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Nash Finch (NASDAQ:NAFC)

Q4 2012 Earnings Call

February 28, 2013 10:00 am ET

Executives

Alec C. Covington - Chief Executive Officer, President and Director

Robert B. Dimond - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Analysts

Charles Edward Cerankosky - Northcoast Research

Ajay Jain - Cantor Fitzgerald & Co., Research Division

Mason Stark

Operator

Good morning, ladies and gentlemen, and welcome to the Nash Finch Fourth Quarter Conference Call. Today's call is being recorded. The company has asked me to advise you that this call will include forward-looking statements, which involve risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Factors that could cause such differences are described in the Nash Finch press release and the company's filings with the SEC, including its 10-K form for fiscal 2012. The company also notes that the call may include references to certain non-GAAP financial measures as the term is used in SEC Regulation G, such as consolidated EBITDA. Reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures are provided on the Investor Relations portion of the company's website under the captions, presentations and supplemental financial information and in the schedules to the company's earnings release, which can also be found in the same portion of the company's website under the caption, Press Releases. It is now my pleasure to turn the conference over to the company's Chief Executive Officer, Mr. Alec Covington.

Alec C. Covington

Thank you, Chris, and good morning, everyone. I'm joined by Bob Dimond, our Executive Vice President and Chief Financial Officer. And I'm also joined by Kathy Mahoney, our Executive Vice President and Corporate Counsel. As we've done in the past, I'm going to turn the call over to Bob Dimond to review some of the financial numbers and then I'll be back to talk a little bit more about the quarter and a little bit more about how we feel about things going forward into 2013. Bob?

Robert B. Dimond

Thank you, Alec, and good morning, everyone. Total company sales for the fourth quarter 2012 were $1.14 billion compared to $1.15 billion in the prior year quarter, a decrease of 1.1%. The acquisitions of No Frills and Bag 'N Save stores contributed to a net increase in total company sales of $35.4 million or 3%. For fiscal 2012, sales were $4.82 billion, compared to $4.86 billion in the prior year, a decrease of 0.7%. The aforementioned retail acquisitions contributed to a net increase in total company sales of $95.6 million or 1.9%.

Consolidated EBITDA and net earnings were affected by several significant items, which are presented in the table on Page 3 of the earnings release for the current and prior year periods. Adjusted consolidated EBITDA was $26.5 million or 2.3% of sales in the fourth quarter of 2012 as compared to $34.6 million or 3% of sales in the fourth quarter of 2011. Consolidated EBITDA was adjusted to exclude the impact of significant items totaling $3.9 million and $1.2 million in the fourth quarter of 2012 and 2011, respectively.

For fiscal 2012, adjusted consolidated EBITDA was $122 million or 2.5% of sales compared to $146.2 million or 3% of sales in 2011. Consolidated EBITDA was adjusted to exclude the impact of significant items totaling $10.7 million and $7 million in 2012 and 2011, respectively. Adjusted net earnings were $6.4 million or $0.49 per diluted share in the fourth quarter of 2012 compared to $12.7 million or $0.97 per diluted share in the fourth quarter of 2011. Net earnings were adjusted to exclude the impact of significant items totaling $35.4 million from 2012 and $4.6 million in the fourth quarter of 2011.

For fiscal 2012, adjusted net earnings were $39.7 million or $3.03 per diluted share compared to $51.2 million or $3.92 per diluted share in 2011. Net earnings were adjusted to exclude the impact of significant items totaling $133.5 million in 2012 and $15.4 million in 2011.

The company took noncash goodwill impairment charges of $166.6 million pretax or $121.1 million after-tax and an impairment of other long-life assets of $13.1 million pretax or $8 million after-tax in fiscal 2012, to write down the carrying values of goodwill and other long-life assets. These impairment charges are noncash items in our consolidated financial statements. Accordingly, none of these items has any impact on our cash flows or consolidated EBITDA.

The Military segment, net sales were $536.8 million, a decrease of 5.3% in the fourth quarter of 2012 compared to the prior year. The year-over-year increase in consignment sales was approximately $0.5 million during the quarter, which was not included in net sales. Including the impact of consignment sales, comparable Military sales decreased 5% in the fourth quarter 2012 compared to the prior year. For fiscal 2012, net sales were $2.31 billion, a decrease of 1.8% compared to the prior year. Including the impact of consignment sales, comparable Military sales decreased 1.4% in 2012. Military segment EBITDA was $8.8 million or 1.6% of sales in the fourth quarter 2012 as compared to $17.1 million or 3% of sales in the fourth quarter of 2011. For fiscal 2012, Military segment EBITDA was $47.6 million or 2.1% of sales as compared to $68.4 million or 2.9% of sales in fiscal 2011.

The combined Food Distribution and Retail segment sales were $598.8 million, an increase of 3.1% in the fourth quarter as compared to the prior year. The increase in sales was primarily attributable to the Bag 'N Save and No Frills supermarket acquisitions, which were responsible for a net increase of $35.4 million as compared to the prior year quarter, and Retail same-store sales declined 1.4% as compared to the prior year quarter. For fiscal 2012, Food Distribution and Retail sales were $2.51 billion, an increase of 0.4% in fiscal 2012 as compared to the prior year. The increase in sales was primarily attributable to the aforementioned Retail acquisitions, which were responsible for a net increase in sales of $95.6 million as compared to the prior year. Retail same-store sales declined 1.1% compared to the prior year.

The combined Food Distribution and Retail segment EBITDA was $13.8 million or 2.3% of sales in the fourth quarter of 2012 as compared to $16.3 million or 2.8% of sales in the fourth quarter 2011. For fiscal 2012, EBITDA was $63.7 million or 2.5% of sales as compared to $70.9 million or 2.8% of sales in fiscal '11.

The company announced on February 13, 2013, that holders of the company's senior subordinated convertible notes, due in 2035, were notified that the company will redeem all $322 million in aggregate principal amount at maturity on March 15, 2013. The convertible notes will be redeemed at a price equal to $466.11 per 1,000 in principal amount at maturity, which represents a total payment to be made of $150.1 million. Total debt at the end of the fourth quarter 2012 was $373.3 million, primarily due to the Retail acquisitions, compared to $297.4 million at the end of the fourth quarter 2011. The company continues to focus on effectively managing its balance sheet and is in compliance with all of its of debt covenants.

The debt leverage ratio as of the end of the fourth quarter was 3.35x. Availability on the company's revolving credit facility at the end of the quarter was $238.5 million after taking into consideration a $150 million reserve for the redemption of the convertible notes. We announced on February 26 that our Board of Directors had declared a regular cash dividend of $0.18 per share to be paid on March 22, 2013. This is our 346th consecutive quarterly dividend paid. I'll now turn the call back over to Alec.

Alec C. Covington

Thank you, Bob. And I think, first of all, in talking about the fourth quarter, I guess the first remark that I would have is that it came in directionally close to where we had expected. At the end of the third quarter, we had indicated that we felt that the fourth quarter would come in somewhere between $8 million and $9 million below prior year for all the various reasons that we've been talking about throughout the year. And when you look at the adjusted EBITDA, setting aside the onetime items, we actually came in negative $8.1 million to prior year. So within the realm of what we had thought might happen in the fourth quarter.

Now much like the third quarter, we have lots of moving parts within this quarter -- within these numbers that I think merit some additional explanation as we did at the end of the third quarter. Now first of all, there's a lack of bonus expense in this particular quarter versus last year. We have movement -- substantial movement of revenue and EBITDA from our Food Distribution business to our corporate Retail Business as a result of the 2 acquisitions we've made. We also have year-over-year changes in inflation within our inventories that we've been talking about throughout the year because we haven't had as much inflationary impact this year as we did in 2012. We also have, particularly in our Military business, actually it's all in our Military business, a lot of operational inefficiencies that is coming from opening 2 facilities essentially at one time, and I'll talk a little bit more about that later. We continue to have the continued impact of the Military bid that we talked about throughout the year. This is where almost all large CPG companies bid out their networks over the last several months and back into the very end of last year that we're still cycling through the impact of those bids, which negatively impacted our EBITDA line. And then we talked a lot this year about the impact of our private label program investments, and that's also evident in our numbers in the fourth quarter because the fourth quarter is our largest quarter for private label distribution throughout the year.

And then lastly, we've talked about during the year the impact of competitive store openings, for us, primarily in Rapid City where we had a second Wal-Mart Supercenter open up in that market. Now turning a little bit to a discussion on what I call our roll forward. I took the opportunity at the end of the third quarter to try to explain more from a roll-forward perspective what is inside our numbers. We were trying to make sure that we were as transparent as possible, making it easier for you to kind of see through the results given all the moving parts. I think that was helpful. In some cases, maybe it raised more questions than it answered. But -- so I'm going to do it a little bit differently this time and be a little bit more specific by individual business segment, hopefully, that will help those of you to kind of understand the roll-forward. So what we're trying to do with the roll-forward is actually to explain this $8.1 million variance that we've had from the fourth quarter of last year to the fourth quarter of this year. Now -- in beginning that discussion, we first have to add something back, that actually positively affect those numbers, and that's the fact that we had no year-over-year bonus and 401(k) accruals because the way our incentive plans works here, if we fall below a certain threshold, it, in essence, terminates all of our incentive plans, as well as our 401(k) match. And unfortunately, in 2012, because of the impacts of some of the influences in our Military business, we actually fell below that threshold, and all of those incentive plans have been reversed. Now year-over-year that accounts for about a $3.8 million positive variance. And it, by segment, it -- of that $3.8 million, $2.6 million of that is in Food Distribution, $1.1 million of that is in Corporate Retail and about $100,000 is in Military. So that's how that lays out.

Now in the Food Distribution business, there are other influencing factors that we need to talk about. First and foremost is we have a shift of EBITDA from Food Distribution over to Corporate Retail to the tune of $1.8 million. That is the impact of our newly acquired chains no longer being customers in our Food Distribution segment. So that's a shift, negative impact of Food Distribution of $1.8 million, positive impact to Corporate Retail of $1.8 million. Next, in our Food Distribution business we have the impact of lost sales year-over-year. We've talked about unraveling the relationship with Kmart. We talked about that a couple of quarters ago. Frankly, that's the more significant part of this number. There's a few other things that are in there, but that represents about $1.1 million in the fourth quarter. We've also talked about a lack of inflation that we enjoyed a year ago and that difference represents $1.1 million in this particular quarter. We've also talked about, throughout the year, the investments that we've made in our private label program. And I'm going to talk about the private label program a little bit more, but it has, at least in 2012, because of the investments we've made, it has had a negative impact on EBITDA. And because the fourth quarter is our largest private label distribution quarter, it has an inordinate affect, and that particular impact is a negative $2 million to our Food Distribution business in the fourth quarter of 2013.

Now we also had a significant accident that occurred, unfortunately, in the Southeast, where we had to take a $600,000 charge, and then we also have some moving parts with overhead allocations. Since Corporate Retail is now becoming a much larger part of our business, we actually have a reversal or a corporate allocation change that benefits Food Distribution to the tune of $1 million and shift that $1 million of corporate allocation over to Corporate Retail in terms of the way you look at it from an external basis. And then there's about $200,000 worth of other miscellaneous changes. But when you add those things up, it comes right back to the $2.8 million variance that we're trying to account for in terms of Food Distribution of the $8.1 million that we're trying to account for totally.

Now in Corporate Retail, we've already mentioned the fact that they benefit from the $1.8 million worth of shift from Food Distribution to Corporate Retail, but we also have the incremental gain of having that acquisition. We still have, of course, some integration costs and things that are going on, but it contributed positively in the quarter to the tune of $2.7 million. In addition, we are -- we've mentioned the competitive issues that we're facing in Rapid City. We have a second Wal-Mart Supercenter that opened up. We're still cycling through that. To a lesser degree, we had a small impact in EBITDA from Fargo where we had a Costco that opened up. I would tell you that in both of those markets, what our standard procedure is, is we will make sure we run a market analysis to determine our potential revenue loss, and we're actually overachieving what the survey analysts said would happen in both of those markets. So we're pleased in that regard. But when you look year-over-year, it still has an impact. And between those 2 markets, for the fourth quarter, that represents about a negative $1 million in lost EBITDA as a result of those competitive factors. We opened a new store in Germantown, Ohio, and that opening we had about $100,000 worth of opening costs in the quarter in Corporate Retail. And then the other thing that happened in 2012 that makes the comparisons -- that happened in 2011 that makes the comparison to 2012 a little bit tricky, is we had an unusual misallocation of vendor funding in 2011 that caused the fourth quarter to be abnormally high and some of the earlier quarters in 2011 to be abnormally low. Now in 2012, we've had more of a smooth effect of vendor funding, and that causes a change. It's not a loss, it's just a change between the 2 quarters of about $900,000. So it makes our Retail business look about $900,000 worse than it actually is, just because of the heavy allocation of vendor funding that occurred in the fourth quarter compared to other historical years in 2011.

And then I mentioned the fact that Corporate Retail has a negative impact from overhead of $1 million, that's shifting between food distribution and Corporate Retail, and then there's about $200,000 worth of miscellaneous changes that occurred in the P&L. And so when you net all those impacts together, that comes back to a $2.4 million positive improvement in EBITDA of the negative $8.1 million contributed by Corporate Retail.

Now Military did not have, as I mentioned, much impact from the bonus accrual because we weren't accruing much of a bonus there last year either. So when you look inside of the numbers, we've mentioned the fact that we saw a year-over-year sales decline. Now we had about a $30 million sales decline quarter-over-quarter in Military. Of that $30 million, $27 million of that was export. So our export sales was our big factor in top line revenue for the fourth quarter, and I'll talk about that a little bit later. But when you translate that to EBITDA, that represents a negative EBITDA for this quarter of about $1.6 million. Now we've also talked about the impact of these new bids, the new contracts that we put in place through the bid process that all Military distributors went through last year and that negatively impacted our results for the fourth quarter to the tune of $1.8 million. Now we also, just like we had a lack of inflation that impacted our Food Distribution business, that lack of inflation also impacts our Military business, it just impacts it to a lesser degree. So there's about a $600,000 decline due to the fact that we didn't have as much inflation in our inventories this year in the quarter as last year.

Now as we've grown, we have been making some changes from a restructuring perspective in our Military business, so we had some charges of about $400,000 due to some recruiting costs and restructuring costs from a personnel perspective in the quarter. We also had $2.7 million in operational inefficiencies, largely driven by our new facility that we opened in Oklahoma City and our new facility that just opened in Landover, Maryland. And those are just simply start-up costs. They are productivity issues. There are things that we did in order to assure service levels during the transition on the East Coast that was quite expensive. Fill rates are everything in the Military business. We take great pride in having an industry-leading fill rate to the commissaries. When you open a new facility and you start moving business around, we've learned the hard way that we can have some disruption there. So we have a system that actually uses a second facility as a safety net to assure service level. And when we turn that switch on during the transition, it requires more shuttle costs between facilities. Of course, now that we've got Landover opened, we've turned that off, but that's embedded in that $2.7 million number. It kept our fill rates high, but it kept our fill rates very high at a very high cost because we were running a lot of shuttle trucks from Norfolk, Virginia up to Landover, and likewise, some similar activity west in Oklahoma facility, San Antonio, in some of those areas because of our startups. So over the course of time, we'll work those issues out, we have before. It's more pronounced in our numbers right now simply because where we may have normally opened one facility a year, we have 2 that are opening and those costs are doubled at this particular time in this particular quarter. And again, we expect to see improvement in that area in '13 and '14. We also had -- they also have a negative benefit from corporate allocation changes of about $0.5 million. That's simply because Military has grown as the percentage of the overall business, and therefore, gets more of an overhead allocation in terms of the way that you see our numbers externally. And then there's another $100,000 of various miscellaneous moving parts. When you net all that together, I believe you come back to the negative $7.7 million that is representative of that $8.1 million by Military. So again, we indicated we thought that number would be somewhere between $8 million and $9 million. It came in at $8.1 million. Of that, we have a negative $2.8 million contributed by Food, for the reasons I talked about, a positive $2.4 million contributed by Retail, for the reasons I talked about, and a negative $7.7 million by Military, for the various reasons that I talked about. So hopefully, that helps to explain the details behind the numbers and our efforts to be clear and concise, but also transparent. If there are other detailed questions, we'll be happy take those a little bit later, or you can call Bob offline and ask questions as well.

Now looking overall at our business. First of all, from a revenue perspective, our Military business, as Bob mentioned, was about 5% negative when you exclude consignment sales for the quarter. That is worse than it's been in previous quarters. And as I mentioned, that's all because of a decline in shipments to Europe, primarily through our export operation during the quarter. During the fourth quarter, there was about 3,500 troops that was moved from Europe, so there's -- as a result of the Base Realignment Commission, things that we've known about for some time. There is shifting of troops from Europe back to the United States and domestically, so we picked that business up back here in the states and other parts. But for export operation, it had a negative impact in the quarter, plus the Defense Commissary Agency runs a warehouse in Europe, and inventory levels there declined by about $10 million, and that represents $10 million in declined shipments for us because we are the primary supplier to that distribution center. And then there's a major remodel in Ramstein that created some congestion that we think will come back, because that particular commissary was actually enlarged and remodeled to accommodate more patrons. So we think we'll probably pick that up in positive sales a little bit later in the '13.

But as I mentioned, the entire decline of about $30 million, with the exception of about $3 million, all of it came from our export operation and principally was the result of declining sales that we saw in Europe. Now we'll say, into 2013, we saw a little bit of that come back and a little bit of life has been breathed back into that.

And as I had mentioned many times over the last 7 years I've been here, we can never always accurately predict how those export shipments are going to come, and therefore, the comparisons quarter-over-quarter get a little bit squirrely from time to time as the shipments don't always overlap exactly. On the Retail side of our business, we had comp sales that were negative by 1.41% in our legacy stores because we haven't cycled through the new stores that we acquired. The largest impact of that negative comp was actually in Rapid City, South Dakota where, as I mentioned, we had a second Wal-Mart location that opened in a market where we have a heavy saturation of Retail stores. Now when you exclude Rapid City, the good news for us is that the remaining stores were actually positive to the tune of 38 basis points. So we're actually seeing some really good trends in our overall legacy Retail store business, contributed by the remodels we've done and some of the improvements that the operating team has made within that side of our business. So we're actually quite bullish on that side of our business, but we have to cycle through the opening of this new Wal-Mart Supercenter.

In Food Distribution, we saw a decline of $3.2 million after adjusting for closed stores and then the Bag 'N Save and No Frills conversion to Corporate Retail. And as I mentioned earlier, that's principally being driven because we haven't yet cycled through the termination of our relationship with Kmart and a couple of other customers that we've yet to cycle through, and those sales were little bit heavier in the prior year quarter. So that is a little bit on revenue. When we turn to capital for 2012, we spent about -- we spent $39.5 million, as I've mentioned before. That's down dramatically from previous years. Also, it's fair to note that maintenance capital was actually $19 million of that. So I've always said that somewhere in that $20 million, $25 million range, we have to spend that for maintenance capital to keep our infrastructure alive and going. But that number has come down a little bit because of some of the investments we've made in previous years. And then strategically, we spent $20 million, a good portion of which was spent on the Military side of our business with our new facility in Landover and finishing up Oklahoma City, along with a couple of remodels that we did on the Family Fresh side and Corporate Retail.

Now for 2013, we expect that number to grow slightly to $43 million. And the only reason why that, that is going up a little bit is because we have the completion of the Landover refrigerated facility that will hit in 2013. And so when you break down the capital plan for 2013, we expect to spend about $17.2 million in maintenance capital, that's almost $2 million below 2012 levels. The primary reason for that is that we don't need to replace as many trailers this year as we have in the last couple of years. We've had some heavy trailer replacements, just because of the way the time worked on some of those trailers, which caused some of our capital to be a little bit higher for the last 2 or 3 years. We have that now behind us. So we're seeing a decline there. But in the strategic side, we'll be about $25.8 million of that number. And of that $25.8 million, about just under $15 million of that is to complete our project in Landover as we build that freezer and that refrigerated facility there, added on to the dry so that we get a fully functioning facility to service the Northeast. And then also, we have, with the remaining capital plans for a new Family Fresh store in St. Peter, Minnesota. So we're very excited about that project. And then we have a number of -- a piece of our capital that has been allocated toward remodels and refreshments of stores that we need to complete in the Omaha market. So we'll be very focused on Omaha, of course, in 2013.

Now as Bob mentioned, our debt levels came in at $373.3 million. That's a little bit higher than what we had anticipated. That compares to $388.9 million at the end of the third quarter. It came in just a little bit higher. That's primarily because we were already beginning to ramp-up a little bit from the standpoint of cigarette inventories in preparation for our Dollar General relationship. That is, as Bob mentioned, our ratio was 3.35, that is actually expected to increase to as much as about $390 million during the first quarter, and that's really principally due to the rollout of the Dollar General tobacco program that they announced in their press release that we would be providing for them, and you also see it also in our press release this quarter.

Now as we look at 2012 in total, and we look at key accomplishments and things that we were able to achieve during the year, at the top of that list, I think is our newly revised private label program. It has been a huge success. It received an industry award, which we're quite proud of. The penetration in our private label actually increased 68 basis points in the fourth quarter alone. That is a substantial increase in private label penetration. And I might mention that we also have 2 self-distributing chains in the Great Lakes, one of which has decided to put our private label program in exclusively in their store, the other of which plans to use our private label to supplement their own program in that market. So we're very proud of what's happening with our private label program. It is becoming a big key factor for our ability to grow our overall Food Distribution business, which is beginning to rebound, so we're quite pleased with the success of that program. It's been an investment for us in 2012. We've always believed it would pay dividends for us in '13 and beyond. It is pretty apparent that, that will be the case.

We also completely redesigned our Produce Program to account a consolidation center in Denver, created a -- added about 1 day's worth of freshness to the product in the way that we changed the logistics. And I might mention that both sales and cases shipped were up during the fourth quarter. So we've got a lot more to gain from the changes made there. The team has done a tremendous job in revamping that program, we're quite proud of it. We've also, during this year, completed what is now the only worldwide Military Distribution platform in the world. We have had several now, awards. I mentioned at the end of the third quarter that we had, had our first major vendor award of a company that would use our platform between us and our partners on the West Coast on a worldwide basis. We now have had several other vendors that customers that have signed up to become exclusive worldwide distribution partners, so that we'll handle all of their business at every destination point around the world. I think it's interesting to note that between our MDV company, which has all the facilities from the Rockies to back east and our export operation in Europe in the Azores, and the Caribbean, along with our partners Coastal Pacific Food Distributors on the West Coast who handles everything up and down the West Coast and also exports to the Far East, we found that there's actually parts of the world, on the opposite side of the world, where our 2 facilities are delivering groceries within 100 miles of one another. So it's truly an unparalleled capability to have a distribution platform that can circle the world and go wherever the military, but also wherever national retailers have a need to go. So we're pretty excited about that. Finally completed, we've got this refrigeration work to be done yet into '13, but all of our distribution points are now active, and it's working beautifully. And our partners so far that have chosen us on a worldwide basis have given us incredible accolade for taking costs out of their system because they only have 1 phone call, 1 check to write versus managing 3, 6, 13 different distributors previously.

We also are seeing ourselves now, because of that worldwide distribution platform, with a serious ability to enter the world of alternative channels. And that obviously has begun through the growth and development of our Dollar General relationship. We couldn't be more pleased with that. As was mentioned, we will now be -- we're just getting started with ramping up a major tobacco initiative with Dollar General. That's just beginning now, as we speak, and it will add substantially to our top line. So we're excited, but the thing we're excited about as anything is that once that was announced and once the broader Retail world became aware of our capabilities, we've begun to get phone calls from other national retailers inquiring as to our capabilities, asking for presentations and meetings. So our development team is staying quite active frankly, traveling around the country talking to drugstore chains, talking to national discounters, regarding similar kinds of capabilities in other channels other than the Dollar Store channel. In that particular channel, we're very happy with our relationship with Dollar General. We're not looking to expand in that particular channel, but we are looking to expand in the dollar store channel and the sea store channel, as well as in the big-box discount channel. and it looks like some of those opportunities could potentially come our way as a result of this worldwide network.

We've had great success this year with our Family Fresh stores that we've opened from the Corporate Retail side of our business. River Falls, Wisconsin, Farmington, Minnesota, both are exceeding projections. Farmington, Minnesota, consistently, week by week, is up 45%, I don't know how, but it just continues to grow. River Falls growing faster than we had anticipated, so we're very, very excited. It gives us a lot of confidence to continue that expansion going forward.

We did complete, of course, during the year the acquisition of Bag 'N Save and No Frills. The integration is expected to be completed by the end of the first quarter, so that is going well. And right now, at least, they're performing against our projections well. So we're very pleased with the financial results thus far, even though we still have quite a bit of integration costs and a lot of costs that the team is incurring to consolidate headquarters and systems and all of that. Behind all of that, they're operating as according to our acquisition model.

I do want to remind all of our stakeholders that when we acquired Bag 'N Save and No Frills, we were fully aware of Walmart's intention to expand into the Omaha market with their neighborhood stores. That was a known fact to us. And as I mentioned, and just to make sure that we're all reminded, before the acquisition, we ran market surveys there to assure that we would understand the impact of those entrants. And then we acquired those businesses based upon getting a profit return after Wal-Mart would open those stores. So we didn't acquire them based on the multiple -- ignoring the impact of those stores. We bought them with a full understanding and having modeled the impact of those openings. So even though, as we began to cycle through a year of ownership, and we began to report on comp store sales here later in '13, we'll see negative comps. We've baked that into our model because you can't have 5 or 6 Wal-Mart neighborhood stores come into a market and not have negative comp. But for us, we knew that. We'd baked that into our model. And just because we'll have negative comps in Omaha, it's not an indicator that we're not going to achieve an acceptable rate of return on our investment, because those things were factored in. And we're looking forward to continue working that market and continue development in that market. And the team down there is doing a fabulous job.

Also, I might have mentioned, in 2012, we're very pleased we just got back the results of our annual customer satisfaction survey that we do each year. It's conducted by a third-party. We play no role in it. We simply get the result and we review the results with our Board of Directors. We saw yet another year-over-year sequential improvement across our entire enterprise. But specifically in Food Distribution, we saw a dramatic improvement and the satisfaction scores directly related to our cost of goods in Food Distribution, some 30% improvement in one year on satisfaction and cost of goods. And we believe that, that links directly back to our private label program, the changes we've made in produce, and it also is a reflection of why our pipeline is getting larger, I think, in our Food Distribution business.

Now as we turn to 2013, we have several key focus areas that we'll be very deeply involved in, in '13. I think the first is revenue, revenue, revenue. I don't think you'll find in the industry a more revenue-focused organization than Nash Finch, right now. In our Food Distribution business, we're thrilled. We just converted a large customer in North Dakota and that just happened, I mean, literally in the last few days. That brings to us quite a substantial increase in volume for our Minot, North Dakota division. We have the strongest pipeline of new business that I've seen in a number of years. And for the first time, I'm pleased to announce that in the second half of 2013, our year-over-year sales and EBITDA results for Food Distribution will turn positive because of some of the new business coming in and the work that's been done there. So that's the first time in a while that we've been able to say that. I'm looking forward to it. I can't wait to get to the earnings call after the third quarter and talk about that because that's substantial for us.

I mentioned, of course, the alternative channel business that we're expanding into. This year, our business will grow substantially in that area, principally driven by the fact that Dollar General announced that they were expanding into tobacco, as well as the fact that they also announced obviously, the addition of several hundred new stores in the near term. So -- and as I mentioned before, that's been a catalyst for us to have been contacted by other national retailers in the drugstore channel, other channels that are interested in us doing some similar things with them in other channels other than Dollar. So we're pretty excited about that, and that'll be a key revenue focus for us in 2013.

On the Military side of our business, sequestration will cast a cloud on our sales during at least the first half. Now every morning, you get up, you hear about sequestration, sequestration, sequestration. And I have to chuckle in the mornings because for a lot of the world, it's as though sequestration has not yet begun. For Nash Finch, sequestration has already begun because we've noticed since January 1 impact in the domestic sales into commissaries, and that is being driven by preparations for sequestration. Sequestration is not a light switch. It's not like people get it 1 day and they make these changes. The reality is, is that the preparation for that work has been going on for quite some time, and I think there's been consumer reaction to that. I mean, if every morning you get up and you're an employee of the Department of Defense and you hear about furloughs and being furloughed one day a week, and those kinds of things, it has to affect the way that you spend your money. So sequestration is already impacting the overall broader economy, I believe, and as it relates to our business and to all parties that are involved in the Military resell system, and I'm talking manufacturers and distributors such as Nash Finch and others. We're already seeing some of the impact of that in our numbers and in our sales. Now none of us know for sure what will be the full impact of sequestration, and we don't know all the details of it, but what we expect to see is that if, in fact, it goes fully into effect, that commissaries will likely close one day a week, and most likely that will be Wednesday. Now how much of those sales will be recaptured on other days of the week, we don't know. But we certainly tried to factor in to our expectations that sequestration will at least impact our business for a good part of the first half and potentially beyond, according to when it's resolved. We expect export sales to remain stronger than they were in the fourth quarter, but weaker than they've been historically, principally being driven by troop movements and potential store closings that will eventually occur in Europe as they bring those troops back to the U.S. We do have, though, a continued strong pipeline of new domestic business. We have increased interest in a worldwide solution. We are just meeting with a major manufacturer just earlier this week who was inquiring about some of our other relationships, asking questions about how they should think about that and how they could accomplish something similar in their own companies. So we do know we have a great model there. It's one that will pay dividends for us in the future, so we're expecting to continue to see increased interest in that worldwide solution, and as I've mentioned, we are the only ones that can provide that. We do expect sales to stabilize in Military in the second half of the year, and we further expect to see improvement in the fourth quarter, assuming the sequestration by that time has been pulled back a little bit or maybe more logically resolved than the way it's being resolved right now. From a Corporate Retail perspective, we will once again grow our sales and our EBITDA in 2013. And of course, that will be primarily due to the 2 acquisitions that we made in 2012 of Bag 'N Save the No Frills. But we will launch yet another Family Fresh Market in St. Pater, Minnesota later this year, and we're very excited about that. And as I said, we'll also focus on Omaha with several remodels and plans to deal with new competition, which we've always known was imminent within that market.

Now from the standpoint of what we expect to see from a financial perspective, first of all, focusing on the first quarter, we believe that the first quarter could be as much as $7 million in EBITDA behind prior year. We expect export sales to remain somewhat soft. We expect domestic Military sales to be negatively impacted by sequestration. And in sight of that, we expect Food Distribution in Retail to be begin to gain more and more momentum. So we've got parts of our business going different directions. But sequestration is really the big impact for us during the first quarter and will represent the lion's share of why we expect to see numbers that could be as much as $7 million behind prior year in that particular quarter. Now for the full year, we believe that if sequestration isn't resolved timely, we could possibly see a number as low as $100 million. If it is resolved quickly, with the additional pipeline business and growth that we're seeing in the other parts of our business, we could see a number that brings us up flat to prior year. I think that the influences in that flavor for 2013 has to do with the uncertainty over the timing, as well as the impact of sequestration and then it also has to do with the need to reload certain incentive plans that we have. We do need to get back in the business of providing 401(k) matches, so we provided for some of those things this year. Obviously, we have a need to retain our associates. So we have to make sure that even though we had a bad year in 2012 and there was, for all the right reasons, we reversed all of those incentives. Clearly, it would not be wise and it wouldn't be responsible to continue to do that going forward, so we have baked in the ability to fund some of those incentives, but also to make sure, primarily from a 401(k) match perspective, that we can get back in the business of providing that match, assuming that our results warrant that in 2013.

So our operating plan for 2013 is very, very simple. We have an extraordinary focus on revenue growth and expansion of our business. Our pipelines are quite healthy across all of our segments. We also have a focus on reducing overhead. Some of that action has already been taken. There'll be more to come. We've had a series of events here at headquarters where we have had some overhead reductions. I think we've proven over the years that we are -- we know how to keep our overhead calibrated to our revenue and we'll take those actions as appropriate. And we have a focus on reducing working capital. We consolidated our Cedar Rapids, Iowa facility already. That was completed before the end of the year. It's gone very, very well. We've retained all those customers primarily into either St. Cloud or into our Omaha facility, so we were able to consolidate that inventory, so we're pretty excited about that. We're looking for more opportunities to improve our working capital going forward. So with that, that's everything that I know to talk about at this point relative to the quarter and the year, as well as some flavor for 2013. And Chris, with your help, maybe we could see if there's any questions that I can answer or Bob can answer before we go.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Chuck Cerankosky of Northcoast Research.

Charles Edward Cerankosky - Northcoast Research

If you are -- I want to focus on Retail a little bit. How are some of the economic headwinds affecting what you're seeing in Retail, say, apart from new competitive entries? And then secondly, Alec, in looking at 2013, what role do you think Retail acquisitions will play in the growth of the business?

Alec C. Covington

Well, absolutely. I think from the standpoint of economic headwinds, I think that, clearly, I think we're seeing what the rest of the world is seeing that when we woke up January 1, we all saw a slice of funds come out of our paychecks because of the changes that were made. And I think it would be naïve of all of us to believe that we can take that much out of the economy and not see some repercussions inside of our businesses. So from our standpoint, we continue to see that people are very price conscious. They're shopping the ads. They're shopping the sales, more trading. It's boded well for our private label initiative because it's helped to grow -- that business is a little bit stronger. But here's the interesting thing, Chuck, is that during the fourth quarter, as we kind of compare ourselves to others, and our Retail business, of course, pales in comparison to some of our peers, but when we set aside the impact of Rapid City and the Wal-Mart that opened there, we actually had a 38-basis-point improvement in comparable store sales. And we were quite pleased with that. So I think that we've got those headwinds. But I think the counterbalance to that for us is that we've got a team that's just executing well. And I think that we had some room to do better in the way we were running that business. So I think there's a little bit of an equalizer there. So we're not particularly worried. We're not forecasting any kind of abnormally unusual headwinds in 2013. To the contrary, we're pretty bullish on our legacy Retail, and we think we're well-prepared to deal with what we have to deal with in Omaha. Now in terms of acquisitions, on the Corporate Retail side, we don't -- it's always hard to time those things. We've always kept an open ear and an open mind to things that would be accretive, things that would add value to our company. So I wouldn't know how to answer that just because you can't know what you don't know and these things seem to come up, they come out of nowhere. And if you're well-capitalized as we are and you can move quickly, you get to take advantage of some of those things. But I don't know that I can see anything at least at this hour that is going to have -- is going to be any kind of a major role. We, in 2013, we primarily focus on what I referred to many times as kind of tuck-in acquisitions, things that just fits well with us, things that makes sense. So we're not really focused on anything big and dramatic and transformative. But we always keep our mind open to things that could be accretive that would be nice, easy tuck-in things that might pop up along the way that we may not know about.

Charles Edward Cerankosky - Northcoast Research

Alec, if I can follow-up, getting back to my first question, would it be fair to say that increased private label sales offset some of the trading down aspects of how customers are shopping?

Alec C. Covington

We have saw that in our numbers. I think that our revamp of our private label program was very timely and played well into the overall operating plays. So we are seeing some shipping there. But we're actually aggressively trying to impact those changes as well by being more aggressive on the private label side. So we're seeing that. We're also seeing that people are responding very well to fuel-type programs, many of which we have in markets that we operate in, in our stores where we're tied in with the local fuel provider to offer some incentives there as fuel has continued to be an issue for consumers, that plays well. And we're just seeing people also -- Chuck, if I go back a number of years and compare what we used to sell on a given ad for a particular item at a given price versus now, there's a lot more penetration of add items and promotional items in the mix today than there was back a few years ago. So I think it's all of those kinds of factors.

Operator

[Operator Instructions] We go next to Ajay Jain from Cantor Fitzgerald.

Ajay Jain - Cantor Fitzgerald & Co., Research Division

Yes, Alec, you talked about sequestration, I think, in the first quarter, and I know there's some very variability in the Military business, just some noise from the impact of export operations, and you guys talked about consignment sales. But just at a high level I wanted to get your feedback on a sales comparisons and whether you're expecting some type of growth as you cycle the customer losses from the beginning of last year. I think you talked about a $7 million sales decline in the current quarter due to the sequesters. So is 1% total sales decline for Military? Is that representative of what you're running right now?

Alec C. Covington

Yes, in the fourth quarter specifically for Military, we had about a $30 million decline in top line revenue. $27 million of that alone was due to the decline in export sales. And what's happened is it's been happening over in Europe. But what I would temper that, AJ, by saying that into 2013, those same export sales are actually stronger than they were in the fourth quarter. So some of that is coming back. So if we look at the first quarter, we would say that directionally that, that negative 1, negative 1 18-type look on the Military side would be a good way to think about that. But now let me also say that as you go further into the year, because we factor -- we tried to factor sequestration in to at least the first half, because even -- even when they resolve it, which I think we all are optimistic and believe that surely, there'll be some resolution to this thing, but even if they resolve it, there will be a lag between the resolution and when we actually see a return to normal within the commissary system, just as we've seen commissaries react well in advance of the sequestration date. So for that reason, we kind of factor that more into the first half. Now when you get to the third and fourth quarters, in the third quarter, I believe, Bob, that we're essentially flat. And then in fourth quarter, we'll begin to see improvements on both ends of our financial statement in Military sales and EBITDA because of growth that we continue to have along the way. So that's kind of directionally the way that we see it work.

Mason Stark

Okay. But from a top line perspective, negative 1% to 2% is what you're looking for in the very near term, is that a fair assessment?

Alec C. Covington

Negative 1% is closer to the number for the first quarter.

Ajay Jain - Cantor Fitzgerald & Co., Research Division

Okay. And I think in your prepared comments, you also talked about transitional costs for -- just from the new warehouses in 2012, I think in Oklahoma City and Landover. So with all that additional warehouse capacity that's in place, do you think you're in good shape now or you should start to see some earnings growth or there are some operational headwinds that you're still dealing with for those facilities?

Alec C. Covington

Well, there are operational headwinds that we're dealing with in both of those newly opened facilities that, frankly, it's gone on a little longer, and I'm not terribly pleased with, to be honest. So we're working hard to get those resolved with the management team, and everybody is focused on it. But we do believe there will be some lag and carryover of that into 2013. Of that $2.7 million that we experienced in fourth quarter, we think at least half of that is onetime, but we may also see some of that carry over into 2013, but it's just going to take a little longer to get everything working the way that it actually should be working. So we opened 2 facilities at one time, probably not a good idea. It just happened that way. And as a result of that, we just had our management team taxed and challenged by trying to ramp-up 2 facilities from scratch and all the moving parts that goes with that. So we'll get those wrestled to the ground. But now part of the reason why some of those operational inefficiencies will carryover into 2013 is the fact that until we get that freezer and chill operation up and running in Landover, we can only go to New England with dry products, which is kind of inefficient. We're doing it, and our customers need us to do it, and we're happy do it. But once you get the chilled and refrigerated, those loads become a lot more efficient going up in New England and we'll help ourselves a lot in terms of inefficiencies. So part of that carryover is driven by the completion date on that chill and frozen, which we won't be able to see completed until the beginning probably, of the third quarter.

Ajay Jain - Cantor Fitzgerald & Co., Research Division

Okay. And then next I'll -- maybe I'll address this to Bob. I think the CapEx outlook was confirmed at $40 million, but can you confirm your outlook on interest expense this year after accounting for the convertible redemption, and if you can also confirm what you're looking for on DNA?

Robert B. Dimond

Sure. That is correct, $43 million on the CapEx. For depreciation, we're looking at about $39 million. Interest expense will go down by about $5 million to $20 million, a lot of that is the noncash interest that goes away as a result of the structure of the existing convert that we have. There is some cash component, though, so at about $20 million next year. And then if you're interested in the income tax rate, we're forecasting about 39.7% next year -- for this year, I should say, for 2013.

Ajay Jain - Cantor Fitzgerald & Co., Research Division

All right. And finally, it looks like your leverage ratio is pretty high, I think, 3.35x. So my question is, even with the convertible redemption, do you think the credit metrics could get worse, at least in the near-term, if your EBITDA outlook continues to decline?

Robert B. Dimond

Yes, I mean, the raw EBITDA or leverage dollars are not going to increase appreciably. But the ratio in the near couple of quarters versus EBITDA will go up a little bit. And then as we go towards the end of the year, should start improving.

Alec C. Covington

Chris, anybody else?

Operator

And we have no further questions at this time. I'd like to turn the conference back over to Mr. Covington for additional or closing remarks.

Alec C. Covington

All right, well, listen, thank you to everybody, and we look forward to speaking with you again in late April after our first quarter. Thank you very much.

Operator

And this does conclude today's conference. Thank you for joining and have a nice day.

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