United Natural Foods Inc (UNFI) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the United Natural Fourth Quarter 2011 Conference Call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

Today's conference is being recorded September 8, 2011. I would now like to turn the conference over to Scott Eckstein, with Financial Relations Board. Please go ahead.

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 212-827-3772 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'll begin this morning with 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 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.

Additionally, in today's press release and on today's call, we provide both GAAP and non-GAAP financial measures, including operating expenses, operating income, net income and earnings per diluted share. Presentation of these non-GAAP financial measures is not intended to be considered in isolation, or as a substitute for any measure prepared in accordance with GAAP. For a complete reconciliation of GAAP to non-GAAP financial measures, please refer to our earnings release issued earlier today, available on our corporate website, www.unfi.com, under Investors.

With that, I would like to turn the call over to Steve Spinner. Steve, please go ahead.

Thanks, Scott. Good morning and thanks for joining us on our call to discuss UNFI's fourth quarter and fiscal year 2011 results, and our view of fiscal 2012.

Let me begin by making a comment I'd made before. UNFI continues to deliver strong results across all aspects of our business, with a relentless drive towards growth, excellence, and improvement. We continue to deliver strong shareholder returns while maintaining our focus on sustainability, the success of the organic industry, and our position as the distributor and employer of choice.

Our success in 2011 was a direct result of the dedication of approximately 7,000 associates delivering on our strategy to increase market share and deliver operational excellence to our customers.

During fiscal 2011, the organic and specialty industry returned to growth. UNFI delivered stellar growth. For the year, our sales increased over 20% to a record $4.5 billion, while sales for the quarter increased over 17% to $1.16 billion, reflecting the lapping of several new customers brought on board during the last year, and the acquisition of our Canadian distribution business in the fourth quarter of fiscal 2010.

Sales since fiscal 2008 have grown 35%, from $3.4 billion to $4.5 billion in fiscal 2011, despite a very difficult economic environment in both 2008 and 2009. UNFI's sales growth demonstrates the overall success of our strategy to build market share. By successfully adding a complete mix of specialty products throughout North America, we have entered into new customer relationships and expanded existing relationships by leveraging our new product offerings with our expertise in the organic channel.

Fiscal 2011 was a transitional year for UNFI, as we became a leading force in delivering value-added programs across both organic and specialty products to the conventional retail channel. Sales by channel for the fourth quarter was robust across all of our customers, with super naturals, conventional supermarkets, and independents, growing 20%, 24% and 15% respectively, further supporting the strength of our industry and consumer demand for UNFI's unique product mix of organic, natural and specialty foods.

For the year, despite the challenges we faced in opening our Lancaster, Texas, facility, our Company performed well across our primary distribution regions, with strong growth in our Albert's Organics, UNFI Canada, Earth Origins Market, and Blue Marble Brands divisions.

During the fourth quarter, we lapped our acquisition of UNFI Canada, and continue to be optimistic about our opportunities north of the border. UNFI Canada achieved record sales of over $200 million during fiscal 2011 on the strength of our newly formed leadership team.

As previously announced, we have made significant progress toward divesting our non-foods and general merchandise business. Our transition out of this business will be completed by the end of first quarter fiscal 2012. Associated with this divestiture and restructuring is $6.3 million in asset impairment, and other expenses associated with the closing of our Harrison, Arkansas, facility, which negatively impacted our fourth quarter 2011.

Adjusting for asset impairment and other restructuring charges, UNFI operating income in fiscal 2011 increased 18.3% over fiscal 2010 to 3% of sales. I am extremely proud of efforts to increase operating income in line with our overall sales growth, despite a changing customer mix and significant costs associated with our high rate of revenue growth. EBIT, since fiscal 2008, our operating profit, has grown almost 50%, from $93 million to $136 million in fiscal 2011, excluding the restructuring charges previously discussed.

Adjusted diluted earnings per share increased 7% to $1.68, and also included the dilutive effect of our secondary stock offering completed in the first quarter of fiscal 2011, which increased our shares outstanding by approximately 4.43 million shares. In addition, on an adjusted basis, UNFI diluted earnings per share has increased 48% since 2008, from $1.13 to $1.68 per share.

For the fourth quarter, adjusted diluted earnings per share were $0.43, which is a 7.5% increase over the prior year, also impacted by the increase in our shares outstanding. During the last several calls, we have also made reference to a short-term phenomenon affecting our operating margin, and this issue relates to the significant growth in revenue and the costs associated with on-boarding new customers. There continues to be a lag between the timing of this gear-up and the productivity gains related to running the new volume through our distribution centers.

And this lag can be as long as six months, as we expect this pressure on our operating margin to continue for the next several quarters.

We made significant progress towards improving our gross margin during the quarter. Overall, gross margin increased 43 basis points sequentially versus the third quarter, and was flat as compared to the fourth quarter 2010. Several factors contributed to the stronger gross margin. Improvements in our ability to manage in-bound freight costs as well as higher fuel surcharges were the primary contributors, while continued changes in our customer mix and related gross margin negatively impacted overall gross margin.

Gross margin for the year fell 34 basis points versus fiscal 2010. This was due primarily to lower gross margin during our first half, and resulted primarily from a rocky start up of our Lancaster, Texas, facility. These challenges were specific to inventory and incremental freight issues incurred while bringing this facility online.

Overall expenses in the quarter excluding restructuring charges fell 38 basis points to 15.5% of sales. And for the year, excluding restructuring charges, expenses were 28 basis points lower than the prior fiscal year, and 15.2% of sales. During 2011 we successfully implemented our national labor management systems throughout our core distribution centers, standardized our operations systems, and began our multi-year strategy of migrating to a national supply chain system. These programs were our primary driver in reducing overall costs.

It is critical that we continue to reduce costs at a rate greater than the decline in the gross margin. During the fourth quarter of 2011 both gross margin and expenses worked in our favor, with expenses reducing and gross margin improving against a period of very strong sales growth.

During the quarter and for the year, the Company continues to face unprecedented increases in healthcare costs. We've instituted a wide range of wellness programs and educational communications to our associates, which we hope will result in a healthier and more educated workforce, which will in turn mitigate these costs throughout 2012 and 2013.

On the balance sheet we also finished very strong. CapEx for the year was 0.9% of revenue, and less than our target of 1% of revenue. Our most significant capital expenditures during the year were the opening of our Lancaster, Texas, facility and our continued investment in warehouse management and supply chain technology.

Days on hand and accounts achievable were consistent with prior year, and are overall leverage fell to one times EBITDA, and the Company generated $66.4 million in free cash for the fourth quarter.

With a very strong year behind us, we are proud of what we've accomplished and excited about what's in front of us. Our pipeline of new business is quite active, and we are moving aggressively toward increasing market share in new categories and products, including specialty cheeses and frozen protein, all specifically targeted at the perimeter of our customer stores.

During the next year, we will continue to on-board previously announced new customers and will complete the divestiture of our non-foods and general merchandise business. The cost associated with these projects will be taken primarily in our first quarter.

For 2012, we expect sales of $5 billion to $5.1 billion, which is a 10.4% to 12.6% increase over 2011. This should be another record year of revenue increases, as the Company pierces $5 billion in sales for the first time. Adjusting for divested non-foods and general merchandise businesses, sales in 2012 will grow from approximately 12% to 14.1%.

Excluding the $4.5 million to $6.2 million in additional costs associated with the restructuring, and the on-boarding of a new national customer, we expect our fiscal 2012 diluted earnings per share to be in the range of $1.83 to $1.93, an increase of 8.9% to 14.9% over fiscal 2011 adjusted diluted EPS of $1.68. Due to the influence of the restructuring and on-boarding costs in our first quarter, we are providing first quarter guidance to a range of $0.33 to $0.36 per share.

Capital expenditures are expected to be in the range of approximately 1% of revenue, or approximately $47 million to $52 million in 2012, and specifically we have expansion projects in Denver, Colorado; Rockland California; Quebec, Canada; Toronto, Canada; Lancaster, Texas; and continued implementation of our warehouse and supply chain technology.

Now, I will turn the call over to our Chief Financial Officer, Mark Shamber. Mark?

Thanks, Steve. Good morning, everyone.

Net sales for the fourth quarter of fiscal 2011 were $1.16 billion, which represents growth of 17.2%, or approximately $170.2 million over the prior year's fourth quarter net sales of $988.5 million. Our acquisitions positively impacted sales by $62.2 million in the quarter. Excluding the acquisitions, net sales increased by $108 million, or 10.9%.

Inflation almost doubled sequentially, as inflation was 2.93% for the fourth quarter of fiscal 2011, compared to 1.47% in the third quarter.

For fiscal 2011 on a full-year basis, net sales were $4.53 billion, yielding sales growth of $772.9 million, or 20.6% over the prior year. Excluding our acquisitions, fiscal 2011 growth was 12.5%.

For the fourth quarter of fiscal 2011, the Company reported adjusted net income of $20.9 million, or $0.43 per diluted share, an increase of approximately 18.3%, or $3.2 million over the prior year. On a GAAP basis, net income was $17.2 million, or $0.35 per diluted share, compared to net income in the fourth quarter of fiscal 2010, which was $17.6 million, or $0.40 per diluted share. Restructuring expenses up $6.3 million, or $3.7 million net of taxes, represent the sole reconciling item between our GAAP and adjusted results. This morning's press release contains a table which presents this reconciliation in more detail.

Our sales by channel remained strong across all of our primary channels in Q4. Sales to the super natural channel increased by 19.9% over the prior year's fourth quarter, and represented 35% of sales for the quarter. Independent sales rose by 14.9% year-over-year, and independents now represent approximately 38% of sales. Our supermarket channel experienced growth of 23.6% over the prior year, and continues to represent approximately 22% of sales. And food service grew by 27% over the prior year, and continues to represent approximately 3% of sales.

Excluding the impact of our acquisitions, the super natural channel grew by 8.7%, independents increased by 12%, supermarket growth was 18.2%, and food service sales increased by 25.8%. On a full-year basis for fiscal 2011, super naturals represented 36% of sales, independents represented 37%, supermarkets represented 22%, and food service represents approximately 3% of sales.

At 18.6%, gross margin for the quarter was consistent with the prior year's fourth quarter gross margin, and improved 43 basis points sequentially. As Steve mentioned, primary drivers of our higher gross margin year over year were continued purchasing and logistics efficiencies and higher fuel surcharge revenue, partially offset by the continued shift in the growth mix of business towards our super natural and conventional supermarket customers, the addition of new, non-service conventional supermarket customers with base pricing lower than our average growth margin, and higher in-bound freight costs.

Gross margin for fiscal 2011 was 18.2%, compared to 18.5% in the prior year, a decline at 34 basis points.

Our operating expenses in the quarter, adjusted for the $6.3 million in restructuring expenses, were 15.5% of net sales, compared to 15.9% for the same period last year. This represents a 38 basis point improvement over the prior year, as operating expenses benefited from, amongst other things, transportation savings from our new Lancaster facility, continued year-over-year improvements in our warehouse through-put and our cost per case, further leveraging of our fixed costs, and slower growth in our consumption of diesel fuel, partially offset by higher health insurance costs, higher workers' compensation costs, and incentive compensation costs.

Excluding our Canadian business, which involves the use of third parties for deliveries in certain regions, diesel fuel had a negative impact of eight basis points in operating expenses in comparison to the fourth quarter of fiscal 2010, as fuel represented 84 basis points of distribution net sales in the quarter. Sequentially, our fuel costs increased by three basis points over the third quarter. We continue to focus on reducing our fuel costs as a percentage of sales in this higher-priced impairment by leveraging larger order sizes, updating and revising existing routes to reduce the miles traveled, reducing idling times, and other similar measures.

Nationally, our diesel fuel costs in the fourth quarter of fiscal 2011 increased by approximately 18% from the prior year's fourth quarter, while national average prices increased to $3.97 a gallon, compared to $2.98 a gallon in fiscal 2010 per the department of energy, an increase of 33%.

During the quarter, we recorded share-based compensation expense of $1.8 million, compared to $1.5 million in the prior year, although in fiscal 2011, that share based comp was slightly lower as a percentage of net sales, representing 15 basis points, compared to 16 basis points in the prior year.

Adjusted for our previously mentioned restructuring expenses, operating income was 3.1% for the fourth quarter of fiscal 2011, a 42-basis-point improvement over the prior year's operating income of 2.7%. On a GAAP basis, operating income was 2.5%, a decline of 12 basis points over the prior year.

Interest expense in the quarter of $1.2 million was approximately 17% lower than the prior year, and was 2% higher sequentially. The decline year-over-year was due to our lower debt levels following our equity offering in the first quarter, and the free cash flow generated during the quarter. Interest income increased from $48,000 in the fourth quarter of fiscal 2010 to $211,000 in this year's fourth quarter. As I discussed last quarter, this increase is due to a change in the accounting surrounding an existing investment with a supplier. Previously, we were rebated a portion of our purchases each year, and those rebates were reflected as a credit to cost of sales. Going forward, we will continue to receive interest income on our investment.

Our effective tax rate for the quarter was 39.2%, bringing our year-to-date or full-year effective tax rate to 39.4%.

Capital expenditures were $16.3 million for Q4 and totaled $40.8 million, or 0.9% of revenues four for fiscal 2011, which is favorable to our target of approximately 1% of revenues.

The Company's outstanding commitments under our credit facility were approximately $136.7 million, with available liquidity of $280.2 million, including cash and cash equivalents at year end. For the quarter, we generated positive free cash flow of $66.4 million, although for fiscal 2011, free cash flow came in at $9.1 million, which is below our target range.

Inventory days on hand deteriorated by slightly more than a day to just over 51 days, above the high-end of our target range, despite reducing our inventory levels by $35.7 million in the quarter.

As discussed in this morning's press release, the Company has also provided its fiscal outlook for fiscal 2012, ending July 28, 2012. For fiscal 2012, the Company expects net sales in the range of approximately $5 billion to $5.1 billion, an increase of approximately 10.4% to 12.6% over fiscal 2011.

GAAP earnings per diluted share for fiscal 2012 in the range are expected to be -- sorry, for fiscal 2012 are expected to be in the range of approximately $1.75 to a $1.87 per share, an increase of approximately 9.4% to 16.9% over fiscal 2011 GAAP earnings per diluted share of $1.60.

We expect to incur approximately $4.5 million to $6.2 million in additional expenses associated with our previously announced restructuring of UNFI Specialty, and start-up expenses associated with on-boarding the Company's recently announced new national customer during fiscal 2012. Excluding the impact of these expenses, we expect earnings per diluted share for fiscal 2012 to be in the range of approximately $1.83 to $1.93 per share, an increase of approximately 8.9 % to 14.9% over fiscal 2011 earnings per diluted share of $1.68, excluding the expenses associated with the restructuring of the specialty division.

As Steve mentioned, the Company expects GAAP earnings per diluted share for its first quarter of fiscal 2012 ended October 29, 2011, to be in the range of $0.33 to $0.36 per share. Excluding the portion of the aforementioned expenses that are expected to occur in the first quarter of fiscal 2012, the Company expects earnings per diluted share to be in the range of $0.39 to $0.41 per share.

Capital expenditures are expected to be in the range of approximately 1% of revenues, or approximate $47 million to $52 million during fiscal 2012, and our income tax rate is expected to be approximately 39.5%. At this time, I'd like to turn the call back over to the moderator to facilitate the question-and-answer session.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions)

Robbie Ohmes, Bank of America Merrill Lynch.

Thanks, good morning.

Good morning, Robbie.

Hi guys, I was hoping you could maybe remind us, or give us some guidance, on the size of the new customer and in your fiscal 2012 guidance, how you are thinking about the core revenue run rate for your businesses when you sort of pull out the new customer and pull out divestitures, et cetera?

The guidance that we had provided, Robbie, on the new customer was approximately 4% of revenue. We hadn't gotten more specific than that. The business that we're actually migrating out of as a result of our non-foods and general merchandise business, is approximately $80 million to $90 million.

Got you, thank you. Just a follow-up question. In the fiscal 2012 outlook, can you just walk us through how you're thinking about the puts and takes on gross margin, and how much more benefit from purchasing logistics you would expect, et cetera, versus pressure from a mix shift, thanks.

Yes, that's a tough one to answer. We generally, Robbie, try to guide folks more towards the operating income line versus the gross margin, simply by virtue of we can't always forecast exactly where the shift is going to come.

I would say that we would expect, certainly with the customer that we're taking on, that we will see some pressure on the gross margin, a little bit in the first quarter, but certainly going into the second quarter, when they're on board for the full quarter. I would think you'll see gross margin decline from here, but from an operating margin standpoint, we feel, as Steve mentioned, we'd have maybe another quarter or two of challenges in getting some of the expenses out, particularly in the first quarter as we transition to Safeway.

I think that we feel we'd start to get the leverage starting in the second quarter and going into the back half of the year, where you'll see the continued progress in the operating margin, and probably the expansion that allow us to hit our three-year target.

The real challenge for us is in looking solely at gross margin, as there's so much noise in that number. Fuel surcharges are embedded in our gross margin, so they're very dependent upon the actual price of fuel. Where we take on full service programs or customers convert from full service programs to no-service programs, the cost of the service programs is embedded in the gross margin, so it's a little bit of an artificial indicator of how well we're managing that line item, just because of all the moving parts associated with gross margin today.

Got it, thanks a lot.

Ed Aaron, RBC Capital Markets.

Thanks, good morning.

Hi, Ed.

Just wanted to ask a high-level margin question about 2012, kind of year-over-year. It looks like your guidance assumes about 20 basis points of EBIT margin expansion, and if I'm thinking about kind of a bridge from last year to this year, it seems like that lapping of some one-time issues like Lancaster, as well as the divestiture impact, would basically account for all of the margin expansion. Is that consistent with how you would look at it?

Well, I think, Ed, you could certainly single out a couple of items that contribute to a large piece of it, but there are a lot different puts and takes that benefit us and could potentially hurt us. So I think that the range that we've got, those might be two larger components to it, but there might be other positives as we continue to roll out the new supply chain that will continue to benefit us.

But as we take on larger customers and we see some of the shift in the mix, particularly with the new customer we're taking on, there are some challenges that it might take us quarter or two to fully get comfortable with on how that customer is going to order, what type of expenses we'll incur, what we'll get from a selection standpoint, delivery standpoint, and those offset some of the other elements where we would make progress in the operating expenses. So net-net, you might get back to a number that maybe represents only a couple of items, but there's a number of positive with a couple of negatives that net out to where we gave the range.

Okay, thank you. Also I just wanted to ask a question about share trends in the independent channel. You had a surprising growth acceleration in that channel in the quarter. I'm wondering how much of that's share driven? Along those lines, there has been some talk of a potential customer lost in the southwest area. Can you just address the status of that, and then what's reflected in your guidance?

Well, let's see, the first part of the question as relates to the independent growth, yes, we were very pleased with the return to growth in the independent channel. We think that it's a combination of just the overall economic environment for independents improving, increased demand on what I typically call the cross-over shopper, who are shopping more in the independent. The independents tend to be extremely innovative, and I think maybe it just took them a little bit longer to adjust to the changes in the economic environment. But we were very pleased.

In that trend we're very happy that the trend seems to be continuing. We haven't seen a lot of slippage in our overall sales growth. As a matter of fact, sales trends, since the end of the fourth quarter, are actually getting slightly better. Overall, those things are very positive.

As it relates to any business coming in or going out, we haven't done any disclosure of customer wins or losses, and we haven't gotten notification of any customer wins or losses in that market.

And when you talk about trends getting slightly better since the end of the quarter, you're talking about in aggregate, not specific to the independent channel?

Correct. We normally wouldn't break it out during the middle of the quarter.

Fair enough, thank you very much.

Meredith Adler, Barclays Capital.

Hi, guys.

Hi, Meredith.

Two questions. First, once you finish exiting and restructuring your general merchandise business, are you expecting that's going to have a benefit to either the operating margins or the returns?

Yes, we got out of that business because it really wasn't core to who we are or what we do. Quite frankly, we were losing money on that business. So by closing a highly inefficient warehouse, actually two warehouses, ultimately, we think it's ultimately going to be $1.5 million to $2 million favorable to us, once we complete the transition.

And, when would you expect that to be visible?

Well, we'll finish the transition late first quarter of our fiscal 2012, so we'll probably pick it up in the second, third quarters of this year.

Yes, I would expect probably it's more visible, Meredith, in the third quarter. While we fully expect all of the costs to be incurred by the end of the first quarter, there is always a chance that in making sure that the transition goes smoothly that there may be some costs that don't hit until the second quarter.

Got it. Then, Steve, you were talking a bit about sort of a whole bunch of unusual costs, not just for the restructuring, but the on-boarding of the new contract, but I am wondering -- and then that would work its way through. But I'm just wondering if you're also talking about rolling out the new warehouse management system? What is the timing of that? How is that going? Do you think you're still on schedule? I think you've said six months delay from what you had originally expected? Any change on that?

Yes, there's two points I think that you're trying to get to, Meredith. The first one is kind of the costs associated with the on-boarding of new customers, and generally, we have all the up-front costs of the hiring, the inventory, the training, without any volume flowing through the system, for -- it could be as much as two months. Once we actually bring the customer on board, and we have the volume to support the cost, it typically takes us anywhere between four to six months to actually flow the expenses through the system to get us to the point where we're actually productive with that particular customer. I think that's just going to be something that happens over the next six months or so.

As it relates to our supply chain, warehouse management and supply chain, we did delay the implementation of the next facility. The biggest reason for that is we are going to be in the middle of on-boarding quite a bit of new business, and also gearing up for the holiday season, which is a very important season for us. When we factored all those things into the decision, we thought that we would be far better off to delay the next implementation until after the holidays. Once we get through the holidays, we'll start to get that roll-out back onto its original schedule.

Is it fair to say, obviously I've been fairly focused on -- I think this is what Mark said, too -- that your revenues are growing fastest with low-margin customers, and you do need to bring your cost structure down. Is it fair to say that strategic issue will continue for most of 2012?

We have had a lot of success in rolling out the first part of the warehouse initiative, which is labor management, which we've talked about, which gives us the ability to rank our folks, and track their accuracy, and we've seen a lot of traction from having labor management implemented throughout all of our core UNFI distribution facilities, and that will continue to bring the costs down throughout 2012.

Where we don't get the savings is the next step, which is -- and I've talked about this before as well -- is true engineered labor standards, which is reliant upon putting our new supply chain system into each one of our warehouses. So we will get a delay there. When we look at overall productivity gains in the warehouses, we are forecasting to take advantage of those gains, and they are embedded in our numbers and our budgets for 2012.

Great, thank you very much.

Yes, for us to get the full bang of what we expect to get out of the new technology platform, it's going to take a while, but we're making significant incremental steps.

Great, thank you.

Greg Badishkanian, Citigroup.

Great, thanks, two questions. First, just a comment that you made to add, I think, just in terms of maybe a little bit of pickup, that you've seen lately, maybe any color on that would be great, if I heard you currently?

Yes, Greg, you did. You heard us correctly and boy I wish we could give you more color. We're thrilled to see it, and it's been pretty consistent over the last couple weeks. Again, we really believe that it's just strength in demand for the product categories that we sell. Whether it's because of the crossover consumer, whether it's people eating more at home, whether it's the strength of the retailers that we service. All those things we think are contributing to a growing demand for these products.

Great, and second -- that's good to hear, by the way. And second part is just in terms of inflation and pricing. What are you seeing in terms of your expectations over the next year or so?

Our inflation has grown quite a bit. It basically doubled from the third quarter of the year to just under 3%. The current trend in inflation is just under 4%, like 3.7%. You know, 2% to 4% inflation for a distributor is actually pretty good, because we can pass it through. I think you start getting north of 4% and now I think you -- there is the potential of seeing some push-back at retail. I think that we have some confidence that over the next 12 to 18 months, inflation will probably be in the 3% to 4% range. We don't believe that it's going to go north of 4%.

Is it sort of like Cisco, where if you have hyper inflation in certain categories that's hard to pass on, but if it's just kind of across the board you can pass it on, actually -- it's beneficial to you?

Again, I think 3%, 4% inflation -- we can pass it through. We don't have a lot of tissue passing it through. The rule that we've been using internally and we've talked a little bit about is the rule of fours. When you get over $4 a gallon, and over 4% inflation, it does have a negative impact relatively quickly on demand. So as long as fuel stays sub-$4 a gallon and inflation stays in check and under 4%, we're pretty confident that we're in a good place.

Great, thank you.

Thanks, Greg.

Scott Mushkin, Jefferies & Co.

Hi, guys. I wanted to follow up a little bit on Greg's questions. What gives you the confidence, Steve, that we're not going to go over 4%? I don't have that same confidence, so I was wondering if maybe you could tell us why the numbers we're seeing are suggesting that maybe we're going to accelerate to 6% or 7%. I was just wondering why you think it's going to stay under 4%?

Yes, I think that what people tend to forget about UNFI is that we trade primarily in the center of the store, which is what we would call the core commodity or grocery product. We don't have a lot of exposure to the product categories that have typically been seeing much higher inflation -- proteins, cheeses, and categories that have a great deal more volatility. So as we look at the last 18 months or so, and certainly when we look at historical data looking forward, we have some confidence that inflation will remain in check. We could be wrong, but again, looking at those factors are what drive us to think that inflation should stay around 4%.

Then, just to follow up on the comment things have picked up a little bit, is that a dollar pickup? Is it volumes have picked up? Could you maybe -- is it just an inflation phenomena, or is volumes are actually picked up? Then I was wondering if you could -- I know you don't do a lot of it, but you're in the cheese business, the frozen meats, and we do have Albert's Organics -- if you tell us about a little bit the sub-sector of the perishable area, and what's going on with volumes there? That would be great.

Yes, I'll answer the second question, I think Mark will answer the first one. Again, these categories or products, protein and specialty cheese are very small, and not material to our overall total. So they're growing rapidly, but they're growing rapidly off a very small number. So I wouldn't expect that those categories would have any kind of material impact on our overall results for quite some time. The upside is that there is a tremendous amount of opportunity. Our customers indicate that they would like us to be a bigger participant in the perimeter business, and so we're responding. But we're doing it slowly to make sure that we do it right.

Scott, on the inflation question, I would say with what we've seen for the pick-up, probably half to three quarters of it is inflation related, and a quarter to half of it would be box count. We're just in the process of closing the first month of our new fiscal year, so I don't have members yet on a detailed basis. But, based on what we've seen for a trend, and what Steve mentioned or what I mentioned for the inflation number for the first quarter, or the first month of the first quarter, that's how I would break it down.

Any hurricane Irene impact on that, do you think?

Not material. We lost a day here or there as a result of facility closing, but not particularly material.

Yes, if I had to put a sales number on it, it's probably less than a couple million.

Okay.

We were very fortunate in that sense.

I was actually thinking maybe the pick-up as a result of people cleaned out the shelves and maybe some of the pick-up is Hurricane Irene-related as the stores re-stocked. But it's good to hear the other side, the flip side, didn't really hurt you.

Yes, I would say that if we did anything, we did a lot of sales of water in the week leading up to the hurricane, but there wasn't really much of a pick-up elsewhere.

Then one final thing, to follow-up on Meredith's, and I'll yield. On the technology, I mean is it just very hard when you're running sales this high to get technology in? It seems like we keep postponing a little bit, and it seems like it's always been somewhat of a struggle for the Company. So maybe 30 seconds on, is this something that we should just get used to us investors? Are you going to try to be opportunistic and get it in, but when push comes to shove, it kind of messes up the warehouse when you're running this fast?

I think there may be some truth that. What really got us off the schedule was the customer win. I'm not sure that it's prudent to go through a customer on-boarding at the same time that you're putting in a new technology platform. That just doesn't make a lot of sense. So when we had to push back the dates and became aware that we were going to have to do this new customer on-boarding, as well as gear up for what's going to be a very busy holiday season, the operator in us says look, it makes a lot of sense to say let's hold off on the next implementation until we get into the next calendar year, where we can really devote the time and attention to getting the system implemented during a slow period.

I think the long answer to your question is that we'll get into January, we'll get back on the implementation schedule of our supply-chain platform, and we'll knock off two major implementations this fiscal year, which is what we had originally said we would do. It's just slightly delayed.

Okay, that's perfect. Thank you for taking my questions. I really appreciate it.

Yes.

Andrew Wolf, BB&T Capital Markets.

Good morning.

Good morning, Andy.

If you stop winning all these new customers, you can concentrate on your system. I wanted to ask you a simple question. Obviously, you've caught to the fact that Lancaster started out -- didn't go well. But how is it now versus the original budget? Another interpretation could be it's not just the new customers, it could be just the finest plans that you came up with didn't -- you something penciled out and in reality, what's happening is different. So how is it running versus what you penciled out?

Look, it's easy to play Monday morning quarterback and say what should we have done differently. I don't get a lot of value out of doing that. Would we have done some things differently? Absolutely? Would we have put it into a location where we already had one of our core eastern or western business systems running? Probably. But that's fruitless, because we did what we did.

We've got a brand-new building, you've seen it, a lot of the folks on the call has seen it, and a lot of great technology. It's taking us longer to get used to this technology and train around the technology than we had ever expected. It's also taken us longer to make the system stable, so that we could really be comfortable in moving that platform into the next facility.

Without a doubt, without question, it is absolutely the right platform for UNFI, and it is the platform that we will use to standardize our supply-chain fulfillment procurement category management and warehouse management over the next couple of years. It's been frustrating, quite frankly, that we couldn't do it faster, but at the end of the day, we opened Lancaster and accomplished what we needed to, and that was to eliminate 600 miles of driving time each way between Denver and Lancaster, Texas. So we've taken advantage of the savings associated with that change.

The challenge has been to get the technology to work the way it was anticipated. We're pretty close. And we've got a very strong team of general managers in the next facility, which is Richfield, Washington, and so I think everybody feels pretty comfortable that we're not going to have anywhere near the issues in converting that facility that we had in getting Lancaster off the ground.

Got it, that was really helpful. So you think it's more, hey you want into a new facility where people were green, and so was it more on the actual labor folks or more in Management ability to train people? Or is it more just having a mature facility where you need certain through-put?

I think again, Monday morning quarterback. If we had done it in a facility that we had already had opened, you've got Management that understands the intricacies of that facility, you've got proven, trained selectors that been with you for a long time, loaders, drivers, et cetera. Lancaster was all new. Management's new, selectors new, drivers new, everything was new. And so it was overwhelming. That really is what caused us to get off the dime. Technology is complicated. It's proven technology. It's going to work for us, it's just unfortunately taken us longer than we would have liked, and we've spent a little bit more money than we would have liked getting us there.

That's helpful and I appreciate it. Maybe you don't want to make excuses, whatever you're thinking. We're trying to figure out if we should feel more confident about the next installation.

I think you should.

And I understand your reasoning behind that more fully now. I wanted to -- just one other question was the, you spoke about there's a good pipeline of new potential business. Obviously, Safeway is coming on board in the next quarter, right now, next quarter or two. Is that pretty much the constraint? You've got to get that right and then you can bring in more business? How should we feel about the constraints to bringing in substantial new business, or moderate new business? How are you managing that?

Yes, look, there's a dual message, right? When you're running a sales force like ours, we don't take our foot off the gas. You move forward, or you move backward. We're moving forward, and there's lots of opportunities for UNFI to increase our position with existing customers, as well as to take on new business. The other message internally is, our first priority is to get our existing customers through this very important holiday season, and we are extremely focused on that, in terms of building our inventories, gearing up our teams, getting the fleet in a position that it can handle the increase that we expect.

The second part of it is to focus the teams' seven distribution centers that are taking on the new business, to make sure that they have the new products slotted, the appropriate amounts of inventory and that we're geared up to start. So we're certainly not looking to take on any more new business at this particular stage in time, but on the other hand, we're out there pounding the pavement as hard as we ever have for new business. Fortunately, this is not a time of year that suppliers typically change anyway.

Right, and that's what I was going to add, Andy. If you look at the last couple of years, typically business gets awarded after the holidays, around the holidays, and then it doesn't start for anywhere from three to eight to nine months later. So any business that we would be trying gain, likely would not start until the third quarter or later of fiscal 2012.

I would tell you that the single biggest benefit of on-boarding this customer is the access to a wide variety of brand new specialty SKUs that are located now around the country, and those specialty SKUs are going to have a lot of interest in a lot of our independents and other conventional retailers because they're good products.

And one final follow-up to the increase in the sales growth at the independents. I understand you said it was both volume and price, but is that business back to, or that segment back to gaining market share, or is that all -- should we all think of that as pretty much all the same customers?

I don't know that I have the detail to answer that question correctly, Andy. Mark, do you?

No, not off the top. I think it's a good mix, but without delving into it in deeper detail, I don't know that we could answer it definitively.

I asked that because I know for a long time your net business had been kind of steady-state on the customer count, obviously with Kehe and Tree of Life getting together, there was some change the industry and sometimes that can change market shares. But it sounds like that's not really the case, it's more of a just better business at your existing customers? Thank you.

Sean Naughton, Piper Jaffray.

Yes, thanks for taking my question. First, I just wanted clarification on the Q4 on some of the restructuring charges. I was looking for maybe a little bit higher number of the restructuring and maybe a little bit lower number for Q1, so just any clarification there. Then secondly, Q1 last year, I think you were talking a lot about trying to chase demand and maintain service levels, and that cost you a little bit on the gross margin side from the suppliers not being able to fulfill demand. How would you characterize the suppliers' inventories today, and their positioning and ability to meet demand?

Well I'll try to answer the first question. I may have to ask you to repeat the second. I think with respect to the timing of the expenses and how the breakdown came out, when you are trying to close the business and transition in a disposal and a divestiture, you give your best guesstimate at the time that you do it, and sometimes things push back. That's really what's been more of the instance there.

I think that from the standpoint of the impairment of the building, we may be able to recover a bit more on the sale of the building than we had initially anticipated, but most of the shift in the timing of the expenses is really just a reflection of making sure that the transition is as smooth as possible for those customers that are being impacted, as well as making sure that our employees, that we wrap everything up as we transition that business over to L&R. So I think that's really what's behind the shift in the expenses between Q4 and Q1.

And then the second question, if I simplify it, it's more just asking about supplier inventory level?

Yes, correct.

We track our supplier inventory levels, or our manufacture service level, very carefully. Historically it runs somewhere between 300 and 600 basis points of manufacturer out-of-stocks. I would tell you that consolidated over the last probably six to eight weeks, our service level, all-in, has been as high as it's ever been, which means we're delivering a very high service level to the customer. Some exceptions in certain parts of the country, but generally speaking, the service level is very high.

We challenge the manufacturers all the time to make sure that they keep the service level up. Unfortunately, a lot of the lines that we play in, we're dealing with commodity products that may or may not have availability at certain terms of the year. Fortunately, everybody's interest are aligned. The manufactures have interest in making sure they have the product so that we can sell it.

But generally speaking in answer to your question, I would say that we've done a good job working with manufacturers to keep product in stock. Now, we've got to obviously focus on that as we get into the holiday season, because we did struggle a little bit last year. We're working hard to not have that happen again during this important holiday season.

Okay, but that's a potential for -- to manage that a little bit better this year maybe a little bit of an opportunity?

Yes, I think so.

All right, great. Thanks for taking my questions and best of luck in fiscal year 2012.

Thanks a lot.

Karen Short, BMO Capital.

Hi, thanks for taking my question.

Hi, Karen.

Just a couple questions on inflation. In terms of the acceleration that you saw third quarter into fourth and then further into the first, what were the categories that you suddenly saw the acceleration in?

Well, we saw it across the board, Karen. One thing that we can highlight is that one of our larger suppliers pushed across a price increase across all of their product categories during the quarter, and that obviously had an impact on us. Then we did see some inflation in some of the bulk categories as well. So, those are two subsets, but it really wasn't limited to any one of the hundred categories that we have broken products out by.

Okay, and was there any benefit to margins from forward-buy opportunities prior to this price increase?

We always have forward-by benefits. I wouldn't say that it was out of the ordinary compared to previous quarters.

Okay, and then within your top-line guidance for 2012, then you're assuming what -- kind of 3% to 4% rate of inflation?

Yes. I mean, it's probably 2.5% to 4%. We're not sure how it will cycle through later in fiscal 2012.

Okay. Then, within your 2012 guidance, I guess -- I think when you put out the press release on Safeway you'd said $1.5 million to $2.5 million would've been the start-up expenses associated with Safeway. So that's embedded within your $4.5 million to $6.2 million, obviously?

It is, yes.

Just wondering, is that something that really should be considered one-time? I mean, I understand it's one-time, but it's also part of your business in terms of winning new customers. I mean, can you help me think about it a little bit?

Yes, I think the way to look at it is, because of its size, and the significance of the on-boarding, I think that's why we viewed it as one-time. If we pick up a $30-million or $40-million customer that is spread across a couple of DCs, we would generally talk about those expenses and just note that they impacted us in the quarter. This is a customer that 4% of $5 billion, say that's roughly a couple hundred million impacting seven DCs, there's a couple hundred or more people and on board for anywhere from a month to two months before we start serving them. It's such a large number that we did carve it out, because we don't win customers that size every day. It's probably been seven years since we on-boarded a customer that size.

Okay, that's helpful. And then, in terms of that additional infrastructure then, that should, I guess, obviously be allocated to new customers going forward, as well? I mean, you hired enough that you could take on new revenues without having incremental hires, I guess is what I'm asking?

Yes, we -- again to Mark's point, we typically would not separate out on-boarding costs related to some of the other customer wins that we've had in the last two years, and I don't anticipate that we would, moving forward. The only thing that makes this unique is just the size. We don't anticipate that happening again, certainly in the next fiscal year.

Right. Karen, to the other part of the question, as we grow during the year, we always are adding people as we need to in a particular DC, but it might be a handful of people in a DC as that picks up additional volume or maybe a new store opens. In this case, again, it's much larger scale in each DC that's impacted.

Okay, got it. And then, I saw it in your prepared remarks, you said something about -- I know you're always talking about the opportunities in terms of expanding your product offering, but I thought you said something a little more specific about expanding in different categories. Did I catch that properly?

Yes. You did.

Can you elaborate on that?

Sure. We -- as I said earlier, we trade primarily in the center of the store, and we feel that there is a significant opportunity for UNFI to play in the perimeter of the store, which is typically your specialty cheeses, your proteins, and related types of products -- deli. So that's going to be a focus area for us. We think our customers would like to buy those products from us. We're already going to the customer location, so it's going to be a slow-growth initiative for us, but something that we think has a great deal of value over the next several years.

But maybe elevated a little bit in terms of priorities going forward? I know you've always talked about it but --

We now have some people on staff that are dedicated to those categories. We actually now have product in our distribution centers that are dedicated to those categories. But these things take a long time to get off the ground, and to do it right. It's just a matter of time, but it will become more and more important to us.

Okay, that's helpful. That's all I had, thanks very much.

Scott Van Winkle, Canaccord Genuity.

Thanks. Steve, I've heard you say on this call several times about a big holiday coming and making sure you meet customer demands for the holiday. Is there something different about this holiday that I should be reading into it other than bringing on a couple hundred million dollar new customer?

Only that our business grew so significantly in the last fiscal year, so if you look at just the amount of revenue that's flowing through the DCs this year versus last year, it's significantly more. We want to make sure that we have just an outstanding holiday season from a service perspective, and it's what we're focused on. So it's really nothing more than that.

Okay, great. And then, Mark, you gave a number for super natural growth, ex-acquisition. I missed that, can you give me that again?

Yes, it was 8.7%.

Great, thank you very much.

Thank you. At this time, I would like to turn the conference back to Management for closing remarks.

Great. Thank you all for joining our call this morning. Again, we are extremely proud of our results in fiscal 2011, and look forward to our fiscal 2012. Have a great day.

Ladies and gentlemen, this concludes the United Natural Fourth Quarter 2011 Conference Call. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325, or 303-590-3030 and enter the access code of 4466649 followed by the pound sign. Thank you for your participation. You may now disconnect.