United Natural Foods Inc (UNFI) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the United Natural Foods Fourth Quarter 2005 financial results conference call. At this time all participants' lines have been placed into 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, Wednesday, August 31st of 2005. At this time I would like to turn the presentation over to Julie (inaudible) with the Financial Relations Board. Please go ahead, Ma'am.

Thank you and good morning, everyone. Once again, welcome to the fiscal year 2005 fourth 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 call Janet Jasmine in our New York office at 212-827-3777 and we will send you a copy immediately following the conference call.

With us today this morning from management are Steve Townsend, Chief Executive Officer and Rick Puckett, Chief Financial Officer. We will begin with some opening comments from management and then we will open up the line for a 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 language regarding forward-looking statements contained in the press release.

That same language applies to comments made on this morning's conference call. With that, I would like to turn the call over to Steve. Please go ahead, Steve.

Thank you, Julie, and welcome everyone to our fourth quarter and fiscal 2005 conference call. Joining me on the call today is Rick Puckett, our CFO.

Fourth quarter EPS excluding special items was $0.28 a share, which is an increase of 21% over the $0.23 per share we recorded for the same period last year. For the year ended July 31, 2005, EPS excluding special items was $1.00, which is an increase of 26% over the $0.79 we recorded last year.

Obviously we're very pleased with this year's results which include growing our top line by 23%, completing two major facilities' expansions in Connecticut and Iowa, closing down two undersized facilities in Minnesota and Hawaii, completing two tuck-in (ph) acquisitions that gave us new products and customers as well as critical mass in key areas, growing sales of UNFI brands by over 77%, and continuing to strategically position our Company to take advantage of the growth opportunities that exist today.

Overall, we are pleased with the 26% rise in EPS which came despite the impact of the number of significant items. These items included the continued rise of fuel and energy costs, the cost to comply with Sarbanes-Oxley and 404, the dilution from the Select Nutrition acquisitions and the cost to open our Greenwood, Indiana facility.

During the quarter, we recorded sales of $543 million. This was an increase of 22% over the 446 million we recorded in the fourth quarter last year. Excluding the impact of acquisitions, our comp growth rates were up approximately 19%. This acceleration of our comp growth rates is a result of our commitment to service our customers at a very high level. In fact, our growth rates continued to exceed that of the industry due to our commitment to provide a diverse selection of products, our ability to offer multiple delivery options to customers, and our consistently strong service levels and fill rates to all of our customers.

In addition, we offer a variety of marketing and customer support programs to help customers drive sales in their own businesses. At present time our current mix of business by channel is as follows. Independents represent 46% of our business, Supernaturals represent 37% of our business, Conventional Mass-market represents 14% of our business and our Other channel represents approximately 3% of our business.

During the quarter we continued to focus on a number of key initiatives which included working to complete the integration of Select Nutrition and beginning our integration efforts with our recent Roots and Fruits acquisition. Finalizing startup plans for our new facility in Greenwood, Indiana which will relieve pressure from our Pennsylvania, Iowa, and Georgia facilities. We actually begin shipping from this facility in early August and expect to transfer the business over the next 60 days. We are continuing our long-term plans to consolidate our legacy systems to our UNFI business system. During fiscal 2005 we removed two legacy systems over to UBS. We are implementing new technologies such as Roadnet which will help us to better route our trucks which ultimately should help us reduce fuel costs and Pick Delight which is now operational on one location.

This system will allow us to improve productivity and accuracy in the selection process. Pick Delight will be rolled out to our other facilities over the next 18 months. We will continue our efforts to grow UNFI brands. We will continue our efforts to implement best practices across all of our divisions. We are also -- will complete the construction of our new facility in northern California.

The Northern California facility will allow us to consolidate operations from our two existing DCs into one building. This will allow us to support the expected growth within the region while operating more efficiently. We expect this facility to open by the end of the first quarter of 2006 and we will concentrate on closing down our two existing DCs during the second quarter. The transition cost associated with this desk move will be approximately $1.52 to $2 million.

For the quarter I am pleased to report the total operating expenses came in at around 15.8% of net sales which is a 15 basis point improvement over the total operating expense we recorded in the same quarter last year. Overall our operating margin excluding special items came in at 3.61%, which is down from the 3.76% we recorded in the same quarter last year. However if we were to exclude the impact of fuel costs, the loss from Select Nutrition, and the cost to comply with Sarbanes-Oxley, our operating margin would have been approximately 3.9% which is in line with past results.

Overall I'm very pleased with these results as they reinforce the success we are realizing from our investments in our people, facilities, equipment, and new technologies. On a year-to-date basis, net sales increased 23.3% to 2.06 billion from the 1.67 billion we recorded in our fiscal '04. Net income excluding special items increased 28% to 41.7 million or $1.00 per diluted share. This compares very favorably to 32.5 million or $0.79 we recorded in our fiscal 2004.

Over the full year I'm pleased to report that we were able to lower total operating expenses by 57 basis points, despite the extraordinary expenses previously noted. Overall operating margin for the year came in at 3.6% before special items. Again, if we were to exclude the impact of fuel, the losses from Select Nutrition and the cost to comply with Sarbanes-Oxley, operating margin would have been approximately 3.8%.

Looking ahead, I continue to be very pleased with our progress today and particularly on how we positioned our Company to meet the growth opportunities in our industry. We will continue to work hard on behalf of all our customers so that they will be more successful with their businesses. And despite our existing high service levels, we remain focused on improving our operating metrics further.

Over the course of the next 12 months, we will focus on the following. Growing our business across all our sales channels, growing sales and new channels, growing sales of UNFI-branded products, continuing the integration efforts of Select Nutrition and Roots and Fruits, implementing a common business system across our Broadline (ph) Distribution business, successfully opening our new 485,000 square foot facility in northern California, continuing to invest in our people, facilities, equipments and new technologies, which will help us to reduce cost across all of our business units and improving operating margins across our divisions.

Lastly, I just want to thank all of UNFI associates for the dedication and hard work and helping to make our fiscal 2005 year 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. As previously mentioned, net sales were 543 million for the fourth quarter of fiscal '05, an increase of 21.6% over the last year's fourth quarter of 446.4 million with a comp growth rate of 19%. Full year net sales were $2.06 billion, an increase of 23.3% over 2004, 1.67 billion -- again with a comparable growth rate of just over 15% for the full year.

Net income for the fourth quarter fiscal '05, excluding the effect of special items, increased 21.6% to $11.6 million or $0.28 per diluted share compared to 9.6 million or $0.23 per diluted share for the same period last year.

Including special items, net income for the fourth quarter of fiscal '05 increased 23.2% to $11.8 million or $0.28 per diluted share compared to 9.6 or $0.23 per diluted share for the same period last year. As detailed in our press release earlier today, special items recorded in the fourth quarter of fiscal 2005 amounted to $236,000 of income, or $146,000 after taxes, and resulted in a negligible impact on diluted earnings per share.

These items included expenses related to the closing of our Hawaii facility and the opening of our new Greenwood facility, which was actually opened in August. In addition, there was other income related to the early termination of the interest rate swap agreement originally entered into in May 2003. There were no special items in the fourth quarter of fiscal 2004.

Also impacting the quarter, fuel cost even net of fuel surcharges remain very high and had a negative impact on earnings during the quarter as fuel prices continued to rise. In addition the external costs of Sarbanes-Oxley compliance are higher than we expected, resulting in an additional negative 6/10ths of a cent in earnings per share over and above what we have already recognized during the year. We are proceeding on schedule with this activity and expect to be complete with our first year of compliance with the filing of our 10-K in October.

The effective tax rate calculation completed with year end actual earnings resulted in a reduction of our accrual requirement to 38% from the previously accrued 38.7% for the year. This adjustment was recorded in the fourth quarter. We have been working very hard to make our tax rate as efficient as possible for our business and this is indicative of the success we are having in this area.

Gross margin for the quarter was 19.4% compared to 19.7% for the same period last year. The decline in gross margin was offset significantly by lower operating expenses despite the higher fuel costs that we continued to experience.

Gross margin for the year was 19.2% as we had previously guided. Operating expenses for the quarter were 15.78% of sales compared to 15.93 for the same period last year. The 15 basis point improvement is a result of increased efficiencies from our continued investments in technology and facilities. The improvement was reduced by the higher fuel and Sarbanes-Oxley cost that I mentioned earlier.

The incremental cost of fuel for the quarter had a negative 19 basis points impact on operating expenses. The costs associated with Sarbanes-Oxley had an additional 7 basis point impact on operating expenses for the quarter.

Excluding special items, operating income was 3.61% for the quarter compared to 3.76 for the same period last year. As Steve mentioned excluding the cost of fuel in Select and Sarbanes-Oxley, that would have been 3.93% for the quarter. So definitely in line with our previous performance in this area.

For the full year ending July 31st, '05, net income excluding special items increased 28.3% to $41.7 million or $1.00 per share compared to 32.5 or $0.79 per diluted share for last year. Net income for the full year fiscal 2005 including special items decreased -- sorry, increased 30% to 41.6 million or $1.00 per diluted share compared to 32 million or $0.78 per diluted share for last year. The EPS for the year excluding special items was at the top end of our guidance for the year. Special items for both years 2005 and 2004 are detailed in the press release provided earlier.

Operating expenses for the full year, as Steve mentioned, improved by 57 basis points. Fuel and Sarbanes-Oxley together amounted to approximately 15 basis points impact on the year in incremental and additional cost.

It is also important to note that our efficiency metrics around revenue throughputs have improved 20% year-over-year. This is certainly supportive of our efficiency gains to technology and facility expenditures. We'll continue to drive towards common applications and processes across the Company.

During the fourth quarter, we increased the long-term debt availability by approximately $40 million. This was put into place to match the expenditures that we have been making recently on the facilities in Greenwood and Rockland . The incremental facility was an amendment and extension of the existing facility that we already had in place. This was completed on July 28th of this year and will result in more effective interest rate overall.

In addition, we entered into an interest rate swap as a hedge against future interest rate increases associated with this debt. The Company's outstanding commitments under the amended and restated short-term credit facility as of July 31st were approximately 135 million, with an available liquidity of $128 million. Our return on total capital was 20% and our return on equity was 14% for the latest 12 months.

Capital expenditures were $66 million for the year. This is significantly higher than our original guidance for the year but is resulting from the timing of the expenditures in Rockland and Greenwood. The capital expenditures for the year included approximately $7 million that will not be spent until January 2006 for the Greenwood, Indiana facility per the purchase contract. The accounting rules dictate that this be recognized today and therefore appears on the balance sheet as additional fixed assets and additional accrued expenses.

Cash generated in operations for the 12 months ended July 31st ',05, was $38.3 million. Our inventory was at 48 days for the fourth quarter at the lower end of our target of 48 to 52 -- 50 days. The day sales outstanding for the fourth quarter was at 24 days. Favorable to our target of 25 to 27 days.

We have not included at this time in our press release or comments today guidance for fiscal 2006 relative to the cost impact of expensing options, pursuant to the requirements of FASB 123R. We do expect to issue guidance on this item when we have completed the analysis for our Company later during the first quarter. The cost will be recognized in our financials, starting with the results of our first quarter ending October 29, 2005.

At this time I'll turn it back to the moderator to facilitate questions.

+++ q-and-a.

(OPERATOR INSTRUCTIONS) Eric Weissman with Goldman Sachs.

First a question on the top line. Can you give us a sense for how the 19% comp broke down by customer channel and whether any of the channels were uniquely strong or uniquely weak?

No. We had very solid growth across all channels, Eric. In fact double-digit growth across all channels, basically, for the quarter.

You guys aren't giving details on each channel?

No we really haven't done that. Again if you look back last year, I think, or last quarter if you look at the percent of business by mix, Independents remained at 46%, Supernatural actually declined from 38 to 37 and the Supermarket business increased a point. But overall the growth rates are -- were solid in double-digits across all. We didn't have any exceptional areas in one particular channel.

Another sales-related question. When you think about the end consumer for natural and organic products, are you seeing or do you anticipate any impact on consumer spending given where gasoline prices are? Or do you think your end consumer is somewhat insulated and also have you factored any impact into your '06 guidance at all?

I think, historically, I mean these are lifestyle choices that people are making. So I feel that, obviously, we are all faced with higher fuel and energy costs and we have been all incurring that over the last really 12 to 15 months. I think when we do our planning, we obviously tend to be conservative about that but I don't expect that what we're seeing today will change certainly the guidance that we put out there for revenue for next year. Because, again, I think this comes back that these are lifestyle choices that people are making.

A couple more questions. With respect to SG&A and operating expenses it looks like your expense dollar growth ticked up. The growth rate ticked up a bit from where it was in the third quarter and I know you mentioned some of this is related to fuel costs and Sarbanes-Oxley. But can you give us some color as to whether anything changed since the last quarter that caused this acceleration to happen and whether you expect this level of expense growth to continue going forward?

I'll take that one. A lot of that isn't actually Sarbanes-Oxley for the fourth quarter, which is a one-shot kind of expenditure. There will be some ongoing costs for Sarbanes-Oxley but certainly not to the extent that we have experienced in the first year. We have spent when you consider outside costs and internal costs well over $2 million on this project from the inception. And we've obviously recorded that in our P&Ls as we've gone forward. So the cost has certainly increased on Sarbanes-Oxley over the last quarter simply because it is coming to an end. And that is when our outside auditors, KPMG, come in and actually do most of the work.

So going forward, we expect the Sarbanes-Oxley piece to moderate back to a maintenance level which is, I think for most companies, still not totally defined yet but and certainly it is not for us. We certainly believe that it's going to be significantly less than we've incurred so far.

In addition the fuel costs spiked up this past quarter a little bit more than it had in previous quarters. So we actually did get -- even though we put a fuel surcharge in place at the beginning of this quarter and actually had the benefit of it for the entire quarter it did not fully compensate for the increases in fuel that we experienced -- and that other companies are experiencing. So, those two items are very significant from the point of view that you are referring to.

All other costs on SG&A and operating expenses, other than the potential increase that we will incur with the added fixed cost of Greenwood, Indiana, have not really changed all that much and actually factor improving as we go.

Lastly, just a quick question on your tax rate. You mentioned your tax rate for 2005 but what is the expected tax rate that you have built into your guidance for next year?

It will be around that 38% number.

Greg Badishkanian with Smith Barney.

Great. Just had a few questions on price increases or fuel surcharges. I believe that was in late May so you didn't get the full (inaudible)

You're right. I stand corrected. Steve's already corrected me. (MULTIPLE SPEAKERS)

I guess the point is, you'll probably get the full benefit next quarter and I am wondering how it was received by customers?

I think overall people understood the necessity for the fact that we really hadn't had any adjustment to pricing to reflect the impact that we have been realizing from continued rise in this, Greg, so I think overall I think people understand that because we all go to the gas pumps to fuel up and certainly we've all seen that personally as well as within our own businesses. So overall I think for the most part it was received, obviously acknowledged that we have obviously incurred these costs from the fuel area.

And at least some of your competitors have followed with either surcharge or price increases on the product invoice?

That's correct. I think that Tree (ph) just came out with that. They addressed it differently. They actually built it into pricing. We did it as a line item so that if fuel were to ever return to historic levels that we've been used to we could eliminate it from what we price into for now.

And you could actually increase that the next quarter too if --?

We left that open certainly that if fuel continues to rise at -- that is an opportunity that we are going to consider. Because again even after this quarter we look carefully at this and I think Rick pointed out that for the quarter fuel on net basis cost us 19 basis points. So we are still not recouping all the fuel cost on this.

Can you talk about maybe trends from the beginning of the quarter, maybe August I mean, has there been a material change? Seems like it's accelerated a little bit but has it changed much or how has that been progressing?

Sales continue to be strong. The thing that we were very pleased with obviously was the fact that our comp growth rates in our fourth quarter were 19%; across the year we were 15%. So obviously we saw acceleration in the comp growth rates in our fourth quarter and we are continuing to see strong sales as we enter our first part of our fiscal '06.

Congratulations.

Edward Aaron with RBC Capital Markets.

Couple questions. First on the -- just with respect to the fuel surcharges. Do you have a sense of how much inflation at the retail level we are actually seeing in the category because you guys have your surcharges and your manufacturers like Hain, for example, recently announced another price increase. Do you have a sense at the retail level what the end market inflation looks like right now?

We run that comparison typically once a year. I can do it I think maybe for next quarter, Ed. I will say this that the trends are we're seeing more price increases from manufacturers. You pointed out Hain just recently had had a price increase. We're seeing more than we've really seen. Historically, we have actually been running quite low on product inflation; in fact last year was 1.2% or something like that. So it was quite low but I think, again, everybody is experiencing the same increases in costs, commodity prices, fuel and energy prices. So I fully expect that -- I really expect that we're going to see continued trends of increased product cost over the next six to 12 months.

Do you think that you have a better ability than your competitors to pass on fuel prices?

No. I think it is one of those things that, obviously, we took a very careful look at this and we didn't rush in and do this. It took us really 12 months before we figured out how we were going to approach this. So obviously we have to take a very thoughtful approach to this thing, obviously because of the impact it has on our customers. So we done some things within our business to help offset that with hedging fuel and things like that but at the same time we have to carefully monitor this thing and obviously we have to remain competitive out there. It is just one of those things that we really pay attention to pricing and how we stand in the market space. But certainly we've left the door open that if we continue to see sharp increases in fuel that this is -- we are going to revisit this topic again.

I guess what I'm trying to figure out is whether or not there are smaller regional competitors out there that really aren't able to pass on these price increases and whether that might avail some acquisition opportunities for you, because they are not able to compete on the same scale.

I really can't comment on acquisition opportunities, things like that. I think certainly those are things that we look at but whether fuel has that kind of impact on them, I couldn't really say.

Also I just wanted to ask about operating margin going forward just over the next couple of quarters. Do you have any facilities coming on line which might be a bit of a drag but at the same time you'll have some of the Sarbanes-Oxley going away and you'll be a little further down the road in integrating the acquisitions? Do you think you can hold this level of operating margin where it is? Or maybe even increase it over the next top of quarters or give us a sense of what -- how the margins might progress from here?

I think Rick and I will probably both take a stab at this one. My sense is, obviously, that we continue to have to invest in our business to make sure that we have capacity to meet the growing demand and I think that is something that we continue to do. The Indy facility is going to take pressure off of our Pennsylvania facility which is our highest grossing facility nationally, our Iowa City facility, and our Atlanta facility. Clearly we need it with the growth that we have experienced in this area. Northern California, when we put Rockland on line it takes basically two facilities that we have to operate out of today and puts it under one roof so we expect we will be certainly more efficient there.

But again as we have done in the past is that, getting into a new building doesn't automatically mean that we are more efficient. It takes us a certain amount of time to work through those types of operational changes.

Ultimately, our goal is that we are going to grow earnings faster than we are going to grow sales and I think that guidance that we put out for '06 really reflects that. Ultimately we expect that our investment in these two facilities primarily which is what your question is centered around, we will realize these efficiencies. And I do fully expect that we will be able to lower operating expenses in '06, similar to what we did in '05, where we saw 57 basis point improvement on the operating expense side.

Then, Ed, I would just add to that that there's no way to really predict the impact of fuel on our bottom line as well. It certainly has impacted us all year and we will continue to do that even now as we look at the impact of Katrina and the price on diesel fuel going forward. It is going to be pretty significant at least for the short-term.

In addition, I would just remind you of the 20% improvement that we made this year just in throughput in the operations area in there; consolidating our operations and putting them under one organization has really driven common practices and processes across our Company to the point where it has made significant impact.

So I think that the further investment in the facilities to Steve's point will add to that. But there will be a period of time where there will be a fixed cost there that we've got to cover.

So, going forward to your point, Sarbanes-Oxley should be a bit less than we have experienced this year. Hopefully a great deal less and that should improve margins. But fuel is still a big unknown.

Nice job on the quarter.

Scott Van Winkle with Adams Harkness.

Steve I know you don't like to break out your business by channels but you have been giving us this revenue mix for quite some time. Assuming I have the right numbers from Q4 of last year as a mix by channel, you continue to have to huge growth in Independents, it looks like the Supernaturals were a little bit softer than trend up 13%. But again I may have the wrong numbers. One, on the Independents, are you still picking up business from your largest competitor who goes through a restructuring, more intentional turn away of business. And, second on that, when do you anniversary the real pickup you had last year when they restructured and cut some of their business. And then second am I right on the Supernaturals that they were up only about 13%? I don't mean to say only but it had been trending much better than that.

It was slightly higher than that but again let me take, because there's a number of parts to the question here. The Independent business for us again is obviously a big chunk of our business at 46%. We continue to see good growth in there and, yes, we believe part of the growth is coming from our competition. But we are also at store level seeing good growth at our -- within the existing store unit. So we're getting a combination of continued good growth at store level, new doors opening on the Independent side and taking of market share from our competition. I don't really remember the timing; and it's not something that we really focus on is what our competitors may do or not do with the timing of it.

For instance, we always talk about the fact that we have to execute day in and day out so our focus, obviously, is that we want to be in stock, we want to have our trucks in on time and if we hit our operating metrics, obviously, that tends to really help us in terms of solidifying business with customers. But, again, our growth rates were really pretty good across all channels. Stronger on the Supermarket, Independent side, a little less on the Supernatural side which is why you saw a slight decline in the percent of business on the Supernatural side from last quarter.

Yes I guess (indiscernible) I fully expected you to continue to take market share. That's what the best in class is supposed to do. But I was just wondering if there's any significant change a year ago with your large competitor. I know they walked away from some business but -- anyway if you don't know the timing, no big deal. Then a couple of other questions. On the Vitamin category, have you seen any change in the trends across that category in your channel?

Not specifically. It's still a slower growth than the other some of the other categories that I think we have, we tend to focus more on. It's an important category for us, but it's been sort of slow growth over four or five years. It continues to be that; it's 8% of our sales but it continues to be relatively slow growth relative to what we see in the chill area which has been probably the fastest growing -- frozen grocery bulk. The hava (ph) area has been quite strong. We are certainly seeing much higher growth rates in the other categories.

Rick, on interest expense it was down like 10% sequentially yet your net debt was only down about 2%. Can you tell me what happened there?

We've done a good job in taking our interest costs down, Scott. We've reduced our debt service on both the short-term and the long-term debt. So we have taken 50 to 55 basis points out of the interest rates.

If you had to credit one more than the other, would it be all the improvements you are making on working capital or more bringing down the debt cost? With that percentage rate, pardon me -- interest rate?

Working capital actually has gone up because we are adding inventories into Greenwood and some other things. So I would say it's more of the interest rate itself.

Thank you; congratulations on a good quarter.

Mark Chekanow with Sidoti.

Talking a little bit about some of the supply chain with a lot of news about the drought and now this storm down in the Southeast. Are there concerns about organic crop supplies? Have you heard anything about this yet?

Probably too early to tell. I think we need to let a little bit of time lapse here I think, Mark, before we get a sense on what that impact is going to be on crop supply at this point.

I can see it would be too early on the storm but the news on the drought has been around for a little while. You haven't heard anything creeping up the chain about that availability on organic stuff?

No. Nothing that really caught anybody's attention.

One other thing, I guess a long-term trend if you could go over it a little bit. With Whole Foods and Wild Oats' emphasis on private label, could you just describe again your involvement in that? What you're distributing, what you're not? What they are doing by themselves and I guess the direction that is going in and how you fit into those plans in general on their private label?

As we've talked about in the past and, certainly, the private label program for both companies are an important part of their growth strategy. We have complemented their reliance on the private label program. We supported in certain areas and certain categories. They do some of their own distribution to their own stores and we do distribution to some of their own stores in different categories in different locales. So it really does vary across the country in terms of what we're doing. In areas where they don't have distribution we tend to handle a higher percentage of it. And in other areas where they have distribution then we just sort of complement them in terms of what they're doing within the distribution side.

So, is there a natural direction I guess or really doesn't matter like what direction they're going in as long as they don't have their own supply you'll continue to have a private label? Or is there a move into one direction or the other as to what (MULTIPLE SPEAKERS)

No I don't see a movement on one direction or another. I think the movement is that they both have an emphasis to grow this part of their business and we are certainly really working to support them and complement what they're trying to do in their private label area.

You mentioned you would look at fuel surcharge in the independent channel. I guess could you comment on the Supernaturals on those contract pieces of business? How fluid is the fuel surcharge there? And does it allow room for adjustments or is it kind of a once-a-year? You know, you would look at it and change.

It is looked at on a quarterly basis basically and it is built into the contracts that we have.

So it's adjustable throughout the year?

Yes.

Eric Larson with Piper Jaffray.

Congratulations on a good quarter and year. I want to go back to the revenue side again. Just on the look forward, I certainly understand why you are hesitant to give guidance until you figure out your option expense line but on the revenue side, you've traditionally sort of held that your revenue -- you sort of guided that revenues excluding acquisitions, internal growth be kind of the 10 to 14% range annually. And obviously the last few years, you have exceeded that. Is there any reason why you would materially change that sort of guidance long-term or how should we look at the revenue piece for the next 12 months?

I think to answer that, I think we put our plan out back in early July for fiscal '06 back and if you go back to this current year we actually revised guidance midyear based on trends. So I think certainly our plan would be that we will certainly look at this year, how we are going as we deem fit, we would actually make adjustments to guidance where appropriate. Obviously, we are just getting into this year. We haven't even concluded our first month at this point and we just put guidance out a month ago. We tend to sort of obviously look at what other companies are doing in the expectations and what the growth in the industry also. There's a number of factors obviously that go into our planning on this one.

We are obviously still comfortable in terms of the guidance we have out there this year but, again, as we have done in the past when it is appropriate we will adjust guidance to reflect what is happening within our business.

You stated, Steve, you stated in the early part of your presentation that the UNFI brand recorded 70 -- I believe 77% growth. I think that was for the fiscal year. Maybe it was for the quarter. What percent of revenues does the UNFI brand now represent at the end of fiscal '05?

It's approximately 2.5% of sales.

A reasonable expectation on a goal for that over the longer-term, what do you think the UNFI brand could contribute to total revenues?

We are looking to grow. Obviously we have had this as a stated objective now for a couple of years. We focused a fair amount of energy into this because we feel to some extent we are a gatekeeper in terms of the products that we can bring to market that -- in support of our customers. So we are going to continue to see this as a key target. We would love to see that number get up into that 5 to 7% range over the next three to five years. We are going to look at, certainly, opportunities to grow this objective pretty aggressively, Eric.

Final question for Rick. Rick, and maybe you mentioned but we were running so fast on the numbers I may have missed it. CapEx for the next year and, obviously, your CapEx was overstated on the cash basis for last year. So I suspect that the cash on that 7 million for your facility in January of '06 will show up on the cash-flow statement this year. But what should be CapEx number look like for '06?

I think we had previously guided it and I apologize -- I don't have it in front of me, but I think it was 30 to 35 million. So to your point, that did include the 7 million that did fall into '05 so theoretically that would come out of the '06 guidance.

Andy Wolf with be BB&T Capital Markets.

I joined the call a bit late sort of at the beginning of Q&A so if you covered this before that I apologize ahead of time.

Can you give the or could you repeat if you already did, the degree of dilution to earnings per share from the (indiscernible) I think you listed in the press release select attrition, fuel and Sarbanes-Oxley and it's hopefully separately or at least accumulatively what that cost you in earnings per share?

We didn't specify specifically the Select Nutrition fees but I will tell you that the three of those together -- let me just look at my notes -- actually were are about 32 basis points for the quarter.

Is that year-over-year? Sometimes you give these sequentially. Is that one year-over-year?

No. That is year-over-year. 32 basis points for the fourth quarter. Yes.

Can you maybe give a rank order like what was the biggest at Sarbanes-Oxley and then fuel or something? In that 32 basis points.

It was probably Sarbanes Oxley, Select and fuel on a net basis.

Can you generally speak to the outlook for Select in the current year? Is that changed (MULTIPLE SPEAKERS) ?

Hasn't changed. We are in the midst of obviously transitioning. We moved the system over to UBS June so we are working to that part of it. We have got some operational changes that are taking place right now. We closed our (indiscernible) facility of Select and that ultimately is going to be put into our Rockland facility when Rockland comes online. So, obviously, we have got a number of key milestones out there for ourselves as it relates to Select but they are tied into our UNFI business.

Do you still look for it to be accretive to earnings per share this year?

Yes I do.

That's good. Also when you mentioned the new facilities impacting this year, I assume you meant that positively on margin as you -- as it helps you harmonize efficiencies? Is that -- ?

That's the expectation but I mean you've heard us say the same thing in the past, which is, when we put a new facility online it takes us generally two to four quarters to work through the operational challenges we have of moving into it. So I would expect the same things there but clearly the Greenwood facility is a facility that is necessary. It takes pressure off of three other facilities. It is an area that we're seeing and experiencing good growth rates. Our Northern California facility in Rockland, it allows us to get out from two facilities and obviously it is not very efficient when you're having to marry orders together out of two buildings. But in fact, that is what we're doing today. So, obviously, we are looking forward to getting into that building and that, too, will support the growth that we see that area.

Steve, do you feel sort of an increased level of internal sales growth this quarter is partially attributable to just having the capacity? Were you turning away business previously?

We never turn away business. We work 7 days a week and basically 24 hours a day to support our customers and you can't turn away business. Unlike a UTC that has a backlog out four years our backlog is if we do a really good job today, we will get the order tomorrow. So we don't turn away business. But what it really does is it helps us strategically position our business so that we can take advantage of the growth opportunities that we see in the near-term plus the long-term.

And Andy, keep in mind that we utilize off-site storage to accommodate that increase in demand.

So this will help your efficiency ratios, I would imagine. The new -- I mean, obviously.

You may have explained this as well and again I apologize for covering old territory. But on be 19% plus internal sales growth, which I found pretty awesome, not to sound like a sycophant, but pretty big increase. Did a lot of that come from new customers and or is that -- is there something going on in the industry with the Independents channel specifically where they are seeing (indiscernible) sales actually accelerated? Were your customers (inaudible)

I think, again, we are seeing it in a number of different areas. Within if you look at the channel of Independents, we are seeing good growth rates at the Independent level. We are seeing new stores opening and we're getting I think the majority share of new store openings with Independents and I think we continue to take market share from competition. We work hard at -- again with really of driving our operating metric so if I am in stock and we have got the product and it's priced properly and we give customers the option in terms of deliveries and we give them the marketing programs, I think that really supports the reliance that customers place on us to be the full-service distributor partner that we are.

Do you calculate, internally, what the decomposition of that internal sales growth between -- maybe as your new accounts are picked up and these are existing customers, hoping new stores doors are having good same-store sales?

No, I mean, we look at -- we look at the number of new stores that we see and have on the table at any one particular month, that sort of thing and we obviously look at industry trends in terms of what growth rates are by class of trade that the industry is reporting out and things like that. We don't spend a lot of time trying to dissect the sales numbers to try to identify it. Our focus is to really work hard on behalf of our customers and to take advantage where we can of new opportunities and things and that tends to be our focus.

Two last things. One is housekeeping. On the tax rate it went down to 38% for the year. Is there any guidance on what that should be? I think it went to 38%.

It did, Andy. Basically, the question came up earlier and I suggested 38 for '06 as well.

Lastly back to the fuel surcharges can you discuss for how many of the 13 weeks you were effectively passed through the fuel surcharge to the Independents during the quarter?

It was about nine weeks.

If oil settles in here assuming you've done some sensitivity analysis -- around $70 can the current suites of surcharges to your various customer groups -- can that keep you whole on fuel cost or will it still be a dilutive?

It still would be dilutive. We did talk about this earlier. It is something the way we structured it is that this is something that if we continue to see a rise in fuel we will come back and revisit.

Gary Giblen, with Brean Murray.

Great quarter. Just wondering with the change of Chief Operating Officer at Oats, I mean there was somebody and now there will be somebody new again but does that affect any aspects of your relationship with them? I mean, are they cost cutting, are they doing anything with logistics that could be -- I mean positive or negative? Just wondering about the impact here?

That is not something that we see impacting our business or our relationship with them at all. It is not something, again, I've had any follow-up with management at Wild Oats and the relationship is very positive there and we don't see that impacting our business or our business with them going forward.

Yes and is your pricing to them, was that by contract or is it subject to some spot negotiations, so to speak?

No. It is set in the contract.

(OPERATOR INSTRUCTIONS) Ed Arnold.

I have a couple of follow-up questions. One is from -- your response to Andy's question on the 32 basis points. I am just a little confused because I think you said the order with Sarbanes-Oxley followed by Select Nutrition, then followed by fuel. I thought you had said previously that fuel was 19 basis points. I just want to clarify that.

The 19 basis points was the impact on operating expenses, Ed, not on operating income. So that would not be net of fuel surcharge. Because the fuel surcharge is on the top line.

I see. Also wanted to ask about food service, it was something you had talked about a few quarters ago -- increasing focus and just hoping for an update there.

Continues to be a growth area for us. It is one that we are adding staff to help drive sales in this area. We see obviously long-term potential in this area. Foodservice is a $200 billion industry and, clearly, it is probably a couple -- 2 to 3 years behind where the retail sale with natural and organic products is. So, again, we feel like we are on the front edge of that curve. We are building the infrastructure internally to look at and go after that business. So we continue to see really good growth prospects in that area.

(OPERATOR INSTRUCTIONS). Gentlemen, at this time, we appear to have no additional participants who would like to ask a question. If you would like to conclude with any comments please feel free to make those comments at this time.

Thank you very much and I just want to say, on behalf of the nearly 3900 UNFI associates, I just want to thank you for your continued interest and support of our Company and the industry that we all serve. So thank you all and have a great day.

Ladies and gentlemen, at this time we will conclude today's teleconference. We thank you for your participation on the presentation. (OPERATOR INSTRUCTIONS). At this time, we will conclude. You may now disconnect.