follow-up question.

Your gross margin performance, especially on UNFI that was fairly healthy just given some of the mix headwinds. So I am just curious if you look to the balance for the year, what are some of the puts and takes we should -- you think are out for the UNFI core and then I guess the SUPERVALU core as well?

John Howard: So, this is John. Just from a margin perspective, we are continually looking to drive improvements in that. From our view as we get deeper into the year where we're hoping that we'll continue to see that, that trend continue that we've seen from Q4 to Q1, we are going to see that continue throughout the year, but I don't think you're going to see a dramatic or sizable uptick as we continue to go through the year and finish the integration work.

Steve Spinner: Yes, if you take a look at the components of gross margin, we're doing a lot of work around logistics and freight and shrink.

And those will continue to serve us well throughout the rest of the year.

John Howard: We'll continue to drive those improvements.

Sean Griffin: Yes, Rupesh. This is Sean. If you recall FY ‘19, early FY ‘19, we began to reverse some of the negative trends on our inbound side, meaning coming from higher costs.

So, I would consider our margin structure stable. We've reached good stability as we think about what Q2 through Q4 looks like at '20. I think where we are today is in the range of what we would expect to continue.

Operator: And your next question comes from the line. John Heinbockel with Guggenheim Securities.

John Heinbockel : So Steve, I don't know if you guys track this. But if you look at the comparable location drop size, a change in that and try to adjust for mix, right, they’re different volume customers. How is that trending? And as you go forward, what do you think the prognosis is on growth, right? Because that's part of the efficiency equation for you.

Steve Spinner: Yes, so I don't have that data in front of me. I can tell you that as I said in the script, if you look at the top 25 customers, I think what you would find is that the average drop in those customers is increasing.

And so, it's increasing either because they are taking share from others. The really interesting data point John is when you look at the top customers that are having the greatest deal of -- greatest degree of growth, they actually buy both conventional and natural from UNFI. And so, we’re winning in those customers by selling more of the store whether it would be perimeter or center store or HABA or wellness or lifestyle brands. And so, the average drop kind of runs hand in hand with the overall sales growth because inflation is pretty nominal. The place where we can get the greatest upside quickly is in being successful in the cross-selling on the independents because that’s who really needs it and the same math would probably apply and that is our -- probably -- average drop is probably down in the independents as well.

John Heinbockel: Can you just remind us, if you looked at the profitability -- and I am talking about not gross but overall profitability of the top 24 take Whole Foods out versus some of your smaller customers, how does that compare and I guess it sort of comes back to, yes you can help the independents to some degree but is it -- would it be better to spend more effort on some of the bigger guys that are succeeding in driving a greater share of wallet as opposed to try getting the independents from declining to flat?

Steve Spinner: Well again the economies of sales for wholesaler are the same whether it’s food service or retail and that is average drop, right? The bigger the average drop, the better the economies of scale are for us because we can work on less we are delivering more. It’s the age-old analogy of delivering a full truckload a mile from the DC versus working at 40% on a $1,000 order 800 miles away right? There is no way that’s going to work. And so it's really less about whether it’s top 25 customer and it's more about how much freight can we deliver to customer location on one truck.

Sean Griffin: Yes, I would also say John that we believe that we can accomplish both in terms of growing the drop size and relationship in revenue with the top 25 and support the independents, be they natural independents or supermarket independents and in particular on the natural independent side, notwithstanding the most significant economic metric is drop size in our distribution business. But as Steve mentioned the service offering that we have puts us in a position where we can play a major role in surrounding the natural retailer with services at scale to help them handle the back of house and concentrate on their consumer -- their customer base.

So there are a number of ways that we can come at this.

Steve Spinner: And I would just finish it with, if you think about what we’re building, so in the West Coast, let's say, Pacific Northwest, South to Southern California, we've now completed the construction of two buildings, we are on our way to completing the construction of two buildings. Both are over 1 million square feet. So on the West Coast we will have 250,000 SKUs, covering every single category of products and services from natural to specialty, produced protein et cetera, et cetera, et cetera, et cetera, no more than maybe a 100 miles from the customer and we will be the only wholesaler to do that. And we'll be able to put it all on one truck.

And so when you think about what value that brings to an independent or natural or specialty or supermarket, in that market is pretty spectacular.

Operator: And your next question comes from the line of Karen Short with Barclays.

Cait Howard: Hi, this is Cait Howard on for Karen, thank you for taking our questions. Also thank you for the information about the multi-employer pension liability. Related to the sale of the 13 Shoppers, is the multi-employer pension plan at retail impacting the sales process? And do you expect the actions that you took this quarter to help with the sales process of the remaining Shoppers going forward?

Steve Spinner: Yes, let me try to take a stab at that.

So, on the first part of it, we're pretty excited about the fact that we've gotten 13 sold. As you know, it's pretty heavy lift to go through an M&A process, especially when the retail environment is difficult. And so we're really pleased with the fact that we've sold these 13, many of which we will be retaining supply agreements for. So that's terrific. The four that are closing, I think two we returned to landlords and two the leases were expiring, we just didn't renew them.

And so we currently are in the process of marketing the balance of the stores and we'll just have to wait and see how that happens. As far as the first question related to the MEP, the MEP does add a layer of complexity. It does make it more difficult. I will tell you that the anticipated cash liability of MEP is currently in our guidance and we'll certainly provide a lot more information about MEP in our quarterly filing. And if there's any specific information that you may want we can certainly handle that off the call.

But does that answer what you're looking for?

Cait Howard: Sure, yes. And then also related to Shoppers, can you remind us how much in FY '20 guidance you're expecting related to the sale like in terms of the debt pay down?

John Howard: Related to the sale?

Cait Howard: Right.

John Howard: So, from a debt pay down we won't discuss the numbers attached to it, but the anticipated net proceeds were baked into the $200 million to $300 million that we provided at the end of last year.

Cait Howard: Okay. And I think you said like a portion of that was going to be funded from cash and then after sale not only from Shoppers but from other things as well, is that correct?

John Howard: Exactly, it's coming from our normal free cash flows that we generate.

It's coming from some of the asset sales that we have with sites like Tacoma and Cub and Shoppers, et cetera. All of that is baked into that $200 million to $300 million number.

Operator: Your next question comes from the line of Kelly Bania with BMO Capital.

Kelly Bania: Just what was -- curious if you could kind of give us a sense of kind of total comp growth, you call out the 2.8% for UNFI but I guess it's unclear how much of that? It sounds like that's significantly impacted by the cross-selling. And as you kind of think about this more as one company, what is kind of the underlying comp growth for wholesale?

Chris Testa: Well, hey, Kelly, this is Chris.

Because we did not have the acquisition of SUPERVALU into Q1, that year-over-year look is tough to get at, right? So we're now one company. As we acquired SUPERVALU one week into the Q1, one week left in the Q1 last year. So moving forward, we'll be able to provide you a really clean look on year-over-year. The 2.8% that you referenced on the natural business, some of that is coming from cross-sell absolutely, but a lot of that's coming from as Steve pointed out the growth in our top 25. There's some retailers with formats out there that are really winning that we're servicing with both conventional and natural and that's pretty clean.

But the look year-over-year for total wholesale, it all falls into our guidance for the year in the $23.5 billion to $24.3 billion that we put out in the year. We're going to maintain that revenue guidance.

Kelly Bania: And in the last couple quarters I think you talked about being at least on the SUPERVALU side, I think it was negative 3.6% in Q3 and improved relative to that in Q4. But you can't give any insight into how that is on a year-over-year basis in Q1?

Sean Griffin: Well, I would say -- Kelly, this is Sean, that sequentially, we're on par with where we were coming out of Q4 into Q1 to the extent that we talked about year-over-year with conventional, let's say, that from a sequential basis, it continues to be on par.

Kelly Bania: To be on par like negative low-single-digit?

Sean Griffin: Correct.

Kelly Bania: So, I guess maybe, can you just expand on what's driving that? Because if you have half of your business kind of down negative low-single-digit and the other half up low-single-digit, isn't that kind of get to flat?

Sean Griffin: Well we're communicating 2.8% growth in natural for reasons that Chris described. So, the conventional business beginning in Q2 will be disclosed along with natural as our total wholesale comp.

Kelly Bania: Okay. And in terms of the…

Steve Spinner: Kelly, I would give you just a little bit more color.

Kelly Bania: Sure.

Steve Spinner: And I think this is going to turn. And that is one of the primary drivers in some of the negative comps historically on the conventional side were associated with previous acquisitions that SUPERVALU had made prior to UNFI coming on board. And that's where we saw some softness and that was a big driver in the negative number. And so, now that we're through those integrations and we've leveled out our service in those markets, I think over time we'll start to see those numbers come back. So that was one of the principal drivers in negative comps in what was the legacy SUPERVALU business.

Kelly Bania: Was there any particular acquisition of those prior acquisitions that was driving that? Or was it there were a lot -- there were several?

Steve Spinner: No, no. It was the acquisition of Unified Grocers.

Kelly Bania: Okay. That's very helpful

Steve Spinner: We're completely through those integrations. They were difficult but we're through it.

Service is in good shape in those markets. They're part of our new reorganized strategy. And so those numbers are actually -- we're going to see those numbers come back.

Kelly Bania: And just also wanted to ask on the discontinued operations, I think it was about $33 million that was added back this quarter and I think that's just Cub at this point. But I think I asked this question last quarter.

But is that the right run rate to think about for the full year? Or can you help us understand what you're planning on in that line? Because it's a significant add back.

John Howard: So the $33 million, it includes both Cub and some of the Shoppers results that we have in that first quarter, that the Shoppers piece will of course drop a little bit with the sales that we announced last week. But it does include both of those.

Steve Spinner: Yes. And so I think the way we're thinking about that Kelly, and it's a good question, is we're in the midst of the Cub process, right? So we're going to try to be as transparent as we possibly can to keep our shareholders and our investors and obviously the analyst community updated as to the effect of selling Cub, which is obviously the largest portion of our remaining retail banners.

It's still premature to provide any guidance there because we're still in the process. And it's obviously a very confidential process. And so it's way too premature for us to try to estimate the outcome without giving information into the public purview that we don't need to. And so our commitment is that certainly as we get through the Cub process and we expect to do that during the first quarter of 2020, that you'll have all the clarity that you need.

Kelly Bania: Okay, is that a change from last quarter? I thought last quarter that Shoppers was not going to be included in that line.

John Howard: No, I think the change there, Kelly, is that what we said was that Shoppers is not going to be part of our FY '20 guidance. So on a net P&L irrespective of disc ops or continuing ops, Shoppers is not material to our results. And we're also expecting as we’ve proven last week, we're going to start to unwind these things as quickly as we can. So what we said was the Shoppers results was not part of our FY '20 guidance. We have always reported the Shoppers results in disc comps along with Cub.

Kelly Bania: Okay, maybe we can follow-up on that offline. And maybe just ask another one just more about the business in terms of the transition to common systems. And just maybe an update on, has that started. Maybe walk us through which systems or which side of the business you'll be transitioning systems to? And how that's going?

Steve Spinner: Yes, so we're now at year-end and we feel really good about where we are. Fiscal '19 was a tough one.

When you go through an integration and a strategic change as big as we have, we've learned a lot. And I think we're emerging as a much different and a much better company. And so, again -- so today we're now a company that does $23.5 billion to $24.3 billion in revenue. We’ve got adjusted EBITDA between $550 million and $600 million. And so I think some people are still skeptical, and that's okay, but I'm glad you asked the question.

So, number one, we've completed the migration on to a singular payroll platform, which is an internal payroll platform. And as an example, we -- 23,000 associates, we actually cut 66,000 payroll checks a week, so we have a big robust payroll services business that we provide to our independents. That work has been completed. We just migrated to a common benefits package. So all 23,000 people are on the same associate benefits package, a very heavy lift.

We just migrated onto common general ledger, which is also a pretty heavy lift. We completed the complete reorganization of our supply chain, logistics, sales, finance, legal into one centralized organization with four separate and distinct regions, all holding the P&L for everything that happens within that geography from conventional to natural to produced to protein, from lifestyle et cetera, et cetera, et cetera. So single throat to choke across every single thing that we do and that work has all been complete. We've also been continuing to do our internal WM conversions on to our common WM platform and we have a very rigid timeline around the migration onto Oracle Financials as well as onto a common ERP and that’s all going to take place over the next two to three years or so. So the next major milestone will be the conversion of networks or specific regions onto a common IT platform, so that we can significantly enhance customer experience, common pricing, common invoice.

Does that help?

Kelly Bania: Yes. That’s helpful. Thank you.

Operator: Your next question comes from the line of Marisa Sullivan with BofA Securities.
Marisa Sullivan : Wanted to just ask a quick clarifying question on the gross margins in the legacy UNFI business.

I think last quarter you called out how excluding SUPERVALU they were actually up slightly. Can you comment on how they performed in Q1?

John Howard: Yes. I think coming back to Sean’s point earlier on the similar question on growth rates, I think what we're seeing is that, that stability, I think we're seeing the sequential stability in those margins as we get deeper into the integration. So as we look through that unless the -- something unusual pops out in the trending or anything like that from a year-over-year sequential basis, I don’t think we will start thinking about that natural and conventional view on it. We will start thinking about more of the regional view, the combined wholesale view et cetera.

Marisa Sullivan : On gross margin specifically?

John Howard: Correct. It sounds very difficult to carve those out, as we continue to improve the cross-selling. Marisa Sullivan : But I mean you backed out the natural business sales, I guess maybe viewing it from a natural perspective for natural gross margins up?

John Howard: Yes, that’s another one. I think that’s because of the quarter-over-quarter. This was the last quarter where the comparisons were against basically all natural.

Marisa Sullivan : Okay. And I guess just changing gears just on the retail divestures. If you aren’t going to be able to find a buyer for some of the Shoppers banners, would you anticipate closing down any banners this year? How should we think about that? And then like, similarly for Cub, it sounds like you’re moving forward on that and expect an update on the sale, did you say Q2?

Steve Spinner: Yes, on the Cub, we said we’ll probably have more information towards the end of the first calendar quarter of the year. So certainly by March we think we will know where we stand on Cub. As far as the Shoppers, we're going to take our time and we're going to do it thoughtfully and economically as we possibly can.

We're not going to make a decision to give stores away just for the sake of giving them away. We've got a Shoppers team in place that can run them extremely well. We obviously have good access to inventory. So, we're going to continue to be careful and thoughtful as to how we market the rest of those stores. Ultimately, we want to be out of retail, if it takes us a little bit longer, so be it.

Marisa Sullivan: Got you. Okay. And then just -- if I could sneak one last one in, just to help us kind of contextualize -- I am sorry if you've already mentioned this or disclosed this, but you talk a lot about the top 25 customers. Can you just help quantify what percentage of your overall sales does top 25 customers comprise?

Steve Spinner: It's 54%, approximately.

Marisa Sullivan: Got you.

Okay. And then, can you speak to trends that you're seeing in the bottom half maybe? I don't know, if you're seeing -- if you want to think about kind of the sales growth as new customers, new lines and then door closings. Like can you talk a little bit about kind of what are some of the drags on the sales growth for that lower half of the business?

Chris Testa: Hey Marisa, so this is Chris. I mean, it's -- I wouldn't say that there's a trend. I think in similar to past years, there's formats that are really winning and thriving.

And there's other formats that are struggling this competitive environment. I can't point to any one single channel or region to say, well, this one is doing well, and this one is doing bad. I think there's plenty that we're growing with, because they have a good proposition to consumers, that it's resonating. And then there's others that are struggling to adapt to a world in 2020. So, look we're here to help both, but I can't point to any one single trend below the bottom 25.

Operator: Your next question comes from the line of Edward Kelly with Wells Fargo.

Anthony Bonadio: Yes, hey guys, Anthony on for Ed, thanks for taking our question. So just wanted to quickly touch on food price inflation. That 1.6 million you give in your opening remarks looks like it was pretty steady versus what you guys were seeing last quarter and almost the last year. Can you just help us understand how you're thinking about trends for the remainder of the year and the key drivers there? And then on the back of that, can you just comment on how an acceleration in protein inflation given sort of business going on with ASF would impact the business?

Steve Spinner: Yes, so inflation, we're assuming that it's going to be fairly static.

We'd love to get a little bit more inflation because as you know, in our business, we get the benefit of -- for higher input costs which don't have to do any extra work to get the extra margin. So, we would appreciate it a little bit if we had more inflation. We would appreciate it a little bit if the economy was a little softer because it would draw a lot more people back into the supermarkets as opposed to go into the restaurants. But, that our time will come. As far as protein inflation, the same rules generally apply.

So, if we get inflation across protein, as long as it’s inflation, it doesn't prevent the consumers from buying it. Moderate inflation works in our favor for the same reason. Cost plus environment, we passed it through particularly in perishable food, and we passed it through pretty quickly.

Operator: Your next question comes from the line at Eric Larson with Buckingham Research.

Eric Larson: Just Steve, as you talked a little bit about this, this morning, but I guess I'm just -- I'm curious on full clarification, the headwinds -- some of the headwinds you faced last year, kind of the unknown headwinds with SUPERVALU of Pacific Northwest, obviously your acquisition in Florida and Pennsylvania.

And if I'm reading you correctly, I think you said those issues are now behind you and they are no longer a drag. Is that -- was that true in the first quarter, I mean is that how we should really be thinking about those major issues that you had to tackle last year?

Steve Spinner: Yes. Thanks for asking that Eric. It's amazing. The work that our team did to get into the DCs on the West Coast, the Pacific Northwest, Florida and Harrisburg, Pennsylvania was beyond heroic.

And not only have they turned the corner in terms of the cost mitigation, but we're providing unbelievable level of service in those distribution centers. So, absolutely, yes, those challenges are behind us. Now, again, this is a management team that invests for the long-term, not for the quarter-to-quarter. And for example, in the Pacific Northwest and Southern California, we're getting ready in those markets to unleash a truly differentiated close to the consumer 1.2 million square foot facility in each one of them with automation to go to market in a most cost effective, service-oriented way with more SKUs than anybody else has. And so in the next quarter, we invested somewhere around $7 million worth of duplicative costs training headcount just to get ready.

But service overall is really good. We had a great holiday. Expect to have a great Christmas. And, so yes, all of that is behind us.

Sean Griffin: And to finish that Steve.

Eric, this is Sean. In the Pacific Northwest, we now have really one distribution center that is left to transition to get to our two DC model, which is Centralia and Ridgefield. So we're very close and we expect that the Portland transition will occur in Q3 -- beginning in Q3 and conclude in Q4.

Eric Larson: And you still have one DC to sell in the Northwest, right? Is that Tacoma?

Sean Griffin: Yes, that's correct. It's actually -- it's pretty much sold.

We are just waiting to close.

Eric Larson: So just a couple of really quick questions, I know we're getting close on time here. So a meaningful step down in interest expense this quarter from your run rate in the final nine months of last year. And I think if I look at your reconciliation of EBITDA, it looks like you're probably expecting interest expense to be below $200 million for the year. Am I reading that correctly?

John Howard: You are reading that correctly.

That's correct. And we're continuing to reduce that debt load as we can.

Eric Larson: So was that a function of debt load or a function of getting a better interest rate? I mean, it's a meaningful step down. It's like $10 million a quarter?

John Howard: It's a combination of both. We are managing that interest as we can -- the rate as much as we can within the environment.

And we paid down debt, we get that nice debt pay down last year, we're looking at the same this year.

Eric Larson: Then finally, your -- are you still -- is your adjusted tax rate for your first quarter, which I believe came in at 29%, is that is that a rate we should be using for the remainder of the year?

John Howard: It is. That's correct. That's the benefit of that approach is it calculates that rate once for the year, and it removes some of the normal U.S. GAAP fluctuations that occur in the accounting world.

So now, you can rely on that for the year unless something unusual or dramatic happens within the business model itself, which we're not expecting, we maintain that adjusted tax rate for the year.

Eric Larson: Got it. And then one final question focused on cash. You said CapEx is targeted this year at about 1% of sales. Is that a high -- is that a number we should look for as an ongoing rate as well or is there some capital efficiency improvements? Can that number drop, let's say in F '21, '22? Because you may have some upfront CapEx spending here that goes away.

How should we look at that?

Steve Spinner: Yes, so historically, Eric, we've guided to just around 1% of revenue. In this quarter we significantly lessened that. We haven't given out guidance looking ‘21, ‘22, ‘23. But I would say that a number south of 1% is probably a good number to use.

Operator: And your last question comes from Chris at Jefferies.

Chris Mandeville: Chris Mandeville. Good morning. So, Steve, can I just ask you with respect to the reference of seven of eight top accounts now using UNFI for both primary and conventional network. Is that new business wins or is that a function of the merger itself? And then I think if I recall correctly, you were talking about the potential for win some new business early this year on the last quarterly call. So was that the new supermarket business won this quarter that you referenced or could there be something more meaningful out there?

Steve Spinner: So yes, we did have some pretty significant wins that we did start in the quarter.

Our pipeline is extremely robust. We're not ready to announce anything. And obviously, in our world we typically don't announce because now that we're $24-ish billion, it would have to be a pretty big win for us to announce it. But like I said, the pipeline is really good, really strong. When you think about the top customers who use both UNFI for natural and conventional growing, it’s both.

They came out of the merger, where we were selling both parties, and there's been some wins where we had the natural and now we have the conventional or we had the conventional and now we have natural, just because the economy of scales work, it’s one relationship. And it's just easier for the retailer. And we're going to -- that trend is going to continue.

Chris Mandeville: Okay. And then given last night's news of Ahold selecting or electing to take some of its own distribution in-house, buying I think three DCs from C&S, and then they plan to build out a couple of frozen facilities.

Have you had any conversations with them to suggest that this might extend into the natural, organic offering? Or do you consider that a risk? And is there any ability to frame up the size of their sales contribution to you guys?

Steve Spinner: Yes. So let me answer it this way. It's a really good thing for us. We have a long relationship with Ahold. Actually, we just took on some additional business with them.

We have big supermarket relationships. And in almost every one of them, they all have captive options. And so, what UNFI does really, really well for supermarket chains who have captive options is we provide a slower moving inventory. We provide a differentiated inventory. We provide the inventory that's really hard to procure and move around the country because they sell in small quantities and we can aggregate and move it really effectively.

And so, we work really well with conventional supermarkets who have their own captive DCs. We also have a category of expertise that they just don't have. We know the SKUs that move by geography. In a lot of cases these big conventional retailers use our service model. And so, that is, we can more efficiently use our service team to actually place the order, rotate the shelf, do the planograms, move the freight in and out.

And we can do that much more efficiently and effectively than the supermarket can. And so I wasn't surprised -- we weren’t surprised, I think it’s a good move for Ahold for their own supply chain. But I think generally it’s really good news for us just evidenced by the fact that we do so well with so many supermarkets that have captive DCs, those captive DCs are generally predicated on the fast moving items.

Chris Mandeville: Okay appreciate that. And if I could just fit in just one last question.

Stock is down over 10%. I guess given the delta in the results versus the street and now you referenced that the numbers are actually in line with your expectations, and much as we can all appreciate that you guys are long-term thinkers, why not offer some element of quarterly guidance just to help manage external expectations. I guess I’m just trying to understand what's the down side when it’s just so challenging to understand what's going on internally from an external perspective?

Steve Spinner: Yes, it’s a good question. But again we don’t think in terms of the business in quarter-to-quarter. We know that we've taken on a big project.

Putting two businesses together that combines you $23.5 billion to $24.3 billion, that initially will create $560 million to $600 million of adjusted EBITDA is a big deal and it’s not something that could be measured quarter-to-quarter. It’s high enough doing it year-to-year. We don’t think about it in terms of year-to-year. We think about it in terms of what we're trying to create, which has never been done before by the way over the next three years and we have a network of 57 distribution centers, we’ve closed three. We’ve got a network of 23,000 associates.

We’ve done an ungodly amount of heavy lifting and we feel like we're on the right path. And all quarterly guidance we do is, move us to make decisions that were not in the best interest of the business long-term. And I don't think that's a good thing for us to do. So we're really excited about where we are. We understand that the market is skeptical.

The management team feels great about what we've accomplished and where we’re going. Our synergies are on track. Our customers love what we’re trying to do, I think our suppliers love what we're trying to do and we're just going to have to prove it.

Steve Spinner: I want to thank everybody for joining us today. We’ve got a great company.

We’ve got a great plan. We're creating a truly differentiated wholesaler, providing services, products, logistics, distribution services across the United States and Canada. All while continuing to be the employer of choice, and our commitment to sustainability, philanthropy continues. We're very proud of our team. And we're very proud of what we've accomplished.

I want to thank you for participating today and have a great holiday.

Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.