Nash Finch Co. Q4 2008 Earnings Call Transcript

Executives

Alec C. Covington, Chief Executive Officer

Robert B. Dimond, Executive Vice President, Chief Financial Officer & Treasurer

Analysts

Karen Howland – Barclays

Blaine Marter – Lowe Partners

Mason Stark – Ramius Capital

Nash Finch Co. (NAFC) Q4 2008 Earnings Call March 12, 2009 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Nash Finch Fourth Quarter Fiscal Year 2008 Conference Call.

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 in the company’s filings with the SEC, including its Form 10-K for fiscal 2008.

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 in the Investor Relations portion of the company’s website, under the captions “Presentations” and “Supplemental Financial Information” and in the schedules of 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, Mark and good morning, everyone. And welcome to our conference call and our earnings call for the fourth quarter and fiscal year 2008. Joining me this morning is Bob Dimond, the company’s Chief Financial Officer, and Kathy Mahoney, the company’s General Counsel. As we’ve done in the past, I will first turn the meeting over to Bob Dimond, who will go through the financial results and then when he is completed that, he will turn it back to me and I have a few comments regarding the fourth quarter and 2008, and a few comments also regarding 2009.

So with that, Bob, go ahead.

Robert B. Dimond

Thank you, Alec, and good morning, everyone. Our total sales in fiscal year 2008 were up 3.8% to a record 4.704 billion, compared to prior-year sales of 4.533 billion. Fiscal 2008 consisted of 53 weeks compared to 52 weeks for fiscal 2007. As we have previously discussed, the fiscal 2008 sales were impacted in the first half of the year by the transition of a large customer to another supplier in mid 2007. And after adjusting for the 53rd week of extra sales of $77.1 million and excluding the fiscal 2007 sales attributable to this customer of $72.8 million, total company sales increased by 3.7% on a 52-week comparable basis.

Sales for the 13-week fourth quarter were 1.203 billion compared to 1.069 billion in the 12-week prior-year quarter, an increase of 12.5%. Excluding the sales attributable to the extra week, sales would have been 1.126 billion or up 5.3%.

Net earnings for fiscal 2008 were $36.2 million, or $2.75 per diluted share compared to net earnings of $38.8 million, or $2.84 per diluted share in fiscal 2007. Net earnings for the fourth quarter 2008 were $6.2 million, or $0.47 per diluted share, compared to net earnings of $8.5 million, or $0.62 per diluted share in the same period last year.

Net earnings for both the fiscal year and the quarter were affected by several significant items. I’d ask that you refer to the table on page two of the earnings release, which details the major items that affected both net earnings and EBITDA. Please take note the significant items which negatively affected 2008 net earnings by $6.1 million or $0.46 per diluted share and $3.5 million or $0.26 per diluted share in the fourth quarter. The primary item affecting both the 2008 fiscal year and fourth quarter periods resulted from a year-over-year increase in non-cash LIFO charges.

Further compounding this issue, our fiscal 2007 net earnings benefited by a few significant items, netting to a positive $4.3 million or $0.31 per diluted share during 2007. And our fourth quarter was negatively impacted by about 200,000 or $0.01 per diluted share in 2007. The materiality of these significance items has caused net earnings between the two years to not be comparable without adjusting for these items.

And once excluding these items, net earnings for fiscal 2008 would have been $42.3 million, or $3.21 per diluted share, as compared to $34.5 million, or $2.53 per diluted share in 2007. Similarly, after excluding these items from the fourth quarter periods, 2008 fourth quarter net earnings would have been $9.7 million or $0.73 per diluted share as compared to $8.7 million or $0.63 per diluted share in the prior-year period.

We provide a supplementary schedule at the end of our earnings release, which details our quarterly EBITDA results. In terms of consolidated EBITDA, you’ll recall that one of the key financial targets in our strategic plan is to drive improvements in our EBITDA margin. And with that in mind, for fiscal 2008, EBITDA increased by 11.6% to a record $143.7 million or 3.1% of sales compared to $128.8 million or 2.8% of sales in fiscal 2007. EBITDA for the fourth quarter of 2008 increased by 17.5% to $35.5 million or 3% of sales as compared to $30.2 million or 2.8% of sales for the fourth quarter of 2007. We remain committed to our core businesses and are particularly pleased with our 2008 accomplishments in both terms of sales and EBITDA.

Our fiscal 2008 gross margins were 8.7% of sales compared to 8.8% of sales during the same period last year. The gross margin was negatively affected by incremental non-cash LIFO charges of $14.6 million or 0.3% of sales. And excluding this impact, our fiscal year 2008 gross margin was up 0.2% of sales due to improvements achieved from better management of inventories. Our gross profit margin was 8.1% of sales for the fourth quarter of 2008 as compared to 8.4% in the same period last year. Our gross margin was negatively impacted by year-over-year LIFO charges of $5.5 million, or 0.5% of sales. Excluding this impact, our fourth quarter gross margin was also up 0.2% of sales compared to the prior year.

Our consolidated selling, general, and administrative expenses as a percent of sales for 2008 were 6.1%, flat in comparison to 6.2% of sales in fiscal 2007. SG&A expenses as a percent of sales for the fourth quarter 2008 were 6% and were unchanged to the 6% of sales realized last year.

Now I’d like to point out a few items in each of our business segments. Year-to-date sales in our Food Distribution segment were 2.741 billion, up 1.8% from 2.693 billion last year. And excluding the 53rd week of sales of $45.3 million and adjusting for the decline in sales of $72.8 million relating to the customer who transitioned to a new supplier in mid 2007, fiscal 2008 sales for the Food Distribution segment were up 2.9% compared to the same period last year.

Sales in our Food Distribution segment were $706.4 million in the fourth quarter this year, up 11.2% compared to $635.2 million last year. Excluding the 53rd week of sales of $45.3 million, sales were up 4.1% compared to the fourth quarter of last year.

The sales momentum in our Military segment continued to be very strong in fiscal 2008 with sales of 1.361 billion in this fiscal year, up 9.1% versus 1.248 billion in last year. Adjusting for the 53rd week of sales of $20.5 million, sales increased 7.4% relative to last year. Fourth quarter Military sales were $348.5 million in this year’s fourth quarter, up 16.5% versus $299.2 million last year. And adjusting for the extra week of sales, sales increased 9.6%.

Our Retail segment sales were $602.5 million in fiscal 2008, up 1.8% compared to $591.7 million last year. And adjusting for the extra week of sales of $11.3 million, sales were relatively flat compared to fiscal 2007. Our Retail segment sales were $148.1 million in the fourth quarter 2008, up 9.8% as compared to $134.9 million last year. And adjusting for the 53rd week of sales, sales increased 1.4% compared to last year. Retail same-store sales decreased 0.8% in fiscal 2008 and decreased 0.2% in the fourth quarter 2008. In summary, we’re very pleased with the strong sales results in fiscal 2008 compared to the prior year.

The following is a breakdown of EBITDA by business segment for fiscal 2008. Our Food Distribution segment EBITDA was $109.6 million or 4% of sales in fiscal 2008, a 7.3% increase as compared to $102.2 million or 3.8% of sales in 2007. EBITDA in our Military segment was $51.2 million or 3.8% of sales in fiscal 2008, an increase of 16.2% versus $44 million or 3.5% of sales last year.

In our Retail segment, EBITDA for fiscal 2008 was $31.4 million or 5.2% of sales, up 13.9% as compared to $27.5 million or 4.6% of sales in 2007. We are pleased with the solid EBITDA performance company wide, which was a record $143.7 million or up 11.6% from the fiscal 2008 – or for fiscal 2008 and was up 30 basis points to 3.1% of sales versus 2007.

I’d like to comment regarding the progress towards our long-term key financial targets, identified in our strategic plan. As you’ll recall, one of our key financial targets is to achieve an improvement in our total company EBITDA margin to 4% of sales. Just as importantly, we’ve also targeted to achieve free cash flow returns on net assets of 10%, a 2% organic sales growth rate, and to de-lever our balance sheet to a debt to EBITDA ratio of 2.5 to 3 times. Since announcing these targets in November 2006, we’ve realized significant improvement on all of these metrics.

Our EBITDA margin has improved from 2.2% to 3.1% of sales and our leverage ratio of total debt to EBITDA has improved by full turn-and-a-half of EBITDA from 3.42 times to 1.92 times. Our free cash flow to net assets excluding strategic projects improved to 14% during the trailing four quarters. And finally, our organic revenue growth was a solid 3.1% for fiscal 2008.

Total debt decreased by $42.6 million during the fourth quarter to $275.7 million. At the end of the quarter, we had $109.1 million of debt outstanding, including $15.5 million of outstanding letters of credit on our revolver and had $190.9 million of availability under that facility. And our leverage ratio of total debt to EBITDA was 1.92% at the end of the fourth quarter, as mentioned previously.

The company announced on Tuesday that our Board of Directors had declared a regular cash dividend of $0.18 per share to be paid on April 3, 2009 and this is our 330th consecutive quarterly dividend paid.

Now I will turn the time back to Alec.

Alec C. Covington

Thank you, Bob. And I guess my first comment for the year and for the quarter is, we’re extremely pleased with the results on all fronts that we’ve made at Nash Finch during the last year as well as the quarter. I think the most encouraging sign to me at the health of our overall company is the continued growth that we see virtually in all business segments. I think our people are executing extremely well in all areas of our business. So we really couldn’t be more pleased with where we are today, particularly in light of the economic situation that we have around us. We think we are well positioned in light of all of that.

Yeah, when we look at the overall company, I think I talk a lot about growth. We’ve worked hard here at Nash Finch to renew the growth of our company in all areas. And when you look at the company today and you look at the fourth quarter, even setting aside the 53rd week, we saw the company grow 5.3% in a very difficult period; 4.1% in Food Distribution and we all know it hasn’t been that long ago that we were talking about sales declines in Food Distribution and setting aside the 53rd week, that division itself grew 4.1%. They’re adding new customers. Our current customers continue to buy more from us and consolidating more of their purchases from outside suppliers to Nash Finch. Our category management program in Lima continues to work and help them to grow their sales. So we couldn’t be more pleased there.

Our Military business, of course, has always been a star gem for us. We’ve talked about it a lot, and we’ve talked about growing it. Obviously we now are. But, setting aside the 53rd week to see a company such as our Military business grow 9.6% in a given quarter in this economic climate, we’ve got to feel pretty good about that. So when we look at the overall company, I measure growth of course as being one key indicator because companies that don’t grow eventually die, and we look at Nash Finch and see today that we’ve got a good track record of growth, we got a good pipeline of growth for the future.

Now when we look at EBITDA, well, it’s difficult to set aside the impact of the 53rd week because you get into that extra week and you’ve got some fixed expenses and always leftover, but I’ll always drive Bob crazy trying to make sure that he does that and gets me a number that I can understand in because I think that it’s fair to say, wait a minute, the EBITDA for the year and the quarter looks great.

But we did have an extra week there that benefited that somewhat, but even setting aside that 53rd week, you see that we’ve improved EBITDA by 9.8% for the overall company for the quarter; 13.3% in Military alone because of the good job the guys are doing out there and driving their efficiencies, the growth they’re seeing on the top line, and just doing a really good job of managing new business. Their damage is down, their overtime expenses are down, their accurate order index has gone up dramatically. So they’re just doing all the right things out there.

In Food Distribution, we saw some start-up cost in our EBITDA performance there in the fourth quarter because we were still getting ready to open our new upstream facility in BelFountain. So we saw a little bit of that in our EBITDA numbers. Frankly, I don’t know that this is any different from what you all hear everywhere else, but we had anticipated a little stronger selling season in Christmas than we saw. We saw the consumer pull back a little bit right at Christmas and that wasn’t such a surprise given the state of the economy.

But I guess the most important thing we saw was more of a beginning of some price declines in certain commodities that influenced our Food Distribution Group and, if you think back quarter over quarter over quarter, I mean even going back – in fact, I looked at the transcript yesterday, I think in every single conference call during 2008, I explained that we were benefiting from a high and unprecedented inflationary period.

That doesn’t mean that when inflation tempers that we’ve got a bad business because we didn’t build this business on the expectation of inflation. But when inflation is there, as I’ve said repeatedly, our people are going to do what they always do and that’s the best job of making the proper investments to benefit our customers first and also benefit our gross margin line, and they did that during 2008.

But in the latter part of the fourth quarter, we began to see some changes in pricing, particularly as it relates to commodities, specifically in dairy. We saw fluid milk, we saw eggs, we saw a number of items that began to decline. So when that happens, of course, we’re going to see a bit of a drop in our gross margin for that period of time, but we monitor all of the aspects of our business. And in Food Distribution, we’ve got growth, we’ve got good execution; our expenses continue – our efficiencies continued to improve and listen, we’ll let inflation do what inflation does because it goes down, it goes up. I’ve been in this business a long time. I told you we wouldn’t have that forever, but we didn’t build our business on the expectation of having that.

When we look at the earnings per share, it’s clearly, heavily influenced once again by LIFO. I think that as we get into 2009, I’ll probably be talking less about LIFO from what we see right now because inflation has clearly cooled off but listen, there was $5.5 million in non-cash expenses in LIFO and of course, that’s hard to overcome but when you adjust for the significant items which is about $0.25 or so a share, you see that we actually had an increase of 16% in EPS in the fourth quarter alone. And I think in this day and time, in this economy, in this world we’re in today, I don’t know that there’s too many companies that are talking about a 16% improvement in EPS for a given quarter. So we feel very strong and very pleased with those results.

As Bob mentioned, in these particular times, we have had an internal mandate among ourselves but also collectively with our Board to make sure that our balance sheet remains strong. Liquidity is king right now, cash is king, making sure that we have plenty of headroom and that has been a fundamental objective of myself or Bob or management team and the Board from the very beginning of this economic downturn.

And as you look at where we were at the end of the year, we only had leverage of 1.92, well below our targeted range of 2.5 to three, but then when you look even immediately after the closing of the GSC acquisition, which occurred after the conclusion of the fourth quarter; it actually occurred at the end of January. Even then, having just acquired a company, our ratio was only at 2.53, still on the low end of our targeted range of 2.5 to three. So we have plenty of liquidity and we’re very well positioned to continue our strategic initiatives and very well positioned to counter the difficult world around us.

As Bob mentioned, we take our targets very seriously. We now are exceeding our growth target of 2%, that’s clear from the numbers. We are moving in the right direction on our EBITDA target because we want to get to four. We started at 2.2; we’re now over three. So we still got a distance to sprint there and that will take some time; that last section of EBITDA always takes more time and effort than making the initial improvements, I think we all know that.

Our free cash flow target is something we take very serious because we heard clearly from our investors, when I first joined the company that this was one of the reasons why they own Nash Finch stock because a distribution business run properly should be able to deliver good solid returns on free cash flow to net assets. And we committed that we would continue to do that. Last year, we did a good job with that; this year, we actually came in well above our target of 10%; we actually landed at 14%, that is an extraordinary return on net assets.

I would ask our constituencies not to get used to that because we were aiming toward 10 and we were fighting high inflation and heavy inventories to get there. And we landed at 14 and principally, one of the key reasons for that happened to be the calendar, the way the – the military roll-ups occur every two weeks; all of a sudden, you can get an incredible influx of cash because of a roll-up of accounts receivable, that’s just the way the Military business is and because of our 53rd week in the way their calendar cut off, we had an incredible influx of cash there that drove that to 14%, but we feel very comfortable that our 10% target is right and that our 10% target is achievable, and obviously with an achievement of 14, that’s pretty clear. Our debt ratio, as I mentioned earlier, well ahead of our targeted range even after the acquisition of GSC.

Now speaking of GSC and the acquisition of the three distribution centers in Pensacola, Florida; Junction City, Kansas; and San Antonio, Texas, I’ll give you a brief update there. The acquisition was completed. It was completed a little bit ahead of time from where we thought it would be. It was done very quickly at the end of our first period, which was at the end of January. So we’ll have two periods of GSC with us in the first quarter of 2009.

We are extremely pleased to have all of these new associates as part of Nash Finch. They are a fine group of people and they’re just doing a fabulous job. We now have a combined integration team of management members that are made up of MDV team members and GSC team members who are working fast and hard on very specific initiatives, well ahead of the acquisition.

We had both sides of the equation with GSC and MDV clearly understanding what are the things that we need to get done quickly in order to make sure that this is an accretive and that this is a positive experience for both companies through this acquisition, and we’re already seeing some of those things materialize. We saw substantial increase in fill rates to customer service by GSC, because of changes that we’ve made and helped them with and they are just doing a fabulous job with those.

We’ve been able to help them with some of their buying power on non-product merchandise such – I’ll just give you one example, shrink-wrap. We use a huge amount of shrink-wrap in all these distribution centers. We were able to reduce the cost to GSC by close to $5 a roll, only solely in shrink-wrap because of our buying power as a total company in the way that we procure shrink-wrap and there is a whole litany of those, it goes on and on and on, that was part of the synergy list that we identified when we looked at GSC to begin with.

So things are going very well. There had been no surprises. So it’s always the most important thing. We haven’t surprised them, they haven’t surprised us. So that’s always a good thing and sales frankly seems to be coming in just about where we expected, maybe just a little bit better than where we expected. So I think we couldn’t be more pleased with the acquisition of the three distribution centers and it’s very early of course, but things seem to be going very well.

Now, as we look at the first quarter of 2009, as we look at where we’re at, we believe that again setting aside GSC, because that’s all additional volume but setting aside the impact of GSC, we anticipate that sales will increase in our company, company wide by about 2%. Now, we’ve continued to add a lot of customers to the Food Distribution side, Military continues to grow but we all are aware that customers are trading down, there is more ingredient-based shopping and in our Food Distribution business, our private label sales like every other retailer and wholesaler is up substantially.

Our private label grew over 10% in 2008; we’re already seeing it grow over 6% again in 2009 and that growth in 2009 is bucking the trend on some price decreases in dairy. If it wasn’t for some of those price decreases, it would be even up much higher than that. So with all those things combined, we’re seeing the continuation of additional customers being added to the Food Distribution side, but because of the change in mix, we don’t quite get as big a jump on the top line as we otherwise would have because of some of those changes but we expect that overall company wide, we would be able to come in setting aside GSC at just about 2% above prior year for the growth side of things.

Now when we get to looking at the Retail side from just our corporate retail stores, we all realize that as we’ve grown our Military division and as we’ve grown our Food Distribution division, the Retail side is a less larger component of overall sales but there is still a very important division, but we do expect a contraction in sales within that division. We expect our comparable store sales to be negative by as much as 3% in the quarter, that’s really driven by a variety of things that I don’t think is new news to anybody. We do have a new Hispanic competitor in Denver, which we’re trying to cycle through right now. We’re doing a really good job of managing against that new store opening and we’re dedicated to protecting our market share, but we’ve got a period of time here that we’ve got to encounter that new store opening.

And our AVANZA stores, as you might remember, have been some of the highest growth stores that we’ve had. So they’ve been offsetting some of the other stores that have been under competitive pressure. So when AVANZA gets a new competitor, it takes some of that away from us and we become a little bit less able to have strong comparable store sales. So that is one thing.

Deflation in certain food products, we’re seeing it very clearly in our store sales. I mean you look at milk sales and egg sales, all of those major commodities are down substantially and when you look fluid milk and you look at something like eggs, there is such a large percentage of what gets sold in supermarkets that it’s hard to overcome that with other items. We’re continuing to see a substantial trading down in generics in the pharmacy.

And even though we like to sell generics in the pharmacy, the fact of the matter is, we’re trading large dollar for small dollars on the sales line when we do that. And of course, in our corporate stores, just like in our Food Distribution business, we’re seeing a substantial growth in private label product sales as well, which does a lot of good things from a gross margin perspective, but it does put pressure on the top line because private label is anywhere from 18 to 25% cheaper than national brand overall.

We do expect gross margin to come under pressure, particularly in our Food Distribution segment in the first quarter. Again if you think back, I think if you go back to the first quarter call in 2008, we had an exceptionally high gross margin during that particular quarter. I said very clearly that that would not be able to continue, that that’s the impact of inflation. Well, now, we’re seeing some deflation in some commodity products. We’re seeing a lack of inflation in non-commodity products.

These are all business cycles. They are not permanent. But when they occur, they have either a positive impact as they did temporarily in 2008, or they will have a negative effect temporarily as we saw a little bit in the fourth quarter and somewhat as we will see in the first quarter of 2009 and then we expect that impact will begin to level out. Because of that, excluding GSC, we expect EBITDA for the first quarter to come in lower than the first quarter of 2007.

We continue to add new customers. Our top line will continue to grow. All of our other lines will continue to be where they should be and where they historically have been. There’s absolutely nothing that has changed fundamentally about our business. What we will see is a bit of a contraction in the gross margin line, particularly in Food Distribution because of the lack of inflation and also because we’re comparing to the first quarter of 2008 where we had an enormous amount of inflation, at least in our inventories. Therefore, that’s going to create a shortfall in the first quarter of EBITDA as we look and compare to the first quarter of 2008.

Now specifically, GSC is expected to add as much as $110 million in sales during the quarter, just in the first two periods. But I want to remind you, as I mentioned when we announced the acquisition of GSC, the EBITDA contribution on these sales do not compare at all to MDV. Again as we look several years out, we believe that and we are more convinced now than ever, that we’ll be able to achieve a 13% or greater internal rate return on that investment. But it will take about 36 months or so to get that done. Therefore, as in the early stages, bringing in sales of GSC, they simply won’t contribute to the level that we expect they will contribute 24, 36 months down the road. And certainly, they will not contribute to the extent that MDV contributes on a pro rata sales basis.

Now in light of all the things that I’ve talked about, I also want to make sure that it’s understood that even though we are a company that’s continuing to grow, even though we are a company that continues to perform, we still nonetheless feel that it has been appropriate for us internally to take some steps, to mitigate some of these impacts and be ready to experience whatever the unexpected might have for us in 2009.

So as a company, we have put in place a company wide wage freeze. So all normal merit increases, we’ve alerted our associates, will not be granted at this time. We have a hiring freeze in place throughout the entire company on all non-critical, open salary positions. And we have a position review underway right now with HR that we expect to be concluded by the first quarter, which will help identify where we might have non-critical positions that might be targets of elimination so that we can make sure that we’re pushing toward maximizing our efficiency.

And we have made decisions currently to delay some capital spending. Specifically, we had planned to remodel two stores to our Family Fresh format in 2009. We have backed that down to one. We will continue to do New Richmond, which is under construction now and already we’re seeing great sales increases from that remodel, even though we got the store tore up. The sales are already coming up, but we had planned to do one additional store in 2009. We will delay that store to 2010. And we’ve delayed some other capital that’s required further out as well, so we’ve been able to go through that, we think and take some prudent steps to make sure that we maximize our cash, make sure that we protect our liquidity, simply because of the uncertain environment that we find ourselves and everybody else find themselves in the business environment today.

In summary, I would say that we continue to be very pleased with the results of operation. Fresh start, it appears to be working and it’s helping us to achieve our growth-related goals. We’re extremely pleased with our AVANZA stores and we plan to continue to expand the format. As a matter of fact, we have one store that is under construction right now, which will likely become – if our market surveys are anywhere close to accurate as they normally have been, it will likely become our highest volume AVANZA store yet and that is in the Aurora area of the Denver-Colorado area.

Family Fresh, the store that we launched in 2008 in Hudson, Wisconsin, continues to perform extremely well from a sales perspective. And we’re just getting excellent consumer ratings in all of our perishable departments. So that continues to progress.

Our Center Store initiative that we launched in our Lima distribution center continues to post excellent results. It is helping us to grow our business because we’re adding customers as a result of it. And it will soon be ready to be rolled out into some of our other facilities here in the not too distant future.

Our upstream warehouse, which if you recall was one of the initiatives that we put in place designed to help us reduce our operating cost; that facility opened shortly after the first of the year. We have now transitioned all customers from the Lima division to the upstream facility and actually this week, we started transitioning some of the customers out of our Westville facility into this new warehouse. And things seem to be going extremely well, it’s quite successful at least so far. We’ve only been opened now for a few weeks but boy, we’re pleased with what we’re seeing in that side of our business.

We are extremely pleased that our Food Distribution business continues to add customers at a very impressive pace and our pipeline today is as strong, if not stronger than it has ever been. So we feel very good about that and our Military business remains the gold standard of the industry and the addition of GSC obviously, will only make that stronger. So all of us at Nash Finch fully recognize the difficult economic environment that we’re operating in, but I think it’s clear and obviously from what I’ve talked about and the track record that we have, that our company is well positioned to weather this storm and to take advantage of all the opportunities that come our way as a result of it.

So with that, Mark, I’m ready to take questions. If you could give me a hand with that, I would appreciate it.

Question-and-Answer Session

Operator

Yes, thank you very much. (Operator Instructions). Our first question today comes from Karen Howland with Barclays.

Karen Howland – Barclays

Just a housekeeping, did you give CapEx guidance for the first quarter and for fiscal year ‘09?

Alec C. Covington

I didn’t and I don’t have that number right off the top of my head. Do you know, Bob, or do we need to get back to her?

Robert B. Dimond

I’ve got the number. We had originally targeted right between $55 million and $60 million for the year.

Alec C. Covington

Year?

Robert B. Dimond

Right. For the quarter, we really don’t have that broken down for you, but for the year, 55 to 60. And then as Alec mentioned, we have earmarked some reductions from that, we’ll probably pull eight or $10 million off of that, right?

Alec C. Covington

Right.

Karen Howland – Barclays

Okay, thank you. So...

Robert B. Dimond

We can...

Karen Howland – Barclays

Probably more in the $45 million to $50 million range?

Alec C. Covington

Yes.

Robert B. Dimond

Correct.

Karen Howland – Barclays

Okay. And then I know you didn’t – you talked a little bit about how the acquisition had lower margins than the current Military, just as far as trying to help us model it out, can you – are we talking 1% EBITDA margin, is it higher than that and where do you think the opportunity? Can it get up to the level of the Military margin in that 3.5 to 4% area?

Alec C. Covington

Well, I would say this and Bob may have some comments on that as well. We were attracted to GSC because we believe that the business was – it could potentially perform much better than it was performing. So that’s on one end of the scale. On the other end of the scale is MDV, sitting there at 4% or wherever they are right now. I don’t have the number right in front me. It’s probably closer to four. We will never get to 4% and the reason is because on average, MDV travels about 200 to 250 miles to make deliveries and GSC travels today roughly three times that much. We think we can reduce that quite a bit over the next year or so. So we’re always going to be plagued with much higher transportation expense, because they go much further to reach the destination basis than we do at MDV just simply because of the geography. They’re going to the bases in New Mexico and obviously we know Texas is not small state, so you’ve got enormous travel there. So we believe that it can be dramatically improved and I guess what we stated in the past is that today, GSC is on the low end of that range, we’ve never given a specific range there. Obviously, you’d see MDV on the high end. We believe we’ll move it more towards the middle, but the one thing that we are certain of is that with the way that we acquired GSC, we are very comfortable that we can deliver at least a 13% internal rate of return on the investment that we made of $80 million or so in that business.

Karen Howland – Barclays

Okay. And then, if I think about – I know during the last conference call, we talked a little bit about deflation and how you thought it would play out and my understanding that you said that you often get support from some of the manufacturers, as far as floor stock protection, when it does become a deflationary environment, do you expect that to happen and is it just that the margin will continue to get squeezed above and beyond that?

Alec C. Covington

Yeah, as we look at what’s happening out there, Karen, I don’t worry about having any major devaluation of our inventories because of deflation, just from the practicality of it. We’re not seeing manufacturers dramatically lowering their prices and I happen to be in the camp that doesn’t expect to see a lot of that on processed and prepared food items. What we are seeing and what we have seen has really been on the commodity side and those are areas where there is not much you can do. When you look at commodities such as eggs, cheese, those are things that you don’t get floor stock protection on because they’re sheer commodities. And when they take a drop on, you just have to take it on the chin, you make it on the way up and you take it on the chin on the way down. And it’s not just in grocery; if you look at some of the meat items today, you’re seeing some of it there, you’re seeing some in produce. So it’s kind of all over the board, but it’s more of the commodity impact that we have felt here recently than anything else.

Karen Howland – Barclays

And is it safe to say the commodities because of the hence the name the commodity nature of them, people are a little bit more sensitive to the pricing than they were perhaps with the packaged goods and so the lower prices have to be immediately reflected in the prices that you then charge the retailers and the retailers just then charge the consumer, whereas on the packaged goods, I am not saying you are seeing deflation, but if there was to be some deflation, it could be a little bit stickier?

Alec C. Covington

Absolutely. I mean, when you look at buying sheer commodities such as grains or whether it’s dairy products or whatever it might be, manufacturers or providers, they go up when the market goes up, they go down when the market goes down and there is really not much of a time lag between those two, but when you look at further processed items, there is not as strong a correlation between commodity decreases and increases as maybe you would think in terms of prices that go up and prices that go down, and we’re not seeing at this time a major shift or a downward pricing spiral in any kind of prepared food items or anything like that. We simply saw some deflation, particularly in dairy, in some commodity items.

Karen Howland – Barclays

And is it safe to assume – I think you actually saw a benefit for the first – at least the first two quarters of this year, because of the inflationary environment that the EBITDA in particular in distribution would actually be down not just in the first quarter, but the second quarter as well?

Alec C. Covington

It’s hard to say, Karen, because as we look at our inventories right now, at this moment, we know that we are not seeing price increases. It’s not so much – we’ve got a little bit of impact in the – a little bit in the fourth quarter and we’re seeing a little bit of it into the first quarter of declines in some commodities, as I mentioned, particularly dairy, but we’re not seeing deflation as being the issue, it’s more of a lack of inflation that is more of the issue. If you look at our inventories today, we’re still seeing a flow of some pricing gains, but it’s not nearly to the level that it was a year ago and then we have the issue of needing to cycle through that inventory. So as an example, you could have some actual price gains in your inventory, but it might right now be overshadowed by cheese products or eggs or something else that currently has gone down. Once you cycle through that inventory of those products that have actually declined, now your embedded price increases and gains actually show up again. So it’s a little bit unclear for me to know exactly how long that’s going to take. I think what we’re seeing and maybe what we have seen is a little bit of an aberration, and frankly, Karen, it was brought about by the fact that we maximized that opportunity a year ago. I mean if you drew a line from where we started in 2006 to where we’re going to end up here at the end of the first quarter or, anywhere you want to draw the line, you will be very pleased in terms of the improvement of gross margin from the beginning to the end. But in the middle, we created some unusual jumps and spikes because we believe the right thing to do was to make hay when the sun was shinning and invest properly in inventories, and take those gains knowing full well that when that party was over, we would see at least a temporary contraction in some of our gross margins and consequently, our EBITDA in some select areas of our business. But if you look at our fundamentals, that is the only line in our P&L that we see any shift in whatsoever and it’s just the one line that we really can’t control that much.

Karen Howland – Barclays

Right. And you said you are seeing an increase in private label, presumably at Retail as well as Distribution and that’s higher margin in both businesses as well, right?

Alec C. Covington

It is.

Karen Howland – Barclays

Okay. So it’s just not enough on the distribution to make up for the significant benefit you saw in the first quarter last year?

Alec C. Covington

No, we just saw some unusual spikes and I think even in the first quarter of last year, I think in my comments on the first quarter, right out of the gate, I said listen, we had a great quarter, but even I wouldn’t have predicted a quarter that was this good. And it was...

Karen Howland – Barclays

Right.

Alec C. Covington

And it was just simply driven by some really strong spikes in pricing and then we were standing on some pretty heavy inventories at that time.

Karen Howland – Barclays

Right. And then I was wondering if you – looking at I suppose the macro environment and if you think about your – you obviously provide distribution to a wide array of different quality of stores. Are you seeing trading down amongst the store based or some of the lower-income stores doing better or can you talk at all the trends you’re seeing there?

Alec C. Covington

I would say, just thinking about our own corporate store group and others that I talk to, there are some universal trends, because we have a full gamut even in our corporate environment. We’ve got stores that are in difficult economic areas and we have – the Family Fresh store over here in Hudson, Wisconsin is really more of a middle to upper income area, but the trends are somewhat the same everywhere and I will give you some examples of that; we are seeing discretionary buying such as citrus products and produce, that’s off, but then basic ingredient items such as tomatoes, which are much cheaper now coming out of Mexico; tomato sales are up. If we look at meat, our meat sales overall if you look at the tonnage we’re shipping is actually up, but because of the shift of what we are selling, the dollars are actually under pressure and the reason for that is, we’re seeing such a spike and increase and I think our ground beef sales are up like 16.5%, but when you look at where that’s coming from, well, it’s people shifting off of higher-price pork cuts and other items shifting more towards ground beef. If you can imagine, we are actually selling more steaks right now than we were, but the price is way down and the price is way down because the restaurant industry usually buys all of those middle meats and creates a higher price at store level and the restaurant business is off so much that we are buying steaks at unprecedented prices and we are actually selling some, but the dollar winning is not nearly what it was a year ago. So it’s really a shift in those areas, a dramatic shift away from typical proteins, whether it’s poultry and pork, towards grinds. Then when you look at the grocery department, we’re seeing a decline in prepared food items. So if you look up and down the grocery aisles, we’re seeing that shoppers today look like shoppers frankly early on when I joined this business, that they’re buying more basic items; they’re buying a flour and they’re buying ingredient-based – they’re more ingredient-based shoppers, Karen, where a year ago, they were buying prepared dinners, things that you could stick in the microwave. We’re seeing that same trend in the frozen food aisle and in the dairy aisle. When you get to the pharmacy, we’re seeing a really strong shift to generics. And we’re concerned that some of our customers who historically were getting prescriptions filled may not have the money to get them filled today. And we worry about that. So we’re seeing those kinds of trends throughout the supermarket and as I talked to our large customers at various food shows, I’m getting the same feeling from them, and the underlying trends that I’ve been looking at in the last few weeks in our Food Distribution business is also consistent with what I have just described.

Karen Howland – Barclays

Okay, great. Thank you very much for the additional color.

Alec C. Covington

Sure. Mark, are there any other questions?

Operator

We have one question at this time. (Operator Instructions). And now we’ll take Blaine Marder with Loeb Partners.