United Natural Foods Inc (UNFI) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the United Natural Foods third quarter earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session, and instructions will follow at that time.

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I would now like to introduce your host for today's conference, Ms. Vanessa Schwartz of FRB/Weber Shandwick. Please go ahead, ma'am.

Thank you.

Good morning, everyone, and welcome to the fiscal third quarter conference call for United Natural Foods. You should have all received a copy of the press release this morning. If you did not, please call at FRB/Weber Shandwick at 212-445-8459, and we will send one out to you your name on the fax or e-mail list.

With us today from management are Mr. Tom Simone, Chairman; Mr. Michael Funk, Chief Executive Officer; and Mr. Todd Weintraub, Chief Financial Officer. We will begin with some opening comments, and then open up the call for Q&A.

As a reminder, this call is also being Webcast today, June 4, 2002 and can be accessed via the Internet at and www.unfi.com.

Before we begin, I'd like to remind everyone of the Safe Harbor statement included in the press release and that the cautionary statements apply to today's conference call as well. Now I'd like to turn the call over to Michael. Michael?

Thank you, , and welcome, everyone, to our third quarter conference call.

Our third quarter resulted in earnings of 29 cents per share excluding special charges in line with the company's expectations. Our record top-line sales of 300.4 million was an increase of 16.2 percent over last year's third quarter. This is the seventh consecutive record sales quarter for us, as well as the first quarter with sales above 300 million. Top line continues to run above our guidance of 12 to 14 percent due primarily to strong sales in all channels and in all regions, market share gains, and continued industry growth.

Sales to all major channels continued to be strong as they have consistently over the last several quarters. Our leading channel for the quarter was our conventional mass-market business which posted sales growth of 25 percent. Most of the growth in this channel is coming from increased sales with existing customers. We did welcome United Supermarkets based in Lubbock, Texas as a new customer at the end of the quarter.

was our second fastest growing channel with sales of 23 percent over a year ago. Growth in the independent channel slowed slightly to nine percent. Our current business mix by channel is with 41 percent of total sales, mass market with 14 percent, and independents with 39 percent. The remaining six percent is comprised of miscellaneous customer types.

Sales in our Eastern region continued to be up over 17 percent and our Western region continued to post sales of 15 percent. Albert's Organic, our produce division, posted 17.7 percent growth for the quarter, below our projected sales targets for that division. We are hoping to see a return to stronger sales growth over the next few quarters for our Albert's division. Sales as a percentage of our total to our largest accounts totaled 19.5 percent for Whole Foods and 13.5 percent for Wild Oats.

UNFI's Western region began service out of its new warehouse in southern California on March 10 and completed the transition of all southern California, southern Nevada, and Arizona customers during the four weeks following March 10. Opening a brand new facility and training over 100 new employees provided many challenges to overcome. However, the management team executed a well structured plan that enabled us to minimize customer impact during the transition. The closer proximity of this new facility to its customers enables us to provide improved service, while reducing our transportation expenses. The removal of business from our Auburn, California facility, combined with our new Fontana facility, gives the Western region capacity to grow the business for several years. We are very pleased with the overall management of this difficult transition, and special recognition needs to be given to our Director of Operations for the West, , and his staff.

Also last month, Hershey Import Company completed its move to a new facility on schedule. Shipping and receiving capacity has been significantly expanded, and a newly acquired packaging line has been installed and is now running at capacity. Also, inventories from three public warehouses are being completely consolidated into the new facility. Hershey Import now has the infrastructure to support its long-term growth strategy and to realize operating efficiencies that will increase its margins. In addition to these two moves recently completed, we have also approved an expansion to our Chesterfield, New Hampshire facility. The expansion will increase the size of the current building from 111,000 square feet, to a building that is approximately 285,000 square feet.

We are hoping to begin construction on this expansion by August 1st of this year. The Northeast market has been one of our fastest growing, and the additional capacity provided by the Chesterfield expansion will allow us to service our growing customer base in that market. We continue to be focused on expanding our presence in the Midwest and Texas markets, by increasing our marketshare in those areas, and as part of our strategic plan to locate new facilities in those areas to further penetrate those markets. We are projecting this can occur by the of our fiscal 2003 year.

Operating metrics continued at optimum levels with bill rate performance nationally over 96 percent, and all order accuracy and customer service levels continue to hit our high standards. We feel that performing at these levels is directly responsible for our continued gains in taking marketshare from the competition. On the expense side, we are pleased with the continued reduction of warehouse labor, which dropped 17 basis points from the previous quarter. This is a result of better warehouse management, and more efficient facilities coming online. At the end of the quarter, we saw sales per employee at $103,573, versus a year ago, when it was 94,876. Our total head count stood at 2,900 at the end of the quarter. This is further indication of our ability to leverage our increasing sales base to gain productivity.

We look forward to our fourth quarter and completing the most successful year in the company's history. With continued strong top line, improving expense controls, and a renewed focus on strengthening our gross margin. We believe we are well-positioned to achieve our operating margin goals in 2003. We have established ourselves as the clear market leader, and the best wholesaler in the natural products industry, with consistent superior performance throughout the company's divisions and regions.

And now, to give addition financial information, I'd like to turn the call over to our Chief Financial Officer, Todd Weintraub -- Todd.

Thank you, Michael, and good morning everyone.

We had our seventh consecutive quarter of record sales this quarter, with sales of 300.4 million, which was an increase of 16.2 percent over last year's third quarter, and above our guidance of 12 to 14 percent. This includes sales for a produce and perishables distributor acquired last quarter, a retail store acquired last April, and a new retail store opened in October. Excluding revenue from these resources, sales increased 14.8 percent.

We had mid 20 percent growth in both our super natural and mass market distribution channels and high single digit growth with our independent channel. This growth included double digit growth in both our eastern and western regions. Special items for the quarter netted to less than $300,000 in expenses after tax, or two cents EPS.

Special non cash income was related to interest rate swap agreements and special charges related to the opening of our Fontana facility. Statement of financial accounting standards number 133 requires us to recognize changes in the fair value of interest rates swaps quarterly due to favorable changes in yield curves during the quarter and the passage of time are fair value increased approximately 200,000.

We will continue to recognize this non cash item quarterly through the duration of the contracts in either October 2003 or 2005 for one contract, and August 2005 or 2007 for our second contract depending on weather the contracts are extended. Whether we recognize income or expense in any given quarter, and the magnitude of that item is dependent on yield curves and the remaining term of the contracts. Please note that upon exploration of the contracts cumulative earnings impact will be zero.

Gross margin for the quarter was 19.4 percent at the low end of our guidance, mid to high . Margin in the western region was lower than past quarters due to the learning curve of buying for an additional warehouse and general competitive pressures. Our eastern region margin was also below past quarters due to competitive pressures. We expect these trends to continue into our fourth fiscal quarter. We believe margin will remain in the mid for the fourth quarter.

Operating expenses excluding special charges were 15.6 percent of sales for the quarter, down from 16 percent in the third quarter of last year. We believe expenses will remain in the mid in the fiscal fourth quarter.

Our insurance expense continues to run over budget for the year. We experienced substantial increases in premiums and retained losses online with our revised estimates which were more than originally budgeted for. Total insurance expense for the quarter was approximately 64 basis points of sales. The corporate risk manager hired in August continues to work closely with our regions, insurance program and our carriers to refine our existing loss prevention, loss control programs and institute new measures.

Transportation costs, warehouse labor, fuel and utilities are tracking out levels lower than past quarters as a percentage of sales. As the percentage of sales compared to the second quarter of our fiscal year, transportation costs were 25 basis points lower, warehouse labor eight basis points lower, fuel 11 basis points lower. And utilities three basis points lower. We continue to leverage these expenses against a higher sales phase and make incremental gains and efficiencies.

We discontinued goodwill amortization this year in accordance with new accounting rules. Our prior year P&L reflects goodwill amortization of approximately 200,000. Our next operating margin for the quarter was 3.8 percent, excluding special charges. We believe this level of the high three percent range is sustainable for the fourth quarter and maintain our goal of a four percent run rate by our fiscal year end.

Turning to working capital, our days sales out standing for the quarter was 29.7 days, down from 32.2 days last quarter. Days in inventory was 49 days this quarter, down from 50-and-a-half days last quarter.

In September 2001, we expanded our revolving credit facility to 100 million. Our current borrowing base based on accounts receivable and inventory levels is running between 140 and 145 million with remaining availability of 30 to 35 million. We expect to continue growing our borrowing base to $150 million through sales growth, resulting in larger investments in accounts receivable, inventory and through acquisition.

Cap ex for the quarter was $3.2 million, primarily related to our new facility in Southern California. We expect cap ex to be slightly less for the fourth quarter of the fiscal year.

Turning to the remainder of fiscal 2002, we expect our Q4 growth to be 12 to 14 percent, and expect EPS of 28 to 30 cents per share before special items. We will be prepared to give guidance for our fiscal 2003 on our next conference call.

At this time, I'd like to turn it over to Tom Simone, our Chairman comments before opening the floor to questions - Tom.

Thank you, Todd.

Well, once again, I am pleased to be batting cleanup here, and to echo Michael and Todd's very positive comments about UNFI's performance in the third quarter.

Sales growth before acquisitions was almost 15 percent for the quarter. Pre-tax income, excluding special items was 36 percent higher. Earnings per share were 32 percent higher.

We completed the move into our new Fontana, California facility this quarter, and just completed the relocation of our Hershey packaging and warehouse facility in May.

We continue to build capacity for the future growth of our business. The approval of our expanded Chesterfield, New Hampshire facility will provide additional capacity in our fast-growing Northeast market.

Our operating metrics continue at all-time highs, and our people continue to prove our key competitive advantage.

We are pleased with UNFI's performance, but strive to exceed your expectations in future periods.

And now we'll open up the lines for your questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone.

If your question has been answered, or you wish to remove yourself from the queue, please press the pound key.

If you are using a speakerphone, please lift the handset before asking your question.

One moment, please, for the first question.

The first question comes from of Investments. Please proceed with your question.

Good morning. Of the inventories, about $140 million, how much of that do you think might be duplication, if you will, because of the warehouse situation? How much of that will go away?

I don't think that - I wouldn't expect to see major decreases in the inventory levels.

There was - there's some redundancy, but, you know, Fontana is now up and running. And we expect to be increasing our sales base down there, as well.

So, while there might be some reduction from the elimination of their redundancy, I would expect that it wouldn't be that significant.

OK. And another item, I guess, we always have the proverbial question that the Wild Oats situation, is anything happening on, like, current events there?

Wild Oats has indicated to us that they'll be making a decision in the next, you know, seven to 14 days, so we do expect resolution of that supply agreement very soon.

OK, thank you.

Thank you. The next question comes from Carole Buyers of RBC Capital Markets. Please proceed with your question.

Hi, good morning, gentlemen.

A question about the growth that you're seeing convention - from the conventional channel. Is this consistent with coming from different regional, conventional supermarkets? Or is it coming from some of the national players?

No, it's definitely continuing to come from our strength in that channel, which is the regional chains. And we are seeing the growth in all regions of the country.

OK. And then with respect to the gross margins, I was wondering what impacted the gross margins this quarter and what kind of initiatives will you undergo to improve it in the fourth quarter.

Yes. Well, we were disappointed that we had some weakening of the - of the gross margin and as Todd indicated on his comments, you know, the additional facility that was - that was brought on-line we feel like there was a drop-off in performance by our purchasing people in a learning curve, so to speak. And that we do feel, you know, we can - we can improve going forward and hit our original gross margin targets of more mid nineteens to the upper nineteens.

OK. And then with respect to that facility, the regions you were talking about - south - you know, southern Arizona, southern Nevada, and obviously southern California, were these all coming from Auburn or were some of them coming from Denver?

No, all of this - all this business was transferred from the northern California facility in Auburn.

OK, great. Thanks.

OK.

Thank you.

The next question comes from Greg Badishkanian of Salomon Smith Barney.

Yes, hi. Greg Badishkanian. First, you know, great execution, again, guys. And just a few questions - first is the share gains that you're getting, I mean, you mention it's due to service levels. Can you give us sort of an indicate - you mentioned I believe 96-plus percent fill rates for United. What do you - what would you expect that to be for the industry? I mean how much better is that than your competitors?

Yes, good morning, Greg. It's a difficult question to answer because the - to actually have specific data for our competitors is you know we're speculating. But we feel like we are significantly better than our regional competition as well as our national competition. By what degree, it's - we would only speculate. But I would imagine that we're, you know, in general three to five points better than most of the competition.

OK, great.

In terms of food inflation, was there - did you notice any inflation? Is that sort of driving sales a little bit or not?

I don't think so. I don't think that was a factor.

OK.

And then, you know, getting back to I guess the Wild Oats contract, if they were to choose one of your - you know, your national competitor, you know, what type of business would you retain as the secondary? And if so, I - if it's a lower amount of volume, wouldn't you get a higher margin for that business?

Well, in general, in that scenario, yes, if there is a secondary position retained with any customer, then generally the pricing's going to be higher than as if you were serving that customer as a primary. So that would - that would make sense.

But again, at this time, it's hard to speculate what the resolution of the Wild Oats agreement will be. We'll know in a few weeks.

Sure, yes.

And finally, you know, would you be able to maybe break out how much of your growth was from just the industry being pretty strong versus, you know, your share gains versus your competitors?

Yes, we continue to I think look at our growth trends as we have in the past quarter or two with in general industry growth being around 10 percent and our market share gains being in the five percent range and then the growth from our acquisitions being the additional one percent plus. So, I don't think we've seen a real change in that overall growth numbers.

Great. Thank you very much.

Thank you. The next question comes from of .

van winkle: Hi, thanks. A couple questions for you, Michael, on your smaller businesses. Albert's, can you talk about why you thought it was a little below target this quarter? And second, you mentioned growth plans for Hershey's. Could you expand on that a little bit?

Yes, the Albert's division has historically been a little bit more volatile in terms of the quarter-to-quarter growth rate. So it isn't surprising that we see numbers moving around a little bit more than in the rest of our grocery business. There's been a little bit of attrition from the acquisition that we had in Denver, and we haven't retained as much business as we had projected in that market. And there has overall been a flattening of sales in some of the regions with Albert's. But again, we are confident that we'll see the future quarters get back up to projected targets.

On our Hershey's business, with the new capacity and the new management that we have in place, we are excited about rolling out some new product launches that will be distributed, both by UNFI's wholesale divisions, as well as Hershey's to its direct customer base packaged snack items, and some new labels of new product launches are expected to happen later in the fall.

van winkle: Michael, are those businesses profitable?

Yes.

van winkle: OK, thank you.

Thank you. The next question comes from of .

I was disconnected for a minute, so if I ask a question you already heard, maybe you can give me just a very brief answer. But on the gross margin, you indicated I think that both regions had I guess it was more heightened competition. Could you give us a little commentary on what's going on, who that's coming from, why, how long do you think it will last?

Yes, , boy, I can barely hear you there. But if I heard your question right, you're just looking for a little bit more color on the gross margin weakness?

Yes, and I think you mentioned -- is that better?

A little bit.

OK, I'm sort of yelling here. I got a bad connection, I guess. I think you mentioned it was partly at least due to increased competition. That's the part I want you to talk about.

Well, I think the whole general direction of our business is, as our customers get larger and negotiate more pricing concessions from us, as they get more volume -- you know, most of our business is volume-based, so that we look at it as trading off gross margin for our largest customers in exchange for increased efficiencies and lower expenses in dealing with those customers.

So in general, we do look at the consolidation of our customer base as putting pressure on the gross margin, but we do believe we can offset it with lower expenses, so that our operating margin remains intact. I would describe those factors as having more of a impact on the gross margin, than actual competitive pressures.

OK, that's good. Todd, on the insurance expense, could you give the last year-ago comparison on the BIPS as a percent of sales? And when do you anniversary the big increase in the insurance rates?

Our insurance renewals for the most part coincide with our fiscal year. And the - there are some smaller pieces of that that have all ready anniversaried, Albert's for example anniversaried in April. And our - there are some other coverages that I think anniversary in the fall. But most of them anniversary with our fiscal year-end.

As far as the last year I'll have to get back to you . I don't have that in front of me.

OK. And lastly, are you talking to any of the big three or four or five, any of the bigger national supermarket chains who may be, you know, looking to your expertise in merchandising, you know, to increase in their offer in the natural foods within their stores?

Well we continued to be focused on expanding the whole conventional supermarket channel both from the regionals as well as the national players. So we certainly are always looking for opportunities to do business with all of the channel in the conventional supermarket business.

Are you perceiving any stepped up interest from some of the bigger players? Or is it about sort of, you know, just sales and, you know, business as normal.

Well I definitely think there's continued interest as a category, you know, gains momentum, you know, throughout the country. I think the national players have - some of them have different strategies. But we do feel like long-term we have a lot of value to add to any supermarket chain that wants to sell natural products.

OK. Thanks.

Thank you. The next question comes from of U.S. Bancorp Piper Jaffrey.

Yeah, hi gentlemen. A quick question on your balance sheet. It sounds that - it sounds like your business is probably going to be more capital intensive going forward, particularly on a working capital side. What prevents you from taking that line of credit and maybe going - lengthening out your debt maturity on that?

We - yeah, as we go forward, we continue to grow. There will obviously be more capital required. I, you know, wouldn't necessarily say that we're going to require more capital as a percentage of our sales, but certainly on just in terms of dollars we will require more capital. And we are exploring various options in terms of how to finance that capital and how to finance, you know, the balance sheet for optimal capital structure. So, you know, we are looking at some of those things currently.

One more question, you know, as you look at the mass channel and the nice growth that you've had in that, is - what would you say, you know, the organic growth rate within that channel is versus sort of the market share gains that you're getting. And in addition that, how's the pricing structure? And what sort of changes have you seen there in terms of margins?

Well in general, I mean I think the growth rate right now in our mass channel is primarily from - is new business with the existing customer. So it's, you know, the majority of the growth that we're reporting is organic growth. You know, that fluctuates quarter to quarter as we bring, you know, new chains on, obviously.

But for certainly this past quarter or two the growth that we're reporting is I think organic growth. You know as far as, I forgot the second part of your question.

How is the margin structure changing? Have you seen any changes over the last several quarters?

Well, in general, the conventional business for us is a higher gross margin business, with also corresponding higher expenses to service that business.

Again, we like to look at it at the end of the day that it gives us the operating margin, you know, comparable to our other channels. But it does, you know, tend to increase our gross margin and increase our expenses at the same time.

OK. Thanks.

Thank you. Again, ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone.

One moment, please.

The next question comes from of Goldsmith and Harris.

Could you go into the nature of the contracts, supply agreement contracts through the different channels?

I'm not looking for statistics on this. I'm just - how does the contract with mass merchandisers, conventional and the independents differ in terms of duration, continuity, et cetera?

Could you go into that a little bit?

Sure. I mean the, you know, the supply agreements that we have with our various customers are, you know, varied, you know, vary greatly depending on the service level requirement that's being looked at from the customer.

You know, with our Supernatural customers, it's generally a low margin business with high volume and high efficiencies associated with that business.

With the conventional business, there, you know, there's varying levels of service that we offer. We give our customers basically a menu of items to choose from. And each one of them has a corresponding cost to us that we need to pass on.

So some supermarket customers choose to utilize more of full-service programs, where we have a lot of staff devoted to servicing the account, more of a turnkey approach. And in those cases, you know, there's a higher cost that we get for the various services.

And then, you know, other customers have varying degrees of service, and the price is based on those services.

So, the duration is really about the same for most of the accounts, is generally, we're looking for two or three-year agreements. And I would say, in most of our, you know, with most of our independents and smaller customers, you know, supply agreements are not usually found. So it's really just with our largest customers, both Supernatural and our conventionals.

Thank you.

Thank you. The next question comes from of Paradigm Capital Management.

Yeah, hi from .

Given your, you know, comments regarding Andy Wolf's questions about that your consolidated customers have low - might have lower gross margins, but also lower costs to serve, so would that mean that, I mean, if you - you know, if there is a change where you don't become the Oats primary supplier, would that be - it sounds like that would be average to above average net margin business, not gross margin but total operating margin business.

I mean, how should we look at that? That remains a little confusing.

Well, I think in general, our Supernatural, our largest Supernatural customers, our operating margin is - would be slightly less than the rest of our business in other channels.

So, you know, I don't think that if we - if we lost any of our business along the way, I think it would have less of an impact on our operating margin than the percentage of sales for that customer.

OK. But - OK, by - is it just a little less lower margin or a lot less? You know, it becomes important in assessing the risk on the Oats situation.

Yes, well, it all depends on the specific situation, you know, exactly what sales are being lost and what margin is being, you know, continuing on and with the sales base that retained. So, it's a difficult question to ask, but I would - I would say it's - it would be a sizeable, you know - sizeable decrease in the - in the loss of the differential between the operating margin and the sales. So, in other words, if you lost - if you lost 13 percent of your business, I think we would - we would probably look at losing, you know, seven to nine of operating margin.

OK.

And of course, that's - you know, I'll add that there are so many unknowns as to - as to what would happen in that event and what portion of the business if any we would keep and what pricing on that would be and you know, there's about a - you know, there's just too many factors to really give much of an answer there. And I know Michael is, you know, trying to give you a range, but it's, you know - it's a really difficult question to answer without knowing more specifics.

Yes, OK. No, that helps. And just finally, the - on the gross margins, the - is the change - is the new Whole Foods contract contributing materially to the - to what we're seeing now on slightly lower gross margins? Or ...

No. I don't think that's having an impact. You know, we've had that agreement in place for, you know, several quarters so it's really just I think the things that we've listed before the call as the reason for - you know, 20 basis points of lower margin this quarter.

OK, that helps. Thanks very much.

Thank you.

The next question comes from of Investment Management.

Hi. I was wondering if you could give a little detail about the different product categories and how they did in the quarter.

Well, in general, we're not seeing a lot of fluctuation in our product category sales growth. You know, we continue to see the mid-twenty growth in the frozen and perishable category. That definitely the fastest growing areas that we - that we have in our - in our product mix. You know our grocery business is, you know, next in mid-teen growth, our largest category being grocery. And I think, you know, some of the other categories are low teens. The supplement business which has been one that has probably been the most volatile and has been actually, you know, mid-single digit growth did actually return to about 11 to 12 percent growth rate for this quarter. So that was - that was encouraging. But other than that, we're not seeing any major changes in growth by category.

Great. Thank you.

Thank you.

The next question comes from of Asset Management.

Thanks. A couple quick questions - one of them inventory. You mentioned earlier you don't expect it to come down much as a percent of sales, anyway, in the coming quarters. It did grow a little faster than sales sequentially this quarter.

Just curious, besides the duplication from the distribution centers, was there anything else where you underinventoried heading into this quarter, in trying to get that back up to a more manageable ?

I wouldn't say under-inventoried, but you know, we've also -- if you look at our total warehouse space, now versus where we were at year-end, its significantly more with the expansion -- well, the moving of Atlanta to a bigger facility, and the new facility in Fontana. And what that does allow us to do more opportunity-buying, and forward-buying, when it makes sense to. We have more capacity to be able to do that. So part of that also what you're seeing is just taking advantage of being able to get deals, and having the space to store the product where we get enough of a discount that it makes sense to do so.

OK. And then just secondly on the acquisition side. Maybe you can just sort of give us some color on sort of the pipeline of acquisitions you're looking at today? And maybe compare it to -- at least qualitatively -- to what you've had in your pipeline, or under review, over the past six to twelve months, in terms of number of deals, and quality of deals, and maybe the pricing environment?

Well, we continue to look for strategic acquisitions. There's a number of companies that we have on our target list that we would like to look at eventually being able to acquire. We really can't comment specifically on any pricing or any specific discussions that we're having currently obviously. All's I would say is that we remain optimistic of being able to do one or two strategic acquisitions over the next two years.

What would be the size of a strategic acquisition? Is that kind of five to ten percent of revenues? Or ...

Yes, I would think that the acquisitions that are available out there could add 10 percent to revenues with each one.

OK, thank you.

Thank you. The next question comes from of US Bancorp Piper Jaffrey.

Based on the growth that we've seen in the supernatural industry observable, and the fact that you had to post some pretty good growth there over the last couple of quarters, is it safe to assume that your penetration has improved within existing customers?

Yes, in the supernatural category?

Yes.

Yes, I think overall in the supernatural category the trend is that we're gaining a greater percentage of business in the existing customers -- existing stores that we service there. There's definitely been a realization with the largest accounts that the more they can consolidate their buying through us, the more efficiencies they can gain to their operation. So I think we will see that trend continue.

How high do you think a typical supernatural would feel in going in terms of total product sourced through one supplier?

Well, I think it depends on the store and the amount of products that we carry, that they're able to buy from us. I think in general we see our supernatural accounts buying between 30 and 40 percent of their total purchases from us, as a primary supplier.

OK, thanks.

Thank you. The next question comes from of .

Is there any guidelines, or your past experience give you any indication that as regionals or conventional supermarkets or national supermarkets, any of the retail channels as they grow in this category and add more business that at some level they - is there a magic number when they do 50 million or 100 million or 500 million that they might want to do their own warehousing? Or is it - or do you have enough proprietary packaging cost advantages to preclude that from happening at all?

And on a longer term basis, is there any room in your strategy for actually move - vertically integrating manufacturing to have more proprietary product?

OK. Well as far as the conventional supermarket business. Your question about is there a magic number in which they would look to self distribute. I would say in general, I don't think there is. You know, what we do see is where there are certain products that may be very high velocity in that channel they occasionally will look to self distribute those items.

But I would say in general, there's very few of the products that we sell that have the velocity requirements necessary to fit into the economic model of a grocery change distribution. They're just - there's not the philosophy there necessary. And in addition, to that, you know, the amount of products that we offer and the expertise that we offer, the additional services that we offer we believe provide a real incentive for most of the chains to maintain a consolidated buying approach in this category through us. There's just a lot of benefits there that they gain.

And in other ways, we do have I think a lot of proprietary items, exclusive items, and pricing advantages that make the decision to - whether to self distribute or keep it with us, you know, in our favor. So a lot of factors there that I think will allow us to continue to offset any high velocity items that may be go into self distribution. Generally what happens is we're picking up 10 or 20 other new items to more than offset any loss in business through that, you know, through that initiative.

And how about the longer term trends towards more vertical integration backwards?

Well we have, you know, we do have our Hershey's division which is creating new products for our company. I think in general, our focus right now is to focus on our core competency which is wholesale distribution. We don't want to get distracted from, you know, from our main business. And, you know, the companies that we have now that we have on the manufacturing side, we're pleased that we're able to gain advantages through that. But I don't see any major initiatives where we look to increase our manufacturing investment and become more of a manufacturer.

Thank you. Good answer. Thank you.

Thank you. Gentlemen, at this time, we're showing no further questions. Would you like to proceed with any closing remarks?

Yes, thank you all for your questions and your interest in United Natural Foods. We anticipate that you will continue to find UNFI your proxy for the natural products industry. And we wish you a great day. Thank you very much for joining us.

Ladies and gentlemen, that does conclude the conference call for today. Again, thank you for your participation. And you may all disconnect. Good day.