United Natural Foods Inc (UNFI) 2008 Q4 法說會逐字稿

Welcome to the United Natural Food fourth-quarter 2008 conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference is being recorded today, Wednesday, September 3rd, 2008.

I would now like to turn conference over to Marilyn Meek, the Financial Relations Board. Please go ahead.

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 contact Janet Jasmine in our New York office at 212-827-3777 and we will send you a copy immediatly following this morning's conference call. With us this morning from management is Michael Funk, President and Chief Executive Officer and Mark Shamber, Chief Financial Officer.

We will begin with some opening comments from management and then we will open the line for questions. 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'd like to turn the call over to Michael Funk. Michael, please go ahead.

Thank you, Marilyn. And thank you for joining us this morning for our fourth quarter and 2008 year-end conference call.

Joining me on the call this morning is Mark Shamber, our Chief Financial Officer.

Earnings per share for the quarter were $0.30 or 12.8 million compared to earnings of 13.1 million a year ago. Our recently acquired Millbrook Specialty Foods Division was dilutive to our results by $0.07 or 2.9 million.

Excluding Millbrook, earnings would have been $0.37 or 15.7 million, compared to Q4 a year ago when we earned $0.31 per share.

In addition, when we add to this the incremental nonrecurring impact of startup costs with our Southern California and York, Pennsylvania facilities, it results in an additional pickup of 17 basis points or approximately $0.03 per share.

As a reminder, our fourth quarter was a 14 week quarter and sales for Q4 were a record 911.9 million, a 29% increase over the fourth quarter sales a year ago of 706.8 million. If we exclude the extra week in the quarter and sales of Millbrook, our sales growth was 11.9%.

And when we look back at 2008, we saw an incremental improvement in year-over-year percentage sales increases for every quarter, even with a sluggish economy and sales to our super natural channel coming in below expectations.

Our sales growth by channels, our numbers are as follows. The super natural channel grew at a rate of 7.9%, the supermarket channel grew at a rate of 67.1% and independents continued their strong performance and grew by 13.3%. Our food service sector grew at 38.5%.

In Q4, we saw our top 100 largest independent accounts grow by 14.39% on a same-store year-over-year basis. The significant increase in our independent sales suggests consumers are changing shopping patterns that are more influenced by fuel consumption than ever before.

Local independents seem to be attracting new business, perhaps at the expense of other stores which require additional miles for shoppers to drive to.

As a percentage of our total business, super naturals were 31.9%, supermarkets were at 20.8% and independents were 42.9% and food service was 2.4%.

For the quarter, our service fulfillment rates were 97.93%, up slightly from last quarter and our on-time deliveries were 99.33%, a strong improvement over the previous quarter as well.

Gross margin improved to 19.5% versus the 18.7% from Q4 a year ago. Contributing to the improvement in gross margin were improved Millbrook gross margin, increased fuel surcharges and our purchasing departments improved performance at passing through the tremendous number of price increases from our suppliers. Cost inflation continued to be high for the quarter.

We tracked our year-over-year product inflation at 5.67%, reflecting the higher commodity pricing, freight increases and impact of higher fuel costs of our vendors' products.

Operating expenses were 16.9% for the quarter, compared to 15.3% a year ago. Our nonrecurring expenses related to the Southern California and York, Pennsylvania facilities startup costs resulted in 30 basis points of increased expense, while increased fuel cost contributed another 33 basis points.

Higher expenses related to Millbrook accounted for the remaining differential. While Millbrook's performance to the customer continues to improve with optimum fulfillment and field service levels, sales were under our expectations for the quarter.

We do believe management has positioned Millbrook to build sales in 2009, both from gaining new customers, as well as building sales with existing accounts. A number of new business initiatives are in place and moving forward.

While our expectations for new accounts being added during the remainder of calendar 2008 are conservative due to avoiding disruptions during the retailers' business holiday period, we do believe we will add new accounts for combined Millbrook and UNFI activity in 2009.

Millbrook's results were impacted by nonrecurring expenses for the quarter of approximately $0.03. The majority of this was in one-time credits to two accounts no longer doing business with the Company, along with some severance costs associated with the reduction in the workforce.

In July a reduction of staff of 138 full-time employees with an annualized payroll of 4.9 million was implemented, which we will see the benefit of moving into 2009. We have accelerated integration efforts between UNFI and Millbrook, which will also begin to improve results in 2009, particularly in the back half of the year. We had hoped to be neutral to earnings by the first quarter of '09 but now forecast dilution of around $0.06 on an operating basis for the full year 2009.

We expect to continue to see incremental improvement on a quarter to quarter basis throughout 2009.

Our Blue Marble branded division grew at a rate of over 37% for the quarter, driven by some new acquisitions recently completed. 2009 forecasts for brand growth are for a 25% increase without factoring in any new acquisitions. We continue to be focused on adding brands which bring accretive. value-added branded products to our portfolio.

CapEx for 2009 is estimated to be in the $57 to $62 million range, reflecting our continued investments in facilities and infrastructure.

This year we will see an additional 1.3 million square feet replacing our Southern California and Pennsylvania facilities, as well as a new warehouse in Texas towards the latter part of 2009.

Once these investments are made, we should have no new facility expenditures, with the exception of a 2010 expansion of the current Dayville location. Assuming current growth trends, we should have ample capacity for several years without further investment and facilities.

As we look ahead to fiscal 2009, we forecast revenue growth in the 10% to 12% range bringing '09 sales to the $3.63 to $3.7 billion range.

In addition, we estimate our earnings per share to be in the $1.30 to $1.38 range, which is an increase of 15 to 22% over fiscal '08. Baked into these numbers are dilution for our specialty division of $0.06 per share and startup -- excuse me -- startup costs for our new facilities and our relocations to be $0.10 per share. Now, I'd like to turn it over for further details on our financial numbers to Mark Shamber, our Chief Financial Officer. Mark.

Thank you, Michael and good morning to everyone listening in.

Net sales for the fourth quarter of 2008, which consisted of 14 weeks were $911.9 million. This represented an increase of 205 million or approximately 29% over fiscal 2007's fourth-quarter revenues of 706.8 million.

In fiscal 2008 our fourth quarter consisted of 14 weeks rather than the usual 13 weeks as fiscal 2008 was a 53 week fiscal year. On a comparable number of weeks basis, net sales for the fourth quarter increased by 20.6% over the prior year and 11.9% excluding impact of the Millbrook acquisition.

For the fiscal year ended August 2nd, 2008, net sales increased by 611.6 million or 22.2% to 3,366,000,000 compared to fiscal 2007 net sales of 2,754,000,000.

Excluding Millbrook and adjusting for the 53rd week, fiscal 2008 sales increased by 12.4% over fiscal 2007. Gross margin for the quarter finished at 19.5%, compared to 18.7% for the fourth quarter of '07. This represents an 83 basis point improvement over the prior year and an 81 basis point improvement over the preceding quarter.

During the quarter. we continued to make progress in improving gross margin within our specialty division, which has been a focus since the acquisition. We also benefited from higher fuel surcharge revenues and improved purchasing as Michael mentioned earlier.

As a reminder, the offset for our fuel surcharges are our outbound fuel costs, which are reflected within operating expenses on our income statement.

Gross margin for fiscal 2008 came in at 18.8%, compared to 18.5% for the prior year, which represents an improvement of 33 basis points over fiscal 2007, primarily due to the areas just discussed.

Operating expenses for the fourth quarter were 16.9% of sales compared to 15.3% for the same period last year, a 150 basis point increase. During the quarter, we incurred $2.7 million or approximately 30 basis points in nonrecurring expenses and startup costs associated with our new facilities in Moreno Valley, California and York, Pennsylvania.

The incremental cost of fuel for the quarter had a negative impact of $2.4 million on operating expenses in comparison to the third quarter of fiscal 2008. As fuel represented 137 basis points of net sales in the fourth quarter.

An increase of 26 basis points over the third quarter and an increase of 33 basis points over the prior year, after adjusting for fiscal 2007's unfavorable fuel hitch.

Fuel costs continue to be a challenge in the fourth quarter reaching a national average price of $4.60 a gallon using the Department of Energy's weekly prices, an increase of approximately 63% over the prior year average for the fourth quarter of $2.83 a gallon.

Share base comp during the quarter was approximately $1.2 million or 13 basis points compared to $1 million or 15 basis points in the prior year. Operating income for the quarter was 2.6% on a GAAP basis, a 75 basis point decline over the prior year's fourth quarter operating income of 3.4%.

Adjusting for the cost associated with Moreno Valley and York, operating income would have been 2.9% for the quarter, a 58 basis point decline over the prior year operating income of 3.5%, after adjusting the prior year for $921,000 in costs associated with Sarasota and Richfield facilities in fiscal 2007.

Our effective tax rate for the quarter in fiscal year ended August 2nd, 2008 was 37.2% compared to 39% for the fourth quarter in fiscal year 2007.

Net income for the fourth quarter decreased by 2.3% to $12.8 million, compared to the 13.1 million earned in the fourth quarter ended July 28th, 2007. Diluted earnings per share decreased to $0.30, a $0.01 decrease over prior year diluted EPS of $0.31.

As I mentioned in discussing operating expenses, net income in the quarter was negatively impacted by 2.7 million of labor costs and related startup expenses associated with our new facilities or by approximately $0.04 diluted EPS.

Fiscal 2008 net income decreased by 3.3% to 48.5 million or $1.13 per diluted share compared to 50.2 million or $1.17 per diluted share for fiscal 2007.

Operating expenses for the full year were 16.1% of sales, compared to 15.1% for the same period last year, reflecting an increase of 98 basis points year over year.

For fiscal 2008 fuel costs increased by 15 basis points to 113 basis points of fiscal 2008 compared to the prior year of 98 basis points after adjusting out the prior year fuel hitch.

This increase in fuel is reflective of the savings that we achieved in opening new facilities in Sarasota, Florida and Richfield, Washington during the first half of fiscal 2008 and would have been much greater had the Company not opened these facilities.

Operating income was 2.75% for the year compared to 3.39% for fiscal 2007 a decline of 64 basis points. After excluding the impact of startup costs associated with the new facilities, operating income for 2008 was 2.9% compared to fiscal 2007 of 3.5% -- for a year-over-year decline of 60 basis points.

Cash generated by operations for the fiscal year was $9.2 million compared to 35.5 million in the prior year, with most of this being in investment in inventory.

Our inventory was at 53 days for the fourth quarter, above the high end of our target range of 47 to 50 days in a four day increase over the fourth quarter of fiscal 2007.

This increase was driven in part by building up inventory levels at our Moreno Valley, California facility, in anticipation of a September opening combined with our efforts during the year at our specialty division.

DSO for the fourth quarter was at 20 days, again favorable to our target range of 22 to 25 days and a one-day improvement over the fourth quarter of the prior year. Capital expenditures were 51.1 million for fiscal 2008, equating to approximately 1.52% of revenues for the fiscal year.

As discussed in our press release, our fiscal 2009 capital expenditures guidance is 57 to $62 million. Included in ouf fiscal 2009 CapEx guidance are costs associated with completing the Moreno Valley and York, Pennsylvania facilities.

We will begin operating out of the Moreno Valley facility this coming weekend and the York facility should comment operations towards end of our second fiscal quarter in January 2009. In addition, our 2009 CapEx guidance includes costs with associated with opening a new distribution facility in Texas, no earlier than the fourth quarter of fiscal 2009.

The Company's outstanding commitments under our amended and restated credit facility as of August 2nd were approximately $306 million with an available liquidity of $90 million, including cash and cash equivalence.

The press release this morning also announced our full year revenue and earnings per share and CapEx guidance for fiscal 2009.

For the fiscal year ending August 1st, 2009, revenues are expected to increase approximately 10 to 12% from fiscal 2008 on a comparable basis to a range of 3.63 to 3.70 billion. Fiscal year 2009 earnings per diluted share are expected to be in the range of $1.30 to $1.38 per share, an increase of 15 to 22% over fiscal 2008.

Our fiscal 2009 earnings guidance includes approximately $7.4 million or approximately $0.10 per diluted share in labor costs and related startup expenses associated with opening the Moreno Valley, California, and York, Pennsylvania facilities during the first half of fiscal 2009, as well as the opening of an additional facility in Texas during the fourth quarter of fiscal 2009.

For fiscal 2009, we expect our effective tax rate to be in the range of 39.6 to 40% compared to our tax rate of 37.2% for fiscal 2008, where we benefited from federal tax credits associated with our solar-powered projects in both Rockland, California and Dayville, Connecticut. That concludes my prepared remarks and at this time, we will turn the call over to the operator to facilitate the question-answer session.

Thank you, sir. We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS).

Our first question is from the line of Simeon Gutman with Goldman Sachs. Please go ahead.

Hey, Michael. On the industry growth, I mean the independents clearly seem to be holding up pretty well.

Can you talk about unit growth versus inflation and, obviously, if the overall number is okay, I'm just curious what the balance between both of those are.

Well, Simeon, that's a question that's sometimes difficult to answer.

Certainly with the cost inflation number being in that 5.6 range that we mentioned and the historical number being more in the 2.5 to 2.7 range, you could factor in 3% of additional sales growth due to pure cost inflation.

However, we do see more additional costs inflation in areas in the perimeter of a lot of the stores in which we don't necessarily participate in as our -- our business is more center store, the groceries frozen sections and refrigerated sections.

So certainly I think our independents are benefiting a point or two from the cost inflation, but clearly, we think there's additional strength reflected in those numbers.

And then on Millbrook, I take it that the $0.03 of the credits and severance, that, I take it, it was unexpected and then related to Millbrook, what needs to happen from here?

I mean, it's been in business for about nine months. I think -- maybe absent that extra $0.03. It looked like it might have improved a little bit. Is it sales ramping up or are is there still lot more on the synergy side that has to occur?

And we believe that the $0.03 was clearly nonrecurring and not expected and when we break down the last three quarters with Millbrook that we have owned the Company. The first quarter we owned it it was $0.08 dilutive, and then we went to $0.06 and this quarter, we really look at the actual performance being $0.04.

So we see ourselves making incremental improvement that we expect to continue into 2009.

What needs to happen really is a host of initiatives that are underway, integration with UNFI in terms of the sales departments and back office functions, improved purchasing efficiencies to continue to drive gross margin, business development initiatives that are underway that we expect to add at sales volume and a number of things such as that.

So we -- we continue to feel like we are making progress there and clearly, we believe we have the customers' confidence in the service levels that we have mentioned before. And at the top line, you know, the reason I think the second quarter that I think the top line growth is a little bit under your expectation is that a reflection of the specialty category drawing a little slower or are competitors trying to take advantage of the integration period that you're going through? Yes, I think we've had some sales erosion that was built in. We feel primarily from prior service levels being poor, before we took over the Company and there were some sales erosion there that we had more or less anticipated, but, again, we look at the business being stabilized now and having the confidence of our customer base going forward.

And the last one I'll just ask it in two parts. One, the -- let's say next six months, what is the magnitude and or number of price -- or is the number or magnitude of price increases coming from suppliers greater than they were in the past six months and then the second question I guess maybe for Mark, I don't know if you mentioned it, the gross margin X the fuel surcharges, how did that perform?

Well, I'll take the first part. We don't have any way of actually knowing what our vendors' price increase are going to be over the next six months but from talking to a number of manufacturers, it seems that there's still a significant amount of increases that need to be reflected of the commodity price increases that have been going on in this past year. So we do expect this inflation number to continue over the -- certainly the first half of the year of '09.

And, you know, Simeon, on the second part of the question, we have never really broken out the fuel surcharges. And I don't think we're going to start that now.

I mean, it's -- it helps to offset a majority of the incremental fuel costs, but it's such a small number in the overall that we really don't want to start getting in a system where we're trying to track what we did for fuel surcharge revenue quarter to quarter.

No problem. I'm trying to gauge the ability of pass-through price, given that there is inflation in the system. I guess, particularly, two independents and just how the core gross margin is performing irrespective. Maybe you can give us a sense directionally.

I think the core gross margin, X the surcharge revenue and X Millbrook has held up relatively well. We have struggled a bit with the rising fuel costs and trying to remain current from an inbound freight standpoint and I think that seeing fuel costs level off a bit and start to come back, we have managed to get to a position where we feel that we're almost caught up in that sense. So I think that that was hurting the gross margin for a period of time, but I think at this point, we have managed to stabilize that aspect of it, and the overall core gross margin has held up relatively well.

We have managed to stay current with price increases that our supplies have pushed through by virtue of getting roughly 60 days on average notice before they come into effect.

Okay. Thanks a lot.

You're welcome.

Thank you. Our next question is from the line of Greg Badishkanian with Citigroup. Please go ahead.

Great. Thanks. Nice job on the quarter, guys. A few questions.

First one is maybe just talk a little bit about segments, product segments that did particularly well and maybe feedback that you're getting from retailers on why those are doing well.

Well, I think there's -- hasn't been any major change, I would say, in our sales by category. Certainly the grocery areas is our largest category and growing very well. The frozen and refrigerated categories have had historically higher growth and continue to do well for us.

Obviously, there's other subcategories that are doing better than others, but I think in general people are more price conscious and they're looking for some more value these days. It tends to be driving some products that have more attraction to consumers on the value side.

So for us it's swapping in sales for certain items for others but really the surprising thing for this economy I think for us is the stability of the sales overall.

I mean, it seems like the consumers that are our core shoppers are just continuing to purchase the products that they have for the most part.

Good. That's helpful. And then was there any deviation in terms of sales trends that you saw in August from last quarter?

No. I would say overall we're seeing stable sales trends.

Good. Good. Also food service did pretty nicely.

What's kind of driving that and also the margins on that business, are they about the same as the other channels overall?

Oh, I would say our margins in that sector tend to be a little higher, certainly. The deliveries -- the order per delivery tends to be a little smaller, so there's a higher gross margin impact. But our business still is growing in that area even though it's a small, small part of the overall business.

Colleges and universities certainly are one area that we have seen growth and we look for that to continue throughout the next coming year.

We're putting more resources on that and trying to capitalize on the demand in that sector.

Okay. Good. And I'm just trying to work out the numbers for 2009.

In terms of organic growth, what does that come out to be, roughly, if -- because I think you do have some of the Millbrook that doesn't lap until, if I'm not mistaken, until, I think, second quarter '09.

Yes, I mean, I would say that it's probably anywhere from maybe 9 1/2 to 11 1/2 %. I mean, it is a range, to determine where we're going to go for the second half of the year. So I mean there's a bit of it in there for the first quarter but for the full year number it probably has a percentage roughly 1% and a half percent to a percent.

Right, right. Great. Thank you.

Thank you. Our next question is from the line of Andrew Wolf with BB&T Capital Markets. Please go ahead.

Thank you. Good morning.

Good morning.

And nice quarter.

Good to see one.

On Millbrook on the $0.06 of dilution or thereabouts that you guided to, if sales -- I guess I want to get to, is that predicated somewhat on a sales lift or is it more or is it entirely predicated on just executing the cost savings and the other programs you're trying to execute?

I would say it's more predicated on the latter. Certainly we -- we're not necessarily relying on sales lift to bring us into profitability, but, obviously, business development initiatives will help us achieve that quicker.

But really as we look at '09 forecast, it's primarily built around reduction of expenses, as well as improved gross margin.

Yes. And Michael, just in terms of, you know, with Rick Antonelli leaving and his reports being taken up by you and others and so on, what's your general -- could you just update us on, A, management at Millbrook where I think you've had some changes. Just your sense of how you feel about management at the Company and potentially replacing Rick.

Well, obviously, we will be bringing in other management resources to replace Rick. That's something we'll be addressing later on. But we feel like we have strong management in our -- all of our key divisions and regions.

We've had stable, stable management there for some time, and certainly we feel that's part of our solid core business performance.

The person that's been leading the specialty division, Casey Van Risen has been with us now for several quarters and we feel very confident in his abilities to lead the turnaround there at Millbrook. So we feel very comfortable. There doesn't feel like we're -- there's a real big gap in our management team right now, but we do look to add resources later on.

And lastly, kind of in housekeeping, if I did my math right, you might have mentioned this, but in any case, I missed it in that case, but, Mark, on the fourth quarter, the DNA, my number is around 7 million, 6.9, up a lot sequentially. Was part of the writing off the credits in there or was there some accelerated DNA or is that the new --

Well Andy, what that actually related to was finalizing -- or not finalizing, but getting closer to a finalized purchase accounting related to the Millbrook acquisition and so with that, we had finished some of the intangibles, identifying some of the intangibles that were associated with the transaction that we needed to record the amortization on.

So we had put some preliminary numbers up when we had done the acquisition and we have gotten a valuation report and so we needed to do a bit of catchup amortization in the fourth quarter related to those intangibles.

Okay. All right. Can you -- thank you. Can you give us a range or some guidance on the DNA you expect in '09?

I can perhaps follow up after the call on it only because that number is preliminary but I would say that the run rate that we had in the fourth quarter -- well, you said it was 6.9 I think was the number you came up with.

I would say that the run rate had been around 5 to 5 1/2 million dollars. I think that with -- with the additional amortization that we're going to have going in, that's it's probably closer to $6 million for next year, but that will depend somewhat on the timing of when we open York, but I would say that 5 3/4 to 6 1/4 would be a good starting point for the first half of the year.

Great. Thanks a lot.

You're welcome.

Thank you. Our next question is from the line of Brent Joan with RBC for Ed Aaron.

Couple of questions for you guys. First wanted to try to figure out kind of what the moving parts in gross margin are. Obviously, there was a pretty good improvement this quarter.

Is there a forward buying in there? Is a lot of that just Millbrook or is there some mix shift to the independents improving margins or how is that working out?

Well, there's a number of factors as we mentioned, Millbrook's margin has improved and is in general a higher gross margin business, so that's influencing the number. Our fuel surcharges that we're collecting are -- go into that number as well.

And the cost inflation environment is such that if we execute -- if our purchasing departments execute and we purchase product and get product in a timely fashion, there should be positive influences on our gross margin.

So I think all those are factors. Customer channel mix certainly does play a role as well and we would say higher independent sales do influence the gross margin as well.

Okay. And how do you think we should think about gross margin '09?

I think there's a challenge there on our part as well, Brent. As long as there continues to be the high fuel costs, we will get some lift from the gross margin that will be offset in the operating expenses.

And the fuel prices continue the downward trend that we have seen sort of since the fiscal year-end. I think the fuel surcharges may take a step back at some point if those prices hold lower.

I think that you could probably model in that it's anywhere, again with fuel roughly where it is now, it could be anywhere from 19.3 to 19.6 and I'd reserve the right to adjust it depending on where fuel prices go.

Sure, sure. Can you quantify the impact of the extra week on margins in SG&A in the quarter?

Well, really there's no impact from an SG&A or margin standpoint. We would accrue -- to the extent there were extra days in the quarter, we would accrue for any of the expenses that would be associated with that.

Okay. And lastly, what are your expectations for these sort of duplicative labor and startup costs in 2009?

Well, we expect that the full year will be approximately $0.10 as we have laid out. I would say that probably the first half of the year probably has closer to -- the first two quarters, it's always been timing wise as to when the facilities actually come online. There's some variability there.

Last year we had thought the full-year number won $0.07 and it ended up being $0.09. as we discussed this morning because of the timing of when Sarasota opened in the first quarter of last year and then some timing related to Moreno Valley this year.

So if I had to estimate right now, I would say that this probably approximately $0.03 in the first quarter and $0.03 to $0.04 in the second quarter and then maybe a penny in the third and $0.02 in the fourth. But, again, that can certainly change depending on the timing of when we decide to open up a facility.

Sure. And actually, one last question. I guess for Michael.

What do you view as the reasons why you still have lost a couple of customers on Millbrook and kind of what do you view as the driving factors towards winning new business there?

Well, you know, when we took over Millbrook, there had been a period of very poor service to the customer and most of the -- most of the business in the supermarket channel is on a contract basis generally two two-year periods or so - so when some of those contracts came up shortly after we took over, there was a built-up negative impression of Millbrook by some customers and most of the sales erosion is related to that, that dynamic.

We, again, have been working hard over the last six months to improve the service levels, improve the performance of field sales and evaporations and we believe we have elevated the impression of the Company in a tremendous way to the current customer base so that we feel today we are in -- well positioned to be able to build new business into '09.

Great. Thanks, guys.

Okay.

You're welcome.

Thank you. Our next question is from the line of Scott Van Winkle with Canaccord Adams. Please go ahead.

Hey, guys. Congratulations as well.

Thank you.

A couple of questions. First, on the Millbrook. Michael, you mentioned obviously sales attrition. I'm coming up with $60 million of revenue for the quarter. Does that sound about right?

Well, we're not breaking out that number. I know specifically and as we obviously as we go down the road, Scott, the initiatives that we're having with our integrated approach to the business will have some of the sales, beginning to go -- flow through UNFI as a whole and so it will be more and more challenging to break out those numbers. But there was -- I don't have the number off the top, Mark. I don't know if you do.

I would say it's in the range, Scott, I mean, there is some seasonality going into, I guess now for us it's our first and second quarter are some of the stronger quarters and then they get a little bit of a lift in the third quarter from a kosher standpoint with passover. So the fourth quarter is the low point of the year from the a sales standpoint because there aren't any really holidays going on driving the sales there.

I don't know that that's exactly the number but it's probably within $5 million.

Okay. And on the branded side, you mentioned 25% growth next year without any incremental acquisitions.

Is there something different being done there or are you starting to see any benefit of kind of having organized that business into probably a little bit of weight now and has a little more impact in the overall market?

Yes, the infrastructure, we spent a lot of resources this past year, I think building the infrastructure of that organization to support a larger business, and we -- we continue to believe that it will be one of the fastest growing areas of our Company.

We have said all along that we feel like it contributes very positively to our gross margin as well as, a number of strategic advantages.

So we're going to continue to look for the accretive smaller acquisitions that we can add onto this portfolio and I would hope that that 25% number is more just a base line. As I said earlier, it doesn't really include the benefit of new acquisitions.

And back on Millbrook. The -- I think 184 headcount reduction, were all of those nonwarehouse employees or nondistribution facilities -- employees?

I would say that there was a variety of positions. I don't have the breakdown, but there was, I would say, a combination of a variety of departments in which those reductions were made.

And, Mark, I think you mentioned, you know, the Texas facility by the fourth quarter and if you mentioned this, I apologize, I didn't catch it, but is there -- is that a new facility or any plans to use that Arkansas facility from Millbrook?

The Texas facility would be a new facility.

I think that we have taken some look at being able to use Arkansas, but there is an aspect where it's approximately a seven-hour drive still to a majority of our customers. So while there is some benefit compared to currently serving that business out of the Colorado market, I think that we feel that there is, particularly with fuel cost where they are, that it supports moving to a Texas facility.

Okay. And just the last question. The timing, you mentioned in the last question the timing of the impact from the startup costs at the new facilities throughout the year on a quarterly basis.

Should we assume kind of the same as historically was the case where it takes a couple of quarters to get those new facilities up to kind of a normal margin and as a result, maybe the back half starts to benefit, maybe Q4 benefits a little bit from the California/Pennsylvania facilities?

Well the issue with the two facilities are in the front of the year -- front part of the year, Pennsylvania and southern Cal. The ramp-up time should be generally less.

While there's always -- it always takes some time to develop efficiencies in a new building. One of the other key drivers is the workforce and in both those cases we are retaining primarily our entire workforce so that the labor training time is, of course, we don't have to wait for the -- for the new labor to get trained up to speed since these are both relocations in the general area of the existing facilities.

Unlike when we did Sarasota, Florida, or Richfield, Washington last year where they were new facilities with all new labor.

Great. Thank you.

Thank you. Our next question is from the line of Gary Giblen with Goldsmith & Harris. Please go ahead.

Hi. Good morning.

Good morning.

Just wondering, I mean, given that Moreno Valley has roughly $0.03 of startup cost and Millbrook is -- has issues which hopefully will be getting better during the year, but is the first quarter of '09 estimate out there for October the 30 to $0.33 at all feasible? I know you don't give quarterly guidance it it would probably be a good public service to indicate whether the 30 to $0.33 is -- is a reasonable range or not.

Well, Gary, I think you just said it. We don't give quarterly guidance but, I mean, we just did $0.30 this past quarter. And I believe, we believe that we've got some positive momentum going forward.

So, I mean, I'm not going to try and give a range to narrow it down but certainly if we did $0.30 this past quarter and we feel that there is -- there is some dilution from Millbrook that we should be able to continue to make progress on, we would like to think that we'd do better in the first quarter, but I don't think we're going to comment specifically on the range that's out there.

Okay. That's helpful. Thank you.

And the -- had you contemplated the payroll and other cost reductions at Millbrook, not the buying improvement but the SG&A operating type improvements when you bought it or did you find some excess that could be cut and how is that consistent with aggressively growing their sales which had been stalled out?

Well, you know, it's been a process of looking for areas that we can reduce expenses. In some cases the infrastructure that was there was -- was much larger than what was needed to support the current sales base.

So we have continued to look for areas that we could carve out and reduce, and again, as integration efforts ramp up, there should be more expenses that we find that we can take out. So we're reacting to the -- the business as we -- as it develops and while we knew we would be reducing, staff, it -- we had this jewelry deduction that was really in response to the current sales base and knowing that we -- we had the ability to cut the expenses without risking any service to the customers.

Okay. Got it. And finally, I mean, apart from accounts moving out and, you know, hopefully now moving into Millbrook, the -- I mean, how would you describe the health of the specialty gourmet business given, I mean, there are some needle points out there that indicate weakness and luxury spending and general or you look at Safeway or Starbucks as examples of food, upscale food not doing well, although there's always company specific issues but in other words, is the specialty natural going to be doing nearly as well as an industry as your independent naturals are doing in the organic and natural side?

Well, I mean, I think our sales on our core business on the natural and organic speak for themselves. Certainly the trends we're seeing, as I said, on the remarks we saw incremental increases with each quarter over the last four quarters in terms of sales growth.

I think overall the specialty category is growing slightly less than the core natural business, but certainly we see continued growth there as well.

I think it's -- our customers are generally benefiting from this current environment, not all customers are out there, but our core customers certainly seem to be doing just fine.

Okay. Great. Thank you and good luck in the October quarter.

Thank you.

Thank you. Our next question is from the line of Meredith Adler with Lehman Brothers. Go ahead.

Thanks for taking my question. I was wondering, you got a question about of the impact of the extra week on gross margin and SG&A but I was wondering if it had any net benefit to earnings per share in the quarter.

I would say it certainly did. I mean, when we had forecasted and given revised guidance at the midpoint of the year, we had factored that in from our standpoint. So if you said it was a 14-week quarter and we did roughly $0.30, it probably had a benefit of a little more than $0.02.

Okay. Great.

For the quarter.

And then just a -- as I get up to speed on your business, does Millbrook service natural food stores, independent natural food stores as well as supermarkets?

No. Primarily it's supermarket accounts.

Okay. Great. Those are my questions. Thank you very much.

Uh-huh. You're welcome.

Thank you. (OPERATOR INSTRUCTIONS) There are no further questions at this time.

I would like to turn it back to Mr. Michael Funk for any closing remarks.

Thank you. Well, thank you again for attending our fourth-quarter conference call today.

We appreciate your support and interest in UNFI and we'll look forward to talking with you again next quarter for our Q1 2009 earnings call. So thank you and good day to you all.

Thank you. Ladies and gentlemen, this concludes the United Natural Foods fourth-quarter 2008 conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3000 or 800-405-2236 and enter access code 11118516 followed by the pound sign. Thank you for your participation. You may now disconnect.