United Natural Foods Inc (UNFI) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the United Natural Foods second quarter 2005 results conference call. (Operator instructions) I would now like to turn the conference over to Mr John McNamara with Financial Relations Board. Please go ahead sir.

Welcome again to the fiscal second quarter conference call for United Natural Foods. By now, you should have all received a copy of this morning's press release. If anyone still needs one, please one call Janet Jasmine in our New York office at 212-827-3777 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 and A. As a reminder, this call is also being webcast today and could 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's press release; that same language applies to comments made this morning's conference call. At this point, I would like to turn the call over to Steve. Go ahead, Steve.

Good morning and thank you, John. Welcome, everyone, to our second quarter conference call. Joining me on the call today is Rick Puckett, our CFO. Our second quarter resulted in EPS of $0.23 per share which is an increase of 32 percent over the $0.18 recorded for the same period last year. Including special items our EPS is $0.22, which is an increase of 29 percent over the $0.18 we recorded during the same period last year. The only item included as a special item was the closure of our Mounds View facility. These positive results came during a quarter where we felt an impact of numerous significant items, other than the closure of the Mounds View. These included the continued rise of fuel and energy costs, the costs we incurred as a result of the shut down of our Hawaii facility due to its small size, the cost we are incurring as a result of Sarbanes Oxley and 404 certification and the dilution from select nutrition, which will continue through the remainder of 2005, or until our integration efforts are can completed.

During the quarter, we recorded sales of 504.7 million. This was an increase of 28 percent over the 393.2 million we recorded for the second quarter last year. Excluding the impact of Wild Oats Select Nutrition, our comp growth rate in our distribution business was over 14 percent. Overall our comp growth rate continues to exceed of the industry due to our commitment to providing a diverse selection of products, multiple delivery options, and consistently strong service levels and fill rates to customers. In addition, we offer a variety of marketing and customer support programs to help our customers drive sales in their own businesses. At present time our current mix of business by channel is as follows. Independence represents 46 percent of business, Super Naturals represent 38 percent of our business, conventional mass market represents 13 percent and our other channel represents approximately 3 percent of our business. Our largest customer, Whole Foods Market, still represents approximately 26 percent of total sales, and Wild Oats represents approximately 12 percent of our business.

Looking ahead, we expect sales increase for our fiscal 2005 to be in the range of 17 to 22 percent. During this quarter, we focused on completing the contract extension with Whole Foods, completing the acquisition of Select Nutrition, implementing operational and process improvements at each division, completing the integration of our former BTI system into United Business System, completing the closure of our Mounds View and Hawaii facilities. In addition, the business that was formally serviced from these two locations is now being serviced from our Iowa City and Fontana facility respectively. We began construction in our new facility in Indiana. This facility will better help us to balance sales between our New Oxford, Iowa City and Atlanta facilities. We expect construction to be completed by mid-summer and we will begin to migrate business into this facility during the first quarter of our fiscal 2006.

During the past 18 months, we completed the upgrades to four of our distribution centers, and over the next two to three quarters we will begin to realize more of the benefits from these efficient facilities. For the quarter, I am pleased to report that total operating expenses came in at 15.6 percent of net sales, which is 110 basis point improvement over the 16.7 we recorded during the same quarter last year. This also reflects a drop of 10 basis points from the 15.7 percent we recorded during our first quarter. If we exclude special items, operating expenses would have been 15.5 percent versus 16.5 we recorded during the same quarter last year. This improvement came despite the impact of rising fuel and energy prices, the closure of our Mounds View and Hawaii facilities, expenses in the period loss associated with Select Nutrition, and expenses associated with compliance with Sarbanes Oxley.

I am confident with stating that the continued improvements in operating expenses come as a result of the investments we make in our people and our business. Overall our operating margin excluding special items came in at 3.4 percent versus the 3.5 we recorded during the same quarter last year. Excluding the impact of fuel and the loss from Select Nutrition, our operating margin would have approximately 3.7 percent, which is in line with past results. Also, impacting the operating margin was expenses associated with Sarbanes Oxley. Overall I'm pleased with these results, as they re-enforce the success we continue to realize from our investments, and our people, facilities, equipment and new technologies.

Looking ahead, we are pleased with the progress to date. we know that we have more work to do to help our customers be even more successful with the their business. Even with our existing high-service levels, we remain focussed on improving our operating metrics, which will enable us to better serve our customers. Over the next 12 months, we will continue to focus on growing our business across all our sales channels, growing sales in new channels including food service and international, growing sales of UNFI branded products, continuing to invest in our people, facilities, equipment and new technologies, implementing common business systems and new technologies to help us drive costs and out of the supply chain, and ultimately improving operating margins within each our divisions. Lastly, I want to take a moment to thank all UNFI associates for the dedication and hard work in making our second quarter a success. I would now like to turn the call over to our Chief Financial Officer, Rick Puckett. Rick.

Thank you, Steve, and good morning, everyone. Just to repeat, net sales were 504.7 million for the second quarter of fiscal 2005. An increase of 28.3 percent over last year's second quarter of 393.2 million. This is the first time we've exceeded the 500 million in a single quarter. This quarter included the acquisition of Select Nutrition distributors with the transaction completed on December 20, 2004. Subtracting out the revenue for Select Nutrition recorded in the quarter, our net sales increased by 27 percent. Our wholesale comp growth rate for the quarter was a very healthy 14.5 percent, when backing out, Select sales and the sales to Wild Oats Markets.

Excluding special items, net income for the second quarter of fiscal 2005 increased 32 percent to $9.4 million, compared to 7.1 million for the quarter ended January 31, 2004. Diluted earnings per share excluding special items increased by 30 percent to 23 percent from the $0.18 recorded last year. Including special items, net income for the second quarter of fiscal 2005 increased 31 percent to 9.2 million or $0.22 per diluted share compared to $0.17 per diluted share for the same period last year.

As detailed in our press release, the only special item recorded in the second quarter of fiscal 2005 was $353,000 in expense or 215,000 after taxes, and resulted in a 0.5 penny negative impact on diluted earnings per share. These charges were all related to the closing of our Mounds View Minnesota facility which was completed during the second quarter. Also, hitting the quarter but were not treated to special items, fuel costs were significantly higher and a negative impact of on earnings during the quarter of a $0.011 cent per diluted share. Excuse me. Excluding this impact, our earnings would have been $0.24 for the quarter. The higher fuel cost resulted in a year-to-date penalty of $0.014 cents per diluted share, so you can see this quarter was particularly hit hard. Fuel costs relative to last year were even more negative at $0.018 cents for the quarter and $0.025 cents for the year-to-date.

Also, detailed in our press release, the second quarter of fiscal 2005, included special items 151,000 in net expense or $92,000 after taxes. The special items for the second quarter fiscal 2004, included non-cash income and for the change in fair value of interest rate swaps and their related options agreements caused by favorable changes in yield curbs. These ineffective swaps were in innovated in December 2003, which eliminated any special charges from that point. This is the last quarter of comparisons relative to the swaps. In addition, expenses related to the transition to the primary distributorship of Wild Oats Markets were recorded in the second quarter of last year.

Gross margins for the quarter was 18.9 percent compared to the 20 percent for the same period last year. The gross gross decline came principally as a result of the increased revenue mix of the super natural channel. In addition, we've been going through an aggressive program rationalization program, which impacted gross margin by 4.6 basis points in the quarter. Select Nutrition gross margins are very similar to the rest of our business and therefore, had no real impact positive or negative on gross margin. The decline in gross margin was offset significantly by lower operating expenses. Gross margin on a year-to-date basis is 19.1 percent, and we expect gross margins to be at that level going forward.

Operating expenses for the quarter were 15.5 percent of sales, compared to 16.5 percent for the same period last year excluding special items. 100 basis points improvement as a result of increased efficiency is due to the larger quantities recognized with the supernatural channeled customers and our continued investments in technologies and facilities. Incremental costs of fuel for the quarter had a negative 24 basis points impact on operating expenses. In addition, 9 basis points of dilution was due to Select. Excluding special items, operating income was 3.4 percent for the quarter, compared to 3.5 percent the same period last year. Additionally,if you were to exclude the impact of the fuel cost and the Select, operating income would have been over 3.7 percent for the quarter, consistent with our previous results.

At this time , we would like to elaborate on our status relative to the requirements of complying with Sarbanes Oxley. And in particular Section 404. Today, we have spent over $600,000 with outside services, plus an additional $350,000 internally to accommodate these requirements. We have completed over two-thirds of the work to date utilizing our internal resources, resulting in a significant savings to the company. There are still more costs to be expended in the next two quarters to complete this project. The opportunity costs associated with the use of internal resource is high, but we feel it is important to complete this in the most economical way. The value to our company for this effort is not justified by the cost, and certainly we have not been able to accomplish a number of items within the finance group as a result of spending time on this project. We do expect to be complete within our time frame requirements, which is by the end of our current fiscal year in July.

As you are probably aware, there will be ongoing compliance costs, as well as that will need to be factored into next year's budget and guidance. Cash used in operations for the six months ended January 31 was $12.8 million. Our inventory was at 48 days for the second quarter. Well within our target of 48 to 50 days. DSO for the second quarter was at 25 days. Within our target of 25 to 27 days. Free cash flow, excluding working capital was $33.5 million for the latest 12 months, ended January 31. CapEx was $9 million for the six months just ended. Approximately 1 percent of revenue. There will be additional capital expenditures related to the new Greenville, Indiana facility, which we previously announced as we continue into the third quarter. Additionally, we expect to spend some capital in the third quarter to increase our capacity on the west coast.

Our full year expectation for total CapEx in fiscal 2005 is still in the $35 to $38 million dollar range. The company's outstanding commitments under the amended and restated credit facility as of January were approximately $140 million with an availability of $110 million. A return on total capital was at 22 percent. A return on the equity was 14.4 percent for the latest 12 months. Both of these metrics have improved over 200 hundred basis points from last year. In addition, our trailing 12-month EBITDA has increased by more than 30 percent year-over-year. These metrics support the company, that the company continues to do well from a performance perspective. Relative to our own past performance, as well as relative to other food distributors. At this time, I will turn it back over to the moderator to facilitate questions.

Ladies and gentlemen, at this time we will begin the question and answer session. (Operator instructions) Our first question from John Heinbockel with Goldman Sachs. Please go ahead

Hey, guys, this is Eric Weisencon (ph). A couple of questions. First on your top line. It looks like you guys saw a step up in comp - comp- sales growth for the quarter. . Can you discuss a little bit about what the primary drivers were specifically with respect to your different segments and whether or not you think this kind of new level, this 14 percent level is sustainable going forward?

Eric, you know, we were obviously very pleased with both top line growth, as well as comp growth rates. You know, 14.5 percent comp growth rates is certainly stronger than we've projected. I think, our expectation is that these numbers will fall into the 8 to 11, you know, maybe 9 to 12 range going forward. I don't think we're going to sustain those kind of comp growth rates, certainly looking forward but they are positive. I think the real positive thing for us is the fact that we are seeing these growth rates across all our key channels. We've got good growth rates out of independents, which we continue to see. you know, our Supernatural business continues to grow nicely, and our mass market business, you know, we continue to see good growth and we see plenty of opportunity in that channel as well

You wouldn't point to any of the segments in particular as being the primary driver?

No, no. We have good growth across all of them.

Okay great. And secondly on fuel cost, what's your policy regarding passing fuel cost through your - to your customers? And secondly, it looks like the fuel costs are going to step up again this quarter. Is the cost pressure that you guys saw during the second quarter going to linger, or do you think you get greater pass through next quarter in going forward?

I think there's two components to it. One is as we see costs rise when we bring product into the facilities, we do address that and we actually, you know, adjust our landed cost upward to reflect that. We can address what our inbound costs are through cost of product and ultimately we charge customers for. What we haven't been able to, at least up to this point, address is the rising cost of delivering our products to the customers. During this next quarter, I think we'll have to address, you know, some kind of potential charge to reflect the rising costs that we have as fuel, because transportation is certainly our largest line item in our budget and fuel is certainly the most significant line item within the transportation budget. I think clearly this is an area we have to take a look at. We are some things internally with technology and software that we have, in terms of better helping us route our trucks more efficiently and coordinate not only our deliveries but pickups. Again, these are important things but they'll take more time. You know, probably next two or three quarters before we begin to realize some of the savings on this thing. As we see barrel prices of fuel now at $51 or $52 a barrel, I think it's going to be something we are going to have to address

Thanks.

Our next question is from Ed Aaron from RBC Capital Markets. Please go ahead.

Thanks. Good morning. A couple questions. First I wanted to follow up on a previous question about the fuel costs. I'm assuming you talked to your customers about the potential for passing some of that along and I just wanted to get a general sense of just how your customers view it at this point.

I think people realize because they are seeing it in other parts, you know, of their business or cost that they have. Because it's not only just fuel any longer. Now it's translating to energy costs and things like that. People clearly see that this is having significant impact within our economy but also in terms of cost of product. So my expectation is that people see this it's impacting not only impacting us, we're not the only ones being impacting Ed. It's impacting everyone. I do think that this is the first time we've ever had to consider something like this. We've seen the price of fuel now pretty well sustain itself at these levels and I'm not sure that anyone has an expectation that it's going to come down

Okay. You've also talked about a couple of -- the impact of some initiatives on the capacity side, with some consolidations that you have done. I know that you have a new facility coming online in a few months. Can you give us a sense directionally, when you look at what you're doing with your capacity. Should we -- didn't it to start getting better from here? Or how should we -- how should we do that?

I think one of the things that we talk about -- because we obviously have over the last two years spent a fair amount on our facilities, both to increase the size of them which enabled us to consolidate often times multiple facilities into one. We typically will see these efficiencies but it takes from 2 to 4 quarters before we fully realize the benefits of operating out of a larger facility. Over 18 months we've upgraded four of our facilities. At this point, we still expect improvements, efficiency-wise, in these facilities over where we are today. Clearly, we continue to address our costs by operating more efficiently and operating from more efficient facilities. What's interesting is when we look at our CapEx expenditures versus others, we still spend less than if you look at Cisco or Super Value or Performance food groups. So clearly, with the growth rates that we have, we have to continue to invest in our facilities and people and technology to help drive costs out of our supply chain and that clearly is what we are focussed on. Because we talk about it really at every quarter. And just to add to that, the current capacity utilization is somewhere around 68 percent throughout the system, but certainly in any particular area that could be greater than that, it could be 85 to 95 percent, which is the case with New Oxford. Too, agreeing with the facility opening up in the middle of the summer will certainly alleviate some of that stress on New Oxford today. And we're not able to expand New Oxford, so we are needing to address the midwest market. And that continues to exist in another place or two throughout the country but for the most part, we are staying ahead of the growth rate.

Okay. And just lastly before I turn it over, can you give us comments our how February went for you?

In general terms, sales continue to be strong. You know, we are pleased with the results. Obviously, the month just ended yesterday, so it's hard to get a handle on it. There's nothing of surprise in terms of what we are seeing from a sales perspective

Okay. Thank you.

Our next question from Gregory Badishkanian with Smith Barney. Please go ahead

Great. I wanted to talk a little bit more about sales growth. Any product lines driving at 14.5 percent of organic growth, such as maybe whole foods or organic? Or is there anything really driving that?

No, you know, it's interesting. We're seeing it -- you know, from a category standpoint, we are seeing good growth, you know, really still in the perishable areas, the frozen areas, which have continued over the last five years have been strong areas for us. Grocery continues to be a strong area for us. The supplement side of the business is still sort of, you know, not growing anywhere near as rapidly as the other. But I can't point to any product lines or anything. I think we're seeing very solid growth and really perishable, frozen, grocery, our growing -- in addition, we are seeing from the unified branded product, we are seeing good growth out of the UNFI branded product. And I think part of that is because, you know, the items we introduced typically are priced better, they are organic and the quality of the product is better than what's out there. I think, overall, those are the areas that we are seeing good growth from the product standpoint

If I'm not mistaken, last year you benefited from the Mad Cow scare. You benefited from low carb really peaking. Too, you had some pretty tough comparisons, if I'm not mistaken. But you're still able to manage that. I'm wondering with all the impacts, like, what sort of got you over the top? I guess market share gains from some of your competitors, is that also contributing to that?

I think we continue to take market share. Again, I think we continue to offer a wide and diverse product selection for our customers. Our delivery options, our service levels to customers are all very good. We offer a variety of marketing programs, which again help the customers to manage their business, manage their inventories, drive sales through the stores. These are things we believe are important to what we do. And again, almost half our business comes out of the natural food stores, independent food stores, so we are clearly focused on helping drive business through this channel, but at the same time, we understand that we have to support the Super Natural customers. We have to work with and attain business from the mass market in areas where we don't have customers. So you know, I can't point it to any one thing, Greg. We're across the board. And for instance, on the low carb, we did not realize much in the way of huge gains from that last year nor did we have the after math of the falloff and low carb sales this year

Yep. So EPS guidance, any change there? I might have missed that. Maybe you didn't confirm that or not?

We didn't change our guidance for the year, Greg.

Excellent. Thank you very much

And the next question from Mark. Chekanow with Sidoti and Company. Please go ahead

Good morning. I'd like to talk about your some of your suppliers. I dont think it's any secret that it's been mentioned on some conference calls about the potential of trade dollars being reinvested with a retailer and more towards a consumer, as opposed to the volume discounting through the distributor channel. Have you been seeing this at all, and is this at all showing up in the gross margin and if it was is it even noticeable?

I think we talked about that last quarter, Greg. There's a bit of that going on right now but one of the measures is our look at is our book to average, which is book is what it costs us to bring product in typically and the average cost is sort of averages what we are actually buying it at. I have not seen a material change in that over six months in terms of our book to average measure and that, to me, tells me what percentage of our inventory we are buying on deal. I'm comfortable there may be a bit of that between suppliers and vendors. But at the same time, it's not really material from the standpoint of how it impacts our gross margin. We are seeing to some extent is the shift in business because of the change between Wild Oats coming on board, and that sort of thing, and the shift in business is having a greater impact in terms of the mix and the impact on gross margins

Again, the revenue guidance that you confirmed at 17 to 22 percent. You know, you tracked first quarter and second quarter at 25 and 28. There seemed to be a significant drop off. Is there anything other than conservatism. I mean, you've already said February was continued to good momentum. Is there anything that you can point to that would cause a mid-teens or low-teens revenue growth rate?

Most of that is a result of Wild Oats being lapsed as of the end of February, March timeframe. The last quarter and a half, we had Oats in last year at a full number. That would be most of the drop off

Thanks.

Our next question is from Andrew Wolf with BB&T Capital Markets. Please go ahead

Hello. A few follow-ups. On the freight costs, are any of your contracts now, do they have codified so you are passing it through or is is all, you know the last quarter, did you essentially eat all the increase?

As far as fuel adjustment?

Yes.

We have some contracts that with we have the ability to go back and get fuel adjustment charges based on where fuel prices are versus what we have built into contracts. And we do have contracts like that, Andy

And for the rest of them and if you could give the proportion, I'd appreciate it. For the rest of them, how long does it take for the adjustment in price to take effect?

Like a quarter, so we look at it, the average over a quarter and in following quarters we implement the fuel adjustment charge. I don't have off the top, what percentage, but again, it's something now that we have it in our major contracts and something we need to start looking at for other classes and trades

For the rest of us, for the independents, let's say, it's something that would follow in another quarter or so perhaps.

Something that we had, that we will be looking at over the next quarter

Rick, on the Sarbanes Oxley cost, if I got it right, it sounds like the company spent $900,000 to be two-thirds done. Is the cost proportional to what's done? I mean, do you have a third more to go?

What we said, Andy, is we spent $600,000 inside and $200,000 outside and two-thirds of the work to date with internal resources. Not necessarily are we two-thirds of the way done. We are far along in the process and certainly expect to be done well within the timeframe at the end of July. Going forward, I think there's another couple hundred thousand of external resources when you consider comparing resources and an effort for us because we are still doing a lot of the work internally and certainly an opportunity cost to that

My bad there. On the 300,000 internal, was that opportunity cost or incremental?

It's not incremental. These are salary people, high-level financial people within the organization after spending time on the project. Essentially the cost of benefits and salary

And I look at it as something we don't get the benefit of them in assisting in other parts of the business, because they are focused on documenting systems and processes, things like that. So it's not like we can utilize in helping, in analyzing and assisting in the business. As Rick said, that will go down and sort of maintenance costs to it, but again, it's one of these things that every company is reporting huge numbers out in terms of what it's costing them to do and I look at this from a benefit cost standpoint and not sure that the benefits derived from this is worth the investment made into it.

I heard that one, too. Now looks like it's a little under $0.02 , the numbers you just specified. That sounds consistent with earlier guidance or is this consistent --

It is consistent but the costs are spread out so aiding this fiscal year is three-fourths of a penny in terms of incremental costs. Now going forward there will be additional -- At the end of the day, we'll probably have a penny and a half on this year.

And my last question is on to sales. Steve, you called out a number of things. Sounded to me, at least, that the mass market opportunity is maybe something -- where are you putting more focus there? Is there, should we be looking for something than -- your normal comment that you're looking there? And do you have any capacity constraints in the system -- you know, for doing a piece of new business?

No, I don't think there's a capacity constraint. I think Rick addressed it. We have some facilities that are pushing 90 - 95 percent capacity. We have certainly service business, you know business, because we have other facilities, that may only be at , you know 50 or 55 percent capacity. From a capacity standpoint , we certainly have the ability to serve more and to support the continued growth that we certainly would expect both over the next quarter. Even looking beyond that into 2006, we just continue to see this as an opportunity. Yes, we have been adding talent into this part of our business. Internally, it's a focus to grow this business back to about 15 percent of our business and then beyond that it should be closer to 20 percent of total sales. So clearly it's an area where we feel we have upsiding, Andy, and yes, we are adding resources to it.

Thanks. That's helpful. Take care.

Our next question from Gary Giblen with CL. King. Please go ahead.

Good morning. Small point, but could be (inaudible). I noticed that Food For Thought, which is one of your NRG stores in West Port, Connecticut, is now closed and is that going to be relocated and what was the history behind that whole thing?

That is not our store. That store was sold three or four years ago so that is not our store.

Is it a supply customer?

I'm sorry?

Do you wholesale to them or is not even a wholesale customer?

Yes, we do wholesale to them. but not one of our NRG stores any longer. Again, we sold out I guess, three or four years ago

Oh, okay. And what was the impact of the supplement acquisition on gross margin? In other words, was that part of the reason why gross margin showed lower than last year?

As I mentioned in my comments, Gary, the Select Nutrition gross margin was essentially the same as the rest of our business. It had no real impact, positive or negative. On an operating margin perspective, it did impact our margin by 10 basis points

Okay. That's good. Thanks. Excellent quarter.

(Operator instructions) We have a follow-up from Mark Chekanow. Please go ahead

I'm going through my notes and I think you said earlier on the call the dilution from FND would continue through the year, but I thought on your press release, you said it would be dilutive in the current quarter and neutral for the remainder of the year. Just clarify what's going on in the integration. Is there any delay in pushing EPS neutral?

I think, we thought we could handle the IT integration more quickly than we can, and, in fact, we're not going to be doing that until around June. So I think there's some things that, you know, it's probably a little bit -- the comment you're alluding to is my reference in my comments to Select. I'm a bit more cautious about that. I think we are taking advantage now of some things, you know, sort of the low hanging fruit that we have. Some of the significant, I think, operational improvements that we will realize with Select Nutrition really can't happen until we brought them over onto United Business Systems. So I think we will see some incremental improvements in margin by being able to move forward by taking advantage of early pay discounts and some of these things, but I think some of the things will have the greater impact ultimately to operating margin, so we won't have a business losing money [ph] will come when we can make the operational improvements to that. And that will be driven when we get it over onto our United Business System

Mark, I would suggest even though it may be dilutive in the next two quarters, it won't be dilutive to the point where we feel that it's necessary to change full-year guidance certainly. And I think it will be less than half a penny a quarter

Our next question from Scott Mushkin with Lehman Brothers. Please go ahead

Thanks, guys. Sorry, I jumped on the call a little bit late. I thought I heard you say that you're going to be adding capacity to the west, the west coast. I was wondering what's driving that need. Anything specific? Contract wins or anything?

Just again, it's continued sales growth within divisions. We are actually seeing faster sales growth in our west division right now than any of our other divisions. So it's also an area that, when you look back over the last two years, a lot of the investments that have been made have been made in some our facilities in the east. So it's something that we need to increase the size and capacity of facilities out west. And there will be things that we will be addressing. you know, really over the next quarter in terms of increasing that capacity in order to support the sales and sales growth that, you know, we expect to come along

But not specifically driven by Wild Oats or Whole Foods?

No, actually not.

And did you do more in your contract with Whole Foods? Did you get any more of their Southern Californian business or still handled by the competitor?

They had an existing contract already in place on that one.

So it remains the same.

It does.

Thank you.

We have a follow-up from Gregory Badishkanian. Please go ahead.

Yeah, I was just wondering if you could talk about the synergies with Select in terms of maybe peaches, and some other areas, of why it made sense for you to acquire them.

Greg, primarily Select brings additional products we don't even have in our product mix, number one. So we incrementally get the benefit of that. In addition, the process of shipping UPS is a significant benefit for us in that don't have to put real small picked items on our trucks and deliver those. We can UPS those out. The model is pretty well set. It's pretty efficient. We believe with more volume, we can make that more efficient and we're looking at the product lines that currently have and the products we currently have, our 17 distribution centers and looking at how many of those we actually pull into Select distribution centers. And really take a small decrease in inventory across the company as well. So there's synergies along those lines. There's certainly the added value of offering customers more products that we currently do not offer. And then the same thing is true on Select's customers, because our customer overlap is not a hundred percent by any means. It's probably in the 20 to 30 percent range. So we're picking up more customers. We're able to offer their customers many more items than they are currently getting as well.

Great. Thank you very much

We have no further questions at this time. Please continue.

Okay. Just to conclude. Again, I will again want to thank everybody for their interest in United Natural Foods. And I want to thank all the employees and associates of United Natural Foods for all the hard work that goes in. It certainly is a -- Second quarter for us is typically a different type -- a difficult quarter and I think we really worked hard with some of the progress we had on. Again, I just want to thank everybody for their participation and on behalf of all the 3,800 Unified Associates, I want to thank you for your interest and support of our company. Thank you very much and have a good day

Ladies and gentlemen, this concludes the United Natural Foods second 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 11023567. (Operator instructions) Thank you for using ATT teleconferencing.