United Natural Foods Inc (UNFI) 2004 Q1 法說會逐字稿

I would like to welcome everyone to the United Natural Foods fiscal first-quarter 2004 earnings conference call. (OPERATOR INSTRUCTIONS). At this time, I would like to turn the conference over to Ms. Susan Garland with the Financial Relations Board. You may begin.

Thank you. Good morning, everyone, and welcome to the fiscal first-quarter conference call for United Natural Foods. You should have all received a copy of the press release this morning. If you have not, please call Etta Henderson (ph) at Financial Relations Board at 212-445-8474, and we will send one out to you and confirm your name is on the fax or a e-mail list. With us today from management are Mr. Steve Townsend, Chief Executive Officer, and Mr. Rick Puckett, Chief Financial Officer. We will begin with some opening comments and then open up the call for questions. As a reminder, this call is also being webcast today December 2, 2003, and can be accessed via the Internet at www.viavid.net (ph) 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 statement apply to today's conference call and Webcast as well. Now I would like to turn the call over to Steve. Steve, please begin.

Good morning, everyone. Thank you, Susan, and welcome everyone to our first-quarter conference call. Joining me on the call today is Rick Puckett, our CFO. Our first quarter resulted in earnings of 6.8 million or 34 cents EPS. Excluding special charges, earnings were 6.6 million or 33 cents EPS. This represents a 23 percent increase over first quarter earnings last year. Obviously, we are very pleased these results considering the fact that we have been working to successfully integrate the BP and NEC acquisitions. In addition, as part of the NEC acquisition, we have been focused on integrating the NEC customers into our newly expanded Chesterfield facility. Overall, we have seen significant progress, though there is certainly more for us to do. We once again recorded a record sales quarter with revenues of $381.4 million. This was an increase of almost 23 percent over the 311 recorded in the first quarter last year. Impacting sales this quarter were the acquisition of the Blooming Prairie and Northeast Cooperative and the loss of our former second-largest customers. With this change and the subsequent business transfers among our facilities, we do not have the ability to break out real sales growth. However, we continue to see very positive sales trends. We continue to see solid sales growth all across our business channels. Growth in our independent channel was up almost 30 percent while growth in our conventional mass market was up 19 percent. Growth in our supernatural channel was up approximately 9 percent. Obviously, we continue to be very pleased with these growth rates and the strength in our key customer channels. Overall our growth in marketshare gains versus the growth in the overall industry come as a direct result of our commitment to providing the best overall customer support, as evidenced by our consistently strong service levels and fill rates for all customers.

With our two acquisitions now complete, our current mix of business by channel is as follows -- independents represent 44 percent of our business; supernaturals represent 33 percent; conventional mass-market represents 14 percent of our business; and our other channel represents approximately 9 percent of our business. Our largest customer, Whole Foods Market, represents 24 percent of total sales. The integration of Blooming Prairie and Northeast Cooperative continue to be where we are focusing much of our attention and energy. At Blooming Prairie, we continue to see good progress with operations. We have now improved where our fill rates and service levels are now consistent with those at our other facilities. In addition, we continue to standardize our operational work practices, which has resulted in improved operating efficiencies and operating margins. In August, we began the expansion of our Iowa City facility. Once this expansion is complete, we expect to see solid improvement in productivity, which will positively impact our overall operating margins. This expansion is not scheduled to be completed until June 2004.

In the East, we have now completed the integration of Northeast Cooperative by consolidating the NEC operation into our Chesterfield facility and shutting down the Brattleborrow (ph) operation. This transition occurred back in June and to date, we have seen market improvements in our overall service levels, though we are still not yet operating at levels that are consistent with our other better-performing facilities. As we get more comfortable dealing with the volume levels in Chesterfield, I expect to see continued improvement in our operating margins over the next two to three quarters. I'm pleased to report that our Hershey operation (ph) -- import (ph) division is now contributing positively to both operating margin and net income for our company. I want to acknowledge the work of Dan Atwwod and all our associates at Hershey for helping turn this division around.

Total operating margin for the quarter was $3.4 percent, which was the same as it was last quarter. We expect to see our operating margin improve over time, as our investments in people, facilities, equipment and technologies help make us more efficient. Overall, I am pleased with our operating margins relative to our internal plan.

Looking ahead, we are obviously excited with the news that we will once again be serving as a primary distributor to Wild Oats. Re-gaining this business came as a direct result of our continued emphasis on providing a high level of customer service and support to all our customers. It's our plan to work with the Oats management team to affect a smooth transition of this business back into the UNFI DCs. Looking ahead into '04, we are focused on the successful integration of the Wild Oats business; growing sales across all sales channels, including food service where we feel we have excellent opportunities; growing sales of UNFI branded product; continuing to invest in our people, facilities, equipment and technologies to help drive more costs out of operations; address new hours of service regulations and their impact on our transportation; and ultimately improving our operating margins in each of our key business units. Overall, I'm very pleased with our first quarter results and how we are positioned for both the remainder of fiscal '04 and the future. I would now like to turn the call over to our CFO, Rick Puckett.

Thank you, Steve, and good morning, everyone. As Steve mentioned, our sales for the quarter were at $381.4 million, which represents the 14th consecutive quarter of a record-setting sales. The growth of 22.6 percent came from all of our channels of business as we do not focus all of our efforts into any one channel. Net income increased 70.1 percent to $6.8 million or 34 cents per diluted share for the first quarter of fiscal 2004. That compares (ph) to $4 million or 20 cents per diluted share in the same period last year. Net income for the first quarter of fiscal 2004, excluding the effect of special items, increased 23.2 percent to $6.6 million or 33 cents per diluted share compared to $5.4 million or 28 cents per diluted share excluding special items for the same period last year. The Hershey operation was slightly accretive for the quarter. This is consistent with our actions there related to the elimination of the loss and getting us back into the black in that operation. The job done there by all the individuals has been extraordinary over the last few months, and we expect that this performance will continue.

Special items for the quarter -- first quarter -- of 2004 totaled $304,000 in income, or $186,000 after-tax, having a positive impact on diluted earnings per share of 1 cent. The special items consisted only of non-cash income related to our interest rate swap agreements and attributable to changes in the yield curves during the quarter, which resulted in an increase in fair market value. 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 the remaining terms of the contract. Please note that at the time of expiration, the swap contract cumulative earnings impact will be zero. Special items for the first quarter fiscal 2003 consisted of costs related to the loss of the primary distribution agreement with Wild Oats, which totaled $574,000, or $345,000 after-tax. And non-cash expense related to the change in fair value of the interest rate swaps and related options agreement of $1.7 million or $1 million after-tax.

The BP and NEC integrations are on plan, and we're pleased with the progress being made on those two fronts. Gross margin for the quarter was 20 percent compared to 20.4 percent for the same period last year. The level of promotions was higher in the first quarter than the previous year, impacting our overall margins percentage. In addition, purchase discounts taken were lower than previous years, and this accounted for approximately 10 to 12 basis points, and was due to the conversion problems to our new accounting system, which occurred in August. This is now completed, and we are now back to normal levels in October. Operating expenses were 16.6 percent of sales for the quarter compared to 17 percent for the same period last year excluding special items. This represents an improvement of 45 basis points, as we have improved our efficiencies year-over-year. Although all of our operations contributed to this improvement, the Hershey operation contributed 13 basis points of the total improvement in our overall operating expenses. As Steve mentioned, operating expenses in our Chesterfield facility are running higher than last year with the integration of the NEC acquisition. Excluding special items, operating income was $3.41 percent for the quarter compared to $3.38 percent for the same period last year.

Free cash flow was $16.8 million for the latest 12 months ended October 31, and CAPEX was $2.3 million for the first quarter. The bulk of the capital expenditures associated with the expansion of Iowa City, Iowa and Dayville, Connecticut will hit in the second and third quarters of fiscal 2004. Therefore, we continue to forecast 24 to $28 million in CAPEX for the year. The borrowing under our credit facility at October 31 was $95 million with remaining availability of approximately 46 million. We have reached agreement, although not signed, with our term loan lenders to increase the existing long-term loan by an additional $10 million to cover the costs of expanding the Iowa City and Dayville facilities. This will be reflected in the balance sheet for our second quarter.

Our receivables outstanding for the quarter were at 24 days, well within our target of 25 to 27 days. Inventory was at 50 days this quarter compared to our target of 50 to 52 days. Our return on total capital was 20.7 percent for the quarter, which compares to 20.1 percent for the last fiscal year. As we continue to invest in infrastructure and people, we will continue to pay close attention to our returns, as we grow our business and enter into new customer contracts. The Company had previously announced guidance for fiscal 2004 of net revenue in the 1.55 to $1.57 billion range, and earnings per share excluding potential special items in the range of 1.42 to 1.46 per diluted share. Subsequent to this guidance as previously announced by Wild Oats, Wild Oats and its primary distributor have mutually agreed to terminate their primary distribution relationship, and Wild Oats plans to transition its primary distribution business to UNFI. When this transition occurs, the Company would anticipate incurring start-up costs in the second quarter of fiscal 2004 related to the Wild Oats transition, and achieving revenue consistent with the primary distribution relationship during the fourth quarter of fiscal 2004. The Company will provide revised guidance for fiscal 2004 after the primary distribution agreement with Wild Oats has been executed. At this time, I would like to turn it over to the operator to facilitate the question-and-answer period.

(OPERATOR INSTRUCTIONS). Gary Giblin (ph) of C.L. King.

I am just wondering how much would you say the Wild Oats volume will benefit your total buying power in (indiscernible) in our basis points, or just dollars of extra allowances, gains (ph) in procurement?

We expect that once we fully absorb the Wild Oats business, which we don't expect that to happen until really probably toward the -- in fourth quarter, we expect that on an annualized basis, we are looking at somewhere between 160 and 200 million new volume for the Company. So I would think that in terms of cost of sales, we would be looking at somewhere in the probably 130 to 150 cost of sales area.

Okay. And the second question is, you have been gaining some marketshare from your primary competitor, and then they are further downsizing. So does that mean further marketshare gains?

We feel that, you know, obviously, that we are the largest customer to many of our suppliers. So certainly as a result of that, we do expect that we should be able to buy consistently at levels that are equal to or better than our competition. So certainly, our approach to that has not changed nor will it change.

Is there a customer transfers -- or are you gaining customers from the changes and downsizing at your competitor?

That's another question. But yes, we continue to see marketshare gains and new points of distribution for our company. I think it's something that we have consistently seen over the last couple of years, Gary.

So the degree of that is just cost benefit (ph) of not picking up? Or in other words, is there more of that now with changes at Tree of Life? Or is it just the same as it has generally been running?

We are certainly getting more calls from customers because of the recent announcement at Tree. But I think we continue to work hard on building business with all customers. And certainly, we have not changed our approach to trying to gain business and marketshare from really any of our competitors.

Eric Larson, Piper Jaffray.

A quick question, I guess I am not -- do you actually have a signed contract with Wild Oats right now? Or are you waiting for that still to be done?

We have a secondary agreement with Wild Oats, Eric, and we are working currently on trying to finalize the primary agreement with Wild Oats.

Okay. So once you secure that primary agreement is when you will provide guidance. It won't be at the beginning of fiscal '05 when you've fully integrated it back in. I guess I am confused on that point.

Once we sign the agreement and we can sort of lockdown what the transition dates are going to be, to move the business back into the UNFI distribution center, then we will give guidance. I would expect the guidance to come out probably sometime in early '04.

Okay, great. That clarifies that. Can you talk a little bit about what happened to gross margins in the quarter? The decline in gross margins actually surprised me a little bit. Obviously, I had some higher operating profit margins and was (ph) also gross margin, it didn't translate to that. Was there an adverse mix of business in the quarter?

Actually, Eric, there were a couple of large items there. One was the one I mentioned as it relates to the transition to a new accounting system, which gave us some issues in getting purchasing discounts. That occurred in the month of August and September. By the end of October, that had been completely disappeared and we were back on track at a normal level. That's approximately 10 to 15 or 10 to 12 basis points of the total margin.

That's ongoing until you anniversary that?

No, it's only a onetime kind of thing.

Okay, got you.

If you are doing comparisons, you'd have some comparison issues. But for the quarter, it was a one shot deal.

The other major -- you said there were a couple major items in there. One was the accounting system change?

There were also high promotions during the quarter, that we typically do this time of year. And I think those were a bit higher than last year.

Okay. And then finally, your tax rate at 39. Is that something that we should use, probably Rick can answer that. Is that what we should use going forward here?

Our internal effective rate is 38.7 currently. So 39 percent is a good number to use on an accrual basis.

Carole Buyers of RBC Capital Markets.

Just a few questions. I was wondering is there any way of telling us what operating margins excluding acquisitions were? I know you had the Northeast facility move. But in the last few quarters, it has been trending in the 3-8, 3-9 range?

Again, Carole, we shut down two of the facilities for Northeast and then integrated the customers into our East region systems. It's just trying to break that business out because many of the customers were common customers and we were both supporting them, as well as NEC prior to the acquisition. So that's why it became fairly difficult in terms of trying to break out that number again, especially after we consolidated operations.

What if we look at say just the Northern California facility, that one has been unaffected? Have margins improved? I know that's a pretty strong facility. But have margins improved in that facility?

Basically, I don't have that information right at my fingertips. But the margins -- the first quarter tends to be a weaker quarter for us from the standpoint of produce. So we tend to see that consistently where our produce operation tends to be down in the first quarter. But in overall, I don't really believe that I saw any real change. Last quarter, our operating margin was $3.4 percent, as we were going into summer. We know this tends to be a little bit softer quarter for us as a company. But I can't point to any one facility being off. The Chesterfield, with the conversion, moving the old NEC business into that, getting comfortable with the volume levels we have, and that's really for us, is generally a two to three quarter process, then realize our operational efficiencies out of that facility. I just can't really point to anything else in terms of that or give you any other guidance, Carole, in terms of what it would have been without the acquisitions.

That was going to be my other question, trying to understand when you shut the Brattleborough facility, I would assume that you'd see somewhat of an immediate impact. And then you said it takes two more quarters after that to get the rest of the benefit?

Yes, we experienced this, and you saw this even when we did the Atlanta conversion, when we shut the facility down in Atlanta, it really takes us two or three quarters to begin to realize the operating efficiency out of those facilities, and Chesterfield is really not any different for us in terms of that. We have taken a facility there really over the last four months, we have actually seen a 35 percent increase in sales. Just getting the building comfortable to deal with the volume levels that are flowing through that -- is just a challenge for our operations teams.

Just to further understand the costs that are associated in the next -- you mentioned in the next quarter, you are going to have some costs associated investing in Wild Oats, basically getting them back online. First of all, will we assume that the added costs will mostly be on the operating line?

Yes. Those costs will be primarily things like hiring people before we actually are running equipment so we can train people, bringing equipment on that we are going to be paying on before we have any sales dollars offsetting it. We teach drivers how to run routes and things, just so they're comfortable with the routes that we run. It's part of being able to service a customer. So those are the types of costs you will see. But they will clearly all be on the operating line.

I'm just trying to better understand this. I know that you didn't specifically give guidance for next quarter. But I am trying to understand how the quarter shakes out, say relative to the first fiscal quarter? Or even relative to last year? Should we assume that maybe on the operating expense line, that year-over-year, it's flat to slightly higher on the operating expense line? Would that be fair?

Again, I will defer a bit on this one. Our focus right now is twofold with Wild Oats, one, certainly work through the transition plan with the Wild Oats management, and then obviously to try to button-down the agreement with them. Once that is done, I think then we will concurrently work on here is what we envision happening. We're starting to get more information now as it relates to the transition plan, the timing. We are going to have 40 tractor-trailers and that sort of thing out of a couple of facilities. So there are certain costs that we are going to be starting to incur. But again, once I think we get the primary done, we get a little further along in the transition planning, I think we will have a better sense that we can then give some guidance out. Like I said, I think it will be sometime in early '04 that we will be able to do that.

Is it fair to say probably early before you guys report your January quarter?

Yes, absolutely.

You will give us how we see our quarter kind of shaking out, is that the type of guidance we will get, and the incremental costs associated with it?

Yes, you'll see that. That's exactly right. The January quarter will not be reported until probably early March. So I would expect the update and guidance to be given sometime during January, the month of January.

One last question, would you be prepared at that time to talk about '05? It seems like the real gain from Wild Oats will probably come in '05?

We may give some topline but at this point, I would like to sort of just get us through the transition of Wild Oats for '04.

Scott Van Winkle, Adams, Harkness & Hill.

Southern California question with the strike, did you see any incremental business down there? And did you see any incremental business at Whole Foods which had real strong sales? I know you're not the primary for Whole Foods in Southern California?

Yes, we saw incremental sales as a result of the -- what's going on with the conventional mass-market side (ph) down there. And we did see some pickup in -- with Whole Foods business down there, supporting them, but not material.

Okay. And the issue at Chesterfield, I know you have talked with us a couple of times. But is it just the fact that you have got a building that is taking 35 percent more volume and you've got to figure out how to move product from here to there? Is it just logistical within the building?

Generally, it's operations. It's people that have been used to working at a building that is 109,000 square feet that are now working in a building that is now 300,000 square feet. And picking up this change, we went from a mechanical pick-system out at Chesterfield to a jack-pick system. So clearly, our people are going through a transition in terms of training. But it was really no different than what we saw again with Atlanta when we did the move from the two facilities that was supporting our business there into the one. One other thing is just we took on a fair number of new customers, which obviously impacted our routing. So we had a tremendous level of re-routing of trucks and trying to support the business also. So those are the changes, principally, that we go through when you shut down a large facility and consolidate it into one as we've just concluded there.

And the drivers and such that you will be bringing back on to handle the Oats business, is a good percentage of these or are a good percentage of these people that maybe were let go when the Wild Oats business was lost?

We don't expect to see that, no. Because basically, that happened over a year ago. We would certainly hope to see some of that. But our expectation is that we are going to higher experienced drivers, but they may not be experienced in natural and organic product. So we have to go through the full training that we would normally go through.

Just trying to get an idea of the forecast for the new Oats business -- what would be the Wild Oats business in the current quarter, if you have it?

I don't have that information available. But I think you have given guidance on that, Rick?

The current quarter was only $3.9 million.

Last question, Steve, I think you mentioned a focus on UNFI-branded product in '04. Can you maybe discuss a little further what you're doing there?

Yes, UNFI has its own branded product program. I think we have been a bit more aggressive in terms of bringing out the lines of product and fill-in categories, where we don't think products exist or new categories and those kinds of things. So we've got a renewed focus on trying to develop more fully the UNFI branded product, and our internal goals are to be able to grow this business over the next couple of years, and in essence double the size of it in the next couple of years. So we feel it's an important part of what we do, especially if we can bring products on that are not being serviced or don't exist, today, and that's kind of what our focus has been.

Andrew Wolf, BB&T Capital Markets.

On the hours of service regulations that you alluded to, have you looked at how that might affect the business, on the P&L, and maybe you are going to have to invest in additional rolling stock or anything like that, even a preliminary look would be useful? If there are additional costs, are those things you can fairly quickly translate and pass through and pricing?

We have looked at that and we have a pretty good idea of what it is going to cost us. We do believe we will be able to recoup the inbound freight side of that. In terms of passing all the rest to the customers, is still a question mark for us. But it is -- it's going to be a significant cost for us. As you say, it certainly brings on additional costs in both labor and equipment. And the impact that we believe right now is somewhere in the $1 million annual range, in terms of additional cost. How much of that we can recoup and price increases, we are still working on. Does that answer your question?

It certainly does. Related to that, the guidance you're giving prior to Wild Oats announcement and you're hopefully pending deal with them, and given what you just said, with that guidance you had out there, would you stick with that guidance? Or would you trim $1 million off it? Excluding Wild Oats coming on.

We are comfortable in the guidance that is out there today. And again, we will be updating that guidance for the remainder of fiscal '04 once we get a better sense on the transition plan. If I had to take a guess today, as Rick has talked about, I think we're going to see more costs incurred during our second quarter, as we gear up to absorb the business. But I do think that overall, I wouldn't be changing our total guidance, annual guidance, the 1.42 to 1.46 for the year, because I do think we will make some of that up over the fourth quarter. So that is kind of where we are today. But we do have more work to do on that. And obviously, we are going to wait until we've concluded the primary agreement and we've got a better sense on the timing of the transition planning with the Wild Oats management team.

I would just clarify the $1 million I gave you was a gross number, not a net number, which means we expect to get some of that back in terms of pricing and so on.

It's far less than a percent of your sales, it sounds like you should be able to pretty easily pass that through. That sounds great. The last thing on Wild Oats, you mentioned 160 to 200 million in new volume. That's incremental to what you're doing now? I am just checking that. That's a lot more than what I think you lost. So what is the difference there? Are you counting on Wild Oats growing a little faster? Or do you anticipate getting new categories from them? Perishables or something, produce or something like that?

When we lost the business, we lost what was approximately 150 million in business. And today, we're doing roughly 12 to 15 million. So when I talk about that number, I am talking about total business including what we're doing today.

So the 160 would be sort of a wash whereas the 200 would be growth plus new stuff, or something along those lines? You're still working that out.

Yes.

So it's not a big (ph) (indiscernible) --?

Their plans are that they're going to have 106 stores by the end of the first quarter '04, so, and I think they have 101 right now. So they obviously are opening stores. That's sort of the number that we are working on from them. And that is kind of the volume estimate that they have given us that we are dialing in now to our transition planning.

Mark Bekanow (ph) Sidoti & Company.

The past several quarters, you have been talking that your core operating margins being close to 4 percent. Now that Hershey has turned around, where do you see -- how close are you getting to your overall 4 percent? And also, how does Wild Oats margins -- when you look back historically -- how does that fit into you getting to 4 percent operating margin goals?

I think the guidance that we have given is certainly we expected certainly lower operating margins in the first part of the year and trending toward the 4 percent by the end of the year. And that clearly is where we are on track right now. What we have found with Wild Oats historically is that they have been a little bit lower than this range. But again, we are trying to work through this in terms of the planning, the transition planning and that sort of thing. So until we have a better sense of timing on this mark and what our equipment and personnel needs are going to be, it's going to be hard to gauge this. That's why we are not really going to give guidance until early '04.

Okay, and a little bit more strategic thinking, when you look at the other type of a retail outlet that consumers are buying or can buy natural products, would you look at the national grocery accounts that you typically have not been servicing as they do kind of direct store and they don't get the same -- you can't get the same margins from them -- is there any change in thinking that maybe you should re-explore going after the Krogers and the Albertson's and the Safeways as opposed to just the regionals that you can do the marketing programs for?

Obviously, our focus has been on the regional conventional mass-market account but we are having discussions with some of the national players now. And certainly, we are not going to preclude doing business with anybody. I think our focus is that we can service any customer in the country and service them at a very high-level. And clearly, if we can find common ground to work out an arrangement with them, we will do that. Clearly, we are not shutting the door on anybody at this point.

If we take it from the other angle, when you talk to these potential accounts, is there any willingness on their part to say maybe we would pay a little more and use you and you would basically design the marketing, is there a shift on their philosophy on how they want to carry organic products?

With the conventional mass-markets, we do business in any number of ways with them. And so we are very comfortable structuring an arrangement that meets their needs. So it's really clearly depending on their needs and whether we can come to an agreement. I will say that we are certainly cautious about doing business with people. We are not going to take on accounts that we can't be profitable with or we can't make money, because we are committing. We're making investments in people and equipment and services. So it makes no sense to me to do business with customers where we can't make a return on our invested capital. So I think we view every arrangement, we want it to be a win, win situation. But certainly at the end of the day, we have to get a positive return, otherwise it doesn't make sense for us to be doing business with customers. And we have walked away from business where we just can't make money with them.

Whole Foods also appeared rather confident in their growth prospects (ph), they upped their comp guidance. Are you seeing an acceleration with that business? Or do you expect to see an acceleration this year as they guide towards better or same-store sales growth?

Our growth with Whole Foods has been very strong, as indicated in our call today. I expect we will continue to -- because of the relationship we have, our growth rates with Whole Foods probably consistently exceed their own growth rates, because again, we tend to take on more of their new items or as we pick up items that they may be buying from other distributors, they tend to consolidate their purchases through us. So certainly, we expect to see more volume with Whole Foods and certainly with their growth plans that they have in front of everybody right now. We are very comfortable with that business, the relationship we have and the business we are doing with them today.

Gregory Badishkanian of Smith Barney.

Just a follow-up on that. (Indiscernible) with new management changes, it seems to be really focused on profitability. Are you noticing a little bit of a change in the marketplace where before they were pretty irrational, I think, in their pricing? Have you noticed a little bit more rationalization in pricing in the marketplace?

It's still early right now. I think I will get a better feel for that probably in another 30 days or so. The transition and the announcement of the management changes and things, they have, from what I understand, hired a firm to find a replacement for the CEO here. So I think this is one that we are going to have to see over time. But I have not seen anything immediate. But I have seen the same things you have. And obviously, if they are going to focus on improving profitability, obviously, starting on the pricing side is probably one of the areas that they will focus on quickly. So we will just have to wait and see. But I had not seen anything yet that I can point to.

With respect to your margins, am I looking at this right? The 10 to 15 basis point impact from the accounting conversion, that is August and September, I believe, that impacted your results? And that was a total of 10 to 15 basis points? Were there any costs, additional -- would it just flow right down to the bottom line to be about a penny or two that it negatively impacted your results, even down (ph) to maybe 34 or 35 cents if it weren't for that accounting conversion? Am I looking at that right?

You are, and it is basically lost discounts on purchases where we were not able to send checks out in a timely fashion to get the discount that we normally do, still paid in time but did not receive the discounts. Some of that was basically due to the fact that we were trying to learn a new system in one of our regions that had a little more difficulty than the other part of the country. So yes, it would flow to the bottom line.

You are right now, trending I guess in November, you feel very comfortable that that is no longer an issue, so that was truly a onetime --?

Even in October, it cleared itself up. So we were back on track. The systems are working fine, and we're good to go.

If you could help me, in terms of -- you had mentioned, Steven I think Atlanta, you sure (ph) had the same issue. How long did it take Atlanta to come back online, and what was sort of the margin improvement once you consolidated those two facilities?

It takes us about a year before we realize fully the operational efficiency that we expect to get. But I expect that we will continue to see improvements. We see improvements; but we have really been focusing on service. We have been looking at and focusing on our fill rates, making sure trucks are getting to our customers, and we have been running extra trucks to make sure that has happened. But that, we have committed ourselves to do anyway because we didn't want to see or have our customers see any disruption to their business because of the fact that we consolidated the two facilities. But I think over the next two to three quarters, we will see continued improvement at this facility, and it will follow more in line with our other better performing facilities from an operating cost standpoint.

Just as a final question, when you exclude sort of lapping the loss of the Wild Oats business and the BP acquisition, which actually lapped that part-way through your quarter, it still looks like your sales growth -- you had sales growth acceleration in the quarter. Am I looking into that wrong? It looks like your sales did accelerate a little bit in this quarter relative to your last sequential quarter, any color on that?

No, I think your observation is accurate. But, again, it's hard for us to try to pinpoint that, which is why we have not tried to give what our real growth number is. But we are seeing it the same way. We have seen very solid growth rates, certainly in excess of what we're seeing within the industry. And I think clearly, it's a reflection of how we're performing as a Company really across our 15 distribution centers.

In terms of how you're feeling just about the overall business, how your topline is going to do, marketshare gains combined with your -- the industry growth. Even if you exclude out the new Wild Oats business you're going to get, just on the core business, how do you feel now versus let's say when you did your last conference call?

I think I am very comfortable. When you look at the fact that the guidance we gave was approximately 15 percent topline growth, so I feel very comfortable about where we stand today, in terms of topline growth relative to that. If you look back historically, a quarter-to-quarter snapshot of how we have done in any fiscal year from Q1 to Q4 and look at the trends in that, when I do that, I feel very positive about how '04 is shaping up for us. But clearly, every quarter we have the items that we are working on, be it Hershey or be it the integration things, operationally, because we are focused on driving costs out of the supply chain. And that's where we are. I feel pretty positive about the fact that we have dropped our operating costs from 17 percent to 15.6, from the same quarter last quarter to this year. And I expect that we are going to see continued improvements over time with this, as well.

Carol Sherman (ph) Merrill Lynch.

With regards to your recent partnership with Sodexho regarding outsourcing food service to college campuses and corporate cafeterias, what's the size of that marketplace, and what do you see that adding to revenues near-term?

The foodservice industry is about a $200 billion industry. So clearly, it's a very large and significant industry. We have, if I run my calculator out three or four places, I don't think we get -- we don't get a blip on it. So I think to us, that's a lot of upside from the standpoint of what we are seeing the potential is for this market. But really remember, we are just starting off. We just signed and executed the agreement back in our first quarter, and we are really establishing how we're doing business with these folks. And so clearly, that's where we're focusing on today, is how to build the business, what products that we want to be working out with them, how to work within the framework of how Sodexho goes to market and that sort of thing. So that is what we're focusing on right now.

Would you even plan to do that directly at some point?

With colleges and universities?

Right and other foodservice areas?

I'm not sure I can answer that right now because again, I think we're trying to build partnerships with Sodexho and other companies like that. So I think our focus is to try to build those relationships and develop this channel for ourselves.

Too early to tell right now?

Too early to tell.

One other question with regard to your retail store, do you see any expansion plans there?

We will look at doing this where, again, it makes sense for us. Certainly, our core business is the distribution of natural and organic products. So we are not going to acquire stores where we are going to be in competition with other customers. So clearly, it kind of limits where we can look. But certainly, our retail division really does complement what we do on our distribution side of our business. And it is a good part of our business that we are committed to.

(OPERATOR INSTRUCTIONS). Mark Poupon (ph) of Glen Hill Capital.

Hi, Steve and Rick, how are you? Congratulations. I'm just wondering on tables (ph) to inventory ratio, seems to have accelerated from the fourth quarter. As your inventories have grown, your payables have grown faster. I'm wondering if that's a trend that we should model in going forward? And if you could discuss what's behind that? Thanks.

I don't think it's a trend, Mark. I think what you're seeing there is a couple things. One is the seasonality of our business a little bit, where our inventories are going up to accommodate the increased revenue, and therefore payables are going up accordingly. And I think at the end of the month of October, we may have been hit with a timing difference a bit there. The accounting system issues basically are cleared up at the end of October. So I think it's more a timing of when the inventory was received and when the payables are do.

At this time, there are no further questions. I'm sorry. You do have a question from a Jamie Delay (ph) of Crossing Bridge, Inc. (ph).

Hello?

Hello.

Yes, hi. I'm wondering -- you said that Whole Foods represents about 24 percent of your business? And with the addition of Wild Oats coming back, what percentage do you expect Whole Foods to then represent and what percentage do you expect, if you can estimate, some sort of range that Wild Oats would represent?

I will take a stab again, if we project out into fiscal '05, I would think that Wild Oats would be 10 to 12 percent of our business, and Whole Foods would probably be, I would think, 19 to 22, somewhere in there.

Nineteen to 22 for Whole Foods, okay.

That is sort of back of the envelope stuff, I mean really back of the envelope, because we are just sort of scribbling it out and trying to figure it out.

Okay. It sounds like a naive question, I am just a stockholder, and I do know that much yet, I am learning. But I'm wondering, did you meet earnings estimates?

I can tell you that we are on track for the guidance that we have out there. And actually, relative to our internal plans, we're running ahead of plan. So we are comfortable about where we are today.

At this time, there are no further questions. Will there be any closing remarks?

Yes, I would like to just first tell everybody that on behalf of the nearly 3500 UNFI associates, we wanted thank you for your continued interest and support of our company and the industry that we serve. And please know we are committed to building long-term value for all our stakeholders. I want to wish you a great day, and thank you, very much for your time.

(OPERATOR INSTRUCTIONS).