Operator: Good afternoon. My name is Sheryl and I will be your conference operator today. At this time, I would like to welcome everyone to the United Natural Foods Inc. Third Quarter Fiscal 2019 Conference Call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Steve Bloomquist, Vice President of Investor Relations, you may begin your conference.

Steve Bloomquist: Thank you, Sheryl and good evening everybody. We appreciate you joining us on UNFI's third quarter fiscal 2019 earnings conference call.

By now you should have received a copy of the earnings release issued this afternoon. The press release the webcast and the supplemental slide deck are available under the Investors section of the company's website at www.unfi.com. Joining me for today's call are Steve Spinner, our Chairman and Chief Executive Officer; Sean Griffin, our Chief Operating Officer; Mike Zechmeister, our Chief Financial Officer; and Chris Testa, President and Chief Marketing Officer. Steve, Sean, and Mike will provide a business update, speak about our performance in the quarter, and address our fiscal 2019 outlook. We'll take your questions after management's prepared remarks conclude.

Before we begin, I'd like to remind everyone that comments made by management during today's call may contain forward-looking statements. These forward-looking statements include plans, expectations, estimates, and projections that might involve significant risks and uncertainties. These risks are discussed in the company's earnings release and SEC filings. Actual results may differ materially from the results discussed in these forward-looking statements. And lastly I'd like to point out that during today's call, management will refer to certain non-GAAP financial measures.

Reconciliation to the most comparable GAAP financial measures are included in the schedule included in today's press release or the press release from our March earnings call. With that, I'll turn the call over to Steve.

Steve Spinner: Thank you, Steve. Good evening everyone and thanks for joining our third quarter earnings call. I'll start with some overall comments on the quarter and our business.

But before I do that, I'd like to cover some nomenclature changes which the company has adopted. We're well along the way towards integrating legacy UNFI and the acquired SUPERVALU conventional business which includes retail as well as the great private brand and professional service portfolio into one company with a singular reporting structure. Both headquarter buildings now carry the UNFI name and going forward, we will be referring to legacy UNFI as natural and SUPERVALU as conventional. Following my opening comments, Sean will provide more detail into our conventional results including our integration work. And Mike will finish with a review of our financial performance including comments on our fiscal 2019 outlook.

I am truly excited about where we are and what we've accomplished. Our future is bright as we emerge as the leading North American distributor of retail products and services throughout the 50 states Canada and the Caribbean. Our priorities moving forward are simple and bringing them to life

is exciting: one, to continue UNFI's core mission, values, and strategy; two, to execute financially in terms of year-over-year improvement to EBITDA, net sales, and free cash flow; three, Build out the Store, sell the entire portfolio of products and services, utilizing our new national organizations; four, deploy Thrive 2, UNFI's project to drive integration work streams and the power behind unique and exemplary experiences for our associates, customers, and suppliers; and five, to divest retail. These are the areas of focus that we believe will drive success for the new UNFI and we look forward to sharing additional color as we close out fiscal 2019 and talk to you about 2020 and beyond in September. UNFI has a long history of growth and integration success.

We know distribution well and I believe that based on our history of success over the last 10 years, we have created an organization that is redefining food distribution to retail throughout North America. Over the last 10 years, we have grown our revenue from $3.4 billion to over $21 billion, while changing, growing, and always looking around the corner for changes in consumer trends, macroeconomic shifts, and customer needs. The retail world continues to change dramatically and UNFI is poised to capture the growth associated with the changes ahead. Our customers need wholesalers of scale capable of serving a wide variety of products including organic, specialty, perimeter, chilled, frozen, services, and much more because consolidating their purchases means fewer deliveries and quicker turnaround. Scale and proximity to the customer drive our core economics and we are close to our customers with considerable scale as a result of the transformational SUPERVALU acquisition.

In early April, to accelerate this integration into one organization, we announced that we're now operating under a national UNFI leadership team that we believe will advance the execution of our long and short-term objectives. I have great confidence in this team. As a group, they know distribution well through broad and deep experience, they have consistently delivered on our strategies, they've worked on complex integrations in the past, and they know exactly what we're working to accomplish and have a sense of urgency to get it done. Our goal remains unchanged; to create the most capable and efficient supply chain network for retail in North America. We have a detailed plan and the leaders to execute it and I'm pleased with how well this organization has been performing against that plan.

In fiscal 2019, we're on track to deliver our cost synergy commitment of more than $36 million and I'm happy to reaffirm our longer term target of more than $185 million in cost synergies by the end of fiscal year 2022. Even more exciting is that we are beginning to see some of the revenue synergies develop through cross-selling of our professional services and broadened product portfolio. Let's get to the specifics of the quarter. Total net sales were $5.96 billion, an increase of $3.3 billion over last year. Sales on the natural side of the business increased 2.8% compared to last year as general softness across the industry continues to impact our topline.

Sales on the conventional side totaled $3.24 billion, a modest decrease from the same period last year. Looking ahead, as we integrate the businesses and focus on execution, cost, services, and product offerings, our near-term priority will be on growing adjusted EBITDA and free cash flow. While optimistic about revenue synergies from leveraging our Building out the Store strategy, we must ensure that our customer contracts reflect the value UNFI delivers while acknowledging the competitive environment. The retail environment continues to be challenging for many of our top customers who are now growing at more moderate levels. New store openings have slowed as retailers adapt to changing consumer trends.

However, we see signs of improvement ahead as higher inflation takes hold. Now, if you look at the last 10 years, we've seen positive results when consumer confidence declines and discretionary income moves away from restaurants and back towards retail and eating at home. And as a result, our business tends to be recession-resistant as evidenced by 2008-2009 where our core business continued to grow. As part of this environment that's captured recent headlines is the issue of tariffs and more specifically, those that could be levied on goods from Mexico which would mainly be produce where we have small exposure. In the short term we'd expect these tariffs to be a form of cost increase that would get passed through to customers and most likely the end consumers.

China is another country facing higher tariffs on goods exported to the United States, but we have very, very little exposure to the products on the most recent tariff list which are mainly in seasonal categories. Combined our inventories associated with China and Mexico are less than 50 basis points of total inventory. Adjusted EBITDA was $168.2 million in the third quarter tracking at the low end of the full year guidance range we provided in March. During the quarter we did continue to invest in improving operations at several conventional distribution centers. And these integration challenges are short term in nature and not structural to our business.

Third quarter earnings per share was $1.12 which included a $0.51 from a favorable adjustment to the impairment charge recorded last quarter net of restructuring and other charges. Excluding these items adjusted EPS would total $0.61. Let me touch on a couple of noteworthy accomplishments during the quarter. First in April we brought together 60 of the new UNFI leaders a truly milestone event for the company. Our business is no longer legacy UNFI or legacy SUPERVALU.

It's natural and conventional. We now have a singular name, singular core values, singular mission and a singular strategy. Second we're moving quickly towards opening a new distribution center in Centralia Washington that was announced earlier this year. Sean and I both spoke on the last call as well as in our January Investor Day about some of the challenges we've had in the Pacific Northwest. We articulated the strategy to consolidate from five DCs into 2 including the ground-up facility in Centralia that is on-track to begin receiving products early this summer.

That will quickly be followed by the first outbound customer shipments. We are currently laser focused on the process of ramping up and ramping down inventories in each building, testing and retesting systems and moving forward on our hiring and training plans. Third we continue to get encouraging feedback on the procurement side from our supplier partners where our supplier-related synergies continued to track on or better than planned. We finalized the organizational structure and are combining the talent of our conventional and natural category management teams to create a best-in-class organization. Fourth as part of our Thrive two integration activity during the quarter we converted four West Coast distribution centers on to our core business systems and completed the conversion to a single payroll platform.

Fifth, we are working hard to identify assets that can be monetized. During the quarter we sold a distribution center, six retail stores and our Shopper’s pharmacies for total proceeds of approximately $25 million. Also since the end of the second quarter we've terminated a number of vacant property leases that will create cash flow benefits over time as we stop the ongoing payments and liabilities. Sixth, we are in the process of bringing together our sales teams into a 4-region structure. The regional sales teams will be led by a region President and they will be responsible for sales of both natural and conventional products.

We believe this structure is necessary to allow our sales teams to customize programs for local retailers and execute our build out the store strategy. And we continue to refresh our Board. Recently we announced the appointment of Jim Muehlbauer. Jim comes to us with a varied background including the CFO role at two large public companies and we expect to add additional members to further enhance our Board's oversight and guidance as a considerably larger and more complex business. Finally before I turn the call over to Sean let me address the static of retail.

We continue to evaluate value maximizing alternatives for Cub and we've retained Greenhill & Co. to assist us in evaluating various alternatives for this business. Cub is a strong franchise with a 50-year history and leading market presence in Minneapolis, St. Paul and surrounding areas. With regards to Shopper’s, we continue to work with various potential buyers and we'll keep you updated as progress is made.

And as I stated earlier, we sold our Shopper’s pharmacies to Walgreens and CVS during the quarter and divested the remaining Shop 'n Save East stores. We continue to target exiting retail within the next 10 months. I am incredibly proud at what our team has accomplished in a very short period of time. We embrace the challenge. We embrace our culture.

We're excited about our strategy and we always move forward. With that let me turn the call over to Sean.

Sean Griffin: Thank you Steve and good evening everyone. Tonight I'll provide some comments on our conventional business as well as a brief update on the progress we're making on our integration journey. Overall, I'm pleased with how quickly we're bringing our two companies together, the things that we've accomplished this quarter that simplify our business and the favorable underlying gross margin and expense trends in the quarter in our conventional business.

Let me first start with distribution operations as that was a big part of the change in our guidance and a topic that I spent a fair amount of time addressing in our March call. As you may recall, we've been challenged by two network realignment projects one on the East Coast in Pennsylvania and one out West in our Pacific Northwest region. These challenges led to higher labor, transportation and shrink costs. And I'm pleased to say that we've largely stabilized these operations and we're executing better. Our service levels are up and we're improving our expense metrics each period.

That includes labor productivity. And in fact our operating expense as a percent of net sales was nearly 90 basis points lower in the last month of the quarter compared to the first. As Steve mentioned, we're excited to open our new Centralia Washington distribution center this summer which we expect will bring us and most importantly our customers many benefits. During the quarter our teams brought four distribution centers on to our common operating systems a critical step forward that frankly we had never endeavored before and it was tremendously well planned and executed allowing us to sunset the systems formerly used to run these facilities which simplifies our business, lowers our expense structure and continues to drive synergies. Having common systems creates operating efficiencies for UNFI as well as streamlines many customer facing processes such as ordering, invoicing and reporting.

Gross margins were solid and improved sequentially from the second quarter by approximately 50 basis points. Part of this improvement was our shrink expense. However shrink continues to run high -- higher than we would expect and represents an ongoing opportunity for the company. To address this we've tasked one of our experienced supply chain leaders with focusing on all aspects of shrink and improving our performance. And I'm confident that, we'll get that done over the coming quarters as we have a plan, we understand the root causes, and we know how to fix it.

Another key piece of our margin trend is improved supplier promotional programs where we've been able to work with our vendor partners and develop new and innovative programs that deliver success for our suppliers, our customers, and UNFI. Although margins are solid and expenses are moving in the right direction, total net sales for conventional were down approximately 3.6% on a comparable basis year-over-year. We are seeing challenges in the center store as well as in a limited number of geographies, where we have experienced temporarily lower levels of service. We know we can fix that. Moving forward, I believe we can recapture a portion of the lost center store business through our cross-selling initiatives, which capitalize on our broader product offering.

This will be particularly true, when we finalize our regional sales organization this summer and we can move forward in a more cohesive singular manner. Let me next provide some comments on the overall integration, which continues to go well and largely on plan. There is a tremendous amount of hard work being done, much that is being accomplished in a relatively short period of time. And let me highlight a few of these accomplishments. First, as Steve mentioned, we are on track to move forward with our first network DC consolidation project in the Pacific Northwest.

Consolidating down to two, state of the industry DCs from five currently will be a major accomplishment for our team and we are on track to begin receiving products next month. Second, staying on our DC consolidation strategy, we have completed planning on our second consolidation project. As we discussed at January's Investor Day, we believe that we could have several opportunities to consolidate volume and reduce the number of distribution centers that we operate. This will allow us to lower our operating costs and potentially improve our overall working capital. Our next steps are to validate our assumptions around growth, building capacity, our transportation expenses, and start-up costs.

Third, we mentioned on the last call that, we were preparing to convert to a single payroll system. This was successfully accomplished in early May. We've migrated all UNFI associates on to a common self-serve portal in addition to consolidating all new hiring and onboarding associates to a single platform. Having completed this, we have eliminated a duplicative service provider. Lastly, we're now midstream in the process of assessing and rationalizing our administrative offices.

We believe we have a meaningful cost savings opportunity by reducing the amount of square footage that we currently occupy. We'll do this in a manner that improves business adjacencies, balances our associate populations across buildings, and creates a dedicated workspace for UNFI. Certainly, as you can tell, there is a great deal of good work happening and as we focus on our key priorities. First, improving our customer experience, everything we do must focus on our customers, what we can do to make our customers stores more appealing and then by that more successful. That goes all the way from selling a broader variety of products both natural and conventional to meeting the needs of our shoppers to making sure their orders are delivered on time to making sure that they know of the many relevant services that we can provide to lower their cost structure and improve their consumers experience.

Second hit our synergy numbers. It is critically important that we remain focused on our overall cost structure and achieve the expense reductions that we've communicated and remained committed to. We remain on track to do just that and are rigorously reviewing our progress to make certain that it continues. Third, look for ways to enhance our profitability. I spoke about this on our last call and Steve referenced it a few moments ago.

When we sell more products to our existing customers, we lower our costs and increase our operating margins. This is a win for our company and our customers, and it is the cornerstone of our Building out the Store strategy. All-in-all I am pleased with and encouraged by the quarter. We accomplished a great deal and we are building the muscle that will be necessary as we move forward down the road on our integration plan, all the while staying focused on what matters in our short-term, building profitable sales, margins and growing our EBITDA. With that, I'll turn the call over to Mike.

Mike Zechmeister: Thank you, Sean, and good evening, everyone. I will cover our third quarter financial performance and comment on our fiscal 2019 outlook. Let's start with our third quarter results, which again include a full quarter contribution from legacy SUPERVALU or conventional business. Q3 net sales were $5.96 billion, an increase of approximately $3.31 billion, or 125% compared to Q3 last year. The conventional business added $3.24 billion, and I'll talk about the comparability of the conventional net sales versus a year ago in a moment.

Legacy UNFI's natural net sales accounted for the remainder, which equates to year-over-year growth of approximately 2.8%. In the third quarter, we experienced inflation of 1.79%, which represents the highest we've seen since Q2 of fiscal 2016. Inflation on the conventional side of the business was approximately 45 basis points higher than on the natural business. As a reminder, from a channel perspective, legacy SUPERVALU net sales are broken out into UNFI's historic channels. For Q3, the supermarket channel grew 420% versus the third quarter of last year, and represented 61.6% of total net sales.

Conventional supermarket net sales were $2.97 billion in Q3, and as Sean pointed out represented a comparable decline of approximately 3.6% versus last year when conventional was not part of the UNFI business. Excluding this acquired conventional business, legacy UNFI's supermarket channel net sales would have decreased by 1.8% versus Q3 last year. Please note that a year ago SUPERVALU was a customer of UNFI in a cross-stock program. As a result, each company independently recognized the cross-stock program net sales. In the combined company, these consolidated net sales are only recognized once, and therefore, get reflected as lower net sales growth year-over-year.

Adjusting last year's results for these duplicative cross-stock sales, natural supermarket channel net sales would have decreased by 0.4% versus Q3 last year. Net sales in the independent channel grew 20.2% and represented approximately 13.9% of total net sales. Excluding the impact of the acquired conventional volume independent channel net sales would have grown approximately 2.5%. Third quarter supernatural net sales grew 11.1% over Q3 last year and represented 18.5% of total net sales. Lastly, our other channel grew by 36.5% and represented 6.0% of total net sales.

Natural net sales in this channel decreased 15.3% driven primarily by e-commerce declines where we have not yet cycled the declines from the rationalization of lower profit businesses. Let's turn to gross margins. Gross margin for the third quarter was 13.22% of net sales, a decrease of 219 basis points compared to the same period last year. The largest driver of this year-over-year change was the mix impact of adding the conventional business, which operates at a lower gross margin rate. You may also recall that in Q3 last year, we recorded a $20.9 million favorable impact to gross margin resulting from a change in estimate related to our accrual for inventory purchases.

It is estimated that the majority of the favorable impact to last year was associated with the third quarter and the remainder related to Q2 and to a lesser extent Q1 and prior. This year's Q3 gross margin was also negatively impacted compared to last year by a shift in customer mix within the natural business where growth with customers where we have lower gross margins outpaced growth with customers where we have higher gross margins. Inbound freight expense improved again sequentially in Q3 and is back in line with expectations after having been a headwind in the back half of last fiscal year. Finally, we recorded non-cash LIFO expense in Q3 that represented approximately 12 basis points of net sales. Third quarter operating expenses totaled 12.37% of net sales, an increase of seven basis points compared to 12.30% in Q3 last year, driven by a 38 basis point increase in depreciation and amortization and largely offset by acquisition-related cost synergies.

In the third quarter, our natural business fuel cost decreased by three basis points as a percent of net sales, compared to Q3 of fiscal 2018 and represented 44 basis points of distribution net sales. Our diesel fuel cost per gallon increased approximately 90 basis points in Q3 versus Q3 of last year, while the Department of Energy's national average for diesel was up approximately 0.7% or $0.02 per gallon over the comparable period. Q3's share-based compensation expense was $9.3 million and represented 16 basis points of net sales compared to 30 basis points in Q3 last year. The improvement was due primarily to acquisition-related synergies. Operating income for the third quarter, which excludes discontinued operations was $69.7 million compared to operating income of $82.2 million in Q3 last year.

Q3 operating income included $50.1 million of additional depreciation and amortization expense driven by the acquisition and a favorable non-cash adjustment of approximately $38.3 million to the goodwill impairment charge that was taken in the second quarter as we advanced our purchase accounting work. I'll provide some additional color on that shortly. Q3 operating income also included restructuring, acquisition and integration-related costs that totaled $19.4 million and the unfavorable comparison to last year's change in estimate relating to the accrual for inventory purchases. Adjusted EBITDA for the third quarter was $168.2 million, an increase of 50% compared to last year's $111.9 million. This includes $34.1 million of adjusted EBITDA reported in discontinued operations.

As a reminder, discontinued operations adjusted EBITDA is benefiting from the GAAP requirement to include certain retail-related costs in continuing operations instead of the remainder of retail in -- instead it went to the remainder of retail in discontinued operations. These costs include rent expense for the retail stores and overhead costs related to retail. The requirement to carry these retail-related costs in continuing operations is the primary reason we are providing adjusted EBITDA guidance on a consolidated basis. You'll notice that we've updated the presentation of adjusted EBITDA in the press release tables. I hope you find this format helpful.

Net interest expense in Q3 was $54.9 million, which represents an average annualized borrowing rate of approximately 6.5%. At the end of the third quarter, we had approximately $2.2 billion of interest rate swaps in place, resulting in approximately 72% of our debt portfolio, now effectively having fixed interest rates with swap maturities staggered over the next six years. Q2 GAAP EPS was $1.12 per fully diluted share, which included the $38.3 million pretax favorable adjustment to goodwill and the $19.4 million of pretax restructuring acquisition and integration costs. Excluding these items and a few smaller items outlined in the press release, adjusted EPS was $0.61 per share, compared to adjusted EPS of $1.04 in Q3 last year, which excluded $0.02 per share in expense related to tax reform. The year-over-year reduction was driven primarily by operating income items that I described previously and higher acquisition-related interest expense.

Next, I'll address the $38.3 million favorable impairment charge adjustment. As a part of our ongoing acquisition-related purchase accounting efforts, we refreshed the preliminary fair value estimates of legacy SUPERVALU's net assets, which affected the initial goodwill attributable to the acquisition. The primary adjustment was an increase to intangible assets. In total, this change to the preliminary fair value estimates resulted in an updated year-to-date impairment charge of $332.6 million, which compared to the $370.9 million charge recorded in the second quarter necessitated $38.3 million favorable adjustment --. As a reminder, the carrying value of acquired SUPERVALU net assets may continue to be preliminary for up to one year following the close of the acquisition, which is Q1 of fiscal 2020.

Q3 ending working capital excluding short-term debt was $1.67 billion compared to $1.63 billion at the end of Q2. Q3 working capital included sequential improvements in inventory, accounts receivable and accounts payable, which were more than offset by the impact of our 338(g) tax elections payment and changes related to the payout of deferred comp liabilities. Capital expenditures for the quarter were approximately $57 million or 0.96% of net sales, which brings the year-to-date total to approximately $137 million or 0.91% of sales. We are expecting higher than year-to-date capital expenditures as a percent of net sales in the fourth quarter due primarily to the Pacific Northwest DC consolidation and acquisition-related information technology investments. Outstanding total balance sheet debt and capital lease obligations at the end of Q3 net of cash and cash equivalents was $3.16 billion, a reduction of $21 million since the end of Q2.

That brings our total net debt reduction since Q1 to approximately $187 million. This net debt reduction occurred despite a $59 million cash tax payment in Q3 related to the 338g tax elections, which I mentioned on our March 5th call. In Q3 we also received approximately $25 million in net proceeds from the sale of assets, which was recorded in discontinued operations and primarily the result of the sale of several retail stores and a non-operating distribution center that previously serviced Shop 'n Save stores in St. Louis. Moving to leverage.

Our Q3 net debt-to-adjusted EBITDA leverage was approximately 5.1 times excluding operating leases and our net adjusted debt-to-adjusted EBITDAR was approximately 4.6 times. These leverage calculations are based on Q3 ending face value of debt less cash on hand, the low end of our adjusted EBITDA guidance for fiscal 2019 and adjusted to include a full year contribution from conventional. At the end of Q3, we had $832 million of available liquidity through a combination of outstanding lender commitments under our asset based lending credit facility and balance sheet cash. This represented the highest level of available liquidity in the company's history. Let's turn to our full year outlook for fiscal 2019.

We're updating our guidance for the full year GAAP EPS. We are now expecting a loss of $5.85 to $5.65 per fully diluted share, which is a $0.55 per share improvement at the midpoint versus the previous guidance of a loss of $6.50 to $6.10 per share. The improved EPS guidance is driven by three factors; first, is the $38.3 million favorable impairment adjustment. Second, is the expectation of additional -- of an additional $10 million in restructuring, acquisition and integration related expenses due primarily to our Pacific Northwest DC network realignment, which brings our estimate for fiscal 2019 restructuring, acquisition and integration to $182 million. Third, we are now tracking to finish the year closer to the low end of the adjusted EBITDA range of $580 million to $610 million that we provided in March.

Several factors are driving our outlook for adjusted EBITDA; first, total net sales are also tracking closer to the low end of the $21.5 billion to $22 billion range that we provided in March for the reasons that Sean and Steve discussed earlier; second, as Sean stated shrink at our conventional DCs are improving but remains higher than we've projected back in March; and third, our full year LIFO charge is expected to be higher as inflation has run higher than previously anticipated. As a reminder, our fiscal year outlook includes the 53rd week in Q4 and the conventional business for 41 weeks. It also assumes that we continue to own and operate both Cub and Shoppers for the remainder of this fiscal year. As a reminder if the divestiture of Shoppers or Cub were to happen prior to the end of the fiscal year, we would expect to incur additional onetime expenses. With regards to adjusted EPS there's no change to the previous guidance of $2 to $2.40 per fully diluted share that we provided in March.

Moving to taxes. Our outlook for cash taxes related to business operations remains unchanged at less than $20 million for fiscal 2019. As previously indicated that excludes the $59 million tax payment we made in Q3 related to the 338g tax elections. As a quick recap, 338g tax elections treat the SUPERVALU acquisition for tax purposes only as an asset purchase rather than a stock purchase. They allow UNFI to utilize a significant portion of the $2.9 billion capital loss carry forward that SUPERVALU generated from the divestiture of the Albertsons business in calendar 2013.

Under these elections, we will be able to step up the tax basis of the acquired assets to fair market value, which provides UNFI with increased future depreciation and amortization deductions, lowers our taxable income and reduces future cash tax obligations. To achieve the 338g benefits, we made a $59 million cash tax payment in February for ordinary income associated with the elections. Net of this payment, we expect these tax elections to generate cash tax savings of an estimated $300 million over the next 15 years. The 338g related tax, or cash tax savings began as expected in Q3. For fiscal 2020, we anticipate a net cash tax benefit of at least $20 million.

And it's important to note that these cash tax savings are incremental to the cost synergies of greater than $185 million that Steve referenced earlier. Normally we would provide an adjusted tax rate but given the negative expected GAAP earnings and positive adjusted earnings, we believe an adjusted tax rate is not as helpful as providing the cash taxes we expect to pay in fiscal 2019. In closing, I'd like to remind investors that our year-end earnings call in September will include fiscal 2020 guidance as well as updated long-term guidance and associated commentary on each. Fiscal 2020 will be a 52-week fiscal year compared to the 53 weeks in fiscal 2019 and the conventional business will be included for a full 52 weeks versus the 41 weeks included in fiscal 2019. Now, I'll turn the call back to Steve.

Steve Spinner: Thanks, Mike. One point of clarification, GAAP EPS earnings are $1.12 for Q3 not Q2. So, earlier I spoke about our April leadership meeting and the way it brought our people closer together. One outcome from that meeting was the formalization of the five core priorities for the organization to focus on as we finish fiscal 2019 and look towards next year, which I mentioned earlier. We've communicated this to every associate so all of us are crystal clear on what is most important to us as an organization.

First, we'll run our businesses with a strong focus on culture. Our journey toward operating as one company is progressing well. We've thoughtfully evaluated our people, our processes and systems and have a path forward with the best of all of these. Internally we're talking differently about the business and ourselves, which is critically important to becoming a single unified organization. And we're focused on common goals and not differences based on historical practices.

Second, we'll build out the store by cross-selling our products and services. UNFI has embarked on a mission to transform food distribution and that includes aggressively selling and taking advantage of the unmatched breadth of products and services we now offer our customers. The SUPERVALU acquisition lends itself to meaningful cost synergies but the revenue opportunities are significant as well. And as Sean said on the last call, we're just getting started. And third, we'll improve our financial results and deliver on the long-term commitments we've made.

We are committed to delivering on the merit and the value of this deal and I'm confident we'll hit the FY 2022 net sales adjusted EBITDA and leverage numbers we provided in January. And fourth, we'll thoughtfully and economically divest retail, which I addressed earlier. And finally, we'll continue to execute against our integration plans. Our teams are led by experienced leaders, and today, I'm really pleased with how we're performing against our internal goals and milestones. As the integration continues to evolve, we'll migrate from our focus to-date on taking out cost to a longer-term transformation that will fundamentally change the way business is done.

And I look forward to updating you on our progress along the way. We provide a lot of information to you today, with a lot of great work that was done in the quarter. And with that, we're ready to take your questions.

Operator: [Operator Instructions] The first question comes from Karen Short of Barclays. Please go ahead.

Your line is open.

Renato Basanta: Hi. Good evening. This is actually Renato Basanta on the line for Karen. Thanks for taking my questions.

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

Chris Testa: Yeah. Hi. This is Chris.

I'll take that question. It's not due to customer losses. It's more due to the dynamics that Steve and Sean were talking about earlier. So new store openings are no longer 200 bps to 300 bps growth that we've seen. We are seeing store closures within that channel.

It is by far the most competitive channel that's out there, as these independent channels' operators are adapting their stores to adjust to today's consumers. I'll also say those that are adjusting, there are some real bright spots in that channel. There's some double-digit growth happening within that channel with the formats that are appealing to today's consumers.

Steve Spinner: And I would also add that it's also the channel that has one of the greatest opportunities for us in terms of cross-selling. A lot of the naturals are starting to add to conventional non-food and related types of products, produce and protein and we're really at the beginning innings of that whole process.

So we've seen this kind of cycle up and down before. But we're confident that with a lot of the things that we have going on internally we'll see that return. Renato Basanta : Okay. That's helpful. And then I guess as you think about your DC network consolidation plans going forward, I think it will be helpful to hear about how you sort of safeguard against some of the issues you've faced in Pennsylvania and the Pacific Northwest.

And then also given what you've learned in those regions, does that maybe necessitate a slower or maybe more patient approach to the consolidation plans that could potentially slow some of the synergy realization?

Sean Griffin: Yes. That's a good question. This is Sean. First of all, I think it's -- the issues that we've experienced in Harrisburg, Pennsylvania distribution center, and frankly in the Pacific Northwest, I think it's less about speed and how quickly the consolidation efforts are taking place than it is about planning. And we certainly have learned a lot along the way and that will inform how we go forward.

I think it's important to call out that in both of these regions we're in a much, much better position this quarter today than we were on our previous call in the second quarter from expense metrics to service metrics, which of course are most important for the customer. We're well on our way through stabilization and getting to improvement. So I mean, the team has learned a lot. These things are complex. These type of consolidation activities, multiple DCs involved are complex.

But we think we've got a good handle on it going forward, and we're not certainly conceding time.

Steve Spinner: And one thing I would add, because it's important, remember that Harrisburg and the Pacific Northwest had been recently acquired by SUPERVALU, and then we came along and bought SUPERVALU. So that dynamic is not going to happen again. So there was a great deal of change both in personnel and in systems and in processes, which further complicated the matters in those DCs. And so that dynamic just is not going to happen again.

We got the four DCs consolidated into our legacy systems platform. We did it well and we will be careful and thoughtful as we go to execute the network optimization in the future. But the biggest difference is we just don't have that dynamic of SUPERVALU bought these DCs and then we came along and bought those. It just added a whole level of complexity that we don't have to deal with anymore.

Sean Griffin: Good point.

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

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

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

Sean Griffin: And certainly not on a channel basis.

Steve Spinner: Yes.

Renato Basanta: Okay. Thanks.

Best of luck.

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

Unidentified Analyst: Hi.

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

Sean Griffin: Yes. Hi, Blake. This is Sean. Actually we did convey the rate, and frankly it was negative 3.6% on a prior year comparable. And so let me just talk a little bit about that.

So, largely the declines are coming from the center store and specifically our independent supermarket customer center store. So there is a lot of competition at retail. I think everyone is aware of that. And customers, our customers that are investing in their formats are winning and the customers frankly that are not necessarily investing are struggling. And frankly, some of what we're seeing is really the catalyst for why we're putting our companies together.

The customers that frankly are struggling in the center store, they need our help. And where they need our help is in better-for-you food. It's in differentiated food. And frankly, we bring an assortment to the game that is second to none. It's just -- it's just going to take a little time.

So we're disappointed. I certainly am disappointed in the negative 3.6%, but we've got many, many customers that are winning and doing quite well.

Unidentified Analyst: Thanks for that. I guess building off that obviously it's a competitive environment. How is your sales pitch to these retailers on investing in your services? Because I know you talked about the cross-sell and the revenue synergies.

I imagine that's part of an investment for them. They have to want to have visibility into the improvement for their growth. Can you talk about that sales process and maybe some of the solutions your adding that you're selling to them?

Sean Griffin: Yes. Sure, sure. I will and I'll allow Chris an opportunity to chime in as well.

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

Chris Testa: Yes. We are -- the largest opportunity that exists with those services is transitioning those services on to the natural channel.

So it's a different person you're speaking to. You're speaking to payroll departments. You're speaking to accounting folks versus the grocery buyer that you're used to speaking to every day. So the sales pitch has gone well. It's a little bit longer selling cycle because it's not that same person you've been talking to every day.

But we're starting to put some points on the board there because the customers are seeing the value, the monetary value that we have -- that we bring with bringing scale to those services to these smaller customers. So there's a real financial benefit to them. And once they realize that, we're starting to get some momentum going. We expect more to continue.

Sean Griffin: I would just -- lastly comment that we've reorganized our professional services organization under a head of house.

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

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

Mike Zechmeister: Yes. This is Mike. We haven't guided specifically to the quarters and we haven't guided to discontinued operations on the year. It was important for us to provide guidance on a consolidated basis and this is really the result of the gap requirement to include many of the retail-related expenses in continuing operations.

As a result of that the discontinued operations EBITDA number's larger than it would be if we had combined those expenses, for rent and for allocated retail-related expenses all into one unit. So that's why we do this as a consolidated basis and also why we didn't provide guidance separately for continued operations and discontinued operations.

Unidentified Analyst: Got it. Thanks so much.

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

Please go ahead. Your line is open.

Anthony Bonadio: Yeah, hi guys. It's Anthony Bonadio on for Ed. So just quickly to circle back on tariffs and specifically the recent announcement around Mexico, it sounds like you guys are estimating a pretty minimal impact if any.

Is that right? And is there anything you can guide us around this?

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

Sean Griffin: Seasonal general merchandise.

A –

Steve Spinner: Yes.

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

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

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

Sean Griffin: Yes, yes. So it's about inspiring discipline frankly and reaching a balance. Make no mistake that it is a competitive landscape. The terrain is competitive and frankly we have a DNA in our company around protecting our customers. And we're going to do that.

However we also have a responsibility to make sure that our services balancing our cost to serve against the profitability of our entire customer base is part of the process. So I'm really not interested in getting into any specifics necessarily, but suffice to say that we are establishing threshold and inspiring a great deal of discipline in our company around balancing the value proposition that we bring to our retail customers with a level of profitability that is aren't that balanced.

Anthony Bonadio: Got it, really good there for now. Thanks guys.

Sean Griffin: Thank you.

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

Rupesh Parikh: Good evening and thanks for taking my question. So I guess I think this question, you may not answer, but I'm going to ask anyway.

So as we look at your longer-term targets that you provided at the Analyst Day, I know you're going to update it with your -- I guess later in September. But is that still intact? Or is -- or would you say that there is -- we'll have to wait for a new update for you guys in September?

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

Rupesh Parikh: Okay. And then I guess the other question I had is so clearly, Steve you made a comment to increase focus on adjusted EBITDA and free cash flow and it seems like a shift away from the revenue line.

So if you could just help us understand in terms of what's driving that shift and whether that's competitive driven or just any more color you can provide there?

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

And that is EBITDA, EPS, free cash.

Sean Griffin: Yeah. And I may just make a comment that as it relates to setting the compass north in terms of revenue, we're in the process under Chris -- Chris' leadership at reorganizing our regional sales organization, Steve described with common practices and approaches and strategies around growing revenue under region presidents. So we have very local face of the company with some real decentralized autonomous selling both out there getting it done. And frankly, we have never had more opportunity to grow our company's top line than we have today.

Our pipeline both from a natural and conventional perspective are very solid, and frankly most importantly, the assortment -- the breadth of assortment that we bring to our customers in terms of solutions solving these center store issues with some customers that are not performing, we have what gets that done. So, although, we're identifying specific metrics around profitability, please don't for a second take away that we're not focused on the top line because we are every day.

Rupesh Parikh: Okay. Great. And then if I can slip in just one housekeeping question.

So, Mike, is there any way -- so I know there are some items related to discontinued operations -- in your continuing operations. I know you have that rent expense of $11.6 million in your press release. Is there a way to understand like the total magnitude of items that are currently sitting in continuing operations?

Mike Zechmeister: Yeah. The retail related expenses that sit in continuing operations we referenced them earlier on a partial year basis as being approximately $80 million. You'd called out for the quarter $11.6 million.

That's really specific to rent expense. That doesn't include the allocated expenses that would be retail specific. If you put those together, you're talking about $10 million -- $15 million to $20 million in the quarter. But as we get into next year and guidance for next year in September, we'll give you a better sense of what those expenses are expected to be when we divest retail, because those expenses will go away.

Rupesh Parikh: Okay.

Great. Thank you.

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

Kelly Bania: Hi. Good evening. Thanks for fitting me in with some questions here. Just wanted to first talk about sales, because in order to reach the low end of your target which is about $21.5 billion, I think you'd need about a $400 million to $500 million acceleration in the run rate relative to where you've been for the past two quarters. And so, I'm just trying to understand if that's the message and why that would be realistic.

And as we think about just where sales are tracking, can you help us understand what would kind of be organic run rate or organic rate for the quarter for SUPERVALU conventional -- the conventional side of the business?

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

Kelly Bania: Okay. That's helpful. And then can you talk about -- just I'm trying to understand the softness.

Is it more attributed to SUPERVALU or UNFI? Or would you equally attribute softness in reaching the low end to both sides of the business? Just trying to understand what's happening underneath.

Sean Griffin: Sure. Hi. Kelly. This is Sean.

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

Steve Spinner: Hi, Kelly. It's Steve. I think I would add that we're in a really interesting kind of consumer dynamic right now. The formats -- the retail formats are changing. The stores themselves are getting smaller, not bigger.

The successful formats are migrating to more perimeter, more fresh, more better-for-you products. And so those stores are in a state of change. Right now, as I mentioned in my script, there's a lot of discretionary income and so, for example, the foodservice, both in terms of distributors and retail are doing fairly well. Well, if you get any kind of modification in the overall discretionary spending that will bring people back into retail and we'll have the opposite effect of what's happening today. I think e-commerce continues to have a really interesting effect as retailers continue to invest lots and lots of money in e-commerce.

Less consumers from our perspective are coming into the stores, because more are buying online click and collect. But when a consumer doesn't come into the store they tend to buy less. And so there's just a lot of interesting dynamics. And it's more cyclical than it is structural and I think it will return. But right now we just have kind of the best of everything hitting us at the same time.

Steve Spinner: Okay. I'm going to wrap us up. Again, we provided you with a lot of information today. Again, I want to thank you for joining. And as you can see we're excited about what we've accomplished.

More importantly, we're optimistic about the value creation associated with the new UNFI. Thanks again and have a great summer.

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