Thanks for joining us. I think we're going to go ahead and get started here. I'm Kelly Bania. I'm a food retailing analyst here at BofA Merrill Lynch, and I am happy to have the pleasure of introducing United Natural Foods who is back again with us this year. We have Mark Shamber, who's the CFO; and Sean Griffin who is the Group President. So I'm just going to turn it over to you Mark for some brief comments and then we'll follow up with Q&A.

Thanks, Kelly. So obviously, I'll start off with the normal Reg FD disclosures. So UNFI is the largest distributor of natural, organic and specialty products in North America. We have 28 distribution centers -- 26 distribution centers split between the U.S. and Canada. We just reported earnings 2 weeks ago today, so before opening into the Q&A, I thought we'd just spend 15 minutes or so going through briefly some of the highlights of the company, and then open it up from a Q&A standpoint as a lot of the items we had covered a couple of weeks ago. So as I mentioned, company overview. We've got about 26 distribution centers spread across the U.S. and Canada, 5 within the Canadian location, 21 within the U.S.. We service approximately 23,000 customers -- 27,000 customers across those locations, and we carry about 65,000 SKUs, a little more than that from that perspective, and we have approximately 7,000 associates. So some details about the company. We operate in 3 primary channels. The largest channel that we service, the supernaturals. Supernaturals represents for us effectively the Whole Foods stores. We service Whole Foods in the U.S. and Canada. We do not service them over in the U.K.. Our second largest channel is the independents. Independents, from our perspective, can range from a small mom-and-pop or co-op to a large regional chain like someone -- Earth Fare in the southeast; Sprouts in the southwest; New Seasons, PCC markets up in the northwest. The third channel that we serve is primarily is the conventional supermarkets. Conventional supermarkets are approximately 25% of the business. They can be anybody. Our largest supermarket customer is Safeway, and we also service a lot of the regional players, Stop & Shop, Wegmans, to name a few. The remaining portion of…

Sure. Mark, I'll just kick it off and then we'll see if we have any in the audience. I guess first, the supermarkets represent a big opportunity. I think in the past, I was looking back at my notes, you said it represents about a $1 billion opportunity, but then you've gained a lot of that business. So how do you think about that as you look out over the next couple of years? What's that number?

Yes, I mean, I think we haven't necessarily updated the number to factor in growth that occurred. But when we look at the supermarket business and we look at what's out there from an opportunity standpoint, there are really a lot of the conventional supermarket customers that we don't currently serve. So starting with some of the biggest players, we don't do anything, well with Kroger, we only do some business with them, a little bit in the Midwest. And we service the Fred Meyer division up in the Pacific Northwest. So we don't do any additional business with Kroger. Now the Kroger opportunity is limited in some respects because they have their own slow-moving warehouse system, and so it would really be a secondary to what they're not looking to carry themselves. But again, it's still a relatively high-level business. In addition, SUPERVALU, we don't do any business with. We weren't doing any business with them prior to the sale. So the sale of the 5 chains that recently went through to Albertsons, and this represents an opportunity for us as well as the remaining business that SUPERVALU didn't sell. Beyond that, there's still a lot of regional players that we don't do business with. In the southeast Publix, we deal about 50 stores in the Miami division and a little bit up in the Georgia area, but we don't do any of the other 1,200 stores. We do some business with central market for H-E-B, but we don't do anything with H-E-B themselves. On the West Coast, we don't do anything with Raley's. In the northeast, we don't do anything with Price Chopper or Big Y; or along the Atlantic Coast, Meijer. In the mid -- sorry, Buy Low; in the midwest, Meijer. So that's a handful of 7 to 10 stores chains that we don't currently have any business with. And so the way business works with the conventional supermarkets is that it's a long lead time to be awarded business. It maybe as much as 12, 18 months between the time frame that an RFP is first issued and between -- and when the business ultimately awarded. So from that perspective, we spent a lot of time establishing relationships, the business development team, the sales team and positioning ourselves so that we're able to highlight UNFI's strengths and indicate reasons as to why they would be better served having us as their distributor. So from that perspective, it's not necessarily that every year we're going to be awarded new business. Certainly not every year we'll win over $100 million worth of business. But over the course of time, as we've indicated -- or as we've shown in the last 3 or 4 years, we should continue to be able to take market share in that sense.

Great. And another follow-up. It seems like everywhere we look, this natural and organic and fresh is just going more and more mainstream. And I guess, in a lot of respect, it's a positive for you in terms of top line and at the same time, there's also that potential negative of things going direct. So can you just remind us how that balance is playing out as you see it right now?

Sure. I mean, I'll offer a couple of things, and I'll give Sean a chance to weigh in as well as that -- part of that balancing falls under his area. But I mean, it is a constant struggle. I mean, to the point that Kelly just made as we grow our business, in some sense with the conventional supermarkets, we've become a victim of the success of the industry. So if you use Greek yogurt as an example, 5 years ago, 6 years ago, Greek yogurts were a very small portion of the overall sales of yogurt and yet they were growing within our categories in north of 10%. However, if you look today and you can see an entire wall of Greek yogurts and in many instances, they've supplanted what would be conventional or traditional yogurts within the retailers. And when that happens, the volume that's they're doing at that potential -- or at that supermarket increases to a level where they elect to take it in-house. And for us, it's always a balancing act of trying to retain that business and how to try to retain that business. So I'll let Sean...

Yes, sure. Good morning. I think it's a maturation of the branding cycle as emerging innovation and so on begin to take in independents as well as conventional supermarkets, the high-velocity SKUs, we have a tendency to lose those at some point to a direct relationship. Now from UNFI's perspective, what we believe we do quite well is the introduction and incubation of innovation and new brands. And from our perspective, the intellectual capital that we bring to play in fostering these new brands to market provide us with the continued engine of growth, whether it's conventional or independents. So new SKUs in, new brands out. We know that we're going to lose some high-velocity SKUs in the mix.

And just -- I mean, just to add on that, just to put some numbers around what Sean was talking about. In any given year, 7% to 8% of what we sell was new SKUs that were introduced that year. So if you translate that over a 3-year period, roughly 20% to 25% of what we're selling was introduced in the last 3 years. And so as we're losing items out of the bottom of the funnel, particularly the conventional supermarket channel where the fast movers are being taken direct, we're constantly replacing them with new products that are coming on board. And so we're showing -- this past quarter, as an example, we showed 14.4% growth on the supermarket channel even with some of those headwinds.

I think we have a question there.

Can you give us a little perspective on growth and maybe also operating margins, differential between the 3 sort of channels that you're talking about?

Yes, I mean, we give it directionally. Obviously, we don't disclose the specifics because the first time we do, every customer who's above that will call us and look for better pricing. When we look at the gross margin, the independents, on average, have the highest gross margin. The conventional supermarkets are in the middle from that standpoint, and supernaturals have the lowest gross margin. And the spread is more significant on the gross margin than it is on the operating margin. In the operating margin, the spread is much closer because the cost to serve is in that same proportion. So although the conventional supermarkets -- so although the independents have the highest gross margin, they also have the highest cost to serve generally due to lower order size, particularly with respect to the frequency of deliveries associated with that order size. The conventional supermarkets are in the middle, and the independents -- I'm sorry, the supernaturals have the lowest operating expenses associated with them. One other factor that comes into play that's only related to the conventional supermarket channel is that some of our conventional supermarket customers are serviced either full service or partial service. And so what that does is that adds on top of sort of the gross margin that they would be charged associated with the cost of the product, it adds a 5% or a 10% or 500 or 1,000 extra basis points of expense, which is captured in the gross margin for the service component that we provide to them yet the actual service is located in our operating expenses. So it's a little bit misleading. So when we take on a customer such as Safeway, if the Safeway business had been full serviced, you might have seen an expansion of our gross margin because of the service component of it. But because it was not and given that Safeway, as we announced when we took it onboard, is our second largest customer, instead it was dilutive to the gross margin. Even though if you look at fiscal 2012, we were able to actually expand our operating margin even though we took them on as a customer. So we tend to focus on guiding our investors towards the operating margin because the gross margin can and will decline over time, but it's really the mix that determines the profitability and the efforts that we make to take expenses out of the business.

I'm just wondering if you can give us a little perspective on some of the things that we've heard from some of the largest supernatural customers in terms of a little bit of a slowdown in same-store sales. And I wonder if that's conventional customers becoming more relevant to the consumer overall, or if it's just some comps or it's just normal variability of the business. If you could just provide some perspective sitting where you are.

Yes, I mean, I can't give too much insight specifically as to what's going on in their end. What I can say is that as we look at this most recent quarter, both the supernaturals and the conventional supermarkets were both at about 14.5%, a little under that, 14.4%; and the independents were at about 8%. So it was, from a standpoint of -- sequentially, it was a little bit of a slowdown, maybe 100 basis points. But we are coming off of tougher comps from a perspective that last year this time or last year second quarter, we did about a 15.5% from an overall growth standpoint. I think the one thing that we tried to highlight, and we may not have highlighted as well on the earnings call as we intended, but if you look at our volume on a year-over-year basis, we're actually moving more cases in this year's second quarter than we did last year's second quarter. So the way I would break that down is that if you look at this year's second quarter, overall growth was 12.3%. We had about 100, 110 basis points related to acquisition, which gets you to roughly an 11%, 11.2% comp x acquisitions, and we had roughly 2% inflation. So from a box count standpoint, we were moving -- the growth was approximately 9.2% to 9.3%. If you go back and you take a look at the second quarter of fiscal 2012, the overall number was 15.5%. We got roughly 4% lift from taking on Safeway as a customer. So that would back it off to about 11%. We also had a headwind of about 1.5% related to the disposition of our nonfood business, so that will push it back up to a 13%. But inflation last year was at 4.35%, almost 4.4%. So when you back that off, you're talking from a box count standpoint 8.6% to 8.7%. So on a year-over-year basis, we're moving 60 to 70 basis points more volume than we were doing last year, but due to the significant drop off inflation, the growth reflected is slower.

I know that organics inflation is not necessarily in line with regular food inflation. So just wondering if you can give us, and forgive me if you have already, the outlook that you have for inflation for your product set over the next 12 months or so?

Yes. 12 months gets a little bit tough. What I would say is I feel comfortable through the back half of fiscal '13. As we stand here now, probably no different than what we said 2 weeks ago, which is likely in the range of 2% to 2.5% through the end of the fiscal year. I mean, as I look at the third quarter, we're below 2% going into the quarter. So could it drop as low as 1.75%? Sure, but it's probably no higher than 2% to 2.25% for the third quarter. I think the fourth quarter is really where it may become interesting in the sense that last year at this time, there were all the concerns about the drought, and a lot of our suppliers lock in their pricing for a full year, and the time frame is generally done in the March, April, May time frame. So as they go to renew those contracts that are expiring, whether their pricing increases and whether they feel the need or they have the need to pass that on at retail, will dictate sort of where inflation goes. So we're seeing a normal level of price increases but slowly declining over time. So the last couple of quarters, we've slowly crept down from 3% -- 4.4% last year's third quarter down to 3%, down to 2.1% -- or 2.1%, 2.2% for this first quarter, and then the second quarter, we dropped below 2% just barely. So back half of the year is probably no more than 2.5%. Looking into the first half of fiscal '14, just not in the position to give expectations at this point. Yes?

You're going through a recruiting and training program for independent service store managers. How many people are going through that program? And then a second question in terms of handhelds. I think you have 2,000 that have been deployed. How many in total do you expect to deploy over, say the next 2 years?

Well, I mean, to the first question, I think you're taking that from a comment Steve might have made on the earnings call. We actually put a class in place to increase our sale in some of the major metro market last August. And so that group has been on board now for 7, 8 months from that standpoint, and they've been deployed into, I think, 6 major metro markets?

Yes, there's 15 new sales associates.

So from that perspective, just looking at the opportunity to increase the amount of business that we do with the independents and putting, for lack of a better word, putting more feet on the street to look at those customers where we're not doing as much volume and see if by an additional presence, we can do that. Also, identify customers where we're not doing any volume, that may have startup and might -- you go into any local store these days and they're carrying more and more natural and organic. There may be an opportunity to pick up that volume depending on how much business they're doing. With respect to the handhelds, we probably -- to clarify the statement, we probably have, by virtue of our entire customer base, north of 10,000 handhelds that are out there. What we've done though is we have a new technology that we deployed -- or we started deploying 2 to 2.5 years ago that we referred to as iUNFI, where they're using our software that feeds directly into our system versus using perhaps a third-party. And really, this is for customers who aren't ordering by the EI or some other means. And so I think as we continue to roll it out, the units that are out there now, we'll basically leave out there. But ideally, given that everyone these days tends to have a smartphone or many folks have a smartphone, what we'd really like to do is see the transition occur to here's a software, you put it on your device and we'll make the software available as opposed to putting more and more devices out there. But I think, we could end up with maybe another 1,000 or 2,000 devices deployed. But realistically, over time, I think you'll see the transition where it'll be our program that'll be there that allow the customer to order but it will be on their device.

And Sean, one for you. You mentioned the innovation, how important it is to the industry, and I know you guys may have just been coming back from Expo West. So maybe you can just give us an update on what you saw out there and where you see innovations?

Yes, well, let's think about that. I'm thinking about some of the functional beverages that I saw: super foods, products made with kale, pears, many products that are coming to market with pear products, Native American organic foods. We still see an awful lot of...

Greek yogurt.

Greek dairy products continue to see significant pops there. Mark...

I mean, I would say on top of that, similar to last year, a lot of coconut, big products. I mean, there was a coconut ice cream -- or coconut-based ice cream product. One of the other things that has gotten a fair amount of press, and it's not so much from a food standpoint but certainly from a labeling standpoint, is that the non-GMO project, the non-GMO or GMO-free product continues to gain hold. And with Whole Foods announcement at Expo West, we're all their -- their intention is to have all the products that they're carrying in their stores by 2018 either be GMO-free, or to the extent that they're not GMO-free, labeled with the notation that they may contain genetically modified product. I think that was a big outcome from the show. I mean, it's been talked about. Proposition 37 came up in California last year and didn't pass. But I think with Whole Foods support, you'll see that continue to gain momentum across all the products that are in the space.

Gluten-free?

Gluten-free. Yes, I mean, gluten-free was very strong there. I mean, you certainly -- you've got the leaders in the space with Glutino and Udi's. You also have companies like Kinect-Kinect. But there were a lot of the existing brands, somebody like an Amy's launching or -- not launching, but increase in the number of SKUs that they have that are Gluten-free. So that continues to be a focus as well.

Can you talk about the promotional environment you're seeing from your customers' perspective? And there's some noise, not as much with your kind of product set, but of increasing competition in the recent fourth quarter, and just curious, your views on that and whether it's more kind of temporary or something that's kind of longer lasting?

Yes, I mean, from the retailer standpoint, don't have as much visibility into the level of their promotions. But what we can say is that certainly with the growth that the industry's had over the last 18 months, we've seen the suppliers reduce some of the promotions levels that they have, not dramatically, but they have eased off because when you're having 15% comps, you don't necessarily have to promote as heavily from that perspective. So I mean, I think -- I don't think it's dropped off dramatically, but you're still seeing it. And I think at the retail level, you're seeing increased competition. So there -- they may be promoting a little more heavily. They may be passing along more of the deal, or they may be adding to the deal that was offered by the supplier in order to lower the price point a little bit further. But from a specific standpoint, just because that's not where we're seeing in our day-to-day, I'm not sure that -- I can offer what I can see on the supplier side pretty well, but not as much on the retailer side. I'm not sure, Sean, if you've got any insight better than mine on that, but...

I think early in the year, we did have some circumstance where suppliers were having a difficult time meeting the demand. And so when we are in a situation like that, suppliers have a reticence to stimulate and spend for obvious reasons. They could sell at full costs, and they have difficulty from a demand -- meeting the current demand. So I think that that's corrected itself. We certainly in -- we're seeing a more robust supplier fill rates into UNFI. We would expect that stimulation to come, commensurate with the performance of the supplier into the UNFI stock. There's nothing really significant.

Mark, we haven't talked much about the technology rollout at the warehouses. I think last quarter, you said you're going to step that up to kind of 2 a year from here on out. So maybe just remind us exactly what happens when you do that, what the process is like and...

Well, that's right in Sean's wheelhouse because that's right in his area.

I can see it. That's such great fun. We're doing well with the distribution centers that have migrated to our WM platform. Late summer, we'll roll in other distribution center through our WM, and we expect 2 to 3 per year out for the next 2, 3 years until we get all of our DCs up and running. Of course, we're going to be adding several distribution centers within this cycle, which will be included in the back half of the implementation. So we're pleased with what we're seeing in terms of our productivity and so on associated with the WM system. We're also in the process of migrating to a demand planning and forecasting the inventory optimization application, starting in our West region. Actually, we will cut our first PO in this new system late March, March 25 to be exact. So a lot of training, change management, a lot of preparation going into going live, and we're looking forward to that and provide our really good people, our buyers, purchasing folks with the appropriate tools to guide their decisions. So we're looking forward to that. 2014, we'll move that application to our east region. And we're also working on an enterprise information management transformation, really getting to single instance across the company, whether it's SKU level, vendor identification, data warehouse, really getting our fundamentals together so that one version of the truth is kind of our practice.

And just to add on that, for those who aren't necessarily with the company. UNFI has operated off of 2 different systems, 1 in our eastern region and 1 in our western region since the company has merged back in '96. So the initiative that Sean is mentioning is an effort in our part to finally align everything across all of the regions and get us to a single instance.

And can you just explain a little bit more about the process of converting a warehouse? I mean, it sounds like a big undertaking. What has to happen and what are the main efficiencies that you get out of it? Is it more in the costs, or is it more in the accuracy in being able to service your customers?

Yes, well, productivity is a very large part of what your ROI ultimately becomes. So I would say that the productivity is a major win for us. Accuracy, the package that we are implementing is a voice selection package. We typically see a reduction in selection errors, for example, after a 90-, 120-day ramp-up of voice selection reduced in half. The W impact, which allows us to build a production platform based upon engineered standards versus purely a cases per hour metric. So one of the significant efforts that go into a migration to this platform, for example, is that we deploy engineers to map every task associated with any move in the warehouse, whether it's a loading function, a put-away function or selection function, all of these are called tasks in their own map and timed. So it's the aggregation of all of these collective tasks that go into building and arriving at a standard. And it's the performance of an associate against that standard, which is -- is really becomes the incentive. And through this concept, we see and have seen in our past deployments significant improvements in productivity and accuracy. So ultimately, our customers enjoy the benefits.

Great. Well, I think we'll just go ahead and wrap it up unless there's any more questions. Thank you, Mark and Sean, very much.

Thank you.

Thanks.