United Natural Foods Inc (UNFI) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the United Natural Foods second quarter fiscal 2010 conference call. (Operator Instructions). This conference is being recorded today, Tuesday, March 2nd of 2010. I would now like to turn the conference over to Scott Eckstein with Financial Relations Board. Please go ahead, sir.

Thank you, operator, 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 Joe Calabrese in our New York office at 212-827-3722, and we will send you a copy immediately following this morning's conference call. With us this morning from management is Steve Spinner, President and Chief Executive Officer, and Mark Shamber, Chief Financial Officer. We will begin this morning with opening comments from management, and then when we open up the line for questions. As a reminder, this call is also being webcast today and can be accessed over 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 Spinner. Steve, please go ahead.

Good morning, and thank you for joining us. Sales are growing. UNFI is winning business across the organic specialty categories, and our strategies for long-term growth are in place. During our last quarter call, I talked about greater predictability in our sales growth, and provided sales guidance of 2.5% to 5% for the year. In Q2, 2010, our sales grew 6%, clearly indicating that our salesforce is demonstrating our strength of our Company to our customers, and the markets for our products are improving. It is also important to note that inflation moderated to 1%, reflecting real sales growth in the period. During the last quarter, I also talked about new business in the pipeline, and I am very pleased to announce that UNFI has secured approximately 100 million in annualized new business which began rolling out in late January, and will continue to phase in through late spring.

This new business includes products in the specialty and organic lines, and again demonstrates that our entry into the specialty space was, in fact, quite strategic. UNFI's diluted earnings per share were $0.36 in the quarter and 14% ahead of prior year. Reflected in the quarter are one-time costs associated with onboarding new business, and severance costs related to retirement of a long time UNFI executive. Similar costs will continue through the third quarter of our fiscal year. I am quite pleased with our results during the period and feel confident that there is considerable momentum driving the Company forward. There were several highlights during the quarter. Our East and Western divisions demonstrated improvements across expense control, new business growth and operating margin. In addition, we saw continued improvements in our Woodstock Farms manufacturing facility and Blue Marble brands business.

As we discussed during the last quarter, gross margin in this year was 57 basis points behind prior year. This was driven by continued change in customer mix, elimination of fuel surcharges and 1% inflation. Gross margin shortfall was offset by continued improvements in expense controls and moderated fuel costs. And it is important to again point out that as the Company migrates towards lower margin customer opportunities, this will also be reflected in our gross margin rate. Product cost deflation also has an impact on our overall gross margin. Inflation in the second quarter of 2009 was 8% versus 1% in the second quarter of 2010. This significant change limits the Company's opportunity to buy into rising markets. In addition, manufacturers have significantly scaled back promotional spending throughout our customer channels. For the first half of our fiscal year, UNFI's diluted EPS increased 14.3% to $0.72 per share, and sales increased 4.2% over the prior year.

Net income is up 16% over prior year, reflecting strong operating disciplines, cost controls, and strong execution on the part of our associates operating our distribution centers. I'm quite proud of our first half results. Growing market share, driving operational excellence, becoming one Company and continuing our belief in sustainability philanthropy have become the pillars for our current and long-term success. We expand our market share through the addition of new customers and expansion of current customers with added products. We are driving operational excellence through the implementation of new technologies in our distribution centers and fleet, using common metrics that measure everything we do. We are becoming one Company by nationalizing support services and the matter in which we go to market, without giving up what makes our Company so strong. Making sure we stay close to our customers and suppliers will always drive our decision making.

We will continue to be innovative in our disciplines to reduce our carbon footprint, and support through philanthropy, supporting those organizations that share our beliefs. During the quarter, UNFI was awarded the EPA SmartWay highest score, reflecting our commitment to fleet fuel reductions; and was awarded the US Environmental Protection Agency's esteemed Energy Star rating at our Chesterfield, New Hampshire facility, marking it as one of the most efficient distribution facilities in the nation for superior energy efficiency and environmental protection. In addition to our core strategies for growth, UNFI will continue to support the organic industry, the independent retailer and emerging organic manufacturers and growers. The key to making this happen is people; and today, through new associates brought onto the team and the development of high potential associates within our Company,, we are in a terrific position to move forward always operating with the highest levels of integrity in all of our endeavors. From our balance sheet, UNFI continued to generate free cash, and we remain comfortable with our target of $30 million to $50 million for the year.

Capital expenditures during the quarter was 68 basis points as a percentage of sales. Our target of less than 1% of sales continues to be a good measure of CapEx for our current fiscal year. As we have disclosed, with the completion of our Texas facility early in fiscal 2011, CapEx will moderate, with future continued investment in information technology and building expansions. Now I would like to turn over the call over to Mark Shamber, our Chief Financial Officer.

Thanks, Steve, and good morning to everyone listening in on the call and the webcast. Net sales for the second quarter of fiscal 2010 were 898.2 million, which represents growth of 6%, or approximately 50.6 million over prior year second quarter net sales of 847.6 million. Year to date, net sales are 1.78 billion, yielding sales growth of 71.1 million or 4.2% over the prior year. For the second quarter of fiscal 2010, the Company reported net income of 15.7 million or $0.36 per diluted share, an increase of approximately 15% or $2 million over the prior year. Net income for the second quarter of fiscal 2009 was 13.6 million, or $0.32 per diluted share. In the second quarter, sales to the supernatural channel increased by 13.7%, and supernaturals now represent 36% of sales. The independents channel sales returned to positive territory with growth of 2.5% for the quarter; however, independents declined slightly from a mix standpoint, and now represent approximately 40% of sales. Our supermarket channel experienced growth of 5% over the prior year, and that channel continues to represent approximately 20% of sales.

And finally, food service also returned to positive growth, with sales increasing by 3.9% over the prior year, and they now represent approximately 2% of sales. At 18.5%, gross margin for the quarter showed a 57 basis point decline over the prior year second quarter gross margin of 19.1%. Gross margin in the second quarter was lower due to a combination of lower year-over-year fuel surcharges, a continued shift in the growth mix of our business towards the supernatural and conventional supermarket channels, and significantly lower year-over-year inflation. Gross margin for the fist six months of fiscal 2010 was 18.6% compared to 19.3% in the prior year, a decline of 68 basis points, due to same factors I just mentioned; although lower fuel surcharge revenues are a larger factor in the six month margin. As we have previously discussed, in general we will continue to experience pressure on our gross margin as we gain additional business with conventional supermarkets.

Offsetting the gross margin impact, we will also continue to experience improvements in operating expenses, as the supermarket channel has a lower average cost to serve model than our independent channel. Combined with the one Company and operational excellence aspects of our (Inaudible) initiatives, we continue to believe we will generate operating margin expansion as we done in first half of fiscal 2010, increasing our operating margin by 10 basis points from 3% to 3.1%. Our operating expenses for the quarter were 15.5% of net sales compared to 16.1% for the same period last year. This represents a 59 basis point improvement over the prior year, as operating expenses benefited from lower fuel cost and continued expense and cost controls. During the quarter, we incurred approximately .4 million or four basis points in nonrecurring expenses associated with reverence for a former executive. In addition, we incurred approximately .3 million in ramp-up costs associated with onboarding new business during the quarter that began shipping in January.

Fuel had a positive impact of 6 basis points of operating expenses in comparison to the second quarter of fiscal 2009, as fuel represented 68 basis points of distribution net sales in the quarter. Sequentially, fuel costs improved by one basis points over the first quarter. Nationally, diesel fuel costs in the second quarter increased by approximately 5% from the first quarter to a national average of 2.79 a gallon, using Department of Energies weekly prices. This represents an increase of approximately 12% over the prior year average for the second quarter of 2.47 a gallon. The Company has managed to reduce our fuel costs despite rising prices by updating and revising existing routes to reduce the miles traveled, reducing idling times and other similar measures. During the quarter, we recorded share based comp expense of $1.8 million or 20 basis points compared to expense of 1.6 million or 19 basis points in the prior year.

Operating income was 3.1% for the second quarter, a two basis point improvement over the prior year. Excluding the severance and new business ramp-up costs, operating income would have been 3.2% for the quarter or 10 basis points higher than the prior year. Interest expense in the quarter of 1.6 million was approximately 13% higher sequentially, and was approximately 51% lower year-over-year. This sequential increase was due to higher average inventory levels during the quarter, while the year-over-year decline was driven by a combination of lower interest rates and lower average debt levels during the quarter. Our inventory days on hand was at 50 days for the second quarter, which is at the high end of our target range of 47 to 50 days, However, this represents an eight-day decrease from the second quarter of fiscal 2009, but is approximately a one-day increase sequentially from the first quarter.

The sequential increase was related to new SKUs of inventory added during the quarter for new business that we had been awarded that began shipping during January. DSO for the second quarter was at 20 days, which is favorable to our target range and is consistent with the prior year. Capital expenditures were 6.1 million for the second quarter, and are $15.8 million or .9% of revenues for the first six months of fiscal 2010, which is right in line with our target of approximately 1% for the year. We expect our capital expenditures to increase during the second half of fiscal 2010 as we begin the buildout of our new lease facility in Lancaster, Texas. Free cash flow for the second quarter was positive 2.5 million, bringing free cash for the first half of fiscal 2010 to 10.3 million compared to the first half of fiscal 2009, which had a .5 million of negative free cash flow.

As Steve mentioned, this puts us in line to achieve our annual targeted range of free cash flow of $30 million to $50 million for the fiscal year, which we presented at our analyst day last June. Our leverage as of the end of the second quarter was approximately 1.7 times, based on the trailing 12 months, and our return on equity was 10.9% over the same timeframe. Our outstanding commitments under our amended and restated credit facility as of January 2010 were approximately 207.4 million, leaving us with liquidity of approximately $184 million after factoring cash on hand. That concludes our prepared remarks, and at this time I will turn the call over to the moderator to facilitate the question and answer portion of the call.

(Operator Instructions). Our first question comes from the line of Meredith Adler with Barclays Capital. Please go ahead.

Hey, guys, thanks for taking my question. Can you hear me?

Yes, hey, Meredith.

I was wondering -- you won about $100 million annualized of new business in the quarter. I was wondering how that size of new business compares to what you think the potential is of other new business? Is that large win, or an average win?

Well, number one, the 100 million is spread out across the couple of different customers, so it doesn't represent one customer win. About a year ago, we started aggressively moving forward towards the market share portion of our strategic plan, and so we think that there are additional revenue opportunities out there that we are working on aggressively. But as I have said in previous calls, we wouldn't talk about new business until we had aggregated it into a significant number, and 100 million I feel is a significant enough number. But it would be unfair for me to talk about additional contracts that we think may be coming our way, because we are certainly not at that point yet.

Okay. And then how is the specialty business doing (inaudible), and does that tie into the ability to win new business?

Yes, I mean, Meredith, that's a great question. And I would tell you that lot of the business wins that we have had are solely due to the integration of the specialty business at UNFI, we would not have been able to compete in those customer discussions had it not been for specialty. So we are moving forward as it relates to integrating specialty throughout the country, and without a question, specialty is critical to our (inaudible).

And is it beginning to show more life?

You mean in terms of year-over-year improvements? Yes, I would say that we are starting to see some improvement in the specialty side. Obviously, they were hit hardest when the economy started to fall. And we have started to see some of those products pick up.

Okay, I just have one more question. You have talked in the past about a project that will give your vendors more visibility into your various -- your marketing initiatives and sales outlook. Where does that stand? And it's not (inaudible) yet, when do you think it will be?

Okay, Meredith, there's two components to that project. The first component is a portal that will give participating supplier a window into our inventory position by distribution center, by region, so they can use that information to more adequately project purchases and growth. That portal is complete, and we are now in the process of rolling that out. The second portion of it is a little bit longer term, and that's the roll out of our new supply chain management system. We have -- we will have the first two DCs going live from a warehouse perspective around the July-August timeframe, and then we will start following that up with conversion of categories onto the new supply chain system. So on the warehouse side, we will do it distribution center by distribution center. On the category management side, we will do a category by category. But that's a two-year process.

Okay, great, thank you.

Thank you. Our next question comes from the line of Ed Aaron with RBC Capital Markets. Please go ahead.

Good morning, guys, can you hear me okay?

Yes, sure.

Hey, Ed.

All right, thanks. I just wanted to ask a couple of clarification questions about the back half of the year. So first of all, just from a topline perspective, you are coming in it seems like a little bit stronger than what the guidance implies for the year, if you assume that kind of current trend fold, I think. If the year did have upside on the top line, would you expect to be above the high end of the range on EPS too? .

Let me just give you a little commentary on that, and then Mark will probably want to throw in comments as well. Number one, the majority of the new business ships sometime during the fourth quarter of the year; and the new business has some fairly significant startup costs associated to hiring, training, et cetera. So since a lot of that business doesn't start until the fourth quarter, you have the cost without the revenue. One of the statistics that we looked at this morning is that with 4.2% revenue growth year to date, 6% for the quarter, the previous range was 2.5% to 5%. So if we do 6% for the third and fourth quarter, we will come in at the high end of the range. So on the top line, I think you are right; we will probably come in at the high end of the range. But given the fact that most of the new business won't start until the next fiscal area, and we have all the costs associated with the ramp-up, that's why we are still comfortable with the EPS range.

Right. And I think Ed, we referenced in an 8-K that we filed in early January about a couple of executives leaving, and we did have some costs associated from a severance standpoint in the second quarter. When the other individual leaves in third quarter, we will likely have some additional costs, as we laid out in that 8-K. So I think that while we have got some business that should put us at the top end of where we expect to be from a sales standpoint, there is a little bit of caution on the EPS side, simply because we know we have some ramp-up costs and some additional severance costs in the back half of the year. So I think I would be more comfortable answering that question at the end of 3Q than I am at 2Q.

Okay, that's fair enough. One clarification on the startup costs.

Yes.

They came in a little bit lower than what you kind of anticipated. Should we expect that will flow in-- to the portion of the start-up costs you didn't realize in Q2 will flow in to Q3? Because I think you talked about 1.5 a million quarter Q2 and Q3, so just trying to understand if we are going to see like more than 1.5 million in start-up costs in the third fiscal quarter?

Well, I mean, I think basically we had anticipated there would be some business awarded in the second quarter that we might have had starting up there. So I don't know that it's going to drift in to the third quarter. I think the number for the third quarter is still would hold; but if we gain additional business, there is certainly the opportunity that any business we gain now would ramp in the fourth quarter and wouldn't benefit us until fiscal '11. So I think I'm comfortable with what we given to date, but if we win additional new business beyond what we have already talked about, there could and should be impact in the third and fourth quarter. But where we stand today, I think the third quarter number still holds. If we win any additional business, there could be that impact.

Thank you. Our next question comes from the line of Scott Mushkin with Jefferies and Company. Please go ahead.

Hey, guys, it's actually [Blakely] in here for Scott. Just few quick questions. I just wanted to understand a little bit of the fuel surcharge lag as far as -- as we model out, I know that it takes a while to cycle through. What should we be expecting for the second half of the year here?

Well, in the second half, actually, Blakely, what you will see is we will have a benefit of the fuel surcharge in Q3 and Q4 -- either a benefit, or it would be roughly in line with what we had last year. The way fuel prices played out at the end of '08 into early '09 is that we saw a dramatic drop going into the December/January timeframe to the point where we actually discontinued our fuel surcharge in January of '09 because we dropped below the threshold at which we would apply it. And it came back during the fourth quarter of fiscal 2009. So given where fuel prices are right now, we will get a modest fuel surcharge benefit in the gross margin in Q3, offset by the higher operating expenses associated with the cost of fuel; but I would expect Q4 it would be roughly neutral, just given where prices are. If prices shift dramatically one way or the other that could change, but we have really cycled through the big elements of the fuel surcharge at this point.

Great, thanks. That's helpful. Okay, and then just on the KE/Tree of Life -- and I know that that's a recent development, but how do you plan to sort of go to market against a bit bigger and potentially stronger competitor in those two?

Well, I think that we are going to market the same way that we have over the last six or eight months with full arsenal specialty, and the largest selection of organic in the US. You add on the fact that we have some terrific brands under our Blue Marble program, our Woodstock Farms Manufacturing, and a whole slew of other things that we consider a very added value, think that the -- there is going to be a lot of opportunity for us. Obviously, we are watching the KE/Tree instigation carefull,y and we certainly hope that there is a viable seg number two. But we are being aggressive. We are looking at as many opportunities as we can for as many product lines as we possibly can.

Okay, and just -- I hope I'm not asking a question you may have already answered, but as you look at your independent customers -- I know it's been an area -- it seems -- clearly Whole Foods seems to have turned at least corner here, and some of your other customers have a little better outlook probably for 2010 than they did for 2009. Independents, it's hard for us to get a gauge on what they are up against. How do you feel about the strength of your independent customers as we head through obviously this downturn and what have you?

This is only my opinion; but I think that there is a little bit of a lag between the growth of -- on the supernatural and growth of the conventional to the growth of the independent. Historically, most of the innovation comes out of the independent space. And I think that they will adjust to the changes in the economic climate; and being the optimist. my hope is that they come roaring back, and we are going to do everything we can to make sure that we help them, because it is an extremely important part of our business.

Basically, this is the first quarter where their comps turned positive for us; and it may have been a year -- or at least directionally the first time in a year -- that they have been increasing. So I think that, to Steve's point, that's a positive sign that we are seeing, albeit that they are a little behind where, say, Whole Foods is at this point.

Yes. So maybe they are out [rejiggering] the model, looking for a better way [laughter]. Okay, great. Thanks very much for your comments.

Thanks.

Thank you. And our next question comes from the line of Greg Badishkanian with Citigroup. Please go ahead.

Great, thanks. In the press release, you mentioned that sales trends at the end of the quarter improved; and just wondering in terms of maybe run rate at the end of the quarter, and then how the third fiscal quarter -- February, March -- is -- how is that doing? Is it off to a good start as well?

Yes, I mean, I think that we saw a modest uptick towards the end of January into early February. I would tell you, Greg, that it's really not been sizable, but we've held with the numbers that we have had for most of the quarter. So I think when we had talked back in mid-December, we had mid-single digits, but those numbers were towards the lower end of the mid-single. We have seen a little bit of an upshift towards the end of January into early February. But we are still holding pretty steady in that range.

Yes, and what I would add is one of the really good things that's come back is predictability. And going back two or three quarters, we talked about how volatile the changes in revenue growth were week to week; and certainly for the last quarter at least, we've seen steady and slow improvement in our top line, and certainly have gotten back to a much more predictable sales number.

Right. No, that's very good to hear. And if I'm doing the math right, if you did 6% revenue growth in -- for the most recent quarter, January was better than the overall quarterly results and February was better than January, so that probably puts you high single digit range in terms of run rate, is that right?

Yes. I mean -- y,es, I mean how you want to break the range, it would put us above that right now. Yes.

Right. Good. That's very helpful. And what product segments are doing particularly well?

I don't think we actually done that look over the last couple of weeks. It's something we probably need to go back and look at. When your sales are trending as positive as they've been, you kind of enjoy it. So I don't know the answer to that.

But probably perishable versus nonperishable, is there a difference between those two basic categories?

No, again, I really -- we haven't looked at it over the last couple of weeks. If I had to give my opinion, I would tell you where we saw the big declines going back a year ago, they are starting to move back towards positive territory. And certainly the more expensive product lines, certainly in the specialty space, are starting to come back into positive territory.

Yes.

And on the produce side, Greg, we saw a good amount of deflation in that particular segment earlier in the year. And so as they have lapsed some of that deflation, even though we were moving more boxes at that time, we were getting the same amount of sales; whereas now that they've sort of gone past that -- we haven't seen in this area a noticeable uptick, but deflation has gone away, so we are getting some of the sales lift in the produce aspect of the perishables category at our Albert's Organics division.

Right, good. No, I mean, good -- obviously a good trend to see. High single digits is very impressive. And just in terms of kind of the new business of the $100 million that kind of got phased in, when you talk to the retailers -- I'm sure you sat in on some of those meetings -- what are the reasons for them giving you the business?

Yes, I mean, I think it's a little bit different by circumstance. I believe that most of the customers in the US believes that if they want to have a exemplary set in organic that UNFI is certainly the way to go. Now that we have the specialty set to match the organic set, it gives them a reason to take a hard look at UNFI when in the past they couldn't. So I think that's the number one reason. I think that with the additional of the specialty, we are starting to expand the relationships that we have with current organic only customers into the specialty space and across a wider range of geographies. With Texas opening up, that's going to create a whole slew of new opportunity for us as we will be much closer to very big market.

We currently serve as Texas from Denver, which is a long way away. So I think it's all of those reasons and more. We are also being considerably more aggressive in terms of getting our folks out into the street, calling on customers that perhaps we haven't seen in a while. When we established our kind of four pillar strategy, the first one is to increase our market share, and the only way -- two ways I know of doing that is sell more to existing customers and take on new contracts.

Yes. Great, thank you very much.

Thanks, Greg.

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

Thanks, and congratulations on a good quarter and the new customers. On the new customers, I don't know if you done this, but can you just tell us what the $100 million translates into in store count? Roughly?

Yes, I don't think we have -- we haven't done that, Andy, and I'm not sure what that store count is.

All right. Can you tell us which change you got, and if you got most or all of these changed business?

I don't want to get in to the habit of disclosing the names of the customers. I think that probably it's pretty easy to find out if you do a little market research. But I really would rather not get into the habit of talking about the new customer wins by name.

But Andy, I think to the other part of the question, I mean, in most of those customers we got both natural and specialty business -- or if we only got one or the other, it's because we had the other piece already. So we have added to some existing, and we've won both sides on the new customers.

Okay. And just as a bit of an update, I mean, I know you didn't give out a number last quarter but seems like it's up -- I don't know, 25% or 50% from the amount of business you had secured three months ago?

Yes, I mean, I would say that that's a fair estimate as to the incremental amount we have won during that timeframe.

Okay. On the Tree of Life being acquired by KE, it's big change for the industry. Are you getting a decent amount of calls from their customers? Like say just out of necessity they could be loyal to them or whatever, but there is a big change coming. Are you getting calls from their customers saying, "What if there is some interruption? We just need to line things up, so on." And if so, where is that leading to? And so is some dialogue opening up with their customers that might not have occurred in the normal course of business?

Yes, I mean, as a rule I don't like to talk about discussions that are taking place with any customers. And like I said earlier, our salesforce is motivated to get out there and look at customer opportunities regardless of who is currently serving them. Obviously, there is a little bit of unknown surrounding those customers with those companies. But I wouldn't say that we are out there treating those opportunities any differently than we are treating the rest of them. And opportunities are coming to us from a wide variety of places, not just those.

Okay. So Steve, are you secured to do specialty in the West Coast now, and this just sort of Texas market that's not the easiest to serve?

We've loaded clean specialty -- and that is specialty that don't have any artificial sweeteners, flavors, et cetera. Those have been loaded into the West Coast. Obviously in the East we have the full selection of specialty, and it's just a matter of doing it slowly and intelligently by DC and by customer. But today, to a large degree, for certain types of customers we have specialty across the country.

Just a follow-up on the customer category growth, is the supernatural definition, is that still just Whole Foods or does that include the some of other natural chains?

No, it's still just Whole Foods.

Got it. And on the independents -- switching -- obviously the volume looks like it is up for the first time in a while, as well as your sales; but you're getting some positive volume out of them. Was that trend -- as Greg was getting to how it strengthened -- and you guys alluded to as well -- did you see strengthening in volumes throughout the quarter into the month of February?

I would say, Andy, that it was a pretty -- I don't want to say sudden, but early in the quarter they shifted back into positive territory and then there was a modest increase from there. But I would say that it was -- once we got into the November timeframe, that it was pretty fast that they got back into the positives and they have held there with some minor volatility from week to week. So it hasn't been a long, slow, steady ramp during the quarter. It was kind of a quick jump, and then some modest gains from there.

Okay, thanks, Mark. And just one last one, if I could. Steve, I think I heard you say that your vendors have pulled back on promotional spending a bit. Opposite of what I think is happening in the larger conventional area -- and a lot of times natural and organic differs from conventional -- but could you just elaborate a little on what is happening with the vendor on the promotional side in your channel?

If you go back a year ago, we had 8% inflation and the economic issues were different. So there was, from our perspective, considerably more discounting going on at retail. And obviously we passed those discounts through to the consumer. With 1% inflation and the economic rebound taking place, if you want to call it that, common sense would tell you that the manufacturers are going to provide less discounting at retail, and that's what we have seen happening.

Okay. Thanks a lot.

Okay.

Thank you, and our next call comes from the line -- pardon me, our next question comes from the line of Chris Krueger with Northland Securities. Please go ahead.

Good morning. Can you clarify two figures for me that you presented? Your supernatural -- the sales growth rate -- what was that?

It was 13.7%.

Okay, and the conventional growth rate?

Conventional growth rate was 5%.

Okay. Can you give us a little help on how it typically works as you try to win new business? I know it seems like you have a lot of -- or several that are rolling out in these early parts of the year. If we are looking forward at potential new customer chains, would a decision be made later in the year and then roll out early next year calendar year? Or how does that typically work? (Inaudible) with the holidays and all that?

Yes, I mean, it depends on the situation and the contract that the customer is currently in. So some of them might start up in 60 days, some might be 90, some might be 120. A lot of it depends on whether the contracts are service or no service. In full service contracts, we actually have to hire staff to actually go in,to the retail location to manage the receipt put away rotation and merchandising at the shelf level. So unfortunately, there is no easy answer; it could be as little as 60 days, it could be as much as 6 months.

And Chris, to add onto that, I mean, the contracts -- some of the supermarkets work under understandings where they don't have signed deals; others have signed deals, but they could end at varying points during the year, dependent upon whether or not there has been an acquisition in the past where they became part of a chain after they were acquired -- and so the deal ends in June, where somebody else's might end after Passover or after the holidays. So there is really no consistency in that sense.

Okay. On the new Texas facility, can you refresh our memory on the time line?

It's going to be probably the early part of our next fiscal year, which will be August, September.

Okay, that's all I've got, thanks.

Thanks, Chris.

(Operator Instructions). And our next question comes from the line of Ann Gurkin with Davenport. Please go ahead.

Good morning.

Good morning, Ann.

Just wondering if you could review -- now that you have had a full year of the blended or integrated business at York, kind of how it went, the positives, negatives, upsides -- now that we are like a year in to it.

Yes, I mean, that's a great question. I think you asked the integrated facility in York?

Right.

Yes, so that's been phenomenal. As a matter of fact, a large percentage of new business is going through our integrated York facility. We learned a lot. But it's a phenomenal high-tech, high productivity facility, and obviously that's going to be the model for our future.

Okay. And then one of the questions I get, and concerns is, is business moving out off your distribution network into more mainstream distribution, and your ability to replace that business. Can you just comment on how that's going?

Yes, I mean, that's a great question, and it's a great issue that we are always going to fight; because certainly as products pick up movement or become more organic conventional, they tend to move into either captive distribution or distribution through alternative channels at lower margins. The challenge that we always have is to make sure that we have more products coming in than are going out, and we have been successful doing that. And the best way for us to deal with that is to be nimble in the way we bring new suppliers into the fold. We are probably the only supplier across the country that can provide emerging manufacturers and growers with a national outlet for their unique products. So far, knock on wood, as long as we can continue bringing out new products across the country, we should be able to deal with those more conventional organic products going into alternative channels. We are always going to deal with it.

So the pace of movement still seems okay?

Yes.

Okay, and then last, putting aside integration costs and severance costs, can you still hit earnings in the range of $1.48 to $1.58 this year?

Yes, I mean, we didn't change our guidance, and I think that we had a very strong growth for the first half of the year -- 14%, 15% from the prior year -- and usually our back half of the year stronger than the first half, so I think we still feel very comfortable with the range that we have out there.

Great. That's fantastic. And last, sorry, you announced 100 million in wins. Are you close to signing more new business that we might see hit in the second half, the announcement? .

As I said earlier, I'm not going to get into customers that we are talking or how much business that's going to be. Obviously, I'm very comfortable with the fact that we have aggregated 100 million, some of it's already rolled out. And that's kind of the way we will work in the future; as we win pieces of business and it aggregates into a material number we will disclose it at that time.

But is it fair to say you have more business you are working on and we could see that hit in next, say, six to 12 months?

Well, I mean, I think we're -- I mean, we are constantly working on new business, Ann, so I don't think it's any different than -- now that we have won some, it doesn't mean that there is no one on our list that we still want to gain. So I think that process is consistent and ongoing; and certainly we would love to be in a position to have new business to announce. But again, we can't predict the timing.

Yes, I don't foresee another announcement in this fiscal equal year.

Okay, that's great. Thank you all very much.

Thank you. And our next question comes from the line of Ajay Jain with Hapoalim Securities.

Yes, hi. I apologize, I'm speaking from a cell phone. Most of my questions ask been asked. Just as far as 100 million in new business, can you confirm the revenue contribution last quarter, either on an absolute or run rate basis? I'm assuming it wasn't material based on Steve's prepared comments, is that right.

Yes, I'm not going to give a exact number, Ajay, but I feel very comfortable telling you that for the last quarter, it was less than 1%.

Okay. Thanks. And in relation to the ramp-up for the new business, I think previously you indicated about 1.5 million in start-up costs both for Q2 and Q3. So now that that process has been pushed out into Q4, is the right way to look at the start-up costs is around 3 million, get absorbed in the back half of the year? Is that correct? And is that evenly split between Q3 and Q4?

Well, I think it's up -- I mean, the issue, Ajay, is that it's up to that; and as we get awarded the new business, it's a question of is it full service, is it partial service, is it no service? So I think a fair answer to it is that the Q3 number could still be up to 1.5 million. There could be some of that in Q4, but I think that hopefully those are the high ends of the range, and given that we don't get any revenue associated with it we try to minimize those costs. But split over the third quarter and fourth quarter, it's probably fair. I don't think the number will necessarily be up to 1.5 million in both quarters. I think they might be more in the third than the fourth.

Okay, great. And I just wanted to clarify your comments on the gross margin outlook. I mean, do you expect gross margin pressures to potentially accelerate in the back half of the year? I mean, could it be higher than 60 to 80 basis points?

I mean, if there is any acceleration in the back half of the year, I think it would be modest from where we are. I mean, if -- without wanting to be held to it, I think that we could be within 15 to 20 basis points either direction, but it's really a function of where the business grows; and so if the independents continue to have growth but it's much more modest than, say, with Whole Foods and the conventional supermarkets are, there will be further gross margin erosion that will be offset in the operating expense side. If the independents start to see stronger growth the the back half of the year, the gross margin may stay where it is, maybe even get some modest expansion. So it's a little hard to predict that perfectly, but I'd feel comfortable saying the range is within 15 to 20 basis points to either side.

And Ajay, just for a little clarification, the conventional in the supernatural business obviously has a lower gross margin associated with it, but it also has a lower cost to serve. So if you look in the quarter we just finished, our overall gross margin fell 57 basis points, but our overall expense rate fell 60.

Yes. No, I definitely understand the implications from a gross margin and SG&A perspective. But I don't know, Steve, if you can comment on this or not, but based on the recent sales improvement and square footage growth at Whole Foods specifically, has that had any direct impact on gross margins year to date? Because my understanding is that the more volume that they do with (inaudible), there are some additional pricing concessions which hit the gross margin line, but conceptually, the gross profit dollar impact shouldn't be overly significant. Do you have any comment on whether that's been behind any of the gross margin decrease? Year to date?

I mean, Ajay, I guess I'll try to answer that instead, and say that obviously Whole Foods is our largest customer; and they, as a result, have the best pricing. So to the extent that we sell more to Whole Foods, the gross margin -- it's obviously fair to say that they are below where the average is. I would not agree with sort of some of the other aspects of your statement, but the more business we do with Whole Foods -- or if Whole Foods has the strongest growth in the quarter, as was the case this quarter -- they will bring down the average gross margin. But again, it's a function of your largest customer where you are the most efficient and you get the best leverage from an expense standpoint. But I wouldn't agree with some of the other aspects of the statement that you mentioned.

I guess relative to the overall contract, that's obviously not something that we would talk about.

Yes. No, of course. I wouldn't expect that you would give specificity on the contract. But thanks for answering all of my questions.

Sure.

Thank you our next question comes from Michael Krestell with M Partners. Please go ahead.

Good morning. I'm wondering if you could comment on what utilization would look like after the $100 million of business gets worked into the network end? Just to follow it up, just on the transportation network, as I was working on it -- and it's always evolving, of course -- but just barring any additional volume (inaudible), how far down the road are you from getting efficiencies out of it and getting all the rerouting and work like that done that you've been working on?

Yes, I mean, generally speaking, the capacity and the rerouting and the efficiencies takes place distribution center by distribution center. So there are distribution centers around the country where we have considerably more space than we have in others. Generally speaking, we have tremendous capacity currently to take on considerably more business. On the efficiency side, in most cases, the more business that you add, to a point, makes you more efficient from an expense as a percentage of sales perspective. As we implement our supply chain initiative, which is our new technology platform; and as I said, the first two DCs roll out in the July/August timeframe -- they will drive down our costs further. And certainly as we migrate onto that national platform, it will certainly give us the ability to act relatively quickly in reducing our costs as we bring on lower margins business. But from a scale perspective, we certainly have plenty of capacity around the country. Like I said, in some DCs it's different than others. And most of the new business that we have announced so far this year is in the Northeast running through our York facility, which is relatively new.

Okay, that's great. Thank you very much.

Thank you, and I show no further questions in the queue at this time. I would like to turn the call back to management for any closing comments.

Okay, thank you. Exciting things are happening; and speaking for everyone at UNFI, we are proud to be part of a great industry and a great Company. Thank you for joining us this morning, and have a great day.

Thank you. Ladies and gentlemen, this concludes the United Natural Foods second quarter fiscal 2010 conference call. If you would like to listen to a replay of today's conference, you can do so by dialing 303-590-3030, or 1-800-406-7325, and enter the access code of 4230242, followed by the pound sign. Thank you for your participation. You may now disconnect