SpartanNash Co (SPTN) 2016 Q3 法說會逐字稿

Good day and welcome to the SpartanNash Company third-quarter 2016 earnings conference call and webcast.

(Operator Instructions)

Please note: This event is being recorded. I would now like to turn the conference over to Katie Turner. Please go ahead.

Thank you, Nicole. Good morning and welcome to the SpartanNash Company's third-quarter FY16 earnings conference call.

By now, everyone should have access to the earnings release for the third quarter ended October 8, 2016. For a copy of the release, please visit SpartanNash's website at www.SpartanNash.com/investors. This call is being recorded, and a replay will be available on the Company's website for approximately 10 days.

Before we begin, we would like to remind everyone that comments made by Management during today's call will contain forward-looking statements. These forward-looking statements express plans, expectations, estimates, and projections that might involve significant risks and uncertainties. Actual results may differ materially from the results discussed in these forward-looking statements. Internal and external factors that may cause such differences include, among others, competitive pressures amongst food, retail, and distribution companies, the uncertainties inherent in implementing strategic plans, and general economic and market conditions.

Additional information about the risk factors and the uncertainties associated with SpartanNash's forward-looking statements can be found in the Company's third-quarter earnings release, fiscal annual report on Form 10-K, and in the Company's other filings with the SEC. Because of these risks and uncertainties, investors should not place undue reliance on any forward-looking statements. SpartanNash disclaims any intention or obligation to update or revise any forward-looking statement.

This presentation includes certain non-GAAP measures, [and comparable period measures] to provide investors with useful information about the Company's financial performance. A reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure, and the other information required by regulation G, is included in the Company's earnings release, which was issued after market close yesterday. It is now my pleasure to introduce Mr. Dennis Eidson, Chairman and CEO of SpartanNash, for opening remarks.

Thanks, Katie. Good morning and thank you all for joining our third-quarter of FY16 earnings conference call. With me this morning are Dave Staples, our President and COO, and Chris Meyers, our EVP and Chief Financial Officer, as well as other members of our Executive Team.

On the call today, I'll provide a brief overview and highlights of the third quarter. Dave will give an update on our business segments. And then Chris will offer you some additional detail on our financial results and guidance, before I issue some closing remarks and then we will take some calls at the end.

Once again, we are pleased with our ability to generate sales and earnings growth in a challenging operating environment. Our third-quarter results reflect the success of our strategy to provide innovative and impactful solutions for both our food distribution and retail customers, as well as our team's ongoing efforts to offset the impact of the prolonged deflationary environment.

These efforts translated into 1.4% top-line growth and an improvement of $0.04 in adjusted earnings per diluted share, as we benefited from new business, and growth in certain existing accounts in our food distribution and military segments, and achieved our third consecutive quarter of improved comp retail store sales, improving 1.2% from a quarter ago to a negative 1.8% in the third quarter. Though we still have work to do, we're encouraged by this performance, given that deflation accelerated from the prior quarter by 80 points to 3% at wholesale, and by 40 basis points to 1.4% at retail.

We've managed through deflationary environments before and have a number of positive initiatives under way that we believe will best serve our food, retail, and distribution and military customers. We continue to enhance our merchandising, pricing, and promotional programs to drive greater customer engagement, and improve the overall shopping experience for both our retail customers and those visiting the independent retailers that we serve. We also continue to expand our natural, organic, and private brand offerings, including the continued rollout of our new fresh Open Acres brand to provide greater value to our customers.

During the quarter, we celebrated grand reopenings for eight newly remodeled stores in Omaha with encouraging results. In addition, we remain focused on productivity and efficiency initiatives, and realize further benefits from our ongoing investments in our supply chain network.

Consistent with our objective to pursue strategic acquisition opportunities, we are excited to announce that we signed a definitive agreement to acquire Caito Food Service. The acquisition provides an opportunity to expand our presence in serving some of the industry's fastest growing categories including fresh produce, value-added fruits and vegetables, and protein-based prepared meals. We are excited to welcome the Caito team into the SpartanNash family and to serve a new group of customers, as well as to provide new and existing offering to our existing partners. Now with that, I would like to turn over the call to Dave.

Thank you, Dennis. The third quarter demonstrates our broad-based success in driving new business and improving operational efficiencies to help offset deflationary pressures.

In our food distribution segment, despite continued deflation in proteins and dairy, we generated another quarter of sales and earnings growth over the prior year, mainly due to new accounts in our core business, as well as growth in other channels. While the independent food distributor market remains highly competitive, our overall sales pipeline is strong. And we are confident in our ability to capitalize on the opportunities we have identified to provide supply chain solutions to a variety of customers. We continue to allocate resources to drive new business development, which we believe will better enable us to pursue opportunities within both our traditional independent and military customer base, as well as in other channels.

We remain focused on providing highly relevant product offerings and services to help our retailers succeed in today's challenging environment. During the quarter, we expanded our merchandising and marketing programs with our independent customers, and continue to work on initiatives that best position our distribution network and improve operations, including supply chain optimization, shrink reduction, and product assortment expansion. In the retail segment, sales remain challenged as we continue to face ongoing deflationary pressures, again, mainly in proteins and dairy, and continued difficult economic conditions in our Western markets that are heavily influenced by the regional oil industry.

In Michigan, we are pleased with the performance and customer response at our remodeled D&W stores. These stores represent our newest offerings to the banner, with a heavy emphasis on fresh, healthy, and prepared products. Though the grand reopening for our Grand Haven D&W was held in June, it has been a year since we relaunched the Breton Village D&W store, and we continue to see positive results, particularly in the perimeter departments. We continue to fine-tune our presentation and pricing strategies at these stores, and look forward to applying these successful strategies to other retail locations.

During the quarter, we celebrated the grand reopenings for our eight newly remodeled and rebannered Family Fare stores, and relaunched the Omaha region's 14 stores as Family Fare. Overall, we have been pleased with the performance of this group of stores. And our investments in merchandising and marketing, improving our produce and private brand product offerings was a key initiative. And I'm pleased to report that we are seeing a significant improvement in trend with respect to produce tonnage, as well as private brand unit growth and penetration in these stores.

In connection with the grand reopenings, we completed the rollout of our Yes Rewards card to all of the Family Fare stores in the region. Sales and signups from the loyalty program are tracking in line with our expectations. During the third quarter, we continued the rollout of Open Acres, our new private brand for fresh products, and remain very excited about its potential.

Open Acres continues to be well received, and closes a gap in our portfolio of private brands that existed on the perimeter of the store outside of our Michigan footprint. It also provides high-quality products at a significant savings to consumers in both corporate-owned and independent retail stores. We currently have approximately 150 SKUs of Open Acres products, which includes the addition of fresh chicken and other proteins. We expect to end the year with approximately 200 items as we expand our product offering.

For the third quarter, private brand unit penetration in our retail operations as a whole was 21.9%, which continues to place us above the national average. We ended the quarter with approximately 7,000 total private brand items.

Turning to the military segment, despite the headwinds being experienced by the commissaries, we generated increased sales, as our new fresh business offset the ongoing pressure in the core business. We continue to bid on new lines of business, and work on expanding our service offerings in new and existing partners, as well as improving margins through supply chain optimization efforts. With that, I will turn the call over to Chris for further details on our financial results and an update on the outlook for FY16.

Thank you, Dave. I will begin with a detailed overview of our third-quarter results, and then review our guidance for FY16.

Consolidated net sales for the 12-week third quarter increased to $1.8 billion, or 1.4% growth compared to the prior-year quarter. Consolidated gross profit margin for the third quarter was 14.2% versus 14.6% in the prior year, primarily reflects the mix of business operation, and the impact of continued deflation.

Third-quarter adjusted operating expenses decreased $4.1 million from $224.3 million to $220.2 million, and improved 40 basis points on a rate-to-sales basis compared to the prior-year quarter. The decrease in adjusted operating expenses [as the rate to sales] was primarily due to lower depreciation expense associated with fully depreciated assets and lower occupancy costs, as well as improved operating expense leverage resulting from sales growth, as well as ongoing productivity and efficiency initiatives.

The adjusted third-quarter results primarily exclude $2.7 million of asset impairment and restructuring charges associated with our retail store rationalization, as well as $2.4 million of merger integration activity. The prior-year quarter primarily excludes $4.4 million in expenses related to merger integration and acquisition costs, as well as $800,000 in net asset impairment and restructuring charges.

Adjusted EBITDA for the third quarter was $53.4 million or 3% of net sales versus 3.1% of net sales last year. Adjusted earnings from continuing operations for the third quarter increased to $20.1 million or $0.53 per diluted share, representing an improvement of $0.04 per diluted share over the prior year. These results exclude net after-tax charges of $0.08 per diluted share related to adjustments previously mentioned. For the prior-year third quarter, adjusted earnings from continuing operations exclude net after-tax charges of $0.09 per diluted share related to the previously mentioned adjustments.

Turning to our operating segments, third-quarter net sales for the food distribution segment increased to $804.5 million from $762.3 million in the prior-year quarter, primarily due to new business gains, as well as the growth in certain existing accounts, which more than offset the impact of continued deflation. Third-quarter adjusted earnings for the food distribution segment increased over 16% to $19.8 million from $17 million last year. The increase was primarily due to higher sales, supply chain improvement, and lower depreciation expense, partially offset by costs associated with a water main break, [inefficiencies] associated with ongoing warehouse consolidation, and the impact of continued deflation.

In our retail segment, third-quarter net sales were $489 million compared to $507 million last year. Comparable-store sales, excluding fuel, improved to negative 1.8% from negative 3% a quarter ago. Despite the sequential improvement in comp-store sales, as well as higher fuel gallons, the ongoing deflationary environment and continued challenging economic conditions in certain of our Western geographies contributed to lower sales. Specifically, the decrease was due to lower comp-store sales, excluding fuel, $7.9 million in lower sales resulting from retail store closures, and $3.8 million due to lower retail fuel prices compared to the prior year.

Retail segment adjusted operating earnings for the quarter were $12.4 million, compared to $13.2 million last year. The decrease was primarily due to lower comparable sales volumes and the impact of deflation, partially offset by favorable rebate programs, lower occupancy costs, and the impact of store closures.

In our military segment, third-quarter sales improved to $506.6 million, primarily due to new business gains associated with the distribution of new fresh products, which offset the continued lower sales at DeCA operated commissaries. Military adjusted operating earnings were $2.9 million, compared to $4.5 million last year, primarily due to the lack of inflationary gains and the change in business mix.

From a cash flow perspective, our current year-to-date operating cash flow was $78.6 million compared to $129.9 million in the same period last year. The decrease was primarily due to customer advances to support sales growth and the timing of working capital payments.

Total net long-term debt was $468 million at the end of the third quarter, compared to $464 million at the end of FY15. The end of the quarter had a net long-term debt-to-adjusted-EBITDA ratio of 2 times, which remains in line with our target.

Now for the outlook for the remainder of the year, we are narrowing the range of our previously issued 2016 guidance for adjusted earnings per share from continuing operations from $2.09 to $2.16 excluding merger integration costs, and other one-time expenses and gains. Guidance reflects continued negative comp retail store sales, and the variability associated with deflation and its related impact on LIFO. We expect capital expenditures for the fiscal year to now approximate $72 million, with depreciation and amortization in the range of $76 million to $77 million and total interest expense ranging from $18 million to $19 million.

With respect to our recent announcement of the acquisition of Caito Food Service, we expect to close the acquisition by early January 2017. Despite the anticipated start-up costs associated with the new Fresh Kitchen, we anticipate the Caito acquisition will be accretive to full-year 2017 earnings. On our next call we will give FY17 guidance, which will include the impact of the Caito acquisition. I will now turn the call back over to Dennis for his closing remarks.

Thanks, Chris. In conclusion, we're pleased with our performance in the quarter, in light of the challenging operating environment. And while the prolonged deflation impacted our sales, we remain confident in our business model, solutions-based approach, and ability to drive top-line sales and improve operational efficiencies. We have been through tough cycles before, and we know that by remaining nimble and focused on value, we will deliver on our key initiatives and exceed our customers' expectations.

We expect that our targeted capital investments and enhancements for our merchandising, pricing and promotional strategies will offset some of the deflationary and competitive pressures in the retail segment. In our food distribution and military network, we are committed to pursuing business development opportunities, and providing quality products and solutions to both new and existing customers. We continue to allocate resources to drive these efforts, and as a result, believe we are positioned to deliver against our key strategic initiatives and enhance shareholder value. With that, we will now open up the call and take some questions.

Thank you.

(Operator Instructions)

Our first question comes from Ryan Gilligan of Barclays. Please go ahead.

Hello, good morning. Thanks for taking the question.

Our first question is on your dividend payout ratio. I know acquisitions are part of the ongoing strategy, and the plan is to acquire and then work your leverage back down. But you also generate a good amount of cash. So could you maybe talk about your dividend payout ratio? And if there's an opportunity to increase it? Especially since it doesn't seem like it would take a lot of cash to move the needle with your current share count.

This is Chris. I will take that question.

First, we don't anticipate a change to our dividend ratio on a go-forward basis. But we will evaluate that when we evaluate our 2017 guidance that we provide. We will provide a further update on that at the end of the first quarter.

Ryan, just one other point. I think if you compare us to a lot of other rates, I think we stand pretty tall in our industry on rates and [dividends].

I think we have (inaudible) five consecutive years that we've actually increased. Have increased the dividend modestly year over year.

Got it. That's helpful, thanks. And can you give us a sense for where retail comps are now in the fourth quarter so far?

Yes, retail comps, we were not happy with the negative 1.8% as we've talked about; we certainly were pleased that at least we continue to go in the right direction. And that is three quarters in a row. We haven't seen a material change early in the quarter.

That's helpful. Thank you.

And the last question on fuel margins. Can you talk about what their impact was on in the quarter?

We had a good fuel margin quarter a year ago. It was one of the better ones we had. So we actually are about nearly $0.04 a gallon less profitable on fuel. And it had a negative impact on our EPS of about a $0.005.

Got it. Thanks.

Our next question comes from Chuck Cerankosky of Northcoast Research. Please go ahead.

Good morning, gentlemen.

Could you, in some way, break apart the retail segment between the Michigan stores and the Western stores in terms of comps and profitability? And would it be accurate to think that Michigan is making money and the Western stores are losing?

Chuck, I think if you look at our retail business, we're not large enough. We don't typically break all that out. I think it's fair enough to say our Michigan market is by far our strongest market. There's no question about that, in all aspects of the business. I think we are happy with what we've seen begin to transpire in our Omaha market. But there's still quite a bit of work to do. As we said in the remarks, we feel pretty good about the direction that is beginning to take. That was a nice contributor to our improving run rate.

The run rate: Dave is referring to the comps improving?

Yes.

Our next question comes from Scott Mushkin, Wolfe Research. Please go ahead.

Hello guys. Thanks for taking my question.

I have three here. So the military segment, Dennis. I think you mentioned that pressure in the core business, obviously offset by some more Fresh. But what is the pressure on the core business? I'm just trying to understand what's going on with the core and why it's having a hard time.

DeCA has been, I would say, dealing with challenging comp store sales now for the last several years. And potentially we went through the government shutdown a few years back and I think it really started a business boom for them. It's hard for me, Scott, to really pine very much about the DeCA business. We are supplier to those stores. And we are proud of fact that we perform at very high levels with regard to on-time delivery and fulfillment. But yet we can only ship what they order. I think they have some core challenges in the business. We are available and discuss the industry with the better community that we supply products for to DeCA and try and be of assistance wherever we can.

We are really pleased that despite the challenges they are having on the top line, that we eke out a slightly positive revenue period, quarter. We are also very much convinced there more things we can do inside of the military resale system that will help that system operate more efficiently and effectively. And stay tuned for things on that. We are working hard on a number of projects.

It is simply that the military has been shrinking? And as people move away from those bases it's not as practical for them to go to those?

I think there's some of that. There has been a shrinking military; European forces are going down a bit. And we supply all of Europe, as you well know. That's part of it. Moving away. That's very much a stock-up kind of shop. The average transaction there is well more than double what a conventional supermarket would see. It's a lot of protein that gets stocked up on in those shopping trips. And of course, we are dealing with the deflation cycle in protein that I have not seen in my career over this prolonged period of time. I don't think there is any one thing, Scott. I think it's an accumulation of variables.

That's great. I have two more. I want to make sure I get them in. Probably other people want to ask questions.

The second one is, just a light at the end of the tunnel on deflation. And then the third one, is SG&A. You guys have been pretty good at holding that number down. Labor costs are going up quite quickly, healthcare costs are going up quite quickly. How should we think of SG&A going forward? The light at the end of the tunnel deflation, and SG&A growth going forward?

There's light at the end of the tunnel, I think you're referring to deflation?

Correct.

Q3, let me just stick with our distribution segment here for just a moment. Q3 was more deflationary than Q2 as I mentioned in my remarks. About 80 points worse. So that doesn't feel very good. I went back to 2008 and looked at deflation by quarter. We have not seen a stretch like this. Q3 was our fifth consecutive deflationary quarter in our distribution segment, and there's no reason to believe that Q4 won't be the sixth. It got worse from Q2 to Q3. We don't have an extremely early read in Q4. I would say the last period of Q3 was modestly better than the quarter run rate. But not materially. As you look at the end of the year, and more basically on a calendar year, there was quite a bit of falloff in increased deflation when you put it that way. At the very end of the year, particularly on proteins, beef being a big one a year ago. So we get to end of year, we're going to cycle that.

Having said that Scott, we don't see deflation going away early next year. The government's got all kind of forecasts out they're and they are suggesting that it's probably going to be inflationary for food [at] home. If that happens, I don't think it will happen in the first half. I don't know if that helps you on that.

The second question was with regard to the pace of SG&A. We're not going to give guidance on that until Q4. But we are going to give guidance for next year when we get to the end of the year. I don't know if, Chris, you want to add any other color to the SG&A question?

We obviously try to aggressively manage SG&A whenever we can. And make that a focus of our efforts going forward. We're always looking for opportunities, and have done a pretty good job taking advantage of cost-saving opportunities when they arise and when we proactively go after them. I think there's going to be a little pressure, given some changes in minimum wage. And some other things going on in terms of regulation in terms of wages next year. But we will do our best to try to offset that with operating initiatives.

All right, guys, thanks for taking all my questions. I really appreciate it.

Our next question comes from Shane Higgins of Deutsche Bank. Please go ahead.

Yes, good morning. And thanks for taking the questions.

First question on traffic versus tickets in the third quarter. Can you guys just break that down on the retail side?

In the third quarter we were negative on both metrics. [SPT] as well as transaction count. It was more heavily weighted [before] the negative transaction count in the quarter.

Okay. All right thanks for that.

If you could give us a bit of an update on your retail store rationalization plan? I know you closed a retail store during the quarter, and just wondering how we should think about modeling out unit growth over the next several quarters?

I think if you look at what we've said consistently since the merger is, we are going to continue to look at our store base and make sure it fits where we want to be. I think as you look forward I wouldn't see many new units. So I don't think I would model anything there. I think I would look more on some continuation of where we have been. There's probably a few more in the pipeline over the course of the next year as we either find opportunities [forums] with someone else or determine that they don't fit the model we're looking for.

Okay. Thanks for that.

If you guys could give an update on where you are with your merger integration activities, when might those begin to start to wind down?

Thankfully, there may be some wind up on some new ones. But if you're talking about the old merger, we are coming down the home stretch. We've got another year, really, to wrap up some of the systems work; a year, year and a half, to really put a bow on some of the systems. But I think we've seen the majority of the heavy lifting is now behind us. And I think we are mostly focused now on some really big opportunities to make it even better for our distribution customers in the distribution segment, as we can bring systems across our entire platform. I think that is the heavy lifting you'll see over the next year and a half.

Thanks -- sorry, go ahead.

Just related to the merger.

Got it. I'm just going to try to squeeze in one more here.

It sounds like a competitive environment remains challenging but not irrational. You guys have any color on Walmart's positioning? Have they been doing anything different in any of your markets? Any color there would be great.

We are aware that Walmart has been more aggressive with regard to everyday pricing in some parts of the country. And we have actually done those price checks in other parts of the country where we don't operate retail to understand better what the implications might be of those moves if they were to come. But in our core retail marketplaces today we have not seen any material changes in Walmart's everyday pricing strategy.

Great. Appreciate it. Thanks a lot.

Our next question comes from Chris Mandeville of Jefferies. Please go ahead.

Hello, good morning, guys.

Chris, any ability to provide a pro forma leverage number post Caito? And then, just generally speaking, you guys could provide a little bit of color there as it relates to the M&A environment. But what is your appetite for additional deals going forward in terms of availability? What are you seeing out there in valuation expectations?

First, we haven't changed anything with our overall capital structure, targets, or guidance. We've had a long-term adjusted debt to EBITDA ratio of 2.0 times. Our ratios will go up post this transaction. But we feel pretty confident that we can get it back down to that targeted level in a reasonable timeframe. In terms of the overall M&A environment, I think that part of our strategic initiative is to continue to participate in a consolidation of the space. And I think the space is going to continue to consolidate. There's going to continue to be activity in the space. And I think it's been healthy. And I think it's going to continue to be healthy on a go-forward basis.

I would just add, on the M&A piece. It's three years ago this month when we closed the SpartanNash Finch merger. And the state pointed out [purposely] and all the heavy lifting is behind us. And that transaction was very foundational. And we talked about, once we digested that, if we saw that the space was going to be consolidated and we wanted to be a player in that consolidation. And we still believe in all of that. And yet, we have also been discussing as part of the strategy around M&A that the perimeter of the store certainly is where the action is today. And we wanted to be even more influenced in our business by the perimeter and the increased volume that comes with that.

We think Caito is very foundational as it relates to being able to look at this very fragmented part of the business and the industry and be able to take advantage of opportunities going forward. Caito is a great company. We identified what we wanted to accomplish with regard to M&A in the perimeter and did lots of work on this. The one company just jumped off the page and it was Caito. It's a great company, it's got a great management team. They have a great vision. They have this whole fresh kitchen opportunity that will come along with it. Is right on point exactly what the consumer is looking for today. So we couldn't be happier with being able to reach an agreement with the Caito family, Phil and Joe, and are delighted the entire management team is staying on board and are going to run that business. We think we had a home run there.

Okay that's all very helpful.

Then maybe switching over to the retail front. Is there any ability to parse out the actual comp performance by department, if you will? Maybe center store versus pharmacy versus the perimeter? And maybe even toss in how the fuel gallon comps were for the quarter?

Chris, like I said before, we just don't going to that detail by department and the like. So we're not going to do that at this time. As far as fuel gallons, it was a solid quarter (multiple speakers). It was a solid quarter.

All right, thank you; and maybe one last one if I could sneak it in there.

On Caito itself, I'm sure you're not necessarily looking to disclose all too much. But if you could, is there any ability to talk about general growth rates within the categories that you'll actually be taking on? And then maybe compare that to Caito and how it's been growing over the last several years? Just so we get a sense of what to expect in terms of sales for 2017 maybe?

This is Chris.

The categories that we are growing, and I think Dennis alluded to it earlier, is the perimeter of the store is where the action is. The perimeter of the store is growing at a faster rate than the center of the store. And in particular, the categories they have exposure to in terms of the cut fruit and veg and the prepared food option. And what we'll get more exposure to is in terms of the prepared meal options when the Fresh Kitchen is operational are some of the fastest-growing categories in the space. We expect that to continue on a go-forward basis. But we are very excited about those categories, and they're growing faster than the rest of the store. Caito has had a good track record of growth. And has capitalized on the growth that has happened in those particular departments over the past couple of years.

All right, thanks again, guys, and best of luck in Q4.

Thanks Chris.

(Operator Instructions)

Our next question comes from Ajay Jain of Pivotal Research Group. Please go ahead.

Yes, hi, thanks.

With the Nash merger, I recall that you outlined a three-year process for getting the synergies. And I noticed that you had some acquisition cost this latest quarter. I was wondering if you could confirm how much of that was related to the Caito acquisition? And then, going forward, do you consider this to be more of a bolt-on acquisition as opposed to Nash, which had a lot of integration work that was involved?

This is Chris.

I would say we did have some acquisition-related costs related to the Caito transaction that hit our current quarter, our third quarter. We didn't break that out between the other integration-related costs, some of which are related to the Nash Finch merger and completing that process. We did not break those out. But this deal for us is very much more about growth than it is cost synergies. There's going to be cost synergies associated with the transaction. When you put two companies together there's an opportunity to benefit from that. We're going to more than double our produce business, which will help us out with a lot of synergies there. And there will be cost synergies here.

But this deal is very much more about growth and that future opportunity that we see for Caito in their existing accounts and their existing categories. And also what we are able to do in terms of helping some of our other existing customers out in terms of these categories as well. So it's very much about growth for us. And that's going to be the primary focus of the integration efforts, is to capitalize on that growth and those opportunities.

Just embellishing a little bit, I think, on the second part of his question. We see a little bit like a mini platform here. Obviously the volume of the business that we talked about in excess of $600 million is not like merging the Spartan and Nash Finch businesses. They were both multi-billion, but we do see this as a platform for us to continue to grow on the perimeter. Whether it's organically, and I think there's big opportunity organically, as well as inquisitively.

Okay. And then could you comment on whether you're expecting there to be a significant bucket for merger and integration expenses? I'm sure you'll have more color in a few months. But can you also just talk about what kind of timeframe you are expecting for that integration process overall? Like three or four years from now, could you still be allocating merger and integration costs for Caito?

We don't think that the integration process associated with Caito is as long or nearly as expensive as what the Nash Finch Spartan merger was. There will be costs associated with the mergers and acquisitions, but it will be a much more smaller scale than what we saw with the SpartanNash Finch merger.

Okay. Just a couple more quick questions.

This latest quarter, you had some EBITDA softness in both military and retail. And I guess that wasn't surprising on the military side. But in terms of the outlook for the fourth quarter, do you expect some kind of EBITDA decline? And can you comment specifically on retail whether you are going to see continued margin pressure in retail? Thanks.

I don't know if we're going to give, and we haven't had history of giving that kind of specific guidance quarter by quarter. But let me tackle that a little bit on a different theme.

With this deflationary environment, it has a negative impact in all of our segments because we don't get the benefit in distribution military of inventory appreciation or, most wholesalers have an opportunity to forward-buy in some way. Or just to build inventory going up. So that hurts our earnings and yet we get a credit back in LIFO. And so it's a bit of a teeter totter; it's not necessarily one-for-one. So we called out in the guidance here that we have what could be a pretty significant LIFO event that could come in the fourth quarter. And so that is that EBITDA earnings teeter totter that we are on. And similarity in retail, when we take inventories of retail and retail prices are going up or on the retail [coming] method when prices are going down from the previous quarter, that also creates a shrink and a negative margin in our retail portfolio. I don't think this is unique to the SpartanNash retail business. And so I think, until we get out of the deflationary world, it is going to have some pressure on earnings and EBITDA. And good guide with regard to historical LIFO trends.

So it's reasonable to expect a LIFO credit in Q4; is that correct?

I think it's reasonable to expect that, yes.

Okay. Just one final question. On your prepared comment on deflation, for wholesale did I hear right that deflation with 3%? So your revenues would have been 3% higher without the deflation?

Deflation with 3% in wholesale, correct.

Okay. All right, thank you.

Our next question is actually a follow-up question from Chuck Cerankosky of Northcoast Research. Please go ahead.

Hi, guys. I just wanted to ask what is the distribution radius going to be out of the fresh Caito facility once it starts operating?

It's not fully determined at the moment. They have a pretty good business plan in place. And it is largely concentric to that DC, I'd say a couple hundred miles or so. But there are some options with regard to packaging that could extend that distance quite appreciably. So I think that's still a work in progress. Of noteworthiness, as it relates to the whole distribution piece for Caito, we also got a business that [cover runs] called Blue Ribbon Transport. It's very innovative with regard to being a third-party provider of logistics. And we're excited about that and they partner with Caito on this activity as well.

Thanks a lot, Dennis.

This concludes our question and answer session. I would like to turn the conference back over to Management for any closing remarks.

Thanks for calling. And I wanted to thank all of you for taking the time to join us today. That concludes our remarks and we look forward to speaking with everybody again at the end of next quarter. Thanks.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.