United Natural Foods Inc (UNFI) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to United Natural Foods first-quarter 2005 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. (Operator Instructions). As a reminder, this conference is being recorded today, Tuesday, November 30th, 2004. And I'd now like to turn the conference over to Mr. John McNamara with Financial Relations Board. Please go ahead, sir.

Thank you, and good morning, everyone. Welcome again to the fiscal first-quarter conference call for United Natural Foods. By now, you should have all received a copy of this morning press release. If anyone still needs one, please call Samantha Alfonzo (ph) in our New York office at area code 212-827-3746, and we'll send you a copy immediately following the conference call.

With us this morning from management are Steve Townsend, Chief Executive Officer and Rick Puckett, Chief Financial Officer. We'll begin with some opening comments from management and we will open up the line for Q&A. As a reminder, this call is also being webcast today and can be accessed on the Internet at www.UNFI.com.

Before we begin, as usual, we would like to remind everyone about the cautionary statements regarding forward-looking statements contained in this morning press release. That same language applies to comments made on this morning's conference call. At this point, I'd like to turn the call over to Steve. Go ahead, Steve.

Good morning, and thanks John. Welcome, everyone, to our first-quarter conference call. And joining me on the call today is Rick Puckett, our CFO.

Our first quarter resulted in earnings per share of 24 cents, which is an increase of 50 percent over the 16 cents we recorded for the same period last year. These positive results came during a quarter that is traditionally a bit slower for us. In addition, during the quarter, we experienced a significant impact as a result of the hurricanes that hit Florida, rising fuel costs, and the costs we incurred as a result of the planned closure of our Mounds View facility, which was due to its small size.

During the quarter, we recorded sales of 478 million. This was an increase of 25.2 percent over the 381 million we recorded during the first quarter last year. Excluding the impact of Wild Oats, our comp growth rates in our core distribution business was over 12 percent. Overall, our comp growth rates continued to exceed that of the industry due to our commitment to provide a wide array of product offerings along with consistently strong service levels and fill rates to all customers. At the present time, our current mix of business by channel is as follows -- independents represent 44 percent of our business; supernaturals represent 38 percent of our business; conventional mass-market represents 13 percent of our business; and our other channel represents approximately 5 percent of our business. Our largest customer, Whole Foods Market, represents approximately 26 percent of our total sales, and Wild Oats now represents approximately 12 percent of our business.

Looking ahead, we expect sales to increase in our fiscal '05 in the range of 17 to 22 percent. And as noted in our press release, we have raised guidance for this fiscal year from 93 to 97 cents to 95 to $1.

During this quarter, we have been focused on implementing operational and process improvements at each division; completing the integration of the former BPIT (ph) system into our business systems; planning for the closure of the Mounds View facility due to its small size; and siting our next new facility, which will be in Indiana. This facility will better enable us to balance sales between our New Ox, Iowa City, and Atlanta facilities.

During the quarter, we completed the integration of our Midwest operations into our East division. We are now fully operational at our newly expanded Iowa City facility, and operationally, we continue to make very good progress as our fill rates and service levels remain strong and consistent with those of our other facilities. In addition, we have now added approximately 1500 new SKUs, which should bring some consistency in our product offerings across our East division. With the expansion now complete, we will still need approximately two to three quarters to achieve the efficiencies we expect in this facility.

We also completed the consolidation of the former BP computer system into our UNFI business system. Overall, the IT consolidation went reasonably smoothly, and we have worked through a majority of the issues that arose in support of our customers. Looking ahead, we will continue to consolidate our various business systems nationwide so that we will eventually have one system.

During the quarter, we announced our intention to open a new facility in Indiana. We just began construction on the 300,000 square foot distribution center. Once construction is complete, we expect to be fully operational by the end of July 2005. Once again, this facility will enable us to release sales pressure in our New Oxford, Iowa City, and Atlanta facilities.

For the quarter, I am pleased to report that total operating expenses came in at 15.7 percent of net sales, which is a 90 basis point improvement over the 16.6 we recorded during the same quarter last year. This improvement came despite the impact of the Florida hurricanes, rising fuel prices, as well as the impact of the pending closure of our Mounds View facility. In addition, I feel confident stating that these improvements come principally as a result of the investments we continue to make back into our business.

Overall, our operating margin for the quarter came in at 3.7 percent, which is up 30 basis points over the 3.4 we recorded during the same quarter last year. This continues a trend of margin improvement that we have seen year-over-year. Overall, I'm pleased with these results as they reinforce the success we're realizing from our investments in people, facilities, equipment, and new technologies. Looking ahead, we're pleased with the progress we continue to make, and we remain committed to helping our customers be even more successful with their businesses. Even with our existing high service levels, we are focused on improving our operating metrics further, which will enable us to better serve all our customers in all the channels that we serve today.

Over the next twelve months, we're going to focus on completing the contract negotiations with Whole Foods, which we expect to complete before the end of the year; growing our business in all sales channels; growing sales in new channels that include food service and international sales; growing sales of UNFI-branded products; and continuing to invest in our people, facility, equipment, and new technologies to help drive more costs out of our operations. And these will ultimately improve our operating margins within each of our divisions.

Overall, we're very pleased with our first quarter and how our fiscal 2005 year is shaping up. And now, I'd like to turn the call over to Rick Puckett, our Chief Financial Officer. Rick?

Thank you, Steve, and good morning, everyone. As Steve mentioned, net sales were $477.5 million for the first quarter of fiscal 2005, an increase of 25.2 percent over last year's first quarter of 381.4 million. Net income for the first quarter of fiscal 2005 increased 45.8 percent to $9.9 million or 24 cents per diluted share compared to $6.8 million or 17 cents per diluted share for the quarter ended October 31st, 2003. Excluding special items, net income for the first quarter of fiscal 2005 increased 50 percent to $9.9 million or 24 cents per diluted share compared to 6.6 million or 16 cents per diluted share for the same period last year.

Included in results for the quarter just ended were the negative impacts of the hurricanes in Florida, the restructuring at our Mounds View, Minnesota facility, and the higher than normal fuel costs. These items were not treated as special items for the quarter, but resulted in a negative impact on EPS of approximately 1.5 cents. There were no special items recorded in the first quarter of fiscal 2005.

The first quarter of fiscal 2004 included special items of $304,000 in income, or $186,000 after-tax, and had a positive impact on diluted earnings per share of 1 cent. The special items for the first quarter of fiscal 2004 included non-cash income related to the change in the bare value of interest rate swaps and the related options agreements caused by favorable changes in yield curves. These ineffective swaps were novated (ph) in December 2003, which was previously announced, which eliminated any special charges from that point forward.

Gross margin for the quarter was 19.4 percent compared to 20 percent for the same period last year. As we previously discussed, our channel mix of business has shifted, and therefore we expect to see lower gross margins, which would be offset with lower operating expenses. We expect gross margins to be in the low to mid 19 percent range going forward.

Operating expenses for the quarter were 15.7 percent of sales compared to 16.6 for the same period last year excluding special items. The 90 basis point improvement is a result of increased efficiencies due to larger delivery quantities and our investment in people, facilities, equipment and technologies. The good performance in operating expenses was offset by some abnormal expenses that were experienced in the quarter just ended. As previously mentioned, the fuel costs had a negative impact of 8 to 10 basis points. The hurricanes in Florida had a negative impact of 6 to 7 basis points, and the restructuring costs related to our Mounds View facility had a negative impact of 4 basis points. Excluding these items, we would have been at a 3.9 percent in operating income for the quarter. This is consistent with our fourth-quarter performance that we showed at the end of last quarter. Actual operating income was 3.7 percent for the quarter compared to 3.4 percent for the same period last year.

As Steve mentioned, based on the strong performance from our operations perspective, we are raising our guidance for earnings per share for the full fiscal year 2005 excluding potential special items to 95 cents to $1 per share on a diluted basis. This is a change from the previous guidance of 93 to 97 cents per diluted share. Previous guidance for annual revenue of $1.9 to $2 billion remains unchanged for the fiscal year 2005.

Cash provided from operations for the twelve months ended October 31st was $4.8 million. Our inventory was at 49 days for the first quarter, below our target of 50 to 52 days. DSO for the first quarter was at 24 days, under our target of 25 to 27 days. Free cash flow, excluding working capital, was $27.6 million for the latest twelve months ended October 31st.

CapEx was 3.6 million for the three months just ended, equating to only 0.8 percent of the quarter's revenue. However, there will be additional capital expenditures related to the Indiana facility, which we previously announced, as we continue throughout the year. Our full-year expectation is still in the 35 to $38 million range.

The Company's outstanding commitments under the amended and restated credit facility as of October 31st were approximately $111 million, with an availability of 135 million.

The metrics for the return on total capital was 22.1 percent for the latest twelve months. And this represents an improvement of over 200 basis points from last year. At this time, I'll turn it over to the moderator to facilitate questions.

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions). Our first question comes from Carole Buyers with RBC Capital Markets. Please go ahead.

Hi, good morning, gentlemen. Good quarter. A couple of questions. One, I was wondering if you could talk about your business results. The overall sales number was a little bit larger than we were expecting. Can you speak to whether this was real growth or pipeline sale?

I think it's a little bit hard for us to look at whether that's going out the door on the other side. I think part of it, you know from our perspective is certainly, we're filling the channel. I also think that they obviously geared up for the holidays. And I would certainly hope that that would translate to stronger performance for them during certainly the holiday season.

And then, true to life, there's been a lot of buzz out there that they're kind of trying to turn it around with their new management team. Can you highlight the differences between the two business models today? What's clearly the biggest competitive advantage that United has over Tree or vice versa?

You know, I certainly, you know, as we've discussed on the past, we view them as certainly a very formidable competitor. They compete with us nationally, really from the East Coast to the West Coast. We have worked hard to develop our competitive advantages. Certainly, we feel like our distribution infrastructure, our product offerings that we have, the management talent we have within our organization, are certainly competitive advantages. But ours is that we really focus on executing day in and day out for our customers, maintaining high service levels, on-time performance. And I think that's what we focus on to differentiate ourselves from all our competitors. So I clearly think that we're executing at a very high level now, and that our management team remains focused on that.

But I guess just to clarify, would you see that there's any -- when you look at their business, they have typically been focused on say the large supermarket business as well as the independents, but say really in the specialty channel. And your focus has been more on the natural side and including all three channels but with a deemphasis on supermarkets. Is there anything that's changed over the last twelve months since the new management has come onboard to change their focus of what they're trying to execute on their level?

We see them, you know, certainly, they're still very competitive in the supermarket channel and they're competitive with the independents. Clearly, because of our relationships with Whole Foods and Wild Oats, we certainly do a lot more business within the supernatural channel. But I don't see that their focus, in terms of trying to build their business has changed an awful lot. I think operationally, they've made some changes within their business structure. And we'll just have to see whether those pan out for them or not.

And just the overall mass channel conventionals, as a percentage of sales has been coming down. Obviously, the other channels are growing quicker. Specifically, the supernatural channel. But is there anything specific going on in the mass channel from a growth standpoint?

No, that typically and historically has been a more volatile channel. That's been one that we haven't focused on from the standpoint of looking at the larger national conventional mass-market accounts. And I think clearly, we saw the growth this quarter was not as strong as what we saw in other quarters, and it has hovered in that 13 to 15 percent of our business. But I still think there's very good opportunities for us on the conventional side, and we are focused and remain focused on growing this business.

Thanks.

Gary Giblin with C.L. King.

Hi. Good morning and great quarter. To what extent can you fully pass on the fuel oil prices? I would think at some point, you could get that totally passed through. But what do you think?

Gary, we historically have been able to pass on essentially the costs that we incur of bringing products in house. For our own fuel expenses, which is what we defined today as an impact, we have not put in place at this point, nor do we have any immediate plans to put in place, a fuel surcharge of any kind. So we are certainly pricing our products with the notion that we want to recover all of our overhead. And as a result, we feel confident that with the easing of oil prices that are currently going on, they we'll be okay there.

Okay. And you know, the guidance is very nice to see because I think there were fears that maybe the Whole Foods contract would be at a low margin level. But what is the general range of assumptions in giving that raised guidance relative to -- what's the assumption relative to the Whole Foods margin level in the contract?

We don't -- right now, we fully anticipate having the contract with Whole Foods signed by year end, which is sort of where we told people it was going to be. And we feel that you know, ultimately, what we're working on is an agreement that works well for both companies. I think you can see from the sales that we do with Whole Foods that they're obviously committed to this distribution strategy. And I think we continue to perform at a very high level for them. So I don't anticipate there being any material margin erosion in terms of the new agreement with them. I think it's going to be a deal that both sides are comfortable with.

Okay. And also, what did you generally contemplate in the guidance relative to the fact that Whole Foods has accelerated their store development next year? So have you done precise calculations on pipeline sale and I guess ongoing higher sales levels that would occur from the larger number of stores coming on for them?

We certainly work closely with them in terms of looking at where new stores are coming and things. But the timing doesn't always work out, so we really base it more on what we've seen historically and then what they're projecting. And then, so we do look at those things. It also helps us in terms of siting. Part of the planned decision to site a facility in Indiana was surrounding what we're doing from business with Whole Foods in really the Northeast and the Upper Midwest area. So clearly, we're building a lot of our distribution strategy around where their growth is. But it also is surrounding the growth that we're seeing in our other channels. So --

Okay. And then finally, I guess it's the same question on Wild Oats. I mean I'm not asking for what their internal plan is. But in other words, are you party to their plan because they've left it a little bit indefinite as to the extent of their store development program next year and so forth. And it's not clear what the (technical difficulty) store sales might be running and so forth. So do you have good, reasonable visibility into that, working with them?

Yes. Clearly, we work closely with all our retailers. And clearly, Wild Oats, as we're getting this relationship off the ground, we meet on a regular basis in the same discussions, in terms of potential new stores, where they're going to be located, timing, and those kinds of things come up. So we are in the loop in those things also, Gary.

Okay. And actually one last one is I know vitamins are not a generally material category for you. But do you have any impact from any vitamin E scare type of concerns that might cause a stoppage in the vitamin E sales for a little while?

For us, the supplement category is about 7 percent of our sales. It's actually down if you look back over the last two or three years. It's still a viable category for us. I think we have certainly a presence, a strong presence, in that category. But we have not seen any impact. I mean in terms of the study of the potential for vitamin E or something like that.

Okay, thank you. And they're very, very good numbers and guidance.

Eric Larson with Piper Jaffray.

Yes, congratulations and good morning, everyone. A couple of quick questions. I don't, for some reason, have your first-quarter independent number from a year ago. What was the growth in your independents for the quarter? And what are you kind of seeing in the industry?

Growth from the independents was actually very strong at over 11 percent. And I think what we're seeing in the industry is probably not quite that high. I think overall in the industry, we're probably seeing a number, just in the independent channel, of maybe in the 7 to 9 range. So I think that's kind of what we're seeing in the industry. But our growth rates, again, are a little bit stronger, I think, as we take market share and continue to execute at a pretty high level here. So --

Okay, great. And then the -- looking at your cash flow, and I'm assuming this is all Wild Oats-related, but your receivables jumped substantially more than your payables in the quarter. Is there any particular reason for that?

Well, I mean our DSO is still 24 days. So I think, Eric, that it's really reflective of the increased sales numbers of $478 million. So the payables were certainly there to support the inventory levels, which also increased to basically keep up with the level of demand in the ads (ph).

Yes, and that makes sense. And then, would it still be your goal to be at a run rate or close to a 4 percent margin level by the end of your fiscal '05 year, operating profit margin?

Absolutely. You know, we keep that out there as our target and we're obviously, clearly focused on that. And our business is -- we feel comfortable that we can attain that.

Okay. Thank you.

Scott Van Winkle with Adams Harkness.

Hi guys. Congrats on a good quarter. First question -- can you give us a little more detail on what was the impact in Florida from the hurricanes?

Well, we have retail stores down there, as you probably know. Actually, 9 of our 12 retail stores are in Florida. And somewhere in the direct sites of Charlie and Jeanne and other of those hurricanes during the hurricane season. And they actually tore the roof off of one of our facilities. So the impact of that is obviously that we lost business. There were power outages and things of that nature across the state of Florida, as well as just losing products because we certainly had frozen goods down there. So the impact is related to lost product, lost business, and actually repair expenses associated -- and cleanup expenses -- associated with those two storms.

Got you. But it was mostly on the retail side, not the distribution side?

It was mostly on the retail side. There was some impact on the distribution side in our produce area. But most significant on the retail side.

And the new facility in Indiana, was that part of Blooming Prairie's plan all along? Or is that something you guys worked on after the acquisition?

No, that's something we worked on after the acquisition. Again, I think the decision to site a facility in Indiana isn't necessarily tied to our decision also to close the Mounds View facility. We looked at them as really two separate and distinct decisions. But certainly, the decision to site a facility in Indiana really kind of relieves pressure that we have at our New Ox facility today, Atlanta today. And once we close Mounds View, we're going to move that business primarily into our Iowa City facility, and that facility will certainly be doing some large numbers -- weekly numbers. So that will, again, help take some pressure off of that facility. So really, it's strategic into our long-term decision from building infrastructure for our business.

And you mentioned you're taking some pressure off of Pennsylvania and Atlanta. Are you running at their capacity out of those facilities currently?

Yes. Overall, we're probably running at between 66 and 70 percent capacity. But certainly, we have facilities that are at higher levels than that.

Right. It wasn't just like a year and a half ago you expanded Atlanta. So I guess your business in the Southeast has grown nicely?

Yes, Atlanta was probably almost two years ago -- two or four years ago. But clearly, we have seen very good growth down in that market. And we expect to continue to see good growth over the next year or so.

And, the comment earlier about converging all your IT systems East and West, why wasn't that done -- besides the issue on the East way back when -- why hasn't that been done in the last several years?

I think part of it is because we went -- if you think over the last few years, we did two major acquisitions with Blooming Prairie and Northeast. I think we needed to get through the operational consolidations and focus on implementing best practices. And again, once we felt comfortable that we fully integrated these businesses, then we'd begin to look at the IT conversions.

And so IT has really for us been not a back-burner issue. But related to the acquisitions, we wanted to first get on the business, get comfortable with the sales, get best practices from an operational standpoint in there, and now we're looking at it. I'm comfortable with what we've done; and I'm also comfortable knowing that we're not going to probably get fully integrated to one business system in our broad-line distribution business for 2.5 to 3 years because I know it's a major task for us. And we're taking them one at a time and we're going to do it the right way. We had the experience a few years ago of what happens when you don't do it right, and we're certainly not going to make that mistake again. So --

Well, thanks. Congrats.

Mark Chekanow with Sidoti & Co.

Good morning. Can you talk a little bit about the refrigerated and frozen categories? I know you guys have expanded in your distribution centers space allocated to that. But I'm guessing that the independents who are -- or the smaller independents -- don't have as much room in their store -- probably under-allocated in this faster-growing section. Is there any way you're working with them on store planning and design in much more of a bigger sense as to how they can better capitalize on that and how you can maybe supply them with that growth?

Sure. We actually have a customer service function where we actually do store planning and design, where we'll go in and work with stores and helping them to lay out. They're thinking about doing an expansion of laying out new store design. And then on top of that, we actually have equipment programs where we'll actually help them acquire equipment. We'll finance it on some instances. We work out with certain manufactures on this. So we clearly, again -- you know, part of our job is to help our customers be successful. And to be successful, we have to help them plan for their future as well. And so clearly, you know, when we can help our customers be successful, we'll ultimately be successful, Mark. So yes, we definitely have programs in place that enable our customers to grow and take advantage of some of the growing categories.

Specifically in frozen and refrigerated?

Really, in full assorted (indiscernible). We help customers expand stores; we help them relocate. We help them to -- if they want to add a second location, these are things that we consider part of our responsibilities as their primary distributor.

Okay. Also, talk a little bit more about private-label role you expect to play in the supernaturals -- does this mean more prevalent there than the independents. And I guess also, how will your house brand be priced? Are you going to go with a discount in mind? Are you going to premium pricing to what's out there?

You're asking two separate questions here. So, clearly, with the supernaturals, they both are committed into developing more fully their own brand of products for Whole Foods and Wild Oats. And as part of our distribution agreements, we do handle them in certain of our regions for them. So clearly, we're gearing up to support the programs that they are running at their own stores. From our perspective, we see UNFI-branded products as certainly integral to where we're going to be going. We're going to continue to develop products and categories that we feel either the products aren't at the quality we think they should be, or at the price points we think they should be. So it is something that certainly is something that's high on our radar screen.

So you wouldn't say that a UNFI branded product is going to be much like in the regular groceries where it's the private-label and maybe like a discount product. You at least try to present something comparable to what's out there?

Yes, I think our approach has been to bring to market high-quality products, and, again, categories that we feel are underserved or the quality is not where it needs to be or, again, the price points aren't where they need to be. So --

Thank you.

Gregory Badishkanian with Smith Barney.

Hey, great. Thanks. I jumped on the call a bit late, so if I ask you a question that was already asked, I apologize. The internal generated revenue growth -- did you give us a number for that -- adjusted for Oats?

It's over 12 percent.

Over 12, good. And then also, with respect to obviously there's some problems that Tree of Life and your gaining share -- it seems almost like they're not being as aggressive. Is that resulting in maybe a little bit more rational pricing environment for you? Or what are you seeing there?

I mean they, again, are a very strong competitor in a couple of the channels. Certainly the independents in the conventional mass-market side. And so we're not seeing them come out with crazy pricing or proposals, but they are still being competitive out on the market space. So again, as we said, from our standpoint, they and others are still very strong competitors. And we focus every day on serving our customers and serving them at a very high level. And if we do that, we'll continue to take I think our share of what the growth is within our industry. So, again, I don't want to comment specifically about the Tree or Tree operations, but clearly, we view them as a strong competitor.

And, with respect to -- you mentioned strong service. Can you give us a metric on that, maybe, and relative either to last year or last quarter?

Actually, our service levels remain pretty constant around that 96 to 97 percent, Greg. This year versus last year, it's held very well.

We're running right around 97 percent right now.

Great. Great. And great quarter. Thanks a lot guys.

Phil Falugie (ph) with Zebra Funds.

Hi. Could you tell us what the inflation was, and how much were you able to pass through?

We didn't measure -- we don't really look at inflation on a quarter-to-quarter basis, Phil. We typically look at it on a calendar-year basis. Last year, we looked at -- inflation came in at around 1.2 percent. Though I would expect that this year, we will probably see a bit more inflation as we've seen more manufactures raise pricing. And I think certainly, whenever we get price increases, we've always been able to pass those on. We don't have to absorb those costs; that's typically not the way we price to our customers anyway. And certainly, the expectation going forward would be that if inflation happens and product pricing does change, that we will push those prices through into our book costs or our related (ph) cost.

And our next question comes from Ashwin Bacion (ph), Balkan (ph) Funds.

Just wanted to ask, looking at the way you've been able to grow EPS quarter on quarter sequentially, and looking at first-quarter results here -- 24 cents EPS, just wondering how you guys came up with $1 or so of guidance in terms of EPS for '05, and what that means in terms of perhaps a little bit flattening out of your guy's growth, or just generally your prospects going forward this year?

I think it's fair to say that we want to make sure that the guidance that we're putting out to you guys is achievable guidance from our perspective. And it is unusual for us to raise our guidance this early in the year. But the strong performance from an operations perspective, which is being driven by our investments in the various CapEx that we're spending in terms of facilities, technology, and equipment, is certainly providing some benefit to us. So we are looking favorable as it relates to our earlier guidance, and therefore we did change that by as much as 2 to 3 cents. And that, for us, is a fairly significant move. So we still feel very confident that we will meet those targets for the year.

Right. Okay. I see. Thank you.

Andrew Wolf with BB&T Capital Markets.

Thank you. I want to follow up on your answer to the inflation question, specifically regarding Hain. Have you are already started to get build on the products where they raise prices at the higher price? And have you already successfully put that in your books? And are you going to pass that through? And the second part to that question is are any other vendors following suit with -- to what Hain is doing in raising their prices?

Yes, the answer to the first part of the question is yes. They put the price in effective July 1, and we did make the changes into our pricing accordingly. And yes, I'm seeing more changes within existing vendors in terms of raising prices. Because, again, we have not seen inflation in our industry, really, if you look back over the last three years, Andy, we have not seen significant inflation. Again, versus what I think some other companies say in food service have seen, where they've seen certainly much higher inflation rates. We have not seen that in our business. So I think we will see more this year. And I think we'll certainly see more as we go into calendar year '05.

It's a little early, but is there any anecdotal feedback from your sales people at the store level? Is the independents or anybody sort of noticing this and commenting in any way? Or is it just they understand part of -- (indiscernible) is there any feedback from the field?

I haven't really gotten any feedback. And you know, I try to remain pretty close to our salespeople. I haven't gotten a lot of feedback negative or positive about it. So --

On the Whole Foods contract -- I also missed a bit of the call -- but I think at one time you had said you were trying to get a deal greater than a three year on the terms. Is that still something that is a goal in this negotiation?

It's a goal. I mean, you know, again, I don't want to comment on any specific parts of the agreement at this point. But the plan and goal when we extend the contract through the end of the year was that both companies would work hard to get it done by end of year. And I think both of us remain committed to getting it done. And I remain positive that we'll have it done by the end of the year. So I think that's the best answer I can give you right now.

Well, that's fair enough. I know it's -- want to keep that close to the vest. Lastly, (technical difficulty) sort of relates to the question about I guess next year -- to the future and earnings growth looking out let's say twelve months or something. Just sort of Steve, how do you feel about the strategy for conventional chains? Obviously I know it's an incredible pool of potential prospects. Do you feel your strategy is aggressive enough or is -- do you feel the strategy is such that you can gain a fair amount of new customers? I know it's lumpy, but over time, that you're going to be able to put new customers into the conventional, get some major wins (ph) in that area?

We're going to remain focused. And what we do well is obviously, we're the premier distributor of natural and organic products. We know what we do well. We know what our niche is, and we're going to remain focused on that niche. And I think that clearly, there's certainly a much higher awareness across all channels about how important natural and organic is. And certainly, we expect to continue to see this segment of business grow. I think you're asking a lot about whether we expect to see continued growth within the conventional side in this category. And my answer is absolutely.

I think that they're seeing this as both a way possibly to grow their business, where their growth rates maybe not be as strong as what they would be growing with the natural and organic side. And then also, as a way of differentiating themselves from other competitors and from a Wal-Mart. You know, we probably would not undertake a strategy like this in the near-term. So we clearly see it as a growing strategy and, certainly, we expect it to continue to grow pretty rapidly in the conventional side.

You know, your offer, I think, to generalize -- and hopefully I'm not misrepresenting is -- you can bring more to the table in merchandising instead of sort of a plain vanilla approach to just (indiscernible). And then a lot of these large chains probably don't know the category well enough to merchandise it as well as you; but you want to get paid for that. If that is sort of a fair representation of your offer, do you have any sense out there that the large -- how is that playing in the marketplace with some of the folks who are looking for let's just say a lower margin products, but without any of the expertise that you bring to (indiscernible)?

Yes, because I'm not sure I'm going to answer the question the way you're asking because I'm not really clear about it, but clearly we see, you know, that more customers are interested in this. Ours is definitely a different distribution model than what a Super Value or CNS performs for customers. They tend to focus on much higher-moving items, fewer SKUs. Ours is an industry that is you know, I think to some extent we're over SKUed, and we are looking at sort of rationalizing that to some extent. But we're always going to have I think many more SKUs than another industry because we want to be sort of at the forefront of new product offerings and things.

So I think clearly, you know, we have to remain nimble as a company. We have to keep our eyes and ears open to new concepts and new ideas for products. And I think that will continue to differentiate us from our competition. And you know, from really the conventional people who probably will be later coming into it. So I -- there clearly is one of those things that get me up at 3 o'clock in the morning when I think about risk to our business. But I think, again, ours is an execution business. It's no different than what those guys do. And we execute, I think at a very high level. And we executed in a distribution model that was definitely different than what those guys are accustomed to. So --

Okay. Thank you. I appreciate it.

Mark Chekanow.

Hi. When you look at the way you've taken back the business with Oats, were there real deficiencies in their packaged goods merchandising that you're helping them out with? And how much can you help them with that? Or is some of their problem have to do with more just overall store layout and less focus on prepared foods the way Whole Foods has been so successful? I mean I guess, just how much can you really improve their business just on the packaged goods side?

We're not involved at all on a day-to-day basis with the Oats private-label program other than that we house it in certain of our distribution centers. So we're not involved in terms of what they choose to package and brand and bring in. So, but we are involved just really on the distribution side, Mark. So we're not sort of working with them in terms of developing their own Oats-branded product. I think that's something they feel very confident in doing. And I think they feel it's important to their overall growth strategy. So what we're trying to do is a system on the distribution side.

Okay. Thank you.

(Operator Instructions). Scott Mushkin with Lehman Brothers.

I was just wondering, kind of looking at the year-over-year sales growth, it looks like both Whole Foods seems to exhibit very strong growth in the first quarter. And as Carole mentioned earlier, my estimates for Wild Oats were a little light. Is there any structural reason why these guys seem to buy more from you in the first quarter? Or is that just kind of a blip here for a couple of years?

I don't know. I don't notice it quite like that, I guess. But I think the first quarter is one that tends to be -- we say it's an unusual quarter because we're coming out of summer, so August tends to be a little slower for us. But then you hit September, October, when our retailers start gearing up for the holidays. So then it tends to be a bit stronger. I think these guys tend to be on the forefront of that, and I think they really gear up the stores in advance of Thanksgiving and some of the holidays. So I think that's probably a bit what you're seeing. And you know, again, I just think it's growth. I mean the comp growth Whole Foods has put out there, which I believe was 8 to 10 percent, is very strong growth rates. And on top of that, you've got the square footage growth because of the new store openings. We're seeing good strong -- growth rates -- in the independent channels; and the industry as a whole has continued to grow. So I think it's really a culmination of a lot of those things that are impacting us in a positive way as we look -- as we both look at our first quarter but as we look into the rest of our '05.

Just a quick follow-up question. Someone was asking about the mass merchant. I think you guys have the Shaw's contract, if I'm not mistaken. I was just wondering if you had any comments on how that is now with Albertsons owning Shaw's, and are you looking to expand that role?

We haven't really had any discussions on that. That's obviously something that we expect to be working with them over the next probably three to six months in terms of what their plans are and then certainly, how if any would that impact Albertsons? So --

Thanks, very much.

There are no further questions at this time. Please continue.

Okay. Just in conclusion, I just want to again thank everybody, on behalf of our 3800 employees, for your continued interest and support in our business and the industry that we serve. We obviously feel very committed toward what we do on a day in and day out basis. And obviously, we're focused on continuing to grow our business. So we want to thank everybody. And have a great day.

Ladies and gentlemen, this concludes the United Natural Foods first-quarter 2005 results conference call. If you'd like to listen to a replay of today's call, please dial in at 303-590-3000 or 1-800-405-2236, and enter the pass code of 11014658. Those numbers again, 303-590-3000 or 1-800-405-2236 and enter the pass code of 11014658. You may now disconnect, and thank you for using AT&T Teleconferencing.