United Natural Foods Q2 Earnings call Transcript

123jump.com Staff
07 Mar, 2010
New York City

United Natural Food, the organic and specialty food distributor net sales grew by 6% in the second quarter to $898 million helped by higher sales. Net income improved by 15% to $15.7 million and earnings per share were $0.36 against $0.32 in the year ago quarter.

United Natural Foods, Inc. ((UNFI))
Q2 2010 Earnings Call Transcript
March 2, 2010 10:00 a.m. ET

Executives

Scott Eckstein – Financial Relations Board
Steven L. Spinner – President and Chief Executive Officer
Mark E. Shamber – Chief Financial Officer, Senior Vice President & Treasurer

Analysts

Meredith Adler – Barclays Capital
Edward Aaron – RBC Capital Markets
Analyst for Scott Mushkin – Jefferies & Co
Gregory Badishkanian – Citigroup
Andrew Wolf – BB&T Capital Markets
Chris Kruger – Northland Securities
Anne Gurkin – Davenport & Co
Ajay Jain – Hapoalim Securities USA, Inc
Michael Krestell – M Partners, Inc.

Presentation

Operator

Good morning ladies and gentlemen, thank you for standing by. Welcome to the United Natural Foods second quarter fiscal 2010 conference call. During today’s presentation all parties will be in a listen only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) If you have a question please press * followed by the 1 on your touchtone phone. Please press”*0” for operator assistance at any time. For participants using speaker equipment it will be necessary to pick up your handset before making your selection. This conference is being recorded today, Tuesday, March 2 of 2010. I would now like to turn the conference over to our Mr. Scott Eckstein with Financial Relations Board. Please go ahead sir.

Scott Eckstein – Financial Relations Board

Thank you, operator and good morning everyone. By now you should have all received a copy of this morning’s press release. If anyone still needs a copy please contact Joe Calabrese in our New York office at 212-827-3722 and we’ll send you a copy immediately following this morning’s conference call. With us this morning from management is Steve Spinner, President and Chief Executive Officer and Mark Shamber, Chief Financial Officer.

We’ll begin this morning with opening comments from management and then we will open up the line for questions. As a reminder, this call is also being webcast today and can be accessed over the Internet at www.unfi.com. Before we begin, as usual we’d like to remind everyone about the cautionary language regarding forward-looking statements contained in the press release. That same language applies to comments made on this morning’s conference call.

With that, I’d like to turn the call over to Steve Spinner. Steve please go ahead.

Steven L. Spinner – Chief Executive Officer

Good morning and thank you for joining us. Sales are growing. UNFI is winning business across the organic specialty categories and our strategies for long-term growth are in place. During our last quarter call I talked about greater predictability in our sales growth and provided sales guidance of 2.5% to 5% for the year. In Q2 of 2010 our sales grew 6% clearly indicating that our sales force is demonstrating the strength of our company to our customers and the markets for our products are improving. It is also important to note that inflation moderated to 1% reflecting real sales growth in the period. During the last quarter I also talked about new business in the pipeline and I am very pleased to announce that UNFI has secured approximately $100 million in annualized new business which began rolling out in late January and will continue to phase in through late spring. This new business includes products in the specialty and organic lines and again demonstrates that our entry into this specialty space was in fact quite strategic.

UNFI’s diluted earnings per share were $0.36 in the quarter and 14% ahead of prior year, reflecting the quarter of one time costs associated with on boarding new business and severance costs related to the retirement of a long time UNFI executive. Similar costs will continue through the third quarter of our fiscal year. I’m quite pleased with our results during the period and feel confident that there is considerable momentum driving the company forward. There were several highlights during the quarter. Our East and Western divisions demonstrated improvements across expense control, new business growth and operating margin. In addition we saw continued improvements in our Woodstock farms manufacturing facility and Blue Marble brand’s business.

As we discussed during the last quarter gross margin this year was 57 basis points behind prior year. This was driven by continued change in customer mix, elimination of fuel surcharges and 1% inflation. Gross margin shortfall was offset by continued improvement in expense controls and moderated fuel costs. And it is important to again point out that as the company migrates towards the lower margin customer opportunities this will also be reflected in our gross margin rate. Product cost deflation also has an impact on our overall gross margin. Inflation in the second quarter of 2009 was 8% versus 1% in the second quarter of 2010. This significant change limits the company’s opportunity to buy into rising markets. In addition manufacturers have significantly scaled back promotional spending throughout our customer channels.

For the first half of our fiscal year UNFI diluted EPS increased 14.3% to $0.72 per share and sales increased 4.2% over the prior year. Net income is up 16% over prior year reflecting strong operating disciplines, cost controls and strong execution on the part of our associates operating our distribution centers. I am quite proud of our first half results.

Growing market share, driving operational excellence, becoming one company, and continuing our belief in sustainability philanthropy have become the pillars for our current long-term success. We expand our market share with the addition of new customers and expansion of current customers with added products. We are driving operational excellence with the implementation of new technologies in our distribution centers, thankfully becoming common metrics in measuring everything we do. We are becoming one company by nationalizing support services and the manner in which we go to market without giving up what makes our company so strong making sure we stay close to our customers and suppliers will always drive our decision making. We will continue to be innovative in our disciplines to reduce our carbon footprint and support through philanthropy supporting those organizations that share our beliefs.

During the quarter UNFI was awarded the EPA SmartWay highest score reflecting our commitment to fleet fuel reductions and was awarded the U.S Environmental Protection Agency’s esteemed Energy Star rating in our Chesterfield, New Hampshire facility, marking it as one of the most efficient distribution facilities in the nation for superior energy efficiency and environmental protection. In addition to our core strategies for growth, UNFI will continue to support the organic industry, the independent retailer and emerging organic manufacturers and growers. The key to making this happen is people. And today through new associates brought on to the team and the development of high potential associates within our company, we are in a terrific position to move forward, always operating with the highest levels of integrity in all of our endeavors.

On our balance sheet UNFI continues to generate free cash and we remain comfortable with our target of $30 million to $50 million for the year. Capital expenditure during the quarter was 68 basis points as a percentage of sales. Our target of less than 1% of sales continues to be a good measure of CapEx for the current fiscal year. As we’ve disclosed with the completion of our Texas facility early in fiscal 2011, CapEx will moderate with future continued investment in information technology and doling expansions.

Now, I’d like to turn over the call to Mark Shamber, our Chief Financial Officer.

Mark Shamber – Chief Financial Officer

Thanks Steve and good morning to everyone listening in on the call on the webcast. Net sales for the second quarter for fiscal 2010 were $898.2 million which represents growth of 6% or approximately $50.6 million over prior year’s second quarter net sales of $847.6 million. Year-to-date net sales are $1.78 billion yielding sales growth of $71.1 million or 4.2% over the prior year. For the second quarter of fiscal 2010, the company reported net income of $15.7 million or $0.36 per diluted share, an increase of approximately 15% or $2 million over the prior year. Net income for the second quarter of fiscal 2009 was $13.6 million or $0.32 per diluted share. In the second quarter sales to the supernatural channels increased by 13.7% and Supernaturals now represent 36% of sales. The Independent channel sales returned to positive territory with growth of 2.5% for the quarter. However, independent declined slightly from a mix standpoint and now represent approximately 40% of sales. As Supermarket channels experienced growth of 5% over the prior year and that channel continues to represent approximately 20% of sales. And finally food service also returned to positive growth with sales increasing by 3.9% over the prior year and they now represent approximately 2% of sales.

At 18.5% gross margin for the quarter showed a 57 basis points decline over the prior year second quarter gross margin of 19.1%. Gross margin in the second quarter was lower due to a combination of lower year-over-year fuel surcharges and continued shift in the growth mix of our business towards the supernatural and conventional supermarket channels and significantly lower year-over-year inflation. Gross margin for the first six months of fiscal 2010 was 18.6% compared to 19.3% for the prior year, a decline of 68 basis points due to the same factors I just mentioned although lower fuel surcharge revenues are a larger factor in the six month margin.

As we previously discussed in general, we will continue to experience pressure on our gross margins as we gain additional business with conventional supermarkets. Offsetting the gross margin impact we will also continue to experience improvements in operating expenses as the supermarket channel has a lower average cost to serve model than our independent channels. Combined with the one company in operational excellence aspects of our Moves Initiatives we continue to believe we will generate operating margin expansion as we have done in the first half of fiscal 2010 increasing our operating margin by 10 basis points from 3% to 3.1%.

Our operating expenses for the quarter were 15.5% of net sales compared to 16.1% for the same period last year. This represents a 59 basis points improvement over the prior year as operating expenses benefited from lower fuel costs and continued expense in cost control. During the quarter we incurred approximately $0.4 million or 4 basis points in non-recurring expenses associated with severance for former executives. In addition we incurred approximately $0.3 million of wrap up costs associated with on boarding new business during the quarter that began shipping in January.

Fuel had a positive impact of 6 basis points of operating expenses in comparison to the second quarter of fiscal 2009 as fuel represented 68 basis points of distribution net sales in the quarter. Sequentially fuel costs improved by one basis point over the first quarter. Nationally diesel fuel costs in the second quarter increased by approximately 5% from the first quarter to national average of $2.79 a gallon using the Department of Energy’s weekly prices. This represents an increase of approximately 12% over the prior year average for the second quarter of $2.47 a gallon.

The company has managed to reduce our fuel costs despite rising prices by updating and revising existing routes to reduce the amount of travel, reducing idling times, and other similar measures.

During the quarter we recorded a share based comp expense of $1.8 million or 20 basis points compared to expense of $1.6 million or 19 basis points in the prior year. Operating income was 3.1% for the second quarter, a 2 basis point improvement over the prior year. Excluding the severance and new business ramp up costs operating income would have been 3.2% for the quarter or 10 basis points higher than the prior year. Interest expense in the quarter of $1.6 million was approximately 13% higher sequentially and was approximately 51% lower year-over-year. The sequential increase was due to higher average inventory levels during the quarter for the year-over-year decline was driven by a combination of lower interest rates and lower average debt levels during the quarter.

Our inventory days on hand were 50 days for the second quarter which is at the high end of our target range of 47 to 50 days. However, this represents some 8 days decrease from the second quarter of fiscal 2009 but is approximately a one day increase sequentially from the first quarter. The sequential increase was related to new SKUs and inventory added during the quarter for new business that we had been awarded that began shipping during January. DSO for the second quarter was at 20 days which was favorable to our target range and is consistent with prior year. Capital expenditures were $6.1 million for the second quarter and are $15.8 million or 0.9% of the revenues for the first six months of fiscal 2010 which is right in line with our target of approximately 1% for the year. We expect our capital expenditure to increase during the second half of fiscal 2010 as we begin the build out of our new lease facility in Lancaster, Texas.

Free cash flow for the second quarter was positive $2.5 million bringing the free cash flow for the first half of 2010 to $10.3 million compared to the first half of fiscal 2009 which had a $0.5 million negative free cash flow. As Steve mentioned this puts us in line to achieve our annual target range of free cash flow of $30 million to $50 million for the fiscal year which we presented at our Annual Day last June. Our leverage as at the end of second quarter was approximately 1.7 times based on the trailing 12 months and our return on equity was 10.9% over the same timeframe.

Our outstanding commitment under our amended and restated credit facility as of January 2010 was approximately $207.4 million, leaving us with liquidity of approximately $184 million after factoring in cash on hand.

That concludes our prepared remarks and at this time I’ll turn the call over to the moderator to facilitate the question-and-answer portion of the call.

Question-and-answer session

Operator

Thank you, sir. We will now begin the question-and-answer session. As a reminder if you have a question please press the * followed by the 1 on your touchtone phone. If you’d like to withdraw your question press the * followed by the 2. If you are using speaker equipment you’ll need to lift the handset before making your selection. Our first question comes from the line of Meredith Adler from Barclays Capital. Please go ahead.

Meredith Adler – Barclays Capital

Hey guys thanks for taking my question. Can you hear me?

Steven L. Spinner – Chief Executive Officer

Yeah Meredith.

Meredith Adler – Barclays Capital

Okay. I was wondering if you won about $100 million of annualized new business in the fourth quarter. I was wondering how that size of new business compares to what you feel is the potential of the new business. Is that a large win or an average win?

Meredith Adler – Barclays Capital

Well #1, a $100 million is spread out of a couple of different customers. It doesn’t represent one customer win. About a year ago we started aggressively moving forward towards the market share portion of our strategic plan and so we think that there are additional revenue opportunities out there that we are pursuing aggressively. But as I said in previous calls we wouldn’t talk about new business till we had aggregated a significant number. The $100 million I feel is not a significant enough number. But it would be unfair for me to talk about additional contracts that we think maybe coming our way but we are certainly not there yet.

Meredith Adler – Barclays Capital

Okay and then how would the specialty business be? I mean does that tie into the ability to win new business?

Steven L. Spinner – Chief Executive Officer

Yeah Meredith that’s a great question. And I’ll tell you that the lot of the business wins that we have are solely due to the iteration of the specialty business and we would not have been able to meet those customers and the discussions would have not been possible. We are moving forward as it relates to integrating specialty throughout the country and without a question specialty is critical to our future.

Meredith Adler – Barclays Capital

And is it beginning to show more life?

Steven L. Spinner – Chief Executive Officer
You mean in terms of year-over-year improvements? Yeah I’d say we are starting to see some improvements in the specialty side. Obviously they were hit hardest when the economy started to fall and we have started to see some of the products pick up.

Meredith Adler – Barclays Capital

Okay I have just one more question. You have talked in the past about project that will give your vendors more visibility into the various marketing initiatives and sales outlook here. Where does that stand and can you reply when do you think that will be?

Steven L. Spinner – Chief Executive Officer

There are two components to that project. First component is a portal that would give the participating vendors a window into our inventory position by distribution center, by region so that they can use that information more adequately to project purchases and growth. That portal was complete and we are now in the process of rolling that out. Second portion of it is a little bit more mature and that’s the roll out of our new supply chain management system. We have the first two DCs going live from a warehouse perspective around the July, August timeframe and then we will, following that up with conversion of categories on to the new supply chain systems. On the warehouse side we will do it with distribution center by distribution center. The category management side will do it by category by category. But that’s a two year process.

Meredith Adler – Barclays Capital

Okay great. Thank you.

Operator

Thank you. Our next question comes from the line of Ed Aaron with R.B.C Capital Markets. Please go ahead.

Edward Aaron – RBC Capital Markets

Good morning guys. Just want to ask a couple of clarification questions about the back half of the year. Suppose for just a moment top line perspective it seems like a little bit stronger than your guidance for the year if you assume kind of current trends following I think. If the year did have some upside on the top line would you expect to be at the high end of the range on EPS too?

Steven L. Spinner – Chief Executive Officer

Yeah let me just give you a full commentary on that and then I’ll let Mark probably comment on it as well. For Q1 the majority of the business shifts were front end during the fourth quarter of the year. And the new business has some fairly significant startup costs associated to hiring, training etcetera. So, since a lot of that business has parts of the fourth quarter you have to cost for that in that quarter. One the statistics that we looked at this morning is that it was 4.2% revenue growth year-to-date, 6% for the quarter. The previous range was 2.5% to 5%. So, if we do 6% for the third and fourth quarter we will come in at the high end of the range. So, on the top line I think you are right. We’ll probably come in at the high end of the range. But given the fact that most of the new business won’t start until the next fiscal year and we have all the costs associated with the ramp up that’s why we are so comfortable with the EPS range.

Mark Shamber – Chief Financial Officer

Right and we think we referenced in the 8-K that we filed in early January about a couple of executives leaving immediately, it has some costs associated with it from the severance standpoint in the second quarter and when the other individual leaves in the third quarter we will likely have some additional costs as we write out that 8-K. So, I think that while we have got some business that should put us at the top end of where we expect to be from a sales standpoint there is a little bit of caution on the EPS side simply because we know we have some ramp up costs and some additional severance costs in the back half of the year. So, I think I’d be more comfortable answering that question at the end of 3Q than I am at 2Q.

Edward Aaron – RBC Capital Markets

Okay that’s fair enough. One clarification on the start up costs, you came in a little bit lower than what you kind of anticipated. Should we expect that will flow into, the portion of the start up costs that you didn’t realize in Q2 will flow into Q3? I think you talked about like a $1.5 million per quarter for 2Q and 3Q. So I am trying to understand if we are going to see like more than a $1.5 million start up costs in the third fiscal quarter?

Steven L. Spinner – Chief Executive Officer

I mean I think that basically we had anticipated that there will some business awarded in the second quarter so that we might have starting up there. So, I don’t know that it is going to drift into the third quarter. I think the number for the third quarter is still what told but if we gain additional business there is certainly the opportunity that any business we gain now would ramp in the fourth quarter and wouldn’t benefit us until fiscal 11. So, I think I’m comfortable with what we have given today but if we win additional new business beyond what we have already talked about that could and should be an impact in the third and fourth quarter. But from where we stand today I think the third quarter number still holds. If we win any additional business there could be that impact.

Edward Aaron – RBC Capital Markets

Thank you.

Operator

Thank you. Our next question comes from the line of Scott Mushkin with Jefferies & Co. Please go ahead.

Analyst for Scott Mushkin – Jefferies & Co

Hi guys this is Bagley in here for Scott, just a few quick questions. I was trying to understand a little bit about the fuel surcharge line as we model out. I know that it takes a lot of cycles through. What should we expect for the second half of the year?

Steven L. Spinner – Chief Executive Officer

Second half actually Bagley what you will see is will have a benefit of the fuel surcharge in Q3 and Q4, either benefit or it will be roughly in line with what we had last year. The way fuel prices played out at the end of ’08 and into early ’09 is that we saw a dramatic drop going into the December, January timeframe to the point where we actually discontinued our fuel surcharge in January of ’09 because we dropped a little bit the threshold in which we would apply it. And it came back during the fourth quarter of fiscal 2009. So, given where fuel prices are right now, we will get a modest fuel surcharge benefit in the gross margin in Q3 offset by the higher operating expenses associated with the cost of fuel. But I’d expect Q4 it would be roughly neutral, just given where prices are. If the prices shift dramatically one way or the other, that could change but we have really cycled through the big elements in the fuel surcharge at this point.

Analyst for Scott Mushkin – Jefferies & Co

Great thanks. That was helpful. Okay and then just on the Kehe Tree of Life matter, the recent development how do you plan to sort of go to market or I guess of the bigger and potentially stronger competitor in those two?

Steven L. Spinner – Chief Executive Officer

Well, I think that we are going to market the same way that we have in the last six or eight months that was for our specialty and obviously the largest selection of organic in the U.S. We had on fact that we have some terrific brands under our Blue Marble programs, our Woodstock Farm manufacturing and a whole slew of other things that we consider very added value. I think that there is going to be a lot of opportunities for us. Obviously we are watching the Kehe Tree integration carefully and we certainly hope that there is a viable set #2. But we are being aggressive. We are looking at as many opportunities as we can as for many products lines as we possibly can.

Analyst for Scott Mushkin – Jefferies & Co

Okay and I hope I am not asking a question you have already answered but as you look at your independent customers and it has been an area I think clearly Whole Foods seems to have turned at least a corner here and some of your other customers will have a little better outlook with probably for 2010 as different from 2009. Independents targets for are you able to gauge what they are up against and how do you feel about the strength of your independent customers as we head through after this downturn and what have you?

Steven L. Spinner – Chief Executive Officer

This is only my opinion but I think that it is a little bit of a lag between the growth of the Supernatural and the growth of the Conventional to the growth of the independents. Historically mostly innovation comes out of the independent space and I think that they will adjust to the changes in the economic climate and being the optimist my hope is that they come roaring back and we are going to do everything we can to make sure that we help them. This is an extremely important part of our business.

Mark Shamber – Chief Financial Officer

You know Bagley this is the first quarter where their comps turned positive for us and I think it may have been a year at least directionally at this time of the year that they have been increasing size and I think to Steve’s point that’s a positive sign that we are seeing albeit that there are a little bit behind as we sail through to the next quarter.

Analyst for Scott Mushkin – Jefferies & Co

But maybe there are ---- in the model for a better way. Okay great. Thanks so much for the comment.

Operator

Thank you and our next question comes from the line of Greg Badishkanian with Citigroup. Please go ahead.

Gregory Badishkanian – Citigroup

Great thanks. In the press release you mentioned that sales trends at the end of the quarter improved and just wondering in terms of the run rate at the end of the quarter and then how the third fiscal quarter February, March is, how is that doing? Did that start of as well?

Steven L. Spinner – Chief Executive Officer

I think that we saw modest up-tick towards the end of January and initially February. I would tell you Greg that it has really not been sizable but we’ve held with the numbers we have had from most of the quarters. So, I think when we talked back in mid December we had mid single digits but those numbers were towards the lower end of the mid single. We have seen a little bit of an up-shift towards the end of January into really February but we are still holding pretty steady in that range.

Mark Shamber – Chief Financial Officer

Yeah what I’d add is one of the really good things that has come back is predictability. Going back two or three quarters we talked about how volatile changes in the revenue growth would be. But certainly for the last quarter at least we’ve seen steady and slow improvement in our top line and certainly it has gotten back to much more predictable sales number.

Gregory Badishkanian – Citigroup

Great, that’s very good to hear. And if am doing the math right if you did 6% revenue growth for the most recent quarter, January was better than the overall quarterly results and February is better than January so that puts you in high single digit range in terms of run rate or is that right?

Steven L. Spinner – Chief Executive Officer

Yeah I mean how do you want break the range? We would put that right above that yeah.

Gregory Badishkanian – Citigroup

Right, that’s very helpful. What product segments are doing particularly well?

Steven L. Spinner – Chief Executive Officer

I don’t think we have actually done that book over the last couple of weeks. Something could probably need to go back and look at. When your sales are trending as positive as they have been you kind of enjoy it. So, I don’t know the answer to that.

Gregory Badishkanian – Citigroup

The perishable versus non-perishable, is there a difference between those two?

Steven L. Spinner – Chief Executive Officer

No I think we haven’t really looked at it in the last couple of weeks. If I had to give my opinion I’d tell you where we saw the big declines going back a year ago, they were probably starting to move towards positive territory and certainly the more expensive product lines, certainly in the specialty space are starting to come back into positive territory.

Gregory Badishkanian – Citigroup

Yeah.

Mark Shamber – Chief Financial Officer

On the perishable side we saw a good amount of deflation in that particular segment earlier in the year and so as they have left some of that deflation even though we are moving more boxes at that time we were getting the same amount of sales whereas now they have sort of gone past that. We haven’t seen necessarily a noticeable up-tick but the deflation has gone away so we are getting some of the sales in the produce aspect of the perishable category in Albert Organics.

Gregory Badishkanian – Citigroup

Right obviously a good trend to see, a high single digit is very impressive and it is in terms of kind of new business of $100 million that is going to get phased in. When you talk to the retailers I’m sure you are starting on some of those meetings, what are the reasons for them giving you have the perishables?

Steven L. Spinner – Chief Executive Officer

I mean I think it is a little bit different by circumstance. I believe that most of the customers in the U.S believe that if they want to have an exemplary set, inorganic set, UNFI is certainly the way to go. Now that we have these specialty sets to match the organic set it gives them a reason to take a hard look at UNFI. In the past they couldn’t. So, I think that’s the #1 reason. I think that with the addition of the specialty we are starting to expand relationships that we have with current organic only customers into the specialty space and across a wider range of geographies. With Texas opening up that’s going to free a whole slew on new opportunities for us as we’d be much closer to a very big market. We currently service Texas from Denver which is a long way away. So, I think it is all of those reasons that and more. We are also being considerably more aggressive in terms of getting our folks out to the street, calling on customers that perhaps we hadn’t seen in a while. When we established our kind of four killer strategies, the first one is to increase our market share. And the only way I know of doing that is to meet with customers and take on contracts.

Gregory Badishkanian – Citigroup

Great, thank you very much.

Steven L. Spinner – Chief Executive Officer

Thanks Greg.

Operator

Thank you. Our next question comes from the line of Andrew Wolf with BB&T Capital Market. Please go ahead.


Andrew Wolf – BB&T Capital Markets

Thanks and congratulations on a good quarter and the new customers. On the new customers I don’t know if you have done it but can you just what the $100 million translates into store counts?

Steven L. Spinner – Chief Executive Officer

We haven’t done that Andy and I am not sure what that store count is.

Andrew Wolf – BB&T Capital Markets

All right. Can you tell us which chains you got and if you got most of all these chains?

Steven L. Spinner – Chief Executive Officer

I don’t want to get into the habit of disclosing the names of the customers. I think that it is probably pretty easy to find out if you do a little market research. I really would rather not get into the habit of talking about the customers by name.

Mark Shamber – Chief Financial Officer

But Andy to the other part of the question in most of those customers we got both the natural and the specialty business or if we only got one or the other it is because we had the other piece already. So, we have added to some existing and we’ve won both sides on the new customers.

Andrew Wolf – BB&T Capital Markets

Okay and this is a bit of an update. I know you didn’t give out the fourth number last quarter but it seems like it is up I don’t know 55% or 50% from the amount of business you had secured three months ago.

Steven L. Spinner – Chief Executive Officer

I would say that that’s a fair estimate, the incremental amount we won during that timeframe.

Andrew Wolf – BB&T Capital Markets

Okay on this Tree of Life being acquired by Kehe, it is a big change for the industry. Are you getting a decent amount of calls from their customers, I think out of…the facts are there. They could be loyal to them or whatever but it is a big change coming. Are you getting calls from their customers saying what if there is some interruption, we need to line things up and so on? If so where is that leading to? Is some dialog opening up with their customers that might not have occurred in the normal course of the business?

Steven L. Spinner – Chief Executive Officer

As a rule I don’t like to talk about the discussions that are taking place with any customers. Like I said earlier, our sales force is motivated to get out there and look at customer opportunities regardless of who is currently serving them. Obviously there is a little bit of unknown surrounding those customers with those companies but I wouldn’t say they were out there treating those opportunities any different than what we were having with the rest of them. And opportunities are coming to us from a wide variety of places, not just those.

Andrew Wolf – BB&T Capital Markets

Okay so Steve, have you started to secure the specialty on the west coast now in sort of Texas market that is not the easiest to serve?

Steven L. Spinner – Chief Executive Officer

We’ve loaded clean specialty and that is specialty that don’t have any artificial sweeteners, flavors etcetera. Those have been loaded into the west coast. Obviously in the east we have the full selection of specialty and it is a matter of doing it slowly and intelligently by DC and by customer. But we today to a large degree for certain types of customers, we have specialty across the country.

Andrew Wolf – BB&T Capital Markets

A follow up on the category, customer category growth, is the Supernatural initial is that just Whole Foods or does that include some of the other natural chains?

Steven L. Spinner – Chief Executive Officer

It is just Whole Foods.

Andrew Wolf – BB&T Capital Markets

Got it and on the independents we have seen obviously the volumes, it looks like it is up for the first time in Ohio, as well as your sales getting some positive volume out of that, was that trend, Greg was getting to strength and you guys alluded to as well. Did you strengthening in volumes growth in the quarter in the month of February?

Mark Shamber – Chief Financial Officer

I mean Andy it was a pretty I won’t say sudden but early in the quarter they shifted back into positive territory and then there was a modest increase from there but I would say that once we got into the November timeframe it was pretty past that. They got back into the positive and then they held there with some minor volatility between. So, it hasn’t been for us a long ramp there anywhere during the quarter. It was kind of a quick jump and then modest gains from there.

Andrew Wolf – BB&T Capital Markets

Okay thanks Mark. Just one last one if I could to Steve. I think I heard you say that if vendors pull back on promotional spending there, opposite of that is happening in the larger conventional area and a lot of times natural organic differs from conventional. Could you just elaborate a little on what is happening with the vendor on the promotional side in your channel?

Steven L. Spinner – Chief Executive Officer

If you go back a year ago, we had 8% inflation and the economic issues were different. So, there was from our perspective considerably more discounting going on at retail. And obviously we passed those discounts to the consumer. With 1% inflation and the economic rebound taking place, if you want to call it that, common sense would tell you the manufacturers are going to provide less discounting at retail and that’s what we have seen happening.

Andrew Wolf – BB&T Capital Markets

Okay thanks a lot.

Operator

Thank you and our next question comes from the line of Chris Kruger with Northland Securities. Please go ahead.

Chris Kruger – Northland Securities

Hi good morning. Can you quantify two figures for me? You presented your Supernatural, the sales growth rate, what was that?

Mark Shamber – Chief Financial Officer

It was 13.7%.

Chris Kruger – Northland Securities

Okay and the conventional growth rate?

Mark Shamber – Chief Financial Officer

Conventional growth rate was 5%.

Chris Kruger – Northland Securities

Okay. Can you give us a little help on how typically it works as you try to win new business? I know it seems like you have a lot of several rolling out in these early parts of the year. Are you looking forward at potential new customer chains? What is the decision you made, maybe later in the year and then roll out early next year, calendar year, or how that typically works in the holidays and all that?

Steven L. Spinner – Chief Executive Officer

I mean it depends on the situation and the contract the customer is currently in. So, some of them might start after 60 days. Some might be 90, some might be 120. A lot of it depends on whether the contracts are service or no service. In full service contracts we actually have to hire staff to actually go into the retail location to manage the receipt, put away, rotation, merchandising at the shop level. So, unfortunately there is no easy answer. It could be as little as 60 days. It could be as much as 6 months.

Mark Shamber – Chief Financial Officer

And Chris to add on to that, I mean the contracts some of the chip markets work under understanding, they have no signed deals. Others have signed deals but they could end it at various points during the year dependent on whether or not there has been an acquisition in the past where they became part of a chain that they acquired, so the deal ends in June whereas somebody else might end after the holidays so, there is really no consistency in that sense.

Chris Kruger – Northland Securities

Okay. The new Texas facility can you refresh our memory on the timeline?

Steven L. Spinner – Chief Executive Officer

It is going to be probably early part of our next fiscal year. It should be August, September.

Chris Kruger – Northland Securities

Okay that’s all guys. Thanks.

Operator

[Larry Giblin – Quinn Miller]

Thank you. Ladies and gentlemen if there are any additional questions please press the * followed by the 1 at this time. As a reminder if you are using speaker equipment you will need to pick up the handset before making your selection. And our next question comes from the line of Anne Gurkin with Davenport. Please go ahead.

Anne Gurkin – Davenport & Co

Good morning.

Steven L. Spinner – Chief Executive Officer

Good morning Anne.

Anne Gurkin – Davenport & Co

I was just wondering if you could review now that you have got a full year of blended or integrated business that you can kind of outline the positive, the negative upside now that you had a year looking into it.

Steven L. Spinner – Chief Executive Officer

Yeah it is a great question. You mean the integrated facility at York?

Anne Gurkin – Davenport & Co

Right.

Steven L. Spinner – Chief Executive Officer

Right, so that’s been phenomenal. As a matter of fact a large percentage of the new business is flowing through our York integrated York facility. We learned a lot. But it is a phenomenal high-tech, high productivity facility and obviously that’s going to be the model for our future.

Anne Gurkin – Davenport & Co

Okay and then one of the questions I got that concerns the business leading out of your distribution network into more mainstream distribution and your ability to replace that business. Can you just comment on how that business is going?

Steven L. Spinner – Chief Executive Officer

Yeah I think that’s a great question and it is a great issue that we are always going to fight because certainly as products pick up movement or become more organic conventional they tend to move into either a captive distribution or distribution for our alternative channels at lower margins. The channels that we always have is to make sure that we have more products coming in than are going out and we have been successful doing that and the best way for us to deal with that is to be nimble in the way we bring new suppliers in the fall. We will probably be the only supplier across the country to survive the merchant manufacturers, the growers with a national outlook of their unique products. So, so far knock on wood, as long as we can continue bringing out new products across the country we should be able to deal with those more conventional organic products going into our channels. We are always going to deal with it.

Anne Gurkin – Davenport & Co

So, you think everything is okay.

Steven L. Spinner – Chief Executive Officer

Yes.

Steven L. Spinner – Chief Executive Officer

Anne Gurkin – Davenport & Co

Okay and then putting aside integration costs and severance costs can you still hit earnings in the range of $1.48 to $1.58 a share?

Steven L. Spinner – Chief Executive Officer

Yes. I mean we didn’t change our guidance tonight. I think that we had a very strong growth in the first half of the year, 14%, 15%, from the prior year and usually our back half of the year is stronger than the first half. So, I think we feel very comfortable with the dreams that we out there.

Anne Gurkin – Davenport & Co

Right I will take a last one, I’m sorry. You announced $100 of wins. Are you close to finding more of new business that we might think will hit the second half of the fiscal?

Steven L. Spinner – Chief Executive Officer

As I said earlier I am not going to get into customers that we are talking to or how much pieces that could be. Obviously we are very comfortable with the fact that we have aggregated a $100 million some of which has already rolled out and that’s the kind of the way we are working in the future. As we win pieces of business and it adds case into the material numbers we will disclose it at that point.

Anne Gurkin – Davenport & Co

But is it fair to say that you have more business you are working on that we could see hits us between the next 6 to 12 months.

Steven L. Spinner – Chief Executive Officer

I mean we are constantly working on new business Anne. So, I don’t think it is any different than, now that we have won some, it doesn’t mean that there is no one on earth and we will still win again. So, I think that process is consistent and ongoing and certainly we would love to be in a position to have new business. But again we can’t predict the timing…I don’t foresee another announcement in this fiscal year.

Anne Gurkin – Davenport & Co

Okay that’s great. Thank you all very much.

Operator

Thank you and our next question comes form the line of Ajay Jain with Hapoalim Securities. Please go ahead.

Ajay Jain – Hapoalim Securities USA, Inc

Hi yes, I apologize I am speaking from my cell phone. Most of my questions have been asked. Just as far as $100 million in new business can you confirm the revenue contribution last quarter either on an absolute or run rate basis? I am assuming it wasn’t material based on Steve’s comments, right?

Steven L. Spinner – Chief Executive Officer

Yeah I can’t give you exact number Ajay but I feel comfortable telling you the last quarter was less than 1%.

Ajay Jain – Hapoalim Securities USA, Inc

Okay thanks and in relation to the ramp up for the new business I think previously you indicated about $1.5 million in start up costs both for Q2 and Q3. Now that that cost has been pushed out into Q4, is the right way to look at the start up cost as around $3 million gets absorbed in the back half of the year. Is that correct or is that evenly split between Q3 and Q4?

Steven L. Spinner – Chief Executive Officer

The issue Ajay is it is up to that and as we get awarded new business it is a question of is it whole service? Is it partial service or no service? I think fair answer to that is that Q3 number could still be up to $1.5 million. There could be some of that in Q4 but I think hopefully those are the high ends of the range and given that we don’t get any revenue associated with it we try to minimize those costs. But split over the third quarter and the fourth quarter is probably fair. I don’t think the number will necessarily be up to $1.5 million in both quarters. I think it might be more the third than the fourth.

Ajay Jain – Hapoalim Securities USA, Inc

Okay great and I just want to clarify your comments on the gross margin outlook. I mean do you expect gross margin pressures to potentially accelerate in the back half of the year? I mean could it be higher than 60 to 80 basis points?

Steven L. Spinner – Chief Executive Officer

I mean if there is any acceleration in the back half of the year I think it would be modest from where we are. I mean without calling to be held to it I think that we could be within 15 to 20 basis points either direction but it is really a function of where the business grows and so if the independents continue to have growth but it is much more modest than say with Whole Foods, and the kind of the supermarkets are there will be further gross margin erosion that will be offset in the operating expense side. If the independents start to see a stronger growth in the back half of the year the gross margin may stay where it is and maybe even get some modest expansion. So, it is a little hard to predict that perfectly but I feel comfortable saying the range is within 15 to 20 basis points either side.

Mark Shamber – Chief Financial Officer

And Ajay just for a little clarification the conventional and the supernatural business obviously has a lower gross margin associated with it but it also has a lower cost to serve. If you look in the quarter we just finished our overall gross margin fell 57 basis points but our overall expense rate fell 60.

Ajay Jain – Hapoalim Securities USA, Inc

I definitely understand the implications from a gross margin and SG&A perspective but I don’t know Steve if you can comment or not but based on the recent sales improvement and square footage growth at Whole Foods specifically, has that had any direct impact on gross margin year-to-date because my understanding is that the more volume that they do there are some additional pricing concessions which hit the gross margin line but conceptually the gross profit dollar in fact shouldn’t be overly significant. Can you comment on whether that’s been behind any of the gross margin decrease?

Steven L. Spinner – Chief Executive Officer

I will try to answer that instead and say that obviously Whole Foods is our largest customer and they as a result have the best pricing. So, to the extent that we sell more to Whole Foods, the gross margin, it is obviously fair to say that they will be below where the average is. I would not agree with sort of some of the other aspects of your statement but the more business we do with Whole Foods, the Whole Foods has the strongest growth in the quarter as was the case this quarter. They will bring down the average gross margin. But again it is a function of your largest customer where you are the most efficient and you get the best leverage from an expense standpoint. But I wouldn’t agree with some of the other aspects of the statement you just mentioned.

Mark Shamber – Chief Financial Officer

Well it is relative to the overall contracts obviously is not something that we talk about.

Ajay Jain – Hapoalim Securities USA, Inc

Yeah of course I wouldn’t expect you to give specificity on the contracts but thanks for answering all my questions.

Steven L. Spinner – Chief Executive Officer

Sure.

Operator

Thank you. Our next question comes from the line of Michael Krestell with M. Partners. Please go ahead.

Michael Krestell – M Partners, Inc

Good morning. I was wondering if you guys can comment on what the utilization would like after the $100 million business gets booked into the network. Just to follow that I am just trying to understand this. I was working on this and I was looking for your thoughts but just borrowing any additional volumes how much are you down the road from getting the efficiencies out of it and getting all that rerouting and getting that platform working for you?

Steven L. Spinner – Chief Executive Officer

Yeah I mean generally speaking the capacity in the rerouting and the efficiencies takes place distribution center by distribution center. So, there are distribution centers around the country where we have considerably more space than we have in the others. Generally speaking we have tremendous capacity currently to take on considerable more business. On the efficiency side in most cases the more business that you add to a point, makes you more efficient from an expense as percentage of sales perspective. As we implement our supply chain initiative which is our new technology platform and as I said the first two DCs roll out in July, August timeframe, they will drive down our costs further and certainly as we migrate on to that national platform, it will certainly give us the ability to act relatively quickly in reducing our costs as we bring on lower margin business

Michael Krestell – M Partners, Inc

Right.

Steven L. Spinner – Chief Executive Officer

From a scale perspective we certainly have plenty of capacity round the country like I said some DC is different than the others and most of the new business that we have announced so far this year is in the North East running through our York facility which is relatively new.

Michael Krestell – M Partners, Inc

Okay that’s great. Thank you very much.

Operator

Thank you and I show no further questions in the queue at this time. I will like to turn the call back to management for any closing comments.

Scott Eckstein

Okay thank you. Exciting things are happening and speaking for everyone at UNFI we are proud to be part of a great industry and a great company. Thank you for joining us this morning and have a great day.

Operator

Thank you. Ladies and gentlemen this concludes the United Natural Foods second quarter fiscal 2010 conference call. If you’d like to listen to a replay of today’s conference you can do so by dialing 303-590-3030 or 180-406-7325 and enter the access code of 4230242 followed by the # sign. Thank you for your participation. You may now disconnect.