United Natural Foods Inc (UNFI) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the United Natural Foods fiscal second-quarter 2004 results conference call. At this time all participants are in a listen only mode. Following today's presentation instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the conference please press the star followed by the zero. As a reminder this conference is being recorded today Tuesday, March 2nd of 2004. I would now like to turn the conference over to Vanessa Schwartz with Financial Relations Board. Please go ahead.

Good morning everyone, and welcome to the fiscal second-quarter call for United Natural Foods. You should have all received a copy of the press release. If you did not please call Etta Henderson at Financial Relations Board at 212-445-8474 and we will send one out to you and confirm your name from our distribution lists. 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 your questions.

As a reminder this call is also being webcast today March 2nd, 2004 and can be accessed by the Internet at www.UNFI.com. Before we begin, I'd like to just remind everyone that the Safe Harbor statement included in the press release and that the cautionary statements apply to today's conference call as well. Now I would like to turn the call over to Steve.

Thank you, Vanessa, and good morning, everyone. We would like to welcome everyone to our second-quarter conference call. Joining me on the call today is Rick Puckett, our CFO. Our second-quarter earnings after taxes increased 28 percent to 7 million or 35 cents per-share EPS. Excluding special charges earnings after taxes were 7.1 million or 35 cents EPS.

This represents a 32 percent increase over our second-quarter earnings last year. Obviously we're very pleased with these results considering the fact that we've been working hard to plan and implement the resumption of business with Wild Oats and to continue the integration efforts with Blooming Prairie and the North East Co-op acquisitions. We once again had a record sales quarter with revenues of 393.2 million. This was an increase of 16.2 percent over the 338.4 million recorded in the second-quarter last year.

Positively impacting sales this quarter were positive comp growth rates along with increased business as a result of the acquisitions of Blooming Prairie and Northeast Cooperatives which were acquired in October and December 2002. Regarding comp growth January was the first month where we had totally annualized (indiscernible) of the Wild Oats business and the acquisitions of BP and NEC. In January we saw strong sales comp growth rates of approximately 10 percent.

Growth across our key business channels remain strong. For the quarter the growth in our independent channel and conventional mass-market channel was up 17 percent while growth in our supernatural channel was up by approximately 15 percent. Overall our growth continues to exceed that of the industry and comes as a direct result of our commitment to providing the best overall customer support as evidenced by a consistently strong service levels and fill rates for all customers.

Our current mix of business by channels is as follows -- independents represent 43 percent of our business; supernaturals represent represent 34 percent of our business; conventional mass-market represent 14 percent and our other channel represents approximately 9 percent. Our largest customer -- Whole Foods Market -- represents approximately 25 percent of our total sales.

With the announcement that we would be assuming the primary distribution with Wild Oats, we have been focused on working through an acceptable transition schedule with the Oats management team.

To date, we have assumed all national promotions. We transitioned all the East region stores to unify effective February 1st and we transitioned the Oat stores in Southern California and Northwest effective March 1st. This represents the largest part of business and to date this transition has gone very well. We expect to complete the transition by April 1st when we assume the balance of the business.

Today I'm pleased with the transition and I am confident with our preparations to handle this business without disrupting the service levels of our existing customers.

The integration of Blooming Prairie and Northeast Cooperatives continues to move forward. At Blooming Prairie we continue to make good progress with operations. Our fill rates and service levels remain solid and consistent with those at our other facilities. In addition, our building expansion at the [indiscernible] City facility is moving along as we plan and we expect to take full possession of the newly space by the end of April.

At that point we will need 60 to 90 days to expand fully into the new space and then we will need 2 to 3 quarters to achieve the operating efficiencies we expect once we expand one of our facilities.

With Northeast Cooperative we've now completed the integration of the business into our Chesterfield facility. This transition occurred back in mid-June -- it's a date. We continue to make good progress with our overall service levels though I still believe we have room for improvement in both our warehouse operations and transportation areas.

Total operating margin for the quarter was 3.5 percent before special items. This represents a 10 basis point improvement over the 3.4 percent recorded in our first-quarter this year and a 30 basis point improvement over the 3.2 percent recorded in the same quarter last year. With the resumption of the business with Wild Oats, we would expect to see downward trends in our gross margin offset by lower operating cost.

Overall we expect to see our operating margins continue to improve over time as our investment and people, facilities, equipment and new technologies help make us more efficient.

Looking ahead, we are very happy with the progress as we re-established our role as a primary distributor to Wild Oats. Regaining this business came as a direct result of our commitment to providing a high level of customer service and support to all customers. Our -- over the next six months we will continue to focus on completing the integration of the Wild Oats business, growing sales across all cells channels including foodservice, growing sales with UNFI branded products, continuing to invest in our people, facilities, equipment and new technologies to help drive more cost out of operations and improving our operating margins at each of our divisions.

Overall I am very pleased with our second-quarter results and how we are positioned for the remainder of fiscal year 2004 and the future. I would now like to turn to our CFO, Rick Puckett, for additional comments.

Thank you, Steve, and good morning everyone. As Steve mentioned net sales were $393.2 million for the second-quarter of fiscal 2004, an increase of 16.2 percent over last year's second-quarter of 338.4 million. This represents the 15th consecutive quarter of record setting sales for the Company. Net income for the second-quarter of fiscal 2004, including the effect of special items, increased 27.9 percent to $7 million or 35 cents per diluted share compared to $5.5 million or 28 cents per diluted share for the quarter ended January 31st, 2003.

The Hershey operations contributed positively to the quarter results. Net income for the second-quarter fiscal 2004, excluding the effect of special items, increased 31.8 percent to $7.1 million or 35 cents per diluted share compared to 5.4 million or 28 cents per diluted share excluding special items for last year.

Special items for the second-quarter of fiscal 2004 consisted of a non-cash income item related to the change of fair value of interest rate swaps and related options agreements through the end of December 2003.

As we previously reported, these interest rate swaps which were ineffective swaps have been assigned and will no longer will no longer be included as a special item after December 2003. The impact of the lower interest rate resulting from the swap innovation for the quarter was approximately 6/10 of a share of earnings per share.

In addition certain equipment rentals and labor costs were recorded in the second-quarter of fiscal 2004 for the start up and transition associated with implementing the Company's primary distribution relationship with Wild Oats.

Through second-quarter of fiscal 2003 special non-cash income was recorded related to the change in fair value of the interest rate swaps and related option agreements and certain costs related to the expansion of the Chesterfield facility.

Gross margin for the quarter was 20 percent compared to 20.3 percent for the same period last year. This was in line with our guidance and expectations for the quarter. As our channel mix of business shifts slightly we expect to see lower gross margins offset with lower operating expenses.

Operating expenses were 16.5 percent of sales for the quarter, excluding special items compared to 17.1 percent for the same period last year. The 57 basis points improvement is a result of increased efficiencies as we continue to fully integrate the recent acquisitions into our business and leverage our sales growth. Improvement to Hershey contributed 6 basis points of the improvement.

Excluding special items, operating income was 3.5 percent for the quarter compared to 3.2 percent for the same period last year and 3.4 percent last quarter. The year-to-date operating margin for this year is 3.5 percent excluding special items.

Cash used in operations for the six months ended January 31st was $5.9 million. This includes cost of innovating the ineffective swaps of $5.4 million, and the building of inventory to accommodate the Wild Oats business. Our inventory was still at 51 days for the quarter -- well within our targeted 50 to 52 days. Receivables were also up in the six months resulting from our sales growth.

DSL for the quarter was at 24 days, again, well within our target of 25 to 27 days. Free cash flow excluding working capital was $12.8 million for the latest 12 months ended January 31st. CapEx was $9.3 million for the first half of fiscal 2004.

The bulk of these capital expenditures were associated with the expansion of Iowa City and Dayville, Connecticut facilities. Additional CapEx will be experienced for these expansion projects in the third quarter, therefore, we continue to forecast $24 to $28 million in CapEx for the year.

The balance sheet has been improved significantly over last year. Total assets have increased by $42 million or 10 percent. Total equity has increased by 20 percent. Total debt is increased only slightly by 7.8 million and only 2.4 million when you exclude the cost of probating the ineffective interest rates swaps in December 2003.

Capital expenditures remain relatively constant from year-to-year. Our current ratio has improved to 1.4 this year from 1.1 last year. The borrowings under our credit facility at January 31st, 2004, were $106 million with remaining availabilities of approximately 35 million. This compares to availability of only $6 million this quarter last year.

We've also increased our long-term debt by approximately 35 million. 10 million actually in this quarter at favorable interest rates. We will use the additional $10 million from this quarter to fund the current expansion projects in the Iowa City and Dayville facilities.

In December 2003 we assigned two ineffective interest rates [indiscernible] to a third party. This resulted in an increase in debt of 5.4 million in the quarter with an offsetting effective interest rate reduction. Our return on total capital was 20 percent and our return on equity was 13 percent for the latest 12 months.

As previously reported, our guidance for the year is $1.6 to $1.62 billion of revenue or growth of 16 to 17 percent over fiscal 2003. Our guidance for earnings per share is $1.46 to $1.52, excluding special items for the year representing an increase of 23 to 26 percent over last year.

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

[Operator Instructions].

Carole Buyers with RBC Capital Market.

Just a couple of questions. With Hershey can we assume that it's at a breakeven point right now? I know you [indiscernible] differently than the last quarter.

Actually it's continuing on the same path as we talked about last quarter so it is positive. It's actually slightly above breakeven.

And then I was wondering could you -- I know it's difficult but are we -- when we look at Northeast Cooperative and Blooming Prairie is it fair to assume that Northeast Co-op contributed favorably to the operating margin improvement this quarter since we were kind of one quarter into seeing the efficiencies and the [indiscernible] into Chesterfield?

As we've talked in the past it is really hard to separate that, Carol, because they were our competitors six miles away. We basically put the operations into one building. We -- even before we acquired them we used to share customers and things so it's really kind of hard but overall what we're looking at is, how is our Chesterfield facility doing vis a vis our other facilities and we've made progress on it but we're still not where I expect them to be. So I think we will continue to see improvements out of that facility over the next couple of quarters.

Do you still feel comfortable on being on target to get to the kind of that 4 percent level by the end of the year? And is it really specifically to a fiscal or calendar year that you're hoping to get to that 4 percent level?

The guidance we put out there on the operating margin is 3.4 to 3.8 percent and I think our goal is to see continual improvement in this as we go toward the end of the year so clearly we are -- I think we are tracking the way we expect ourselves to be tracking at this stage.

And then just one quick question with the cash-flow statement flow statement? When you look at the cash flow from operations, for the first six months it was negative. And it makes sense -- is it fair to assume the increase in inventories for Oats?

Yes, it is a fair assumption. Also the increased revenue as well, Carol.

Right and the Accounts Receivable is a function of just the increased revenues as well.

It's actually -- if you look at the AR balance it increased by about 15 percent and in sales increased by 16 percent.

And then finally what's revenues with Oats from the quarter?

Hang on -- approximately $5.8 million.

Gary Giblon (ph) with C.L. King.

Since you guys are restating the guidance previously given, does that reflect the strike benefit that Wild Oats is going to pick up or is it just that you don't serve the Southern California market very much so it is not material?

The strike in Southern California -- it sounds like they have settled the strike now and going forward, I'm not sure what the impact is going to be, Gary and then, up until this point, we're not primary we weren't primary with Wild Oats or Whole Foods up to this point. We're just now effective March 1, we are assuming the Oats business in Southern California so we're just in the process of transitioning that business over to us, so I'm not assuming that there's going to be incremental business as a result of that because we really didn't see an awful lot of it, because we weren't primary to either of those two accounts down there up till the end of the quarter.

So you are saying that Oats is able to retain a fair amount of business then that would be -- there might be upside on the estimates or ... ?

No. I mean we're not changing our estimate at this stage. Obviously we are transitioning an awful lot of business over to UNFI at this stage so at this stage we are comfortable where our guidance is.

And then just any surprises in terms of as you've gotten closer to taking on the Oats business -- anything that makes you think that it will be better or worse in terms of total Company profitability, you know. In terms of able to get better deals from your vendors for the whole Company or is it pretty much as you had envisioned from the beginning?

No I think we've obviously worked very hard on the transition plan with the Oats management team and, clearly, we've laid out a transition plan that made sense, both for us as well as for Wild Oats and obviously our concern was to do it in a way that was controlled. And we didn't want to disrupt other businesses. And I think we were able to do that. At this stage, I think where I'm seeing the sales are probably higher than we were projecting in each of the regions that we've assumed to date but I think part of that is I think we're filling back up the stores and we're filling the pipeline in a little bit. So I think in another month I will get a better sense on where we're sort of sorting out to.

Thanks, and last question, I guess, I am California oriented this morning. Did you, although you're not primary to Whole Foods in California but I mean, is there meaningful extra business reflected in this current entire quarter because of the strike? I mean, you know, because they had hordes of customers and they needed product -- extra product in a hurry, you know, anything that really came through to benefit you in the quarter?

We would have to attribute some but it's really hard to measure because, obviously, we had focused on growing that part of our business from last year so we had added two new sales reps down in that area and we're building business anyway. So I think, marginally, we saw some business down there. I would guess that there would be anywhere from maybe 10 to 40 basis points of business but it's really hard for us to break out and say, okay, this is related to the strike because, again, we weren't primary with our two key customers down in that area. Up -- you know, through the end of our quarter.

Scott Van Winkle with Adams Harkness.

Hi, guys -- congrats on a good quarter. You mentioned that you continue to grow faster than industry rate. I'm wondering what you saw as to how fast the industry is growing and where that growth is among the segments you serve? In other words where are picking up shares? Is it independents, mass-markets, supernaturals?

Yes I think overall I'd say the industry is probably somewhere on the 6 to 8, maybe 6 to 9 percent range. You know I think, certainly, you know, you look at Whole Foods. Their growth rates are very strong right now so that's going to help drive the supernatural category. I'm seeing good growth rates with the independents and, certainly, on the conventional side. So that's our sense. And I can also say that I think our February trends even though we've only seen three weeks are actually running slightly above the comp growth rates we talked about when I talked about approximately 10 percent, Scott.

And with the [indiscernible] City expansion what's the near-term impact? I recognize it will take a few quarters to get some benefit from lower costs and such. Is there a capacity limitation right now that will be alleviated allowing you to pick up some incremental revenue?

I think clearly, what we see there -- you know, we are operating out of a facility that's 120,000 square feet so we get into a situation where we have a limitation on the number of SKUs that we can handle so I think once we can expand into a new space we will add more products and we will be able to from an operational standpoint we will become more efficient. We shouldn't have to touch product as we do now a couple of times to move it around, but those are the things that we will tend to see over the two to three quarters, Scott. We can't add new items now because we do not have space so we have to take possession of the building and then grow into the space and then we can add the new items and that ultimately will help, I think, drive revenue as well.

Okay as we try to forecast the effect of the new Wild Oats business, should we assume that the current contract you have with Oats is somewhat similar to what you had a couple of years ago as far as terms?

Yes.

Eric Larson with Piper Jaffray.

Congratulations on a nice quarter. Questions on growth margins and we know the growth margins are going to be down again going forward. Is it really the mix of business, is it more supernaturals sales relative to the others?

That's exactly what it is, Eric, and we expect to pick up as we noted offsetting benefits and the operating expense side as well.

Could you get more efficiencies on the selling side of it as well?

Right, absolutely, and the delivery as well.

And then when you look at your business going forward from an EBIT margin basis continued improvement you've given a fairly wide range this kind of tailors on to Carole's question, but is it -- do you still believe that in the '05 fiscal year that a 4 percent number is something that you can achieve or is that a little bit on the [indiscernible]?

That's clearly our goal. We put that out there and, obviously, the last year and a half has been interesting because we've had a lot of things impact our business. Going back to losing the Oats business and then [indiscernible] two acquisitions and having to deal with the impact of those transition items on our operations and then this year re-establishing the relationship with Wild Oats. So we've obviously had a lot of fluctuation as it relates to the mix of business that we're dealing with but clearly that is our goal. I'm happy seeing the trends in terms of the improvement to the operating margins and then if you look back at the quarter, we do expect to see the gross margins decline as we saw because again the mix is changing but, again, this quarter, we saw a 30 basis point drop in margin but a 57 basis point drop in operating expenses. And I think that's a trend we should see over time.

Sure, that makes perfect sense. Final question is Blooming Prairie, NEC. Those are now -- anniversaried those. Will the next couple of quarters still benefit from continued efficiency improvements or are they -- are they now from a margin point of view where they should be?

I think BPI will not see much in the way of operating margins' improvement simply because we are in the midst of still having to operate out of the Iowa City facility which we're not as efficient at today as we will be once we're in a new building but as I mentioned earlier comments with Chesterfield, I'm expecting to see continued improvement out of that facility as it relates to our combined business with NEC out of that facility.

Mark Chekinow with Sidotti.

Couple of questions. When you look at how Oats is going to be transitioning their business back to you, in the past or currently your strategy with the mass channel with the independents certainly to work with them more on the marketing and the SKUs selection helped them grow their business, because Oats has lagged Whole Foods, are they going to be, perhaps, relying on you, relying on you a little bit more in terms of growing their business and just not the distributor function? With that transit at all into the profits, perhaps?

I think we work hard with all our customers and customer types to try to help merchandise the stores and make sure we're getting the right products into the mix and things like that so I don't see that effort being really any different with Wild Oats. And we have had just numerous meetings with them on the purchasing and the marketing and merchandising side in terms of their product mix, and clearly working with the Company to help merchandise the stores and make sure that we got the right items that we're carrying and that they want to be carrying in the stores so that is just part of our function. I think that is what we bring to the table with all of our customer types.

Also in the past you've talked about increasing transportation costs. Were there any issues when you were getting the new Oats distribution set up that you ran into with higher costs that were a little higher than you had expected?

No I mean obviously during this transition period we're also dealing with the new hours of service regulations which did impact us. But I think the fact that we had done business with Wild Oats before, we had knowledge of the stores, what runs we used to do before. So we have -- we had enough history that we were able to go back and sort of rebuild routes and things like that so I think all in we dealt with, obviously, that transition while we're dealing with hours of service and things like that but I didn't see anything outside the ordinary in terms of dealing with the transportation, Mark.

Lastly, you did comment a little bit about the January comp around 10 percentish. What I look back I seem to have in my Notes something more like in the mid teens on an internal growth rate maybe a year ago and when you kind of gotten away from giving these [indiscernible], is that correct or maybe you were seeing more of a normalized, low double-digit as opposed to kind of the mid to higher teens internal growth rate.

No -- I mean two things. One is, we got away from trying to give a comp growth rate because it was almost impossible with the things that we had to deal with last year of the loss of the Oats businesses, the two acquisitions, and the timing and shifting of customers between facilities. So it was almost impossible for us to try to get to that number but I think, certainly, the -- what we're seeing today is I think consistent with what we've given in terms of our comments as far as our sales and our projections for sales growth, Mark, so ...

Gregory Badishkanian with Smith Barney.

First question is just with respect to Northeast Co-op was you had about a month in the previous year (indiscernible) (inaudible) full quarter so sort of if you add in I guess about $5 million in extra Oats business coming out with sort of an internal generated revenue growth of about 10 percent. Is that right or did I miss it? Did you actually give that number?

No, the 10 percent was really for the month of January, Greg, that was the month that we sort of annualized past everything and that does exclude Wild Oats. The impact of Wild Oats both from January last year and this year.

Right, right. Good. So for the quarter did that calculation sort of come out to be about right for the quarter though, at about 10 percent if you sort of... ?

Can't really do it from the quarter because we still had the same issues in November, December where we had -- I guess I'm looking at the trend where, I think January is approximately 10 percent and February -- as we come out of the gate, we're actually running slightly higher than that for [indiscernible]. So that's kind of what we're looking at at this point.

Good and with respect to -- you talked about the EBIT target of about 4 percent in '05. I mean, that sort of would that be achieving a run rate in '05 or is that achieving 4 percent in '05?

I think it would be achieving 4 percent in '05 on a conservative basis. We'd like to be there on a run rate basis, quarter after quarter. But it's certainly still our target.

Right.

We haven't put out plan together for '05 yet. We will be starting to do that the end of March and from the standpoint of what '05 looks like. And I think, certainly, as we do that, we will have a better sense of again what the new mix of business and the impact on our operations are, because we will then have by March 15th, we will have assumed the last of the Oats territories and so we will have a better sense on how we're operating over the next two or three months.

Good and, obviously, growing at 10 percent internally generated revenue growth. You're taking share. Can you talk a little bit about maybe your service levels on an absolute basis and then maybe on a relative basis within the industry that is allowing you to achieve above industry growth rates?

From a service level standpoint we haven't seen really any change even after assuming the Oats business in the East. I think our service levels in three of our four facilities remained pretty solid. We are a little higher in one facility than I would like to have but we're working against that one but, overall, our service levels remain strong. Our fill rates with Oats are good and will improve as we get a better sense on their volume and the movements on the products that they buy. So again, overall, I haven't seen any hiccups or anything in our business that I think that transition with the Oats business has been planned in such a way as not to be disruptive to any of our other customers or customer types.

Great and can you comment relative basis to some of your competitors?

You know I really can't because I certainly look at what they do. But I don't really pay all that much attention to it. Again, our focus is if we operate efficiently and we make certain that we service our customers and do the things that we're supposed to then I think that's all I can manage and control. I can't really deal with what our competition is doing. So, again, our focus is to service our customers at as high a level as possible and that's what we try to do every day -- day in day out.

Andrew Wolf with BB&T Capital Markets.

I just want to clarify this for myself, at least. Your 10 percent plus internal sales growth -- that's without Oats? Correct?

That's correct.

And the $5.8 million of revenue for the quarter from Oats, was that from primary -- new primary business? That's how much you had in the quarter from new primary business.

We weren't primary in the quarter. We did not assume primary distribution until February 1st in the East. And then each of the other regions have a certain schedule. March 1st we did the Southern California area and the Northwest and then March 15th, we will take on the balance of the business.

So the 5 8 is the normal secondary and maybe a little help in California or something like that?

Yes and it's probably a little bit higher, only because the stores, obviously, began to buy a little bit more but, again, we took that out from the calculation of what our comp growth rates were for January.

Great. And just -- on a last couple more notes. I thought your -- actually your expense hit this quarter you just reported from Oats was going to be a little higher. It sounds like you came in lower at least than I was looking for. Is that a timing thing or did you just manage down the expenses?

Timing thing. There will be other special items for the Oats transition in the third quarter and it will be as much as this one, maybe slightly more.

My last question Steve, I think you got a range out there of 150 to 200 million of sales you could get out of Wild Oats? And you have any comfort with which end of that or where you are going to be on that scale at this point or is it still wait and see?

Yes I think it's still a little bit early, Andy, I'd rather not try to pin that down. I think obviously we're working hard in terms of identifying the items that we'll be servicing Oats with and that sort of thing. So I think at the end of next quarter I think we'll be able to give you a better sense on that one moving forward.

Carol Sherman with Merrill Lynch.

Great quarter. I have a generic question regarding the tremendous boom of low carb products. Are you seeing your largest companies introducing any more low carb products?

Yes. For sure we're seeing that. I think Hain has come out with their carb fit lines that they introduced back in November, December and they are expanding that line -- companies like Fantastic Foods are coming out with them, certainly Atkins. So, clearly, this is -- I mean, from our perspective we don't believe this is a fad. We think this is a trend that's here to stay and I think a lot of the manufacturers that we do business with are stepping up to address this.

I agree with you. In the past, there was some consternation among natural food retailers about low carb products because a lot of them contain Splenda so are you seeing a shift in these products being more acceptable then?

Yes I think certainly, again, the companies we deal with are dealing with ingredients that are cleaner and more acceptable and clearly that is the trend that I am seeing.

Thank you.

Scott Van Winkle.

Do you ever talk a lot about Albert's Organics or any of the business you've been building in the organic produce side? I wonder if you had any comments on what's happening with that business broadly?

Just in broad terms because we don't usually give divisional updates other than when we're experiencing problems with like Hershey's but Albert's continues to perform at a pretty high level. We are seeing good growth rate out of that division and all in certainly it's a very much -- a complementary business to our natural organic business and where we've been able to integrate that business for instance, in Chesterfield and Denver, and [indiscernible], California, there is certainly a lot of synergies with our companies and that product mix certainly is very complementary to what we carry out of our natural and organic distribution centers.

Back on the low carb question have you seen any change in sales trends of low carb products? Do they seem to be accelerating decelerating -- anything if you kind of micromanage by a product basis?

Clearly some of the companies like Atkins we're seeing the trend and our sales trends with them are up very substantially over where they've been in the past and, again, as I expect as other companies come out with products in this category, we expect to say good growth trends [indiscernible] as well.

Mark Chekinow.

Mark Chekinow. Looking again at your competitors. Are you any more concerned than you were in the past now that they have lost the Oats business about them trying to take more share in the independent channel through pricing?

No, we worry about that every day. That's what we do is work to support our customers and so, clearly, our competition is going to focus on this channel since they're not doing business with Wild Oats. But I'm not seeing any new initiatives or things like that. I think they've been always been an aggressive competitor and I am continuing to see them work to try to gain business from us and I don't expect that trend to change.

You don't think there would be a significant acceleration of them trying to capture market share because they just lost a large chunk of revenue?

No. I think what they're trying to do rationalize their business. Every thing I read about them they are obviously making some management changes and things like that so I think their focus now in going forward is probably probably going to be different from what it's been in the past and now think we just all have to wait and see what is happening with them.

Carole Buyers.

Just one follow-up question. Just trying to get a better understanding of the operating margin improvement we saw this quarter. If you had to just look at the sequential improvement, where would you say you saw the most benefits from? Was it integrating acquisitions? Was it the strength in a certain category or mix of business? Was it a specific region that saw an improvement? I know you mentioned Hershey's was like a 6 to 8 percent improvement.

No I think what we look for is continuing improvement in our operating expenses and we break operating expenses down between our distribution side and our SG&A and we saw improvement on both sides of the coin. And I expect that those are things as we invest in our facilities and equipment and technology that we should become more efficient with and so clearly that's our focus, Carole.

Steve, if I were to just say, let's focus on just two regions -- the two large regions, the Northeast and the West Coast regions. Did you see significant improvement in the Northeast this quarter?

I saw improvement I wouldn't say significant improvement but, again, we're talking about basis points now. I mean if I can (indiscernible) our three basis points from one division and 5 in another, to me, that's good improvement. So everything is sort of is relative to what the expectations are from the standpoint of our business plan and we work, we manage to our plan and we work hard at, again, seeing continual improvement to our operating expenses.

Okay and then if I just look in the future at the benefits, is it fair to say that the getting all this back and looking at the Denver and Southern California regions, getting greater volume through there will probably be the biggest benefit we will see in the next six months? If I had to [indiscernible].

I think that is certainly one aspect of it. We see a lot of potential with that but, too, we are expanding the Iowa City facilities so I would expect to see good improvements out of that. We are expanding our Dayville facility right now our smallest [indiscernible] nationally is in Dayville and this is also one of our higher volume facilities. So I expect continual improvement here. So as my management staff really knows, I expect it across the board. I'm not going to look at it for one or two buildings. We're looking at a continuous improvement across all our facilities and divisions.

Plus we should start, we should see improvement from the Chesterfield facility too more closely in the near-term right? Okay. Got it, thanks.

[Operator Instructions].

Gentlemen, we appear to have no further questions at this time. Please continue.

I just want to thank everybody for participating today and I also wanted to thank you on behalf of the 3700 United Natural Food Associates for your continued interest and support in our Company and you all have a good day. Thank you.

Ladies and gentlemen, this concludes the United Natural Foods second fiscal second-quarter 2004 results conference call. If you'd like to listen to a replay of today's conference, you may dial 303-590-3000 or 800-405-2236, followed by access number, 570-047. We thank you for your participation in today's conference. And at this time, you may disconnect.