United Natural Foods Inc (UNFI) 2015 Q1 法說會逐字稿

Greetings and welcome to the United Natural Foods first-quarter 2015 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Katie Turner. Please go ahead.

Thank you, Kevin. Good morning, everyone. By now you should have all received a copy of the first-quarter FY15 earnings press release issued this morning at approximately 7 AM Eastern time. The earnings press release and webcast are available under the Investor section of the Company's website at www.unfi.com. On the call today are Steve Spinner, President and Chief Executive Officer, and Mark Shamber, Chief Financial Officer.

Before we begin, we'd 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 risks and uncertainties. Actual results may differ materially from the results discussed in these forward-looking statements.

In addition, in today's earnings press release and during the call, Management will provide both GAAP and non-GAAP financial measures. These non-GAAP financial measures include sales excluding acquisitions, operating expenses, operating income, net income, and earnings per diluted share.

Presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for any measure prepared in accordance with GAAP. For a complete reconciliation of GAAP to non-GAAP financial measures please refer to the Company's earnings release. With that, I'd like to turn the call over to Steve Spinner.

Good morning and thank you, Katie. Also joining us this morning, here in Phoenix is Sean Griffin, UNFI's Chief Operating Officer. The first quarter of 2015 continued to demonstrate strong demand for UNFI's products and services. Net sales across all channels performed well, culminating in a 24.4% growth rate versus the first quarter of 2014. Adjusting for acquisitions, our sales grew over 10%.

Our organic growth in the first quarter of 2015 reflected a slow start to our fiscal year as mentioned during our last call discussing FY14. We also mentioned at that time that our sales during the second period of our first quarter 2015 had begun to accelerate. I'm pleased to report that the trend has continued and our sales have, in fact, remained quite strong during the back half of the first quarter and into the holiday period.

The first quarter 2015 sales increased almost $400 million versus the first quarter of FY14 and the Company reached record sales of approximately $2 billion for the quarter. These results also reflect approximately $20 million in higher supplier out-of-stocks during the quarter.

Operating income during the period increased nearly 22% versus the first quarter of FY14, reflecting our ongoing commitment to service, efficiency, and revenue growth. Operating expenses as a percentage of net sales continued to decline during the first quarter of FY15, as we gained traction with our Thrive initiatives. Expense ratios were also positively impacted by the addition of Tony's Fine Foods.

Gross margin during the quarter, which Mark will discuss in detail, was negatively impacted by the addition of Tony's Fine Foods. However, another significant driver of our gross margin decline during the period was continued high levels of supplier out-of-stocks, which were approximately 175 basis points worse than prior year, representing approximately $20 million in lost sales.

These issues occur primarily across the chill category, with organic milk and milk by-products driving most of the chill increase. The chill category represented approximately 40% of our total increase in out-of-stocks during the quarter. Higher out-of-stocks during the quarter also resulted in higher inbound freight expense, which negatively impacted our overall gross margin for the quarter.

During the quarter we announced that our Aux Mille facility in Quebec, Canada, would close and move into our facility and Montreal, Quebec, Canada. We believe this change will result in higher service levels in the market and significantly lower cost to serve the Canadian market, in general. We are extremely committed to continuing to build out our network in Canada as we strategically build market share and capacity.

The market for UNFI's products has changed dramatically over the last five years. Natural and organic products were once viewed as unique and differentiated products for a narrow band of consumers and retailers. Today, our products are demanded by consumers across North America, which has led to the adoption of these items across every channel.

This rapid adoption rate has led to new opportunities for UNFI, as we operate the broadest network of companies specializing in natural, organic, and specialty products. Consumers continue to demonstrate a desire to seek a healthier, know-your-ingredients lifestyle. This results in increased shelf space across a growing number of retailers, which ultimately drives demand to UNFI.

During October, UNFI hosted an analyst day at our new facility in Hudson Valley, New York. We talked about our five-year strategy for building out the store. This strategy is based on, one, continuing to expand our market share by selling more of the store to existing customers, by acquiring new customers, and by select acquisitions that add products or geographical coverage. With the acquisition of Tony's Fine Foods, UNFI offers retailers a wide array of organic produce, commodity organic groceries, natural supplements and personal care, proteins, specialty cheese, bakery, deli, and e-commerce.

Two, continuing to build out our infrastructure through capacity expansion and our Thrive technology and business improvement projects. We believe that the building-out-the-store strategy and our infrastructure improvements should drive 10% to 14% revenue growth, 10% to 16% EBIT growth, free cash of $30 million to $85 million per year, and EPS expansion of 14% to 19% per year over the next five years. We have built a strong team with a proven track record of delivering exemplary results against its long-term strategies.

Over the next several years, we expect to build out two new exciting channels. The first is our gourmet and ethnic channel, which will focus on merchandising specialty products to specialty-based retailers. These products include Italian, Hispanic, kosher, Asian, and other related ethnic products, which are growing rapidly. This is a long-term opportunity to grow net sales by up to $5 billion, which UNFI has yet to take advantage of. Our market share in this space is approximately 1.5%. We have established a new sales and procurement organization and look forward to expanding this important channel.

Second is our e-commerce channel. As we build out capacity across the US, our goal is to offer retailers over 15,000 SKUs across gluten-free, organic, personal care, supplements, lifestyle, and other important lines. Given our proximity to the retailer and the consumer, our hope is to be the e-commerce solution for retailers and business-to-business e-commerce providers. Additionally, we hope to provide similar e-commerce services to manufacturers whose products are distributed throughout our network.

Lastly, Tony's Fine Foods turned in a very strong operating result during their first full quarter as part of the UNFI family, with over $200 million of net sales. We are actively planning a rollout of this platform and product mix to other markets by securing new customer contracts and expanding relationships with existing customers. All of UNFI's new distribution centers have the capacity, as well as the refrigerated systems, needed to accommodate this exciting strategic product mix. Now I'll turn the call over to Mark.

Thanks, Steve, and good morning, everyone. Net sales for the first quarter of FY15 increased by 24.4%, as Steve mentioned, to just under $2 billion, coming in at $1.99 billion, a $390 million increase over of FY14's first-quarter net sales of $1.6 billion. Our two acquisitions, which occurred in FY14, contributed approximately $228 million to our sales growth in the quarter, or 14.2%, with Tony's Fine Foods representing approximately $215 million of the growth while Trudeau contributed approximately $13 million, as we have lapped this acquisition in the month of September. Excluding these acquisitions, net sales increased by $163 million or 10.2%.

Inflation decreased modestly on a year-over-year basis to 1.94%, a decline of 10 basis points from the first quarter of FY14. However, this represented a sequential increase of 18 basis points over the fourth quarter of FY14. For the first quarter of FY15, the Company reported net income of $33 million, or $0.66 per diluted share, an increase of $5.3 million and 19% over prior-year net income of $27.8 million, or $0.56 per diluted share.

In the first quarter, sales to the supernatural channel increased by 16.5% over the prior year's first quarter and supernaturals represented 33% sales for the quarter. Independents sales rose by 23.8% year-over-year and independents also represented approximately 33% of net sales. Our supermarket channel experienced growth of 30.6% over the prior year, and now represents approximately 27% of net sales.

Finally, food service grew by 60.4% over the prior year and now represents approximately 4% of net sales. Excluding the impact of the acquisitions, supernatural's net sales growth was 11%, supermarket sales [increased] by 9.3%, independents net sales grew at 8.2%, and food services net sales growth was at 23.3%.

Gross margin for the quarter was 16%, which represents a 92 basis point decline compared against the first quarter of FY14, which had a gross margin of 16.9%. The major driver to our lower gross margin in the fourth quarter of FY15 was the dilutive impact of Tony's, which represented more than 50 basis points of the gross margin decline for the quarter.

Our gross margin was also negatively impacted on a year-over-year basis due to supplier out-of-stocks, increased inbound freight cost, shift in customer mix, and the decline in the value of the Canadian dollar on our Canadian business. As the example specifically associated with increased inbound logistics costs, when we send a UNFI truck or a third-party carrier to a supplier to pick up an inventory order, the freight costs associated with that inventory are higher if the suppliers that not have the ordered quantity available, as the costs associated with the truck picking up the product don't change whether we received 60% of the quantity ordered or the complete ordered quantity.

Operating expenses for the first quarter of FY15 represented 13.1% of sales, an 85 basis point improvement compared to 13.9% for the same period last year. Adjusting for the $0.6 million impact of the write-off of an intangible asset related to Aux Mille location in Canada, operating expenses improved by [88] basis points over the prior year. The quarter also included $1.4 million in start-up expenses associated with our Racine, Wisconsin and Hudson Valley, New York facilities, as well as our Auburn, California location, which will serve as a west coast hub for our Select Nutrition business.

Fuel had a positive impact of 3 basis points on operating expenses in comparison to the first quarter of FY14, as fuel represented 70 basis points of distribution net sales in the first quarter of FY15. Fuel expenses were 5 basis points better than the fourth quarter of FY14 when fuel came in at 0.75% or 75 basis points of net sales. Nationally, our diesel fuel costs in the first quarter of FY15 decreased by approximately 0.4% for the prior year's first quarter, while the national average price decreased to $3.75 a gallon, a decline of 4.1%, compared to $3.92 a gallon in the first quarter of FY14, per the Department of Energy.

Share-based compensation expense during the first quarter of FY15 totaled $6 million, or 30 basis points as a percentage of net sales, compared to $5.5 million, or 34 basis points in the prior-year period. Operating income increased by 21.6%, or $10.4 million, to $58.4 million in the first quarter of FY15.

Operating income as a percentage of sales was 2.9% in the first quarter, a decline of 7 basis points over the prior-year first-quarter operating income of 3%. Operating income declined by 4 basis points over the prior year's quarter as adjusted for the impact of the intangible write-off in FY15. Other net expense was approximately $0.6 million during the quarter and primarily reflects a non-cash charge related to the impact of the continued decline of the Canadian dollar on our Canadian business.

Our inventory days on hand averaged 49 days for the first quarter of FY15, an improvement of the three days from the first quarter of FY14 when we averaged 52 days. The primary driver of the year-over-year improvement was the inclusion of Tony's for a full quarter, as Tony's inventory turns are much faster than Unified's broadline business, due to the heavier, perishable concentration. Within our broadline business, we have selectively been carrying higher inventory levels in an effort to compensate the continued issues with supplier out-of-stocks in certain categories, as Steve touched upon in his commentary. DSO for the first quarter of FY14 was consistent with the prior year, coming in at 21 days.

Capital expenditures were $27.4 million, or 1.4% of net sales, for the three months just ended. The largest components of our CapEx incurred during the quarter were associated with new facilities, specifically our new Twin Cities facility located in Prescott, Wisconsin, which is ultimately expected to be a sale-leaseback, as well as our new facilities in Gilroy, California and Hudson Valley, New York.

Outstanding commitments under our credit facility were approximately $400 million at quarter-end, with available liquidity of approximately $206 million, including cash and cash equivalents. Our leverage increased approximately 2 times on a trailing 12-month basis as a result of higher debt levels due to combination of our acquisition of Tony's Fine Foods and our normal seasonal investment in inventory for the holidays.

In today's press release, we reaffirmed our guidance for the fiscal year ending on August 1, 2015, which was originally provided back on September 17. For FY15, we expect net 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 are 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.

Additionally, our capital expenditures guidance of FY15 of approximately $130 million to $140 million net of the planned sale-leaseback of the Company's new Twin Cities area distribution facility in Prescott, Wisconsin, remains the same, as does our guidance surrounding our expected tax rate for FY15 of 39.25% to 39.75%. At this point, I'll turn the call back over to the operator for question-and-answer session.

(Caller Instructions)

Operator?

(Operator Instructions)

Karen Short, Deutsche Bank.

Hey. Thanks for taking my questions. Just a quick question, in general. In terms of your organic growth rate, it was obviously very strong, but it looks like it was at the lower end of your range of guidance. The first question I have, is that a fair statement or how do you view your organic growth rate? And then I have a follow-up?

Hey, Karen. We did talk about a slowdown that we experienced at the end of last quarter and into the first period or so of the first quarter. However, we did see that pick up quite nicely through P2 and P3 of our first quarter. So yes, that's right. We were a little light on the sales towards at the end of last quarter and into the beginning of the first quarter, but we've seen it come back nicely.

And I would just add, Karen, when Steve touched on, in his commentary, about the impact of the out-of-stocks coming to almost $20 million, that would be about 1.25% off, on a year-over-year basis, that's factoring into that, as well. So one aspect of it is that as long as we continue to have higher out-of-stock in some of those perishable categories, we're going to continue to see the sales growth impacted a bit.

Okay. And would you say -- is it fair to say that the demand picked up and the cadence of the sales trends was correlated with a GAAP prices? Any color there? And then some color, just in terms of sales trends, into the second quarter, given that gas and diesel prices continue to come down?

Yes. I don't know that we have any data that would support the fact that sales began to pick up a little bit when gas prices came down, so I'm not sure that we would have any good commentary there.

And Karen, just one thing I want to interject, only because you raised diesel, the one thing that I'd want folks to know is that while regular gasoline prices for unleaded have come down significantly, the decline from diesel since the May timeframe is still less than 10%. It's only in the 7% to 8% range as of this week, so we've seen--

Right, but--

[For consumers]. Yes.

Yes. No, no. The numbers are definitely not as compelling on diesel, but it would affect the customer demand, obviously. But then just following on that, is there any color on the sales trends into the second quarter?

The sales trends continue from where the accelerated rate that we've been talking to, during your question. So I wouldn't say that it's accelerated beyond that, but we're certainly pleased with where it is.

Okay. Thanks.

Rupesh Parikh, Oppenheimer.

Thanks for taking my question. Congrats on a nice quarter. I just also wanted to just touch on the sales trends. Is there a way to maybe quantify the magnitude of acceleration we've seen for maybe the first five weeks or so of the quarter?

That's something that -- we normally don't provide any color about where it was. We give directionally, but we wouldn't want to go that route because in any given week, things can fluctuate based off of the pattern or anything that could happen for weather for a week. Weather doesn't usually impact us over the course of a quarter, but it can make impacts from day to day or week to week, so we'd stay away from that. But if you looked at what we've said back in September, we said that we've seen a deceleration of 100 to 150 basis points off of where we were coming out of the fourth quarter, so you can make some inferences based on that.

We also indirectly answered the question just by confirming guidance for the year.

Okay. That's helpful. Then with the Tony's acquisition, clearly very upbeat commentary that you guys provided in the press release. So far -- two parts of Tony's. One what type of comp growth did you see this quarter for Tony's? And also, at this point, have there been any significant early surprises that you've seen?

We're not going to get into the comp growth at Tony's, but it's just been, knock on wood, a wonderful acquisition. It's a great cultural fit, terrific leadership there. The customer base and the markets in which we share are excited about having both companies. We have got, actually have an exciting new program rolling out right now, actually, which is based on bundling customers' purchases between all of our companies to give those customers that participate in all of our brands, a significant advantage, and we're in the process of signing customers up to that as we speak. So it's just, it's been a very, very good, well-accepted acquisition on both UNFI, Tony's, as well as the customer, from where we see it today.

Okay. Thank you. Good luck next quarter.

Thanks.

Sean Naughton, Piper Jaffray.

Hi. Thanks for taking the questions. Just based on your Q1 performance, you were a little bit ahead of the external expectations, but didn't flow through the earnings upside of the full year with a raise. Just curious how the first quarter maybe was relative to your expectations and has anything changed on the outlook moving forward? And then just as a follow-up question is just if you could clarify what you think the inflation expectations are going to be for the balance of the year? Thanks.

Sean, we generally do not adjust the guidance upward or downward based off of what comes out of Q1. It's still too early in the year. There are a lot of things can happen. If trends were to remain favorable and we get to the second quarter, we would adjust accordingly from that standpoint.

On the second component, with regards to, or the last component you asked about with regards to inflation, our outlook is similar to what we stated at September and at the analyst day, where we are seeing a modest uptick, but we're still going to hover around that 2% range. Maybe it is close to 2% to 2.25%, on the high end 2.5%, over the next six months, but most of the price increases that would have come for the holiday period have already come through, and are reflected in what we saw in the October results, and that's not very far north of 2%. So I would say that there is probably some modest upside in inflation, but there's nothing that indicates that we're going to get north of 2.25%, 2.5% from that standpoint.

And then maybe just one more follow-up on just some of the impacts you had in Q2 last year. There was some on the polar vortex or the cold weather that happened last year. Maybe could just elaborate on what those impacts were and then maybe some of the steps that you've taken to help mitigate some of those things this year to avoid some of those increased costs that we saw in Q2 last year?

Yes. Last second quarter was brutal, from a weather perspective. As you know, we move a lot of product across the country by rail. Unfortunately, a lot of that product got -- dry product got caught up in Chicago in the middle of the polar vortex and had some implications to service, as well as had to dump a lot of product.

We've obviously spent a lot of time on that this summer and planning for how to work around weather implications and we've done that. Basically, what will happen is we'll use alternate routes during the winter to bypass markets where we worry about the weather, whether it's by truck via the south, whether it's by rail in alternate directions. So our hope is that we're not going to let that happen again.

Okay.

We're pretty well prepared.

Okay. Great. Thank you.

Yes.

Mark Wiltamuth, Jefferies.

Hi. I just wanted to see if you had any updates on securing key customers for -- anchor customers for spreading Tony's out to the other regions?

No updates. Certainly if we get in a material win, then we would announce it. Otherwise we'll just quietly plod along and take on some business wins in markets in Hudson Valley, in Racine, et cetera.

Okay. And as you look at moving more into the perimeter and pushing into perishables, do you think you need to do more acquisitions in that area in those other verticals?

I don't think we need to. There's plenty of opportunity for us to not have to do M&A; however, it is a pretty fragmented market and so there will be some follow-on M&A opportunities that come our way that would ultimately get folded up underneath Tony's and we'll be opportunistic and look at those. The beauty of having had the foresight to build the capacity is that gives us a tremendous amount of flexibility and in terms of acquiring small regional companies that specialize in this product and getting -- and having the ability to fold them into our much bigger, much more efficient distribution centers.

Okay. Thank you.

Vincent Sinisi, Morgan Stanley.

Good morning. Thanks very much for taking my questions and congratulations on a nice quarter. Wanted to ask about the Tony's product going to your DCs. When those of us who were at your analyst day about a month or so ago, we saw in the Hudson Valley DC the room that Tony's products would be going in. Can you guys just give us a sense for -- first, for that facility, specifically, is there now Tony's product there, and how should we think about the time frame for more of a full rollout of Tony products?

We do not have any products, specific products of Tony's there yet. We're still in the process of moving products and customers from our Dayville and Chesterfield facility, phasing it into Hudson Valley. That's our first priority. We will begin to put Tony's product into Hudson Valley as we secure agreements with customers who will pull that product. Again, I don't think that any one customer win is going to be material and so it's just going to be slow and steady as she goes. Sean do you have anything to add?

Other than, again, for folks that had an opportunity to tour Hudson Valley, Hudson Valley is indicative of Denver's capacity, of Racine's capacity. We will also include the Twin Cities DC, and we believe that we can essentially house somewhere between 3,500 to 4,000 SKUs of a Tony's [faciliment]. So we really have to find the anchor customers so that we can assure that we get the inventory turns and the buy side, the supply chain is efficient. Yes. It's a pre-requisite].

The economic model for an existing UNFI customer to add those products to the current list of items that they take from UNFI is very compelling, because what drives our profitability is a scale on the delivery. So if we're already going to the retailer multiple times a week, the cost of adding new categories of products is very low. We believe, and a lot of the customers believe, that it's very compelling. We just have to phase it in carefully and bide our time.

Okay. No. That's helpful. Thank you. And then just as a follow-up question, regarding the ethnic and gourmet opportunity, I know obviously right now a very low percent, 1.5% market share of that $5 billion or so opportunity. Can you give us more of a qualitative sense in terms of product that you currently have available, where you have that now and where you foresee that going?

Yes. We have a wide array of the product already available. It's just we don't have it widely available across all of our networks. So what we've chosen to do is to focus our efforts on very specific urban markets where we know that there is very high demand for the product and we know there's a large amount of what we call specialty retailers, which has not been a targeted customer that we've focused on.

Really it's more a factor of building out a sales force who calls specifically on the specialty retailer that is going to build our share in that category. If you are familiar with New York City, there's bodegas on every corner, and given the growth of specialty and the higher-end natural and organic, those small stores are carrying a large amount of those products, yet we've never had a sales force specifically designed to call on them. That's what we've created.

Got you. All right. Great. Thanks very much.

Scott Mushkin, Wolfe Research.

Hey, guys. Thanks for taking my question. Just wanted to understand the speed up and growth, and your answer, Steve, to Karen's question, is that things have sped up post the slowdown that you saw, but they haven't sped up further. Is that -- am I paraphrasing what you said right?

That's right. That's right. We are not talking about hundreds of basis points here. We're still comfortable with where we are for the year in terms of our overall guidance, and obviously, very pleased with the fact that the sales accelerated from what we would call a slowdown towards the end of the last fiscal and into the beginning of this one.

Then a follow-up to that. There's been a lot of building going on in the space. How much -- when you guys say things sped up, are you taking that into account or is some of this speed-up related to the fact that a lot of stores are being built and you are benefiting from that?

No. No. It's definitely when we look at same-store comps, that's what we viewed as an acceleration.

Okay. Actually, that's it for me, so I'm going to go. Thank you for taking my questions.

Thanks, Scott.

Meredith Adler, Barclays.

Hey, guys. Thanks for taking my question. I want to go back to something you mentioned about giving a benefit to your customers if they buy products from multiple ones of your companies. Could you talk a little bit more maybe about how things work now and how you would do that and how does it impact sales or commissions or how does everybody work together?

Yes. Sure. In the markets in which we have overlap with Tony's, which is primarily the western part of the country, an Albert's rep covered a retailer, a Tony's rep covered a retailer, a UNFI rep covered a retailer, a Selection Nutrition rep covered a retailer. They played, outside of Tony's, they played very well together being that they are with the same Company. But we call on the customer as separate organizations under UNFI umbrella, and up until now, we haven't aggregated the customer volume in order to essentially provide more economic value to the customer as a result of buying from more UNFI companies.

So what we're doing in the west is we're bundling the total sales that a customer buys from all of our brands into one number. We are providing the customer with a growth target, which ultimately gives the customer an incentive to buy more from all of the UNFI brands. And we think it's a very compelling experiment in order to build business across all of our companies. We'll see how goes. It kicks off later this month.

So that means that they don't get a discount unless they hit the growth targets. You're not just lowering the money you receive simply by aggregating. They have to achieve more?

Yes. They have to earn it. So they have to drive more purchases through any of our brands in order to achieve a targeted number, which obviously is a growth number. So they don't get a discount today. They have to earn it.

Got it. That makes a lot of sense. I have an unrelated question, but I know you've talked about the newest facilities having been built with the idea that you put Tony's product in there, but you obviously have a lot of customers, very established business, in other parts of the country with older distribution centers. Is it in your mind at some time in the future, you would retrofit those facilities to be able to handle more of the Tony's product or it's just too difficult?

If you think about where we are building the buildings, the buildings are going into the very strong urban markets, Chicago, New York, San Francisco. Those are the markets that have the greatest demand for those products. As we move volume from older DCs into the newer DCs, that will create some opportunity for us to retrofit where it makes sense and that's a relatively modest cost to do it.

But the reality, Meredith, is if you think about Hudson Valley, New York, we're pulling volume out of Chesterfield, New Hampshire and Dayville, Connecticut, and so it may not make sense for us is to retrofit those facilities because they're just not playing into markets that have a high degree of demand for natural protein and specialty cheese. So the long-winded answer is we're pretty comfortable with where we built the DCs in order to satisfy demand for those products, but moving the volume out of existing DCs will give us the ability to retrofit if we need to.

Got it. Since we still have some time, I'm going to ask one more question. Do you get any pushback from existing customers when you talk about them buying Tony's product, or even for that matter, getting them to buy from more of your businesses? Is there anything in particular that they have -- very close established relationships with other providers or is it just going to take time, a selling process?

There is an emotional answer and there is an intellectual answer. Right? The intellectual answer is that if it's economically appealing, then most of the customers are going to make a smart decision that it makes sense for them to add those product categories into their current UNFI program. Right? So if we have quality product that's differentiated, that meets or is better than what they currently have, and they can get it on the UNFI system, and it's cheaper, better, faster, then they're going to do it and we're pretty confident of that.

On the smaller stores, we'll get a little bit of, I already have 40%, 50% of my purchases into the UNFI system, do I really want to go to 75% or 80%? And that's more an emotional decision. But we're pretty confident that the economics, the products, the services are going to be very compelling for the majority of our customer base to add the products.

Great. Thank you very much.

Robby Ohmes, Bank of America.

Hi. This is [Marisa] on for Robby. Thanks for taking my question. Wanted to dig into the sales growth acceleration that you were seeing in the supermarket and independent channels. Was wondering if you could provide any color about how much of this is driven by new customers or existing customers and your building up the store strategy? Are there areas of the store that you're seeing increased demand for additional product?

Yes. As Steve mentioned in one of the earlier questions that were asked, we typically don't highlight any new business that we've taken on board unless it was material in nature, and historically, we have used a threshold of $100 million for that. It's fair to say that it's a combination of the growth, from a comp standpoint, and obviously, as there have been some new store openings, we get the benefit of that in those channels.

Having said that, in the first quarter, ex the impact of Tony's and Trudeau on those two channels, we believe that the supermarket channels are a little bit of a deceleration on a quarter-over-quarter basis, so from the fourth quarter to the first quarter. The independents were relatively flat but the supermarkets were a little bit softer.

Okay. Thanks. That's really helpful.

Kelly Bania, BMO Capital Markets.

Hi. Good morning. Just first, a quick housekeeping question. I'm assuming the start-up costs and the Tony's acquisition costs were probably embedded in your guidance, but just curious on the asset write-offs that you incurred this quarter, looks to be about $0.01 to the quarter, was that part of your guidance or was that--?

We did not have that originally factored in. We went through some internal review and made the decision that, that was, over the course of time, the best decision from an operational basis. And so we did have that roughly $600,000 charge in the first quarter and we'll have, due to severance and some other related restructuring costs, we will probably have somewhere between $800,000 and $1 million in the second quarter, as well.

And that was also not contemplated?

It wasn't. From a GAAP standpoint, it is a factor in not touching the range, as well, but just to Sean's earlier question, we normally wouldn't adjust it after Q1.

Great. Got it. That's very helpful. And then just a couple questions on your Thrive initiatives. First, on inventory optimization, I believe that was completed this quarter on the east coast. Just curious if there were any savings (inaudible) impact to the gross margin this quarter or maybe we start to see it over the next couple quarters? Just any comments you have on inventory optimization?

And then just a bigger picture question on WMS. I believe at your analyst day, you spoke about a $5 million cost savings. Can you just help us understand what exactly you mean by that? Is that a per warehouse cost? But where exactly are the savings coming from and how should we think about those savings as you accelerate the implementation of that over the next few years?

Good morning. This is Sean. With respect to the IO rollout, we did complete the east region recently, in the last 60 days. We expect that inventory optimization will drive a similar result in the east as it did for us in the west, but we're in the early innings of IO for the east region, so we've got some upside ahead of us in terms of gross margin.

As it relates to WM and the productivity savings, the productivity savings were a 5% number and it was related to a DC-to-DC rollout of WM. So when we think about completing a number of WM migrations from our older system to the new, plus the new DCs, which are all stood up on the WM system, we are anticipating 5% improvement productivity in each of these DCs.

Those numbers are obviously factored into our guidance.

Right.

Got it. So that 5% equates to that $5 million. Is that the right way to think about it?

I don't know where the $5 million came from. That might be there out of context.

Yes. We [people in terms] of productivity numbers, driving to [a dollar] number, but let's just speak of it in terms of productivity increases of 5%.

Kelly, I can try to follow-up with you offline after the call to try to work through that and make sure at the analyst day where you're referencing it and try to create the bridge for you.

Okay. That would be very helpful. Thanks so much.

Andrew Wolf, BB&T Capital Markets.

Good morning. Hi. On the sales, Mark, when you talk about the out-of-stocks being worth 1.2% of it [dent to] sales -- is that -- what was that trending at before, if we want to look sequentially and adjust for that?

Well, Andy, part of the reason we highlighted it -- we went down this course a couple of years ago when we said at that point in time, it was $25 million. We, obviously, from an industry standpoint, have a normal fluctuation of supplier out-of-stocks. So where we were basing the numbers, there is some of the, I don't want to call acceleration, but some of the increased out-of-stocks on the supplier side that we saw in the first quarter.

We're a little conservative to make sure that we don't overstate that impact, but we're taking off of where we were for the third- and fourth-quarter average and where we are trending for the first -- we're we trended or where we came in for the first quarter. That's where we're getting roughly the $20 million, which would be that incremental 1% to 1.25%, so that's how we get to it. Does that help?

That is. So it is all above normal number? Okay.

Yes.

That's what I wanted to know.

Yes.

Okay. And then when you look at the customer segments, and like you said, with the supermarkets slowing relative to the other two, is it fair to think that there was some reacceleration in that sector? Or was the early quarter slowing and the reacceleration across the segments?

I would say that what we saw at the beginning of the quarter versus what we saw when things reaccelerated was across all channels. So it was not channel specific that supernatural, independents, or supermarkets were the one driving the slowdown, in that their return led to the reacceleration.

I would say that we saw softness across all the channels in the first quarter. We did see a little bit more in the supermarket in the first quarter, only because of the issue with the customer up in the northeast, but with regards to a work stoppage, but other than that, it was across all the channels.

Got you. Okay. I'd like to switch to Tony's with a couple questions. Could you give us what the EPS accretion was?

From a standpoint, we've never historically broken out any of the divisions or any of the acquisitions from an accretion standpoint below the sales lines, so I don't think we're going to break with that precedent. We did give some general ranges as it relates to the analyst day and what we thought for the full year.

I would say that Tony's came in a bit above on the top line our expectations, so they probably exceeded a little bit where we had projected, but we are not necessarily going to get into the specifics, because some of the synergies that we start to get may be on the UNFI side or may be on the Tony's side. So some of that $0.09 to $0.17 on an annual basis for FY15 reflects synergies that could help one part of the business versus another.

Okay. Your Tony's guidance was at first a little hard to understand because you were factoring potential business losses. It looks like -- is that out of the question now or could we still see some of that?

Yes. We have been, again, knock on wood, pleasantly surprised by the customers' acceptance of the acquisition and so we feel pretty good about where we are in those markets. It's still only been three months, so it's a little premature to answer that question, but we're optimistic.

That's it for me. Thank you.

Thanks, Andy.

(Operator Instructions)

Scott Van Winkle, Canaccord Genuity.

Hey, guys. It's Mark Sigal for Scott. Was just wondering, with regards to Tony's and the ethnic initiative that you have going, without trying to pin down any specifics on timing, are there any milestones that you are watching for or that we can watch for, in terms of when we should expect Tony's products in the facilities eastward with anchor customers? And then on the ethnic side, is the milestone a build-out of a sales force there or perhaps some initial sales? How are you thinking about that?

Yes. Let me answer the gourmet ethnic first and that is that we already have the organization established. We've already hired the sales force and so we are actively building our business, primarily in the New York City market, as we speak, and that will expand to other markets as the product becomes available. So we're pretty well established on that front.

On the Tony's side, we are still working our way through the acquisition, understanding the items and the item requirements and the procurement requirements and the storage requirements. We know where we are going to put our first Tony's product selection and that's going to be going into the Denver market. We have not talked about timing at this point, nor would we want to commit to that yet, but Denver will be the first location which makes sense, because geographically it's contiguous to their existing -- their current territory.

Okay. Thanks.

(Operator Instructions)

Joe Edelstein, Stephens Inc.

Hi. Thanks for taking the questions.

Thanks, Joe.

If the diesel prices have come down, is there a fuel surcharge here that you're going to need to give up on a go-forward basis and maybe just clarify if you had some benefit from that in your first quarter here?

To answer the question, we do have a fuel surcharge. It generally works in roughly $0.25 increments, so it fluctuates up and down over the course of time, as diesel prices move. We do adjust that as prices come down and we would adjust that as prices come down, just as we do when it increases.

As it relates to the first quarter, or it relates to any benefit, what we highlight to folks is that the fuel surcharge only gets us anywhere from an 80% to 90% recovery of the increase in diesel prices, so that as prices drop, we only get a 10% to 20% benefit of whatever that change is. So I would tell you that for the first quarter, we would be lucky if it was between a 0.5 basis point and 1 basis point and that's maybe on the high side, depending where the prices move month-by-month in the quarter. So there is a modest benefit when we reduce the fuel surcharge and the price the prices come down, but it's not anything meaningful.

How quickly do you adjust that? Just the lag in the price?

It's generally on a roughly four-week basis.

Okay. That's helpful. If I could ask another question. I was curious about your usage of intermodal during the quarter. Just how fast did that grow and does that growth rate expect to change for the second quarter as you think about just some alternative routes that you had mentioned as maybe some weather concerns?

Yes. We've continued to grow out our intermodal capacity, which has obviously been increasing quite significantly over the last couple of years, just because it's a very efficient and economical way to move freight, primarily from the west to the east. Obviously, during the winter, that will fall off as we move more product away from rail through the center of the country and back to truck to avoid, obviously, the potential weather. Sean?

One other point that is important to talk about is that in a stable supply environment, where we plan rail, which add four to six days in-transit time, there are times that, that becomes an issue -- a problem for us in terms of [fillings] and service level to our customers, in which case we may move loads that were planned for rail to a higher cost over the road, in order to support fill rate. So it's a fluid situation, but at the end of the day, we continue to find the most attractive way to move freight at the lowest cost and the highest fill rate.

Yes. One additional comment I'll make on freight, which is important is what happens in a high supplier out-of-stock environment, which we've been in, is if you think about the freight to move that product, if we negotiate -- because we pick up a lot -- we manage the freight for almost half of everything that goes into our distribution centers. So if we contract for a full truckload of freight to be picked up from a supplier, which is, let's say, 45,000 pounds, and we send that track to the manufacturing point and there's only 28,000 pounds, but we've already committed to pay a 40,000 pound rate, so we are paying for that full truck, whether there's 18 pallets or 12 pallets. So that was part of the gross margin issue that we had during the quarter, that we will obviously change some of our practices to prevent that from happening in the future.

That's very helpful. Good luck.

Thank you.

Thanks, Joe.

We've reached the end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.

Thank you again for joining us this morning and we hope that you have a terrific holiday and new year.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.