United Natural Foods, Inc. (UNFI) Q4 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the United Natural Foods Inc. Fourth Quarter Fiscal 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Halie O’Shea, Director of Investor Relations and Corporate Strategy. Please go ahead.

Thank you. Good afternoon, and thank you for joining us on UNFI’s fourth quarter fiscal '17 earnings conference call. By now, you should have received a copy of the earnings release issued this afternoon. This press release and webcast of today’s call are available under the Investors section of the company’s website, at www.unfi.com. On the call today are Steve Spinner, Chairman and CEO; Sean Griffin, Chief Operating Officer; and Mike Zechmeister, Chief Financial Officer. Before we begin, we would like to remind everyone that comments made by management during today’s call may contain forward-looking statements. These forward-looking statements assess plans, expectations, estimates and projections that might involve significant risks and uncertainties. These risks are discussed in our earnings release and SEC filings. Actual results may differ materially from the results discussed in these forward-looking statements. In addition, in today’s earnings release and during the call, management will provide GAAP and non-GAAP financial measures. These non-GAAP financial measures include adjusted net sales, adjusted net income and adjusted earnings per diluted share, EBITDA, adjusted EBITDA, free cash flow and leverage. In addition, please note that we made an acquisition related modification to our historical channel data reporting to better align with the categorization of UNFI channel data. The primary effect of this modification is to move certain sales from the independent channel to the The primary effect of this modification is to move certain sales from the independent channel to the supermarket channel, including $22 million of acquisition related sales in the fourth quarter of fiscal 2016. This had no impact on total UNFI sales, but did impact channel sales for period Q3 fiscal 2016 to Q3 fiscal 2017. A complete reconciliation and explanation of these data changes and reconciliation to the most directly comparable GAAP measures is located on the Investor section of our website at unfi.com. I’d now like to turn the call over to Steve Spinner.

Thank you, Halie. Good afternoon, everyone. Today, I’d like to start off by highlighting some of our key accomplishments for fiscal year 2017 now behind us. Our team successfully completed the integration of four acquisitions. Acquisition integration is never easy and the integrations of Haddon House, Global Organic, Nor-Cal, and Gourmet Guru were complicated. However, our team of dedicated associates accomplished these integrations all in this fiscal year. They involve multiple product categories, facilities, and geographies and the onboarding of many associates. While, the hard work related to integration is behind us, we still have a lot of work ahead of us as we look to optimize both the product offering and service models, each of these acquisitions can deliver to enhance our Building Out the Store strategy. Secondly, we reorganized our business under three region presidents with broad P&L responsibility and have really paid off. We saw our gross margins stabilize early in the year and then expand with a 15-basis points improvement over prior year in our fourth quarter of fiscal 2017. And consistent with our new region structure, we migrated to United States team strategy, where our sales team calling on our retail customers represented all banners and categories of UNFI saluting our business, Building Out the Store strategy. From center store, to meat, deli cheese and protein, our team pivoted to these new responsibilities with gusto and we expect much more ahead. Lastly, some great work continued with our UNFI Next team, expanding our offering of new and emerging better-for-you suppliers. We are really excited about the innovation coming to market through our supplier relationship team, working very closely with these companies on marketing, packaging, and placement. We are extremely committed to enhancing our customer experience throughout all of our companies. Change is taking place for retailers and customers, are happening in real time. UNFI is well positioned to help with differentiated products and service offerings all designed to drive retail traffic and increase our customer's revenue. As I said earlier, I’m really pleased with our performance in fiscal year 2017. We grew sales by nearly 10%, increased our gross margin in excess of 30 basis points, and generated nearly $225 million in free cash, which is our second highest level ever. We achieved these results in light of ongoing industry challenges, such as deflation, consolidation, and challenging same-store sales at many of our retail customers. For the fiscal year, we experienced 12 basis points of deflation, which is a significant reversal from inflation of 1.44% that we experienced last year, employing that we experienced a 156 basis points less in sales growth or approximately $130 million in fiscal year 2017 due to the lack of inflation. We continue to adapt and grow in an operating environment that is evolving in ways we’ve never seen. Consumers are shopping for better produced food and an increasing number of store formats and channels. They want variety and that includes newer and more established brands, exclusive brands, and private label. We are helping our retail customers across those formats, channels, and product offerings with merchandising data analysis and category management. M&A has continued to shape the industry, and the fourth quarter was no exception and included most notably the acquisition of our largest customer by Amazon, another one of our customers. I am really excited about the opportunities I believe this combination brings to UNFI. Amazon and Whole Foods are both incredible brands. We believe UNFI is well positioned to service them in our digital and brick-and-mortar growth strategy through our network of distribution centers, our logistics capabilities, and our breadth of differentiated and unique product offerings. Dynamic change also brings new and innovative products, retailers, technology, and creative thinking. We’re seeing terrific new initiatives that are independents and conventional retailers, all geared towards making their customer experience more distinctive to consumers, and the same dynamic is taking place within the supplier community. Lots of innovation and exciting new products coming to market through UNFI Next, which I mentioned earlier. Initiatives around e-commerce capabilities will be a major focus to fuel our growth as we service many customers today that have a lot of interest in our e-com capabilities and our e-commerce business is now under the leadership of Kirsten Hogan, who many of you have had the opportunity to meet at Natural Products Expo West in March. UNFI’s e-commerce sales were up more than 22% in the fourth quarter and we see significant opportunities ahead. Our ability to offer a variety and endless aisle of product categories to make UNFI a great e-commerce partner. Looking specifically at our 2018 strategic goals, we are focused on a narrow set of objectives which continue to encompass our belief that Building Out the Store continues to deliver long-term value. So, in 2018, our key strategic goals are; one, winning new customers and expanding our relationships with our key retailers. Two, continue to expand our dairy, deli, and protein businesses throughout our distribution centers. Three, continue to optimize our gross margin. Four, grow our e-commerce infrastructure endless aisle and revenue base. And five, maintain a strong M&A pipeline with a strong balance sheet to deploy towards acquisitions and new customer growth. With UNFI scale and team, we believe success in this strategy drives value throughout all of our constituents. Lastly, UNFI remains resolute in its commitment to doing what’s right for the communities we serve. During 2017, the UNFI Foundation, which is focused on promoting healthy organic food systems donated more than $553,000 to non-profit organizations in 18 states. In addition, our associates volunteered over 8,880 hours to service projects, and UNFI donated more than 12 million pounds of food through feeding of Americas network of food banks. Also, we recycled more than 22,000 tons of waste, and on our DCs we diverted 81% of our operational waste from landfills, a 5% improvement over prior year. And before I wrap up, I want to acknowledge and thank our UNFI associates who worked around the clock to keep our buildings and system going throughout hurricanes Harvey and Irma. From drivers to warehouse associates and logistics teams to operations management, these are the associates who exhibited leadership, poise, and dedication in moving much needed supplies into the affected geographies as fast and safely as possible. And I’m really glad to report that all of our associates are safe and accounted for and our warehouses are in good shape and operating. In summary, this is a really exciting time for UNFI. Our industry is evolving and we’re changing with it to meet the needs of our customers and grow together. Consumer demand for the products we sell remain robust and we have a strong pipeline of exciting opportunities ahead. We believe our sourcing capabilities, our recent acquisitions, our very strong balance sheet and demonstrated leadership within better-for-you distribution will provide long-term growth opportunities and enable us to achieve our strategic objectives. And now I’ll turn the call over to Mike to review our financials in greater detail and outlook for fiscal year 2018. Mike?

Thanks, Steve, and good evening, everyone. Net sales for the fourth quarter of fiscal 2017 were $2.34 billion, which represents growth of 5.7% or approximately $127.2 million over the fourth quarter of last year. As a remainder, our acquisitions of Nor-Cal Produce and Global Organic closed in Q3 of fiscal 2016. As a result, they were included for a full quarter of Q4 results of this year and last year. Haddon House closed on May 13, 2016, approximately two weeks into our Q4 fiscal 2016, and Gourmet Guru closed during Q1 of fiscal 2017. Due to the integration of these acquisitions, their respective financial results are no longer fully separable, however, we estimate that Haddon House and Gourmet Guru contributed approximately 1 percentage point to net sales growth in the fourth quarter of fiscal 2017. In the fourth quarter fiscal 2017, we experienced inflation of approximately 13 basis points, which was a slight improvement versus the third quarter this fiscal year. The recent run of five straight quarters with deflation or historically low-levels of inflation continue to be a headwind to our net sales growth and EBITDA margins. From a channel perspective, supernatural net sales were up approximately 6.8% over last year’s fourth quarter and represented our strongest quarter of year-over-year net sales growth since Q1 of fiscal 2016. Supernatural represented 32.9% of our total net sales compared with 32.6% in Q4 last year. Supermarket channel net sales increased 8.3% in the fourth quarter versus Q4 last year, and landed at 29.9% of total net sales. Independent channel net sales were up 4.5% in fourth quarter versus the year-ago period and represented 26.3% of net sales in the quarter compared with 26.7% a year ago in Q4. Foodservice net sales were up 0.6% over the fourth quarter last year with growth slowing primarily due to the rationalization for the less profitable business. E-commerce increased approximately 22.4% versus last year and now represents over $280 million in net sales on an annualized basis. Gross margin for the quarter came in at 15.75%, a 15-basis point improvement over the last year’s fourth quarter. The increase was largely driven by ongoing margin enhancement initiatives and fuel surcharges partially offset by competitive pricing. Operating expenses for the quarter were 13.12% of net sales, a 34-basis point increase compared to the fourth quarter of last year. The year-over-year increase was driven by an increase in incentive and stock-based compensation, restructuring costs, depreciation and amortization expense, all partially offset by margin enhancement initiatives. Fuel costs for Q4 of fiscal 2017 decreased 3 basis points, as a percentage of distribution net sales, compared to the fourth quarter of fiscal 2016 and represented 42 basis points of distribution net sales. Our diesel fuel cost per gallon decreased by approximately 3.9% compared to the fourth quarter of last year, which compares to the Department of Energy’s national average price per gallon for diesel in Q4, which increased 5.9% or $0.14 a gallon over the fourth quarter of last year. Compared to third quarter of this fiscal year, our diesel fuel costs per gallon were down 5.5% or $0.13 per gallon. For the same period, the Department of Energy’s national average price per gallon for diesel was down 1.8%. Unfavorable fuel locks in Q4 last year, which expired in Q2 of fiscal 2017 contributed to our favorable position on diesel fuel cost per gallon versus the reported national average this year. Share-based compensation expense represented 30 basis points of net sales in Q4, compared to 12 basis points in the fourth quarter last year. On a dollar basis, share-based compensation expense was up $4.3 million to $7 million, compared to $2.6 million in the same period last year. Compared to Q3 of this fiscal year, share-based comp was up 10 basis points as a percentage of net sales. Operating income for the fourth quarter was $61.5 million, a decrease of 1.6% from the same period last year. Adjusting for the restructuring expenses incurred in fourth quarter of fiscal 2017, operating income increased 1.3% to $64.4 million compared to adjusted operating income in Q4 of last year, which excluded $1.1 million of GAAP to non-GAAP adjustments. Interest expense in Q4 was $3.9 million, $600,000 lower than Q4 of last year due to $214.6 million less debt and offset by an 87-basis point increase in average rate to 3.58%. At the end of Q4, approximately 72% of our debt kind of fixed interest rate, leaving approximately 28% of our debt with a floating rate exposure. For the fourth quarter of fiscal 2017, the company reported net income of $38.9 million, an increase of 12.1% over the fourth quarter last year. Q4 EPS was $0.76 per diluted share compared to $0.69 per diluted in Q4 of last fiscal year. Adjusting for the after-tax impact of restructuring charges and the gain on sale of Kicking Horse coffee recognized in the fourth quarter of fiscal 2017 and the after-tax impact of restructuring, asset impairment and acquisition costs in Q4 last year, adjusted earnings per diluted share was $0.72 compared to $0.70 for the same period last year. EBITDA for the fourth quarter was $83.6 million, an increase of 1.3% from $82.5 million in the same period last year. And adjusted EBITDA was $86.5 million during the fourth quarter, up 3.5% versus Q4 of last year. Total working capital at the end of Q4 was $958.7 million, up 3.3% versus Q4 of last year, compared to net sales growth of 5.7% over the same period. The working capital favorability was due to targeted initiatives that helped improved days of inventory outstanding and days of payables outstanding in Q4 versus Q4 of last fiscal year. In the fourth quarter, our capital expenditures landed at approximately $16.1 million or 0.69% of net sales, an increase from 0.56% of net sales in the fourth quarter last year. For the fiscal year, our capital expenditures were $56.1 million or 0.61% in net sales compared with $41.4 million or 0.49% of net sales last year fiscal year. We generated free cash flow of $101.6 million in the fourth quarter of fiscal 2017, compared to $78.7 million in the year ago period. This represented the highest Q4 free cash flow in our company’s history. For the full year, we delivered free cash flow of $224.7 million, primarily driven by improvements in working capital. At the end of the fourth quarter, our debt-to-EBITDA leverage, excluding operating leases, was 1.24 times, which equals our lowest leverage in over three years. Sequentially, leverage was down 0.27 times, from 1.51 times, at the end of third quarter. At the end of Q4, the company’s debt-to-EBITDA leverage was a full turn lower than our long-term expectations. End of Q4 outstanding lender commitments under our credit facility were $883.8 million, excluding reserves with available liquidity of approximately $642.1 million including cash and cash equivalents, which was our highest available liquidity ever. As discussed in our press release, we expect fiscal 2018 net sales to be in the range of $9.63 billion to $9.81 billion, an increase of approximately 3.8% to 5.8% over fiscal 2017. Earnings per diluted share for fiscal 2018 are expected to be in the range of $2.67 to $2.77 an increase of approximately 4.3% to 8.2% over fiscal 2017. We expect capital expenditures for fiscal 2018 to be 0.6% to 0.7% of net sales, and free cash flow to be in the range of $155 million to $185 million. Effective in the first quarter of fiscal 2018, we’re adopting accounting standard update, 2016-09 titled improvement to employee share based payment accounting. Based on hypothetical stock price of $37 per share in mid-September, when the vast majority of annual equity based award vest, the adoption of this ASU would be expected to raise the fiscal 2018 tax rate by approximately 75 basis points, resulting in our fiscal 2018 tax rate guidance in the range of 40.3% to 40.7%. The tax rate impact of the ASU adoption is entirely non-cash. Looking beyond 2018, we expect growing net sales in the mid-single digits, holding gross margin consistent and growing EBITDA in the mid to high single digits, that guidance does not include the impact of acquisitions, divestitures or major customer contract wins or losses. Finally, I’d like to make you aware of the typo in the fiscal 2018 guidance section of the press release that we issued earlier this afternoon. The fiscal 2018 earnings per diluted share guidance of $2.67 to $2.77 was incorrectly referenced as fiscal 2017, it should have been referenced as fiscal 2018 guidance. At this point, I’ll turn the call over to the operator to begin the question-and-answer session. Operator?

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question is from John Heinbockel with Guggenheim Securities. Please proceed with your question.

So, Steve, let me start with, what are you looking for at this point in terms of M&A, what does the pipeline look like? And then kind of attached to that, where do you stand in rolling out perishables across the country in getting those anchored customers in some of the DCs that haven’t had them?

Okay. Hi, John. So, as you know, we were very acquisitive over the last year or so, four acquisitions that we fully integrated into our businesses, lot of heavy lifting. We know how to build an M&A pipeline. We know how to make acquisitions. We're very disciplined about the price that we pay and the way that we integrate them. And so, I’d say we have a pretty good M&A pipeline, and we’re just now getting back on the tracks to make some good acquisitions again, and they all kind of fit this Building Out the Store profile that we've been talking about for the past couple of years, and that’s certainly is a key driver in keeping kind of balance sheet that we have. On the perishable side, we now have what we consider perishables, which is dairy deli proteins around the country throughout our Albert's DCs. We now have a lot of that product in our core UNFI DCs. We’ve had a great deal of success in winning some anchor customers throughout last year. I think we’ll continue to do that this year, and so I feel good about where we were. Sean, do you want to add anything to that?

Yeah. Only that as it relates to the national distribution network, we can service in the Atlantic, Central, and Pacific region as an adjunct to the deli meat cheese protein that exists today in all of our Albert’s distribution centers which they are intent.

Okay. And then as a follow-up, where do we stand now on capacity utilization and where do you think that will be at the end of fiscal '18?

So, it’s a hard number to tell you unless regarding to the specifics of by market.

Yeah.

And so, I can tell you we have some capacity in Northern California. We have some other markets where we don’t, but we certainly view that as being extremely competitive. So, we certainly wouldn’t want to talk about it on the phone, but believe me, if we get the opportunity to win a nice piece of business, we can usually find a way to make that work.

And I would add to that, in fiscal 2018, we don’t have capital deployed for any new warehouses or major warehouse expansions.

Okay. Thank you.

Thanks, John.

Our next question is from Rupesh Parikh with Oppenheimer. Please proceed with your question.

Good afternoon. This is actually Erica Eiler for Rupesh. Thanks a lot for taking our question. So first, I just wanted to touch on gross margin. I was hoping you could provide some additional color on your gross margin expectations for this year, perhaps you could just walk us through some of the puts and takes you should be thinking about?

So, we haven’t historically given forward-looking guidance specifically on gross margin. But what we have done is given you some insights into the things that we’ve been working on when Steve covered his strategic priorities for next year. We certainly called out gross margin as an initiative across the company where we are focused and there are many pieces to that to work on expanding gross margin. When you look at the current position on fuel surcharge for example, we’re not in the business of forecasting diesel prices for the fiscal year, but we’re in a position today where we’re getting some fuel surcharge that we weren’t getting a year ago. And so, in the near future, we would expect that to continue as well. And Sean, I don’t know if you want to add any more to the gross margin.

Yeah. Thanks, Mike. When we think about some of the initiatives that Steve alluded to, I would just call out three specifically. The first is and we’ve had this discussion in prior calls and Steve talked a little bit about it is reorganizing our business on the three region presidents and a broad P&L responsibility, and that in effect has driven us a discipline around investing in price against cost to serve that has worked in FY 2017 and we expect in FY 2018 that we will have advantages from that. Secondly, changing the compensation for our outside sales organization. You may recall that previously we had incented our sales organization on pure top-line growth and in FY 2017 we pivoted to a more balanced approach that aligns to our financials which is gross profit dollars or gross margin dollars over prior year. And then third is, really again scrutinizing where our cost to serve against customers relationships that have low margin per delivery. We’ve recognized that, that was an opportunity and we’ve done some rationalization.

Okay. That’s helpful. And then just switching gears to inflation, as you look at your center store suppliers, are you seeing more inflation coming there. Is that starting to pick up here or is it still below what you’ve historically seen. Just any additional color you can provide there, and what you’re seeing on the inflation front would be helpful?

Yeah. Happy to do that Erica. So, as Steve pointed out, we had 12 bps of deflation on the year, but the composition of that by quarter, things improved. As we were in the middle of the year, if you recall in Q2 for example, we had our fresh business with double-digit deflation in some categories and that improved in Q3. And now here in Q4, we’re starting to see inflation in many of the areas of the business and in fact was the highest inflation quarter of the year. So that certainly has come back on us. As we look forward in fiscal 2018, we’re not expecting to go back to our historic levels of inflation and if you looked at our 10-year average for example on inflation, which includes the last five quarters which were almost zero, that 10-year average is still 2.6% inflation. So, we don’t expect to get back to that level of inflation here soon. But in fiscal 2018, we would expect it to be higher than it was in fiscal 2017.

Okay. Great. Thank you so much.

Our next question comes from Andrew Wolf with Loop Capital Markets. Please state your question.

Great. Thank you. Good afternoon.

Hi Andy.

Hi. I wanted to ask you on the Internet business, you’ve got a small base and my understanding is that still mainly or entirely your independent customers where you’re handling the backend for them?

So, we handle some endless aisles and e-commerce fulfillment for a wide range of customers, not just independents.

Okay. That’s where I wanted to go with that. So, is that where were you see the increase in demand is basically all classes of and sizes and shapes of retailers who are need a backend solution, particularly for slow moving product.

Yeah. Absolutely. It’s not just slow-moving product, it’s product that just answers the particular retailers product offering.

Got it. Against the Amazon and Whole Foods specifically, you did put out an 8-K which indicated you gave a consent to go forward with the merger which I guess was in the contract. Were there any specific benefits that came from that process, either in terms of amendments to the contract or just specific promises between the two companies or senses of how they want to do, you want to business together that to give you such confidence about where the relationship is going?

Yeah. I mean we’ve got a relationship a very long relationship with Whole Foods, we’ve got a great relationship with Amazon and yeah, you’re right we did file an 8-K that essentially, they required us consenting to the transaction which we did. And basically, what the consent means is that, that Whole Foods Amazon is now committed to very specific minimum purchase obligations for the remainder of the contract which goes out to 2025. And so, I mean, the rest of that agreement is obviously highly confidential, we’re not going to get into discussion about what it means, but we feel terrific about the combination. We feel terrific about the relationship that we have with both companies, and we think they are going to do terrific things, and we’re glad to be a part of it.

Okay. So just now we all understand, so the contract didn’t change, it’s just the contract is a contract, and a lot of it's redacted?

That’s correct.

Got it. And just for Steve, I just wanted -- sorry for Mike, when you said there was a 1% contribution in this quarter or the last quarter fourth quarter from acquisitions, is that more or a less pro rata across the customer segments, really specifically I just want to see if I can get to what the independence we’re doing – ex-acquisition would that be 3.5% or close to it, close enough?

When you talk about our growth ex-acquisition, we’ve tried to give you our best estimate of what that is and we’re therefore pleased that the Q4 results showed an acceleration in our ex-acquisition growth. So, I would call our Q3 ex-acquisition growth about 4%, and I would call Q4 about 4.7%. So, about a 70-basis point acceleration in our ex-acquisition growth in Q4 versus Q3. We haven’t broke out specifically where the acquisition volume comes from and quite frankly as we break it down, it’s more and more difficult for us to get at that, as you can imagine because we’re now sharing products across PC’s in terms of what heritage UNFI PC’s were, and what the new acquired PC’s are.

Got it. Thank you.

Thanks, Andy.

Our next question comes from Scott Mushkin with Wolfe Research. Please proceed with your question.

Hey, guys. This is actually Mike Otway in for Scott. Thanks for taking the questions. First, in terms of the sales growth outlook for this year. Is your expectation that all the channels are going to see improved growth or some channels growing faster at the expense of others? Any kind of color there?

Yeah. I mean we don’t obviously give guidance by channel set. So, I think we wouldn’t want to go down that road.

Okay. And then, I guess Mike, in terms of the midpoint of the EPS guidance range, I think it’s going to grow a little faster than sales. Is some – is there some level of EBIT margin improvement, and if so, what’s driving it because I think you may have said that you saw a consistent growth margin or did I miss here that, so is there some anticipation of expense leverage or what’s driving a little faster EPS growth?

Yeah. Just to recap, the low end of our EPS guidance is a little over 4% growth in the high ends of little over 8% growth, so the midpoint is a little over 6%, and while we don’t give specific guidance on margins. I think it is fair to assume that we’re a getting little bit of expansion there. When I referenced the expansion on EBITDA margin, that was referencing a long-term guidance which would be guidance -- is after fiscal 2018.

Okay. But did you comment on gross margins being consistent or did I just miss here that?

That was a comment about after fiscal 2018 results.

Okay.

We were giving that guidance specifically for 2018 but that was…

Understood.

…an important section of longer-term.

Okay. I appreciate it. Thanks for taking the question.

No problem.

Our next question comes from Ben Bienvenu with Stephens Inc. Please proceed with your question.

Hi. Thanks for taking my questions. So, you continue to show a nice deleverage on the balance sheet, I know you referenced just over 1.2 times of debt to EBITDA. I know you continue to look for M&A opportunities, I also know that the timing of acquisitions can be lumpy and unpredictable. If your leverage continues to moderate meaningfully, what is your appetite for supplementing an M&A strategy with, and potentially returning cash to shareholders via share repurchase or dividend or books some other alternative?

Yeah. Ben, that’s a good question and you’re right, we have strong balance sheet, we’ve got high available liquidity, the highest we’ve ever had. Our mission is to use that balance sheet strength to deliver value to shareholders. Three most likely ways for us to do that. As Steve talked about a sound strategic value-adding M&A, a capacity to enable major customer contracts wins or share repurchase. I think those are the three most likely ways to that we would go about that. Long-term we would be comfortable with a full turn, a higher leverage and we currently are at and then clearly with the free cash flow guidance that we provided for fiscal 2018 that gives us some additional room to work as well.

Okay, great. And then my second question, it sounds like you’re excited about Amazon purchase of Whole Foods. A question that get across from investors, if I think about the potential benefit of Whole Foods to their tonnage from price investments in the store. To what extent, do the Whole Foods market share gains have to come at the expense of your conventional and independent channels? Can you help us think about the interplay between your customer segments, this – has to be a counter balance across the mix?

Oh, I wish, we could. But that’s – we certainly don’t have the answer for that one.

Okay. Fair enough. I'll get back in the queue. Thanks.

Our next question comes Stephen Tanal with Goldman Sachs. Please state your question.

Thanks, guys, for taking the question. I guess, just to clarify one thing and outlook for 2018. If we think about deleveraging a little bit, it seemed to us that EBIT margins are implied flattish. Zech, it sounds like you see a little bit of -- I'm sorry, Mike, you see a little bit of better outcome there. Can you sort of talk about the puts and takes for why that would be? Obviously, you commented on gross margin longer term, but I'm sort of curious how are you thinking about margins in relative to the comments there?

Yeah. Like I mentioned earlier, we don’t provide specific guidance in 2018 on the margin lines. We talked about our margin enhancement initiatives. Sean provided a little bit more color on that. Those do extend down beyond gross margins into operating expense. We took a couple of initiatives that we talked about in fiscal 2017. That has ongoing benefits for us. In fiscal 2018, that was the first round and second round of restructuring. Those continue to look good for us in terms of the progress there. We talked about commented to, and those continue into fiscal 2018 which helps our COGS as well. And so, that’s what I would tell you we’ve got focus there. We’ve got initiatives that are ongoing and we’re continuing to search for nuances as well.

And I would also add that if you recall the end of fiscal 2016, we talked about this organization into three regions which was heavy lifting to say at least, and whenever you get senior people closer to the customer, while at the same time, centralizing the back of the house, management of pricing and margin and operations and those things that represent the largest percentage of our expense. We get a real benefit and some of those benefits just take time to play out. But, I would tell you that it was a very difficult task to split the company to three regions and we are – I think we’re just beginning to see the benefit from that.

Okay. That’s really helpful. And I guess, we think beyond fiscal 2018 -- it seems like you’re implying EBITDA margins are sort of flat to up or -- maybe you have interest out right up, and is it sort of similar color each year there?

Yeah, the longer-term guidance was that we would have EBITDA margin expansion in the out years to relatively flat gross margins.

Okay.

Same price just as we go forward. And we expect that eventually inflation normalizes at around 2% which helps our EBITDA margins as well.

Perfect. Okay. That’s really helpful. Thanks a lot guys.

Our next question comes from Chris Mandeville with Jefferies. Please state your question.

Hey, good afternoon.

Hi, Chris.

Steve, or Mike for that matter. I guess I’m just trying to think about the sales guidance here. You mentioned for Q4 you have put up a good number of 4.7 organically, but basically that would imply kind of flattish growth off of that when it comes to the midpoint of sales guidance for 2018, I think kind of backing into EPS you’re looking fairly flattish margins as a whole. So, I guess, I’m just wondering why that’s the case if inflation isn’t expected to impact improve and particularly given some of the optimistic commentary you had regarding your buildup store strategy?

Yeah. I think it’s a good question. We feel we put that range out there on net sales and quite candidly we have struggled on our net sales forecast in the past, and so we’ve got – we want to have a number there now that we feel like we can deliver. The midpoint of that range is basically what we just finished. We’re still onboarding some new customers, so we expect to get growth associated with that and we feel good about our pipeline of new business going forward too. We didn’t build any major new customer contract wins into our guidance for the year to the extent that, that were to happen and we of course reforecast for you. Sean, I don’t know if you want to add any more to that?

No, I think you’ve got it, Mike. It’s good.

Yeah. And then also if you think about the timing of our budgets, our budgets typically get done in the month prior to the end of our fiscal year. And we never ever budget any new customer wins or customer relationship expansions.

Right. Yeah, that’s certainly prudent. And you mentioned that, the Whole Foods channel are super natural if you will grew nearly 7% in the quarter and that was really quite strong, really strong, it’s actually over the last two years if you will. And of course, folks are obviously curious. So, I’m just wondering if you do willing to entertain the question and discuss if that momentum has continued and how you think about that channel going forward when it comes to not just sales, but even that the EBIT margin mix impact as some of the more Whole Foods oriented products find its way online.

Obviously, we can’t get into any detailed conversations about Amazon or Whole Foods. I think that the media obviously has a position on this issue and kind of I would differ you to – to those kinds of outlets for news, it’s just not something that we would ever comment on.

Fair enough. And then just last one, Mike, I apologize if you mentioned this earlier, but did you have forward purchases right now on diesel, because I think I recall here you saying that it should be a benefit to gross margin, however I’m just curious about the cost side of things.

Yeah. We do not have any fuel locks in place at the moment. The last fuel locks that we had which were actually underwater expired in Q2 of fiscal 2017. However, we do have fuel surcharge program and we are receiving surcharge on that program now, which covers the increase in fuel expense for us.

Okay. So, the benefits to the gross margin line as diesel has appreciated, but none the less there is going to be an offset eventually when it comes to the cost.

That’s correct.

Okay. Thanks very much.

Our next question comes from Chuck Cerankosky with Northcoast Research. Please state your question.

Good afternoon, everyone.

Good afternoon, Chuck.

Looking at that 8.3% growth for the supermarket segment and then the 4.5% for the independents, what comes for the supermarkets, what are you looking at that might affected plus or minus into the new year, that’s a pretty good rate. And then what are the independents doing as far as new store development, building out their product mix et cetera?

I’m sorry, could you repeat the first part of the question again, Chuck?

If you’re looking at the supermarket channel, you grew 8.3% in the quarter, what might influence that positive or negative in fiscal 2018?

Yeah, again not getting into the specific, so any particular channel growth. Supermarket growth tends to be lumpy. As we take our new customer contracts, lap others, and so I don’t think that there is anything different in the numbers in 2018 versus 2017. I don’t know if there is anything out specifically you’re looking for.

Yeah. I would just say that we have customer wins in both segments that we are on boarding that we’ll move into FY 2018 along with category expansion in our Building Out the Store strategy that would pertains both channels.

And how about new store construction among the independents, what are they doing in terms of developing their locations?

Again, we can’t really comment on any specific customer channel. I will tell you that over the course of the last since I’ve been here which is going on nine years, 10 years, lot of innovation comes from the independents and obviously given some of the challenges that everybody faced in the last year, independents tend to be the first ones to differentiate and have exciting new ways in which they merchandise and we’re certainly seeing that today. But I couldn’t really comment on whether they’re how many more stores they are opening.

All right. Thank you.

Our next question is from Kelly Bania with BMO Capital Markets. Please state your question.

Hi. Good evening. Thanks for taking my questions. I just wanted to go back.

Hi.

Hi. Just wanted to go back to the acquisitions, now they’ve been folded in and integrated for several quarters now, can you just talk about how they are performing relative to you expectation and what is anything you learned about how you want to continue to shape that build up of store strategy as you look at – potentially adding more in those premier categories over the next couple of years?

Yeah. I mean, I think that the, the message for us is generally – the bigger acquisitions are better than the smaller acquisitions, rip the Band-Aid off and integrate them quickly, as opposed to letting it happen over an extended period of time. I think that for the most part our acquisitions met or exceeded our expectations. I think Produce companies are tough and so, even though I think there is so room in our M&A strategy that continues to meet them, they tend to be more difficult than others. I will tell you that we had incredible success in getting considerably more synergies out of several of the acquisitions than we initially planned and that really came as a result of very careful integration planning and execution by the team.

Great. That’s very helpful. And then, I guess, just want to ask another one that was in the room question, because it’s interesting to hear you Steve, very excited about Amazon and Whole Foods deal. I guess from my perspective, as many are worried that Amazon may not need UNFI in the same way that Whole Foods relied on UNFI over the years as we’ve seen that Amazon, and Whole Foods may be able to take on some more products directly over time. So, just I think this is the first call for the deal. So, I just wanted to see if you wanted to candidly address this for investors?

Yeah. No, I certainly heard that before Kelly, and that’s probably not something I’m going to spend much time talking about. Other than we talked earlier in the conversation about the conditions of our contract in the 8-K filing of our consent, which provides obligations through 2025 which is a longtime from now. And so, I’m really confident, and if you’re really good about the value that we bring to both Whole Foods and Amazon, we’ve got a lot of scale across a lot of products and a lot of suppliers that quite frankly is very hard to replicate. And so, like I said in my comments, and I think a couple of times on the call, I just – we feel really good about the direction that they’re taking. And quite frankly, I think it’s bringing more people into all the stores, and so we’ll just have to see how it plays out. But I feel good about it.

Thank you.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to management for closing remarks.

Thank you everybody for joining us on our call this afternoon and its exciting times and I just want to thank you for joining us. We look forward to speaking with you on our first quarter fiscal 2018 in December.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.