United Natural Foods Inc (UNFI) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the United Natural Foods first quarter 2007 conference call. At this time, all participants' lines have been placed in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. [OPERATOR INSTRUCTIONS] As reminder, this conference is being recorded Tuesday, November 21st of 2006.

At this time, I would like to turn the presentation over to Julie [Too] with the Financial Relations Board. Please go ahead, ma'am.

Thank you and good morning, everyone. By now you should have all received a copy of this morning's press release. If anyone still needs a copy, please call Janet Jasmine in our New York office at 212-827-3777 and we'll send you a copy immediately following this morning's conference call.

With us today this morning from management is Michael Funk, President and Chief Executive Officer, and Mark Shamber, Chief Financial Officer. We'll begin with some opening comments from management and then we will open up the lines for questions. As a reminder, this call is be 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 Michael Funk. Please go ahead, Mike.

Thank you, Julie. Thank you and welcome to our first quarter conference call. Joining me on the call today is Mark Shamber, our Chief Financial Officer.

Our first quarter sales were 646.4 million, a 12.3 increase over the first quarter a year ago. We are comping over a very strong quarter a year ago which had come in at 17.27% growth giving us a two-year comp growth of nearly 30%. Our sales by channel numbers continue to show the strength of all our channels. The independent channel grew at 12% and in the supermarket channel continued to be very strong at 24%. Our supernatural channel grew at 9.5, and food service continued to show tremendous growth opportunities with a growth rate of nearly 60%.

While the quarter came in on the lower end of our 11 to 15% guidance for the year, several factors should drive the numbers up as we go into the latter part of our fiscal '07. New store openings from Whole Foods Market, our largest customer, estimated to be 18 to 20, will push our supernatural sales back up. Wild Oats, who announced closure of some eight stores recently, which will impact us negatively about 7 million in annual sales. However, recently four new Oats stores were opened in the quarter mitigating this loss to a great extent.

We're also pleased to announce the addition of Whole Foods southern Pacific region, which had been added as part of our seven-year supplier agreement recently signed with Whole Foods Market. This business will transition to us next January as well as new business in the northern California and Pacific northwest regions. The estimates on the new business is between 95 and $105 million on an annual basis and roughly 47 to 52 million in additional business for the remaining part of '07.

As a percentage of our total business, supernaturals was 34.7%, supermarkets were 15.8, and independents were 45.1. Food service was 2.2. Whole Foods percentage of our total business was 25.5% and Wild Oats was 9.2. Operations once again reported consistent performance. Fulfillment rates were 97.67%, excluding manufacture out-of-stocks, and on-time delivers were at 98.12.

Expenses for the quarter were 15.5% of sales, an improvement of 30 basis points from the year before, even though fuel costs were 10 basis points higher this quarter than a year ago.

Our Albert's Organics produce operation located in our Greenwood, Indiana facility continued to underperform for the quarter, impacting our operating margins by 8 basis points. A decision was made November 1st to close down the Albert's Organics produce operation out of Indiana and transfer the sales to our Minneapolis facility. We'll expect no further negative impact on the Indiana produce business.

We continue to drive our long-term initiatives to expand our operating margin. On our expansion of technology into our warehouses, we finished one pick the light installation during the quarter and we anticipate another facility to have this technology installed roughly by February '07. Our plan is to have all facilities installed with new technology in the next 30 months, which will help us greatly improve productivity and lower operating cost. We have committed to a new facility just north of Portland, Oregon that should be completed by late summer of 2007. When completed, this facility will handle business in the state of Oregon and outlying areas, relieving our Seattle facility which has been operating at overcapacity for some time. In addition, we expect to have a site in Florida very soon which we are targeting for a fall 2007 opening. As previously announced, we are also planning a facility in Texas in the next 18 months as well. These new locations will reduce our transportation expenses by reducing the miles our fleet has to travel as well as open up new sales potential in those states.

Our United Natural Brands division grew at a rate of 29% for the quarter even with very little new products being introduced. At approximately 3.5% of our business, our goal remains to build this division to 5% of total Company revenues by the end of fiscal '08. We are looking at a number of small branded acquisition opportunities with emerging companies that will help us continue to drive the growth of our branded products division. We expect to conclude some of those during the next two quarters.

Net income for the quarter was 12.4 million or $0.29 per share over 20% above last year's 10.3 million or $0.24 a share. Our earnings per share guidance continues to be in the range of $1.25 to $1.30 per share for the year. We will revisit our top line and earnings guidance after the transition of the Whole Foods southern Pacific business in January.

Our Select Nutrition division posted solid performance for Q1 and it completed the implementation of transferring shipments for western customers to our Rocklin, California warehouse during the quarter. When looking at this division a year ago when it posted a loss of 470,000, this has been a major accomplishment. Tom Dziki, who was the president of this division up until recently, deserves the bulk of the recognition for the turnaround. We expect Select to continue to improve under the leadership of Tom Delaya, our current president of the division.

And now for some further details on our financial numbers, I would like to turn the call over to Mark Shamber, our Chief Financial Officer. Mark?

Thanks, Michael, and I would like to extend a welcome and good morning to everyone listening in on the call and the webcast. For the first quarter of fiscal 2007, net sales were 646.4 million, an increase of 70.8 million over last year's first quarter of 575.6 million, resulting in a comp growth rate for the quarter of 12.3%. As Michael mentioned, strong growth in our supermarket and food services channels contributed to this growth.

The Company reported net income of 12.4 million or $0.29 per diluted share for the first quarter of fiscal 2007, an improvement of 2.1 million or 20.4% over the first quarter of fiscal 2006, excluding special items of 10.3 million or $0.24 per diluted share. GAAP net income for the first quarter of fiscal 2006 was 7.7 million or $0.18 per diluted share.

Gross margin for the quarter was 19.1%, which is down 9 basis points from the previous quarter and 4 basis points from the first quarter of fiscal 2006, which were both at approximately 19.2%. The year-over-year gross margin decline was due primarily to low gross margin at our Albert's Organic location in Greenwood, Indiana.

Operating expenses for the quarter were 15.5% of sales compared to 15.9% for the same period last year. Operating income was 3.6% for the quarter compared to 3.3% for the prior year, excluding special items. This reflects a 30 basis point improvement over the prior year and is effectively consistent with the operating margins achieved in the fourth quarter of fiscal 2006.

As Michael mentioned, our Select Nutrition division continued to build on its momentum from the prior quarter and appears to be on its way toward achieving operating results consistent with our other divisions.

During the quarter, our Albert's Organics Greenwood, Indiana facility continued to be dilutive, negatively impacting operating results by approximately 8 to 9 basis points. Based on the slower than anticipated improvement in results, we elected to close this facility and we began serving this market from Albert's Organics Minneapolis, Minnesota facility effective October 31st.

We recorded share-based compensation expense of $954,000 during the quarter or 15 basis points compared to 1,514,000 or 26 basis points in the prior year, excluding special items. Incremental cost of fuel for the quarter has a negative impact of 10 basis points in operating expenses over the prior year. Excluding the share-based compensation expense and worst than anticipated dilution from our Albert's location in Greenwood, our operating income for the quarter would have been 3.82%, an improvement of approximately 12 basis points over the prior year.

Our effective tax rate for the quarter ended October 28th was 39%. The increase in the rate for fiscal 2007 is due primarily to following FAS 123-R share-based compensation and the rules governing the recognition of incentive stock option expenses in the income statement as certain incentive stock option expenses are not deductible for tax purposes. At this time, we believe our tax rate will remain at approximately 39% for fiscal 2007. However, our effective income tax rate will continue to be affected by the tax impact related to incentive stock options and the timing of tax benefits related to disqualify and dispositions and therefore may fluctuate from quarter to quarter.

There were no special items in the first quarter of fiscal 2007 ended October 28th. And in the first quarter of fiscal 2006, we have special items consisting of relocation and opening costs related to our Rocklin, California and Greenwood, Indiana facilities and certain costs associated with the employment transition agreement with the Company's former President and Chief Executive Officer. These costs and the related GAAP to non-GAAP reconciliation are detailed in the press release that we issued this morning.

Our inventory was at 48 days for the first quarter, which is within our range-- our target range of 47 to 50 days, and is an improvement of more than one day from the prior year. DSO for the first quarter was at 22 days, again favorable to our target of 25 to 27 days, and a slight improvement over the prior year number.

Capital expenditures for the first quarter were 4.8 million, well below our target spending of approximately 1.75% of revenue. We would expect that our capital expenditures will continue to rise during the remainder of the year as we begin to incur costs associated with our planned new facilities in the Pacific Northwest, Florida and Texas. Our full year fiscal CapEx guidance remains at the 40 to $45 million level as previously announced.

At 2.9 million, interest expense was higher on a year-over-year basis due to rising interest rates over the last year, partially offset by lower debt levels during the quarter. Compared to the prior quarter, interest rate expense was effectively flat with an increase of 11,000 from the fourth quarter of fiscal 2006. The Company's outstanding commitments under our amended and restated credit facility as of October 28th, 2006, were approximately 129.5 million with available liquidity of 128.9 million including cash and cash equivalents. Our return on total capital was 19.5% and our return on equity was 12.7%, both for the trailing 12 months. Both our return on total capital and our return on equity were negatively impacted due to share-based compensation expense by 121 basis points and 73 basis points, respectively.

And at this time, we'll turn the call back over to the moderator to facilitate questions.

Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. [OPERATOR INSTRUCTIONS] One moment, please, for the first questions. Our first question will come from John Heinbockel with Goldman Sachs. Please go ahead.

Hi, guys. This is Simeon Gutman from Goldman Sachs. Up first with regard to the expense performance, what drove it and how sustainable is it as your new facility's going to ramp up and get open in the back half of the year and as you transition into some of the accelerated Whole Food store openings?

Well, to me-- I think the performance in the-- the improvement in the expense is primarily due to efficiencies in our operations of both warehouse and transportation departments. We have seen continued improvement over the last several years as we continue to leverage our-- our growth against our operating overhead, so we would continue to see-- we would expect to continue to see the-- the improvement, the transportation improvements that we'll see with the new facilities are certainly significant as-- as is the improvement in the productivity with the technology installations that we have been referring to. So we-- we do believe in continued sustainability on the improvement on the expense numbers.

And that-- that holds even with regard to the magnitude-- I mean, where we were here in the first quarter is-- about half of where last year came out on average. Is that sort of where we're going to continue to be?

I would-- you mean from an improvement standpoint -- ?

From a dollar growth standpoint, yes.

I don't know that I would be able to commit that we would get that much more from efficiency. Last year, we were sort of saddled in the first quarter by opening new facilities in both Greenwood and in Rocklin, and so they actually were sort of negative for 6 to 9 basis points, decreasing over the first three quarters. But I think that we would still see some incremental improvements in the operating margin.

Okay, and then can you guys shed some more light on the Albert's Organics facility? What was going on there? Was it not enough sales leverage? Was it a logistics problem? If you could just touch on that.

I would say the primary issue there was underperforming our forecasts for sales. Our expenses were running much higher than we had predicted and we-- we believed that we could continue to service that market by transferring the-- the sales to the Minneapolis facility, so the decision was made.

And-- and is that-- and is Albert's was selling primarily into what channel?

They are primarily-- it's a produce operation with-- with sales to mostly the supermarket and independent channels.

Okay. And then lastly, the southern Pacific increased relationship, that was not factored into your 11 to 15% top-line forecast in any way, correct?

That's correct.

Okay. Thank you, guys.

You're welcome.

Our next question comes from Michael Lasser with Lehman Brothers. Please go ahead.

Hi, guys. On its recent conference call, Whole Foods talked about extracting more favorable pricing from its suppliers so can you talk about the potential margin impact from your revised relationship with that customer?

I mean, Michael, that's not something that we have ever disclosed. We don't break down what the terms are with individual customers so I don't think that we would break with that precedent.

Okay. And could you talk a little bit more about what you are seeing in the independent channel? Seems like growth has slowed down a little bit there, and some of the other larger customers have talked about increasing competition as one of the reasons for-- for slowing growth. Is that what you are hearing from the independents as well?

Well, we have seen extremely strong growth in the independent channel over the last four quarters. A lot of our top-line growth is derived from new store openings in all our channels. I think this-- the new store openings do have some fluctuation, they do fluctuate from quarter to quarter. Certainly we see independents continuing to show strong comp growth on-- on average, and even though it's slightly-- it's down slightly from the peak numbers that we saw over the last three and four quarters, but the independents continue to serve, I think, a valuable part of the-- the industry. Many-- many areas of the country are only represented by-- by the independent channel, and the popularity and growth of the-- of the industry is served by that channel.

So it is reasonable to expect that it will remain around the current rate for the foreseeable future?

Well it's always difficult to forecast sales by-- by channel, but certainly we-- we see strength in that channel, and what-- what may die-- drive the numbers up or down is new store openings in that channel, just like the supernaturals as well.

Okay. And then you-- you talked about some-- acquisition opportunities for small branded food companies. Are there other acquisition opportunities that you are looking at perhaps to bolster your presence or your distribution presence in certain geographic regions?

Well, at the moment I would say there's no major distribution acquisitions that we would need to make to bolster our geographic presence domestically. But we always remain opportunistic for-- for any-- any acquisitions that we feel may be to our advantage.

Okay. And then could you talk about your hedging program for-- for fuel costs and what impact that had on the expense during the quarter?

Well, again, it's not something that we typically go into that much detail on. I mean, what I would say is that we did mention that the fuel was a negative impact of 10 basis points this year over last year, and what I would say is last year, we were-- benefited-- let's say-- I think fuel excluding our-- our total fuel inclusive of the hedging program was 118 basis points for this quarter versus, say, 108 basis points for the first quarter of last year, and what I would-- all I guess I would be willing to say from a hedging standpoint is that last year we benefited from the hedges that we had in place. This year they were detrimental to that-- to that ratio. So I would rather not go into the specific beyond that.

And then two last questions, given that your annual meeting is right now, and I think you were going to revisit the stock option expense for this year. Is there any updated commentary that you could provide on that? And secondly had you assumed a 30% tax rate in your initial guidance or is that a change?

You mean 39%?

39%. Yes, I'm sorry, yes. Getting a little too aggressive there.

With respect to the first question, I don't have anything that I can offer. Our-- our annual meeting is actually on December 7th.

Yes.

So until-- until that date-- again, until we have our annual grant and we have the meeting and see where the stock is at that date, I won't be able to update the share-based comp guidance. And as I mentioned, the income tax rate, we had originally expected it to be between 38 and 38.3 for the year. It now looks like it's going to be around 39, maybe 10 or 20 basis points either way, so that is-- that is a change from what we had originally anticipated.

Okay. And congratulations on winning that Whole Foods business.

Thank you.

Thanks, Michael.

Next question will come from Scott Mushkin with Banc of America Securities. Please go ahead.

Hey, thanks very much. Hi, guys.

Morning, Scott.

Couple clarifications and then a couple questions. The new Whole Foods contract, the terms go into effect in January, is that correct? Or are they already in effect?

No, we're assuming the business in January.

In January. Okay. And then looking at-- I noticed what was absent from-- from your discussions about the getting the southern Pacific business is there anything about expansions of facilities down in southern California. Is that going to be necessary?

Well, at the moment we're-- we're not anticipating a new facility. The facility we have down there has some capacity. This will largely take up that capacity and in addition, we will end up having some additional off-site storage that will be necessary. But it's not going to necessitate an immediate new facility construction down there.

Okay. Great. And then just wanted some updates if-- if you could on some-- I know there's a competitor of yours that's been walking around saying the Shaws contract is theirs. I was wondering if you had any update on what is going on with Shaws and how those discussions are going?

Well, we wouldn't give out specific information about individual accounts and certainly there's-- there's a number of negotiations and-- and business that's constantly up for-- for grabs, but wouldn't make any comment about-- about any specific account. We-- we don't see anything happening in the supermarket channel that would affect our results for the current fiscal year.

Perfect. And then one final -- I guess kind of a little housecleaning, just so I understand how things are clarified-- classified I mean. The people like Mrs. Greens and Vitamin Cottage, are they part of your independents? Is that how you guys classify them?

Yes.

Yes, they are. Okay. Thanks, guys. Thanks very much.

You're welcome.

Our next question will come from Ed Aaron with RBC Capital Markets. Please go ahead.

Thanks. Good morning and congrats on the new business.

Good morning, Ed.

Good morning, Ed.

Couple just clarification questions. One on the Albert's business, can you maybe help me understand from just a sales perspective why you think you might be seeing some softness there? Just the channels that you throw that product into seem to be holding up well and produce-- I have kind of thought that a-- reasonably strong-- just categorically a strong part of the market? What-- what are you seeing there?

Well, we continue to believe that the produce part of our business, which accounts for a fairly small percentage of our overall business, we think we can continue to grow that business at the same levels that we're growing our grocery and perishable business in other parts of the country. It's certainly-- in terms of the-- the organization, we-- we feel like we have a lot of opportunity to lower our expenses and become more aggressive on-- on the pricing. A number of conventional produce wholesalers are dabbling in organic produce and we feel like we have the opportunity to-- to meet those competitive threats by just having a more efficient organization, which is what we're focused on right now.

Okay. And then on the-- on the gross margin line, Mark, I think you said that the year-over-year comparisons were affected by the-- by the Albert's.

It was actually the -- yes, the year-over-year, I'm sorry, you're right.

So, but you saw a similar change on a sequential basis, and I think that the Albert's loss was a little bit greater last quarter than it was this quarter. Is there anything-- if I'm looking at it sequentially, is there anything that would explain the sequential down tick?

I mean there's nothing--looking at it, Ed, there's nothing that jumps out. I mean there were a few items with regards to just higher fuel costs of getting in-bound freightwise, but there wasn't any one specific thing that I could cull out from-- from a prior quarter standpoint.

Okay.

Beyond sort of the Albert's impact and the Albert's impact was neutral for fourth, was effectively neutral for the fourth quarter versus the first quarter which is why I didn't, I only attributed for year-to-year.

Great. Great. Last question with respect to that southern Pacific region, do you think that there's opportunity-- having got that business with Whole Foods to-- to get additional business from competitors in that market?

Well, that would just be speculation, Ed. But we're trying to increase our market share in all regions of the country, so-- so the southern California region and the southwest region would be no different.

Got it. Thank you.

Our next question will come from Greg Badishkanian with Citigroup. Please go ahead.

Yes, great. Thanks. Yes, just one follow-up on the southwest contract, southwest Pacific contract. And I think in the past, you have said that the west was a little bit more, was less profitable than the east. Is this something that you think will, by getting that increased utilization, is that going to sort of help correct that-- that imbalance?

Well, the differences from region to region are, there's nothing there long term that-- that exists that makes us believe we can't be putting out the same margins in all parts of the country and all of our divisions. Certainly the-- the additional business will help our capacity since we were under capacity in that region. That certainly will help in the long term creating more margins.

And then if you can get some more increased business, I'm assuming that will help, and maybe just some improvement efficiencies or is it primarily utilization or is it just more operating efficiencies?

I would say in that example it's more utilization. I just want to keep-- keep-- remind you that this business is a large chunk of business that will be inheriting in a relatively short period of time. There will be inefficiencies associated with it for a while as we ramp up our abilities to-- to take the business in, but again, certainly long term this will-- this will help us build results in that region.

Yes. Sure. I mean, that's understandable like when you got the Oats business back. I mean it's just normal sort of ramp-up costs with any distributor so understood. Moving to private label, it's about 3.5% now, 5% by the end of fiscal '08. What-- what do you look at when you are looking at these targets? Is it growth? Is it certain niches that are not -- where there's less competition, when you are looking at your branded-- private branded label.

Yes, I think there's-- there's several factors we're looking at. Primarily emerging companies that we have identified as having a lot of growth opportunity. Certainly we are looking for companies that are-- like I said, small, emerging and under the radar so to speak that we can invest in and take those products to the next level. Definitely looking at niches that are-- that are underserved in the marketplace. We're trying to develop items that we can sell in-- in all of our channels that-- in some cases, don't compete with other private labels that are out there.

Okay. Great. Thank you very much.

Okay.

Thanks, Greg.

Our next question comes from Scott Van Winkle with Canaccord Adams. Please go ahead.

Hi, guys. Congratulations.

Good morning, Scott.

A couple follow-ups on the last two questions. First, what was your capacity utilization in your southern California facility?

Well, I don't have the exact number, but I know that with this new business, we will be fully at capacity down there, so we were 50% or north-- north of 50% capacity on a real rough basis. We are going to, like I said, need to lease an off-site storage, which we have in several other facilities as well. But roughly 50% plus capacity down there.

And I think it was Ed Aaron's question about your ability to pick up new business from competitors in that market. Wouldn't you think that there might be some aggressive moves by Nature's Best in southern Cal, now that they have lost a third of their volume?

Well, it's again speculation. We're just going to focus on servicing all of our customers at a high level, and hopefully we can continue to win market share, but it's only speculation on how-- how they may react in the marketplace.

Yes. And-- and you mentioned the inefficiencies taking on the Whole Foods business in that region. When does that start? I mean, do you start hiring now and training now? Do we expect to see a little bit of impact in the next couple of months before you actually take the business as well?

Yes, that's a good point. Certainly we are beefing up staff now and we have training costs now that will need to be in place for the mid-January transition. So yes, we will be taking in some costs in our current quarter related to taking that business on.

Okay. And last question-- Mark, can-- I have a little trouble getting to the channel growth year-over-year using this year's mix of business by channel and last year's from the 10-Q. Do you have accurate or more specific numbers for last year? Maybe there was some reclassing or something of those percentages in the first quarter of last year.

I mean, there was-- we are constantly sort of looking at that, Scott, and there was a bit of reclassing some customers that might have been in the independents may have shifted over into either the other or may have been initially reclassified into the supermarkets. I don't have the full reconciliation in front of me, but it's something that we plan to put into the 10-Q to give them out, because I know it has been a question in the past when we've done such reclasses for you to be able to follow it. So I don't have it all in front of me at the moment, but that is something that we were going to map as to how it had been cast in '06, and what it will look like comparatively going through the rest of '07.

Great. Thanks and hopefully see you guys in Providence.

Thanks.

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

Thank you. I think, Michael, you said you also got new business in northern California. Could you give us-- maybe a sense of how much that is, and maybe what channel that is? Customer channel.

Well, there's other-- other business related to Whole Foods Market as well that exists in the other two regions in the west. I-- I would say the bulk of it has to do with carrying more private label products for them that we previously were not carrying.

So the whole 100 million is, really, Whole Foods? Is that what you are saying?

Yes.

And back to Ed's question, fair enough, you don't want to speculate on where the market is going, but how about since Randy has come on board? What-- what has been-- have you won business in southern California that was-- let's say independents and what have you? Was Nature's Best and is there any sort of trend to that that you might want to share with us?

I wouldn't say there's anything significant to report. I mean, I think our position in the-- in the west all over-- all over is-- is strong with-- with the addition of Randy as president of the region, certainly familiar with customers all throughout the-- the western states. Again, I-- I think we're continuing to-- to gain market share in all those markets, but there-- there's nothing specific that I would-- I would say towards southern California at this time.

Okay. And just a couple of follow-ups on the gross margin, I think Mark, you said-- was the whole 600,000 loss at Albert's in gross margin, or just most of it?

There was-- I mean, not all of it was in gross margin, Andy, but a good piece of it was, and in talking about the decline, it's comparing where the rest of Albert's is coming in versus where we came in there so it's not necessarily just the loss piece, but if you are looking at-- let's say that Albert's has a 20% gross margin, if Greenwood comes in at 2%, that's still part of the decline in the overall margins because it's driving down everybody's results. So it doesn't necessarily have to be the loss there. It's as much as how much is performing below the rest of the division.

Okay, so that's in a sense a pro forma look which is also useful. That's at least how I'm interpreting it.

Yes.

So I if I add back 8 BPS or so, you had about flat year-over-year gross margin. And-- actually whatever.

It would have been like 3 BPS, yes. So we still would have been down maybe 4 BPS, 4 to 6 BPS year-over-year.

Okay. Fair enough. But I just want to clarify, Whole Foods, the new contract was effective I think late September, so you were delivering under the terms of that contract for one month in the quarter; is that right?

That's correct.

And you are not willing to-- sounds like you are not willing to get any more granular on the effect of that contract in the quarter?

Yes, it's not something I think we are going to go into detail on.

Well, we had given guidance for the fiscal year with the impact of that new agreement baked in. So we-- we didn't expect any impact of-- from-- from the guidance to be delivered once we took the business on.

Good. And lastly, on the fuel being up 10 BPS, that's-- that's the gross number in the SG&A-- in the operating cost. It has no relationship to the-- to-- to any surcharges?

Right. And that's how we have consistently sort of presented it because it's difficult to pull it out of the sales and offset it that way.

Your feel with fuel where it is, your surcharges, I think it's like $15.00 per stop, is that kind of adequate and kind of accepted by the customers that, where-- where kind of fuel has settled in lately?

Well, I think, Andy, much as we have said at year end, we'll probably reevaluate it. Costs did go down from when we had implemented it to the end of the first quarter and we have sort of committed on our end to looking at it on a quarterly basis. So I would say that if fuel stays-- let's say the national average is $2.50 to $2.55, I would say that if fuel stays there, both of our east and west divisions, as well as Albert's, where we've implemented the $15 drop charge, we'd take a close look at that and revisit whether we should go back to the $10 that we were at before or the $15, because we did put it in roughly when fuel prices were $2.80, $2.90, and we were looking to sort of catch up from the previous quarter, so-- I think we take a second look at it if fuel prices stay where they are currently.

Okay. Thank you.

Our next question comes from Eric Larson with Piper Jaffray. Please go ahead.

Yes, good morning, everyone.

Good morning, Eric.

And congratulations to you, Mark, on your promotion.

Thanks, Eric.

Exciting. Most of my questions have been answered, guys, but Michael, as I recall, most of the sales that you have in Texas is distributed out of your Denver facility, is that still correct?

Yes, it is Ed.

So when we look at these facility changes, I mean that could be one that is probably most demonstrable on the cost-saving front.

Well, that one and Florida, which we service that whole market from our Atlanta, Georgia facility. So the miles-- the savings on miles is similar in both of those areas.

Okay so both have pretty similar characteristics. Okay. Thanks, guys. I'll follow up offline.

Thank you.

Our next question will come from Alec Patterson with RCM. Please go ahead.

Yes, good morning. Just following up on the last question, just trying to think through the tradeoffs on-- as you look to lower your logistics and fuel costs with the new facilities and then obviously there's got to be some new overhead, new staffing, what have you. How does that flow over the next, I guess, two years in terms -- ? Do you expect essentially a wash that benefits the lower fuel offsetting increased expense and utilization issues?

Well, typically what will happen, Alex, is once we, when we ramp up or when we first open the facility, we usually see some decline in the margin for a quarter, initial the quarter that it opens up, and then we start to get the incremental gains from there. With these new facilities, once we-- with the miles that we're cutting out, that decline may not be-- that may not be as dilutive as it has been in the past, but I wouldn't say that it will take a full two years or so for when a new facility opens. It's typically six to nine months after we open each facility that we tend to get the efficiencies that we had planned for from an operational standpoint, but again with the circumstances in fuel costs where they are currently, it may be slightly accelerated from that standpoint, just because the fuel will kick in immediately once we start driving the routes out of that new facility.

Yes, two years was roughly the cycle of getting the third facility up and running. Is that what I heard correctly? It will be sometime in-- I don't know late '08 for Texas?

Well, I mean depending on which ends up being the third facility, but yes.

Okay. And with that, do you have a rough number for CapEx in '08?

Not at this time. We-- I mean, we have-- I would say we anticipate the level to be similar to '07, but again, we have talked about the fact that we'll have one facility completed effectively by the end of '07 and a second underway, and it really depends on how far that is underway before we would be able to give CapEx for '08. So it will be within a similar range to what we have given for guidance in fiscal '07, but if we accelerate the expansion in '07 or slow it down, that may impact '08's guidance.

Right. Understand. The two matter against each other?

Right.

And just lastly, the mix of business, 45.1% for independents, is that what I heard? I may have misheard that.

Yes, that was the number we gave.

If-- if I just plug that in just quickly-- and this maybe gets back to another question, implied about 10% sales growth in that segment. Is that right? Or am I miss-- is there a comparison issue there?

That was the comparison issue that Scott Van Winkle asked about. We have reclassed a couple of businesses out of the independents into other channels, and so when we file from a standpoint of the 10-Q, we'll provide a bridge that will get the '06 numbers to compare against that.

Okay. Thank you.

Thank you, sir. [OPERATOR INSTRUCTIONS] One moment for the next questions, please. Our next question will come from Michael Krestell with M Partners. Please go ahead.

Good morning. Just a quick question about the pick to light. How many facilities are now equipped with pick to light and how many do we have to go?

We have currently two, where we have that installed. There's an additional 12 facilities beyond that that we still have to install.

Okay. And that's over the next 30 months you were saying?

Yes, and of course that doesn't include the newer facilities where we're bringing on line. But yes, that's our estimate. We wanted to be able to do kind of like one a quarter, but that's-- as we get deeper into it, hopefully we can execute them on a little quicker basis.

Okay. And just a question about the food service, I know it's still a small piece but with an incredible growth rate by the looks of it. Can you just shed a little bit of light on that? Where's it coming from? It it specific types of institutions? Is it just restaurants? Is there a geographic trend that you are seeing behind it?

It's definitely a national initiative that we have hired food service salespeople to-- to help us develop that business. It's-- it's coming along nicely on both-- both coasts and the rest of the country. I would say one of the main drivers of that growth is colleges and universities, and other, also other schools are potential targets. That's probably the-- the main driver of that business right now.

And from a margin perspective. I know you can't disclose exactly, but relatively speaking versus the other areas of the business, how it is performing? Is it performing along with your expectations?

Yes, that business would be in the higher end of our margin business as it's generally smaller-- smaller drop sizes, et cetera, so we would tend to look at that as a higher-- higher gross margin business with some corresponding higher expenses as well.

Great. Thank you very much.

Thank you, sir. Management, at this time we have no additional questions in the queue and I'll turn the presentation back to you for any closing remarks.

Well, again, thank you for joining us on today's call and for your continued interest and support of United Natural Foods. For more information, feel free to visit our website at www.unfi.com. Thanks, and we'll see you next quarter.

Thank you, management. Ladies and gentlemen, we will conclude today's teleconference at this time and if you would like to listen to a replay of the presentation, please dial 1-800-405-2236 or 303-590-3000 with an access code of 11076482. Once again, if you would like to listen to a replay of today's teleconference, please dial 1-800-405-2236 or 303-590-3000 with an access code of 11076482. We thank you for your participation on today's program. At this time, we will conclude. You may now disconnect and please have a pleasant day.