United Natural Foods Inc (UNFI) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the United Natural Foods fiscal 2013 first-quarter results conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions).

I would now like to turn the conference over to Scott Eckstein from Financial Relations. 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; Mark Shamber, Chief Financial Officer; and Sean Griffin, Group President. We will 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.

The 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 everyone and thank you again for joining us this morning to discuss UNFI's first-quarter fiscal 2013 results. We had quite a bit going on during this quarter, which we will discuss in detail this morning, in particular, our continued sales growth, highlighted by increased demand for organic, natural and specialty products, unusually high supplier out-of-stocks, continued shift in our customer mix, one-time expenses associated with closing out a multistate unclaimed property audit, and a brand impairment, continued expense control driven by increases in productivity.

And despite all the moving parts, which I will discuss shortly, during the quarter our net sales increased almost 16% to another record of $1.4 billion, and our adjusted diluted EPS grew 16.1% to $0.46. Additionally, adjusted net income grew by 17.8%. The significant expenses, which we will address today, are in fact one-time events, and we believe the gross margin challenges we experienced this quarter are now predominantly behind us.

On the sales side consumers drove continued demand for our products. In addition, we were positively impacted by three acquisitions made during the quarter, one in Canada, one by our Albert's Organics division, and one new e-commerce business, all of which we have previously disclosed.

Net of these acquisitions our net sales grew by almost 15% over the first quarter of 2012. And it is important to note that we have now lapped our national customer, which was on-boarded last October, and as a result net sales growth will moderate by approximately 3% to 4% for the balance of the year.

During the first quarter UNFI saw for the first time a significant increase in the rate of supplier out-of-stocks causing negative pressure on our gross margin and topline sales. Now I will address the gross margin implication shortly.

On the topline our supplier-outs during the first quarter were approximately $25 million greater than prior year. The higher out-of-stocks were caused primarily by ingredient shortages and high demand to support the holiday season. While difficult to manage, we are confident that the higher outs will subside and return to a more normalized rate over the next several months.

Looking at gross margin, we finished the quarter at 16.7%, which represents a 110 basis points decline from the prior-year's first quarter. And as you know, gross margin is an important line item for UNFI as more of our business comes from conventional retailers.

During the first quarter we faced several challenges affecting our gross margin -- the implementation of our Transportation Management System, or TMS; lost gross profit on supplier out-of-stocks; and diminished trade spend; increased freight cost to move product needed to support customer demand; and customer mix shift.

During the last quarter I talked about the implementation of our TMS system. The system is critical to our management of supply chain logistics, moving product from point of manufacture to the UNFI distribution centers. And the disruption that I mentioned during the last call related not to the system itself, but to change management and training. And during the first several weeks of our first quarter this disruption continued as we moved to a completion of this initiative.

The conversion to our new system led to instances which caused us to move freight through outside carriers versus our own fleet. And this system is imperative to our ability to manage increasing amounts of freight through a complicated and demanding network.

The majority of our freight issues occurred during July of Q4 2012 and August and September of this fiscal year. Our key indicators monitoring freight and overall gross margin returned to normalized levels during October.

Also negatively affecting gross margin during the period were higher than anticipated supplier out-of-stocks. And as I mentioned earlier, these outs were approximately $25 million more than prior year. This translated into approximately $4.2 million of lost margin during the quarter.

Additionally, similar to holiday periods in the past, UNFI moved product around the country at our expense to ensure that we delivered exemplary fill rates to our retailers. As an example, these situations occur when we run short of product in California but have inventory in Connecticut. We make the choice to move the freight across the country to meet the demand at our cost.

The challenge in this period was higher levels of supplier outs, which translated into more freight being moved, again, at our cost. These issues represented the majority of our gross margin decline during this period. And over 70% of our gross margin decline in the period related to TMS implementation, increased freight costs, and increased supplier out-of-stock.

So let's talk now about the expense side of our business during the quarter. During the quarter we terminated a licensing agreement with a brand managed by our Blue Marble division, which resulted in the impairment of $1.6 million to the associated intangible asset. Adjusting both for the intangible impairment in this quarter and the nonrecurring expenses from prior year, again related to new customer on-boarding and the divestiture of our non-foods business, our operating expenses decreased 110 basis points.

Our productivity continues to increase as we strive for efficiency throughout our warehouses. Our Ridgefield, Washington, facility is running quite well on our new Warehouse Management System, and we are continuing to evaluate the next distribution center for implementation.

I continue to be optimistic and quite pleased with the achievements of our supply chain and logistics teams in driving towards expense control while always focusing on the service excellence and accuracy and on-time delivery and safety.

During the quarter UNFI continued to experience significant contingency planning costs related to the expiration of its contract with UNFI's Seattle, Washington workforce. And as we have discussed in prior calls, our contract expired in March of 2012. We have negotiated in good faith for eight months to secure a mutually beneficial resolution.

During September the union authorized a strike. UNFI incurred significant costs to ensure continued high level of service to our customers. We hope that this issue is resolved shortly; however, we expect to continue to incur additional costs until an agreement is made. And it is important to remember that less than 5% of UNFI's associates are unionized, and we will always ensure that pay rates and benefits are consistent and competitive across all of our distribution centers and divisions.

A couple of comments on Hurricane Sandy. I can't even begin to tell you how proud I am of our teams throughout the Northeast. They prepared and worked around the clock to ensure that our people were safe and customers received critical deliveries prior to and following the storm. We had limited disruption, which was caused primarily by power outages. However, because of the team's preparations we anticipate costs of no more than $500,000 during the second quarter.

Many of our associates did have considerable damage to their property and we are working closely with them to ensure that they receive adequate time and resources to repair and rebuild.

Capital expenditures during the quarter consisted primarily of maintenance related costs. We are on target to build three new centers over the next several years, and continue to target the Northeast, Midwest and Pacific regions in order to accommodate growing demand. And previously we addressed this issue by commenting on the increased capital expenditures as a percentage of sales during the next several years increasing from less than 1% of sales to less than 1.3% of sales.

And also during the quarter UNFI settled a multi-state unclaimed property audit related primarily to a 2007 acquisition, and Mark is going to provide a lot more detail on this shortly.

During the quarter several divisions had exemplary performance. Our Albert's Organics division delivered high growth and return as they continue to expand the organic produce and perishable perimeter business. Demand for these products continues to outpace our core organic, natural and specialty foods business.

Also, Select Nutrition continues to improve as more and more consumers choose to purchase natural supplements and personal care over the Web. Both Albert's and Select Nutrition are integrating previously acquired Purity Organics and Honest Green.

And we had lots going on during this quarter. With 16% sales growth we remain bullish on continued demand for our products and services. And with the one-time issues we discussed today behind us we are confident that UNFI is on track to achieve our 2013 guidance.

Now I will turn the call over to Mark to comment some more on the financials. Mark.

Thanks, Steve, and good morning everyone. Net sales increased by 15.8% or $192.6 million to $1.41 billion for the first quarter of fiscal 2013 versus net sales of $1.22 billion in the prior year. The three first-quarter acquisitions we announced on our fourth-quarter conference call in September positively impacted net sales by $11.2 million in the quarter. Excluding the impact of these acquisitions, net sales increased by $181.4 million or 14.9%.

Inflation decreased sequentially again to 2.15%, a decline of 86 basis points from the fourth quarter of fiscal 2012, and a 170 basis point decline over the first quarter of fiscal 2012. However, we did note that while inflation declined sequentially there was a modest increase in October as a couple of our larger suppliers increased their prices in the month of October.

For the first quarter of fiscal 2013 the Company reported adjusted net income of $22.8 million, or $0.46 per diluted share, excluding the impact of the items disclosed in this morning's press release, an increase in adjusted net income of approximately 17.8% or $3.4 million over the prior year. Adjusted net income for the first quarter of fiscal 2012 was $19.4 million or $0.40 per diluted share.

On a GAAP basis for the first quarter of 2013 net income was $21.5 million or $0.43 per diluted share, an increase of 42% over fiscal 2012's first-quarter GAAP net income of $15.2 million.

In the first quarter sales to the supernatural channel increased by 16.4% over the prior year's first quarter, and supernaturals represented 36% of sales for the quarter.

Independent sales rose by 9.4% year-over-year and independents represented approximately 34% of sales. Our supermarket channel experienced growth of 25.6% over the prior year and now represents approximately 25% of sales.

And food service grew by 24.2% over the prior year and continues to represent approximately 3% of sales. Excluding the impact of the acquisitions, supermarket sales increased by 22.2%, while independent sales growth was 9%.

Gross margin for the quarter was 16.7%, which represents a 110 basis point declined from the first quarter of fiscal 2012, which had a gross margin of 17.8%. Our gross margin for the first quarter of fiscal 2013 was negatively affected by higher supplier out-of-stocks, and increased inbound freight costs, some of which were incurred as part of our efforts to maintain higher service levels for our customers, as Steve just mentioned, which together represented approximately 70% of the year-over-year decline.

Also, the continued shift in our customer mix towards the supernatural and conventional supermarket channels, along with changes in our product mix, negatively impacted gross margin in the quarter.

GAAP operating expenses for the first quarter represented 14.1% of sales, a 155 basis point improvement compared to 15.7% for the same period last year.

Adjusted operating expenses for the first quarter of fiscal 2013 represented 14% of net sales compared to 15.1% of net sales in the first quarter of fiscal 2012, a 110 basis point improvement. Details of the adjustments to operating expenses in both years were provided in this morning's press release.

Fuel had a positive impact of 5 basis points on operating expenses in comparison to the first quarter of fiscal 2012, as fuel represented 82 basis points of distribution net sales in the first quarter of fiscal 2013, consistent with the fourth quarter of fiscal 2012.

Nationally our diesel fuel costs in the first quarter of fiscal 2013 increased by approximately 4.3% from the prior-year's first quarter, while national average prices increased to $4.07 a gallon, an increase of 6.4% compared to the $3.82 a gallon in the first quarter of fiscal 2012 per the Department of Energy.

Non-cash straight-line rent expense associated with our Aurora, Colorado distribution facility under construction was approximately $0.8 million in the quarter. Share-based compensation expense during the quarter was $4.7 million or 33 basis points compared to $3.9 million or 32 basis points in the prior year.

Adjusted operating income for the quarter was 2.7% in both fiscal years. On a GAAP basis operating income was 2.6% for the quarter, an increase of 45 basis points over the prior year's first-quarter GAAP operating income of 2.1%.

This quarter we reached an agreement in principle to settle a multi-state unclaimed property audit related primarily to our 2007 acquisition of Millbrook Distribution Services, Inc. This agreement resulted in a one-time charge of $4.9 million reflected in our other expense line. We recently finalized a settlement agreement and expect to make payment during the second quarter.

In addition, our provision for income taxes reflected a discrete tax benefit of $2.7 million in the quarter, primarily related to the reversal of reserves for uncertain tax positions. As a result, our effective tax rate for the quarter was approximately 30.5%. Excluding these discrete items, we would expect our effective income tax rate to be in the range of 39.5% to 40% for fiscal 2013.

At just under $720 million at quarter end our inventory averaged 49 days for the first quarter, a decrease of 3 days from the first quarter of fiscal 2012 when we were at 52 days, as we built inventory in anticipation of taking on a new national customer. The primary driver behind the lower average days on hand was the high level of out-of-stocks across our supplier base.

DSO for the first quarter was about 1 day better than the fourth quarter at 21 days, which is favorable to our target range and consistent with the prior year.

Capital expenditures were $4.6 million or 32 basis points of net sales for the three months just ended, which is below our target rate as a greater portion of our CapEx is planned for the remainder of fiscal 2013 as we finish our new Aurora, Colorado, distribution facility and complete other initiatives.

Outstanding commitments under our credit facility were $183 million at quarter end with available liquidity of $308 million, including cash and cash equivalents.

Our leverage increased to approximately 0.7 times on a trailing 12-month basis due to our normal seasonal investment in inventory going into the holidays and the corresponding increase in debt.

At this point I will turn the call back over to the moderator for the question-and-answer session.

(Operator Instructions). Ed Aaron, RBC Capital Markets.

Thanks for the question. Steve, I guess you have had a few things go against you so far this year just between the stock outs, the TMS issue and then some expenses maybe with Sandy. It sounds like things have normalized, but you have a little bit of a hole to dig out of, particularly around the gross margin, so I just was curious to know if there are any sort of incremental offsets on the positive side that keep you confident in your full-year ranges?

I think that we -- Ed, we continue to see nice improvement in our productivity and our expense control around the country, and that was evident in this quarter in particular, and I think we'll continue to see that. The topline sales for sure is a terrific positive that we certainly think is going to continue throughout the year and that will really help us.

So I think those are the two primary drivers that I can think of. It is a terrific time to be in the industry. Yes, we had a higher degree of supplier out-of-stocks that we didn't anticipate, but it is a pretty high-class problem to have.

Fair enough. And then just to follow-up on the recent normalization. So is that to say that none of these issues will be material to the gross margin in the second quarter?

When we looked at the gross margin trends which kind of started in the last period of last fiscal year and into the first two periods of this quarter, that is where we saw the majority of the decline. When we look at P3 of our first quarter a lot of those margin components normalized to more historical levels. So we have a fair amount of confidence that those issues that we mentioned in the call are behind us.

Okay. And then just one last kind of clarification question. If I look at the sequential increase in your balance sheet inventories, it was actually higher than usual this quarter, which is a little bit surprising given that there were some tight supply issues. How do those things go hand-in-hand?

I think that the sales -- as we mentioned, Ed, the sales coming out of Q4 and into Q1 we saw an acceleration, and so -- I presume you're talking from just a straight dollar standpoint.

Yes, I am just looking at like the percentage inventory growth from Q4 to Q1 this year versus prior years; it was on the higher end of the range of what we typically see.

Yes, so it was a factor of the sales. And I think as I mentioned in my comments, we were at 49 days versus being at 52 days last year. And a portion of that last year might have been the -- we could certainly attribute to the new national customer we had taken on.

But certainly we would have probably been happier being at 50 or 51 days of inventory at the end of the quarter, which would have been another $20 million to $25 million higher. So it really is just a reflection of where the sales are running at in trying to get to that level.

If you think of it from the standpoint -- I am not sure where your calc is coming out percentagewise, but if you were to think that it should be lower, that might have put us at say 48 days or 47 days of inventory, which would be relatively tight historically for us going into the holidays.

So I understand what you're saying, but just by virtue of the strength of the sales, even though the jump might have been higher from Q4 to Q1, the sales dictated that we have that higher inventory level. And, again, we could have used more if it had been available.

It makes sense. Thanks for taking the questions.

Scott Mushkin, Jefferies & Company.

I wanted to go where Ed was going in his first question. I am just trying to understand what you guys believe normalized operating margins were in the quarter, because if I take out some of these one-time items -- and I don't like to give companies a lot of excuses, but I actually do feel like a lot of it what you saw was one-time. And then also -- and I don't think you quantified it, the strike and the extra cost, you called out the extra costs, but you didn't quantify them. And it seems like your operating margins were probably over 3% if we normalized stuff, maybe even higher than that.

And so I am wondering -- that is a good number, and what is your confidence? I know we have debated this back-and-forth on calls for the last year or so that underneath the hood we are really at a -- we are going to see operating margins really turn the corner here and move up. Because if I look at it, it seems like they did in the first quarter, and I just wanted to get your comments on that.

I think I will start off, and then Steve will probably jump in and we will try to cover all those questions. We may need you to repeat a couple parts of that.

But as we look at the first quarter and the way things ended up, certainly what gives us confidence in where the number might have been and where we're back to on a more normalize run rate is that we saw the gross margin come back in the third period of the quarter to a level that was in line and slightly above where we averaged for the fourth quarter.

So you can do the math and presume that the other two months of the quarter were lower if we averaged out to being down almost 50 basis points. So that is what gives us the confidence that it is an issue that we can address. And we have seen the supplier out-of-stocks moving positively towards the levels that we saw last year -- you know, and decreasing. So there is optimism that as some of these issues get behind us we will get back to normalized gross margin levels and normalized supplier out-of-stocks, which given the current demand in the industry should continue to fuel the sales growth.

And, Scott, I will just add a little more color there. We have given long-term guidance on our operating margin, which we are still very comfortable with. We delivered some nice operating margin improvement during our last fiscal year and still feel good that we are going to be able to deliver against those targets.

As it relates to the union collective bargaining issue, during the quarter it was about $1 million. We are really hopeful that we're going to get that behind us soon, but it is what it is at this point.

And is that in the gross margins or where is that? I probably should know.

That is in the expenses.

Yes, the expense side.

Okay, so $1 million. And then my second follow-up question is -- and I know you said 70% were due to the -- I think the out-of-stocks but also the technology implementation. And so this goes to the technology implementation. The Company has had a -- before, Steve, you got there, has had a long track record -- I have been following it for a long time -- of really struggling to get technology into its distribution network.

You obviously came and your teams come with a great background in getting it done in other places. Is there something different about UNFI that it really causes issues, or do you think as you guys learn and move forward that what we have seen as far as technology rollout, whether it is in distribution centers or whether it is with the logistics network, will these fade over time or is there something more systemic or harder about doing it at UNFI?

I think that is a good question. First and foremost, I think these decisions that we are making and these implementations that we are doing are really transformational for the Company. Yes, maybe we have a few more disparate systems; maybe they're a little older. But I don't really view them as being any more difficult or complicated than any that we have done in the past.

A lot of the issues around IT implementations relate not necessarily to the system but to change management. And that is the training of the people, getting them to get on-board with the fact that their entire life is going to change, because the way they have done it for 20 years is going to go away and they're going to have to adjust to a new methodology.

So TMS, in particular, had to be done, needed to be done. Yes, maybe a little bit more complicated than we thought, but not that much. As it relates to the WM implementations, it is a little bit more complicated, because of the diversity of systems around the country, whether it be in carousels and the systems that we use to manage the carousels, whether it be in the legacy systems.

But we had a tremendous amount of success with Ridgefield. We had a great management team, we really took our time. We delayed it, as you know, and in the end we ended up with a terrific implementation. So I think that is my general view. Sean, do you have any additional comments you want to make?

No, I agree, Steve. Technology, of course, played a major role in our learnings coming out of Lancaster and we applied those learnings to Ridgefield and we all feel good about where we are in that respect.

To put some color behind the Transportation Management System, on any given quarter UNFI moves in the range of 800 million pounds of freight in a fairly complex network. The technology related to TMS has worked as it is intended to work throughout the process. It really has been an iterative change management opportunity to get fully realized and be able to book the returns that we had expected with the system.

Looking at, again, how we have performed since the implementation rollout June/July, versus what it looks like in terms of the percentage of freight that we are moving and the income related to that freight in October, we feel pretty good about being on track.

And business process is really where our opportunity lies. And we have learned a lot. We are benchmarking the heck out of all of the initiatives that we are rolling out through the supply chain. And this one in particular, though complex and has taken some time to realize, we feel good about it.

All right, guys, I actually have more questions, I will just get back in the queue if they are not asked. Thank you so much for your answers.

Meredith Adler, Barclays.

I guess I have a couple of questions. I didn't quite hear what you said about how many of your employees are unionized. I think you said 5%.

Yes, less than 5%.

Okay. But I was just wondering, what would be the strategy, the longer-term strategy, in terms of dealing with this kind of labor difficulty even though it is limited to one area? How do you approach it?

I think it would be inappropriate to get into a discussion about UNFI's relationship with a single bargaining unit. We have had a 20-year great relationship with this local. We feel as though we have put out a very reasonable offer to get this thing resolved, and for one reason or another we just can't get there.

So all we can do is continue to negotiate, but continue to negotiate in a way that says we are just never going to be in a position to offer a collective bargaining unit a benefit, compensation package that goes beyond what we do for the rest of our associates across the country.

Okay, that is fair. And I should have known better that you're not going to talk about it while it is still going on. Another question I have is in terms of the out-of-stocks they sounded like there were two issues, one of them were raw material shortages, and maybe the other was the very strong demand for the holidays.

I'm not sure that you can do anything necessarily to help the first problem, but how do you address the second problem or even the first problem? Is there enough variety out there for you to be able to find other products to sell to your customers, and say, listen, this is just as good, people will want this, or do you have to live with those issues?

Well, let me go back to the first part of your question. There is a third component as well, and that is that when we have a higher degree of out-of-stocks we also lose out not only in the gross margin from the lost sales, but from the reduced trade spend. Because obviously when suppliers have significant out-of-stocks they are not going to promote the product. So we loose across a couple of channels.

As it relates to the out-of-stocks themselves, I think that we had some pretty unusual ingredient shortages that were pretty prevalent. I think that a couple of things happened. One, suppliers add more capacity. When demand increases for a sustained period of time they add capacity, similar to what we are doing with building new buildings, it just takes a little time.

The other interesting thing that happens in our industry is that a large percentage of our suppliers use co-packers to produce their product. They don't own their plant. So as they reach capacity in one co-packer, they either have to get that co-packer to add capacity or they need to find another co-packer who is willing to make the product. And these things just take time. But we are pretty confident that the system is robust enough that they will produce more product.

And I think that will happen, and we have seen it happen already. So we have a fair degree of confidence that prior out-of-stocks will mitigate. Sean, I don't know, do you have anything to add?

Well, also, it is just the current demand and capacity issues leading up to and through the holidays. So as we peak the holidays and get into a different cycle it gives the suppliers an opportunity to reevaluate capacity, take a breath, if you will, and get on track to the current demand. And we are seeing that in our numbers.

And one category that has been all over the news is nut butters -- organic nut butters, peanut butter in particular. And when we are out of stock on an item like that it has two compounding effects. One, you're out of stock on the case, and two, Nut Butters are very expensive, so your dollar outs grow significantly when you have a category like that with an out.

Okay, that is fair. I guess my final question is maybe a little bit of a tougher question. And if Scott is looking at the glass half full, I will look at the glass half empty. It seems to me that as an industry and as a company you have two things going on that create a lot of unusual impacts. The first is tremendous growth in the industry and the second is your effort to become a much more streamlined, efficient business.

I guess the question is how long does that last? Should we anticipate that this kind of thing is going to happen for a while? I am not saying there is anything wrong with having these issues, but I feel like everybody wants to just wipe it out, but if it is going to continue they shouldn't. I just happen to be in the camp that you can exclude the one-time costs for Safeway. You can when you compare year-over-year but you can't when you think about the earnings power of the Company. So it is a little bit along the same lines.

I am not sure exactly what the question is, but I think at the end of the day our net earnings and EPS still grew over 15% during the quarter. So, yes, we had some one-timers that were painful, I would agree with that.

But I think with what you are saying really from an operating standpoint the write-off -- and if we look at this fiscal year, we are not trying to pull out the impact on the gross margin as one-time. We are explaining what the elements are that were behind it, and the only item that we are addressing is the impairment and the ending of that royalty agreement.

So we can disagree, and we have in the past, on the on-boarding of a customer the size of Safeway, but I think to Steve's point if you want to leave the information in, on a GAAP basis it was up 42%. If you want to pull it out, you can get somewhere between -- I don't know what the number would be if you pulled out the Safeway piece, but you would still be in double-digits up. So it is -- everyone comes up with a different perspective in that sense.

And Sean just made an interesting point which is true, and that is as a management team we are extremely disciplined in the sense that we are building the Company for the long-term. And so we are going to make decisions that we need to for the long-term and that means implementing systems like TMS, implementing systems like WM in our warehouses, increasing the CapEx to add capacity with three new buildings.

If we were more focused on near-term results, I am not sure that we would be doing those things. But we have a high degree of confidence in the industry, in the industry's growth, and obviously our ability to deliver both topline growth as well as bottom-line margin expansion and bottom-line earnings growth. So we view this quarter and the things that happened in it as just part of the process.

I think, also that in transformational initiatives such as are underway at UNFI it is always a balance -- this is obvious, but I think it important to say it -- there is always a balance around how fast we move versus the risk. So we believe that we are taking the appropriate balanced approach to both speed and risk mitigation.

I am sorry, I didn't mean to be criticizing what you were doing, because I applaud the long-term approach, and you have to do it, your business is growing very quickly.

Probably the message was really for investors that the entire package of what you are includes needing to make investments in facilities and technology, and nothing ever goes perfectly smoothly and that is the nature of the business. But I guess that was a little bit of getting on my soapbox, so I apologize.

Meredith, no problem.

And we try to be as transparent. We put -- as much as it caused some pressure on the stock when we gave our fourth-quarter earnings, we don't break out when we open up new facilities as nonrecurring. We put the costs associated with Denver -- the new Denver facility in and the cost of relocating from one facility to the other into our GAAP guidance. We provide the information so that those investors who want to exclude it have the opportunity to do so, but from our standpoint it is in the numbers.

So, you're right, not everything goes perfectly, and that is why there is a range for the guidance. But from our standpoint we try to include as much as of that in our guidance that we give to the Street and give them the opportunity to pull it out if they so desire.

That is fair. Thank you. That is very helpful.

Karen Short, BMO Capital Markets.

Actually, just on that note in terms of guidance, I assume you are maintaining your prior fiscal 2013 guidance, even though there has been a lot of noise. I just wanted to clarify that.

Yes, so we did not make any changes to the guidance. So what we gave at the end of the fourth-quarter setting for fiscal 2013 is still in effect.

Okay. And I guess then turning to sales, I am wondering if you could make any comments on sales trends or the cadence of sales into -- or during the first quarter and then sales trends into the second quarter?

The sales trends have been pretty consistent across both quarters. As I mentioned in my prepared commentary, we do lap the Safeway business -- we just lapped the Safeway business. So you will see some moderation. It is probably 3% to 4% in our overall topline through the rest of the year, but the net sales growth continues to be strong.

Okay. Then on the strike -- or negotiations, is that something that we should expect ongoing costs into the second quarter from that?

It is hard to know. If we need to, we will. We are hoping that we can get it settled as fast as we possibly can.

Okay. And then I am going to --.

Karen, just to add to that, but as we sit here today we have continued to incur costs into November because we haven't yet reached a resolution.

And we continued to be prepared to do that in an effort to make sure that our customers get serviced.

Okay. And then just turning to the supplier out-of-stock issue, I guess -- I understand what you are saying, but in general it would seem that the out-of-stocks or the supply issue would have maybe impacted like the little guy, like the independent a little more than supernatural or the supermarkets. But the organic growth rate at the independents were still really strong this quarter, so I don't know if there is any color you could provide there.

Out-of-tocks for us affects everybody equally, because we don't -- we don't treat any customers differently as it relates to the supplier out-of-stocks. So the supplier out-of-stock rate you would apply equally across all three or four of our channels.

But I think to the question, or a little -- to add on to what you are asking, I think it reflects the strength of the industry right now is that all the channels put up strong numbers, and had we had that additional inventory and been in a position to sell it through, our growth rate, while strong for the quarter, may have been even higher.

That is a good point, yes.

Okay, and so you would say the supply issues are what, 80% resolved at this point, 60%?

That is hard to know. Do you have any feel?

I would just say the indications are that it is improving and has been improving, but I don't feel comfortable with any -- putting any kind of a relative value to that.

Okay. So then the last question is just any update on the rollout of systems to other facilities? Do you know for -- I guess, the first thing is that are you still feeling pretty comfortable that you will be able to do two more facilities this fiscal year, and any idea which facilities you are planning on doing?

We continue to feel good about Ridgefield, and I commented that Lancaster as well is performing to expectations. And we continue to benchmark the performance of both of these distribution centers against overall performance. So we're not there yet where we can describe where we go next, and we certainly will communicate that when we have that nailed down.

But it is not --?

Yes, we just don't yet have a firm answer on when and where the next DCs are going to be. So I would say that it is unlikely that we're going to do two this fiscal year; likely that we will do one.

Okay, that is helpful, thanks. Yes, you have a lot going on, I realize.

Sean Naughton, Piper Jaffray.

Mark, maybe you can talk a little bit about the inflation front, maybe what you are expecting for the next three to six months. We did see a little bit of moderation here in the quarter. And then as it relates to that, what you are seeing in terms of your fuel prices. Do you continue to expect to get that benefit spread to the overall national average?

Yes, so with respect to inflation, I would say that we still feel pretty comfortable with the guidance or the range that we had given at the start of the year or the end of the fourth quarter, which is probably somewhere between 2% and 2.5%, at least through the second quarter. I might say through part of the third quarter at this point just based on where it is coming out on a monthly basis.

So we have seen some price increases going through, but those price increases were more in the range of 2% to 3% for certain customers, or certain suppliers, I should say, and all that would do is maintain the current rate of inflation that we have. So I think that as we sit here today for the next three to six months we are probably still in that 2% to 2.5% range, but as we continue to have shortages there could be an impact where the suppliers are fighting over the supply that is out there and that could lead to increases as well at some point. It hasn't happened yet, but it could.

And then -- sorry, the second part of the question again, Sean?

It was just on the fuel, what you were expecting on that front moving forward.

So as a Company, we continue -- Sean's team continues to evaluate where fuel prices are. And when it is opportunistic for us or we are comfortable with where it is versus our plan, we will lock into fixed-price contracts that give us some protection.

We have been successful in mitigating some of the rise in prices by virtue of the efforts that we undertake regularly to look at the routes that we have and reduce the miles that we are traveling. And so I think that we will still see some pressure on fuel prices, particularly this time of year. We will probably see diesel prices go up through February or March. But we have got a portion of ours locked in and that mitigates where the overall national average comes in versus our own performance.

Got it.

I would expect a single-digit movement as long as diesel prices don't move double-digits or more.

Got it. And then, I guess, just on the gross margin line, obviously a number of things impacting that in the quarter, but as we look out -- and I think, Stevie, you had mentioned that as you anniversary Safeway the growth may come down a little bit. Is there any change -- possibility that the change in the growth in the mix from where you're getting your sales and your channels of distribution could actually start to be a little bit less of a drag as we move through the balance of the year on the gross margin line?

I think in our own internal forecasts, thought process, once we lap that business, our belief was that there would be some moderation. Now one thing that is working both with us and against us is our continued strength in the supernatural channel, which is just phenomenal growth, which adds a little bit of an additional wrinkle. But I think that our view was that once we got a year past the Safeway business that what you describe would happen.

That is helpful. Thank you and best of luck for second quarter.

Andrew Wolf, BB&T Capital.

On the sales side, just kind of pro forma'ing it for the lost sales from the vendors not being in stock, and you take out Safeway, and so you look at core business, but you add in what could have been sold if it was in stock, it looked to me like the case growth actually would have accelerated sequentially pretty stunning.

And assume that is the case -- and I guess you would have to analyze your orders more than your shipping to figure that out -- can you comment on what -- if there is anything going on either with the categories? It sounds like -- or maybe elaborate more on where you're seeing accelerating growth in any of the channels or segments that you comment on?

Are you talking about specific product categories that are seeing high-growth?

If I am right that it has accelerating -- or accelerated in the period, the case growth, it looked like it accelerated on a pro forma basis?

Yes, I mean, it is --.

Where would that be going on either by category or by customer grouping or any other way you would want to describe it?

It is the same categories that we talk about every quarter -- it just continued to show remarkable growth -- and that is in organic produce, in particular. They lead the way every single quarter in year-over-year growth, followed probably pretty closely by continued growth in organic dairy, core center store items like cereals and snacks, nuts, those are the primary drivers of just tremendous growth in the organic category.

We also see a lot of growth in the specialty side, but that is more a factor of additional customer concentration more than it is year-over-year net category growth. But I don't think there is anything unusual about the categories that continue to show significant strength.

On the channel side, one of the things that obviously makes us very happy is when the independents start growing pretty close to 10%, which is what they did. And so we are incredibly optimistic that is a good indicator for the industry.

Thanks. I want to follow up on the supermarket channel specifically. Barron's wrote a piece about Hain being cautionary that you can get product on the shelves at Wal-Mart or a supermarket, but it may not move. You see that movement, and you have gotten -- with Safeway it is not like you have gotten your product on the shelf, but you have displaced another distributor. But not -- just the whole channel, the whole supermarket channel, as you get the sales that you're getting out of that ex-Safeway, which I know is a pretty positive number even excluding the new Safeway business, is that more velocity? I mean, are the items that you sell moving out of the supermarket channel or is it just adding more items, which as Barron's may not move -- you can get stuff on the shelf, but it may not move?

I read that article, and was really disappointed by it. I felt like a lot of the data they used was very old. Hain is a terrific supplier for us. We have been an incredibly close relationship with them. What is good for us is good for them and vice versa. It is extremely mutually beneficial. So I didn't buy into that article one bit.

As far as the second part of the question --.

I think it is both. Certainly the conventional supermarkets continue to add SKUs, but when we look at what they're adding versus what our volumes are doing, it is moving off the shelves. Having said that, we have talked in the past that anywhere from 7% to 10% of what we sell was introduced in a given year, and as a result there are some products that don't move and some that do, and so there may be an aspect of brands that are introduced and they don't have success whether it is at the independent, supernatural or the conventional supermarket. But there are just as many that come on the scene and take off that have phenomenal growth.

And I would answer it a little bit differently, Andy, in that I think that Hain's job and UNFI's job is very aligned in the sense that for us we view our responsibility is to get organic out into as many possible consumers' hands as we can. And that means if we have got to do it by reaching out to the independent channel, we do it; the supermarket channel, we do it; the supernatural channel, we do it; the mass channel, we do it.

I think that it benefits the industry in the sense that the more successful we can be in getting penetration of Hain's products or anybody else's products out to as many retailers as possible, it is going to benefit the overall industry at the end of the day. Because if somebody starts in a -- starts buying one or two organic items in a retailer -- a mass retailer, history proves that over the course of time they're going to become what we call a crossover shopper.

That mass retailer is not going to be able to satisfy that consumer's demand. That consumer is going to then need to go to either a conventional retailer with a broad offering, or to Whole Foods or to an independent, and that benefits us.

Okay, got you. So it does sound like there is some velocity movement all over the place, it is not just --. And in particular with supermarkets where conventional items, not Campbell Soup -- not to pick on Campbell's, but that stuff isn't -- you know, the velocity has been the wrong way.

Okay. And the only other thing I want to ask on the -- you called out, I think, $4.2 million of gross profit dollars that would have come if the vendors had been in stock. And, obviously, you're using the lower depressed rate on gross profit margin from this quarter. I won't quibble over that.

But what I really want to get to is -- now that is not all pure contribution dollars, because that still would've had to have been moved in the warehouse. There would have been some -- certainly item movement cost, you would have leveraged delivery.

Right.

So from my calculation it looks like it is about $0.02 to $0.03 of foregone earnings. Is that in the ballpark?

That is probably in the range, yes.

Okay, thank you.

Stephen Grambling, Goldman Sachs.

So there are lots of discussion on the strength in natural and organic, and I know that specialty has been something that is discussed as an opportunity. Can you maybe help us frame that in terms of the size, what channels that can open up, and then also maybe a margin opportunity going forward?

Sure. UNFI got into the specialty business in 2007 with its acquisition of Millbrook Distribution. Today we have got a pretty small share of the overall specialty foods market. Obviously, we have a much greater share of the organic market, but the specialty market itself is a -- directionally this is accurate, it is not exact -- it is probably a $40 billion industry. So when you look out a couple of years, the greatest opportunity we have in terms of selling additional categories of product is in the specialty space.

The reason that our conventional channel -- supermarket channel -- is increasing at 25% a quarter is because we are selling more and more conventional product to customers where historically we either only sold them natural and organic or we couldn't sell them at all because we didn't have natural, organic and specialty. So there is just a tremendous amount of room for UNFI to grow organically in specialty as well as through M&A in specialty.

And so maybe a quick follow-up on that. In terms of the M&A aspect, are there opportunities that you're seeing that are coming up that are actually increasing or increasing opportunities as a result of the current environment or has that been more steady-state and it is still just very fragmented?

It has been steady-state. We didn't -- interestingly, we didn't really see any pick-up in the deal flow related to the end of the year, which was surprising. We did -- we made two acquisitions that we talked about in Canada. They were primarily specialty foods companies. And there are lots of opportunities for us here in the US. But we look at them as they come up. We are not in the market for fixer-uppers. We have got a pretty disciplined approach to the way we approach M&A.

Great. And then one more granular question maybe for Mark. As we think about CapEx in the back half ramping up, should we be expecting SG&A at the same time, at least on a year-over-year basis, to ramp up, the core rate to be higher despite all the one-time items and noise?

You know, it is really a function of our standpoint as to where the volume comes from because our operating expenses to serve our customers are in operating -- so the ops expense to deliver warehouse, et cetera, is in our SG&A line. So if we see a substantial pick-up we will see some increases in the dollars even though the percentage may still get leveraged.

So if you're talking from a dollar standpoint, certainly we will see some growth there, but from a percentage standpoint it is where that growth comes, where we have talked in the past that the supernaturals and the supermarkets have lower operating expenses, where the independents have higher. So it is not an easy question to answer without knowing the mix in those quarters.

Understood, thanks so much.

Operator, we have time for one last question. I know there are still a few people in the queue, but we are pretty much out of time at this point. So this will have to be the last question.

Ann Gurkin, Davenport.

I wanted to follow up a little bit more on the M&A. Are there opportunities particularly in Canada for M&A opportunities over the next couple of years?

Absolutely. We have done quite a few follow-on acquisitions in Canada. As you know, we have talked about those over the last couple of quarters. I think we have done -- since we made the initial acquisition in Canada and 2010, I think we have done -- how many have we done in Canada -- two or three?

Two in Canada since then.

Two in Canada since then. We have got a nice pipeline there. We love being in Canada. So we are tremendously optimistic. And, again, we continue to look at opportunities in the United States as well, both in terms of specialty foods companies, niche players in the organic segment, perishable companies. We just acquired a company through our Albert's division that we closed on in the last quarter that will be extremely important to us in the sense of sourcing organic product.

So I think there are lots of opportunities, we have got a very disciplined approach to which ones are the right ones and which ones are the wrong ones.

Great. And then, Steve, if I could just ask you, in the food space this week we had the consolidation or the pending acquisition of Ralston by ConAgra and the interest in private label. So I would be curious your opinion on private label. Are you working with customers to work towards more private-label organic or how do you that maybe unfolding in the organic segment and UNFI, if you don't mind commenting on that?

So, first, UNFI has several what a lot of people would call private label brands. The first one is a brand called Field Day, which we rolled out about two years ago. It is now a $12 million organic brand. Very proud of the fact that brand is a non-GMO brand predominately, which is one of the only brands out there that is.

We also have a brand called Woodstock Farms, which is private to UNFI, and that is a $50 million brand for us. As we look out into the retailers, the organic -- the big retailers in the conventional, supernatural space have had private label organic brands for some time.

I would say that we haven't seen any significant increase in the number of SKUs rolling out in private label. But they are extremely popular and there is certainly a lot of volume that flows through those brands, and we carry a lot of them in their warehouses. But I don't think that we are seeing a migration towards a significantly increased number of items flowing out under the customer private labels.

That is great. That is very helpful. Thank you.

That does conclude our question-and-answer session. I would like to turn it back to management for any closing remarks.

Thanks again, everybody, for joining us this morning. We had a lot going on and I hope the call helped answer a lot of your questions. Have a terrific holiday season, and we look forward to catching up with you again at the end of our second quarter.

Ladies and gentlemen, this concludes the United Natural Foods fiscal 2013 first-quarter results conference call. If you'd like to listen to a replay of today's conference, please dial 1-800-406-7325, with the access code of 457-5783. We would like to thank you for your participation. You may now disconnect.