United Natural Foods Inc UNFI
Q3 2013 Earnings Call Transcript
Transcript Call Date 05/28/2013

Operator: Greetings and welcome to the United Natural Foods Third Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Katie Turner of ICR. Thank you. Ms. Turner, you may now begin.

Katie Turner - IR: Thank you, and good morning, everyone. By now, you should all have access to the third quarter fiscal 2013 earnings press release issued this afternoon at approximately 4.05 pm Eastern Time. If anyone still needs to review the release, please reference the Investors section of the website at www.unfi.com. As a reminder, the webcast of the earnings call is also available on the Company’s website.

On the call today are Steve Spinner, President and Chief Executive Officer and Mark Shamber, Chief Financial Officer. Before we begin, we would like to remind everyone comments made by management during today’s call may contain forward-looking statements. These forward-looking statements discuss plans, expectations, estimates, and projections that might involve significant risks and uncertainties. Actual results may differ materially from the results discussed in these forward-looking statements.

Additionally, in today's press release and during the call, the Company will provide both GAAP and non-GAAP financial measures, including operating expenses, operating income, net income and earnings per diluted share. Presentation of these non-GAAP financial measures is not intended to be considered in isolation or in substitute for any measure prepared in accordance with GAAP. For a complete reconciliation of GAAP to non-GAAP financial measures, please refer to the Company's earnings release issued earlier today, available on the Company's website, under Investors.

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

Steven L. Spinner - President and CEO: Thanks, Katie. Good afternoon, everyone and thank you for joining us today to discuss UNFI's financial results for the third quarter and first nine months of the fiscal 2013.

Our consistent solid financial performance demonstrates the demand for UNFI's products and services continues to grow and highlights our focus on improving efficiency and draw any further operational excellence across our business.

In the first nine months of this fiscal year, our net sales grew almost 14%. And sales during the third quarter grew almost 13% when comparing to the same period last year again reflecting a dynamic and expanding organic natural and specialty industry.

Our operating profit adjusted for our Auburn labor action grew almost 14% in the quarter versus the same period last year and our operating margin expanded by 4 basis points.

For the year our net income has increased 14.5% versus prior year. Two important notes we have now lapped the onboarding of Safeway and inflation was again very modest at approximately 2%.

Interestingly the year-over-year inflation spread is now at its greatest gap as inflation in Q3 2012 was 4% a 200 basis points difference. This further accentuates the strength in our sales growth, our consistent top line growth, reflects consumer demand being driven by more and more people maintaining healthier life styles with a growing interest in natural, organic and specialty products, food safety and environmental awareness. According to industry data published by SPINS, last year natural and organic products continued to outpace overall store growth across all channels. We expect this trend to continue for the foreseeable future.

Another interesting data point supporting the growth of our industry is consumer's growing demand for transparency and food labeling. People are becoming more and more interested in knowing as the food they buy is made with genetically modified seed also known as GMOs and we believe that this interest will result in federal guidelines requiring a labeling of GMOs. UNFI is a proud supporter of the non-GMO movement and currently produces as many products through our Blue Marble division which are certified not to contain GMOs.

To ensure that we are positioned to capitalize on the positive industry trends and corresponding growth opportunities for UNFI, we are working on a number of new construction projects to enhance our natural distribution infrastructure.

Just two weeks ago we moved into a new facility for our Albert's Organics division, which is one of the country's largest distributors of organic produce and perishables. Sales growth for this division had been consistently strong in the past couple of years and our new facility will help us to better service our customers. One of our fastest growing categories continues to be organic fresh produce and natural antibiotic-free proteins, which are now distributed by our Albert's division. UNFI's Albert's division has been delivering high double-digit sales in operating income growth from the last several years.

We are now on track to open a new distribution center in Denver in the early summer of this year. The building is now open and we are receiving products for our core distribution and our Albert's business which is now integrated into this 540,000 square foot building. The distribution center replaces three existing facilities in the area, and we believe will significantly enhance our service level and product offering. Additionally, we are aiming for gold LEED certification in this facility.

We also plan to build new facilities within the next 14 to 24 months in Wisconsin, Hudson Valley, New York and Northern California. The new facilities will create capacity for growth and keep us very close to the retailers, which allow us to meet the high level of service and quality that is critical for business, while continuing to drive out cost.

In the third quarter, we incurred approximately $1 million in costs associated with building not yet occupied. While these costs will continue for the next several years as we continue to build capacity, we believe these are necessary steps to invest in our future growth opportunities.

The construction will also present us with several interesting financing alternatives which we will discuss in subsequent quarters. Our goal is to continue producing free cash while maximizing the strength of our balance sheet by using currently owned and under construction real estate.

Now, focusing on our customer mix for a few moments. During the third quarter and compared to the prior third-quarter, supernaturals grew to 36.6% from 35.7% of net sales, supermarkets grew to 24.3% from 24.2%, and independents declined 33.7% from 35.1%. Interestingly, all three channels are grown rapidly with supernaturals leading growth during the quarter with 15.5% sales growth over the third quarter and prior year. Independents are also growing quite nicely and UNFI continues to be deeply committed to this very important customer base.

As we anticipated, our gross margin was impacted by the continued shift in customer mix to the conventional supermarket and supernatural chains. On a sequential basis, our gross margin in the third quarter of fiscal 2013 was 16.8%, which represents an increase of 7 basis points compared to the second quarter of this fiscal year. On a year-over-year basis, gross margin declined 83 basis points from 17.6% in the third quarter last year.

While there will continue to pressure causing some quarterly volatility in our gross margin, we continue to be optimistic that there will be more stability as our customer mix shift stabilizes and our strategies take hold.

Another factor that continues to impact our gross margin is higher than normal supplier out-of-stocks, which we’ve spoken about on previous calls. We’re pleased that in the third quarter of fiscal 2013, our out-of-stock rate improved sequentially versus the second quarter. However, it was 67 basis points and $17 million worse than in the prior year period.

During periods of high supplier out-of-stocks, UNFI loses the gross margin on these lost sales and reduced promotional activity. Additionally, in many cases we elect to move freight around the country at our costs to ensure higher levels of service.

Now we continue to believe that this is a short-term issue, and we expect that manufacturers are making the appropriate adjustments to gear up for continued growing demand. UNFI will carry additional inventory to ensure a high level of service to our customers, especially as we approach the holiday season.

We continue to make progress on our initiatives to drive to operational excellence with a focus on increasing leverage of UNFI’s cost structure across higher sales volume and enhancing productivity. In the third quarter, our operating expenses as a percentage of net sales improved to 13.4% representing a decrease of 76 basis points compared to the prior year period, despite incurring $1.5 million related to the labor action at our Auburn, Washington facility.

Adjusting for Auburn costs our operating margin in the third quarter fiscal 2013 improved 4 basis points despite the headwinds associated with supplier fill rates. This improvement is important for us as we continue to confirm that UNFI shifting customer base can be supported through a very efficient cost model.

On the M&A front we continue to look for attractive acquisitions through expanding product offering and geography are important to our growth strategy looking at over the next five years.

Additionally our previously completed acquisitions are moving forward as we planned. From our Pacific organic produce sourcing business to our Canadian specialty distributors B.K. Sethi and (indiscernible). UNFI is delivering strong results within these companies.

Operationally UNFI's excelling, as demonstrated in our service levels, productivity our warehouse metrics which measure our cost per case and our transportation metrics which measure our deliver efficiency are all at record highs. This is a direct result of our national operations team and their seasoned organizations.

Their results are driving factor in our ability to deliver record operating expenses which are necessary as we change our customer base.

We are also implementing several exciting technologies to improve safety and coal chain management. First we are now rolling out tractor cameras to enable higher levels of fleet safety and second we have successfully tested the use of onboard online and wireless sensing devices for our temperature-controlled trailers. So this system provides additional cold chain integrity and is critically important to delivering the highest standards for food safety.

Also, we're on track to covert three DCs per year onto our new management warehouse system with Auburn, Washington going live this summer. And we have also successively begun implementation of our inventory optimization platform with 60% of the west region suppliers converted. Our goal is to increase service level, while lowering overall inventory costs with enhanced transparency with our suppliers.

Turning to CapEx, our capital expenditures during the quarter were less than 1% of net sales and were driven primarily by construction at our new Denver facility. We expect CapEx will continue to ramp up as a percentage of sales as we build new capacity to support our growth, including the new projects I mentioned earlier in my remarks. Guidance for 2014 CapEx will be provided during our September conference call.

On the balance sheet, all of our metrics for payables, receivables and inventory remained strong which resulted in continued leverage of less than one-time's EBITDA. We have considerable flexibility to invest where necessary to continue to advance our growth and sustainability strategies.

Net income increased 14.5% during the first nine months of fiscal '13 compared to the same period last year.

Before I conclude my remarks, I want to highlight that UNFI was added to the Fortune 500 in the most recently published list. This ranking is a testament to the strength of our industry and equally important to the hard work, passion, innovation and success of the UNFI team. We are excited about the opportunities ahead and look forward a continued growth and success.

And now, I'll turn the call over to Mark Shamber, to discuss our financials for the period. Mark?

Mark E. Shamber - SVP, CFO and Treasurer: Thanks Steve, and good afternoon, everyone. Net sales for the third quarter of fiscal 2013 were $1.57 billion, which represents growth of 12.8% or approximately $178 million over the prior year third quarter's net sales of $1.39 billion. Excluding the $12.5 million in sales from the three acquisition that closed in the first quarter, sales increased by 11.9%.

Inflation continued to moderate both sequentially and on a year-over-year basis for the quarter coming in at 1.76%, a 22 basis point decline from Q2, and a more than 250 basis point decline from last year's third quarter inflation of 4.43%. Year-to-date net sales of $4.42 billion, yielding sales growth of $530 million, or 13.6%, over the comparable period in fiscal 2012, excluding the acquisitions, our year-to-date growth is 12.6%.

For the third quarter of fiscal 2013, the Company reported net income of $31.6 million, or $0.64 per diluted share, an increase of approximately 8.9%, or $2.6 million over the prior year. Net income for the third quarter of fiscal 2012 was $29 million, or $.59 per diluted share. Earnings per diluted share increased by 8.5% as EPS growth was impacted by the higher average share count in fiscal 2013.

Looking at our sales by channel, as Steve mentioned, supernaturals increased by 15.5% in the third quarter. Sales growth in the supermarket channel was 13.6%, while the independent sales accelerated to 8.3% from the 7.9% achieved in the second quarter.

Finally food service grew by 23.7% in the third quarter and food service continues to represent 3% of total sales. As covered in the press release, gross margin for the quarter was 16.8%, an 83 basis point decline over the prior year’s third quarter gross margin of 17.6% and a 7 basis point improvement sequentially. The primary drivers of our lower year-over-year gross margin continue to be the same factors that we’ve highlighted in the last couple of quarters, a couple of which were covered in the press release.

The ongoing shift in our gross mix towards both the supernatural and conventional supermarket channels will continue to pressure our gross margin as these customers on average have a lower gross margin. Additional factors are increased sales of customers’ private-label brands, higher inbound freight costs and fewer inflation-related forward-buying opportunities due to price increases being generated by our suppliers.

Year-to-date gross margin of 16.7% compared to 17.6% in the prior year, a decline of 84 basis points, again driven by the same factors along with the additional freight expense in the first half of the year associate with higher manufacturer out-of-stocks.

Our operating expenses for the quarter were 13.4% of net sales compared to 14.1% for the same period last year. This represents a 76 basis point improvement over the prior year as operating expenses as a percentage of our net sales continue to benefit from the mix shift in our business, positive trends in our self-insurance areas, along with strong execution by the general managers in our broadline distribution centers.

Costs associated with the strike at our Auburn, Washington distribution center negatively impacted expenses by $1.5 million in the quarter or approximately 10 basis points. These expenses came in higher than our projections at the end of the second quarter, but this quarter represents the end of these costs as the strike was settled in February.

Similar to the first and second quarters, we incurred approximately $1 million in non-cash straight-line rent expense and certain cash move related costs associated with our new Denver, Colorado area distribution facility. Year-to-date these non-recurring expenses are $2.6 million and are in line with a full year guidance providing during our September 11, 2012 earnings call discussion.

Excluding the portion of our Canadian business which involves the use of third parties for deliveries in certain regions, diesel fuel had a positive impact of 8 basis points and operating expenses in comparison to the third quarter of fiscal 2012, as fuel represented 71 basis points of distribution net sales in the quarter.

Fuel in the third quarter decreased by 1 basis point versus the second quarter as our fuel expense increased 7.2% sequentially due strictly to the higher sales volumes.

Our diesel fuel prices in the third fiscal quarter declined by approximately 0.4% from the prior year's third quarter. While the Department of Energy's national average was down approximately 1% over the prior year.

Share based compensation expense totaled $3.1 million in the quarter compared to $2.5 million in the prior year's second quarter.

Share based compensation expense represented 20 basis points as a percentage of net sales on the quarter a 2 basis point increase over the prior year.

Operating income for the second quarter was 3.4% a 6 basis point decline over the prior year's operating income of 3.5%. Adjusting for the $1.5 million and 10 basis points associated with the Auburn strike operating income was 3.5% a 4 basis point improvement over fiscal 2012's third quarter.

Our effective tax rate for the third quarter of fiscal 2013 was 39.5% and as we look to the fourth quarter we would expect the tax rate for the quarter to be in the range of 38.5% to 39.5%, dependent upon our state taxes apportionment.

Inventory was $723 million at quarter's end as days inventory on hand averaged 48 days for the third quarter and improvement of about 0.5 a day over the prior year's third quarter when we were at 49 days.

The lower average days on hand resulted primarily from the acceleration in sales growth in the quarter, despite maintaining higher inventory levels. Our supplier base has continued to have out of stock levels above historical trends and we've elected to build inventory levels to compensate for these issues to the extent possible. Our service levels improved throughout much in the quarter, although certain categories such as (indiscernible) continue to have significant out of stocks.

Our DSO for the third quarter improved by approximately one day to 21 days both sequentially and on a year-over-year basis. Capital expenditures were $14.7 million for the quarter and our $34.8 million or 79 basis points of net sales for the year-to-date, which is favorable to our full year guidance.

With the completion of two facilities in the fourth quarter and the ground breaking for our new facility in Sturtevant, Wisconsin which is near Racine occurring earlier this month, our fourth quarter capital expenditures will be more heavily slanted. In addition, our Auburn, Washington facility is scheduled to go live on our new WMS late in the fourth quarter.

Outstanding commitments under our credit facility were $209 million at quarter end, with available liquidity of approximately $290 million including cash and cash equivalents. Our leverage decreased modestly, while remaining at 0.8 times levered on a trailing 12 months basis due to continued investment in inventory to try and compensate for continued high levels of out of stocks across our supplier base.

As discussed in this afternoon's press release, we are raising our net sales guidance for fiscal year 2013 to a range of $6.03 billion to $6.06 billion, which represents an increase of 15.2% to 15.7% over fiscal 2012 net sales. Our previous sales guidance was a range of $5.88 billion to $5.98 billion. I'd also like to take this opportunity to remind you that fiscal 2013 is a 53-week fiscal year for UNFI. The additional week occurs in our fourth fiscal quarter and is expected to contribute approximately 2.2% to 2.3% to our overall fiscal 2013 net sales growth.

We have also updated our GAAP diluted earnings per share guidance for fiscal 2013 to a range from $2.12 to $2.14 as noted in the press release. Our previous GAAP earnings guidance was $2.12 to $2.18 per diluted share.

As a reminder, included in our fiscal 2013 earnings guidance is approximately $5 million to $5.5 million of nonrecurring expenses associated with our new Aurora facility and a new facility for our Albert's Organics division of which $3.5 million to $4 million are duplicate, primarily non-cash rent payments, with the remaining balance comprised of relocation costs to consolidate the existing facilities.

Excluding the special items referenced in this afternoon's press release, we expect diluted per share for fiscal 2013 in the range of $2.15 to $2.17 per share, which is an update of our previous fiscal 2013 guidance excluding those items, which had a range of $2.15 to $2.21 per diluted share and was included in the second quarter earnings release on February 26, 2013.

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

Transcript Call Date 05/28/2013

Operator: Andrew Wolf, BB&T Capital Markets.

Andrew Wolf - BB&T Capital Markets: Couple questions. First on the independent sector doing a little better; do you think that’s sort of market wide or is that more some of the initiatives you spoke of, adding territory managers and trying to get I guess more touch points with customers in some of the technology and other things you’re trying to bring to the table?

Steven L. Spinner - President and CEO: It’s kind of hard to pinpoint exactly where it’s coming from but certainly those things you mentioned have helped us quite a bit in terms of getting more feet into the retailer's locations across the country adding the iUNFI technology, adding some specialists into the market to concentrate on various specific product groups. Certainly, the strength of our Albert’s division as it relates to antibiotic-free all natural protein and specialty cheese. So, I think all those things have really contributed to the growth in the independent channel as well as just the general demand for the product across all the channels.

Andrew Wolf - BB&T Capital Markets: I guess another way or a follow-on to that is, are you actually seeing new customer conversions or is it mainly a penetration either category management or bringing like you mentioned new products to categories?

Steven L. Spinner - President and CEO: I mean, we sell a large percentage of the independents across North America today, and so I think where we’re having a lot more success is through further penetration of SKUs that we either hadn’t had in the past and now have through additional promotional activity, and just the general health of the industry. I would say those are the three things that are driving the growth within that channel. The other thing I’d mention is that, within that channel are what we call multiunit independents, which tend to be extremely fast growing. Actually the fastest growing within that segment. And those are typically independent retailers or retailers that have somewhere north of 10 locations. It seems as though that new openings have ramped up much faster than they have in the last three years.

Andrew Wolf - BB&T Capital Markets: Just wanted to ask about guidance just putting some numbers in the model, looks like Q4 falls out to about 59 to 61. And operating margins kind of flattish year-over-year and I guess, I'm trying to tie that to is that because you've increased non-cash earnings impact at Aurora and Talbots Organics or is there something else that accounts.

Mark E. Shamber - SVP, CFO and Treasurer: As we talked about going through year, I mean we are at about 2.6 million through the first nine months of the year and this is the third quarter where we are actually going to move those two facilities, I mean as Steve we've actually already done it on the Albert's facility and will be going through the process very shortly on the Denver facility. So those are, we lose the, we lose the non-cash piece of the rent in the fourth quarter, but then we actually have the physical moves cost, which if you were to go back and look in some cases have been as much as $2 million. So you factor that in on the GAAP side and really that’s what's any improvements that we are getting on the rest of the business being offset by that being in the guidance for the fourth quarter.

Andrew Wolf - BB&T Capital Markets: Talked about $2 million of costs?

Mark E. Shamber - SVP, CFO and Treasurer: Yeah. I mean again, we're at $2.6 million and the guidance for the year was $5 million to $5.5 million, so it could be anywhere from $2.4 million to $2.9 million in the fourth quarter.

Andrew Wolf - BB&T Capital Markets: So I guess another way to ask you, sales guidance went up and yet – I think verses most folk's models, it looks like margin is not – operating margins – like I said, listen my modeling, it looks little around flattish. So, the guidance here didn't change, so was there another aspect? Is there a sales mix issue or is there something or you guys just sort of being conservative based on lack of inflation or something you see out there?

Mark E. Shamber - SVP, CFO and Treasurer: Yeah. I mean I think it's a combination of – there is I mean, one, we continue to see the supernaturals are inlying with historical growth, but the supermarkets' growth has been much higher than the independents these last two to three quarters, which is driving down the gross margin and driving down the overall margins a little bit. Having covered us for a number of years, we are generally conservative in the guidance from that perspective. So, I think that the combination of the two, plus the move costs, honestly they tend to come in a little bit higher than we envision sometimes. So, we've left ourselves a little bit of room if that is in fact the case. I mean they don't also go up flawlessly even though – the operation's team does everything. They tend to make sure that happens.

Operator: Sean Naughton, Piper Jaffray & Co.

Sean Naughton - Piper Jaffray & Co.: Just on the shrink, you'd called it out as a little bit of direct quarter and I don't think I caught it that you called it out this quarter. But it does sound like you may be using some technology to track some temperature control in the trailers and maybe just give us an idea, is there a really big opportunity here on shrink? And did that actually improve in the quarter?

Steven L. Spinner - President and CEO: Sean, I don't remember calling out shrink in the last call. I'm pretty sure we did not. Our shrink rates are actually pretty and have been pretty good. Every once in a while, we get – you know hit, but I don't remember if there was anything called out on the last couple of quarters related to shrink. I mean we've been talking about supplier service issues, but that's more out of stocks and not inventory loss that related from (out of code), et cetera.

Mark E. Shamber - SVP, CFO and Treasurer: I mean, last year in the first half of the year, we had two successive quarters where we had that in fiscal '12, but the fiscal '13, the run rates on the shrink side have been more consistent with historical trend. So, there wasn't any. And if we did perhaps give that impression, it was not intentional in the second quarter. And also when we talked about -- during a very brief period of time, it was basically – we geared up our inventory for the holiday season and that's what caused some of the very brief shrink issues that we had.

Sean Naughton - Piper Jaffray & Co.: Then private-label, you did also call this one out again that's been increasing over the first few quarters of this year. Is there any sign of this particular dynamic moderating for you right now, or is this something this is after we get through maybe the next quarter or two here and we should be potentially on a more normalized run rate if you will for that particular portion of the margin expectations moving forward?

Steven L. Spinner - President and CEO: I mean, this is an old story unfortunately for us. I mean, basically what we see is, we see a big migration to private label. There was some push back and then we see the private label fall off, and then overtime it starts to come back again. So, I think right now we’re in a situation where it is ramping up. So, I think it'll be a little bit of a drag for maybe the next couple quarters, but it’s not material. It’s just a little bit of the headwind and I think that over time, consumers will ultimately push back and demand more national branded product and falloff again. But right now, we still are in a little bit of an upswing. For clarity, private-label is a net-net price structure whereas nationally branded products are not. So, all-in-all, nationally branded products tend to be more profitable for us to carry than private label.

Sean Naughton - Piper Jaffray & Co.: Just a quick follow-up and you guys have given this a number of times, but where do we stand on the warehouse management over the next 18 months. How many do we expect to have and how many do we have in right now? Tell us what are the some of the performances you’re seeing out of that implementation and rollout?

Steven L. Spinner - President and CEO: We’ve our third one going into Auburn, Washington this summer, and then we’ll be doing three a year, which I think is a schedule we can keep. We see nice performance increases. The biggest single change that happens when we put in our UNFI warehouse management system is we virtually eliminate our selection errors. So from a selection perspective, we’re almost 100% accurate. But we got to take our time, we got to put it in right, we’ve had huge success in the second implementation in Ridgefield, Washington. So, we feel like we’re pretty good at it. We’ve got a team dedicated to it, and so we'll not go off through a year following this summer Auburn, Washington.

Operator: Meredith Adler, Barclays Capital.

Meredith Adler - Barclays Capital: Talking just a little bit about both private label and the customer, vendor out of stocks. Does more private label help you at all in that area and then I mean I think I had a conversation with you about this that there is a sort of a lag and then manufacturers add some more capacity when they can, but shouldn’t we be worrying about the holiday which is when you really had a big problem last year?

Mark E. Shamber - SVP, CFO and Treasurer: In the answer to the first part of your question. I think historically the out of stocks on private label tend to be higher than the out of stocks on the national brands. Just because they require a dedicated run to produce them. Historically I think that’s the way we have seen it. I would say that right now we have a fair degree of confidence that based upon what we are seeing in the suppliers that capacity is being added either through planned expansions or through the addition of new co-packers and we see it sequentially getting better as I mentioned in the prepared remarks. And every manufacturer is in the same where we are for the holidays and that is that the retailer relies heavily upon that time period. So we feel pretty good that we are going to be okay through holiday season.

Meredith Adler - Barclays Capital: Just talking a little bit you do have a lot of capital investment activity planned for the next two years. I think you had promised that it should be free cash flow positive, so I think maybe you could talk a little bit more about how you plan to fund those DCs or how you would do it to come up with the most money? And then I have one sort of related question.

Steven L. Spinner - President and CEO: Yeah. I made a little bit of referenced to that in my prepared comments and we have some very specific thoughts on financing the new buildings and actually we've got a very healthy balance sheet today. So, we're in the process of taking a look at bundling real estate, both in terms of buildings that we already own and buildings that are currently under construction or soon to be construction, and using those buildings to create some very attractive financing alternatives for us. Mark, do you have any other comments you want to make now.

Mark E. Shamber - SVP, CFO and Treasurer: Yeah. I mean I think the one thing I would note, Meredith is that, the timing of when this plays out maybe a little inconsistent in the sense that we'll likely build the facilities on our own balance sheet, and then once they're complete, look at some sort of financing scenarios in that sense, it just leads to a lower cap rate, then what we will be charged if we were to sort of enter into financing transaction upfront, plus it allows us to manage the construction of the buildings in a manner and form, which is most desirable from our standpoint. So, we'll be in a better position particularly as it relates to timing once we give our guidance at the end of our fourth quarter and mid-September or so. But what you would likely see is as we build the buildings, the CapEx will flow through, but in the fourth quarter once the buildings are complete, we might enter into sale lease back or some other similar type transaction.

Meredith Adler - Barclays Capital: That makes sense. And then just my final question would be will you be giving us some guidance on sort of the costs related to opening those facilities, the operating costs related to opening facilities, and cost to ship product or whatever you have to do similar to what you are doing in Denver? And, I know we called that out as being unusual, but, is it fair to assume that we're going to have cost like that for the – at least the next two years?

Mark E. Shamber - SVP, CFO and Treasurer: Yes. And that's part of the reason Meredith, where we put it into the guidance and we have not spoken about the operating expenses or operating income ex-those costs. We've highlighted that so that folks know what they are and are able to trend it, but we will likely have some of those costs over the next couple of years. As it relates to giving you the information, we'll certainly do that when we give the guidance. The further out we are, on a construction project, the more likely that the dates could shift slightly. So, we'll give a range as we've historically done, but depending on the weather, we could shift as much as a quarter in the constructions schedule.

Steven L. Spinner - President and CEO: We've spent a tremendous amount of time thinking about financing, thinking about the generation of free cash, and so we're very focused on that. I mean at the end of the day, fortunately, it's a very rich problem to have that the business. I mean we've essentially added $3 billion in sales over the last four years, and so you got to build the capacity to meet demand, and we certainly believe that the fastest growth is in front of us, not behind us. So, we've got to plan out capacity, while not giving up on our strategy to build free cash and operating margin expansion every year. And I think we can do that.

Operator: Stephen Grambling, Goldman Sachs.

Stephen Grambling - Goldman Sachs: Just a quick clarification on SG&A. Were some of the costs for the building not yet occupied also taken in the third quarter?

Mark E. Shamber - SVP, CFO and Treasurer: Yes. So that $1 million that we referenced, I think in my comments, and I think Steve actually mentioned this as well, but there was approximately $1 million worth of expenses in the results in the third quarter.

Stephen Grambling - Goldman Sachs: So then when I look at SG&A, just on a year-over-year basis, then maybe this isn’t the best way to look at it, but it looks like it was the lowest it has been in years. Can you talk about how we should think about these underlying rates and ex- some of these one-time costs going forward, and maybe how sustainable this rate is?

Mark E. Shamber - SVP, CFO and Treasurer: Well, I think that it continues to go back to the mix shift in trying to answer that question. Steven, I can tell you that last year at this time we were asked whether or not we could get the expenses lower than what we had because last year’s third quarter was a significant uptick in that sense. So I think what happens I mean, our third quarter is always our highest sales volume quarter. So we tend to get the greatest leverage starting at that point. We take a little bit step back in the fourth quarter because the volume declined sequentially a little bit, excluding the extra week and then we maintain that until we sort of get to the next year's third quarter with modest improvements as we go. So, I think that if I could tell you definitively where the sales by channel is going to come out, I probably be in a much better position to give you the exact mix because if we do more independent sales, we will see higher expenses but no profitability is higher on the independents than total on average. So, we’d be more profitable even though the SG&A would go up. So, I think to answer distinctly it’s a scenario we will continue to take the expenses out. We will continue to get leverage. The rate that we have for this quarter is sustainable, but you’ll probably see a little bit of a step back in the fourth quarter and then maintain that until we get to next year's third quarter.

Operator: Kelly Bania, Bank of America Merrill Lynch.

Kelly Bania - Bank of America Merrill Lynch: Just quickly on gross margin, it's been incredibly stable over the past 2 or 3 quarters and just wondering I think, Steve maybe you mentioned volatility and gross margin coming up I want to make sure I understand what the message was there and then maybe if you could also tie in the out of stocks. I thought that had abated last quarter I am wondering if you can talk about what categories you are seeing and if we should expect that to moderate in the fourth quarter?

Steven L. Spinner - President and CEO: I just wanted make sure that everybody shouldn’t think that because we had a couple of quarters where our gross margin was stabilizing that we couldn’t have some up or down volatility as we look forward. We do think that the gross margin from here forward should be fairly stable. There is nothing that we know of today that would cause significant decline like we've had in the last couple of years related solely to customer mix. But I just wanted caution folks into not thinking that it was going to be exactly the same quarter-to-quarter, because it could go up or down as I said. But there was nothing hidden in that message. And then U.S. question on the supplier out of stocks. I forgot what was your question on supplier out of stocks.

Kelly Bania - Bank of America Merrill Lynch: I thought that the supplier out of stocks had kind of abated last quarter so I was just wondering if that was the same categories and if you think that it is kind of resolved at this point or as we think about the next couple of quarters?

Steven L. Spinner - President and CEO: Yeah. So, it's definitely getting better. Sequentially, it was better in the second quarter, but it was still considerably worse than last year. So, we probably have another two quarters where the comps are pretty tough, but I think that we're going to start to see gradual improvement in the service level. We're still faced with some out of stocks related to some very specific products and it's just going to take a while for those to get back-up to the volume demand. Like I said in the comments, we have a fair amount of confidence from the suppliers that they're on it for adding capacity and we'll see it continue to improve.

Kelly Bania - Bank of America Merrill Lynch: Then if I can ask another one just on the DCs, I don’t recall if those locations were announced – I think you said Wisconsin, Hudson Valley and in California. And I was just curious if you can talk broadly about the process that you go through in determining those locations and I think you mentioned some of the independents maybe growing a little bit faster. Just curious how much visibility you have into that and if that plays into those decisions?

Steven L. Spinner - President and CEO: Yeah. I mean that's a great question. I think a couple of years ago, we used to think that the most efficient way to build a distribution center was to build (indiscernible) center. 800,000, 900,000 square feet, you spread your fixed costs over a really wide turf and that would be the most effective way to manage DC. But what we've learned was when you actually put the zip codes of your delivery points into a model, what we found was that whatever efficiencies we gained it by building a big building, we actually lost in transportation cost. So, the analysis brought us to, let's take a look at the geographies where we have the greatest saturation of customers and where we're driving the furthest distance to get to. And that's where we need to build facilities. And so, when you look at Racine, Wisconsin or Sturtevant, Wisconsin, it's far more efficient for us to build a new building there and offset volume from several of our existing buildings that are at capacity, then it is to build a singular mega center. Far more cost effective. So, our model moving forward will be to have what's called a fold-out strategy where we will build a building that's in somewhat close proximity could be 200 to 300 miles away from an existing facility, will offload volume from the existing facility into the new one, and it will just bring us closer to the customer and significantly reduce our transportation costs.

Mark E. Shamber - SVP, CFO and Treasurer: Then Kelly just to the other part of the question, we – our facility in the New York area is in the Hudson Valley area, it's actually in the town of Montgomery and we have not yet signed on a location in northern California, although we have narrowed it down to a couple places.

Operator: Ajay Jain, Cantor Fitzgerald & Co.

Ajay Jain - Cantor Fitzgerald & Co.: I guess, given that you have one quarter remaining this year, I wanted to clarify, if the updated sales guidance is mainly related to the extra sales week? If I compare the midpoint of the original sales guidance to the new range, I think the incremental amount works out to the same 2.2% to 2.3% that you attributed to the extra week in your press release. So can you confirm if the 53rd week is mainly behind the new sales guidance and if we should assume that the calendar shift was not accounted for?

Mark E. Shamber - SVP, CFO and Treasurer: No, actually that’s not the case. The uptick was that we had much stronger – we had an uptick in the third quarter where we went from 12.3 in the second quarter Ajay, to 12.8 and we’ve seen that the first four weeks of the fourth quarter have seen a modest acceleration from there. So, it’s more a reflection of the continued sales growth and the improvement in the sales growth than it is anything to do with the 53rd week.

Steven L. Spinner - President and CEO: And the extra week was always in our guidance.

Mark E. Shamber - SVP, CFO and Treasurer: The extra week we had laid that out in the beginning and I think even on the fourth quarter earnings call fiscal ’12 we had kind of roughly estimated the number so that people knew that it was 10 to 12 comp get roughly before the extra week just factored in.

Ajay Jain - Cantor Fitzgerald & Co.: I just had one follow-up question. I think that Steve in your prepared comments you gave out the sales contribution by channel. Maybe you gave it, but what was the growth of independents this most recent quarter for both independents and the conventional supermarket channel?

Mark E. Shamber - SVP, CFO and Treasurer: Actually, Ajay, I covered it in mine, Steve only touched on this supernatural. So the conventional supermarkets were 13.6% for the quarter and the independents were 8.3.

Operator: Andrew Wolf, BB&T Capital Markets.

Andrew Wolf - BB&T Capital Markets: I have two follow-ups. The roughly $5.5 million the non-cash and I guess now the cash moving costs at Aurora (indiscernible) Albert’s. When you compare that to last year, was there any similar cost last year, if we just want to adjust for that.

Mark E. Shamber - SVP, CFO and Treasurer: The last time we had had any costs of that nature Andy were in the first quarter and a little bit into the second quarter of fiscal '11 when we opened the Lancaster, Texas facility, but there were no such cost in fiscal '12.

Andrew Wolf - BB&T Capital Markets: You are saying going forward they will be and depending how things fall out could be a washer, but something like that?

Mark E. Shamber - SVP, CFO and Treasurer: Right, because we are going to have the new facility in Wisconsin will likely be done late in fiscal '14 the new facility in New York will probably be at some point in fiscal '15 I think it’s a little bit early for us to comment on timing there because we haven’t broken ground yet. Then we have a new Northern California facility that comes onboard at some point after that. So as we look at the next couple of fiscal years we'll likely have those types of expenses in that time frame.

Andrew Wolf - BB&T Capital Markets: Then just lastly I think you mentioned inbound freight as a drag to the expense ratio and either I missed it or maybe I didn’t but is that tied to your inbound freight system or routing, and I think last quarter you mentioned it was a lack of backhaul opportunity, so could you just discuss what's the situation there and when…

Mark E. Shamber - SVP, CFO and Treasurer: I mean there is a few different things but I think Steve, in his comments touched on it and that, we in the instances where we have higher than normal supplier out of stocks where we feel the need to address customer service level needs we'll move products around at the higher expense on our side and that is a component of inbound freight. I mean there may have been a few instances of some higher costs where we expedited shipment on directly coming in versus relocating – versus moving in between existing DCs. But I think what we are trying to allude to there was more along the lines of we'll move things around particularly when we continue to have service level issues. We'll move things from DC to DC if we have the inventory in another location.

Andrew Wolf - BB&T Capital Markets: So really to some extent, you are dependent on the vendor community really getting back to kind of normal in-stock levels. If you want to properly service your own customers.

Steven L. Spinner - President and CEO: Yes.

Operator: I'll now turn the call over to Mr. Spinner for closing comments.

Steven L. Spinner - President and CEO: Thank you for joining us this afternoon. Eat more organic and specialty food and we look forward to presenting our 2013 fiscal year results and 2014 guidance this September. I hope you all have a great summer. Thanks again for joining us.

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