United Natural Foods Inc (UNFI) 2003 Q4 法說會逐字稿

Welcome to your United Natural Foods fourth quarter year end conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference call, Ms. Vanessa Schwartz of FRB Weber Shandwick.

Good morning everyone, and welcome to the fiscal fourth quarter and year end 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 Etta Henderson (ph) at FRB Weber Shandwick at 212-445-8474, and we will send one out to you and confirm your name on the fax or e-mail list.

With us today from management are Mr. Steve Townsend, Chief Executive Officer, and Mr. Rick Puckett, Chief Financial Officer. We'll begin with some opening comments and then open up the call for your questions. As a reminder, this call is also being webcast today, September 2, 2003, and can be accessed via the Internet at www.viavid.com, and www.UNFI.com. Before we begin, I would like to remind everyone of the Safe Harbor statement included in the press release and that the cautionary statements do apply to today's conference call as well. Now I would like to turn the call over to Steve.

Thank you Vanessa, and welcome, everyone, to our fourth quarter conference call. Joining me today is Rick Puckett, our CFO. Our fourth quarter resulted in earnings of 32 cents per share, which, excluding special charges, is in line with our previous guidance. For the year, this gives us EPS of $1.19, excluding special charges. We are pleased with these results considering the fact that we successfully managed 2 acquisitions, expanded our Chesterfield facility, and prior to year-end, consolidated the former northeast operations into Chesterfield. This year has certainly been one that we can truly attribute the success in dealing with all this change has really happened as a result of the dedication and hard work of all our associates here at United Natural Foods.

We once again recorded a record sales quarter with revenues of $367 million. This was an increase of almost 19 percent over the 309 million recorded in the fourth quarter last year. Impacting sales this quarter were the acquisitions of Blooming Prairie and Northeast Cooperatives, and the loss of our former second-largest customer. Because of all the customer transfers among our facilities, we just don't have the ability to break out real sales growth.

We continue to see solid sales growth in all our key business channels. Growth in our independent channel was up almost 36 percent percent, while growth in our conventional mass-market channel was up 23 percent. Overall growth in the (indiscernible) natural channel was down approximately 6 percent due to the loss of our former second-largest customer. Excluding the loss of this customer, the growth in the supernatural channel would have been up by 33 percent.

Overall, we continue to be very pleased with our growth end the strength in all our channels, especially in light of a relatively weak economy. I continue to believe our growth and marketshare gains versus the growth in the overall industry come as a direct result of our commitment to providing the best overall customer support and consistently strong service levels and fill rates for all our customers.

With our two acquisitions now complete, our current mix of business by channel is as follows -- independents represent approximately 45 percent of our business; supernaturals represent 33 percent of our business; conventional mass-market represents 14 percent of our business; and our other channel represents approximately 8 percent of our business. Our largest customer, Whole Foods Market, represents approximately 24 percent of our total sales.

We continue to focus much of our energy and attention on the integration of Blooming Prairie and Northeast Cooperative acquisition. At Blooming Prairie, we continue to see good progress with our operations. We've now improved our fill rates to levels consistent with those at our other facilities. In addition, we continue to standardize our operational work practices. We are challenged because of the small size of these two facilities in the region, but with these changes in our work practices, we expect to continue to see incremental improvements to our operating margins. In fact, we expect to realize continued improvements in operating margins over the next three quarters, especially after we complete the expansion of our Iowa City facility. The expansion to this facility has just begun, and is expected to be completed by the end of May 2004.

Our East region team has completed the integration of the Northeast Cooperatives by consolidating the NEC operation into Chesterfield, and concurrently, closing down the NEC Brattleboro facility. This move and shut down occurred in mid-June. The move went well, but we did experience some minor service issues, particularly with our produce department. However, we continue to make incremental improvements in our operations so that our service levels are now approaching the levels of our other facilities. As we get more comfortable dealing with the volume level out of Chesterfield, we should soon begin to realize improvements to our overall margins out of this facility. I do expect to see these improvements mature over the next two or three quarters.

Once again, Hershey negatively impacted our results this quarter; however, with the steps we've now taken and the team that is now in place, I do expect to see improvements beginning with first quarter 2004. As mentioned previously, we have taken concrete steps to improve our operating results at Hershey, and we continue to work with local management to reduce overhead, improve productivity and drive sales. Total operating margins for the quarter, excluding special charges, was 3.4 percent. This represents an improvement in our operating margin from last quarter, when we reported operating margin of 3.3 percent excluding special charges. Overall, I'm very pleased with the continued improvements to operating margins.

Looking ahead, we're going to continue to focus on the successful integration of our two acquisitions, growing sales across all sale channels -- including foodservice, where we feel we have excellent opportunities to realize substantial growth in this category -- continuing to bring Hershey back to its former levels of growth and profitability, and improving our operating margins at each of our business units.

On a year-to-date basis, our fiscal '03 sales increased 17.4 percent to $1.379 billion, up from about 1.2 billion in fiscal '02. Operating margin for the year was three percent, and excluding special charges, was 3.3 percent. EPS on a fully diluted basis was 119, which is consistent with the previous guidance we gave of 118 to 120 EPS. So overall, were very pleased with this year's results and how we've positioned our company for the future.

I would like to now turn the call over to Rick Puckett, our Chief Financial Officer. Rick?

Thank you Steve, and good morning everyone. Net income increased 20.4 percent to $5 million, or 25 cents per diluted share, for the fourth quarter of fiscal 2003, compared to $4.1 million, or 21 cents per diluted share, in the same period last year. Net income for the fourth quarter of fiscal 2003, excluding the effect of special items, increased 15.6 percent to 6.4 million, or 32 cents per diluted share, compared to $5.6 million, or 29 cents per diluted share excluding special items for the same period last year. Hershey had a negative impact on earnings per share of 1.3 cents for the quarter, excluding special items.

For the full year ending July 31, net income increased 17.5 percent to 20.2 million, or $1.02 per diluted share, compared to $17.2 million, or 89 cents per diluted share, for the same period last year. Net income for the full year fiscal 2003, excluding the effect of special items, increased 10.1 percent to $23.4 million, or $1.19 per share -- per diluted share, compared to $21.2 million, or $1.10 per diluted share, excluding special items, for last year. The earnings per share, as Steve mentioned, excluding special items, was consistent with our full year guidance of $1.18 to $1.20.

Special items for the quarter totaled $2.4 million in expense, or $1.5 million after-tax, having a negative impact on diluted EPS of seven cents a share. Special non-cash income was related to our interest rate swap agreements, and attributable to changes in yield curves during the quarter. This resulted in an increase in fair market value of $1.4 million, or $827,000 after-tax for the quarter. On a full year basis, a special non-cash charge of $484,000, or 293,000 after-tax, was recorded related to our interest rate swap agreements. 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 and remaining term of the contracts. Please note that the time of expiration of swap contracts to cumulative earnings impact will be zero.

In addition, special items included costs of $554,000, or 339,000 after-tax, related to the expansion of our Chesterfield, New Hampshire distribution facility. The full year charge for this expansion was $1 million, or 607,000 after-tax. The Chesterfield move is now complete and we do not expect any further special charges associated with this transition. In addition, special charges for the Hershey operation were $3.2 million for the quarter, or $2 million after-tax. The charges were related to the impairment and restructuring of the Hershey operation that were previously announced. Special items for the fourth quarter of fiscal 2002 consisted of moving and other costs related to a relocation of the Company's subsidiary, Hershey Import, from (indiscernible) to Edison, New Jersey, and non-cash expense related to the change in fair value of the interest rate swaps and related option agreements.

The BP acquisition was accretive for the quarter and the year, and the NEC acquisition was slightly accretive for the quarter and neutral for the year. Gross margin for the quarter was 20.3 percent, compared to 20.6 percent for the same period last year. This reflects the impact of the adoption of EITF 02-16, accounting by customer including the reseller for certain consideration received from a vendor, which was adopted with our third quarter results, and requires reclassification of certain advertising income. Gross profit excluding special items for the quarter was 20.6 percent. Operating expense excluding special charges was 17.2 percent of sales for the quarter compared to 17.1 percent for the same period last year. Operating income was 3.4 percent for the quarter excluding special items, compared to 3.5 percent for the same period last year. The full year operating income was 3.3 percent excluding special items. This is consistent with our full year guidance of operating income margins in the 3.3 to 3.7 percent range. Free cash flow was $12 million for the twelve months ended July 31. Capital expenditures were $20 million for the year, representing 1.4 percent of our full year net sales, coming in at the low end of the range that we previously provided in guidance. Cash flow generated was used to service the outstanding debt, and the borrowing under our credit facility at July 31 was $96 million, with remaining availability of approximately $48 million.

Turning to working capital, our days sales outstanding for the quarter were 24 days compared to 23 days last quarter and 28 days last year. Our target for DSO is 25 days. Inventory days were 50 days for the quarter, compared to 48 days last quarter and 50 days last year; our target here is 50 days. Our guidance for fiscal 2004 is earnings per share for the full year of $1.42 to $1.46 per share, before special items. We believe topline revenue will be in the (indiscernible) -- 1.55 to $1.57 billion range, or approximately a 15 percent increase over 2003. This reflects no change from our previous guidance, and we expect capital expenditures for fiscal 2004 to range from 24 million to $28 million.

At this time I would like to turn it over to the operator to facilitate the question-and-answer period.

(OPERATOR INSTRUCTIONS). Eric Larson, Piper Jaffray.

Could you give a -- put a little more clarity on your full year operating margin? You were down about 30 basis points -- could you maybe tell us what the impact of acquisitions and Hershey was on both margins?

Well, it's just like we have a real difficult time with breaking out the revenue -- actually an impossible time of breaking out the revenue, the same thing is true for the operating margin for those acquisitions. They have been totally integrated into our existing business. But Hershey had a -10 basis points on overall year-to-date margins by itself, and I think we said, too, that a number of things impacted this year. With the loss of the oats business right at the start of the year, that impacted us and brought margins down initially; and then the two acquisitions -- both of which we have said that -- Blooming Prairie was going to be slightly accretive. In acquiring it, it had lower operating margins than our typical distribution company, and NEC was really at a breakeven (indiscernible) point in time. So that's really where the work has been, in terms of looking at -- the effort this year has been put into addressing the two acquisitions, the loss of the business from our second largest customer, and then trying to manage that impact on our overall business.

Can you give us what you're seeing out there? Did we see any sequential pickup in growth rates in August vs. July? It looked like we had probably a low water mark in April of this year, and we've seen steady improvement in the industry. Do you have any sense of how the current trends have been going?

I think the current trends that we've seen the past quarter have continued into August, so we are pleased with those trends.

Greg Badishkanian, Smith Barney.

Just actually wanted to ask you a few questions. One was -- you had -- moving and other costs related to the expansion of the Chesterfield, and you had mentioned that the operating profit was impacted. Could you just break out what was included in the charges and maybe what wasn't? Because I think -- I could be wrong, but I believe there is some additional costs associated with the labor, maybe an additional service; truck labor labor that you use to keep service levels higher that maybe weren't excluded from the operating profit in the quarter?

We tried to break out cost with the shutting the facility down, the moving costs, the moving inventory from Brattleboro into Chesterfield. Those were consistent with what we've done in prior facilities moves such as this. Certainly, coming out of the box, we're probably running more vehicles and trucks at this point -- managing the volume we have and trying to make sure that we maintain the high service levels that our customers are expecting from us. And those will be things that we will certainly see, and hopefully become more efficient at, over the next two or three quarters. I did mention in my comments that I think we will see improvements in operating margins at the Chesterfield facility really mature over the next two to three quarters, as we get comfortable dealing with this volume.

And is there any reason why the Northeast Coop business can't have a similar EBIT margin as the rest of the Chesterfield or Eastern division, maybe in terms of pricing to the customers or customer mix? Is there any reason why you can't get that up there at the same margin level?

None whatsoever. We have high expectations for Chesterfield. This is right now our largest facility nationally, and by consolidating this from a volume standpoint, this is a very good facility from the amount of volume we are running through it. Now it's just a question of our mention of our management team up there getting accustomed to dealing with this volume out of the one facility.

And just as a final point or question -- we heard there was some slight disruption, as with any integration when you did the Northeast Coop integration, but that basically service levels are back to normal. Can you confirm that or give us more color if that's not the case?

We had some minor issues that arose during the transition, but we were moving better than 2 million a week in sales from one facility to another, and moving people over. So we did see some issues, and it was primarily related into our produce area. But we made headway with these things; we are continuing to work against them, and I don't think -- for the most part, the service levels now coming out of this facility are pretty consistent with our other facilities.

And finally, what's your overall service levels, if you look at company-wide?

96, 97 percent across the Company. They remain at approximately the same level as the previous quarter's 97 percent.

So that compares to the (indiscernible) 92, 93 with Tree of Life? And when you look at your calculations, do you calculate that differently than they do or do you not know?

I don't know how they calculate it. Certainly our commitment is to have the highest service levels in the industry. And again, I think that's one of the reasons why I think we've been able to grow our topline at a faster rate than the industry -- the overall industry is growing.

That excludes the vendor out-of-stocks, obviously?

Yes.

As all distributors exclude that? Good, thank you very much.

Carole Buyers, RBC Capital Markets.

Hi, good morning gentlemen. Just a few questions. I was wondering, could you quantify the expected costs from the expansion in the Midwest and what quarter we will see this in?

You're talking about the transition cost?

Yes, I'm sorry. The transition cost.

Steven Townsend; We will have completed the move by 2004, so Rick, have you --?

I think that what we will see is something not at the same level that we saw at Chesterfield, because we're basically not moving one building to another there, we're simply expanding the same building. We have not yet put a forecast together for what that would be, but I would expect something less than $1 million.

Was that the best and worst case scenario in the time frame for the goal of getting to the four percent operating margins?

In our forecast for next year, we are going to be approaching it by the end of next year. I think -- again, we have the areas where we are working against. We are committing capital, large capital expenditures to the Midwest to expand that facility. That'll bring us up, in terms of size, to the size that we have and consistently operate across the country. Then we can, I think, become more efficient their -- so we will see that certainly happen. And then in the Chesterfield facility, I think as I mentioned earlier, it'll take us two to three quarters to see operating margins mature. So we are comfortable. We've seen a positive trend in operating margin. If you go back the last three quarters, (indiscernible) operating margin excluding special items had gone from 3.2 to 3.3 to 3.4, and I expect that trend to continue.

And then you mentioned -- you were talking about the foodservice strategy. I was wondering if you can provide us with a little bit more color on that -- what this market comprises, are there any large players, is it a fragmented market? Just a little bit more clarity on that strategy?

This is a large channel. The foodservice channel is about a $200 billion channel. There are some players out there, such as Tedexo (ph) and Aramark, who are key players that we are now beginning to do business with. And we feel this for us is going to be a good growth opportunity, as we look into the future.

Gary Gilman (ph), CL King & Associates.

Can you give us an approximate sense of your same accounts growth in supermarket vs. the addition of additional supermarket accounts, in driving your sales growth in that segment?

It would really -- this is -- I can give you -- at some of the key customer growth that we've seen, have averaged on a low-end of about 20 percent up to a high of 38. We've had other accounts where it's been low, like 10 percent. But I think on some of our key customer's where I participated in the annual reviews, we've had very good growth, again, in the 20 to 38 percent range. I think we're seeing this channel look at natural and organic as a way of adding more value and services for their customers. And also, a way to differentiate themselves from other competitors that they have. So we continue to get more lineal feet of shelving to support, as well as more doors and coolers, freezers. I think from last quarter you actually saw our number kick up, in terms of the percent of our overall business in this channel, as well -- from 13 to 14 percent.

Can you be a little more specific on the strategy to turn Hershey around, because it's been -- it still is a negative. And I guess, hopefully, it was going to be a neutral for this quarter, but you gave us some sense. What are the steps that are really going to make that the get it back into breakeven or better for the next quarter?

I think what we've put out there when we did the address to Hershey -- back in June we started by making the management change there. We've continued to address our overall management there. We are now at a point where our management is intact, we have our strategy for going forward. Our plan is that we are going to get the business stabilized during our first two quarters. We expect to be near breakeven by the second quarter, and then we expect that it's going to be positively adding to operating margins in the last two quarters of this year. That's what our goals are for this. From a business standpoint, we saw a good August with Hershey from a sale standpoint. Which tells me that our strategy, in terms of how we are approaching our market and our customers, is working. And now we just need to give it time to see that the steps we've taken are having the impact that we expect them to have.

And just finally, just to drill down on -- you mentioned that you have continued sequential improvement in the business, which is great. Is that the consumer strengthening, is it consumer confidence or is it inflation? What are the factors in order of importance?

I think the good thing is we're still seeing the industry grow. I think the most recent report show the industry growing at around seven percent. So I think there is still heightened consumer awareness about this, which is helping to drive it. I think inflation is a little bit of a factor, we haven't measured it yet, but after the calendar year end, we will try to get a sense of what that impact is. And I still think we are continuing to take market share away as a result of the service levels that we're providing our customers, the product offering. And that, again, is some of the key strength that we have as an organization.

John (indiscernible) from (indiscernible) Capital.

Hi, I was wondering if you guys could give any guidance, in terms of CapEx expectations for fiscal '04? And possibly, dropping out from that a free cash estimate as well? Thanks.

What we said for fiscal 2004 is that we expect CapEx to be in the 24 to $28 million range, with free cash flow of 13 to $14 million.

Mark Chicida (ph) from Sidoti.

Good morning. Now that you have the Hershey efforts underway, you completed a Chesterfield transition, and you were working on Iowa City expansion and possibly another consolidation. Once you get close to 4 percent later into fiscal '04, where does the feeling go from there? What would prevent you from surpassing four percent as the Company grows?

I would want to get to four percent before I set another bar our there. But I think internally our goals are that we can have a higher operating margin than that. At the same time, we see our -- this year has been a year where we've seen tremendous amount of business change. We talk about having almost a $400 million revenue swap on a 1.2 billion sales base, with the two acquisitions and the loss of our former second-largest customer. So we have had to manage our way through a lot of changes that impacted us differently across different facilities. And certainly, I think our target has been to get to four percent. I think we are on track to get to there towards the end of our fiscal '04. And then once we've done that, I think we can really sit back and assess where the next hurdle and what the next bar should be for us. Internally, I can tell you that my goals are higher than that, but we still need to demonstrate that we can get to this goal before we set a second gold.

Can you talk about retailer acceptance of some of the mainstream organic products? Frito is the highest profile one. Talk about your customer base, and what they are doing with these types of products and whether they are asking you to carry these, or they are going to traditionals for that?

I think everybody is sort of taking a wait, see and look at it. I don't think the independents will sort of lead this effort. I suspect it may come from the supernaturals in terms of what happens with -- whether some of the new product offerings out (indiscernible) like Frito. So at this stage, I haven't seen a lot of companies, or haven't had a lot of people talk about whether we're picking it up or not.

Are you carrying the Frito line?

No.

Is Whole Foods carrying the Frito line?

I don't know whether they are. They've talked about -- I know when I was visiting with them that they were talking about it, but I don't know whether they have picked it up yet or not.

Has there been any shift in strategy regarding you looking at the national grocery accounts? I know you normally stick to the regionals -- is there any shift there?

No. We still feel like we have a lot of opportunity with the regional chains, and I think that's where our focus is. But that's certainly not to preclude us from doing business; and in fact, we do do business with national chains through some of their subsidiaries. And I think that's -- again, the way we focus is through the regional chains.

One last thing. The percentage of revenue you gave by channel -- that was for the most recent quarter correct, that was not for the year?

That is correct.

And lastly, as recently as last quarter you were able to break out sales growth ex-acquisitions. What has changed that you can no longer -- or it seems to be a little bit more blurred getting this kind of same account, or an organic -- ex the acquisitions and ex oats sales growth number that you have given us in the past?

What has happened is really we've moved business now amongst our facilities, we've moved customers from our Denver facility into Blooming Prairie. We've moved customers from NEC to Blooming Prairie. We've moved customers from NEC over to our Chesterfield facility. These were (indiscernible) -- these were customers also that, you know -- an NEC used to be primary for, and we were secondary -- that we now do all the business with them. So it's really almost impossible for us to determine what is -- what would have been the sort of base growth or baseline of what sales would be, and what the growth of any sales to that customer was, when in fact NEC, for instance, and UNF had been doing business with (indiscernible) prior to the acquisition. So it's really just -- in a couple of more quarters after we sort of anniversary our way past the oats business and the two acquisitions, I think we will be able to get back on track to that. But it's going to be almost impossible for the next quarters to come out with a number that I can with any certainty that I have any confidence and as a growth number.

So we can't put you on the spot for a ballpark number today?

Or tomorrow either. I don't see -- it's just it's very difficult. This has been something Rick and I and our staff have looked at, just to see if there is a way we could get comfortable with this market, and we just can't.

I think if we had originally coated customers as NEC customers and tracked them through our existing system, because all those customers now are existing, we might have had a shot at it, but we don't have that.

And lastly, would you still consider yourself an aggressive acquirer, or are we seeing (indiscernible) for a while?

We've now had a year with BP, and we have had half a year with NEC, and that consolidation is done. I think that certainly we will continue to look at opportunities out there.

Andrew Wolf, BB&T Capital Markets.

I wanted to follow-up on Gary's question on your growth of the regionals. Nice numbers -- very impressive actually. Steve, you mentioned (indiscernible) getting more distribution (indiscernible), more doors. Can you speak to -- I don't know if you have a look on the velocity? In other words, it's the same store sales in the natural foods, comparable store sales for any given deep, good regional player -- is it like two or three times regular the average same store sales for that store? I'm curious if you have a look on that?

I don't. I look at it for us as a year-over-year basis, and even that isn't maybe as true as it should be. Because if we had gotten more doors or more shelving that has been given to us, then we are not dealing sort of apples to apples. But I think I look at that as more the trend, is that we are getting more space to put natural products, organic products into stores. And I think that for us, again, helps drive that volume. But I think it speaks to the way the customers are viewing their own businesses today and where they see their growth opportunities. A lot of stores that we talk to, their conventional side they are seeing virtually no growth whatsoever. So if they are seeing a 30 percent growth in this category, than I expect that they'll start expanding more into these categories of products. And I think that's kind of what we've seen over the past year.

And on the sales side, could you talk a little bit about -- and earnings as well -- just what effect the northeast blackout had?

None of our facilities were impacted by that. We did have customers that were impacted by that down in the city, and certainly, we probably ran extra trucks and things down there. We held drivers over who couldn't make deliveries because stores didn't have power for certain days. But overall, from an operational cost standpoint, we'll probably see some cost but nothing that will probably try to break out or identify. From sales, there will probably be some incremental sales because some of the stores lost product when the power went out for a couple of days. And they lost what was in their coolers and freezers. But again, it's not anything that I think we are going to be able to quantify or break out for anybody.

And lastly, you're cycling the loss of the primary business from wild oats -- yesterday or recently, what -- in terms of gross margin, what kind of effect -- can you isolate what kind of effect that might have on gross margin?

As it relates to this year, none, because we're not with Wild Oats. (indiscernible) from comparisons into next year -- from last year, I'm sorry -- I don't know that it's -- I haven't tried to break that out quite honestly, as it related to what the impact to Wild Oats was in 2002. But going forward, obviously, we are going to be comparing sort of apples to apples.

I would just add -- I think in terms of what we've put out there as far as our plan for fiscal '04, that's all dialed into that, in terms of what the impact of that is as it relates to our fiscal '04. So again, I think that business -- it's not like it's a light switch where it's on/off; that business sort of transit transitioned out away from us over about a six month period. So it's really hard to measure its overall impact until we sort of (indiscernible) full transition period, too.

(OPERATOR INSTRUCTIONS). Scott Van Winkle, Adams, Harkness.

A couple of housekeeping items. First, what was the share count increase in Q4?

Basically, the share price at the end of the quarter was high enough that a lot more options were included, more than anything else.

And a guidance for next year on share count, if you can?

What we've estimated at this point is around 20 million shares, slightly over actually for the year.

And a couple of other guidance items if you can Rick? One would be interest expense -- if you can give us a range for next year? If you did I apologize, I didn't catch it. Second would be fuel cost, if you are anticipating any uptick with the recent price surge?

Actually, fuel costs for the quarter were actually down from the third quarter, but you're right, they have started to creep back up. We don't have any significant assumptions in for fuel costs for '04 that were any different than this year, quite honestly. The variation hasn't really impacted it as much. The only thing we did do is we did raise our (indiscernible) our gallon fuel price from where we were (multiple speakers) -- but we did raise that up about 15 cents a gallon --

-- over where we were. On interest Scott, it's somewhere between 8.4, 8.6 million.

With regard to all the growth you've had in the independent channel, do you think that some of the easy share gains from your competitor taking the Wild Oats business and having problems a year ago -- do you think some of that -- is it harder to come by going forward?

Certainly, yes -- I think it's going to be harder to come by, but I also think it's still available, because I think they are still struggling with that business and certainly we still see it. So again, our plan is not to worry so much about what our competition is doing, but to continue to focus on doing a really good job for our customers. And if we do that, I think we are going to be able to continue to take market share in excess of what the industry is growing. So certainly, that's what our focus is.

Last question, if you can give it. What you are seeking in the supplement, nutritional supplement channel?

I can call you back. I'm actually looking at some data that I just got now for the year in terms of what we have there. But I can tell you that supplements as a percent of our business is actually down from where it was a year ago. But I can get back to you Scott, with some additional color on that, once I've had a chance to sort of digest more of this.

Carole Buyers, RBC Capital Markets.

Just a follow-up to clarify the guidance for next year. If we assume a midpoint of 1.5 billion to 1.7 billion in revenue, and the midpoint of your earnings per share range, we only have two assume a modest expansion in margins to more like the 3.6 percent range to get to the earnings number. That's number one. And then number two is, why is (indiscernible) interest expense going up next year?

Why is it going up?

Yes.

I will deal with the interest first, then I will let Steve deal with (multiple speakers) --

The interest assumption is basically the taking on of the long-term debt and the continuation of the swaps -- basically.

And Carole, to your question -- basically yes; that was sort of built into the model in terms of what the operating margin was. But what we were looking at is it sort of improving over the fourth quarter as to where by the end of the year, we are approaching the four percent operating margin for the business.

The first half will be significantly weaker than the back half?

It'll definitely be weaker than -- I'm not defining significantly, so it will be weaker than -- the first two quarters will be lower than the second two quarters for us, from an operating margin standpoint?

You're not expecting them to go down?

No.

In the sequential quarters?

No.

Okay. Thanks.

(OPERATOR INSTRUCTIONS). There are no further questions in the queue at this time. I would like to turn the program back to management for any further remarks.

We just want to certainly thank everybody for their continued interest and support of our company. And on behalf of the nearly 3600 UNFI associates, we want to thank you for participating in today's conference call.

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