United Natural Foods Inc (UNFI) 2015 Q4 法說會逐字稿

Greetings, and welcome to the United Natural Foods fourth-quarter 2015 earnings conference call.

(Operator Instructions)

I'd now like to turn the conference over to your host, Katie Turner of ICR. Please go ahead.

Thank you; good afternoon, everyone. By now you should have all received a copy of the fourth-quarter and FY15 earnings press release issued today at approximately 4:05 PM Eastern Time. The earnings press release and webcast are available under the investor section at the Company's website at www.UNFI.com. On the call today are Steve Spinner, President and Chief Executive Officer; Sean Griffin, Chief Operating Officer; and Mark Shamber, Chief Financial Officer.

Before I begin, we would like to remind everyone that 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 today's call, management will provide both GAAP and non-GAAP financial measures. These non-GAAP financial measures include net sales, operating income, earnings per diluted share, and free cash flow. A reconciliation of these GAAP to non-GAAP financial measures can be found on the Company's investor site.

And with that, I'd like to turn the call over to Steve Spinner.

Thank you, Katie, and thanks for joining us this afternoon to discuss UNFI's fourth-quarter and FY15 results, as well as our guidance for FY16, which began on August 2, 2015.

For the last five years, UNFI has grown at record levels in both revenue and earnings. In 2009, UNFI's revenue was $3.45 billion, with $59.2 million in earnings. Today, our FY15, our sales were $8.18 billion, with earnings of $138.7 million, representing growth of 137% and 134% in only six years. This growth was achieved by consistently increasing our top line through expansion of existing customer distribution programs, as well as the addition of new customer contracts. Just as important are the strong cost efficiencies we have delivered, as our customer mix and the industry evolved.

Several years ago, we embarked on a major shift in strategy. We identified a changing market dynamic, migrating towards perishable products, including protein, produce, prepared foods, specialty cheese, and gourmet ethnic foods. This was a difficult decision, which required significant capital to build out our distribution center capacity, and a renewed acquisition campaign focused on these categories, including our acquisition of Tony's Fine Foods, an industry leader in perishable food products in the US. As we've previously discussed, UNFI has opened five new distribution centers across the US, all with perishable capacity to meet the needs of our future growth and product strategy.

In late FY15, we began shipping to two significant new customers. These new customers utilize UNFI's broadline offering and Tony's Fine Foods, both of which continue to exceed our expectations. This supports our strategic belief that there is significant value in UNFI's position as the leading provider of logistics, distribution, category management for both the center store and perimeter.

Additionally, we believe that gourmet ethnic products and fresh foods represent significant incremental growth opportunities for UNFI. With a market share of less than 6% in each of these fast-growing product channels, we believe there is considerable growth ahead for UNFI, and that we are still in the early stages of capitalizing on these opportunities. Our buildings are built, we have the talent, and we have a strong and growing customer base to create a national footprint that carries a much deeper product assortment. We believe the combined market size of fresh and gourmet ethnic is over $10 billion, and UNFI is poised to capitalize on this exciting and growing market opportunity.

UNFI is also well positioned with distribution centers closest to the consumer, broad product offering across the country, and a compelling economic model which should drive additional traffic to our network. The beginning of mid-2016, we plan to begin reporting on our overall fresh and gourmet ethnic sales as we develop the reporting and systems necessary to do so.

So, what's changed? During FY15, we did experience approximately 200 to 300 basis points of slowdown occurring from Q2 through Q3. Whether the industry slowed or the significant increase in the availability of our products negatively affected our top-line growth, we remain extremely well positioned to continue growing, especially in our fresh and gourmet ethnic product categories. And despite some challenges, in 2015 our overall sales grew 20.5%, and Tony's Fine Foods delivered results better than expectations.

In addition, our brands business grew earnings by 18%, driven by the rapid growth of our independent private labels, Field Day and Woodstock Farms brands. Combined, these two brands are UNFI's sixth largest distributed products. Also contributing to our 2015 results is growth in our eCommerce business, which continued to build at a rapid pace. As a business-to-business based provider, we believe UNFI has the necessary infrastructure to deliver via fulfillment to a growing range of retailers and eTailers.

Operating income during the year grew almost 15% to a record $242 million. Coming out of FY15, our team is energized and motivated to continue to grow throughout the next several years.

Today, our M&A pipeline is robust, as we focus on new and exciting opportunities. We remain an actively acquisitive Company, and stand poised to aggressively take action when the time is right. In order to facilitate any acquisitions, our balance sheet will remain strong in FY16.

With the completion of our capacity buildout, we will focus on generating cash by managing our CapEx over the next several years at less than 1% of revenue. And for FY16, we expect our CapEx will be approximately $50 million to $60 million or 0.6% to 0.7% of revenue. Most of our capital expenditures in FY16 through FY18 will be applied towards expanding and improving our information technology infrastructure. We estimate that reducing CapEx will drive approximately $80 million to $100 million in free cash in FY16. This management team is focused on the long term.

Now, as I mentioned during our pre-release several weeks ago, our top-line numbers continue to reflect improving demand. Overall growth during the last two weeks was approximately 7.6%. Adjusting for the upcoming transition of Safeway-Albertsons, our overall growth was approximately 8.4%. As we continue to build out our gourmet ethnic and fresh portions of our distribution business, we should be in a position to update long-term guidance during this fiscal year.

We've also announced an executive team transition plan today. Mike Zechmeister has been appointed Senior Vice President, and will succeed Mark Shamber as our Chief Financial Officer next month. A separate press release details Mike's background. I want to thank Mark for his contributions to UNFI over the 12 years he has been with the Company, and specifically the seven years that I've worked with him. Mark's transparency and daily execution of our core values have been very much appreciated, and Mark will continue to work with us through the end of the calendar year, as we further expand our corporate business development.

And now I'll turn the call over to Mark to review the financial details. Mark?

Good afternoon, everyone.

Net sales for the fourth quarter of FY15 were $2.06 billion, which represents growth of 16.8%, or approximately $297 million over the prior year's fourth-quarter net sales of $1.76 billion. In Q4, sales growth related to acquisitions accounted for approximately $176 million.

Inflation increased 29 basis points sequentially, coming in at 2.81% versus the third quarter's average inflation of 2.52%. On a full-year basis, inflation in FY15 averaged 2.36%, an increase of 60 basis points over FY14's rate of 1.76%.

FY15 net sales increased by 20.5% to $8.2 billion (Sic-see press release �$8.18 billion�), or increased by 7.9% to $7.3 billion excluding the impact of acquisitions. Acquisitions contributed approximately $851 million, or approximately 12.5% of our FY15 sales growth.

For the fourth quarter of FY15, the Company reported net income of $36.1 million or $0.72 per diluted share, an increase of approximately $2.7 million or 8.2% over the prior year's fourth quarter. Net income for the fourth quarter of FY14 was $33.4 million, or $0.67 per diluted share.

Breaking down our sales by channel, supernatural sales increased by 14.3% in the fourth quarter over the prior year's fourth quarter, or 10% excluding acquisitions, and represented 33% of total sales in Q4. Supermarket sales growth was 15.5% in Q4, or 2.6% excluding acquisitions, and supermarkets were 26% of total sales in Q4. The independent channel grew at 14.6% in the fourth quarter, or 3.6% excluding the impact of the Tony's acquisition, and independents represented 32% of total sales in Q4. And finally, food service sales were up 54.5%, or 23.7% excluding the impact of acquisitions, and represented 5% of sales in Q4.

Gross margin for the quarter showed 109-basis-point decline over the prior year's fourth-quarter gross margin of 16.44%, coming in at 15.35%. Sequentially, this represented a 7-basis-point decline over the third-quarter gross margin of 15.4%. A little more than half of the drop from the third quarter -- from the prior year 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 the decline in fuel surcharges, along with continued weakness in the Canadian dollar.

Our operating expenses for the quarter were 12.2% of net sales compared to 13.5% for the same period last year. This represents 135-basis-point improvement over the prior year, as operating expenses as a percentage of net sales benefited from a variety of areas.

For the quarter, fuel costs decreased by 16 basis points in comparison to the fourth quarter of FY14, as fuel represented 59 basis points of distribution net sales in the quarter. Our diesel fuel costs in the fourth quarter decreased by approximately 14% versus the same period in FY14, while the Department of Energy's national average was down approximately 27.3%, or over $1 per gallon, compared to the same period in the prior year.

Share-based compensation expense totaled $2 million in the quarter compared to $1.5 million in the prior year's fourth quarter. This led to share-based compensation expense representing 10 basis points of net sales in the quarter, compared to 8 basis points in the fourth quarter of FY14.

Operating income for the fourth quarter was $65.1 million, an increase of $13.8 million or 26.9% from the prior year's operating income of $51.3 million. Our operating margin in Q4 was 3.2%, a 25-basis-point improvement over the fourth quarter of FY14, when the operating margin was 2.9%. Interest expense in the quarter of $3.8 million was more than double the prior year's expense of $1.8 million, due to the higher average debt levels following the acquisition of Tony's Fine Foods, and capital expenditures associated with our new DCs in Hudson Valley, New York, serving the Twin Cities in Prescott, Wisconsin, and Gilroy, California.

Inventory was $983 million at quarter's end, as our days inventory on hand averaged 51 days for the fourth quarter, consistent with last year's fourth quarter. DSO for the fourth quarter was also consistent with the prior year's fourth quarter, coming in at 22 days.

Capital expenditures were approximately $31 million or 1.5% of net sales for the quarter, primarily related to our new facilities in Gilroy, California, and Prescott, Wisconsin, and technology investment. For FY15, capital expenditures were $129.1 million or approximately 1.6% of net sales.

Outstanding commitments under our credit facility were $401 million at quarter end, with available liquidity of approximately $200 million, including cash and cash equivalents. Our leverage at the end of FY15 was approximately 1.8 times on a trailing 12-month basis as of fiscal year end.

For the fourth quarter, we generated about $24 million in free cash, although we finished the year in a negative free cash flow position due to the completion of the investment cycle and new facilities. As is typically the case, we expect leverage will increase in the first half of FY16, as we invest in inventory for the upcoming holiday season.

As discussed in the press release, we previously provided our financial outlook for FY16 ending on July 30, 2016, on August 19, 2015. For FY16, we expect sales in the range of approximately $8.51 billion to $8.67 billion, an increase of approximately 4% to 6% over FY15.

GAAP earnings per diluted share for FY16 are expected to be in the range of approximately $2.80 to $2.93 per share, an increase of approximately 1.3% to 6.2% over FY15 GAAP earnings per diluted share of $2.76. Included in our FY16 GAAP earnings guidance is approximately $4 million to $5 million of expected expenses associated with planned severance and working capital costs expected to be incurred primarily in the first quarter of FY16. Adjusted for these costs, earnings per diluted share for FY16 are expected to be in the range of $2.86 to $2.98, an increase of 0.4% to 4.6% over FY15 adjusted earnings per diluted share of $2.85.

We expect our capital expenditures to be in the range of $50 million to $60 million, as Steve said, or approximately 0.6% to 0.7% of expected FY16 net sales. And finally, we expect our FY16 tax rate to be in the range of 39.4% to 39.8%.

At this point, I'll turn the call back over to the operator to begin the question-and-answer session. Operator?

(Operator Instructions)

Our first question comes from Joe Edelstein from Stephens.

Mark, maybe just to clarify, but it does sound like a retirement. Is that the right characterization of your plans going forward?

Well, look, I'm only 46, so I wouldn't say it's a retirement, but I think that once the transition takes place and works through a few things that are currently in process, I'm going to take some time off, and look at what's out there for my next opportunity. I don't think my wife could handle having me home for the next 20 years.

You could have plenty of time for the sports that you follow, all your sports teams, certainly.

This is true.

Steve could you maybe talk, I apologize I'm at the airport, apologize for the background noise, but Steve, where do you think there's going to be the most opportunity for M&A? Is it really in the protein, maybe produce categories, items in the perimeter, and also, what are you seeing in terms of valuations for those types of businesses? Are they starting to move up now that you're being more vocal about your interest?

Yes, I mean I think that the M&A is going to be primarily be in what we would consider gourmet ethnic and fresh. Those are the two categories where we're spending most of our energy, and I think that we have a pretty disciplined approach to M&A, and so, I think because of that, I think we've been able to manage sellers' expectations, and so there's a fairly robust pipeline for M&A. It's just a matter of timing, but I'm very excited about that. We finished Tony's over a year ago, so the team really feels like we are ready. As far as, what was the second part of the question -- the second part?

Just movement in valuations, whether or not that's moving up.

Yes, no I don't think so. I don't think so. We're certainly not going to get -- acquire good companies for [four times], but no, I haven't seen any change in the general valuations that we would be willing to pay and sellers would be willing to accept.

Okay if I could just squeeze in one more. I was hoping you could just talk a bit more to the decision to delay the Gilroy, California facility opening. How much of a drag does that really put on the business, and really once it's opened up, opening it without perhaps a large single customer, that certainly could put some stress on the utilization rates there, at least, they would be quite a bit lower than what you might normally expect, or could you at least talk to that please?

Joe, I'll answer the first part of the question about the drag, and then I'll let Steve discuss more -- Steve and Sean discuss the decision. We were wrapping up the construction, and we still had a few things left to do, so we slowed the pace at which we finished the construction and getting the building open so there will not be much drag, if any, during the first half of FY16. We'll sort of take occupation of the building and finish the construction towards the end of the second quarter, so it will probably start to be a drag as any new building would be, in opening, at the start of Q3, but it won't have any significant impact on Q1 -- and Q2, sorry.

As far as the decision, it really was a factor of, we're going to be terminating our distribution agreement this week, and so to terminate an agreement and also start up a new DC at the same time, would just be way too complicated, and so it really was a matter of logistics. Saying -- let's settle out and close out one program before we jump into the opening, which will now take place in February. Sean, I don't know if you want to add anything there?

Well, with respect to Northern California and the distribution center at Gilroy, the customer that's in transition has a very dense geography, and terrain, and revenue associated with Northern California, so number one, we want to do a very good job in the transition, and then number two, we want to exceed expectations for the current customers. Our existing customers, our go-forward customers, so it's a little bit of a push in terms of how we will roll into the February/March time frame and get started in Gilroy, but we believe we're doing the right thing, and that we're going to deliver a high level of execution through the upcoming holiday.

Okay, and thanks, everybody for all of the comments.

Thank you. Our next question comes from Rupesh Parikh from Oppenheimer.

Thanks for taking my question. I'll start with a housekeeping question, and I apologize if I missed this in your prepared comments. what was the organic sales growth rate in Q4?

For Q4, it ended up being [6.8%]. I think we had indicated that it was going to -- when we had the preliminary call, we thought it was going to be a little bit higher, but when we split the days of the week as to when we lapped the Tony's deal, I think I said roughly 7% when we were on the call in August, and so it ended up being about [6.8%] the way the days fell versus when we closed the deal.

And 7.6% of late.

And then the commentary in recent trends, so last time on your call, I think you said that there was in acceleration of excess of 100 basis points, but it sounds like there was a little improvement even from that on a comparable basis, is that the right way to think about it?

Yes, I would agree with that. I'd just note that's ex the business that we're losing, so the overall business is still about 100 basis points, but backing out the customer transitioning away, it's better than that. We started to see softness in their sales.

And maybe just one more question. In your conventional segment, we have seen again continued moderation, and I think a quarter or two ago, you thought there might be some lumpiness to that business. So any additional thinking in terms of what's driving that continued moderation in your conventional channel?

Yes, I think it's just a general, it wasn't just conventional. I think it was across all three channels that we report, and I think certainly for FY15 it was just a matter of the product being available in so many additional locations. I think that was the key driver to the general slowdown. Most of it, as we talk about access points, a lot of access points that today, they are not a UNFI customer, but we have every expectation that they someday will, but I think that was the key driver.

Okay, thank you. Good luck for the back half.

Our next question comes from Karen Short from Deutsche Bank.

It's actually Ryan Gilligan on for Karen. How should we think about the penetration or rollout of the ethnic gourmet and fresh SKUs at your facilities for next year?

Do you know what? We're going to give you a lot more detail on both of those categories as we move through the fiscal year. We've got some reporting that we needed to develop regarding to both, and so we'll give you more clarity around growth trends in both the categories as we move towards the middle or latter part of the fiscal year.

Got it.

We want to be in a position, Ryan, where once we start sharing the data that we can do it consistently, and be able to take it to the next level for some of the questions that we know will arise. And so we're just making sure we're validating the information internally a bit further, before we start to share publicly.

Makes sense, and do you think the independent segment could regain momentum with the traditional product offering, or has the environment gotten much tougher for them to operate in, and the competition is just increasing from conventional supermarkets?

Yes, I'm a huge optimist, especially as it relates to this group. They are dynamic, a lot of the innovation within the channel tends to start in this channel. I think they got caught by surprise, like many of us, in the beginning part of 2015, but I think that they will rebound. I think that they will figure out a way to have a differentiated product offering, whether it's prepared foods or perimeter or deli, and a whole bunch of other offerings, but I'm optimistic that they are going to figure it out and we'll see some significant growth from them over the next couple of years.

Got it, that's helpful thanks. Just last question on capacity utilization. What would you say the variance is across your facilities, and is there a minimum utilization that you would need, in order to open a facility?

Well I mean, we don't anticipate opening a new facility for at least two to three years, probably closer to three. We've got an extremely robust model that we use to pinpoint by geography, by zip code, where our customer locations are, and the only real place in the US where we travel some miles is the Southwest, Las Vegas, Phoenix, but there's not enough density there for us to build a DC. So it's not something that we're going to be talking about for at least two to three years.

But they generally open, Ryan, north of 50%. It might be, often, they're in a phased approach, so we may do three or four phases, so the first phase may be 10% jumping to 30% and then jumping to 50%, but generally when a new DC is fully loaded to begin operations, we're usually at least 50%.

That's helpful, thank you.

Thank you. Our next question comes from Andrew Wolf from BB&T Capital Markets.

Steve, I think at a recent conference you said something along the lines of you'd be very disappointed if you didn't have substantive conversations with -- maybe for new business, around the Albertson's transition. I thought maybe you were thinking there would either be some transition issues that might affect other customers, or just pricing or something along those lines. So I was wondering if you'd like to elaborate on how things might be going in that regard, or is it too soon? And if you're willing to talk about, why would people want to talk to UNFI now in regards to that?

Well I think what I would comment on is that we're in the fortunate position of having capacity in markets, whereas a year ago we had no had capacity, and so we're able to have the kinds of conversations relating to new items, specific items for a particular retailer, private label. In markets that, like I said, we couldn't do. And so whether it's related to transition or anything else, I'd be disappointed if we weren't able to win some significant business this year.

Okay, so in a way, if this had happened a year ago, it might have been moot, because you weren't in a position to address certain markets?

That is correct.

That's clarifying, and just a housekeeping question. You might have said this, and I'm sorry if I missed it, but did you quantify the impact of the Canadian dollar on the sales for the quarter? And I'm also curious, speaking of currency, if that recent trend update, if the Canadian dollar impact remained about the same?

I would say that for the quarter, Andy, I would say that it was probably about, on a year-over-year basis, it's probably still about a 60 basis point headwind. I'm going off the top because I don't have it in front of me, but I want to say it was in the range of $10 million to $11 million off the $1.7 billion. You get to be about the 60 basis points. It got a little bit worse because Canadian dollars softened a little bit further in first quarter but we have talked about, we are still on track to lap the largest portion of that decline in currency, as we get into the second fiscal quarter.

Okay and just the other housekeeping. On the trend, it's [7.6%] with the impact of some Albertson's bleed, but it's [8.4%] on the base business, on the go-forward business. Is that what you said?

I think that the numbers -- (multipke speakers)

[8%] and [8.4%] are the numbers that Steve --

[7.6%] and [8.4%].

Okay, and what was the time period? Was it quarter to date or the last couple of weeks?

That was the last couple of weeks.

Okay, and is that fairly evenly distributed among the segment? Specifically, were the independents also picked up in that magnitude?

I didn't get into that.

Okay, well thank you very much.

Our next question comes from Steve Forbes from Guggenheim Securities.

Can you just go into a little more detail about the various opportunities with the e-commerce business? You clearly have tons of capacity to grow, so has there been any key business wins over the past quarter, or increases in SKUs or anything you can comment, including the [2016] plan?

Yes, I mean, there's nothing that I would specifically comment on, other than there are some pretty significant e-tailers that have started up over the last couple years that are extremely well-funded that are all UNFI customers. We also have a really active methodology for using e-commerce to satisfy retailers and customers who just aren't big enough to take a delivery by truck. And so obviously, there's a lot of interest across a lot of our retail customers to be in e-commerce. It's growing exponentially, it's still relatively small, but it's growing exponentially. And very optimistic about where it can go, but I wouldn't want to get into any further detail than that. It's actually one of the categories that we're also considering right now.

Okay, and then if we look at the growth within the independent segment, excluding Tony's, how much of that growth is being driven by the larger super-natural chains that are within that segment? Is it most of it, because it then if you can touch on what's going on with the smaller independent operators, and any specific details on categories?

Yes, that's not a data point that we break out.

Okay. Thanks.

Our next question comes from Kelly Bania from BMO Capital.

Thanks for taking my questions and best of luck to you, Mark, in your next step.

Thanks, Kelly.

Just first wanted to ask, lots of moving pieces for next year on the margin line, with cycling Tony's, I guess, and the loss of Albertson's. Just curious if you can give a little detail, if you were to pick out some noise from Canadian dollar and so forth, and start-up costs, just what's the underlying run rate of gross margin that we should be thinking about in 2016, if there's any color you can provide there?

Well you know, Kelly, I think that if we were not having the business transition at the end of this week, I think that we were starting to get some consistency in the margin, where we've been around a 15.4% level for a little bit of a stretch. There are some questions as we transition some of the business, and what happens in Q1. A portion, as we have referenced in the guidance, a portion of that $4 million to $5 million which will break out, maybe impacts from transitioning some of that lost business and some inventory to maybe identified where we take some charges there. But I would say that I think you'll see a much smaller tick down as we go into FY16. And the big question mark, which has always been the case with our business, is where is the channel growth coming from.

So to Steve's point, where if the independents rebound and they start representing more of the historical trend as a percentage of the overall industry growth, the dilution on the margin may be in the single digits. If we continue with some of the trends that we've seen the last couple of quarters, where they're being almost ex the acquisitions impact, three or four times on the super-natural channel growth versus the independent growth, then we may be looking at dilution into the high teens, low [20%s]. But the challenge and part of why we don't guide on the gross margin is that while we have a reasonable amount of clarity as to where we're going to see the top line growth, it is challenging to see which customers and which channels will win in any given quarter.

That's very helpful, and then, I guess just as you think about the independent channel, any discussions with them, and just kind of what they're going through with all these new points of distribution, do you have any sense for what's embedded in their square footage growth versus their comp growth? Are you hearing from any of them they're thinking of slowing square footage growth, or where that is? Any thoughts there.

I guess the only thing I would provide is -- anecdotally is I think the independents who are trying to compete in center store on a price for price, dollar for dollar basis on cereal and commodity dairy, that's not a good long-term outlook. So I think a lot of the independents are looking for exclusive products, local products, fresh products that are really differentiating, whether it be in the gluten free, vegan, macro, products and categories of products that are just never going to be provided by some of their larger competition. And I think that there is certainly a track record of success for independents that have done that. So I think the only thing I would really point to is independents really looking to differentiate themselves in differentiated product categories, as opposed to trying to compete on price with Wal-Mart.

Thank you.

Our next question comes from Scott Mushkin from Wolfe Research.

This is Mike Otway in for Scott. Thanks for taking the question. Steve, you had talked about, I think in your prepared remarks, Tony's exceeding expectations, but as you try to think back about the major drivers of the better results, what sticks out, and then, as you look to add growth through M&A, are there things that the team is focused on, based on these learnings? It's almost like a kind of playbook or an update to that, when you think about bringing on future acquisitions on to the platform?

Yes, sure. I mean, Tony's I would say a couple things happened. One, we were really successful in communicating our core values, which were very similar to Tony's core values. We had no turnover, on the contrary, the Company grew exponentially in our first year of ownership. Tony's did also get the benefit of having the UNFI infrastructure, as it relates to operations. Operations, accountability and metrics. And the last part of it is we did get I think a fair amount of growth related to customers that we shared, where customers got a great deal of comfort in expanding their relationship both with Tony's and UNFI, because the customers were buying from both. So I would say those were the top three drivers, but just a tremendous cultural fit, and the folks running Tony's just did a phenomenal job.

On the M&A side, I would say go large. The larger companies that have infrastructure and processes and standard operating procedures are much easier to acquire than the smaller companies, so it doesn't mean that we wouldn't acquire the smaller companies. We would tend to want to merge them into existing facilities, where at all possible. But generally speaking, a larger Company with infrastructure, larger DCs, are certainly much better for us than the smaller. The larger tends to have cultural alignment, similar benefits, and the smaller companies they tend not to. And we treat everybody the same way so if we acquire a smaller company where the benefit plan is not as robust as UNFI, it's not like we're going to allow the smaller acquired company to keep an inferior benefits package, and so it just gets much more difficult to get the accretion that we need at smaller companies.

That's really helpful. So it sounds, I guess for some of these things, bringing them into your infrastructure, a lot of these are things that are repeatable that may give you more confidence over time, that as you add more and more M&A you can kind of really improve the results under your own ownership?

I think so, yes. Trudeau, we acquired Trudeau in FY15, and it was a smaller Company, FY14. We integrated it in FY15. But you know again, that was a situation where we acquired it because we knew we were building a facility in the Twin Cities, once it was ready they closed their building and moved it into ours.

That's really helpful and then just quickly, Mark, on the housekeeping side. The other income, the $1.8 million, is there anything -- I'm sorry if I missed this, anything that sticks out?

Are you talking other income or other expense, sorry. The other expense, yes. We had an investment that we had made many years ago from a technology standpoint that we wrote off during the fourth quarter, so I would say that of the split, probably about $800,000 is some continued softness in the Canadian dollar, sort of revaluing the balance sheet, and then about $1 million is a write-off of an investment that goes back probably seven or eight years, where the Company just doesn't look to be headed in the right direction.

Okay, thank you both. I appreciate it.

Thank you our next question comes from Robbie Ohmes from Bank of America Merrill Lynch.

It's [Marisa] on for Robbie. Just a question on fuel, and your expectations for both fuel surcharges and fuel costs. I know that -- I think you do some hedging, so I don't know what your expectations are for next year, but any clarity on that would be great.

Yes, we tend not to -- just to split it up a little bit, we tend to actually engage in some fixed price contracts versus hedging, so given that we're going to actually consume the diesel, there's no mark-to-market aspect from our standpoint, if that's the price when we actually use it. I would say that on the fuel surcharges, look, where prices are right now for oil, we're down, I think we're very close to the bottom bracket for where we have fuel surcharges, and if prices stay where they are, or certainly oil prices decline further, we would likely see a drop off on the fuel surcharges. As it relates to, because it's very much just grid-based so wherever the Department of Energy number comes in for a full-week period, that's where the fuel surcharge plays out.

As it relates to our costs, we had locked in some pricing last year that for all of calendar 2015, that at the time looked very advantageous. Right now it's a bit of a headwind and that will continue through the end of December, so into our first and second quarter. And then we've similarly locked in some pricing for FY16, which is a bit more favorable than certainly where we were for calendar 2015, but at the moment with prices having declined further it will represent a little bit of a headwind so I'd say on a year-over-year basis, we would expect that fuel would be more favorable on the expense line, and you'd see a measurable tick up if prices stay where they are beginning in Q3. And on the fuel surcharge, if prices stay where they are, we're probably in the bottom bracket, so the headwind associated with margin, we should start to lap that in, let's say the fourth quarter of FY16.

Got it, that's very helpful. And then on produce deflation, anything to call out in the quarter or quarter to date trends?

No, I think we started to see that we lapped a lot of the challenges that we had in Q3 and the first half of Q4. We've seen some benefit in the Albertson's business, having gotten that behind us.

Great. Thank you very much.

(Operator Instructions)

Our next question comes from Mark Wiltamuth from Jefferies.

Steve, if you could just talk a little bit about the margins and returns on those perimeter categories, I think there's some perceptions out there that because Tony's was 100 basis points lower on operating margin, that's just the way it's going to go for the business as you build it out. If you could just talk a little bit about that?

Yes, the benefit for the long haul is being able to combine the fresh product onto the (technical issue), where we can do that is wildly accretive to our operating margin. Not only our operating margin, but our operating profit [balance], because we're all about scale. The bigger we can make the deliveries, the better it's going to be for us. In the short-term there's a lot of delivering on separate trucks, whether it be produce or protein or core UNFI, but we've lapped it. So we don't anticipate that kind of issue as we move forward, certainly through FY16. But the ultimate goal is to get as much consolidated on to one truck as we possibly can.

So it could still be gross margin dilutive, but you're saying it's not necessarily operating margin dilutive as you grow the business?

It will absolutely be gross margin dilutive but it will not be, or most likely not be, operating margin dilutive.

Okay and if you could give us a few more details on cost mitigation and reaction to the lost Albertson's business, is it just a delay of Gilroy, or are there some other steps that you have got?

No I think the cost, the $4 million to $5 million that we talked about is solely related to severance. We have some really good policies for our associates, and it's predominantly related to a reduction in force, specifically related to the reduction in annual volume.

Okay thank you and good luck to Mark on your next efforts.

Thanks, Mark.

Thank you. At this time we have no further questions. I will turn the call back over to Steve Spinner for closing comments.

Thanks, everybody for joining us this afternoon, and have a terrific evening.

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