United Natural Foods Inc (UNFI) 2016 Q3 法說會逐字稿

Greetings and welcome to the UNFI third-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Katie Turner.

Thank you, Ms. Turner. You may begin.

Good afternoon and thank you for joining us on UNFI's third-quarter FY16 earnings conference call.

By now, you should have received a copy of the earnings release issued this afternoon at approximately 4:05 PM Eastern Time. This press release and webcast of today's call are available under the Investor section at the Company's website at www.UNFI.com. On the call today, are Steve Spinner, President and CEO; Sean Griffin, Chief Operating Officer; and Mike Zechmeister, Chief Financial Officer.

Before we begin, we'd like to remind everyone that comments made by management during today's call may contain forward-looking statements. These forward-looking statements assess 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.

In addition, in today's earnings release and during the call today, management will provide both GAAP and non-GAAP financial measures. These non-GAAP financial measures include net sales, net income, earnings per diluted share, EBITDA and free cash flow.

I'd now like to turn the call over to Steve Spinner.

Thank you, Katie.

Good evening, everyone.

Our entire team has been extremely busy over the last several months with the completion of three strategic acquisitions. As many of you know, we completed the acquisition of Global Organic and Nor-Cal in the third quarter. And most recently, in May, we completed the Haddon House transaction. We're excited to welcome 1,400 new associates to UNFI's family.

Our latest acquisition, Haddon House, is very exciting for UNFI. David Anderson, Senior, and David Anderson, Junior, will continue to lead Haddon as we fully deploy a national specialty foods program as part of our building out the store strategy. We have thoroughly enjoyed getting to know the entire Haddon team and look forward to working together as we integrate our businesses.

Additionally during the quarter, we welcomed Todd Achondo from Nor-Cal and his team, serving as the basis for our drive towards a national conventional produce program. Under our Albert's umbrella, we see terrific opportunities as this business is integrated into our national fresh distribution platform. We remain intently focused on building distribution opportunities with new customers and expanding relationships with current customers.

We believe UNFI is increasingly uniquely positioned, particularly with the addition of Global Organic, Nor-Cal and Haddon House to provide customers across every channel of food retailing with compelling value-added product and service offerings. In just the last few months, we have strengthened our business across fresh, ethnic gourmet, and conventional produce and have further enhanced our national supply chain infrastructure to support our future growth over the next several years.

As many of you know, UNFI began executing a strategy of building out the store several years ago. Our mission was, and is, to provide retailers e-commerce and food service customers with the most comprehensive selection of better-for-you consumer products. We anticipated a contraction in the center of the store as to dry grocery products, and began aggressively building out our fresh offering with refrigerated distribution centers, new customers and acquisitions.

We also recognized the need to acquire a specialty foods business, which would serve as an enabler towards national full-service capabilities in this fast-growing product category. With these latest acquisitions, we believe UNFI is well-positioned as the largest national provider of fresh produce, proteins, bakery, deli, specialty and natural with a fully-deployed service-based sales team representing both the United States and Canada.

Focusing on our quarterly performance for a moment, we are pleased with the sequential improvement in our financial results from the second quarter to the third quarter of FY16. Net income of $38.3 million, or $0.76 per diluted share, improved from $22.7 million, or $0.45 per diluted share, in the second quarter of this year. Our $2.13 billion in net sales was a quarterly record. And we are particularly pleased with our margin improvement over the second quarter.

Gross margin for the third quarter increased 60 basis points to 15.1%, from 14.5% in the second quarter. And operating profit margin increased 106 basis points, to 3.1% from 2%, in the second quarter of FY16. Our team continued to manage the more controllable aspects of our business as we made strategic improvements to improve our sales growth rate and customer experience through the back half of this fiscal year and into FY17.

Third quarter also marked a second consecutive quarter of strong cash flow generation. Operating cash flow and capital expenditures were $80 million [sic, see Earnings Release, "$81 million] and $8.6 million, respectively, resulting in free cash flow of $72.4 million for the third quarter of FY16. And on a year-to-date basis, we have generated cash flow of $176.5 million, representing the strongest year-to-date cash flow generation in the Company's history.

As a result of our third quarter and year-to-date performance, we are raising our guidance for the full fiscal year, which Mike will cover in his remarks.

UNFI's acquisition strategy continues to play an important role in our long-term growth. In the third quarter, integration efforts for Global Organic and Nor-Cal started off strong, and we are now deep into integrating these three, as well as Haddon House. Our customers have asked us for more robust specialty assortment, which we can now deliver.

Once integration is complete, UNFI will have a complete offering of full-service gourmet ethnic, fresh, produce, grocery, wellness and e-commerce to satisfy a much wider range of customers. UNFI's fresh distribution network, capital structure, breadth of product offering and, most importantly, our people, all contribute to our very unique position in the marketplace today.

We now have the capacity to represent our portfolio of brands and products and service offerings under our new organizational structure beginning in August 2016. Everyone at UNFI is very excited about this new initiative. As we believe it brings our teams closer to the retail operator and will serve as the primary driver towards an exemplary customer experience.

As many of you may already know, this means UNFI will soon be structured more regionally with a Pacific Central and Atlantic region. Each region will have a President responsible for all of our products and services within the territory, including fresh, grocery, wellness, e-commerce, food service and ethnic gourmet.

UNFI territory managers will now sell across UNFI's complete product offerings, with a single point of contact for our customers. Innovative technology will help us even further enhance the customer experience as program economics and merchandising drive operator behavior towards a greater share of the store with UNFI. We expect this to fuel even stronger customer relationships than we have today.

Our continued rollout of fresh in Denver and now in Florida, is moving forward as we expand our assortment to serve a wider group of customers in these markets. Our Global Organic acquisition significantly moves our timing of fresh in Florida forward. And as we enter FY17, we plan to provide further detail on fresh and the opportunity this represents for UNFI.

In the third quarter, costs associated with new distribution centers performing under capacity remained a headwind. However, we believe this capacity creates opportunity for us to grow into and should serve us well as we further enhance and build out our specialty and fresh product offerings. Our distribution facility in Gilroy, California, is now fully operational and serving the Bay area of Northern California.

I'm very pleased with our performance in the warehouses and on our fleet. Total warehouse productivity was up 7% year over year in the third quarter, and our transportation costs as a percentage of net sales were down 9%. At the same time, customer fill rates and service levels were higher than they have been in the last several years. Very pleased with the progress we've made year-to-date, and we believe we are well-positioned for future growth.

Before I turn the call over to Mike, I would like to thank the thousands of UNFI team members that worked tirelessly over the last several months to complete our three strategic acquisitions. It is because of your efforts that we were able to continue to move UNFI forward as we grow our business and enhance shareholder value long term.

And now I'll turn the call over to Mike Zechmeister, Senior Vice President and Chief Financial Officer.

Mike?

Thanks, Steve.

Good evening, everybody.

Net sales for the third quarter of FY16 were $2.13 billion, which represents growth of 0.8%, or approximately $17 million, over the third quarter of last year. Our adjusted net sales growth for the same period was approximately 6.1%, excluding the year-over-year impact of the previously disclosed termination of a customer distribution contract. Acquisitions contributed an estimated 0.9% of growth, or $18.1 million of net sales in the quarter.

Inflation moderated for the quarter as it decreased 90 basis points sequentially, coming in at 1.25 versus last quarter. From a channel perspective, supernatural's net sales outpaced overall sales growth, up approximately 3.5% over the prior year's third quarter, and represented 35.7% of total sales. Supermarket's sales decreased 12.5% in Q3 versus the prior year and landed at 25.0% of total sales. Adjusted for the customer contract termination, supermarket sales increased 5% in Q3 over the prior year.

Independent channel grew at 6.1% in the third quarter over the prior year's third quarter, and represented 27.8% of total net sales in the quarter. Excluding the impact of $13 million of net sales from the Nor-Cal acquisition, the independent channel grew at 3.8% in the third quarter versus last year. Food service sales were up 20% over the prior year. And the rapid growth of e-commerce continued, increasing approximately 31.6% over the prior year's third quarter.

Gross margin for the quarter came in at 15.12%, a 29-basis-point decline over last year's third quarter. The decrease versus prior year's comparable quarter was due to continued competitive pricing pressure, a reduction in fuel surcharge, moderated supplier promotional activity, and a shift towards sales in lower margin categories.

Sequentially, third quarter delivered a 59-basis-point improvement in gross margin for the second quarter of 14.53%. The gross margin increase versus second quarter was driven primarily by a sequential improvement in supplier promotional activity and favorable foreign exchange on our Canadian business.

Operating expenses as a percentage of net sales for the quarter improved to 12% compared to 12.2% for the same period last year. Total operating expenses for the third quarter of FY16 included approximately $0.9 million of acquisition-related costs and $1.2 million of startup costs related to the Company's Gilroy, California facility.

For the quarter, total fuel costs decreased by 18 basis points as a percentage of net sales, in comparison to third quarter of FY15, and represented 46 basis points of distribution net sales. Our diesel fuel cost per gallon decreased by approximately 31% in Q3 versus the same period in FY15. While the Department of Energy's national average of diesel was down approximately 25%, or $0.65 a gallon, compared to Q3 last year.

Share-based compensation expense was higher on a dollar basis for the third quarter at $3.2 million, compared to $2.4 million for the same period last year, representing 15 basis points of net sales compared to 11 basis points in the third quarter of FY15. The increase in third quarter this year was due to a larger reduction in last year's third-quarter share-based compensation related to long-term equity incentive plan for members of our executive leadership team.

Operating income for the third quarter was $66 million, a decrease of $3 million from the same period last year. Operating margin in Q3 was 3.1%, a 16-basis-point decline over the third quarter of FY15, driven primarily by gross margin headwinds previously noted. Operating margin increased 106 basis points compared to second quarter of 2016, due to savings in operating expenses from expense controlled programs across the business, favorable foreign exchange, improved strategic business unit performance, and improved leverage across fixed costs.

Our EBITDA as a percentage of net sales in the third quarter was 3.94%, down 10 basis points versus third quarter of last year. And an improvement of 112 basis points sequentially over second quarter. As we move forward, we'll place a greater emphasis on EBITDA margin versus operating profit margin to ensure proper focus on cash generation from the business.

Interest expense in the quarter was $4.4 million, 11.8% higher than Q3 of the prior year, primarily due to an interest rate swap agreement effective in August on our term loan. As communicated previously, we expect this swap will effectively fix interest rate on the remaining term loan and will be approximately $0.03 dilutive to EPS for the year.

Other Income was $0.6 million for the quarter, a decrease of $3.8 million compared to Q3 of the prior year. As you may recall, Other Income in Q3 last year included a pretax gain of $4.2 million related to the transfer of land for our Prescott, Wisconsin facility.

For the third quarter of FY16, the Company reported net income of $38.3 million, or $0.76 a diluted share, a decrease of approximately $3.5 million from the prior year's third quarter. The impact of acquisitions was neutral to EPS for the third quarter of FY16, including $0.9 million of related acquisition costs.

Inventory was $0.98 billion at quarter end, an increase of 4% compared to the third quarter of last year, due primarily to the startup of the Gilroy facility and increased sales over the prior year period. Capital expenditures were approximately $9 million, or 0.4% of net sales for the quarter, the largest portion related to continued investment in our warehouse management and procurement systems. For the third quarter of FY15, capital expenditures were $42 million, or a 2% increase, due to spending on the construction of our Prescott, Wisconsin, and Gilroy, California, facilities.

At the end of Q3, the available borrowing base under our credit facility was $854 million, with available liquidity of approximately $571 million including cash and cash equivalents. As previously announced, on April 29, 2016, we amended our revolving credit facility, increasing the aggregate availability under the facility from $600 million to $900 million. Our debt-to-EBITDA leverage at the end of third quarter, improved to 1.51 on a trailing 12-month basis, which included financing the Global and Nor-Cal acquisitions.

Q3 leverage represents the lowest level since the end of third quarter of FY14, just prior to our acquisition of Tony's Fine Foods. The impact of leverage from the Haddon House acquisition, which closed after the completion of the quarter on May 13, 2016, was an increase of approximately 0.7.

As Steve mentioned, we generated free cash flow of $72.4 million in the third quarter, driven by continued working capital improvements and reduced capital expenditures. Our year-to-date free cash flow was $176.5 million, the strongest nine-month free cash flow in Company history. We anticipate positive free cash flow for the remainder of the year, landing us in a range of approximately $200 million to $220 million for FY16.

As outlined in this afternoon's press release, we are raising guidance for FY16. We expect net sales to be in the range of $8.47 billion[sic, see Earnings Release, "$8.46 billion"] to $8.50 billion, which represents a 3.4% to 3.8% increase in total net sales over FY15. The increased guidance is driven by net sales from acquisitions, which are expected to come in at or above approximately $160 million, adding 2.0% growth to FY16 net sales. The previous guidance was $8.31 billion to $8.43 billion.

In addition, we are updating our GAAP diluted earnings per share guidance for FY16 to a range of $2.47 to $2.53. Our previous GAAP earnings guidance was $2.27 to $2.37 per diluted share. As a reminder, included in our FY16 earnings guidance is approximately $4.8 million of restructuring charges and $1.9 million of acquisition costs that we incurred in the first nine months of FY16. The revised guidance includes acquisitions of Nor-Cal, Global Organic and Haddon House, which are expected to be neutral to EPS in FY16, including acquisition-related costs.

As a recap of our acquisition activity, the Global Organic acquisition closed on March 7, 2016, at a purchase price of $20.6 million; the Nor-Cal acquisition closed on March 31, 2016, for $68.6 million; and the Haddon House acquisition closed after the completion of third quarter on May 13, 2016, at a price of $217.5 million.

Capital expenditures for 2016, are expected to be approximately $40 million to $45 million, or approximately 0.5% of estimated FY16 net sales. And finally, the Company expects FY16 tax rate to be in the range of 39.4% to 39.8%.

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

(Operator Instructions)

John Heinbockel, Guggenheim Securities.

A couple of things.

Steve, I want to start with the new organizational structure and the dialogue you're going to have with both existing and new accounts. How is that going to change?

And then, how will that play out in terms of timing? Is that something that new and accounts are going to have to get used to? It will take time to sell them on the new structure? Or it's something that can bear fruit more quickly than that?

John, we actually announced internally the reorg structure, I want to say five months ago, four months ago. We announced it quite some time ago. So for the last four months, we'll say, we've been staffing the teams.

The teams are now fully staffed. We've been out talking to customers. And the first thing is, we're not going to disrupt a customer relationship. And so for those customers that are used to having contact with a specific person, that's not something that's going to get disrupted right out of the gate.

The first and most important thing that we are looking to do is make sure that our salespeople, whether they're calling on independents or a chain, are selling 100% of the brands that we have in our arsenal. So regardless of whether it's a supermarket or an independent, we want their contact to be selling fresh, fresh produce, conventional, organic, specialty, core, center store. And that we now have in place.

It took us a little bit longer than I think we'd like to get there. But we feel good about the training that's taken place, the change management that's taken place, the quality of the leadership teams in each one of the regions. And it formally takes effect August 1, 2016.

And when you do an acquisition, such as the three you've done here, do they immediately go into the new organizational structure? Or do you keep them aside for some period of time just to assimilate them?

The answer is it depends. Global, because of their physical location, will be folded in relatively quickly. Nor-Cal is being folded up underneath Albert's Organics.

Haddon we will let run separately for some period of time to ensure that, one, they have a very high service, high-touch model that we need to fully understand. We need to learn from them. And so we're not going to integrate that business until we're comfortable that we fully understand it; they fully understand it; that we've identified all the risks. We know that we are converting their computer system into our system certainly within about a year. So that one, given its size, we're going to be careful; and we'll take our time.

All right and then lastly, the sequential step up in vendor promotional support, is there any way to tell if that is tactical or longer lasting? I don't know if you've seen that continue. What's your thought there?

This is Sean, John.

At this stage in the game, there's so much lumpiness around trade spend that it would be difficult to forecast forward what we see in Q3 as something that we would expect to continue in Q4/Q1 of 2017.

Some of the margin improvement was due to lapping some of the FX problems in Canada, some fuel surcharge. But generally, we were pleased with what we saw.

Okay, thank you

Scott Mushkin, Wolfe Research.

Hello. Thanks for taking my questions.

I just wanted to make sure I understood guidance, Mike -- what was said on the EPS side. It looks like on the revenue side, taking the revenues at $160 million out, I think you are, the core, you're guiding to the lower end of your previous guidance. Is that correct?

Yes. The annual guidance, the top-end annual guidance of $3.4 million to $3.8 million, is an increase obviously, driven primarily by the acquisitions. And on the bottom end, we took the EPS up to capture the improvement in third quarter.

So that was the only thing I was trying to understand with what you said. Sorry, if it's kind of maintenance stuff here. Are you getting any EPS benefit from ex the GAAP? Because I know you guided to $2.47 to $2.53 non-GAAP. Does that have any EPS benefit from the acquisitions in it?

Yes, what we tried to articulate in the communication was that we are neutral on EPS, both in the quarter and on the year, related to the acquisitions. But that includes acquisition-related costs. So we've experienced $1.9 million of acquisition-related costs year-to-date, and $900,000 of that was in the quarter. And we are neutral both on the quarter and the year as a result.

So if I'm reading this, adjusted earnings per diluted share, that adjustment takes that out? That's correct, right -- in what you released?

Yes.

It does take it out? Okay. I might have to take this off-line because I'm just trying to understand what's in there and what's not, and I don't.

So on the revenue side, getting back to that. This is a broader question. It seems like, are you seeing, ex the acquisitions, any improvement in what's going on in the industry overall?

And you obviously, I think, talked about a sequential lowering of the inflation rate. So just any update you have on what's going on with the base business would be great. And then I'll yield, thanks.

I think the base business is generally stable. We know over time, as I said in my prepared remarks, that I think that there's going to continue to be contraction in the center store. Nothing new there, which is why we worked so hard to build out the perimeter and the related fresh offerings.

I think that the Haddon House specialty products give us an interesting opportunity to fully deploy that product category in a lot of markets that we don't currently have it. So I think we'll start to see some growth in the center store related to that. But I think generally, it's stable. It's not up; it's not down; it's kind of flat.

Perfect. Thanks.

Sean Naughton, Piper Jaffrey.

Hello, good afternoon.

Just quickly on the gross margin, just in terms of the outlook. It's been a tough line item for us to forecast. Should we continue to expect year-over-year declines but maybe just at a lower rate?

And then just given the longer term, the mix of the portfolio today, it does feel like we're reaching a more normalized level. Is that a fair way to think about gross margins moving forward? Or have we not come to a baseline yet on where the business is trending?

Sean, it's Mike.

Your question is about gross margin. Obviously, we'll come back in our fourth-quarter call and give guidance to FY17 and some long-range guidance as well that will help you understand the business a little better from that perspective.

And we've been articulating to looking back headwinds on gross margin, particularly related to FX and fuel, which we don't have a fuel surcharge today; that's material, which has certainly been a headwind on gross margin, and the FX has been as well. And then we've outlined some of the other items as well.

So forward-looking, some of those elements are more difficult to forecast than others. But we'll certainly give you guidance on that when we come back in the fourth quarter.

Those items look like they're getting potentially a little bit easier over the next, call it 6 months to 12 months, if things were going to stay at a steady run rate now for some of those items that you just described.

If they stay steady, you are absolutely right.

Okay And then just a bigger question again. I know this goes back to the last question as well, is just on the growth rate of the business. Your organic growth rate looks like it continues to go down just a little bit further, both on the one- and two-year stacked trend. Maybe you can help us think about the industry.

I think most participants have said this is a 10% grower typically on the top line, but seems like most people are coming up short of that. Just any updated thoughts about how you feel about where the industry is today and where it's going based on your visibility. Thanks.

Sean, I think in the center of the store that one of the biggest drivers, certainly on the national side, is private labeling, in mass and conventional, which is escalating at an extremely rapid pace. So certainly the larger national branded manufacturers in the natural channel, one of the biggest uphill battles they're facing is just the plethora of new private label natural brands that are finding their way into mass and drug and convenience and conventional. So certainly that's a trend that I think we've all been fighting with for some while.

But again, if you look back over time, private label tends to have a very cyclical nature to it. A lot of it comes on and then it backs off. A lot of it comes on and backs off.

I don't think there's any doubt that retailers will, over time, contract their center store as perimeter and products that they can be differentiated in become more important. And so we've adjusted our model with that. So I think what you're seeing in our sales growth is this window of time where we've built the infrastructure; we've started to have some traction around becoming penetrated in those categories. Just not enough to move the needle.

Got it. Thank you.

Joe Edelstein, Stephens.

Hello. Good afternoon, everyone.

Just to stay on the mass channel, FDM channel, there's been some talk about the potential for a new customer when in this segment. Just hoping you could talk a little bit about what you feel like you need to do to start winning some business in that channel.

And maybe you could even talk about it in the sense of how did the service levels, the in-stock levels, compare when you would be servicing this type of customer versus a mass retailer that would be certainly looking to potentially do this on their own. They would certainly have capability to take full truckload size. But they have to weigh that against the benefits for what they can manage from an in-stock.

So is there even any sense that the in-stock levels today for a mass retailer would be more narrow than what they were a few years ago, just given the amount of availability and product today?

If you're talking about the fresh perimeter business, where UNFI has a full product offering in organic produce, fresh produce, bakery, deli, specialty cheese, protein, et cetera. I think that we have the most built-out network closest to the consumer, regardless of whether the customer is mass, conventional, independent, et cetera.

And so I think we're optimistic that there's going to continue to be business wins. We've already had a few. And quite frankly, I would prefer that they tend to be smaller wins that gain sequential improvement quarter over quarter, year over year.

But we are also in front of a lot of the big conventional or other retailers that we feel should be using some, or all, of the services that we offer. When we're at a point where any of those need to be announced, you will be the first to know.

We've been working hard at building the infrastructure and having the technology and the resources and the intellectual capital to be a true national provider of cold chain. It's a lot different than handling chips. And we've put a lot of work into it, and feel we're in a great place to start taking advantage of that network.

We speak an awful lot about categories and products and the depth of UNFI's assortment. But we don't speak enough in terms of how the supply chain in this infrastructure evolves into a solution. And when you're talking about the selling cycle for a significant mass retailer, it's a quite lengthy selling cycle. However, it's about selling a solution versus selling a category or a product. And we are well-positioned there.

Sean, Steve, I appreciate the comments there.

Also, I wanted to come back to the gross margins and really the vendor support there. Was there any component that would've been breakpoint-driven from a sales standpoint? Or was this more fully a discretionary promotion that may not be as sticky?

No, I don't think there was anything in the quarter. I think that the gross margin was, as we discussed, primarily driven by FX. But some improvements in our trade spend, some seasonality, associated with it.

Okay, thanks for the clarification there.

And maybe a bigger-picture question. There's certainly been a lot of growth in e-commerce. I think you even called out your own business grew 31%. Lots of new innovation and even to the last-mile delivery.

And I was curious, how much opportunity you see at this point as you've developed the infrastructure that you spoke to, Steve. But how much opportunity do you see from partnering with alternative retailers -- the Amazon's and even meal delivery companies or other online driven concepts here?

Listen, our strategy is to get better-for-you products into as many consumers' hands as we possibly can, regardless of the channel and regardless of the mechanism by which that product gets ultimately to the consumer. So whether it's click and collect, direct-to-consumer, direct-to-store, we want to make it easy for a retailer to use UNFI in order to make that happen. I think that's the best explanation I can give you.

Okay, well, thanks and good luck.

Robby Ohmes, Bank of America Merrill Lynch.

Thanks for taking my question.

I don't know if you'll get it, but I was wondering if you could talk a little bit about the organic growth outlook for Nor-Cal and Haddon House and Global Organic. Do you expect to grow these pretty solidly over the next several years? Or should we think of them more as there's really good margin improvement that you could generate now that you own them? Maybe just a little color on what you're going to be doing with them now. Thanks.

Sure. Not going to give you specifics around how we see the actual numbers playing out, but I will provide you this explanation.

The reason we bought Nor-Cal is because they were 70% conventional produce, 30% organic. We really needed to have a conventional produce offering. As you might imagine, at Albert's, as the largest distributor of organic produce across the country, we've been competing pretty hard with conventional distributors who have started to take on organic over the last four or five years.

And so we felt as though conventional was a very important part of our strategy. Today, we only have it in half of California. Nor-Cal serves as our base to move conventional throughout every Albert's distribution center. Our expectation would be a significant amount of growth from Nor-Cal in Albert's as we move conventional into the Albert's DCs.

The same thing applies to Haddon. We had specialty gourmet ethnic. We just didn't have it in all of the right geographies. And I would say that I don't think we really fully understood the service portion of that business in terms of the quality and the type of the individual that was calling on the store on a weekly basis to actually do the work around order entry, receipt, reset, et cetera.

And so, with Haddon, we now have full coverage in the eastern half of the US. And we will begin rapidly deploying the Haddon model across most our major DCs and urban markets over the next year. So we would expect a fairly significant amount of growth associated with both conventional produce and specialty.

Steve, just on the appetite for further acquisitions from here. Is the focus growing Haddon and Nor-Cal? Or should we look for you to do more of these type of things over the next few years?

We redid our credit facility. We are starting to throw off more cash than we've ever thrown off before. We have the capacity, in certain markets, to take on some new business. So I think that we're going to continue to be opportunistic.

Despite what's happened in the last year or 18 months, we still view ourselves as a growth Company. And so, that's where we see using our cash. That's where we see using our balance sheet. Now, having done three in the last couple months, it would be nice if we could breathe a bit. But sometimes you don't have that luxury. So I guess it's a long way of saying that we will continue to be opportunistic when it comes to M&A.

Got it. Thanks very much.

Andrew Wolf, BB&T

Thanks and congratulations on a strong quarter.

Just looking inside your numbers, it looks like 4%-4.5% volume is the new normal inside the store. At least that's been the trend the last few quarters. Add inflation to that, this quarter it was low.

So based on what you've seen out of Denver with the fresh rollout, what you're thinking about could happen in Florida, Nor-Cal, can you give us just a sense, maybe a range, how much can that volume pick up when you start distributing more fully throughout the store, particularly fresh where the growth rate is so much better?

I think it's hard to answer that at this point in the quarter and the year, Andy. And I would say I think we'll be in a much better position to give you more color around that in our guidance for 2017.

Okay, I understand you don't want to get in front of guidance.

There are different ways of coming to what the growth rate might be on the perimeter for the industry. And I think previously you have said it's pretty fragmented. Most of the competition is smaller than, let's say, Tony's -- or Haddon, well, it's sort of mixed there.

Is there any reason to think Tony's, or in the produce side of things, that (inaudible) shouldn't be able to grow at least with the rate of growth in the perishable side of the stores?

I'd say directionally that's right. But again, we'll get into more confirmation of that, or discussion of that, in September.

Okay, and I just wanted to follow up inflation. I probably missed this, but what caused the slowdown sequentially? Was it perimeter stuff with the area and meat or something else?

The 90-basis-points decline versus second quarter down to 1.25 for inflation, there are elements of that. As you know, meat deflation; cheese has been flat to deflationary over time. And those are driving the numbers down for sure.

So where you get the promotional money, is that just the center of the store? Or is it also in perishables and so forth?

It depends on the perishable. Generally, commodity proteins would carry no trades. Any processed products, delis and food service, bakery would probably have some. It's harder to increase your gross margin with no inflation because we would typically buy into rising markets.

So it's largely grocery. It can be frozen; it can be dry; center store-- but certainly, index to grocery versus perishable.

And last follow-up housekeeping. On the cash flow, in a more typical year, Q4 is the big cash flow generator year for the Company. Obviously, you've had three strong quarters in a row. I think some of that is working capital released with the customer termination.

But should there still be this cyclical pattern, where Q4 is still the strong cash flow quarter?

Yes, Andy, we've pointed to continued positive cash flow as we move forward to the end of the year. I put the range out there at $200 million to $220 million. We anticipate that we'll continue to be where we've been year-to-date on CapEx, so we won't see it there.

But beyond that, it really comes down to our performance on our working capital metrics. And we are focusing there. We're trying to improve our working capital. We've done a nice job of that.

And to the extent we can do that, that can improve our number going forward, too. The cash generation for the business is strong. And you're absolutely right that Q4 has been a good quarter for UNFI historically. And we assume it will be nice, solid, positive quarter again for UNFI.

Thank you.

Rupesh Parikh, Oppenheimer

Thank you for taking my questions.

First on Haddon House. Again, I'm not sure if you're going to actually provide color. As we look out to FY17, is there any color you can provide at this point to try and think about what that can contribute next year? Or even if you can't provide forward guidance, maybe just some historical data on the acquisition?

We expected that we would get this question. But I think what we've provided was the aggregated acquisition numbers in the quarter and in the anticipated for the year. And we'll provide a lot more of the color in 2017. Keep in mind that it's going to be getting harder and harder to report them separately as we integrate these businesses into our business systems.

Global will be integrated into our Albert's system relatively soon. Nor-Cal will be integrated into our business systems certainly within the next -- third quarter next year. And then Haddon will be integrated into our systems around this time next year.

A lot of the business is going to move around as we do this. So it's going to get a little bit clunky to get to that data, but we'll try in September.

Okay, great.

And then, Steve, we've seen in the past few months a number of grocers with -- well, actually most grocers that miss their top line trend. And some have called out a choppy backdrop out there. As you look at your base business, are you also seeing a similar choppiness within your data?

I think that our numbers have been relatively flat. They're not getting consistently better. They're not getting consistently worse. I'm not sure that it's choppy, per se; but a little yawny.

But given the initiatives that we have in fresh and produce and specialty, those are the things that get us pretty jacked about moving forward.

Okay, thank you.

Zach Fadem, Wells Fargo.

Hello.

On the M&A in the quarter, Global and Nor-Cal, is that all independent customer business? Or is there a conventional or other segment revenue component?

And also, can you give us a sense of the Haddon House sales mix by channel?

Yes, Global and Nor-Cal are predominantly independents in Northern California and Florida, respectively. And what was the second question? I'm sorry.

Just what should we expect for Haddon House, the mix by channel, as we look ahead?

I'm not sure that we're going to provide that. We haven't thought about that actually.

I mean is it mostly independents, conventionals?

I'm hesitant to give the data because, quite frankly, I don't know the exact data off the top of my head. And I'm pretty sure nobody else does as well. So we're going to have to table that one and think about how we want to deal with that question.

Okay. And just to follow up, can you talk a little bit about the moving parts here driving the operating expense leverage in the quarter? Specifically, the impact of Gilroy, restructuring initiatives that you have done? And also the improvement in your fuel contracts?

And then, secondly, can you also talk about any reinvestments or planned spending for the M&A?

We outlined some of the costs that are included in the numbers for the Gilroy startup. The fuel is an interesting one because while we lose the fuel surcharge, which affects our gross margin, we get back a benefit down in operating expense from the reduction in fuel expense. So we've seen nice pick up there. And the net fuel impact overall then for us is positive.

We have done some price locking to do some hedging. Some of that is in the money; some of it's out of the money. But it's certainly been a tailwind for us in the quarter relative to last year and in the quarter relative to last quarter.

Great and then on the reinvestments for the new acquisitions?

Well, is your question what is our plan regarding the free cash that we are creating?

Really more around any step-up in spend to reinvest in the deals that you've closed, be it capacity or any other kind of reinvestments?

No. Definitely not.

Great. Thank you very much for taking the questions.

Mark Wiltamuth, Jefferies.

Hello, good afternoon.

I want to ask about the 365 stores. As hopefully this rolls out more of those, is that better for you or worse for you versus a Whole Foods bannered opening?

It's neutral as it relates to Whole Foods 365. We see that as an opportunity to support Whole Foods in urban markets; and so far, so good. Of course, they opened up in Silverlake. They've got a number of locations signed through the remainder of this calendar year and into 2017.

But in terms of product mix and so forth, it doesn't really affect you that much?

It continues to be positive. It doesn't affect us negatively.

Okay, thank you very much.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I'd like to turn the call the back over to management for any closing remarks.

Thank you very much for joining us this evening. Have a terrific summer, and we'll talk to you in September.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your time and participation today. You may disconnect your lines at this time and have a wonderful rest of your day