United Natural Foods, Inc. Price & Performance (UNFI)

Good morning, everyone. And thank you for joining us on UNFI's second quarter fiscal twenty twenty five earnings conference call. By now, you should have received a copy of the earnings release issued this morning. [indiscernible] The press release and earnings presentation, which management will speak to, are available under the Investors section of the company's website on the Events tab. We've also included a supplemental disclosure file in Microsoft Excel with key financial information. Joining me for today's call are Sandy Douglas, our Chief Executive Officer and Matteo Tardidi, our President and Chief Financial Officer. Sandy and Matteo will provide a business update after which we'll take your questions. Before we begin, I'd like to remind everyone that today's comments made by management 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. I'd like to point out during today's call management will refer to certain non GAAP financial measures. Definitions and reconciliations to the most comparable GAAP financial measures are included in our press release and the end of our presentation.

And finally, as we stated on our last call, we've changed the sales reporting on the face of our press release which now breaks down our revenues in a manner consistent with the previously announced realignment of our wholesale business. To provide historical context, last week we posted prior quarter sales under this updated approach to our website. We believe these changes will give you additional insight and transparency into our multiyear strategy and sales performance. I'd now ask you to turn to Slide six of our presentation as I turn the call over to Sandy. Thanks, Steve, and thank you everyone for joining us this morning. As we shared in our release, we delivered another quarter of improving financial results, and operational execution. While achieving key milestones of our multiyear plan.

Our results also reflect solid sales growth, and adjusted EBITDA growth of over 13%. And significant improvement in year over year free cash flow. As a result, we've again raised our full year outlook for all financial objectives other than capital spending and remain firmly on track to deliver our longer term fiscal twenty twenty seven targets. And to continue creating sustainable shareholder value. Today, I'm going to focus on three key areas. First, I'll describe how we are working to increase the value we offer to both customer Then I'll discuss some accomplishments within our multiyear plan and highlights from our results in the quarter. We've outlined our strategy of adding value for our customers and suppliers, while also improving UNFI's free cash flow, strengthening our balance sheet. And we believe our recent results validate our strategy and demonstrate that we're delivering improving operational execution as we work to embed lean management practices throughout the organization. We've strived to learn and adapt. As we've implemented our plans soliciting feedback from both customers and suppliers on what we're doing well and importantly areas in which we can improve. We routinely evaluate our potential to improve and create more value for all of our key stakeholders.

And by so doing, we believe our value creation opportunity continues to grow.

We expect our focus on continuous improvement to increasingly benefit the customers and suppliers we partner with. Driving greater sales and profit opportunity for our mutual businesses. In turn, we anticipate we will continue to create sustainable shareholder value. We have identified new areas to add value and increase effectiveness and efficiency. This includes opportunities to improve the customer and supplier experience, in our wholesale distribution business, expand services catering to key customer groups that have historically been underserved by the digital and professional services available in our industry [indiscernible] elevate our merchandising capabilities and make targeted investments in our private brands program to ensure that we have the unique innovative items retailers need to drive relevance and value with consumers. These are all opportunities that would be incremental While we've been identifying new areas of value creation, we've also had another strong quarter achieving key milestones within our multiyear plan. Matteo's leadership has helped us become more effective and efficient. Across our operations and our teams are embracing the principles and power behind Lean. We've extended Lean daily management into additional distribution centers including reducing shrink down to the second lowest level as a percentage of sales in the past ten quarters.

Lean daily management is now practiced at nine DCs and we plan to continue to methodically expand this discipline across our network. Importantly, these practices not only strengthen our operating efficiency, but also deliver improvements in effectiveness and accuracy that benefit our customers and suppliers. We also continue improving our effectiveness and efficiency through targeted optimization within our distribution network. We successfully consolidated our Fort Wayne, Indiana distribution center in mid February and transferred its volume to other more modern and efficient Our previously closed DC and Billings is also now under contract and the sale is expected to be completed in the fourth quarter of this year. With proceeds to be utilized to further reduce net debt. Our Fort Wayne and Bismarck DCs are actively being marketed as we've mentioned, we will not trade time for value as we seek to maximize our proceeds from these sales. As part of our network optimization, we're also working to evolve select customer relationships. To drive win win solutions that are mutually beneficial to both parties. We've already completed extensive work across our customer base to improve key agreements in most cases we've successfully achieved mutually beneficial outcomes for UNFI and our customers.

We're now focused on doing the same for a few remaining agreements. While our goal is always to reach a win win agreement, when a win win agreement is not possible, we'll explore a mutually agreeable plan. In all cases, we are continuing to take actions that support our customers and suppliers and accelerate our multiyear financial targets to create shareholder value. Lastly, as we announced in January, we have taken steps to realign our wholesale business into two product centered divisions. That we expect will enable us to offer more differentiated and tailored solutions to customers and suppliers. One division will be focused on conventional grocery products and the other will be focused on natural, organic, specialty and fresh products. The basis of our multiyear strategy was a deep understanding of the unique ways that we can add value for customers that are included in the growing $90,000,000,000 plus target market we previously described. We believe these new more focused divisions supported by centers of excellence that will scale enterprise wide capabilities will enable our commercial teams to provide a more customized product and service centered experience. This increasingly effective and responsive operating model is intended to help our customers and suppliers differentiate compete We expect most of the organizational changes required to support this realignment will be completed by the end of this fiscal year.

The strategic actions we took during fiscal twenty twenty four and thus far in fiscal twenty twenty five to strengthen our foundation and execute our multiyear plan are delivering results. During the first half, adjusted EBITDA grew nearly 14% We free cash flow generation climbed nearly $250,000,000 and net leverage has been reduced to 3.7 turns. This is the lowest net leverage level since fiscal twenty twenty three. As Matteo will describe in more detail, we expect to build on this performance during the second half of the year. In closing, as we execute our strategy, we become even more confident our multiyear objectives. Long term trajectory and in our ability to add value for retailers and suppliers across the food retail industry. As I described, we're also continuing to identify further opportunities for value creation.

We are focused on becoming the most efficient value creating partner for our stakeholders, which in turn creates more UNFI associates who serve our customers and suppliers with dedication every day. Together, we remain confident our plan will continue to drive sustainable shareholder returns. And with that, let me turn it over to Matteo to discuss our Q2 results lean progress and revised outlook.

Matteo?

Thank you, Sandy, and good morning, everyone.

Thanks again for joining our second quarter earnings call. As Sandy stated, our operating momentum, execution and performance have continued to accelerate during the first half of fiscal twenty twenty five. We remain confident in our multiyear strategy and the corresponding longer term financial objectives we outlined during our fiscal twenty twenty four year end call. Today, I will provide additional insight into our second quarter results, including our free cash flow generation and capital structure, and comment on our updated outlook for fiscal twenty twenty five. With that, let's review our Q2 results. Turning to Slide eight, You will see the walk on this slide that reflects the updated sales disaggregation Steve Our second quarter sales grew nearly 5% to $8,200,000,000 Our gains in the quarter were led by our natural products business where sales increased by over 8% compared to last year's second quarter. Primarily reflecting higher sales and category penetration existing customers. Our conventional products business was up just over 2%, reflecting new business wins and new customers over the past four quarters. Across our wholesale business, volumes were up about 3% which represented another quarter of sequential acceleration and a continuation of the favorable trends we cited as we exited fiscal twenty twenty four.

This broadly outperformed the key industry Nielsen benchmarks and partially reflects the benefit of new customer additions will begin to cycle later this year. Inflation was largely unchanged sequentially at approximately 1.5% which was close to a percent lower than last year's second quarter. Total sales in our retail business were down about three primarily the result of five store closures over the past twelve months. On an ID basis or same store sales basis, sales were down about 40 basis points a sequential improvement of about 100 basis points This also reflects positive ID sales at Cub, the larger of our two banners after being roughly flat in Q1. Moving to Slide nine, let's review profitability drivers in the quarter. Overall, you can see that our wholesale business drove the growth in the quarter. Wholesale gross profit dollars net of higher operating costs were up nearly $20,000,000 This was largely due to higher volumes. However, our consolidated gross margin rate excluding LIFO declined 20 basis points compared to the prior year period to 13.2% of net sales.

This was driven by a lower wholesale margin rate as well as a mix shift toward the wholesale partly offset by a higher rate in retail. In wholesale, our gross margin rate declined about 10 basis points versus last year's Q2, largely due to changes in customer and product mix, and some target strategic commercial investments. These impacts were nearly offset by innovation and efficiency initiatives including value adding supplier programs and the lower level of shrink Sandy referenced. More than offsetting this gross margin rate decline was continued solid execution and management of our operating expenses. Which compared to last year's declined by approximately 40 basis points as a percentage of sales. As we've emphasized before, we are laser focused on improving processes and removing waste so we are better able to bring value and improving service levels to our customers and suppliers. This improving efficiency also partially reflects some benefits from the customer mix shift impacting our gross margin rate. Growing more quickly with large existing customers has benefits to route optimizations and drop sizes As Sandy mentioned, have now rolled lean daily management out to 9DCs and we're pleased with the improvements we are seeing. Several of the newer implementations have already seen initial low single digit productivity gains which is a good progress to the higher gains we ultimately expect.

This is coupled with improvements in safety and delivery quality. Equally as important are the lessons that we have learned and the skills we're applying to become more proficient. Teams are strengthening their ability to problem solve, to effectively reidentify and document countermeasures and a culture of championing breakthrough thinking being embedded across our organization. These actions along with the other strategic initiatives undertaken in fiscal twenty twenty four and to date in fiscal twenty twenty five, drove adjusted EBITDA to grow over 13% compared to the prior year quarter to $145,000,000 Our adjusted EBITDA rate expanded 13 basis points compared to the prior year to nearly 1.8%. This represents the highest adjusted EBITDA margin rate since the third quarter of fiscal twenty twenty three. Our adjusted EBITDA combined with some benefits on below the line items led to strong adjusted EPS growth with adjusted EPS in the quarter of $0.22 compared to $0.07 in last year's second quarter. Turning to Slide 10, our improved profitability and continuous focus on deploying and adhering to lean principles [indiscernible] which was approximately $77,000,000 more than last year. Working capital in the quarter was an approximately $100,000,000 cash benefit which combined with our stronger adjusted EBITDA more than offset our capital investment and interest expense.

This brings our year to date free cash flow to slightly more than $30,000,000 This represents an improvement of nearly $250,000,000 compared to last year free cash flow use of $212,000,000 in the first half. It also brings total free cash flow generated over the last twelve months over $150,000,000 We continue to make earlier than anticipated progress on working capital including a net reduction in days on hand of inventory which has been achieved through further refinement of the decentralized procurement model and improved forecasting concept I explained last quarter. Importantly, we're doing this while also driving fee rate improvements where supply is not constrained. We deployed our free cash flow generated to reduce our net debt to close to $2,000,000,000 and lower our net leverage to 3.7 times which is about a half turn less than last quarter in the prior year second quarter.

This is also the first time we have been below four times since fiscal twenty twenty three. This keeps us firmly on track to deliver our longer term deleveraging goal of less than 2.5 times by the end of fiscal twenty twenty seven. Looking at Slide 11, halfway through fiscal twenty twenty five, we continue to build confidence in our momentum and and multiyear plan. We're again raising our full year outlook for all financial metrics other than capital spending. As outlined in our press release, the updated guidance for net sales is a range of $31,300,000,000 to $31,700,000,000 which represents a 3.6% full year increase the midpoint compared to fiscal twenty twenty four when adjusting for the 502.3% increase in dollars from the midpoint of our prior outlook. This increase partially reflects higher customer retention than what was previously expected as part of our network optimization. This revisited outlook also implies an expected sequential deceleration in sales growth from 4.6% in the first half of fiscal twenty twenty five to around 3% in the second half of the year. This anticipated cadence is largely due to the impact of timing associated with when we onboard new customers in the prior year period.

Also reflects the expectation that natural products will continue to lead growth across our business.

We have raised the bottom end of our expectations for adjusted EBITDA by an additional $20,000,000 bringing the new range to $5.55 $80,000,000 which is more than an 11% increase over the last year at the midpoint. The midpoints of our sales and adjusted EBITDA outlook imply that we expect adjusted EBITDA margin rate acceleration of around 10 basis points in the back half of the year, compared to the 1.74% of sales in the first half. This reflects the benefit of the initiatives completed already as well as those we expect to take during the remainder of the year. Given the seasonal nature of our business with be sequentially lower than in Q2. As a result, even though we expect our adjusted EBITDA margin rate to be higher in the second half, we'll likely see adjusted EBITDA dollars in Q3 decline marginally sequentially from Q2 while still growing solidly compared to the prior year. This reflects the benefit of ongoing strategic initiatives which continue to ramp driving a better margin rate. Included the benefit of lower forecasted interest expense based on our year to date free cash flow performance, our EPS and adjusted EPS ranges have increased as well with adjusted EPS now expected to fall within the range of $0.7 to $0.9 per share compared to $0.14 last year.

Full year free cash flow is now expected to be at least $150,000,000 an increase compared to our prior outlook of greater than $100,000,000 This represents a roughly $250,000,000 increase compared to fiscal twenty twenty four full year free cash flow. As Sandy mentioned, in mid February, we completed the closure of our fourth Wayne distribution center consolidated the volume into other nearby more modern and efficient facilities. Our previously optimized billings DC is under contract for sale and we're actively marketing the owned real estate for the other two DCs have been closed in the past six months. But as I've stated before, we will not sacrifice value for time. We will continue to evaluate other opportunities along these lines but have not included any incremental strategic actions in our updated outlook. Flipping to Slide 12. We're off to a solid start at the midway point of fiscal twenty twenty five, and we're encouraged by our operating momentum and the work streams in place to add value and better service our customers and suppliers. While making Unify a more efficient partner for both. Our efficiency initiatives powered in part by lean principles, are largely generating the operating benefits we expected, while our volume trends reflect the successful execution of our customers as well as the trust they place in us every day.

Importantly, we are funding more ways to improve to bring even greater value to both ends of the supply chain, and ultimately create additional shareholder value and we're aggressively pursuing these opportunities. The strategy we have outlined of bringing value to our customers and suppliers through a differentiated go to market proposition and strengthening service levels while improving UNIFY's free cash flow is simple and powerful. And our progress to date reinforces that we're working to accomplish. We remain confident and optimistic about our future and the value creation opportunity we have we work to improve our capabilities and customer facing execution. Our mantra of delivering and deleveraging remains intact. And we look forward to updating you on our progress again this summer. With that, operator, please open the line for questions.

The first question comes from Jan Heinbockel from Guggenheim. Your line is open.

Hey, Sandy. On the wholesale realignment, and the new sales breakdown, One, can you touch on functionally the changes that have occurred how that will change your go to market day to day, right, interacting with your customers And the biggest benefit that you see And then just so I understand, natural and conventional, is that products natural products that are sold to any customer or all products that are sold to largely natural customers, the same thing for conventional.

Good morning, John. The second question you asked is yes, it's all customers. What we learned from feedback that we've gotten from is that product expertise was a principle focus for them. And so what we've done is taking that feedback. We've aligned the wholesale business into two product centered divisions.

Each focused largely on functional dedication in sales, procurement and merchandising.

We kept the scale enterprise level capabilities behind them in supply chain and IT and across the company. But what customers wanted from us was really focused product expertise around the key levers that drive those categories and we organize that way. But it's transversal across customers. So to the point of your second cousin, question, natural products will be represented in an expert fashion by natural people but the customer manager, if the customer is principally conventional, will come from conventional.

Okay. My first part of that, right. So how does this change I guess it doesn't change that much in terms of how sales are interacting with the accounts?

Yes, it's not a big change, but but I guess the best way to think about it is the customer who's principally focused [indiscernible] interested in innovation. They're interested in things that are changing. Whereas the conventional products, a lot of those are big brands and they're looking for the best promotional activity and sharpest price points And it's a different merchandising motion. It's not completely different, but it's enough different that we felt that segmented them was the best way to serve our customers.

All right. And then just my last quick thing, You referenced four incremental areas of potential. To the strategy.

Of those four, which one or two are the furthest along and you think are the most impactful if one or two stand out?

Sure.

I mean, from my perspective, the services for customers who have typically not been well served by pro services and digital services are the best.

While it's in development, I think it has tremendous potential. One of the things that that I like to say internally is that UNFI needs to be in the retail media networks of the future in year one. Not year four. But we're catching up quickly and we have a whole pipeline of products and services there that we think will serve customers very well in the future. And give them the edge that they need to compete more favorably.

Thank you.

The next question comes from Bill Kirk from ROTH Capital. Your line is open.

Hey, good morning, everybody. I had a couple of things related to the closure of the Fort Wayne, D. C. I guess, first, were there duplicate costs while it was still open that are now gone?

Is there a step down in depreciation expense with the closure? And how large would that be? And then finally, what did you learn in the process of closing that and rerouting that will help inform future facility closures and help inform customer and facility kind of optimizations.

Good morning, Bill. It's Matteo here. So on the question on and duplicative cost, so we are ramping down very quickly the four twenty in operations and with that the operating expenses. So we had a little bit of kind of double dipping or double costing in the second quarter. But from now on, should expect to basically just transfer all the activities to the receiving DCs scaling down significantly the OpEx and the fixed cost that the Fort Wayne DC and see the full benefits for the of the year, which is part of the reason why we built a high confidence case to increase EBITDA 10 basis points in second half versus first half. There should be some step down in depreciation and amortization as well. And then relative to the learnings, the customer experience has been the first priority over and above the cost out or the free cash flow So we spoke before about the safety quality delivery cost always in that order set of priorities. And so understanding first of all how we were increasing operations and ramping assortments to the receiving DCs while ensuring that the customer experience was as smooth as possible while closing ADC and ramping others.

Was top priority. So this is what we continue to embed as we continue our journey in terms of DC network optimization Billings and Bismarck, we are smaller scale in a way. Fort Wayne was more meaningful. And as we always say, as we look at underperforming DCs, the journey continues.

Thank you, Mattheb.

The next question comes from Scott Mushkin from R5 Capital. Your line is open.

Hi, guys. Thanks for taking my questions.

I just want to go back to what John was talking about. As far as the realignment of the business. When the merger was done, the idea was putting the two N together a long time ago now that there was leverage in putting those super value together with UNFI the idea of one truck, one bill, maybe even one DC, sounds like you guys are saying, hey, maybe that's not ideal. And I guess the question is, do the two assets belong together over time? Or is that something you guys will consider the years go on?

Yes.

Thanks for the question. From my perspective, the answer is kind of both. Scale is good where scale is good. And specialization is good where specialization is good. We were hearing from customers is if my main product set is conventional, I need really good pricing. I need the promotional intensity and focus of vendors If my principal product set is natural organic and specialty, it's all about product and innovation and speed. And generally, those motions are two different types of processes and therefore we found specializing that part of the organization to be in the interest of our customers. From a supply chain and IT and back office standpoint, there's a lot of synergy available that we've been capturing. And through those centers of excellence, our places where efficiency can be captured through enterprise wide capability. So Scott, it's really both.

Okay.

So my second question is actually really short one. The conventional was up, I think, 2.1% on revenues.

I know there's some wins in there. Can you talk a little bit about kind of core sales growth, core volumes with continuing customers? Kind of ex the wins Sure. Good morning, Scott. So the the overall volumes for United what I 3% and within that natural grew at a more accelerated fashion than conventional. With that said, what we saw is that conventional was roughly flat from a volume standpoint.

And slightly better than The U. S. Food kind of traditional grocery, indicator. Conventional have improved in part from adding business from existing customers. And we also believe that our volume changes have up based many of the conventional peers. So we are pleased with the sequential progress that we have seen there. We remain cautious with the kind of overall dynamic going on. But pleased with what we've seen in the second quarter, knowing that again, broadly we picked up favorable volume early July of twenty twenty four it grew to 1.8% in the first quarter, grew to 3% in the second quarter.

Okay, guys. Thanks very much.

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

Good morning. Thanks so much for taking the questions. You guys put together strong results, brought up your guidance. At the same time, we've seen some pretty big shifts in consumer sentiment over the last few weeks. Are you seeing any changes in end customer behavior in the early weeks of 3Q across really any of your channels?

Or has your momentum really been pretty much sustained?

We're really not seeing anything change. In fact, over the last year or so, we've continued to see generally very strong performance by our customer base.

A whole lot of the causes in our growth are the success of a excellent group of customers performing very well in the marketplace.

Obviously, really well differentiated Sharp strategy, retailers are doing very well. But in general, we have not seen consumer behavior change significantly over the past few weeks.

There may have been a little bit of upstocking in some categories, but beyond that nothing to that we could call a trend.

Great. That's helpful. And then related to tariffs, how much exposure do you guys have to imports overall Would you expect to fully pass through the impacts either on a dollar or percentage basis? And then if we do see sustained tariffs, how do you think about the balance between incremental trade in from food away from home and any potential demand disruption as consumers potentially control their own shrink, so to speak?

Yes, that's a good question. Those are variables that we're thinking about as well. I think obviously the most important message here is this all continues to evolve. And so we'll be paying attention to it. Our teams are obviously very agile in thinking about diversification [indiscernible] Ultimately, we learned a lot from the supply chain disruptions in COVID. And so we're running some of the same plays to make sure we maximize optionality for our customers. I think you can over time the premise of your question is true that it could start to change the value equation between food and at home versus food away from home. But it's really too early to tell. And what we're trying to do is make sure we're doing the best job we can for our customers in any environment.

Makes sense. Thanks so much. Good luck.

The next question Good morning. I wanted to start, I guess, with Matteo on the lean principles.

In the nine new DCs being I guess at least you gave a productivity trend in the low single digits. And I think last quarter in the two pilots in Texas and Colorado was mid single digits.

So is there anything other than just timing, it's sort of newer in these new in the nine or or is there anything that we should know about or are your expectations kind of similar that they'll trend up?

Good morning, Andrew.

Expectations remain at mid single digit plus in terms of productivity gains. And when you think about what we've been able to deliver in throughput, for instance, in the last several quarters, is close to a 10% improvement or lower or higher cases per hour. So we see the benefits. I would say that on the fact that for the new disease that move to LDM, Lean Daily Management recently, it's just timing. So we see that the ones where we had lean daily management implementation six months ago reducing or improving safety improving delivery quality, and starting generating more and more productivity we expect to see the same from the seven that moved lean daily management and adopted lean daily management in the last three months.

Got it. Thank you.

And just back to the top line that I think some folks have been asking about you nice acceleration in volume and sequentially And you talked about a lot of things. So some is supplier partnerships and how you changed some of the well, a big change in you're addressing fees and so on. And sharing data back to the suppliers to help them with their merchandising. And then I think obviously this realignment I think Sandy already referenced procurement merchandising sales, so on. So how do you I could hear this in thinking, in conventional, sophisticated suppliers using the data coming to you with programs and partnering that way. And then in the natural, it's more internal like, hey, we really got to put some resources against this. There's a lot of growth here we're leaving on the table. Is that kind of conceptually and qualitatively, is that accurate or is it a little more nuanced than I'm kind of portraying it?

My takeaway?

Andy, I think you've got it. I think the main thrust of the conventional product that is making sure that we're priced right and making sure that the promotions are focused But like any generalization, there's significant nuances. Across our conventional customer base. We've got ethnically positioned customers that are doing as well as any retailers in the country. And we have other customers who are working hard on building new differentiated programs, e commerce, etcetera. But what they all have in common is they've got to be priced right on the key items. So we're devoted to helping them do that. On the natural side, obviously value is very important, but innovation and uniqueness is really important to We've had a huge show on the West Coast called Expo West and there were 80,000 people out there trying to get advantage over each other. And we had a large team of merchants out there looking for new items and talking with customers to figure out what was going to create news and enthusiasm in their retail outlets in the second half. So there are different bases of competition at the end of the day it's all about retail execution.

And I would say the biggest driver of our growth is the success of our customers.

Okay.

And if I could just sneak one in on the gross margin, the contraction rate was a little better than last quarter. And I think I asked about the last quarter as well. So is there anything particular or is that just sort of that in your own metrics or was it more realization or pricing or was it or mixed out better or better shrink?

There anything significant that improved the gross margin rate sequentially?

Yes. So Andy, we grew gross profit dollars by about $35,000,000 mostly through volume, but we also continue to see improvement in shrink and the progress with the suppliers programs that are a very important part our strategy. The rate was down about 20 basis points from 13.4% last year to 13.2%. And what we see is progress with reducing shrink sentiment [indiscernible] We continue to see a ramp of our suppliers programs you may recall aim at reducing friction and improving transparency while being a And we also started seeing some of the benefits of the commercial value creation and stronger underwriting activities. So it's very early innings. We know that it takes time to convert underwriting improvements into a margin in backlog. But we started seeing signs of it. And we're also focusing a lot more on understanding mix with the stronger analytical tools that we have.

Whether it's customer or category and we actively work on those. So more to do there, but pleased with what we see, at least with the controls and shrink suppliers programs and the overall kind of underwriting environment.

Thank you.

The next question comes from Kelly Bania from BMO Capital Markets. Your line is open. Good morning and thanks for taking our questions. I wanted to just ask what you're seeing with the [indiscernible] by conventional retailers. I guess the idea several years ago was that the cross selling offer opportunity was quite significant. To get that kind of product into conventional retailers. And just wondering if you're seeing a change in their interest and kind of stepping into that further or if there's a change in even the marketing or sales effort to kind of do that cross selling? Given this kind of the realignment that you're discussing?

Hi, Kelly. Good question. I think the answer to that is yes. That opportunity that the team saw a bunch of years ago is still a very large one And there's a whole lot of category momentum for natural, organic and specialty regardless of the channel. We're seeing that both across branded and then also across our own brand portfolio, particularly our Wild Harvest brand, which is doing extremely well. In multiple channels. But we're seeing a very broad based consumer trend towards better for you products and that would show up in our natural portfolio.

Okay. That's helpful. And just a couple more questions. With the lean daily management and Matteo, some of the figures you gave there, Sounds like it's been implemented in the nine DCs Are those more conventional DCs or natural DCs and there is the opportunity different as you look at those two sides of the business with this initiative?

Good morning, Kelly. It's a very good question. It is a mix and a balance of natural and conventional BCs. So we obviously want to make sure that our teams embed lean and lean daily management principles equally. Especially as we continue to evolve this kind of more decentralized model that Sandy described on natural and conventional. So it is in both. We see positive results in both.

We really like the fact that now every day we have nine teams that get together around standard KPIs on safety quality delivery cost and get into problem solving with the idea of fixing and developing countermeasures very quickly.

Okay. Thank you. And just one more, I guess, on the new customer additions that you mentioned, Matteo, starting to cycle later this year. Any help you can give us on the magnitude of that? [indiscernible] the channels that that impacts and any insights into the pipeline for additional customer additions as we move forward?

So when we think about the second half growth of 3% versus 4.6%, would have a couple of considerations. First, we continue to see several opportunities to find profitable growth. In natural and in conventional. Obviously, faster growth in natural, but several opportunities in conventional as well.

And then the offset to that is the fact that a few customers that we onboarded in the second half of twenty twenty four will start cycling. So we'll have tougher comps in a way, while still delivering the same absolute dollars in the second half of twenty twenty five and beyond. So I would really think about growth that we kind of enjoyed in the first half kind of decelerating or lapping the second half of twenty twenty four for the remainder of the year.

Kelly, Sandy here. The one thing I would tack on though, which was part of your question is what is the pipeline look like? And what I would tell you is it it's very strong.

It's strong across the $90,000,000,000 addressable market that we've identified and we continue to see opportunity But I think the guidance we've given you is our high confidence guidance but we're continuing to work to beat it.

Thank you. That's very helpful.

And that concludes our Q and A session. Will now turn the call over to Sandy Douglas, CEO for closing remarks.

Thanks, operator. As you heard on today's call, we continue to make solid progress on executing our multiyear strategy and delivering our full year outlook. We have an excellent and very focused team in place We remain laser focused on creating value for our customers and suppliers, while making UNFI a more effective and efficient organization. We again delivered strong sales, adjusted EBITDA and free cash flow growth compared to last year's second quarter and our increased outlook reflects our year to date performance and growing level of confidence in our business model and customer base. As we implement our strategy, we've continued to gain additional insight and believe that the opportunities before us are greater than the progress behind us. To capture this opportunity, we know we must stay focused and strive to get better every day and we're committed to doing just that. Embracing lean management, we're becoming a more efficient and effective organization and creating sustainable shareholder value.

For our customers and suppliers, we thank you for your continued partnership the business we do together.

For the UNFI associates listening today, our thanks to each of you, for everything that you do for our business, our customers, our communities and each other. And for our shareholders, thank you for the trust that you continue to place in us. Thanks again for joining us this morning. We look forward to updating you on our progress in June.

Ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now disconnect.