Executives: Katie Turner – ICR Steve Spinner – President and Chief Executive Officer Mike Zechmeister – Chief Financial Officer Sean Griffin – Chief Operating

Officer
Analysts: John Heinbockel – Guggenheim Rupesh Parikh – Oppenheimer Karen Short – Deutsche Bank Vincent Sinisi – Morgan Stanley Scott Mushkin – Wolfe Research Andrew Wolf – BB&T Stephen Grambling – Goldman Sachs Bill Kirk – RBC Meredith Adler – Barclays Mark Sigal – Canaccord Joel Edelstein –

Stephens
Operator: Greetings and welcome to the United Natural Foods Definitive Agreement to Acquire Haddon House Food Products Inc and Preliminary Second Quarter Fiscal 2016 Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Katie Turner of ICR. Thank you.

You may begin.

Katie Turner: Good morning and thank you for joining us on short notice to discuss UNFI’s Definitive Agreement to acquire Haddon House Food Products Inc and the Company’s preliminary unaudited second quarter sales and earnings results, as well as updated fiscal 2016 guidance. By now you should have received a copy of the two press releases issued this morning at

approximately 6:00 AM Eastern Time. Both press releases and the webcast of today’s call are available under the Investors section at the Company’s website at www.unfi.com. On the call today are Steve Spinner, President and Chief Executive Officer; Sean Griffin, Chief Operating Officer; and Mike Zechmeister, Chief Financial Officer.

Before we begin, we would like to remind everyone that comments made by management during today’s call may contain forward-looking statements. These forward-looking statements assess plans, expectations, estimates, and projections that might involve significant risks and uncertainties. Actual results may differ materially from the results discussed in these forward-looking statements. In addition, in today’s earnings release and during the call today, management will provide both GAAP and non-GAAP financial measures. These non-GAAP financial measures include net sales, earnings per diluted share, and free cash flow.

And with that, I’d like to turn the call over to Steve Spinner.

Steve Spinner: Thank you, Katie. Good morning. Today, I’ll provide you with an overview of our Definitive Agreement to acquire Haddon House, and the strategic benefits we believe this transaction will generate for UNFI over the next many years. Mike will then review our preliminary unaudited second quarter fiscal 2016 sales and earnings results, as well as our revised guidance for 2016.

And, finally, I will provide brief closing remarks and we’ll open up the call for your questions. First, we are very excited about our definitive agreement to acquire all the outstanding stock of Haddon House Food Products Inc. For those of you not familiar with Haddon House, the business was founded in 1950 by the Anderson family as one of the country’s finest distributors, importers, and exporters of specialty gourmet and ethnic products. Additionally, Haddon House has a distinctive line of branded gourmet and ethnic products sold across the U.S. They have a diverse, multichannel customer base including conventional supermarkets, gourmet specialty stores, and independently-owned retailers.

Haddon House has a unique product and service offering that we expect to play an important role in our ongoing strategy to build out UNFI’s gourmet and ethnic product categories across the country. We’re excited about Haddon’s full-service merchandising business and a new customer channel for UNFI, gourmet and specialty retailers, many with multiple locations. There are also terrific opportunities for Haddon’s product lines in existing UNFI-served retailers. Haddon currently operates its core distribution business from locations in Howell, New Jersey, and Richburg, South Carolina, both owned facilities. We believe these facilities are well placed among UNFI’s distribution center network and provide us with the opportunity to broaden our distribution scale, product, and service offerings in key geographic markets.

We expect to convert the distribution center to UNFI’s core technology within a year. The Haddon team will continue to be led by David Anderson, Sr., and Dave Anderson, Jr. Under their leadership, the Company has demonstrated exemplary service and growth over the last decade with net sales of approximately $537 million for the year ended December 31, 2015 including $36 million in sales to our customer who is no longer operating. We are excited to have them join the UNFI family as we venture into new channels and markets together. The cash transaction is valued at approximately $217.5 million, including real estate, subject to certain post-closing adjustments.

And we expect to finance the purchase price through a combination of available cash and borrowings under our revolving credit facility. From a financial perspective, the transaction is not expected to be dilutive to fiscal 2016 earnings, excluding transaction costs. We anticipate additional moderate accretion in FY 2017 as we more fully realize the sales and fully realize the sales and cost synergy benefits. The transaction is expected to close early in the fourth quarter of fiscal 2016, subject to regulatory approvals and other customary closing conditions at which time Haddon will be operated as wholly-owned subsidiary of UNFI. We appreciate all of the hard work and dedication of the Haddon and UNFI teams and look forward to working together to further develop our product and service offerings as we work with the UNFI team to broaden our geographic reach and route to market across complementary customer bases.

Now I would like to talk briefly about UNFI's second-quarter 2016 results and our revised guidance for the balance of the year. Please keep in mind that today we will address general trends in our business and we will provide more specifics and details at our regularly scheduled earnings release next Monday, March 7. First, while I am disappointed in our results, I continue to be confident that our strategy to increase our product offering into perishable perimeter, gourmet and ethnic, e-commerce, and brands will better position us for future growth. For the last year, our industry has been in a dynamic state of change as organic and natural center store products become more mainstream and distribution of these products expands into many more sales channels. As a result, the competitive nature of our industry at retail, wholesale, and supply is evolving, and at UNFI we continue to build upon our new distribution opportunities outside of our core natural channel.

Over the last five years, we've changed our growth and expense model into one with new customer channels and a highly-efficient platform across North America. Today we find ourselves in a position where we are temporarily caught between having built capacity to efficiently service our customers, but yet to source the volume growth to leverage that capacity. In the second quarter we faced continued and, in some cases, strengthened headwinds across many of the areas that challenged us in the first quarter including pricing, supplier promotional activity, channel and category mix, as well as other unique circumstances. I believe our revision to 2016 guidance will provide us with an opportunity to further focus our strategy on building volume across sales channels and cost reduction. We are intently focused on managing the controllable aspects of our business.

And we plan to make strategic investments to improve our sales growth rate and customer experience through the back half of this fiscal year and into fiscal 2017. We remain optimistic about new customer growth potential in both our emerging fresh and core distribution programs. Also of note, in transitioning out of volume lost associated with our previously-announced customer, after having built new capacity and infrastructure, the near-term impact was greater than anticipated and we are diligently working on marrying demand with capacity. Despite the current challenges we are experiencing, there are several very positive trends developing within our business as well. During the quarter we generated over $100 million in free cash, the highest level we have ever delivered, and our Field Day brand for independents grew over 47%.

Before I turn the call over to Mike, I also wanted to mention that even with today's announcement on our definitive agreement to acquire Haddon House, we believe our M&A pipeline continues to be strong. Our announcement today to acquire Haddon House serves as impetus towards moving UNFI rapidly into specialty gourmet and ethnic retailers, while providing significantly new distribution opportunities within UNFI's existing customer base. Now I will turn the call over to Mike to review the financial information reviewed today.

Mike Zechmeister: Thanks, Steve. Good morning, everyone.

First, I will review our preliminary unaudited second-quarter and year-to-date net sales and earnings results. Then I will cover our revised guidance for fiscal 2016. Our financial performance remains challenged. We continue to face headwinds from Competitive pricing pressure, reduced supplier promotional spending, and the evolving mix of our business from both the channel and category standpoint. These, in combination with the lack of a fuel surcharge, continued foreign exchange headwinds, and the strategic investments we have made to expand our warehouse capacity have put pressure on our margins.

In the second quarter of fiscal 2016 we anticipate net sales of just under $2.05 billion, an increase of approximately 1.5% from net sales of $2.02 billion in the same period last year. Net sales for the six months ended January 30, 2016, are expected to be $4.12 billion, a 2.8% to 2.9% increase from net sales of $4.01 billion in the same period last year. Adjusted net sales for the second quarter of fiscal 2016 are expected to increase 6.4% to 6.5% compared to the same period in fiscal 2015, excluding the year-over-year impact of the previously disclosed termination of a customer distribution contract and the impact of the previously disclosed second-quarter fiscal 2015 non-recurring reduction in net sales. Adjusted net sales for the six months ended January 30, 2016 are expected to increase 6.6% to 6.7% compared to the same period in fiscal 2015, excluding the same items. We expect GAAP net earnings per diluted share in the range of $0.43 to $0.45 for the second quarter of fiscal 2016.

Adjusted for estimated severance and other transition costs due to the previously disclosed restructuring plan of $2 million in the quarter and $1 million of acquisition related costs, adjusted earnings per diluted expected to be in the range of $0.47 to $0.49 for the second quarter and $1.10 to $1.12 for the first half of 2016. As Steve mentioned, we’re also anticipating generating free cash flow in the quarter of $102 million to $107 million, which would be the largest largest quarterly free cash flow in company history. Moving to our fiscal 2016 annual guidance, based on the performance to date and our outlook for the remainder of fiscal 2016, we have revised our guidance for fiscal 2016, which was provided on December 7, 2015. Please note that the acquisition of Haddon House is not included in this guidance. While we expect the transaction to close early in our fourth quarter, closing date is subject to the satisfaction of customary closing conditions and regulatory approval.

For fiscal 2016 ending July 30, 2016 we now expect net sales in the range of approximately $8.31 billion to $8.43 billion, an increase of approximately 1.5% to 3.0% over fiscal 2015. We expect GAAP earnings per diluted share for the fiscal 2016 in the range of approximately $2.27 to $2.37, compared to fiscal 2015 GAAP earnings per diluted share of $2.76. We expect adjusted earnings per diluted share to be earnings per diluted share in the range of $2.34 to $2.44 after adjusting for an estimated $5.8 million of acquisition costs, severance expense, and other costs related to the previously-disclosed restructuring plan regarding the termination of a customer distribution agreement. Please be reminded that in fiscal 2015 earnings per diluted share were adjusted for the $7.7 million second-quarter impact of the previously disclosed $9.3 million nonrecurring reduction in net sales to the Company. Capital expenditures for fiscal 2016 are expected to be approximately $49.8 million to $59.0 million, or approximately 0.6% to 0.7% of estimated fiscal 2016 net sales.

Finally, we expect the fiscal 2016 tax rate to be in the range of 39.7% to 40.1%. We plan to release our complete second-quarter and six-month results on Monday, March 7, 2016, a week from today. With that I will now turn the call back to Steve.

Steve Spinner: I think we're now ready to take some questions.

Operator: Thank you.

We will now be conducting a question-and-answer session. [Operator Instructions] One moment, please, while we poll for questions. Thank you. Our first question comes from the line of John Heinbockel with Guggenheim. Please proceed with your question

John Heinbockel: Steve, I know you will reserve some detail for next week, but to me the big question second-quarter EBIT margin, or an implied EBIT margin a fair bit worse year over year than the first quarter.

So what specifically changed in terms of what was really some of the key – I think you listed a few things but what really drove that? Then, secondly, the implied EBIT margin would then suggest that this is the worst – this quarter is the worst. The third and fourth are directionally better. What do you think specifically gets better in the second half?

Steve Spinner: Well, I mean it's hard for me to give you a lot of color today. I think our plan is to give you a lot more detail in our earnings call for next week, John. As far as the overall guidance, we essentially took our estimated performance in the second quarter, extrapolated it into the third and fourth.

But if you take a look at the seasonality associated with our business, the numbers generally improve in the third and fourth quarter and they always have. But like I said in the comments, we are caught in this uneasy position, temporary uneasy position where we are over-indexed in the natural channel or under-indexed in conventional. We're unbelievably excited about getting into this new channel of gourmet and ethnic. There are many gourmet and ethnic or specialty chains that have never been a channel at all for UNFI, so this is brand new. And another way to think about that is, while growth has moderated in the natural channel because the products have been around for so long, when you think about the gourmet and ethnic channel, the fastest-growing category within those stores is natural and organic.

So we're really optimistic about what the acquisition of Haddon brings to us. It's a great team. I had the opportunity to stand in front of their 150-plus salespeople on Saturday morning and those things always are a little emotional. You're not quite sure what to expect. They made the announcement to go in and having a standing ovation for the Anderson's because the people felt like they made the right choice who to enter into long-term relationship with was energizing.

So I think for the time – the long answer to your question is I think for now you're going to have to hold off for a week until we can provide more color. But, generally speaking, it supplier promotional activity. It's fuel. It's certainly competitive pricing pressure across a wide range of wholesalers, changing in mix of our business from a channel and a category perspective. Foreign exchange in Canada is still difficult and we've got a lot of capacity right now that we've paid for that we just don't have enough volume to run through it.

And so all those things kind of came together and hit us in this business particular period in time. But we will give more color next week.

John Heinbockel: Just then as a conceptual follow-up, the EBIT margin this year looks like it probably ends up the 2.5% range. Do you think the fundamental profitability has been reset and what you've lost over the last year or plus that never comes back? Just because the market has been reset. Or then I guess as a corollary to that, do you think you need to do anything more dramatic on the cost side, on your cost side? That has been an area of strength historically.

Or no, because you think you don't want to cut because you think there will be growth over the next couple of years?

Steve Spinner: Yes, I mean you are kind of asking me to give guidance and I'm not in a position to do that yet. I can tell you that this company has a tremendous history of changing its business model to adapt to a changing customer dynamic. Certainly we have had a history over time to take out costs at a greater rate than the decline in the margin. Now, obviously, things have shifted much faster than anybody ever expected; not only in distribution, but in retail as well. Look, we have got a great team; we've got a great model.

There's no one else as close to the consumer as we are. The statistic I love to use is that we are no further from than 200 miles from 75% or 80% of the North American population. So there's plenty of customer opportunities. There's great M&A opportunities. Certainly the acquisition of Haddon House gives us the ability to get into a new channel that, quite frankly, is underserved by UNFI and overserved by others.

And so, as far as any other particular detail around the numbers, will just have to kind of wait until next week where we can give you a little bit more color.

John Heinbockel: Okay, thank you.

Operator: Our next question comes from the line of Rupesh Parikh with Oppenheimer. Please proceed with your question.

Rupesh Parikh: Good morning, and thanks for taking my question.

Two questions related to the acquisition. One, if we can get a little bit more color on how you are thinking about the Haddon House margin profile. And then secondly, Steve, does this at all help you – I know with Hudson Valley you were waiting to get the scale with some new, fresh customers. Does this acquisition at all help you in terms of achieving that?

Steve Spinner: Rupesh, first of all, without giving you any specifics around the Haddon margin, I would direct you to that – the thing that makes Haddon work really well is the exemplary customer experience. And that exemplary customer experience has a lot of what I would call full or partial service programs embedded in their customer programs, where customers are using the Haddon expertise to set the shelves, in some cases receive the product, reset the shelves, help the customer determine what should be on the shelves.

And that’s something, quite frankly, we desperately needed. And so that is embedded in their margin and so when we do provide you some color, you will see that in the numbers. As far as capacity, the other kind of accidental benefit to Haddon is we are at capacity in Atlanta. We are at capacity in Florida. We need capacity in the Northeast and so now we acquire a big building in Howell, New Jersey, a big building in Richburg, South Carolina.

It provides us with an incredible amount of opportunity to go to customers that we previously couldn’t to expand our relationship in fresh within those markets. Again, when the time is right we will provide some additional color on that, but having those DCs – Richburg, South Carolina, in particular – is very, very exciting to us.

Rupesh Parikh: Okay, great. And I’m not sure if you’re ready to provide this, but are we able to get the multiples you paid for this transaction and how you are thinking about your expected leverage ratio on the completion of the acquisition?

Steve Spinner: I don’t know that we will give you the multiple. I would tell you that it’s consistent with the kind of things that we’ve done in the past, and any other information – we will give you a little bit more on March 7.

Mike Zechmeister: Yes, Rupesh, the valuation on this is based on an IRR; feel very comfortable with the IRR that we achieved on the deal.

Rupesh Parikh: Okay, thank you.

Operator: Our next question comes from the line of Karen Short with Deutsche Bank. Please proceed with your question.

Karen Short: Hi.

Thanks for the question. I’m just – so, Steve, just looking at bigger picture in terms of the business, I fully appreciate you are doing what you need to do in terms of diversifying your revenue stream. But I guess I’m wondering if you could kind of give a little bit more color broadly on what you are going to do to shore up the core of your business, because that is still an issue in terms of the competitive landscape. So any color on that would be helpful, because you can’t obviously – you can’t acquire your way to prosperity.

Steve Spinner: No, that’s a great question and I think that again next week we’re going to give you a lot more color about some of our really fast-growing sectors.

I mentioned earlier that our Field Day brand grew 47%. Our overall brand business is growing in the high 20%s. Our e-commerce business, I’m not going to give you any color today, but I would tell you our e-commerce business may be close to our fastest-growing category. We have tremendous opportunities in conventional produce. And by the way, I still believe that there are tremendous opportunities for UNFI within our core customer, and Haddon House certainly plays a role in being able to solve that problem, because we just didn’t have the products across the country to satisfy that demand.

Secondly, we are way under-indexed in mass and there are tremendous opportunities for UNFI in mass and drug that we are taking a serious look at that three or four years ago we would’ve never looked at. And so because our distribution system is so robust, there are incredible opportunities for UNFI from a logistics perspective, from a redistribution perspective, from satisfying other conventional mass and drug distribution requirements that we are pretty excited about. And I would also tell you that being somewhat of an optimist, we’re at a little bit of a lull, as you know, within our natural channel but I feel fairly optimistic that we will also come out of that. It may take a couple years, but we will come out of that, too.

Karen Short: Well.

Just following up on that, can you just talk about like culturally and philosophically why these areas in terms of mass and things like that are now areas of opportunity, whereas you had previously not had any interest in supplying those channels?

Steve Spinner: Well. I think it really is a matter of when our top line was growing close to 20% a year we just never looked at it. And when you get some contraction in your volume you start to consider, okay, well, if your core channel has moderated, we have to aggressively go after the channels that are going to deliver the growth. Because we know that our scale is what drives our ability to improve our bottom line. We have a lot of capacity and we need to put a lot of volume through it, and that’s generally why we are where we are.

Karen Short: Thanks, that’s helpful.

Steve Spinner: Okay.

Operator: Our next question comes from the line of Vincent Sinisi with Morgan Stanley. Please proceed with your question.

Vincent Sinisi: Hey, good morning, guys.

Thanks very much for taking my question. Also just kind of one or two bigger picture questions. Similar to Karen’s question, when you are looking at your core business – I know you said in the call today that kind of under-indexed to mass and drug opportunities, conventional opportunities. Do you think when you look at over the next couple of years even how will the customer makeup change? Also, I know you’ve made some comments in the past where, as necessary, you might go into more conventional type of products to get different contracts, et cetera. Can you just kind of give more of a theoretical take on your future kind of customer and/or product mix and how that may change?

Steve Spinner: And so we talked a lot a couple years ago about our building out the store strategy and that strategy is still not only a good one, but it puts us years ahead of everyone else.

And while it’s highly unlikely that we will ever carry Coke and Pepsi and Fritos, that’s just not what we do, we do want to build out the customer store. And so when you think about what UNFI will look like in a couple of years, it’s certainly conventional produce, organic produce. It’s every natural protein known. It’s rack deli, food-service, prepared foods. It’s center store, it’s frozen, it’s dairy, it’s gourmet and ethnic, it’s specialty, et cetera, et cetera.

So what we want to be in a position to do is to solve a customer’s needs across all or some of their store. We think that strategy is still good and that strategy applies to a wide range of customer channels that we have talked about and we are well on our way. Again, the challenge for us right now is we are just in that squeeze between having the capacity and not having enough volume to push through it. But I think our building out the store is not only appropriate, but it’s going to get us to where we need to be.

Vincent Sinisi: That’s helpful, Steve.

Thank you and then maybe just one other follow-up just on the M&A landscape. I know you said that there’s still opportunities that are out there and obviously good luck with the Haddon House acquisition. But how do you – I guess kind of just also more theoretically than anything, but how do you think of – Haddon House is the newest one, obviously, upcoming. You’re still building out the infrastructure for Tony’s. There are other things out there.

So kind of what do you weigh in terms of put funds towards new acquisitions that give you, like you said, what Haddon House gives you today versus continuing to invest in your current ones and building those out further? Just how do you internally prioritize?

Steve Spinner: Yes. I mean I think from an M&A perspective we have a very disciplined model that we use. They have to achieve a certain IRR. They also have to be within our historical multiple range that we pay. I think that, generally speaking, if it’s a large company like Haddon House, they have to have a management team that is committed to growing the business.

That are passionate; that have a lot of people around the country doing what they do that will become an important part of the Company. On the smaller acquisitions, we may close them and merge them into our existing distribution centers, but I don’t think that there is a black-and-white answer. If you are asking a question about the capital structure, we certainly have a very rigid position on debt and we are giving serious consideration to our balance sheet and our capital structure as we speak, especially in lieu of having a quarter where we just generated over $100 million in free cash. And again, we will provide some more color on that when the time is right.

Vincent Sinisi: Okay, great.

Thanks very much.

Operator: Our next question comes from the line of Scott Mushkin with Wolfe Research. Please proceed with your question.

Scott Mushkin: Okay, guys. So just a little housekeeping just to make sure my math is right.

It’s about $500 million in revenue, is that what Haddon House was? You said there’s $36 million? Okay. And then the second question goes to I guess the productivity issue. Obviously you have that West Coast facility you built and then the account went away, but it sounds like maybe the productivity issue is a little greater than that. But there’s also clearly some facilities in the Southeast and maybe in the Northeast that are running at full capacity. So I just was wondering if you could run us through a little bit of more of the challenges there.

Is it just there’s certain actual facilities besides the one on the West Coast that you’d really like to have some more volume in, or is it still you underestimated the impact of that West Coast facility and losing that customer?

Sean Griffin: Hi, Scott, good morning, this is Sean. We think about the optimum capacity across the network to be, give or take, 80% and so when we look at the current state of network capacity including holding and/or opening up the Gilroy distribution center, which we will open up here in Q3, we find ourselves in a circumstance where we are south of that 80% optimum number. Keep in mind, when we open up a distribution center, let’s say for example, in the Northeast and it’s Hudson Valley, we fold revenue from current DCs – for example Dayville, Connecticut, or Chesterfield – to seed the new DC. So not only do we look to drive new revenue in the brand-new distribution center, but we are also – we also generate opportunities, if you will, in the host DCs. So we have certain areas across the US in our network where we are sub-80% capacity and we still certainly have – Steve talked about Southeast and Atlanta.

We still have some distribution centers where we are north of 80% and actually in the 90%s. So there’s no one-size-fits-all, but at the end of the day we certainly have to put this capacity to work.

Scott Mushkin: Sean, that’s great. So it’s really not just a Gilroy issue, because that has to I guess open up in the third quarter, so it is other facilities that – at a 1.5% sales growth you’re just not where you need to be as far as revenue growth I guess? Is that correct?

Steve Spinner: A lot of it, Scott, is built for when you kind of – a year before you look at where your growth is going to come from and it doesn’t come, you have the potential of being overbuilt. When you look at – we put up Gilroy, we put up Hudson Valley, we put up Racine, we put up Twin Cities, all within the last couple years.

And so absolutely the right decision to do, because now we have facilities that have 100% perishable capacity. There’s a rule that I learned a long time ago that says build it and they will come, and that’s generally true. We’re just caught in the year where we didn’t anticipate there to be as much of, kind of a slowdown in our core channel and it’s just going to take a little time for us to build it back up, but we will.

Scott Mushkin: So, then just one last one. I’ve been to some of those facilities and they are just phenomenal.

And kind of taking a step back you would think, given they handle a lot of slower-turning items for the traditional space or other spaces, you think the need is there. But I guess the question would – if the natural channel continues to slow, how do you balance that? It seems like it could become – it could continue be challenging, at least for the next year.

Steve Spinner: Well, certainly we are spending a lot of time with a lot of people focused on building volume specific to geographies and channels that we historically have not been in, and there’s a lot of opportunity for us. But I think our guidance reflects the fact that it’s going to take a little time.

Scott Mushkin: All right, perfect.

Thanks for taking my questions, really appreciate it.

Operator: Our next question comes from the line of Andrew Wolf with BB&T. Please proceed with your question.

Andrew Wolf: Thanks. Steven, I’m interested in the comment I think you said there was increasing competitive activity from other wholesalers.

Recently you locked up, I forget if the number was 55%, but a lot of your either Whole Foods or some of the bigger chains. So should we infer from that that there is increased competitive activity in the independent channel? And if so, can you give us a little flavor, is that from traditional competitors like KeHE and other natural distributors, or is it more other larger distributors like SUPERVALU or C&S or any of those guys getting into the channel?

Steve Spinner: Well, I mean, I think the biggest thing, Andy – there’s two biggest things. It’s the competitive pressure at retail which are driving down comps. Okay, so when your existing customer base across our entire natural channel, if they are getting competitive pressure from other retailers, their comps are compressed. Those comp compressions translate directly to us and so I would say that is driver number one.

Number two is suppliers, and this is a gross generalization, but suppliers generally promote where they are getting the growth. And so when you take the growth out of the channel you see a significant reduction in the amount of promotional activity. Promotional activity is a significant source of margin from UNFI, so if the suppliers divert the promotional activity to other channels, we’re going to feel the pain. Then the third part of that is there is a general lack of product inflation. And so when costs are not inflating, we lose the ability to buy into rising markets.

And so I think those are really the key inhibitors, if you will, in the short term that are really pressuring our margin.

Andrew Wolf: Okay, got you. It’s really – the competitive thing you cited is a derivative from your customers, it’s not other distributors coming after the independents or something and driving down margin?

Steve Spinner: I think there’s been competition in all the channels for a long time and there’s nothing new there. What is new are kind of the three things that I shared with you.

Andrew Wolf: Okay.

And then on the promotional activity, that also sounds like it’s not structural, but more of just the effect you got caught up in. So it’s not like the amount of promotional funds are down – it’s just because you guys are down, particularly with Safeway, you’re not getting the promotional funds you anticipated. And I guess with the other channels being slower. So it’s not really structural, it’s just the fact that the volume didn’t come. Am I understanding that right?

Steve Spinner: I think so.

I would say that’s accurate.

Andrew Wolf: Okay. And the last thing, I know you don’t want to get into too much detail here, but it would be helpful – sort of an add-on to Scott’s question. It would be helpful to get an understanding of how much of the guide down you would apportion to the things you just cited and how much of it is just the previous financial calculation on the effect of Safeway going away sort of was understated? And that would just be helpful to understand, so we could base how much of this guide down is transitory versus – just give us a sense of that.

Steve Spinner: We obviously can’t answer that today, but we will give that one some thought and see how we might be able to come back and answer that next Monday.

Andrew Wolf: Okay. Thank you.

Operator: Our next question comes from the line of Stephen Grambling with Goldman Sachs. Please proceed with your question.

Stephen Grambling: Hey, good morning.

Going back to the capacity versus demand mismatch topic, how quickly can you get Haddon product I guess into the existing – your current supply chain? And how do you think about that as an opportunity to kind of correct that mismatch?

Steve Spinner: We are not going to get into a lot of strategic discussion about the integration of Haddon, but I will tell you that there is a market that we will be converting the Haddon inventory into very close to the close date. Remember that we signed a definitive agreement; we won’t actually close for probably 30 to 75 days. But we will move very aggressively and very quickly. And obviously it will go into the markets where we have the capacity and the demand.

Stephen Grambling: Great.

And then a quick clarification. Just the free cash flow guidance suggests some pretty big I guess working capital and other swings that aren’t related to EBITDA. Can you just talk to us about what’s going on there? How we should think about working capital going forward? Are there any opportunities, in addition to just rightsizing the cost structure, just working capital in general going forward?

Mike Zechmeister: Let me take that. Working capital is a focus for us. We feel it’s an area where we can get some improvement.

The free cash flow in Q2 was certainly driven by inventory reduction quarter over quarter. I think if you looked at the inventory after the first quarter, where it grew 10%, we had some opportunity to get that into a better place. We did that in Q2 and that’s where that cash flow was primarily sourced from.

Steve Spinner: One thing I would comment on the inventory, I would characterize it by more effective management of our overall inventory as opposed to driving our inventory days down because our overall service level for the last 12 months has been higher than it’s ever been.

Stephen Grambling: That’s helpful color.

Thank you so much.

Operator: Our next question comes from the line of Bill Kirk with RBC. Please proceed with your question.

Bill Kirk: Hi, guys. I guess a question a little bit on capacity.

If you are below maybe ideal levels today, how much of this margin rebase is to get the volume back, whether it’s keeping customers through renegotiations or going out to win new customers, targeted specifically to get capacity back to ideal level?

Steve Spinner: If I understand your question, are you asking if we are going to use price to attract new business?

Bill Kirk: Yes, maybe address some of the short-term capacity underutilization.

Steve Spinner: I would say that we’re – look, we’re not going to use price to attract new business because that’s a recipe for disaster, but we are going to be competitive where we have to. Whether it’s existing customers or new customers, whether it’s full-service specialty, natural, etc., we are going to think about the environment in its entirety, where the business is going – for example, if it’s going into a market where we have capacity versus a market where we don’t have capacity – and we will be competitive to ensure that we can take the volume out without being stupid about it.

Sean Griffin: I would go so far as to say that, notwithstanding the sort of short-term pressure on our top line, that our pipeline of new customer opportunities and extensions of additional categories on our core business has never been greater. It’s never been more robust.

Timing is a challenge, but the opportunity, they are in front of us. Particularly now with the Haddon acquisition and the opportunity to see the assortment, the gourmet ethnic assortment that Haddon brings to the table, again, as Steve suggested, against distribution centers that are in the appropriate markets where there’s a high index of gourmet ethnic and we have the available capacity.

Steve Spinner: One of the interesting things about Haddon House is Haddon does a phenomenal job across some very, very specific channels. Some served by UNFI, some not served by UNFI. If you look at the ones that are not currently served by UNFI, Haddon has been restricted to the eastern half of the U.S., so those customers certainly see the acquisition as a wonderful opportunity to deploy the Haddon salesforce, the Haddon SKUs into the balance of the country that they’ve never been able to do before.

Bill Kirk: Okay. I guess another quick one. Is there anything in the margin rebase that has anything to do with the Ahold-Delhaize merger closing?

Steve Spinner: No.

Bill Kirk: Okay.

Operator: Our next question comes from the line of Meredith Adler with Barclays.

Please proceed with your question.

Meredith Adler: Thanks for taking my question. A lot of my questions have been answered, but I just have a couple more. I think this goes back to Vinnie’s question about prioritizing and I guess the more direct question I

have is: you are going to use over $200 million to buy Haddon House. It clearly brings you a lot, but does it in any way stop you from buying the fresh capabilities, the deli companies, that are going to allow you to leverage the fresh capacity you have in your distribution centers?

Steve Spinner: Meredith, thanks for the question.

We are looking at our capital structure very closely. We’ve got sufficient capacity to do the Haddon House deal. We’ve got capacity after that as well and when we talk next week we may provide a little bit more guidance on what our plans are going forward, but in no way do we see our strategic plans, going forward, limited at all by the leverage on our balance sheet.

Meredith Adler: Okay, that’s very helpful. I want to go back also to just kind of confirm what you were saying when you answered Andy’s question, just to make sure I understand.

You are seeing a mix – the volume is shifting to customers that are not yours and that’s putting pressure on capacity utilization. But you are not seeing pressure on pricing, your own pricing, because your customers’ volume is down.

Steve Spinner: Look, it wouldn’t be fair to say we’re not seeing any pressure. We’ve been seeing pressure for the last couple years; certainly take a look at our margin and that would direct you to that. And so if you think about kind of margin across distribution, it’s been coming down, driven by competitive pressure, whether it be in our own sector or direct or other competitors or conventional convenience store distributors and so on and so forth.

And so that pressure has always been there. Now, of course, now we have several national competitors that we play with all the time. But I think that when you look at the margin pressure in this particular quarter embedded in our guidance I think most of the issue was driven by the couple of things that I mentioned to Andy.

Meredith Adler: Okay. Then my final question is you talked about free cash flow generation being strong because of working capital improvement, specifically the second quarter been kind of a fixing or a correction of what happened in the first quarter.

When you look out further is there significant opportunity to reduce inventory or working capital? And will you at some point, maybe next week, give us a sense of what kind of free cash flow you believe you can generate just on a normalized basis?

Mike Zechmeister: Yes, Meredith, a couple things there. First of all, when you think about working capital, it’s obviously primarily driven in our business by our inventory levels. When you think about inventory levels you have to think about the ability to acquire inventory at a good price is also an important aspect. So the way I think about it, when we find an excellent value on acquisition of inventory, that’s good inventory. For any other inventory, we’ve got to make sure we’ve got our items in the right location to – and use technology to get us there to make sure we are as efficient as possible.

So there’s not a one-size-fits-all answer to the optimized inventory. It is a combination of the buy and the efficiency in an item location standpoint.

Meredith Adler: Got it. I have one more very quick question. When are you reporting earnings next Monday? Is it before the market opens or after the market closes?

Steve Spinner: After, after.

Meredith Adler: Okay, great. Thank you.

Operator: Our next question comes from the line of Mark Sigal with Canaccord. Please proceed with your question.

Mark Sigal: Hi, good morning.

Steve, you guys have talked for quite some time focusing on the cost side of things. You’ve invested in warehouse management, transportation management; obviously inventory is a big focus. Is there further room to run on those initiatives? I know some of them have been largely complete in the past, but as you think about continuing the focus on cost reduction to try and right-size to the new demand environment, what incremental levers are there to pull?

Steve Spinner: We are not fully deployed across the country on our warehouse management system yet. We are still rolling out a couple of DCs the year. We expect that will finish probably within the next two to three years.

We do have some infrastructure projects that Mike is going to be spending a lot of time working on as we bring the Company to a single financial services platform. That is going to take a couple years to do. And we have a lot of ongoing initiatives around how we run our warehouses, how we deliver that give us a great deal of confidence in our ability to continue to be efficient against whatever our volume is.

Sean Griffin: I would say that with respect to our warehouse management platform, we’re about halfway there. We certainly have been successful and are seeing benefits from nationalizing our inventory optimization platform.

We’ve done good work on our inbound logistics model. I would say that from a productivity perspective that we are seeing some real strong performance. We expect to be able to continue that. Scale helps us; deleverage hurts us. But I would say also that with respect to the WM distribution centers – Mike and I were chatting about this recently – that the results coming out of those DCs versus our legacy DCs from a productivity perspective are nearly 2 times x.

So when we think about what’s ahead of us, do we still have some blue sky in terms of production, productivity across the business, including SG&A, shared service, etc.? I believe we certainly do.

Mark Sigal: Okay. Then just understanding Haddon House is obviously new here, but just can you talk about some of the mix, gourmet ethnic versus natural and organic, perhaps conventional versus independent? And then I believe that they have fairly significant private-label. What percentage of the mix might that represent? And if you can give us any sense of the growth rate on private-label. Thanks.

Steve Spinner: We are not going to give you any specific detail around those numbers that you are looking for, but I understand why you want them. We will give some thought to giving you some more color on that next Monday. But one thing I would point out, which is a great comment, is, yes, they do have some phenomenal private brands within the specialty space that we are very excited about. But we will give that one some thought and maybe give you some color next Monday.

Mark Sigal: Thank you.

Operator: Thank you. Ladies and gentlemen, due to time constraints our final question will come from Joel Edelstein with Stephens. Please proceed with your question.

Joe Edelstein: Hi. Good morning, thanks for taking the question.

I know you have talked a lot about capacity this morning, even saying obviously that you are less than 80%. I think that’s pretty clear, just given the numbers. But I was hoping you could talk to how much revenue you think that the existing infrastructure could support. And then, secondly, as you do try to move quickly to fill that capacity, should we anticipate that there is more of a permanent step down in margin or is it more of that balance that you spoke of as you try to balance the demand from customers today?

Steve Spinner: Yes, Joe, unfortunately I think it puts us in a position where we are guiding and we’re not ready to guide yet on the capacity issue. I would tell you that a good thing about having too much capacity is it does put us in a situation where we don’t have to build any new DCs for a while.

Now, certainly if we had a new customer opportunity and it was right, we have the capital to put it in to new capacity and geographies that we are not in if we need to. But I don’t think we have ever disclosed the capacity question, so I think we would pass on that one.

Joe Edelstein: Okay, thanks. I guess we will look for some more details next week.

Steve Spinner: Great.

Operator: We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

Steve Spinner: Thanks. In closing, we are excited about the announcement this morning to acquire Haddon House, who’s unique product and service offering will play an important role in our continued strategy to build out UNFI’s gourmet and ethnic product categories across the country. Despite the near-term challenges we face.

We are committed to generating growth in a competitive environment and we’re excited about our pipeline of new customers and the expansion of relationships with current customers. We have invested in our fresh infrastructure and have confidence in our pipeline of new customers in this important product category. From an M&A perspective, we are optimistic about our opportunities to benefit some additional consolidation within our industry. Again, despite our 2016 challenges and the competitive industry condition, the foundation of UNFI’s business model remains strong, supported by history of growth, change, and execution. We are intently focused on improving our results and managing the controllable aspects of our business to increase profitability and enhance shareholder value.

Thank you for your participation in today’s call, particularly on short notice. Have a great day.

Operator: Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.