United Natural Foods Inc (UNFI) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your United Natural Foods fiscal third quarter 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 be given at that time. If anyone should require assistance during the program, please press “star” and then “zero” on your touch tone telephone. As a reminder, ladies and gentleman, this conference call is being recorded. I would now like to introduce your host for today's conference call, Ms. Susan Garland. Please go ahead, ma'am.

Thank you. Good morning, everyone. Welcome to the fiscal third quarter conference call for United Natural Foods. You should have all received a copy of the press-release. If you did not, please call my office at FRB Weber Shandwick at 212-445-8474, and we will send it to you as soon as possible after the conference call.

With us today from management is Mr. Steve Townsend, Chief Executive Officer, and Mr. Rick Puckett, Chief Financial Officer. We will begin with some opening comments and then open the call up for Q and A. As a reminder, this call is also be webcast today, June 4th, 2003 and can be accessed via the Internet at www.unfi.com.

Before we begin I would like to remind everyone of the Safe Harbor statement included in today's press-release, and the cautionary statements apply to today's conference call as well.

Now I'd like to turn the call over to Steve.

Good morning, everybody. Thank you, Susan, and welcome to our third quarter conference call. Joining me on the call today is Rick Puckett, our CFO.

Our third quarter resulted in earnings of 31 cents per share, which excluding special charges, is consistent with our previous guidance of 30 to 32 cents a share EPS. We once again recorded record sales this quarter with $363.6m. This was an increase of 21% over the $300.4m recorded in the third quarter last year.

Positively impacting sales this quarter were Blooming Prairie and Northeast Cooperative acquisitions. We had both Blooming Prairie and Northeast for the entire third quarter. If we were to exclude the impact of BP and NEC acquisitions, our sales would have been $300.6m or roughly a 0.1% increase over the $300.4m recorded in third quarter last year.

Finally, if we exclude these acquisitions and the change in distributors of our former second largest customer, who is Wild Oats, then our year over year real sales growth would have been approximately 14%.

We continue to see solid growth in all our key business channels. Growth in our independent channel was up almost 38%. Growth in our mass market channel was up 21%, while growth in our Super Natural channel was down overall by approximately 3%.

However, if we exclude acquisitions and the change in distributors of our former second largest customer, our growth rates would have been 14% for Independents, 13% for Mass Market and 18% for the Super Natural channel.

Overall, we are continuing to be pleased with our growth and the strength in all our channels, especially in light of a weak economy, the war, and the impact of a very difficult winter. We lost approximately $2m in sales because of weather in the Northeast, Denver and Texas, and this certainly would have improved our sales gains for the quarter.

With our two acquisitions now complete, our current mix of business by channel is as follows. Independents represent 45% of our business, Super Naturals represent 33% of our business, Mass Market represents 13% of our business, and our other channel represents approximately 9% of our business.

Our largest customer, whole Floods, now represents approximately 24% of total sales. The integration of Blooming Prairie and Northeast Cooperatives acquisitions are moving along as we expect. Our Western Region team, led by Kevin Michel continues to make good progress with our operations at Blooming Prairie. We have improved our fill rates to levels consistent with those at our other facilities. In addition, we continue to standardize work practices and have made some personnel moves to strengthen our overall organization.

Though we continue to be challenged because of the small size of our facilities, with these changes, we have seen an incremental improvement in our operating margins. Though we have seen some improvement, we expect to realize continued improvements to our margins over the next three or four quarters. As stated previously, we expect this acquisition to be slightly accretive to earnings through the end of this fiscal year and then accretive to earnings thereafter.

Our Eastern Region team led by Rick Antonelli continues to make good progress with the integration of Northeast Cooperative. To date, we have seen market improvements in fill rates out of the Northeast Cooperative Brattleboro facility along with improvements in our gross margin through the implementation of the UNFI purchasing practices. In addition, we continue to work on lowering our operating cost. To date, we have gone through significant route reorganizations where we have shifted customers between UNFI facilities where they can be more efficiently accommodated.

In addition, in April, we closed the Columbus, Ohio facility of NEC and moved customers over to our new Oxford, Pennsylvania facility and Iowa City facilities. As mentioned previously, our plan is to close the Northeast Cooperative Brattleboro facility sometime early this summer. As noted earlier, we did not purchase that facility which was in Brattleboro, Vermont. As stated previously, we expect this acquisition to be neutral to earnings for the rest of our fiscal year and accretive to earnings once we've moved into our newly expanded Chesterfield facility.

Once again, Hershey Import negatively impacted our results by approximately 1.8 cents EPS. We have taken numerous actions to improve our operating results including reorganizing our management team and installing Dan Atwood, our Senior Vice President, to serve as the interim president. We continue to work with local management on reducing overhead, improving productivity and driving sales. In addition, we have adjusted our head count to reflect current demand. Since January, we have reduced inventories by some $3m, and implemented a SKU reduction program to provide further warehouse efficiencies.

In summary, we have made changes to the overall leadership structure at the division, and continue to make improvements on the cost and expense side of the business. Unfortunately, we have not seen market improvements in overall sales. Obviously we will continue to work at turning this operation around over the next several months.

Total operating margin for the quarter was 3.3%. This represents an improvement from last quarter of 2.3%. In addition, if we were to exclude our acquisitions and the impact of Hershey, our operating margin would have been 3.9%. So overall, I'm very pleased with the continued improvements that we're making in operating margins.

Looking ahead, we will continue to focus on the following. We will continue to focus on the successful integration of our two new acquisitions. We will look to grow sales in all our key business channels. We will address the ongoing operational issues impacting our Hershey division, and we will continue to focus on improving operating margins within each of our business divisions.

As far as our plans for fiscal 2004, we will provide guidance on this by early to mid July. I'd like to now turn the comments over to Rick Puckett, our Chief Financial Officer. Rick?

Thank you, Steve. And good morning, everyone. Net income increased 9.4% to $5.8m, or 29 cents per diluted share for the third quarter of fiscal 2003, compared to $5.3m, or 27 cents per diluted share in the same period last year.

Net income for the third quarter fiscal 2003 excluding the effect of special items increased 11.2% to $6.2m, or 31 cents per diluted share compared to $5.6m, or 29 cents per diluted share excluding special items for the same period last year. The earnings per share excluding special items was consistent with our guidance of 30 to 32 cents stated earlier.

Special items for the quarter totaled $696,000 in expense, or $425,000 after tax -- having a negative impact on diluted earnings per share of 2 cents. Special non-cash expense was related to our interest rate swap agreements and attributable to the changes in yield curves during the quarter, which resulted in a decrease in fair market value of $360,000 or $220,000 after tax for the quarter. We will continue to recognize the swap agreement non-cash item quarterly for the duration of the swap contracts. Whether we recognize income or expense in any given quarter and the magnitude of that item is dependent on the yield curves in the remaining terms of the contracts. Please note that at the time of expiration of the swap contracts, the cumulative earnings impact will be zero.

In addition, special items included costs of $336,000 or $205,000 after tax, related to the expansion of our Chesterfield, New Hampshire distribution facility. Special items for the first third quarter of fiscal 2002 consisted of moving and other costs related prime primarily to the start-up of the company's Southern California distribution facility and again non-cash income related to the change of fair value interest rate swaps and related option agreements.

We believe that the BP acquisition will continue to be slightly accretive and the NEC acquisition will be neutral for the remainder of the fiscal year. In addition, Hershey Import again had a negative impact on the results this quarter by 1.8 cents in earnings per share.

The implementation of certain strategic tax initiatives has resulted in overall reduction in our effective tax rate. Therefore, in Q3, we have reduced our accrual from 40% to 39%, which will be the rate that we will use to accrue going forward. This resulted in a positive impact of earnings per share 4/10 of a cent and had no impact of earnings per share of 31 cents.

Gross margin for the quarter was 20.2%. This reflects the impact of the adoption of EITF 02-16, which is the accounting by a customer including a reseller for certain consideration received from a vendor, and which requires us to reclassify certain advertising income. This reclassification has no impact on operating income. But had the effect in the quarter of increasing both gross profit and operating expenses by .9 of 1% of the revenue.

Operating expense, excluding special charges was 17% for the quarter. Again, excluding impact, the reclassification required by the adoption of EITF 02-16, operating expense was 16.1% of sales.

Fuel costs as expected were higher than average by 8 basis points and was certainly in line with our internal projections in our Q3 guidance.

Regarding working capital, our day sales outstanding for the quarter was 23 days compared to 25 days last quarter and 29 days last year. Days in inventory were 47 days in this quarter compared to 51 days last quarter and 49 days last year.

The borrowing under our credit facility at April 30th was $103m, with remaining availability of approximately $47m. We did complete the financing of our real-estate during the quarter by putting into place a $30m long-term loan. The proceeds from that transaction were used to pay-down the existing debt under the credit facility.

Free cash flow is $12.5m for the nine months ended April 30th. Capital expenditures are $15m for the nine months ended April 30th, representing 1.5% of our net sales year-to-date. We believe the capital will be in the $20m to $22m range for fiscal 2003 as previously stated.

The Chesterfield expansion will continue to be the most significant project for the remainder of the year. In addition, there will be systems infrastructure investment as we continue to standardize our financial systems across the company.

Our guidance for the remainder of fiscal 2003 and earnings per share for the full year remains at $1.18 to $1.20 per share -- before special items. We expect top line growth to be in the 15% to 19% range for the remainder of the year.

At this time, I'd like to turn it over to the operator to facilitate the question and answer period.

Thank you. Our first question comes from Eric Larson from Piper Jaffray. Your question, please.

Hi, everyone. Two questions. First on Hershey Import, Hershey has been, I think, taking your EPS numbers down a penny or two now for some time. What's the patience level with this, and if you can't get it turned around, what are some other strategies that you might do to lessen that impact?

Well, we're really becoming more fully engaged now, we've become more comfortable in terms of what's happening with the integration efforts with BP and Northeast, Eric. So I think the move with getting Dan Atwood down to serve as interim president, we've really begun to take a hard look at the operations down there.

I think that within the next two months, we're going to be able to sort of ascertain where we need to be from the standpoint of what our costs are, where sales are, and our ability to get this to break-even, and then obviously the positive side of the ledger.

And quite honestly, we've said if we can't get this thing turned around, then our plans would be that we would either sell it off or discontinue it, but right now, we're approaching it as if we can turn this thing around because we've got the right people operating in there now.

Ok. Thanks. Second question is, you've quantified the loss of revenue from some bad weather in the quarter, which I think everybody in the industry has suffered from. Do you have any idea what that may have done to either your growth margins or your EBIT margins?

No. I think we really just wanted to point to the fact that this was a particularly winter, and we got hit really in three different areas. But we're not going to use that from the standpoint of trying to say, ok, here's what sales would have been. We obviously -- our growth, top line growth was 21%. Had we had the additional $2m we felt we lost, it would have been higher, but I think we were just pointing to the fact that there are some external factors that have impacted sales. Certainly weather was one of them.

Ok. But it would be fair to say that you did have some margin impact probably there as well?

Sure. Absolutely.

Ok. And then finally, guidance for fourth quarter revenues, 15 to 19, you were at 18 to 22 for this particular quarter. Is there any reason why that number is sliding down a little bit for the fourth quarter?

I think in part, we saw some slowdown in sales in April and then whole foods reported comp growth rates that were certainly a little bit lower than what people were expecting. We saw sales strengthen in May. So we were taking more prudent action of being a little bit more conservative as far as our top line guidance.

Ok. Thank you, gentlemen.

Thank you. Our next question comes from Mark Chekina (ph) from Sidotti (ph).

Good morning, gentlemen. Following up on that last question, was there any reason to suspect for seasonality purposes that on a sequential basis, it would be lower than the third quarter?

The fourth quarter tends to be a little bit slower than third quarter for us, when you look back historically. But not a lot. Again, part of it is just what we saw a little bit in April, and again, I want to emphasize that we did certainly see sales strengthen in May. Our preliminary May numbers show top line growth of around 18%, but we're just viewing that -- that's one month of a quarter, so certainly one month doesn't make a quarter. So we're just being a little bit cautious in terms of what we're expecting out there, Mark.

Ok. And talking about some of the large food manufacturers coming in, how do you gauge whether you are going to be carrying a product, for example, if Whole Foods decides that they're not going to be carrying maybe a Frito-Lay chip because it doesn't fit their profile and independents don't decide to carry it. Do you still carry that for your mass channel products or is that a product you would avoid all together?

We would avoid it all together. It doesn't meet our product standards, so we wouldn't carry a product like that.

And aside from the Frito introductions, how would you view the rest of the large food manufacturers as they try to get a piece of that pie and how would you handle that going forward? Does it cause any disruption with the relationship with your other manufacturers who view them as a tremendous competition?

We look at the partnership with many of our key suppliers and we look at a lot of new products on a month-to-month basis, and generally the decision about what items we pick up and carry are driven a lot by our sales, marketing and purchasing people as to how they will certainly fit into the products that we carry within our business.

And so there's no formula for what we pick up. It's got to meet certain standards in terms of quality, and then we have to make sure it's consistent with what we're trying to do from a product standpoint. So, there's no real formula that I can tell you as to how we go through it. It is certainly a process that we pay a lot of attention to on a month-to-month basis. Because our emphasis is that we want to be first to market with new items, but they've got to be consistent with what our product standards are.

So I guess the bottom line to my question is, would you carry a product if it was only going to be sold through the mass channel?

We would consider that, but, again, we have certain product standards that we try to carry, so we would view that, but again, it's got to be within the context of the product quality standards that we have as a company.

Ok. One final question. When you look at pricing, organics and naturals verses traditionals, where do you see the premium headed? Is there a pressure from the retailers to say -- to drive the category, it needs to be priced more competitively, and are you feeling that pressure at all? Or are manufacturers feeling that pressure, do you think?

You're talking about on organic products?

Organics and naturals. The pricing premium verses traditional foods, do they want to see that premium come down so they can drive more volume of the naturals category?

I think certainly in time, as volume increases and as manufacturers gain more economies through their operation, you typically will see prices get closer. But there is certainly going to be a price differential between organics and natural verses what's sold in the conventional supermarkets, just because of the quality of the product. But I think typically, over time, there will be certainly the day a new item is introduced, it may be a wide disparate, but over time, that will certainly tighten up. At the end of the day, I still expect there will be some differential between a natural item and an item sold through the conventional supermarket.

So you're saying over the long term, the premium would have to trend down.

Yes.

Ok. Thank you.

Thank you. Our next question comes from Greg Badishkanian from Smith Barney.

Hi. A question related to the weather impact on the quarter. I think Whole Foods had seen about 150 basis point impact from weather and I guess they have more perishables and they were a little bit more concentrated in those areas. The areas that you were hit, I think that would primarily have just impacted your internally generated revenue growth if you look at it, because if I'm not mistaken, it didn't impact as much the areas where you made acquisitions. Would that be correct or not?

Primarily that's correct. Certainly, it impacted the Northeast at our Albert's division in New Jersey, Denver, and the business that we do through Texas, which is all -- would have all impacted the internally generated growth rates, Greg. So yes, that is correct.

And you saw a rebound in May, and I guess there was some weakness in April, weather, war, all the companies sort of saw that. But what you're saying is that May is really -- has strengthened so it's sort of back to a more normalized growth rate for the industry?

Again, our preliminary May numbers, our top growth is 18% based on what May closed out for us.

Yeah. Good. Good. And just, I guess, one final question in terms of taking share from some of your competitors. How are they doing with all the changes there, Tree of Life, are they still sort of having some service level issues, and are you continuing to benefit from that situation?

We tend not to -- we focus on our business and we try to execute at a very high level. I've been really pleased with the level of our service, and I think, the feedback that we're getting is that, our competition is experiencing some fill rate issues and things like that, but again, our focus is on our service levels to our customers and having the highest in stocks in the industry, you know, with the best and widest product selection, the most delivery options for customers. I mean, these are what we need to do in terms of providing service. So our focus obviously is always internally as to how we're doing, and that's what kind of I've got our management team focused on, Greg.

Great. Thank you very much.

Our next question comes from Carol Buyers from RBC Capital Markets.

Good morning, gentlemen. Two balance sheet questions. I was wondering if you could elaborate on the accrued expenses. Is this related to the move for Northeast Co-op, and then what are DSO's? Those are my first two questions on the balance sheet.

What was the second part, Carole? Sorry?

Day sales outstanding. DSO's.

Oh, day sales outstanding. Certainly the day sales outstanding for the quarter were improved. There are 23 days, I believe, verses 25 days last quarter. 29 days last year for same quarter. Some of this was a result of losing Wild Oats customer because their terms were a little further out. And the first part of the question, I'm sorry, was the accrued expenses?

Yeah, the accrued expenses went up somewhat and I was curious, is this related to the move for the --

It is certainly centered in the East region primarily, and yes, it would be part of that, but I don't have the exact numbers of that right now. I could certainly give that to you if you want to call me back.

Ok. And then regarding the mass market, we noticed that slowed somewhat. Is this more a function of slower same-store sales or fewer distribution? If you had to kind of break out just -- I mean, it's still good growth, but slow somewhat versus other quarters.

It's no fewer doors or anything. I think it's just a little bit of a slow down that we saw through the conventional side, Carole.

Is there anything specific going on at the conventionals that you can elaborate on?

No, nothing that I saw. We did three key business reviews in the quarter, and the volume with those we saw was pretty solid, but just again a little bit slower than what we had been seeing in prior quarters.

Ok. And then finally, just looking specifically at the operating margin, is it fair to say that Blooming Prairie and Northeast Co-op are trending at about 2% and flat operating margins?

We don't break out any information. Again, we talked to that Blooming Prairie is slightly accretive to earnings. We have improved our operating margins there. It's still not at the level that certainly we expect to see it at, and we are as Northeast has basically been neutral to earnings. So I think that has certainly had the impact on our operating margins, which is why, we talked about the fact that if we exclude the acquisitions and we exclude Hershey, our operating margins would have been 3.9%, because obviously our goal is to get to 4 and above, with our business unit. So I think we've made good progress there, and obviously we've laid out the areas that we're working on.

What about the facilities that did a lot of volume with Wild Oats? Are you seeing that improve, for example, I guess the Denver region was a big region for Wild Oats. Can you talk a little bit about just the capacity utilization there? Are you seeing it improve, and what are the plans going forward?

Yeah, I mean, our two facilities that have been most impacted by the loss of that business was I think first and foremost our Fontana or Southern California facility and then Denver next. So, we have been working at growing sales in all our channels to try to replace that business and I think we've had a really good year in terms of our success at doing that. We're not operating those facilities at a sales level where I want to be, so I think we're going to continue working at that.

And then on top of that, we've also been sort of distributing some volume between Denver, for instance, and out to the upper Mid-west, which is more efficient for us to handle that business, for instance, out of Minnesota than out of Denver. So we are shifting business around, so it's being accommodated where it can be done most efficiently. So we're not where we want to be primarily with those two facilities, but obviously our efforts are to continue to grow sales and again, we're trying to do it across all business channels, so that is certainly a challenge that we have in front of us.

And then finally, and then I'll open up, the move to Brattleboro that you expect to go through this month, just walk us through the logistics and what are the biggest risks that you see in going through the move? I know it's only seven miles, but just for our benefit.

First and foremost, any time you have a move where you're moving $4m to $5m of inventory over a weekend, there's a lot of logistics coordination that takes place, but we've done this a number of times, we've got a very experienced team here. We did it in Atlanta about a year ago, we moved about $9m in inventory in Atlanta seven miles away, so it's something we're experienced in doing.

From a coordination standpoint, our facility is ready to receive it. We've been selecting out of this, so we had to do some retraining of people because it's a new facility for them. Operating, a little bit different production methods for the new people that we're bringing over from Northeast Cooperatives into our facility.

So, I mean, the logistics, any time you're moving 100 tractor-trailers of product in a pretty short period of time, there's a lot of coordination that takes place. But what we've done in the past is we count it when it goes on a truck, we count it when it comes off the truck, so we do a pretty full physical inventory of the product that's hitting our new facilities. We're fully staffed, we've already coordinated with outside carriers to provide equipment as well as drivers for us.

Those are the risks that you take with it. We feel pretty confident. We did Atlanta over four days. This one, we're going to be able to do over three days because it's only half the inventory.

And getting rid of the overhead at a facility, what kind of increase in margin will we see, what kind of benefit will we see right away?

Certainly we expect Chesterfield in our East region, Chesterfield is probably our weakest facility from an operating margin standpoint right now, but once we dial in the volume out of the Brattleboro facility, which is roughly $2m a week in volume there, we'll be operating a facility at a level that I'm really comfortable with. We expect Chesterfield to open doing sales somewhere between $3.2m to $3.7m in sales. So volume, for us, through the facilities is where we derive our greatest economies and efficiencies, so that's ultimately where we want to have it. Obviously we're running one building doing that volume verses two facilities doing the same volume of a $1.6m or $1.7m in sales, you just don't pick up the economies, you have no ability to really leverage those expenses.

Great. Thank you.

Thank you. Our next question comes from Gary Gindlen (ph) from CL King.

Good morning. Hate to belabor the gross margin question, but, I mean, do you still feel that you can get each of the co-op acquisitions to the full United Natural corporate gross margin and operating margin? And if so, what is the latest thought on the time frame for that?

Yes, certainly that's our goal. The expectation is that we have work to do, with both of these. And they're two different acquisition opportunities for us. With NEC, basically we're doing a consolidation, we're shutting down the facilities. We closed Columbus, we'll be closing in mid June the Brattleboro facility. Getting everything under one roof I think is the way that we'll maximize our gross margin and operating margin opportunities with this acquisition.

With Blooming Prairie, it's certainly going to be a little bit longer, and that's why we talk about it over the next three to four quarters. We have seen some improvement in our gross margins, we've seen some improvement in our overall operating margins, but we have certainly room to grow. We've talked about this in the past, that we see no reason why the Blooming Prairie acquisition cannot contribute the operating margin that we expect as a company. So I suspect that over the next three to four quarters, that we'll be able to get those operating margins out of that division.

Ok. And just my second question is, on the secondary business to serve Wild Oats, what kind of volume are you doing, let's say, in -- let's take May, and how does that compare with either dollar terms or just percentage difference verses in December? In other words, is it changing from the initial stages of the change in the Oats relationship?

We've talked about Wild Oats being a company that will do basically 10% of the volume that we had done with before, and the numbers that we're generating on sales basis with Wild Oats is consistent with that. We're still working at the same levels we were last quarter as far as volume with Wild Oats.

Ok. I mean, do you expect that to sustain at that level or is it going to dissipate? Is there a built-in secondary supply business there or is it going to get all transferred over as soon as Tree of Life gets its act together?

We continue to work with them on obviously servicing the stores, and we're actually having discussions with them about formalizing a secondary supply arrangement with them. So we obviously expect that -- they're a large customer, that we can supply them and support them, and certainly our efforts are to do so wherever it makes sense, and certainly that's our goal, and we've had a long relationship and history with Wild Oats, and certainly we expect to do business moving forward with them.

Mm-hmm. Ok. So you're saying in recent months, the volumes are about -- have been consistent in terms of the secondary supply?

We haven't seen any degradation of volume in either East or West Divisions, Gary.

Ok. But that is less than it was in the -- let's say the last few months of 2002? In other words, that it didn't step down from the initial snafus that required extra distribution from -- the initial distribution wasn't working, you were getting a lot of secondary supply, so has it changed from that level, from the late 2002 level, I guess?

I look at it really from the standpoint of what are we doing this quarter verses last quarter. Certainly we expected there to be issues when the distribution moved over and there were, but we've said that we expect to retain approximately 10 plus % of the business, and we have. I don't think there's been any change in our third quarter from what it was in our second quarter.

Ok. That clears it up. Thanks very much. And good luck with the Oats discussions.

Thank you. Our next question comes from Andrew Wolf from BB&T Capital Markets.

Hi. A lot of my questions were answered, but I have some follow-ups. First on the Hershey situation, do you expect the earnings impact to improve in the fourth quarter from the 2 cents or the 1.8 cents here?

I don't think I can comment on that. I can tell you I don't expect them to get worse. I think it will -- I do expect some improvement, Andy, but I'm not ready to quantify that yet. Again, we just basically over the last week and a half really became fully engaged down there. Dan went down for the first time this week and has begun really kind of assessing what our opportunities are and so on and so forth. So I suspect that that in short order over the next couple of months, we'll get a sense of what our opportunities are there, both in terms of improving our gross margins, reducing expenses further, and what our sales opportunities are.

And on the Northeast Co-op integration or fold-in, one of the risks I thought might be present is -- and you may disabuse me on this -- on the customer interface side, do you have different item codes or different ordering procedures? Is there any risk of less visibility of inventory at the d.c. or customer level?

And then on the rewards side, I guess I could have listened a little better to your answer, but are you expecting to get to the 4% sort of corporate margin goal at this facility, and, could you give us a sort of flavor for the speed with which you might achieve something like that?

I'll take the second part of the question first. Once we dial the sales in to Chesterfield, I expect that we're going to make very good progress in terms of getting to the 4%-plus operating margin. So yes, I expect that to happen in relatively short order.

To your first question, these are customers, many, many of these customers that Northeast Cooperatives had were existing customers for UNFI, so there's really going to be no -- we did not pick up a tremendous number of customers who we were not t already doing business with, Andy. So I don't really see any issues with regard to the move over or the item numb numbers. Basically we've been working with the stores, re-tagging stores, but that's been happening really since the first of the year, and we've continued to do business with them. Some customers have, in fact, moved already, so it really is not what we expect to be any kind of ongoing issues from just the standpoint of our ability to take orders and deliver because we're really already delivering to most of them already.

Sounds good. Thank you.

Thank you. Our next question comes from Jennifer Secless (ph) from Atlantis Investments.

Hello. You gave the figure for May, the sales growth up 18%. Could you give it for April?

I don't have those numbers with me, but I think we can get back to you with that, Jennifer.

Ok. Thanks.

Thank you. Our next question comes from Burt Becky from REF Partners.

Good morning, gentlemen. If you take out the impact of EITF 02-16, it seems like your gross margin for the quarter will be 19.3%, approximately 10 basis points lower sequentially. What was some of the breakdown of lower gross margin for the quarter?

Some of that impact will certainly be Hershey again coming through and impacting that.

Ok. And what about the fuel impact?

The fuel impact was 8 basis points over the average for the year, which was consistent with our guidance and our expectations. It's actually gone down from the end of the quarter and continues to be a more positive sign for us.

Just to give you an example, in February, our average fuel price per gallon was $1.80 per gallon. As of May, we were down to $1.50 a gallon, so certainly things are getting back to what we consider to be normal.

Sure. Thank you very much.

Jennifer, we have that number for April. The growth for April was 17%.

Thank you. Our next question comes from Scott Van Winkle from Adams Harkness and Hill.

Hi. A couple questions. First, on the 18% number you gave in May or maybe you want to relate this to your guidance of 16% and 19% growth for the fourth quarter, what would be the internal figure, excluding acquisitions and the loss of Wild Oats?

That number for us, Scott, is going to be very difficult for fourth quarter because of what we're doing with the integration of Northeast. As we shut down Columbus, we've moved customers now over into New Oxford and Iowa City facilities. When we shut down Brattleboro, we're moving those customers over to Chesterfield. It's really going to be difficult for us to get at what an internally generated number will be.

So at this point, we don't expect there to be really any -- basically we expect that the internally generated number will approximate what it was for third quarter, but it's going to become very difficult in Q4 to try to break that number out just because of the moving of customers between facilities. And the shutdown of the facilities of Northeast Cooperatives particularly.

Ok. Do you happen to have the Q4 sales last year to Wild Oats?

No, not -- Not right in our hands, no.

Ok. A separate issue. When you look at your mass market business and your independent channel or super natural business, do you see any relationship between those sales? In other words, in a certain region if sales are strong in super naturals, it's lower in mass market. Is there any difference in the relationship between those two channels?

We don't see any correlation like that.

Ok. And on the moving costs that were excluded this quarter, would it be fair to say that those would probably end in the fourth quarter? You have them in the fourth quarter with the Chesterfield move, but you don't have any facility expansions on tap for next year, do you?

Not at the present time. And I think that's a good assumption, Scott. We'll certainly make sure we get all those costs in Q4.

Ok. And Rick, are there any other financial matters that you're working on such as getting the tax rate down a point in this last quarter that could pay off?

I'm continuing to work on the tax rate. I haven't given up on the fact that we can't get that down even further. We hired a new tax manager, for instance, internally which we did not have before, and that individual will be expected to obviously pay for himself.

So other than that, I'm continuing to work on the balance sheet and some other things going forward to make sure that we're properly leveraged everywhere and positioned to grow even further. So we're putting in an overall financial system as well for both general ledger and accounts payable, which will help us analyze the business a bit better and get to information a little faster.

Thank you.

Thank you. Our next question comes from Ken Cassidy (ph) from Cassidy Investments.

You've got $90m that's on these swap agreements. Am I right on that?

That's correct.

Have you given any thought to doing some sort of refinancing? (inaudible) converts are popping up these days, the stock price has been up. If you were to do a refinancing, what would happen to the swaps? Would you have to pay any money to get out of them?

We would have to pay some money to get out of them, unless we're able to tie the swaps to other underlying variable debt. So as it is today. I think about this a lot, because they are unfavorable and as time goes on, they'll be less and less unfavorable because they're coming closer to term. But at this point, they are a significant nuisance for us, and we would love to get out of them, but at this point, we'd have to pay a little over $7m in cash to get out of them.

So if you did some financing, you might just have extra cash sitting around and have this as a temporary negative?

I've been in this business for 20 years and we don't have a lot of extra cash laying around generally. I mean, I think it's -- as Rick said, it's something that we've looked at, what our alternatives are in terms of getting out of these things, and it's going to be something that we're staying in the forefront of how we look at how we're capitalized as a company. But we're not rely to pull the trigger yet in terms trying to take these things out.

Thank you. Our next question is a follow-up from Jennifer Secless from Atlantis Investments.

Hi. Could I get the sales growth for February and March also?

February was 22 and March was 23.

Ok. Great. Thank you.

Thank you. Our next question is a follow-up from Andrew Wolf from BB&T Capital Markets.

Hi. Just on the gross margin sort of situation, it was down 20 basis points sequentially, adjusted. Last year, it was down 40 basis points. Isn't it really just sort of a seasonality issue here? I mean, or could you just address gross margin again? It doesn't seem like there's any issue here at all to me. I just want you to -- see what you have to think about that.

Andy, I still think it's more Hershey than seasonality, but Hershey is really a drain on the margin more specifically than in the operating expenses. So most of the operating income impact on Hershey is coming on the gross margin line.

Ok. Do you have -- I think you said you didn't know exactly what it was. Do you have an estimate what Hershey might have done to the gross margin?

I think we tried to give some guidance in terms of the overall -- the operating margin impact. We didn't really break out what it was on a component basis.

I mean, I could give you what I think it is. We reported 20.1, I believe, gross margin, 20.2. It's about 60 basis points. But that would also include the acquisition. So excluding Hershey and the acquisitions, 60 basis points in gross margin impact.

Ok. And any sense of -- or any flavor for what portion of that was Hershey versus, let's say, the two acquisitions combined?

No, not really, Andy.

Ok. Well, that's helpful. Thanks.

Thank you. Our next question comes from Michael Zimmerman (ph) from FAC Capital.

I was wondering if you guys could give us an estimate of the benefit that you think May got from the weak April.

I don't believe there's any correlation at all. I think -- I'm not sure what the factors were for April to tell you the truth, but again, we saw the strengthening in May. I just wasn't ready to believe that there was anything fundamentally changing within our business after April. So we needed to see how May came back, and again, we did see an improvement in May over April. So I just think it was a combination of things. Certainly the weather, the war that was taking place, the economy in general. So I just can't point to any one thing that we feel, had caused sort of the slowdown in April.

You don't think there was any pent-up demand benefit in May from April?

No, I don't. I don't think people because they didn't eat in April ate more in May. I think there are some things psychologically that may be impacting because of the economy and war and things that have an impact in April that we didn't see have the impact in May.

Right. And has there been a change in terms of growth rates within your channels of distribution?

No, nothing visible. Nothing visible. I think just the fact that overall, what we've been seeing from a trend basis for May has really -- has continued into May as far as our growth rates been channel.

And I guess built into the assumption of the top line expectation for this quarter is that June and July will moderate from the pace of May. Is that correct?

Again, we feel comfortable with the guidance that we've put forth in terms of sales, and I think April was something we feel was an anomaly. We saw the strengthening again in May. We just felt it was bet better to be prudent and a bit conservative in terms of looking ahead of what sales were going to be for our fourth quarter.

Ok. Thanks.

Thank you. There are no further questions in the queue at this time. I'd like to turn the program back to you for any concluding remarks.

Thank you, Jonathan. I'd just like to say on behalf of the 3800 UNFI Associates, that we really thank you for your continued interest and support of our company, and we appreciate you following us. So thank you all very much, and have a good day.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect.