United Natural Foods Inc (UNFI) 2014 Q4 法說會逐字稿

Greetings and welcome to the United Natural Foods fourth quarter 2014 earnings conference call.

(Operator Instructions)

I'd now like to turn the conference over to your host, Hunter Wells of ICR.

Thank you, operator and good afternoon, everyone. By now you should have all received a copy of the fourth quarter and full-year FY14 earnings press release issued this afternoon at approximately 4:05 PM Eastern Time. If anyone still needs to review the release, please reference the investor section of the website at www.UNFI.com. As a reminder, the webcast of this earnings call is also available on the Company's website. On the call today are Steve Spinner, President and Chief Executive Officer, and Mark Shamber, Chief Financial Officer.

Before we begin, we would like to remind everyone comments made by management during today's call may contain forward-looking statements. These forward-looking statements discuss plans, expectations, estimates, and projections, that might involve significant risk and uncertainties. Actual results may differ materially from the results discussed in these forward-looking statements.

Additionally in today's earnings press release and during the call the Company will 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 GAAP 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 the Company's earnings release issued earlier today, available on our corporate website under investors.

With that, I would now like to turn the call over to Steve Spinner.

Good afternoon, and thank you Hunter. Joining Mark and I this afternoon in Sacramento, California are Karl and Scott Berger, who are the co-Presidents at Tony's Fine Foods, our newest member of the UNFI family.

FY14 was a very successful year, highlighted by continued revenue growth of over 12% and operating income growth of over 13%. Looking back over three years, on a compounded basis, revenue has grown almost 15% and operating profit has grown almost 18%. These results have been highlighted by a team of approximately 8,700 associates, driven toward connecting farms and manufacturers to retailers and families.

Today, UNFI's products and services are close to every market throughout the United States and Canada. From organic produce, natural supplements, ethnic specialty, and commodity organic, to perishable specialty, e-commerce, non-GMO brands, natural proteins, specialty cheese, and private label production across frozen, refrigerated and dry, UNFI is extremely well positioned to grow in an industry dominated by high demand, and a very strong future.

With our almost 15% compounded annual growth rate, creating optimal capacity is of the utmost importance. Anticipating strong demand over a three-year timeline, UNFI launched an aggressive construction schedule, which delivered two new centers in FY14. Racine, Wisconsin is now online, and Hudson Valley, New York is now receiving inventory.

During FY15, we will begin shipping from Hudson Valley, serving the New York City metropolitan area, and our UNFI Twin Cities facility in Prescott, Wisconsin serving Minneapolis and St. Paul, Minnesota. These facilities provide us with the ability to address capacity issues, grow with new and existing retailers, bringing us closest to the consumers, and reduce our miles driven. In our business, managing distribution expense is critical, and having distribution centers close to the customer provides us with a very unique position as the low-cost, high-service provider.

There are significant upfront costs to opening these buildings, including recruiting, hiring, training, and receiving, all before a case is shipped. Additionally, when we cede volume from an existing facility into a new facility we temporarily have two buildings operating at less than ideal efficiency. This is a phenomenon that lasts approximately 6 to 12 months.

Expense drag associated with building openings and volume shifts during the fourth quarter was approximately $2.5 million, and we anticipate that this phenomenon will continue at a rate of approximately $12 million in FY15. But despite the short-term impact associated with our construction strategy, in the long term, UNFI will be in a terrific position to compete for new business, service our retailers, and run our network in the most efficient and closest to the customer structure.

During FY14, we continued to make significant progress in our supply chain transformation, known as Thrive. Our business and technology teams have been successfully implemented new solutions that support our One Company goal and provide us with increased efficiencies across the enterprise.

Now, three years in, we have a fully-implemented national transportation management system, a national procurement system that is fully implemented in the West and will be completed in the East by the end of the second quarter of FY15, a national warehouse management system that is integrated into both of our business systems, and is now deployed in five DCs across the country, with several planned for FY15, and a national data warehouse.

As we continue our transformation efforts, our focus remains on our customers and our suppliers. In the long term, we are building a Company that has robust processes and enabling technologies that allow us to be easier to do business with, and supports the continued growth of our industry. For perspective, during FY14, we converted two existing warehouses to our warehouse management system, and brought two new distribution centers online.

Additionally, the implementation of our national procurement system in our western region increased service level approximately 4%, while reducing overall inventory by 4.7%. Our Eastern region system began conversion during the fourth quarter, and will be completed by the early second quarter of FY15.

We've also been busy implementing several new customer-facing technology improvements. iUNFI, our mobile order entry solution, continues to offer our customers superior intelligence in the aisle, with added realtime information on product status and relevant promotions. This translates into higher fill rates for iUNFI customers, over most other ordering methods.

This is of key importance for all customers, particularly our independents so we extended this capability to the Android platform, so more of our customers can benefit from this business boosting intelligence, while making their replenishment decisions. We now have over 2,000 units deployed.

We also launched our new customer portal, which offers new and improved functionality for our customers, such as search capabilities, order entry, new item introductions, and industry news, just to name a few. We are also committed to further streamlining our services with suppliers, to make it easier to do business with UNFI. We built out a new supplier portal platform, and will be rolling it out to suppliers early this year.

Also, our customers told us that being able to know when their estimated time of delivery will be is extremely important. In response, we developed UNFI Arrive, which allows customers to access real-time delivery information for their specific location. This exciting new program is now in test, and we look forward to rolling it out across the country.

E-commerce is also an area UNFI has been investing in. Since acquiring Honest Green two years ago, we have been building out our service offering to provide our customers every option for delivery, whether to store for retail, to store for consumer, or to consumer directly on behalf of our customers, UNFI is building out its infrastructure to support this important and growing channel. By the third quarter of FY15, UNFI will have approximately 15,000 products available online with complete digital images, and standardized attributes, through three primary distribution centers across the US.

We have also had considerable success managing our inbound freight, which improves service level and reduced cost. During FY14, our utilization of intermodal movement by rail grew over 50% to almost 10,000 loads, which in general is a much more cost-effective solution.

Another important component of UNFI's business strategy is reducing our carbon footprint, and during FY14, we improved our fleet fuel efficiency by 3.8% year-over-year. We laid plans with the addition of Racine and Hudson Valley to remove 2.8 million miles of distribution, improving both our customer delivery performance, while significantly reducing UNFI's carbon footprint.

Both of these two new distribution centers, along with Prescott, are expected to achieve LEED Gold certification. We also reduced our electricity and water usage intensity by 11.7% and 14.6% year-over-year respectively, despite our growth.

As for the UNFI Foundation, we awarded 51 grants to support organic agriculture this year, a 36% increase from last year. We funded non-profits to allow them to develop new organic farmers, conduct research, and teach organic farming practices and much, much more. And we funded three main areas, organic food production, research and science, and organic farming education.

Looking at the fourth quarter, we had several key short-term factors influencing our results. Service levels, as UNFI has begun ramping up inventory preparing for the 2014 holiday, we are again seeing supplier outages running approximately 1% higher than what our forecasting had anticipated. Perishable categories in particular are driving a significant share of this issue, and this was a contributor to our gross margin pressure during the quarter. While we have incurred additional costs on and off over the last few years as a result of these outs, we are confident that the shortages will abate.

Additionally, the Tony's acquisition Canadian FX also negatively impacted gross margin in the quarter. There was some revenue softness during our fourth quarter, which did extend into our first period of 2015; however, during the last several weeks, we have seen an improvement across all of our sales channels. Our numbers reflect a very robust slate of new store openings, and continued increasing demand for our products and new customers, and across our growing Tony's platform.

As our guidance suggests, looking towards FY15, we remain confident in the growth of the industry and continue demand for UNFI's product and services. A prime driver of our revenue growth in 2015 will be Tony's. Fueled by high demand for perishable specialty products, and our strategy to aggressively move across the country, we believe that our investment in capacity, infrastructure, and people will continue to deliver strong results to our shareholders long term.

And based on our estimated net sales for FY15, our business will have more than doubled over the last five years from $3.7 billion in FY09 to over $8 billion in FY15. The industry has also changed quite a bit in the last several years, with competition, and a far greater awareness relating to the health benefits of natural and organic products. These changes all benefit UNFI, as we are very well positioned to serve the needs of retailers across North America, with a broad array of products, with distribution centers in every major geography.

To demonstrate our new capacity, infrastructure and products, we will be holding a Investor Day at our new facility in Hudson Valley, New York, on October 21, 2015, with details to follow. And now I'll turn the call over to Mark Shamber, UNFI's Chief Financial Officer.

Thanks, Steve and good afternoon, everyone. Net sales for the fourth quarter of FY14 were $1.76 billion, which represents growth of 7.4% or approximately $122 million over the prior-year fourth quarter's net sales of $1.64 billion. In Q4, sales growth related to acquisitions accounted for approximately $64 million, or 3.9%. As a reminder, FY13 was a 53 week fiscal year, and that extra week occurred in last year's fourth quarter. Adjusted for the extra week, which represented approximately $119 million in net sales, fourth-quarter sales growth was 15.8%.

Inflation decreased 9 basis points sequentially, coming in at 1.55% versus the 1.64% rate in the third quarter. On a year-over-year basis, inflation was down 37 basis points, as inflation in last year's fourth quarter was 1.92%. On a full year basis, FY14 net sales increased by 12% to $6.79 billion or 14.3%, excluding the impact of the extra week.

Acquisitions contributed approximately $111 million, or approximately 1.8% of our FY14 sales growth. As Steve mentioned, through the first six weeks of our first quarter, our sales growth slowed modestly versus the growth trends in our fourth quarter, although we have started to see trends reaccelerate in the last couple of weeks.

For the fourth quarter of FY14, the Company reported net income of $33.4 million or $0.67 per diluted share, an increase of approximately 4% or $1.3 million over the prior year's fourth quarter, which contained the extra week. Net income for the fourth quarter of FY13 was $32.1 million or $0.65 per diluted share.

With respect to breaking down our growth by channel, I'll provide the results discussed in growth, adjusted for the extra week in the prior year, sales growth adjusted for both the extra week and excluding acquisitions, and then the percentage of total sales for the quarter. For example, super natural sales increased by 10.5% for the quarter adjusting for the extra week, 9.3%, also excluding the impact of acquisitions, and represented 34% of sales. Using the same sequencing, supermarket sales growth was 23.5% in Q4, 15.1% excluding acquisitions, and supermarkets were 27% of total sales.

The independent channel grew at 13.4% in the fourth quarter or 8.4%, excluding the impact of the Trudeau and Tony's acquisitions, and were 33% of sales in Q4. And finally, foodservice sales were up 25.4%, as acquisitions had no impact, and represented 3% of sales. A reconciliation to our actual growth by channel is available on our website.

Gross margin for the quarter showed an 88 basis point decline over the prior year's fourth quarter gross margin of 17.3%, coming in at 16.4%. Sequentially, this represented a 29 basis point decline over the third-quarter gross margin of 16.7%. Approximately half of the drop for the fourth quarter was due to the impact of the lower gross margin associated with Tony's Fine Foods. The remainder of the drop was mostly due to customer mix and weakness in foreign exchange rates of the Canadian Dollar.

Our operating expenses for the quarter were 13.5% of net sales, compared to 13.9% for the same period last year. This represents a 36 basis point improvement over the prior year, as operating expenses as a percentage of net sales benefited from a variety of areas. As discussed in the press release, within our operating expenses, we incurred approximately $0.9 million of additional expenses associated with the acquisition of Tony's.

We also incurred $1.5 million of non-recurring expenses associated with the start up of the Hudson Valley and Racine facilities, as well as duplicate rent for our Denver facility. Combined, these expenses represented approximately 13 basis points of expense in the fourth quarter.

For the quarter, fuel costs decreased by 2 basis points in comparison to the fourth quarter of FY13, as fuel represented 73 basis points of net sales in the quarter. Our diesel fuel costs in the fourth quarter increased by approximately 0.3% versus same period in FY13, while the Department of Energy's national average was up approximately 0.9% over the prior year.

Share-based compensation expense totaled $1.5 million in the quarter, compared to $4.1 million in the prior year's fourth quarter. This led to share based compensation expense representing 8 basis points of net sales in the quarter compared to 25 basis points in the fourth quarter of FY13. The decrease in this area was due to lower performance-based long-term equity compensation, driven primarily by the failure to achieve the threshold set forth in our two year LTIP award, one of which was the performance of the Company's stock in relation to the specified comparator group.

Operating income for the fourth quarter was $51.3 million, a decline of $4.8 million from the prior year's operating income of $56.1 million. Our operating margin in Q4 was 2.9%, a 51 basis point decline from the fourth quarter of FY13, when the operating margin was 3.4%; however, the benefit of the change in the Denver lease accounting in last year's fourth quarter was approximately 18 basis points, or $3 million.

Interest expense in the quarter of $1.8 million was approximately 7.5% lower than the prior year quarter, due to the change in our treatment of the Denver lease. The sequential decrease was due to lower average debt levels during most of the quarter, primarily due to lower working capital levels, partially offset by the higher debt levels following the closing of the Tony's transaction in mid-July.

Inventory was $835 million at quarter end, as our days inventory on hand averaged 51 days for the fourth quarter. This reflects a day improvement over last year's fourth quarter, when we were at 52 days. Our lower days on hand is being driven solely by the impact of the acquisition of Tony's Fine Foods. If Tony's were excluded, we would be at 52 days, consistent with 2013's fourth quarter. Inventory levels were higher than target based on building inventory levels at our Racine, Wisconsin facility, as we ramp up sales volume out of that location.

DSO for the fourth quarter increased by about a day to 22 days over the prior-year quarter, and was up about the same over the third quarter. Capital expenditures were $39.4 million, or 2.2% of net sales for the quarter, primarily related to our new facilities in California, Wisconsin and New York. For FY14, capital expenditures were $147.3 million or 2.2% of net sales, which was in line with our guidance.

Outstanding commitments under our credit facility were $452 million at quarter end, with available liquidity of approximately $151 million, including cash and cash equivalents. Subsequent to year-end, we successfully closed on $150 million term loan facility, increasing our availability under our credit facility by that same amount. Our leverage at the end of FY14 increased approximately 1.7 times on a trailing 12-month basis, following the acquisition of Tony's.

For the fourth quarter, we generated about $44 million of free cash, although we finished the year in a negative free cash flow position, due to our investment in new facilities, as we have communicated during the course of the year. As is typically the case, leverage will increase in the first half of FY15, as we invest in inventory for the upcoming holiday season. As discussed in the Press Release, we have provided our financial outlook for FY15 ending August 1, 2015.

For FY15, we expect sales in the range of approximately $8.13 billion to $8.38 billion, an increase of approximately 19.7% to 23.7% over FY14. GAAP earnings per diluted share for FY15 is expected to be in the range of approximately $2.88 to $3.01 per share, an increase of approximately 14.3% to 19.4% over FY14 GAAP earnings per diluted share of $2.52. Included in our FY15 earnings guidance is approximately $3 million to $3.5 million of non-recurring expenses associated with the planned opening of our new Hudson Valley, Wisconsin and Gilroy facilities.

Finally, we expect our capital expenditures net of the planned sale leaseback of the Company's new Twin Cities area distribution facility in Prescott, Wisconsin to be in the range of $130 million to $140 million or approximately 1.6% to 1.7% of expected FY15 net sales. Our new facilities in Hudson Valley, Gilroy and Prescott, along with continued investments in technology, represent the majority of planned capital expenditures in FY15. The gross expenditures for the Twin Cities construction are expected to be in the range of $35 million to $40 million.

Finally, we expect our FY15 tax rate to be in the range of 39.25% to 39.75%. At this point, I'll turn the call back over to the Operator to begin the question-and-answer session.

(Operator Instructions)

Our first question comes from Andrew Wolf from BB&T.

I wonder if you'd be able to give us a little more color on the extent of the softening? You gave us a timing which was helpful, and how much it flowed in July and August, and how much it's come back here in September?

Yes, I think Andy, it probably flowed 100 to 150 basis points late in the fourth quarter, and extended into a couple weeks into our FY15, but it seems to have come back, so we gained the 150 basis points that we lost. So we're not exactly sure why we saw a softening, so whatever softening seems to have dissipated.

So you're back at the old run rate, you're not saying it's went above it?

Correct. We're back at the run rate, although for the quarter, we'll have some of that drag associated with it for the few weeks that it hit.

I just wanted to clarify, I heard with regard to opening the distribution centers, Mark, you gave a hard dollar cost of $3 million to $3.5 million for this year, and I think Steve referenced a $12 million drag. And is the $12 million drag more of a -- have some hypothetical components to it that are non-cash, around estimating the inefficiencies, or is that also a gross hard dollar amount?

It's generally attributed -- well we've got two things going on, right? We've got the cost of opening up new facilities, which is hard, we know what it is, and then the second component is as we open up these facilities, we're actually ceding volume from existing facilities into the new ones, so what we're doing in a sense is, we're making both the facilities inefficient.

We're transferring volume from one efficient building to a brand new building, which is not particularly efficient, because it just doesn't have that much volume in it yet. So the $12 million is a rough estimate of what we think the drag is associated from that movement. The more successful we are, the less the drag, but it's something that we have to do, we do it very carefully, so as not to negatively impact the service level in the market, but it's a real number.

Andy, we've always talked in the past about the drag associated with new buildings for the first two to three quarters or three to four quarters from when they open, and so to the question, it's a hard number in the sense that we can match those facilities up against more mature facilities, and see what we're getting for expense leverage in those existing facilities. Whether they get exactly there and whether they get there in 6 or 12 months, that's the soft numbers associated with it. To Steve's last comment, if we get there in six months it will be less than $12 million. If we were to get there at the full 12 months, it's probably at that number or a little higher.

That's really helpful. But you're getting more than just the facility that's being opened back to a budget or something, it's also the facility with the transferred cost?

Yes, it's both facilities right? Because you're taking volume out, and you may have a higher number of people working in the facility than you need, until the volume ramps back up.

Okay and I guess the last question is on diminution in the -- or the contraction in the gross margin, when you said about 50/50 between Tony's and the other items, was it sequentially? Seems to be how the math works.

That comment on the elements for Q4 was sequentially, so that represented about half of the 29 basis points.

Okay, thank you. Appreciate it.

Our next question comes from Karen Short from Deutsche Bank.

I had to jump off just for a second, but in your prepared remarks, did you give the impact on the EPS from Tony's, so that we can back into what your core EPS growth rate is, and the same question I could ask for the top line?

We did not, Karen. The main reason being that it's a range. Tony's could contribute a greater than expected aspect of that range or less, and we debated that internally as to how much of that we were going to share. But from the element, I think as we go along, we could say what they are contributing on sales and the impact they are having on the margin to each quarter, but we don't want to get boiled down as we go through the year as to what part of guidance was Tony's, versus what part was the core business.

And just as a follow-up Karen, first of all, one correction. In my comments I said the Investor Day was October 21, 2015 and it's actually 2014, but we would expect to provide a lot more color around Tony's, or strategic plan for Tony's revenue related to earnings growth in October.

Okay, because I mean I guess the reason I'm asking is, if I apply a growth rate to Tony's, based on what you gave us in your press release when you made the announcement, so if I applied a revenue growth rate to Tony's and backed into your implied core revenue, I don't know that I see really any dramatic change in what you're guiding, versus what you previously guided. So I guess it makes me think there may not be any change in your core EPS growth rate, but it's hard to know, but if you don't want to go there, that's fine.

I was following you all the way until the end. So I would say consistent with the comments we made with the announcement in May and at the third quarter, I would say that Tony's has -- you certainly saw it in the fourth quarter, with regards to gross margin.

I would say that the guidance for next year has been with the lower operating margin, and so, if you were looking at it from the standpoint that the numbers didn't necessarily generate the 9 to 12 basis points of expansion that we've historically targeted on a consolidated basis, we probably would have that on the core UNFI business, as sort of an operating margin growth, along with the expansion of the margin. And then Tony's would be sort of melded into that to give us the range that we have. I mean that's probably the closest I can get you to, without giving the specific numbers.

Okay, that's helpful. I think that helps. I may follow-up, or wait until October 21. And then just on -- in terms of where you saw the deceleration and then the reacceleration, obviously, you just gave numbers in terms of channel growth excluding acquisitions, and it seems to be kind of the story that we've seen consistently, which is supermarkets seem to accelerate, especially on a two-year basis, whereas super natural and independent slightly decelerated on a two-year basis. Is that consistent with what you saw into the first few weeks of the first quarter, and when the recovery happened, was it broad-based, or any color you could give there?

I think interestingly, it was across all the channels. It wasn't across any one channel, and when it came back, it came back almost equally across all of the channels.

Okay, and then I guess just the last question. Steve, on the last earnings call, you gave some comments in terms of the competitive environment, and it made us wonder whether you're seeing a greater threat from going direct. I guess I was wondering, it comes up every call in general, in terms of the threat of going direct, but is there anything you're seeing that makes you think that anything has changed on that front?

No, no, Karen, and I tried to clarify it during the last call, but I think it was too late. There really hasn't been any change in the competitive environment. The reason we're building these buildings is so that we can be as close to the customer, with the most efficient distribution network, as anybody in the country, and that's what we've done.

So given that is almost completed, I think we're going to be in an enviable position of being able to win business, retain business, help our customers build their business, in a really efficient manner, which quite frankly, nobody else has. And so the long way of answering your question is that my point in making that comment was just to say that there is competition out there. Our challenge is to make sure that we're better than everybody else, which I think we are. But in the end, I think the competition from direct or from other distributors is pretty much the same today as it was two or three years ago.

Great, thanks.

Our next question comes from Rupesh Parikh from Oppenheimer.

Thanks for taking my questions. I had two more quick questions on Tony's. Is it possible to get the pro forma FY14 sales, and also, is there any noticeable seasonality in Tony's business?

We're only going to provide the information we're required from an SEC standpoint, and I'm pretty sure we aren't going to need to file their FY14. We referenced that their growth rate -- their sales growth as of 2013, September of 2013 was $713 million. I would say that they pretty much grew in line with the industry, so you can pick where you want to pick from the industry growth level to get a rough number for that, and I think that would put you in the ballpark. And then what was the second part of the question?

And is there any noticeable seasonality in the business for Tony's?

I would say that similar to UNFI's business, Tony's is softer in what would be our second quarter, the end of our second quarter, the start of our third quarter, and they are stronger in our fiscal fourth quarter than UNFI is.

Okay, and just shifting topics to inflation. How are you thinking about inflation for your business, excluding Tony's and Tony's alone.

Yes, I think for the last couple years we've been hopeful that inflation was going to creep up to 2.5% to 3%. It just hasn't done that, and we don't see anything in the future that would lead us to believe that we're going to see any significant inflation over the next year or so.

I do think we'll start to, because of some price announcements that are already gone, price increases have already been announced, I think that we will in the first quarter trend back towards 2% versus the slow and steady decline we've seen. But to Steve's point, I don't see it getting to 3% or if it did, it probably is at the very end of the fiscal year on the non-Tony's.

The only change to that is with the acquisition of Tony's, we do now have some inflation associated with proteins that we didn't have as much exposure to in the past, but I'm not sure it's going to move the needle a whole lot when we consolidate our inflation.

Okay, thank you, good luck next quarter.

Our next question comes from Scott Mushkin from Wolfe Research.

The first thing I wanted to dive into is looking at the super natural number that you guys put up in the quarter, 9.3, and I think it's about two-thirds or three-quarters of that comp is usually new store growth, and the other quarter of it is same-store sales growth. So my question is, one of your largest customers looks like maybe it stopped growing its comp store sales with you. Does that create business challenges for the Company, and deleveraging issues, or no?

Well Scott, we would never provide any comment on any individual customer. I can tell you they've got a very robust new store opening schedule, as you know, and so we're a direct beneficiary of that. But we would never get into any disclosure of any single customers' same-store comps.

I wasn't even trying to get disclosure. I want to understand if it creates business pressure for you, if that happens.

No, not at all.

No. From our standpoint, the growth is still at a level where we're getting leverage within our facilities from that standpoint, whether it's the comp growth or whether it's new store openings. And what that mix shift or what that element of mix might be within the comp, or within our comp, it's still helping us leverage our fixed expenses in the buildings.

That's what I was really asking, so I probably didn't ask it right. Second question I have is, obviously you're spending a lot, and I understand the idea of what you're trying to do, but when does CapEx settle down? Is this like a more normal level of spend that we're going to see? I think you're free cash flow negative this year, you're free cash flow negative, I think, in 2015 if our projections are right. When do we turn that investment dial back down?

Yes, so that's a great question. I think we talked about this, that 2014 and 2015 were going to be our primary investment years, in that once we get into 2016 and 2017, obviously we'll be a much larger Company, but we'll go back to a more historical less than 1% of revenue and CapEx, which will obviously help.

Yes, I'd say that 2016 would be a ramp down from where we are, Scott, and then 2017 we would probably be back in that 1% range.

Okay, perfect. My last question is more strategic than anything else, is that clearly, the business is changing a lot with a lot of these -- like a Kroger coming into the business. Do you think your investments are significant enough where you could convince someone that's taking product directly from the suppliers, to consider switching to outsourcing?

Yes, that's certainly part of our hope, that because of our access to data, our merchandising in the store, our retail category management, the way in which we move product around the country, because keep in mind that even though the industry has gotten a lot bigger, it still relies very much on what a typical conventional retailer would refer to as slow-moving product. And it's very hard for them to make that work, and we've got a very efficient model for distributing these types of products. So I think the answer is yes, and there is some historical data that would point to the fact that we can have a great deal of success in convincing retailers that we can handle those types of products more efficiently than they can.

Is there an example, Steve, that you have? And then I'll yield.

Yes, I wouldn't get into a specific customer example, but there's many, many examples where -- if you take a very popular line of soups, and as these items become more popular, let's say that 3 of the 30 soups become faster moving, and it makes sense for that conventional retailer -- and keep in mind we're only talking about one-third of our business in this example, because that's all it affects -- and that retailer says well it's cheaper for us to move those three SKUs into our captive warehouse. But in the end, what the data points to is, because of the way that they have to buy that product, they're out of stocks at shelf go up significantly.

And so even if they have to pay a little bit more by having us handle the distribution, they know their fill rate at the shelf could be 500, 600, 700 basis points higher than if they are trying to buy it direct. So whatever savings they might have on the distribution side, they lose, because they don't have the product to sell to the consumers. So I think the more sophisticated retailers have seen that, and have gradually migrated in this example, those three soups back to UNFI.

Interesting. Thanks for the detail, appreciate it.

Our next question comes from Jason DeRise from UBS.

I'm going to try to ask about Tony's Fine Food. I hope this piece of information you'll share. How is their customer mix different than yours? Are they over indexed somewhere or under indexed relative to your business?

I'll try to give it, because I'm not sure. I think the Tony's folks give their percentages off the top, but I would say that their concentration of super naturals is probably about half of ours, roughly half of ours, and then I'd defer to them on the supermarket and independent split.

This is Scott Berger. The retail upscale environment, which is the way we look at -- we look at our business by channel and we emphasize value, and upscale is our biggest class and it's in the range of 44% of our revenue, followed secondly by our value retail environment, which has been in the high to mid 30s, and then everything else from there is either traditional grocery, smaller independents, and foodservice operations.

Thank you, that helps. I wanted, shifting back to the bigger picture part of the business, there's consolidation going on, I'm sure, as always, in the distribution environment, but there's obviously a bigger one announced lately. Can you share what your thoughts are and how that affects your business, as perhaps smaller players start to get larger, your competition? Sorry, I'm trying to be, I should just say it. Nature's Best and KeHE, yes. Sorry.

Listen, I think at the end of the day, it's going to help us. Nature's Best was a relatively small regional Company, it did a good job and we compete with them every day, and have for a long time. They always been known as a local player. KeHE's also a good competitor, obviously much larger, and so that local small advantage, if you would call it that, is probably gone, but we're ready, we're prepared, and we know where we need to go and we know how to get there. There's always going to be changes in the marketplace, and one of the things that makes us as good as we are is, we're pretty nimble.

Okay and also there's an acquisition, high profile acquisition on the producer side of a bigger food Company buying one of the main natural players. How do you think that affects your business?

Yes, if you're referencing Annie's, again the consolidation on the manufacturing side has been going on for quite some time. They've been in the space, as have many of the other big CPG companies. We've got a pretty good relationship with them. And so if anything, again, our mission is to try to get natural and organic out to as many hands as we possibly can and if they help us do it, then that's okay. But there's not a lot we can do to control that, so we tend not to worry about it.

Okay, thank you. Well, sorry one last question. Could you just share a little bit more on the thought process of why we are not going to get more than the minimum on Tony's Fine Food? It's -- the way we have it estimated, it's more than 10% of your sales. And it's got a very different P&L structure, and cash flow structure. Could you just share why we are not going to get the full details?

I think at this point, it's still relatively new. We're still learning the business, we're still understanding the revenue streams, and quite frankly we don't want to lock ourselves into a box. We think that the disclosures that we provided are probably adequate for you to get the information that you need. And once we get to a point where we're more comfortable with how the Tony's platform is rolling out across the country, looking at the overlap in terms of our sales mix, looking at any potential negatives that might be perceived out of the acquisition, I think then we'll be in a better position to give a really good educated number.

Okay, looking forward to it when you guys get comfortable there, because it's a very interesting combination.

Our next question comes from Vincent Sinisi from Morgan Stanley.

Wanted to first ask about the supermarket channel growth. If you could give some further insight into the -- maybe directionally how much of that growth is coming more from increased volumes at your current customers, and then any color in terms of notable new customers that you have signed up on that side of the channel?

We've never broken that out, Vinnie. We tend to sort of talk about additional volume coming on Board, if it's in excess of $100 million in the aggregate. So I could say that as it relates to FY14, that any new business, one, wasn't in excess of that, and to the extent we lost any business it didn't exceed that.

So if you look at it from a standpoint of our overall sales, that's maybe 1% to 1.5%, so I would say that proportionately not a large amount of that business came from new customers. It gets more challenging as it relates to do they add to their SKU assortment or is it just comps because they're rotating sets, they may do it once a year, may do it twice a year, may do it quarterly, as to updating some of the products they are carrying. But I would say that the majority is comp growth or comp growth with inflation, not new customers.

Okay, that's helpful, thank you. And just a follow-up question.

Vinnie?

Can you hear me guys?

We can now. We couldn't hear the question.

Okay, sorry about that. Just wanted to ask anything that you are doing from, of course now more recently with the Tony's assortment, but you racked off so many initiatives that you are making from assortment, from technology, from distribution. Can you give us a sense for the advertising or the communication with your current customers, in terms of how are you making them aware, or more aware, of maybe they would normally be of the new enhancements that you are making to your network?

Well if I get the question right, you were asking how do we help our, how do we help customers understand, to make sure they have the right products on the shelf, or how do we make them understand the enhancements to the network?

Yes, to the point that was made earlier about that the benefit of UNFI is that obviously we do have access to your assortments, your efficiencies, your technology. Obviously they will see changes and how they are ordering et cetera, but are you doing any particular kind of communications to really make them aware of what has been done and what is upcoming?

Yes, fortunately our customers are very well aware of what we're doing and what's happening within UNFI, whether it's through their own sales channels or electronically. They see the benefit every day, in terms of the -- number one, the breadth of line, which I think is the single biggest point of differentiation for UNFI. If it's natural, organic, specialty, specialty perishable, and so on and so forth, we're going to have the greatest selection of any Company in the country, and then that's a huge point of differentiation.

From a distribution perspective, if we're close to them, then they can place the order later and get it earlier, which is another huge point of differentiation. Because as soon as you have to start driving hundreds of miles, a customer has to place the order several days earlier, and the actual delivery time becomes more difficult to pinpoint. So the closer you are to the customer, the much easier it is for us to provide a higher level of service, and so they see those things directly as we roll them out.

We also have a very sophisticated retail category management group, which uses a lot of our own proprietary data, as well as the syndicated data to look at sets, products by SKU, by space allocation within every geography in North America. So that if a customer was looking to redo their cereal sets and was willing to allocate 16 feet, and they happen to be located in Tennessee, we could use our retail category management group to provide them every piece of data they would need, to make sure that they had the right products and shelf.

Okay that's helpful. Thank you very much, and best of luck.

Thank you. Our next question comes from Kelly Bania from BMO Capital.

First, just wanted to ask about the one-time gain for the quarter. Can you just explain a little bit what that was, and just remind us if it was or was not contemplated in your original guidance?

Yes, so the number nets itself out because there were approximately $800,000 or $900,000, or it nets out a bit because there's $800,000 or $900,000 of write-offs that occurred in that line as well. But there was a portion of it that was factored into the guidance. It wasn't fully factored into the guidance, because we weren't really sure what the value of the property would be.

But as part of the entry into the Wisconsin market, we were given some incentives, and part of that was the land that we ended up building the Racine facility on, so that's what the gain was associated with, and we will have a similar gain in FY15 for the new Twin Cities location, which is in Prescott, Wisconsin. Not necessarily the same magnitude, will probably be $1 million or so less, and that will probably happen late in the second quarter or in the third quarter. Not sure exactly timing, because it basically occurs once the construction is complete.

Got it. That's very helpful. And then just on gross margins, a lot of moving pieces, I guess, in the quarter, but didn't hear much discussion of mix which is usually the focus. So I'm just curious if you could touch on what's going on in the core growth margin in terms of mix right now, and could you also touch on the impact of maybe a slightly slower growth in the super natural channel? Is that actually less of a mix pressure potentially for you?

No. The gross margin components were -- the Tony's impact was the largest, that was about 14 basis points. That may change.

Right.

Second was the Canadian FX, which negatively impacted our gross margin. Some of the supply issues that we have, and then the fourth, and small but not insignificant was continued customer shift, and that customer shift was more towards the supermarkets.

But I think by virtue of how we broke out the sequential decline, you could see that, as Steve just covered the other items that make up half, half of it, we said specifically was the dilution based on Tony's having a lower gross margin. The other element was those four items that Steve mentioned. So customer mix was in there, but was not as big of an item as it can be in some quarters.

Got it, that's helpful. And then was wondering if you can also fill us in on how WMS, sounds like you're up to five now. How that's going, what the specific plans are for FY15? And then just same question on inventory optimization, now that you're in the process of putting that in, in the East, should we expect similar benefits, or any just comments on how that implementation is going, any feedback from your customers as you're working through that?

Yes, so inventory optimization is essentially, not essentially, it is implemented in the East. It's finished in the West. We will complete a DC by DC implementation of inventory optimization in the East, and that should finish the early part of 2015. And certainly, we're hopeful that we'll get the same kind of benefits in the East as we got in the West.

As it relates to the WM implementation, we have several scheduled for this week -- for this year, and at this point, we feel like we're pretty good at it. We've got a dedicated team that does the implementation. We do have some service issues, very, very short-term, when we make the conversion, but I think we've been able to really mitigate that risk. And like I said, we've gotten pretty good at it, but we'll continue to knock off a couple, two to three DCs a year for the next couple years until we're finished.

Great, thank you.

Our next question comes from Mark Wiltamuth from Jefferies & Company.

Wanted to ask on the arc of the earnings accretion from Tony's. Is it going to be something that kind of peaks within two to three years, or do you think you'll get mostly there in this year? And just a little more color there, if you could.

Yes, I think we're going to see the accretion in the first year.

Okay.

Look, we would certainly expect to become more efficient and more effective so who knows at what rate we expand geographically or through additional M&A, but I think from the core business, there's certainly opportunities to drive some synergies but it's not as if this business needed to be fixed in any way, shape or form.

Okay and on the guidance for next year's revenues, are you still assuming something around 13% core growth ex-acquisitions for the core business, and do you have any finger on how much of that growth is going to be coming from new store expansions from those retailers?

Well, the new store expansions, we get from some of our customers a pipeline of what they're looking to do, and we try to factor into the extent that they hit their timelines or their timelines push out a little bit. So we've got a combination built into the guidance, or built into our internal numbers, that breaks out what's the comp and what we think are going to open for new stores and roughly when they think they are going to open. So sometimes that slips, and more often than not it slips versus it accelerates.

As it relates to the FY15 guidance, again, I'm not trying to get pinned down too much on the ranges, but I would say that you're not far, the 13% you're referencing is not too far off from one element of it. The issue becomes, Mark, is we could outperform on the UNFI side, underperform on Tony's, outperform on Tony's and underperform on UNFI and that's why the range is so wide. As Steve mentioned, there's elements of business we may be able to gain as well as elements of business we may lose from sort of some of the shake out of the acquisition, that caused us to set a much wider range than normal.

And then on the fourth quarter, did you come in a little better than expected on taxes? Because I know versus our model, you definitely came in a little better. Where was it versus your internal expectation?

It was probably modestly a bit better. There were a couple of opportunities by virtue of where we had some profitability on the state side that allowed us to use some NOLs that we did not have originally factored into the model, so it was a little bit stronger, but it wasn't dramatically off from what we had thought.

Okay and lastly, I think you said you were preparing to do some delivery on behalf of retail customers. How does that work? Is that coming right out of your DC to a consumer and how are you going to do that?

Yes, so we will deliver via eCommerce several ways. Today for example, for a lot of business to business e-tailers, we deliver directly to the consumer but UNFI is invisible to the consumer. We're doing it on behalf of another retail customer, and so we do that today.

And so with the additional eCommerce platform, we'll be able to offer 15,000 SKUs, where through a retailer's website, they can have UNFI fulfill for the consumer, directly to the store. They can have UNFI fulfill directly for the consumer through the store's website to the consumer's home, and several other ways. It's all through our existing customers. We are not selling the consumer direct but we're providing the retailers with every eCommerce option that they could potentially need.

And have you seen a lot of uptake of this, is this building, or where do you stand on it?

It's building. It's still relatively small for us, but we certainly think that it's going to get bigger, and we need to make sure we have a platform to deliver it.

Okay, thank you very much, and we'll look forward to seeing you in October.

Operator, I think this probably has to be our last question. I know there's a half dozen folks still in the queue, and we haven't gotten through everyone, but we're already past the hour.

Thank you. Our last question comes from Meredith Adler from Barclays.

Most of my questions have been asked, but I'd like to go back to your comment, Steve, about already seeing some out of stocks. You think you can work through it, but can you talk a little bit about what you do, because in the past, we know that there was some incremental expense by moving product around between DCs or you ended up with more inventory, just to make sure this didn't happen. But you've already got some out of stocks, so how do you think you'll be able to mitigate this?

Meredith, it's predominantly in categories that have a relatively short shelf life, so it's really not like we can move those products around the country, and I do believe that it's going to be short-term. I think, going back to the last time it happened, we were somewhat unprepared, and we made a conscious decision to move the freight around the country during the holidays, in order to make sure there was a reasonable service level. But we learned a lot from that experience, and don't see us being in that situation again, without a lot of support from our suppliers.

So the two periods really aren't comparable, because I think the last time that it happened, it wasn't good for anybody, but we did what we had to do, We learned a lot, like I said. In this period right now, we haven't seen a significant fall off. We've just noticed that there's been some increased out of stock across certain categories, and we're working closely with those manufacturers to ensure that we have supply, and like I said, I feel pretty good that we will.

Okay and then I want to go back to the gain, and I was just wondering where does the gain show up? Is that in other?

Yes, it's below the line in other, and I think it's called other income or other net.

And are some of these one-time costs netted against what shows up in that other line or are they in SG&A?

No, so, well let me identify. So any of the -- what we talk about as non-recurring but we don't break out of the P&L, so costs associated with the start up of Racine, costs associated with the start up of Hudson Valley, the deal-related costs, as well as the dead rent for Denver, those are all within operating expenses and SG&A.

In other expenses or other income net, you've got the gain, you've got the write-offs of CapEx projects that didn't continue, didn't get finished, and then you also have any -- I think it's expense this quarter, but any non-cash expense associated with revaluing the balance sheet at month end associated with the Canadian dollar, and the movement of the dollar. So on the actual income statement, it's showing those three items are all netted into that line item.

Okay and when you think about the earnings of the Company, do you think about the gain as being something that is really earnings, or is it just a one off thing? Although you said it's not one off, because it's going to happen again with Prescott.

Yes, I think I personally view it as earnings. It's a strategy that we implemented, as it relates to the way in which we build our buildings. Like Mark said, it's going to happen again in Prescott, and it may happen again in future buildings.

In some respects, the incentives that we may get in different communities, some of them are above the line, some of them are below the line. But Steve mentioned in doing the ROIs in the models, they factor into the decisions as to where to build a location and whether to own it or to lease it or do a sale leaseback scenario.

Got it, and then you did mention, I think you'll do a sale leaseback on Prescott?

Yes, that's our plan yes.

And is there any other plan for Racine or the Hudson Valley at this point?

Well, we were asked a lot about that last year, so both of those facilities were mortgaged as part of the $150 million term loan facility that we did, so we have financed those buildings through a term loan that goes through 2022.

Okay, that's right. I think you told us that and I forgot. Okay, thank you very much.

Thank you. I'll turn the call over to Steve Spinner for closing comments.

Thanks again for joining us this morning. For information regarding our October 21, 2014 analyst day, please contact Katie Turner at ICR. We look forward to seeing you in Hudson Valley, New York. Thanks everybody, have a good evening.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.