United Natural Foods, Inc. (UNFI) Q1 2009 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen. Thank you for standing by and welcome to the United Natural Foods first quarter 2009 conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) This conference is being recorded today Tuesday, November 25, 2008. At this time I’d like to turn the conference over to Scott Eckstein with Financial Relations Board; please go ahead, sir.

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 3772 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; Mark Shamber, Chief Financial Officer; and Michael Funk, Chairman of the Board. We will begin this morning with opening comments from management and then we will open 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 would 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.

Thank you, Scott. Good morning and thank you for joining us. Today UNFI announced operating results of its first quarter of 2009. Total sales grew 17.4% to $864.2 million. Net of our specialty business, which is not included in our 2008 results, sales grew 10.1% to $811.1 million. Our sales growth was driven primarily by our sales to independent retailers and conventional supermarket channels which grew by 11.5% and 56.2% respectively. Net of specialty, conventional supermarkets grew at 7.6%. As a percentage of our business in the quarter, super naturals were 31.9%, supermarkets 19.8%, independents 42.9%, and food service 2.8%. EPS in the quarter was $0.31 per share. Adjusting for Specialty, which was not in our numbers in prior year’s results, EPS grew by $0.02 per share and 7.7%. Dilution from Specialty in the current year was negative $0.03 per share and non-recurring expenses in the quarter were $2.58 million. Our results demonstrate that our initiative to integrate our specialty business is on track. In addition, based on the efforts of our associates working on this project, our service levels and customer retention are exceeding our internal objectives. UNFI Specialty Distribution will become the fastest growing segment of our business, following its integration into our national footprint of distribution centers by adding new customers in this space and more fully penetrating existing customers. Gross margin in the quarter was 19.4% versus 18.4% in the prior year. The 100 basis point improvements was reflective of higher specialty gross margins and fuel surcharges, offsetting increased fuel costs, as well as our continued focus on passing through cost of goods inflation. Gross margin net of specialty was 15.6% versus 15.1% in the prior year. Inflation during the quarter was 7.48%, primarily driven by increases in bulk grains, pasta and dairy and perishable. On the product side, sales of bulk grains, cereals, baking supplies, and shelf stable products had double digit growth, while general merchandise, including personal care, paper and plastic goods, household cleaners, pet food and bottled water had declines; all indicative of a shift in consumer behavior that retail towards less expensive, more value-oriented products. Operating expenses in the quarter were 16.4% versus 15.1% in the prior year. Increases in expenses during the quarter were driven by 10 basis points of fuel increases and non-recurring expenses of 29 basis points in the quarter versus 31 basis points in the prior year. CapEx during the quarter was approximately $11 million. We are now operating from our Moreno Valley, California facility. Our York, Pennsylvania facility is nearing completion and will be online in January. In addition, we announced earlier that our corporate headquarters would be moving to a renovated facility in Providence, Rhode Island. We expect to take occupancy during early summer 2009. We have also previously announced our intention to build a distribution center in Texas. This is expected to begin in calendar year 2009. Once Texas and our Connecticut facility expansion are completed we will have a fully built out national structure, providing us with the ability to compete on a national scale with the most cost efficient platform in the industry. Additionally, we expect CapEx to moderate substantially following completion of these construction projects. During the last two months, I have traveled the US visiting UNFI customers, suppliers and associates. We are a passionate group. Strategically during the next year UNFI will be focused on continuing to be the leader in the organic naturals supplement space while integrating Specialty and working diligently to acquire new conventional organic supplement and Specialty customers. In addition, we will be reviewing how UNFI utilizes its national scale to take advantage of efficiencies and the implementation of some common metrics that ensure the highest level of service while more effectively managing return on capital. We will also focus on building market share in our existing customer base by utilizing our industry leading divisions, Select Nutrition and Albert’s Organics. UNFI also will further enhance its commitment to alternative energy, sustainability and the environment. I look forward to scheduling an investor meeting and tour at our York, Pennsylvania facility during late spring 2009. Looking ahead we are cautiously optimistic. Top-line revenue, while strong in the first quarter, has softened during the first weeks of November. While fuel costs and interest expense have moderated, we remain concerned about continued top line revenue growth across all of our channels of distribution. We will continue to be vigilant in controlling our expenses and monitoring the economic environment and its implications on our business. Based on current trends we remain comfortable with our earnings estimates through the second quarter of our fiscal year. Now I would like to turn the call over to our CFO, Mark Shamber.

Thanks Steve and good morning and welcome to everyone listening in on the call and the webcast. As Steve mentioned, net sales for the first quarter were $864.2 million which represented an increase of $127.8 million over last year’s first quarter net sales of $736.4 million resulting in sales growth for the quarter of 17.4%. Excluding the impact of the acquisition of UNFI Specialty Distribution Services, net sales grew by $74.7 million or 10.1%, to $811.1 million. For the first quarter of fiscal 2009, the company reported net income of $13.2 million or $0.31 per diluted share, a decrease of approximately 2% over the prior year. Net income for the first quarter of fiscal 2008 was $13.6 million or $0.32 per diluted share. Excluding approximately $0.03 of dilution associated with UNFI Specialty, net income would have been $14.7 million or $0.34 per diluted share, an increase of approximately 8% over the prior year. Gross margin for the quarter was 19.4%, which represents a 99 basis point increase from the first quarter of fiscal 2008, which had a gross margin of 18.4% and a 12 basis point decline from the previous quarter. The year-over-year gross margin improvement is due to a combination of improved gross margins at our Specialty Division, higher fuel surcharge revenues and increased focus on efficiencies such as forward buying by our purchasing teams. It’s important to note that the recent declines in fuel prices will result in lower fuel surcharge revenue going forward, which will negatively impact gross margin. As a reminder, the offsets for our fuel surcharge revenue are outbound fuel costs that are reflected within operating expenses on our income statement. Operating expenses for the first quarter were 16.5% of sales compared to 15.1% for the same period last year, a 138 basis point increase. During the quarter we incurred $2.5 million or approximately 29 basis points in non-recurring expenses and startup costs associated with our new facilities in Moreno Valley, California and York, Pennsylvania. We expect to incur non-recurring expenses at a similar level to the first quarter in Q2 as we prepare to move to our York, Pennsylvania facility from our New Oxford, Pennsylvania facility in mid-January 2009. The incremental cost of fuel for the quarter had a negative impact of 10 basis points in operating expenses in comparison to the first quarter of fiscal 2008, as fuel represented 110 basis points of distribution net sales in the quarter. Sequentially, fuel declined by 29 basis points over the fourth quarter of fiscal 2008. Fuel costs in the first quarter declined by approximately 16% from our fourth fiscal quarter to a national average price of $3.86 a gallon using the Department of Energy’s weekly prices, which represent an increase of approximately 30% over the prior year average for the first quarter of $2.97 a gallon. Share based compensation during the quarter was approximately $1.7 million or 20 basis points, compared to $1 million or 14 basis points in the prior year. Operating income for the quarter was 2.9% on a GAAP basis, a 39 basis point decline over the prior year’s fourth quarter operating income of 3.3%. Adjusting for the costs associated with the Moreno Valley and York facilities, operating income would have been 3.2% for the first quarter of fiscal 2009. Our effective tax rate for the quarter ended November 1, 2008 was 39.6%. The increase in the tax rate for fiscal 2009 is due to the prior year yielding a benefit related to tax credits associated with our solar panel installation projects at both our Rockland, California and Dayville, Connecticut distribution facilities. Our inventory was at 56 days for the first quarter, above our target range of 47 to 50 days and an increase of five days in comparison to the prior year. Our higher inventory levels at the end of the quarter were due to the inventory build that is currently in process for the mid January opening of our York facility, as well as our continued efforts to work down inventory levels in our Moreno Valley facility following its opening in September. In addition, this year we have a higher inventory build out our Specialty Division, which was not part of the company in the first quarter of fiscal 2008, as the holidays in the second quarter represent Specialty’s peak periods. We expect to work our inventory levels down towards the high end of our target range by the end of the second fiscal quarter. DSO for the first quarter was at 20 days, favorable to our target range of 22 to 25 days and a one day improvement over the prior year. Capital expenditures were $11.4 million or 1.32% of net sales for the three months just ended, which is slightly below our target spending. At this time we continue to expect our CapEx to be inline with our previously announced guidance of $55 million to $62 million as we look to relocate from our existing Pennsylvania facility to a new facility in January 2009 and we continue to evaluate potential facility sites in the Texas market. At $3.4 million, interest expense reflected an 18% increase on a year-over-year basis due to higher debt levels associated with the prior year acquisition of UNFI Specialty, partially offset by lower interest rates during the quarter. The company’s outstanding commitments under our amended and restated credit facility as of November 1 were approximately $321.7 million with available liquidity of $85.8 million, including cash and cash equivalents. Our leverage as of the end of the first quarter was approximately 3.1 times based on a trailing 12 months, while our return on capital was approximately 10% and our return on equity was 10.3%. At this time, I’d like to turn the call over to our Chair of the Board, Michael Funk.

Thank you, Mark. I just want to make a couple of final comments. The Board is very pleased with the results of this quarter, especially considering the challenges of this economic environment. In addition, we are also very pleased with the progress of our leadership transition which began in mid-September and has gone very smoothly. Now we’d like to open it up for any questions that you may have for us; operator.

(Operator Instructions) Your first question comes from John Heinbockel - Goldman Sachs.

Steve, a couple of things; you talked about the softness in November, how broad-based is that? If you look at your distribution channels, you look at geography, you look at product categories; fairly broad-based or is it more concentrated?

No, I think generally speaking we are seeing the softness across all the channels. Obviously we have some product categories that are increasing. I mentioned that in the commentary a little bit, some categories that are decreasing, but generally speaking, there was an overall softening in November across supplements, produce and organic and natural.

Is it significant enough where you need to do something different tactically or it’s not that material?

It’s premature I think John, for us to make that kind of a judgment. We’ve seen a lot of volatility in the sales; swings up and down week-to-week. We really want to take a look and see what happens over the holiday season. Thanksgiving is a week later this year. We want to see what happens between Thanksgiving and Christmas before we’re really in a position to give a real good feel for where we see sales going throughout the rest of the year. So in answer to your question, right now we are pretty comfortable with the projects we have going on and we are not in a position to modify those as of yet.

Sort of as a follow-up to that, how do you think moderating inflation is going to play through the P&L next year? When do you think that’s going to happen? I assume you will think it will be a little bit of a benefit, but where is it going to be a benefit on the P&L and when do you think that takes place?

Well, number one, we’ve seen elevated inflation now for a while. Our hope is that we are seeing the last of kind of the supply, the manufacture catch-up in this quarter with the hope that inflation will start to trail off in the third quarter. It seems unlikely, with everything that is going on that we would have these kind of unprecedented levels and inflation continue beyond that.

Do you think manufacturer trade spends go up and promotions go up and that’s how you capture it?

I’m sorry, say that again, John?

Do you think manufacturer trade spending or promotional activity as opposed to list price reductions, that is how it will play out and that is how you will see it?

Yes.

Then finally, you mentioned forward buying, how big an issue is that; because I know one of the things for the traditional guys they’ve said because of just-in-time inventory and changes in manufacturer behavior, you are just not seeing as much forward buying opportunity as before; was that significant or pretty modest?

No, we haven’t seen that. We are taking a look at the entire supply-chain model as we speak, as it relates not only to forward buy, but the way we go to market with our suppliers across the country, what kind of value proposition we provide them and all those things are taking place and they are in the very beginning phases, but specifically answering your question regarding forward buys, we haven’t seen a lot of change there yet.

Your next question comes from Greg Badishkanian - BD Company.

Just on the slowness that you saw in the last month or so, what does your 2009 guidance assume for organic sales growth as well as just for fuel price surcharges and those types of items?

Well, I mean Greg, I would say that the organic sales growth, our first quarter was the only quarter where we were going to still have the benefit of the Specialty year-over-year. So I think if you backed that out it would give you an organic growth in the range of I think it’s 8.5% to 10.5%, 9% to 11%, something in that range. So that is what we had from an organic standpoint. No additional customers, etc, built-in from that perspective. Then with respect to the fuel surcharge; I think we’ve talked about it before, that in a rising environment we gain additional revenue which helps us on the gross margin side as the fuel surcharge increases, but it only covers a portion of the cost and so it’s maybe a 70% to 80% recovery on the rising fuel prices as we don’t pass that on completely to our customers. So in a declining environment we have the reverse benefit where there may be a 20% to 30% tailwind for each dollar drop in fuel prices. I mean ultimately on fuel, our hope is that it’s neutral. In a rising and a falling market that the expense and the charge offs set one another.

When you look at sort of your branded food business, you look at the Millbrook business. I know it’s a tough environment in terms off from a liquidity perspective, but do you think there might be some acquisition opportunities over the next 12 months and are you having companies come to you that might be good brands to fit into your businesses? Is that something you are looking at and sort of the take-out multiples that are in the industry, have they come down similar to what the public market valuations have come down as well?

Yes, I mean as it relates to brands, we continue to make small brands acquisitions. As a matter of fact, we just completed one; we’ll probably do another one or two. They tend to be smaller very accretive deals that are a great addition to our Blue Marble Brands program. As it relates to the overall acquisition market, we haven’t seen a lot of activity, so I really can’t comment on whether the multiples have come down. I can tell you from our perspective that it would be nice to take a little bit of a breather to really make sure that Specialty gets integrated before we take another jump into an acquisition of significance. However, if the opportunity was presented to us we would take a look at it.

Maybe just a little bit on some of the opportunities; Millbrook in terms of gaining new supermarket business, because now you have a full platform of products, a whole portfolio of products. Just some color on that in terms of what the opportunities are.

Yes, I mean clearly that is one of the most significant opportunities we have as a company, not only in Specialty but in customers that buy specialty, natural and organic, more in the conventional space or the mass market space and that is where we are putting a lot of effort towards to significantly grow our share in those categories of customers and I feel pretty confident that it’s going to happen. I don’t want to comment as to when, but we are putting a lot of effort into it.

Your next question comes from Ed Aaron - RBC Capital Markets.

A couple of questions; so if fuel stays where it is right now it seems possible for you to maybe come up short on your sales guidance for the year but still hit earnings and in that scenario what would you think is kind of a minimum level of sales that you’d need to still meet your earnings guidance?

That’s a great question and that’s one that we’ve obviously spent a lot of time talking about. With the sales softening, based upon what we see today, we still think our numbers are attainable. We’ve got a couple of things moving in our direction; fuel interest, expense control, being able to increase our market share in some of the customers I just talked about. So I think you’re right, should the sales soften to a much greater degree, well, I guess that will be a conversation we’ll have at the next quarterly call.

If I were to assume that organic or internal sales growth over the next three quarters is in kind of the mid to high single digit range, do you think in that scenario your earnings guidance would be achievable based on what you know today?

Yes, I think in that scenario we still feel that we could achieve it. As you mentioned there is a number and Steve responded, there are a number of different levers that we could pull and so in that sort of scenario we’d still feel comfortable with the guidance.

Then on Millbrook, so it looks like adjusting for the extra weight that you had last quarter it looks like sequentially the sales might have been a little bit lower, but I’m just trying to understand how much of that would be seasonality versus any incremental weakness in that business and then similarly how should we think about seasonality of that business in the current quarter?

I’ll give you kind of two comments on that. (1) we did see that the Specialty business softened a little bit sooner than the business in the other channels; (2) the biggest sales softness in Specialty when you look at year-over-year was resulting from a group of supermarkets that we sold last year that closed. So it wasn’t a business loss, it was just that those supermarkets closed and that represented the largest portion of the decline year-over-year, but clearly the greatest opportunity for us is to obviously take market share in the Specialty channel.

Okay, and then last question just on the fuel surcharges. So you mentioned that it hurts the gross margin as the surcharges come out, but it seems like from a timing perspective you kind of get a benefit because there is a lag period between when the fuel prices come down and when the surcharges come down. So in that first one or two quarters initially will it hurt the gross margin over the next one or two quarters or is it more two or three quarters down the road?

It certainly benefited us this quarter as prices started to decline Ed, but in order to try and work with our customers to be more timely, both on the increasing prices as well as when prices decline, we are looking at changing the frequency with which the fuel surcharge is adjusted and as a result of that I would say that in the second and the third quarter and going forward that it will have, certainly in this price environment with oil at $52 a barrel, I think that you will see much more of an impact on the gross margin this quarter than you might have, had we not made that change.

We are looking at adjusting the fuel surcharge more on lines of like a four or five week basis, than sort of a trailing three months basis which we’ve been using before.

Do you have a sense of whether your competitors are doing the same thing?

I do not know from that standpoint, I couldn’t answer that for you, but we think it’s the right thing to do, particularly with the rate at which we have seen prices decline recently.

Your next question comes from Andrew Wolf - BB&T Capital Markets. Andrew Wolf - BB&T Capital Markets: A couple of follow-ups; first on Ed’s questions and in relation I think Mark to your prepared comments. You still expect to gain back some of the, I think you said 20% to 25% if I remember, here in the deflationary period for fuel that you essentially ate on the way up, right?

Correct. Andrew Wolf - BB&T Capital Markets: And just help us do the math, I’ve been trying to figure out how many gallons you guys use a year. Is it about 9 million to 10 million gallons of diesel fuel per year? Is that a good ballpark guesstimate?

I would say that it’s in the range, Andy. I mean it certainly is changing all the time, particularly as we relocate facilities and we continue to make efforts to reduce our consumption. I’d say it has probably hovered in that range consistently for the last two or three years. Andrew Wolf - BB&T Capital Markets: Thank you and on the sales, how much does the late Thanksgiving factor into potentially the slippage not being what you think? I mean, last week must have been really down because the year ago was probably the biggest shipping week of the year. So I mean, do you really have valid information to work off or do you need to see this week?

See that’s the reason why we really don’t want to comment on the sales number because you’re exactly right; we really want to wait until we see this week as well as the next couple of weeks up until Christmas before we can really feel like we have enough information to get to an intelligent basis for how we look at sales moving forward. Andrew Wolf - BB&T Capital Markets: I guess a lot of the food at home retailing space is doing better; people are preparing more at home, Thanksgiving shouldn’t be any different. Do you have any sense how this week might look for the retailers or on your shipping side?

Not at this point. Andrew Wolf - BB&T Capital Markets: Okay and Steve, both in the press release and in your remarks you guys are sounding increasingly bullish about getting new customers as an integrated company with Specialty; is that more of informed if you will, from things you are seeing out in the field and hearing from your sales pitches or is it more just internally like the integration is finally where it should be and you feel you’re prepared to go to market with a persuasive sales pitch? So is it more evidence that people are listening to what you’re saying or is it more you just feel like you’re ready to go to market?

I think it’s both. I mean the reason why we bought the Specialty is because our customers told us that they wanted us to sell it to them and we needed the year to get that business turned around, start the integration, make sure our service level was good before we really wanted to go in front of them to tell them we were ready and we are now going in front of them to tell them we are ready. So again, we have got that process and that project resourced up and we are out there making the calls. I’m out there making the calls and it’s very important for us to land some new business in that space. Andrew Wolf - BB&T Capital Markets: And just a quick follow-up; I mean, I think you have alluded to this but is there a structural advantage for UNFI that is part of either pricing or service levels? I mean what are you saying that distinguishes UNFI from some of the competitors as a retailer is going to really get interested in?

I think the answer is that number one we have the most robust distribution network, so when you look at where our DCs are, we can do it more efficiently from a cost perspective than most, if not all. Secondly, I don’t think there is anybody that competes with us on a skew-to-skew on the natural organic space. So for the retailer that really has a commitment to being in the natural and organic business, we carry 20,000 plus line items. So that’s a tremendous point of differentiation, but I would tell you that the biggest reason is that if you look at our distribution network, the way we can go to market throughout the United States and cover all of our customers facilities without running thousands of miles, we are the one that can do it. Andrew Wolf - BB&T Capital Markets: So does that translate into like a better dead net cost delivery or just a better service levels or both?

It’s all of the above.

Your next question comes from Scott Van Winkle - Canaccord Adams.

I guess for you Mark, when you talk about inflation does that include fuel surcharges?

No.

So you would add that on top of inflation? That’s really kind of an inflation measure, wouldn’t it be?

It would be, but I mean depending on where the prices increase and the timing of how the quarter had been on a trailing basis, it doesn’t always work itself out to be a fair reflection. If there is a week that moves us from one bracket to the next by a penny and then it jumps right back down, it sort of becomes a false measure for that quarter. So I mean there are some aspects off it, if you’re looking at the fuel overall, but from the surcharge and the way it’s calculated, it doesn’t have as much validity by virtue of how we put it in place.

Okay, and on the private-label side, can you see into your customers to identify if there is any change in mix towards private label. Obviously we hear it from your largest customer, but I’m wondering from the supermarket side if you see that. We hear certainly a lot of talk about it on the conventional side.

No, I don’t think so. We are not handling that for them so I don’t know that we would have that same visibility other than if we were to see any changes in our growth with them.

Your next question comes from Scott Mushkin - Jefferies & Co. Bakley Smith - Jefferies & Co: This is Bakley actually filling in for Scott today. I just want to talk about real quickly your cash levels. I mean I understand that you have had to build out some inventory levels with the expansion or the new facilities etc. Talk to us a little bit about the $7.5 million as of the end of 1Q as it compares historically and how you feel about that.

Honestly Bakley, the cash at any point in time that we have on hand is really a reflection of when we have LIBOR strips expiring that we can pay down the debt. So if you look at the fact that at year-end we were at $25.3 million, we would have had less cash on hand if there had been a LIBOR strip expiring that last day versus the current scenario. So, I mean we tend to look more at our availability and liquidity from that standpoint versus the straight cash, as we are a net debtor. From that particular standpoint, the first quarter is generally our high water mark for the year, so you see that from a standpoint of the increased inventory levels in a general sense and then obviously with Moreno Valley opening and York preparing to open we have got additional inventory on hand. So if I look at it from that perspective, we will continue to work our inventory levels down and the back half of the year is really where we generate a lot of the free cash flow that we have, whether we put it to CapEx or yield free cash flow. So from where we stand right now, I’m very comfortable with the levels that we are at. Bakley Smith - Jefferies & Co: Okay and I guess we’ve kind of hit on the diesel. I did have a question about diesel, but it sounds like the benefits from lower diesel costs are more in the future than you would have seen in the recent quarter, so I mean that’s kind of the message I’m getting?

Yes, if you look at where the prices were, we were still up year-over-year in diesel prices. Bakley Smith - Jefferies & Co: Okay and I know that no one changed their contracts around this time of year, but do you have any previews or insight into how contract negotiations are going as we get into the first calendar quarter of ‘09?

Nothing we really would comment on.

Your next question comes from Bob Cummins - Shields & Company. Bob Cummins - Shields & Co.: I wanted to get a little more detail, a little more flavor for your Specialty business. To what extent does their distribution extend across the country or do they just market in certain regions? What went wrong following the acquisition that resulted in the disappointing earnings and what are you doing to get that business straightened out; specifics steps that you have been taking that are obviously having some impact now. Finally, maybe you could just give us a little more insight into how that business may be integrated over time, into your mainstream operations?

Let me start with that and then I will have Mark step in and give you a little bit more on the history. As I said a little while ago Bob, for us to be a player in the conventional retail space, mass market space, those retailers really demanded that they buy natural, organic and specialty from one supplier. Up until the Specialty acquisition, UNFI obviously was the leader in the natural and organic space but didn’t have any specialty business; so strategically long-term we needed to be in the specialty business and this acquisition represented a great opportunity for the company to get into it. I’ll jump forward a little bit forward to where we are now and then I think Mark can give you a little bit more color around the dilution in the first year. Where we are today is we have that business stabilized, our service level is very high. We feel pretty optimistic that we are doing a great job with the customer base that we have and we are talking to a lot of customers on the natural and organic side about adding Specialty to our mix, as well as taking on new customers that are not currently with UNFI. From an integration perspective, we will have our first fully integrated UNFI Natural, Organic and Specialty building in York, Pennsylvania and we expect that integration to be completed in April of 2009. We currently have a facility in Florida where we are carrying the specialty product with our natural and organic; however, those two are on different systems right now. Once we get finished with the York, Pennsylvania IT integration, we’ll then move into Sarasota, Florida and make sure that they are on one system as well. The idea and the project will bring us towards integrating all of our Specialty DCs into our existing UNFI Natural and Specialty Distribution Centers within about 18 months and once we do that, we’ll be in a great position to really handle distribution of all those products in a very, very cost effective way. Right now Specialty is primarily in the eastern half of the US; however, we just finished a building in Moreno Valley, California, which is Southern California. We have some room at some of our other facilities in the West, so the intent would be to fairly aggressively move Specialty into the West with the acquisition of a new customer in that market. I will turn it over to Mark and he can give you a little bit more color around it.

Sure. Bob, I think we’ve gone over it on some of the previous calls, but the short version is that the transaction dragged on longer than we would have liked and so the business that was cash starved when the transaction was closed, it was a bit worse than we had anticipated at that point. We felt after three or four months in that we needed to make some changes with the management team and go in a different direction from an integration standpoint and so what that basically did is put us about four to six months behind our original integration plan, which led to the dilution extending out beyond the end of fiscal ‘08 and into sort of second and third quarter of fiscal ‘09 which is roughly where we anticipate we would be back at breakeven with Specialty for this year. So I think that the business, they just did not have a lot of free working capital to invest in inventory and their service level suffered as a result. That obviously impacted the customers and led to some of the customer losses when we took over the business.

Your next question comes from Meredith Adler - Barclays Capital.

I would like to actually go back to a question that was asked earlier by John Heinbockel, just talking about some of the impact of inflation and I think there was commentary about vendors providing more promotional allowances perhaps to offset the fact that the prices haven’t come down as quickly as commodity costs have, but I wasn’t sure I understood to what extent are you getting promotional allowances? It’s certainly for some of the big branded products, not Natural, Organic or Specialty, they are not going to have their costs come down or their prices come down for a while. So you seem optimistic that that will happen pretty soon. So could you just talk a little bit more about that?

Well, I think what maybe we were trying to get across Meredith, is that we expect that the inflation levels will start to mitigate going into the third quarter and the way the question was posed I think that you are very unlikely that you are going to see that the manufacturers lower their prices. So if demand softens at that point or continues to be soft, what we are more likely to see is additional promotional offerings in order to drive sales from the manufacturers’ standpoint and so that’s when we would expect to see similar levels or increased levels, perhaps on a forward buying opportunity, but that’s sort of the direction that we were going in trying to answer that question.

Okay, that makes more sense. Just I guess a follow-up with that; you say that most of the opportunities in forward buy; did they also actually provide you funds, co-op advertising, or promotions or anything like that that you would share with your customers?

Yes, I mean there are a variety of different marketing initiatives and advertising programs that are in place and it varies by manufacturers to which a program they feel works best for them.

(Operator Instructions) Your final question comes from Andrew Wolf - BB&T Capital Markets. Andrew Wolf - BB&T Capital Markets: Looking at this quarter’s operating expenses and looking at prior quarters and taking out the extra week, it looks like it’s the first quarter in a forever where actually your operating expenses sequentially, especially going from the fourth to the first quarter were flat to down; that strikes me as a very good thing. Is that, Steve, what you are talking about with some expense disciplines or is that more to do with some costs that were just heavy into Q4 or heavy last year that aren’t in ‘09?

Andy, I don’t know that there was so much from an expense control standpoint, but we are at a scenario now where the Sarasota facility has been open for over a year, once we get into the middle of the first quarter. The Portland facility at this point is coming up on, depending on which month of the quarter anywhere from seven to nine months; so I think it’s a scenario where we have started to alleviate some of these facilities where we were overcapacity and operating inefficiently and yielding the benefits of some of the build out that we’ve had. I think those are some of the benefits that we’ve had. The other piece as we talked about last quarter, is that where we were with the Specialty division is that we felt we had the gross margin at the level that it needed to be at, but there was still expenses to get out from the system there and so the improvement that we’ve seen from a dilution, tends to be more on the operating expense side related to Specialty than improvement in gross margin.

We did go through a fairly significant expense reduction in Specialty. I’m not sure if that is in the comparable periods that Andy is looking at. Andrew Wolf - BB&T Capital Markets: Okay, so it sounds like it’s a combination and structurally the company is just much more efficient as it builds out and some of its Specialty being less dilutive. To that, I didn’t hear this and if you did say it, I apologize, but are you still at a $0.06 budget for the year for Specialty dilution and pretty much to let the run rate to breakeven by Q4?

Yes, and I think that as Steve mentioned in the press release, I think we are very happy with the progress that we saw this quarter and we think we are still on track for that. Andrew Wolf - BB&T Capital Markets: The last housekeeping item is on the distribution centers. I think you had talked about $0.10 or $0.11 something, a number like that impacting this year. It looks like its $0.035 so far. Could you give us a sense if that’s still the number? It sounds like Texas, it has a little effect, but when is the big load for York; is it in the second quarter?

It’s in the second quarter, so if we were to go back to year end Andy, I had given at that time an estimate of $0.03, $0.04, $0.01, $0.02 as to how I thought it would play out over the four quarters. There was a little more of a load in the first quarter and I think the second quarter will be relatively consistent. So if you say it was close to $0.035 this quarter, I think it would be similar for the second quarter, so instead of being $0.04, maybe a little bit less than that in the second quarter, but yes at this point I’d say we are still on track for roughly $0.10 for the year. Andrew Wolf - BB&T Capital Markets: That would mean Texas you start to spend some money that impacts Q4?

Yes, at this point I would say that is still on track. We’ve talked that Texas could slide into fiscal 2010, but at this point I don’t think we’d be changing that and so we’d still have it in 2009.

At this time there are no further questions. I’d like to turn it back to management for any closing remarks.

Thank you. I want to once again thank you for joining us this morning. Despite the challenges we all face in these difficult times, UNFI will execute its long term core strategies for growth. Thank you for your continued interest in UNFI and have a great day.

Thank you sir and ladies and gentlemen, if you’d like to listen to a replay of today’s conference, please dial 1800 405 2236 or 303 590 3000, using the access code of 11122176#. ACT would like to thank you for your participation on today’s conference. You may now disconnect.