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United Natural Foods, Inc. (NASDAQ:UNFI)

F3Q08 Earnings Call

May 20, 2008 11:00 am ET

Executives

Scott Eckstein – Financial Relations Board

Michael Funk – President, Chief Executive Officer

Mark Shamber – Chief Financial Officer

Analysts

Andrew Wolf – BB&T Capital Markets

[Eling Conception] – Citigroup

Regina Russell – J.P. Morgan

Simeon Gutman – Goldman Sachs

Glenn Primack – Broadview

Eric Larson – [Sunhurst Asset Management]

Operator

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to the United Natural Foods third quarter fiscal 2008 conference call. (Operator instructions) I would now like to turn the conference over to Scott Eckstein of Financial Relations Board. Please go ahead sir.

Scott Eckstein

Thank you and good morning everyone. By now you should have all received a copy of today’s press release. If anyone still needs a copy, please call Samantha Alfonso in our New York Office at 212-827-3746 and we will send you a copy immediately following this morning’s conference call.

With us today from management is Michael Funk, President and Chief Executive Officer and Mark Shamber, Chief Financial Officer. We’ll begin with some opening comments from management and then we will open up the line for questions.

As a reminder, this call is also being webcast today and can be accessed on the Internet at www.unfi.com. Before we begin, as usual, we would like to remind everyone about the cautionary language regarding forward-looking statements contained in the press release. That same language applies to comments made on this morning’s conference call. With that, I’d like to turn the call over to Michael Funk. Please go ahead Michael.

Michael Funk

Thank you Scott and thank you everyone for joining us on our third quarter conference call. Joining me today on the call is Mark Shamber our Chief Financial Officer. For the quarter, earnings per share were $0.30 or $13 million. Our recently acquired Millbrook Specialty Division was dilutive to our results by $0.06 or $2.4 million.

So excluding Millbrook, earnings would have been $0.36 or $15.4 million compared to Q3 a year ago when we earned $0.32 per share. Third quarter sales were $887 million, a 21.1% increase from the third quarter a year ago. Exclusive of the Millbrook acquisition, our sales grew at a rate of 10.5%.

This core growth rate is slightly higher than the 10% that was produced last quarter when you net the impact of the Whole Foods Southern Pacific new business gained last year. As a reminder, in mid January our Western region cycled through the incremental sales volume achieved during the last 12 months related to gaining the primary wholesale natural grocery distribution for Whole Foods’ Southern Pacific region.

We expect to finish our year with sales in the $3.3 to $3.35 billion range, an increase over last year of 19-20%. The sales growth by channels are as follows: the super natural channel grew at a rate of 8.1%, the supermarket channel grew at a rate of 77.7%, independents continued their strong performance and grew by 11% and food service grew at 60.2%.

In Q3 we saw our top 100 largest independents accounts grow by an average of 13.52% on a same store year over year basis. We are very encouraged by these numbers, suggesting consumers are shifting their spending away from restaurants and other non essential items into more grocery store purchases.

We tracked our year over year product inflation at 4.66% reflecting the higher commodity pricing, freight increases and the impact of a weak dollar. We continue to be able to push these increases through all channels and consumers seem to be digesting them with no material impact on our business.

Our historical inflation numbers over the past few years have been in the 2.25% to 3% range. As a percentage of our total business, super natural was 32%, supermarkets were at 21.8% and independents were 41.2% while food service was 2.5%.

On our Millbrook business which we are renaming UNFI Specialty Division, we made progress improving financial results and improving service to our customers. We are confident that we’ll continue to make improvements as we are seeing margin being restored to more historical levels.

We have identified several initiatives to reduce expenses which we are executing on and which we believe will get us to our goal of being neutral to earnings by Q1 of our new fiscal year starting on August of 2008.

Operating expense were 15.9% for the quarter compared to 14.3% a year ago. The majority of this 161 basis point increase is due to Millbrook. We saw a diesel fuel price increase during the quarter by 28%. The impact on our numbers from fuel was 26 basis points year over year as Mark will explain further.

Long term, this cost gets passed onto our customers. There has been little push back on our fuel surcharge program. While the fuel situation impacts everyone in distribution and transportation, it impacts many of our competitors to a much greater degree who are trying to serve customers from a sparser network of distribution centers.

We continue to invest in our national distribution footprint which positions us closer to our customers and lowers our consumption of fuel. Most of our competition does not enjoy this advantage. Our two new building projects continue to move forward as planned. Our new Southern California building in Moreno Valley is expected to open in August this year and our York, Pennsylvania facility will probably be ready for occupancy last this fall.

The two new buildings will add 1.3 million square feet of distribution space to our network and will take the place of our two most overcapacity buildings in those regions. Operations and service remain consistent with our fulfillment rates at 97.69% and our on-time deliveries were 98.67% consistent with last quarter.

Our United Natural Brands Division grew at a rate of over 42.8% for the quarter driven by an acquisition that was recently completed. We are encouraged by the strength of our core business and the strength of consumer demands for our products, even in this economic downturn. Our long term goals of leveraging our leadership position in the distribution of natural and organic products to also becoming a leader in the specialty ethnic foods business as a strategy that we are focused on executing.

We’ll continue to build capacity, invest in technology and infrastructure to allow us to capitalize on these long term goals. We look forward to meeting with you next quarter and updating you on our FY09 forecast and guidance for the following year. Now to give additional color on the finances, I’d like to turn the call over the Mark Shamber our CFO. Mark.

Mark Shamber

Thank you Michael and welcome to everyone dialed in on the call and listening via the webcast. Net sales for the third quarter of fiscal 2008 totaled $887 million which represents growth of 21.1% or approximately $154.4 million over prior year third quarter net sales of $732.5 million.

Excluding our acquisition of Millbrook Distribution Services, which occurred in the second quarter, net sales for the quarter were $809.7 million, resulting in comparable sales growth of $77.2 million or 10.5% for the third quarter. Year to date net sales of $2.45 billion yielding sales growth of $406.5 million or 19.9% over the prior year.

Excluding our Millbrook acquisition, comparable sales growth was 12.5% for the first nine month of fiscal 2008 with year to date net sales of $2.3 billion. At 18.7%, gross margin for the quarter showed a 96 basis point improvement over the prior year’s third quarter gross margin. Gross margin in the third quarter benefitted from our Millbrook acquisition and growth and sales of our branded products through our Blue Marble Brands Division.

In addition, prior year gross margin was adversely impacted by approximately 51 basis points related to non-recurring inventory adjustments and forward buying issues in our Western region. As we stated previously, Millbrook’s full service supermarket model should allow us to generate a higher gross margin than our core distribution business, but it also carries higher operating expenses in providing those services.

For the first nine months of fiscal 2008, our gross margin is at 18.6%, a 14 basis point improvement over the prior year. As Michael mentioned, our operating expenses in the quarter were 15.9% of net sales, compared to 14.3% for the same period last year, with Millbrook representing the majority of the increase over the prior year.

Also, as we discussed on our last quarterly call, our branded products division, Blue Marble Brands, has had higher operating expenses as we previously built out our infrastructure in anticipation of growing that business which is now beginning to materialize.

And while we’re pleased with our progress to date, both our Sarasota, Florida and Portland, Oregon area facilities continue to have opportunities for improvement with our local work forces gaining additional experience as both facilities negatively impacted operating margins in the quarter.

As we’ve noted in prior calls, our new facilities typically require between six to nine months of operations before they’re able to achieve our optimum anticipated efficiencies. Operating income was negatively impacted by Millbrook’s operating loss of $2.6 million which equates to approximately 30 basis points.

Excluding Millbrook, operating income for the quarter would have been approximately 3.4%. During the quarter we recorded share based compensation expense of $1.1 million or 13 basis points compared to expense of $1 million or 13 basis points in the prior year. Fuel costs for the quarter were approximately 111 basis points, an increase of 8 basis points over the second quarter and an increase of 19 basis points over the prior year.

However, prior year fuel costs also included $512,000 in expense or 7 basis points related to the fuel hedge that was in place in 2007. Excluding the fuel hedge from the prior year figures, fuel expense increased by approximately 26 basis points over the third quarter of fiscal 2007.

As a reminder, our last fuel hedge expired in June 2007 and we have not engaged in any fuel hedging at any point in fiscal 2008. Fuel and transportation savings from our new Sarasota and Portland area facilities have been more than offset by rising fuel prices as diesel prices increased by 28% during the quarter and have increased by approximately 49% over the prior year as of the end of April.

Our fuel surcharges have been adjusted to reflect the higher fuel costs of the current market and in general we continue to feel that our fuel program allows us to offset the majority of rising fuel costs. Although rapidly rising fuel costs do present a challenge in our being able to remain current in passing along increases to our customers in a timely manner.

Our days in inventory was at 51 days for the third quarter which represents a 6 day increase compared to the prior year and a 1 day decline from the prior quarter when factoring Millbrook into the equation. The higher inventory levels are due in part to the opening of our Sarasota, Florida and Portland, Oregon area facilities as it takes some time for inventory levels to stabilize across the impacted facilities.

In addition, the company has made significant investments in inventory at Millbrook to take advantage of forward buying opportunities as part of our efforts to improve the gross margin at Millbrook. It will likely take a couple of quarters for Millbrook’s inventory levels to stabilize at a normal run rate with forward buying factored in.

DSO for the second quarter was at 20 days, favorable to our target range of 22-25 days and a day improvement over the prior year. Capital expenditures were $32 million or 1.3% of net sales for the first nine months of fiscal 2008 which is below our target as a percentage of sales for the current year.

We expect our capital expenditures to increase during the fourth quarter of fiscal 2008 as we continue with the build out of our new facilities in Moreno Valley, California and York, Pennsylvania. Interest expense in the quarter of $4.2 million was down approximately 17% sequentially and was approximately 39% higher year over year.

The sequential decrease was due to a combination of lower debt levels and lower interest rates during the quarter. The year over year increase was primarily driven by the debt taken on to fund our acquisition of Millbrook and in addition higher debt levels associated with increased working capital directed to Millbrook, the opening of two new distribution facilities and a number of branded product company acquisitions represented the balance.

The company’s outstanding commitments under its amended and restated credit facility as of April 2008 were approximately $321 million with liquidity of over $86 million. As discussed in our press release, we have updated our sales and earnings guidance for fiscal 2008.

We are narrowing our projected net sales to $3.3 to $3.35 billion for 2008 which represents a 19-20% increase over fiscal 2007. In addition, we are reaffirming our earnings per share guidance for fiscal 2008 with a range of $1.12 to $1.14 per diluted share.

Our guidance reflects our expectations that the Millbrook acquisition will be dilutive to earnings by approximately $0.18 to $0.19 for fiscal 2008. At this point in time, we expect that Millbrook’s operating results will be neutral to earnings by the first quarter of fiscal 2009.

Our earnings guidance also includes approximately $0.03 per diluted share in labor costs, duplicate rent and related startup expenses associated with relocating to the previously announced Moreno Valley, California facility. We expect that the majority of these expenses will be incurred in our fourth fiscal quarter, although there is a possibility that certain costs will slide into the first quarter of fiscal 2009.

As a reminder, prior to fiscal 2008 we had broken these types of costs out as special or non-recurring items. As previously announced, these costs are now reflected within our earnings guidance. Finally, we are reaffirming our anticipated fiscal 2008 cap ex guidance of $50-$55 million.

Included in our cap ex guidance for the remainder of fiscal 2008 are expenditures associated with the previously announced 613,000 square foot Moreno Valley, California facility which is expected to begin operations in the first quarter of fiscal 2009, as well as capital expenditures for our recently announced 675,000 square foot facility in York, Pennsylvania, which we anticipate opening in the first half of fiscal 2009 and will replace our existing facility in New Oxford, Pennsylvania.

Once completed, these facilities will be the largest facilities in the company’s network of distribution facilities. That concludes our prepared remarks and at this time we’ll turn the call back over to the operator to facilitate any questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Andrew Wolf – BB&T Capital Markets.

Andrew Wolf – BB&T Capital Markets

I wanted to ask you on the sales line, there were two things, first, Millbrook looked like at least sequentially the sales were a little better. Is that real growth or more seasonal, kind of like the core business?

Michael Funk

No, I’d say that’s more seasonal. Overall Millbrook’s sales results were just slightly under our internal forecast. But nothing material.

Andrew Wolf – BB&T Capital Markets

The core business, it’s held up as you said, can you comment how it was doing intra-quarter and perhaps quarter to date? You know there’s some concern out there that the channel is seeing some slowing recently.

Michael Funk

We haven’t seen that Andy, I’d say I would describe the quarter as well as the period after the quarter as very consistent, we haven’t seen any noticeable changes in sales either total or by our channels.

Andrew Wolf – BB&T Capital Markets

Also on sales, the way I view Millbrook from a strategic rationale was to really increase the addressable market for the company, mainly the conventionals. Can you comment on progress there, how it’s coming together, is that still something where you think there could be a lot of progress made in the coming months and years?

Michael Funk

We certainly hope so, we’ve been working on getting an integrated sales approach to our supermarket customers in which we can sell them the full breadth of our product assortment and bring them the expertise for not only the natural and organic side of the business but the specialty ethnic business.

We’ve got a lot of interest from lots of supermarket chains looking at this and we expect to make inroads over the coming year on some new business opportunities as well as expanding some of the specialty offerings to our existing customer base within our natural channel as well.

Andrew Wolf – BB&T Capital Markets

Have you had any progress with the latter yet, getting any further penetration with the existing customers or is that, now that Millbrook is stabilized sort of a place you can now focus more intently.

Michael Funk

Yes, I’d say it’s now more of a place we’re focusing on and a big part of it is getting our capacity set up so that we can handle the extra SKU counts and certainly our two facilities that are under development are going to assist us in that to a great degree. So getting the infrastructure right sized so that we can attack that market with the full assortment of products is what we’ve been working on.

Andrew Wolf – BB&T Capital Markets

When you talk about the new facilities, as far as I understand, Millbrook certainly didn’t have facilities in the West Coast, were you talking about that you can actually expand this to national business and do a national account let’s say once the LA facility is up, is that kind of what you’re speaking to?

Michael Funk

Yes, I mean, we’ve added the capacity in the Northwest obviously and now in Southern California, this will certainly help us be able to offer the full breadth of products to the Western region as well as to the Eastern region. So our plans certainly are to look for opportunities for national business, we’re not limited this to one region of the country.

Operator

Your next question comes from [Eling Conception] – Citigroup.

[Eling Conception] – Citigroup

I wanted to ask about internally generated sales, they’ve held up pretty nicely, are there any product segments that are doing particularly well?

Michael Funk

Well I wouldn’t say there’s any major changes in product category sales that we would call out. I mean the perishables, the refrigerated and frozen items have continued to do well for us as well as specific items, functional foods, gluten free products, there’s definitely specific areas in grocery that are showing more exceptional growth. But in general the perishables and the frozen I think continued to grow at a faster rate than our grocery products overall.

[Eling Conception] – Citigroup

Do you have any guidance on what you expect organic sales growth to be in the fourth quarter?

Michael Funk

Well we would look to see our current trends maintained through Q4, we’re not seeing any evidence of any change. We’ve anniversaried all of the more non-recurring things that we talked about like the Whole Food SoPac business. So we would look for the current trends to continue into Q4.

[Eling Conception] – Citigroup

And then with Millbrook, how large do you think that opportunity is in regards to gaining new business with supermarkets?

Michael Funk

Well that’s a good question, I mean we would like to believe it’s a very significant opportunity long term supermarkets are currently 21% of our business. I think as we look down the road several years we think supermarkets can become a much bigger percentage of our business, perhaps as much as 30% of our business going down the road. So we truly believe that it’s one of the biggest opportunities we have to gain new sales and new customers.

Operator

Your next question comes from Regina Russell – J.P. Morgan.

Regina Russell – J.P. Morgan

I just wanted to touch on Millbrook one more time, obviously you’re seeing some improvement in the business this quarter and I’m wondering if the majority of this improvement is really being driven by the purchase synergies and how much progress you’ve actually made on that front?

Michael Funk

Yes, I would describe most of our improvements to date being on restoring gross margin. So that has to do with purchasing synergies as you say, taking advantage of more inbound freight synergies and doing more forward buying and that type of thing.

The opportunities that I think we’re focused on now are more on the expense reduction, we have again a number of initiatives that we see reducing expenses here over the next three or four months that we think will have a material impact. So that’s kind of the focus now, although we still believe there’s still opportunities to continue to improve gross margin as well.

Regina Russell – J.P. Morgan

So in the next three to four months we’ll see some significant progress in terms of expense management on that side?

Michael Funk

Yes.

Regina Russell – J.P. Morgan

To really recognize the total quality of what you can accomplish in terms of expenses, are we looking at maybe nine to 12 additional months from there or what’s the timeline on that?

Michael Funk

Well we certainly see the integration of Millbrook into UNFI as a, there’s definitely a longer term project that will enhance our ability to make Millbrook a very accretive operation for us and certainly some of those things are longer term that will take, that will occur over the next year to two years.

That will see I think another level of a pickup and make the deal again very accretive as opposed to the short term goals of getting it neutral to earnings and next quarter we’ll update you on what we see our 09 goals being as far as Millbrook goes and the rest of the company. But we would believe we were going to be able to incrementally improve the operation over the next two years.

Regina Russell – J.P. Morgan

Switching to the core business, if we look at the independent channel and the read through to the customer, are you seeing any changes, obviously this being an excellent barometer for what’s happening in the industry as a whole, are you seeing any sort of evidence of additional trading down or anything that’s pressuring the customer with the food inflation or anything like that from the independent channel?

Michael Funk

Well, again, everyone is asking that question. We’re asking that question to see if the consumers are in fact trading down as you say. The numbers that we have don’t really support any evidence of that. We’ve heard some supermarket reports suggesting that there’s some trading down going on in the supermarket channel but as far as our core business, we’re just not seeing it.

Operator

Your next question comes from Simeon Gutman – Goldman Sachs.

Simeon Gutman – Goldman Sachs

With regard to the Sarasota and Portland facility, it sounds like that they’re performing relative to your expectations, is that correct, are they ramping up any quicker or slower? And then related to that, are there any scale differences between those two facilities and the next two, the Moreno Valley and the York so that they’ll have a different trajectory? Do you expect that same six to nine month ramp up?

Michael Funk

Well I would say first of all the two newest facilities that are in operations, Sarasota and Portland are performing on our expectations. So there’s nothing there that we’re disappointed with certainly, it’s just taking the normal amount of time to get into optimum efficiencies as Mark had mentioned.

In regard to the latter question, I think the York and the Moreno Valley, certainly both of those facilities, while they are much larger, they also represent capacity constrained facilities, they’re replacing two facilities that have had significant capacity issues. We have in both cases several offsite warehouses which were holding product, not only dry product but refrigerated as well, so product is being handled several times in a very inefficient way.

So day one we will be able to improve efficiencies in probably a much greater way than was shown with the Portland and Sarasota facilities. So because of those capacity constraints I would say our six to nine month issues while that will still be true in terms of getting efficiency on the building overall, I think we may have a quicker return because we’ll be able to shed a lot of the expense in the offsite warehouses and the extra labor in the double handling of product.

Mark Shamber

One other thing to add is that we’re hopeful with both of these facilities that we will keep the majority of the workforce as we’re not relocating the facilities too far from the existing facilities so that you’ll have an assembled team that’s already experienced in the warehouses moving from one facility to the other, so there will be a little bit of regaining familiarity with the layout but it’s the same team that was working in say the Fontana building or the New Oxford building.

Simeon Gutman – Goldman Sachs

And is there anything related to channels, your mix of customers that can help profitability or are those facilities going to have a very representative channel mix or channel exposure relative to the rest of your facilities?

Michael Funk

Yes, they would be representing all channels just like the rest of our buildings do, so no difference there.

Simeon Gutman – Goldman Sachs

And then as far as private label, I think in fiscal 08 you didn’t get as much done or didn’t get much done at the end of last year or not as much done this year, what’s on tap for 09, is it more of a focus on Millbrook or are you going to be consistently pursuing stuff in the private label arena?

Michael Funk

Well as far as our branded division goes, I would say we have invested in that infrastructure, we’re incurring the expenses of a division that can do a lot more revenue and so we plan to continue to look for opportunities to acquire emerging brands and brands that have a good value to our company.

We haven’t set our 09 goals yet, we will be able to communicate those next quarter, so it’s hard for me to comment on exactly how aggressive we may be on that. But we still are firmly behind the strategy of building our branded sales to help us create extra margin and provide additional strategic value. So I don’t look for us to change course on that for 09.

Simeon Gutman – Goldman Sachs

And the rationale for evaluating emerging brands hasn’t changed, meaning you’re not going to look, would you consider looking at something more established versus emerging or it’s still going to be a focus on emerging better value?

Michael Funk

Yes I think that’s generally where we’re going to be. I think the idea that we have the insight into what trends and what products are emerging before a lot of other people have those brand insights I think is the best way for us to leverage our dollars by not paying for established companies generally that have a higher multiple. I think we can invest more wisely and get a better ROI on some of these newer brands. So I would think we will stick with that.

Simeon Gutman – Goldman Sachs

And lastly, it sounded pretty minor that Millbrook missed your top line expectations by a little bit this quarter but what was, any clarity on that?

Michael Funk

Well we’ve had some small sales erosion from Millbrook over the first two quarters of the business, something that we were expecting and nothing again that we feel is out of line or out of our expectations. It was just for Q3, Millbrook’s sales numbers were just slightly under what we had forecasted.

Operator

Your next question comes from Glenn Primack – Broadview.

Glenn Primack – Broadview

My questions are more geared towards Millbrook as most. That business, is that able to earn you think over the intermediate term a 3% type operating margin?

Michael Funk

Well it’s certainly capable of earning that kind of operating margin. I’m not sure what intermediate term is.

Glenn Primack – Broadview

You know, 12, 18 months ish.

Michael Funk

I wouldn’t say that’s out of the realm of possibilities certainly we were obviously working towards a goal of that and again I think we’ll be in a better position at our yearend call to give a little more clarity on that. But what you described isn’t totally out of line, I think definitely over the next two years we would plan to have Millbrook be throwing off the same kind of operating margin as the rest of our business.

Glenn Primack – Broadview

Okay because I assessed the opportunity, I mean you bought a company I assume the other companies that were potentially up for sale wanted a higher multiple on a bigger base of business than what you paid for Millbrook? I’m just trying to back in if you can get $350 million in revenue at a 3-3.5% operating margin, that gives you $10 million in operating income versus what was it $78 million the purchase?

Mark Shamber

Yes, $79 million.

Glenn Primack – Broadview

And so that would, my guess would be a lower multiple than what other options there were out there for you and if this is good enough base to go after a market that let’s say is, I don’t know, is this a $2 billion market in specialty?

Michael Funk

Well it could be bigger than that. I mean we look at the opportunity, there’s a good $10 billion in specialty business being done by just some of the larger specialty foods distributors. So the opportunity is nearly as large as the natural products opportunity that we enjoy a dominant share in. So with Millbrook, when you’re trying to calculate the ROI on that, there’s a huge component of strategic value that we looked at as part of it. So that’s again part of the value that it brings to us.

Glenn Primack – Broadview

I hear you, I own the stock. It’s just I’m trying to assess what that opportunity is, I’m not sure and you just said that there’s billions out there potentially and I think at the beginning of the call, you’re the only national, you think you’ll become the only national provider of the specialty foods?

Michael Funk

Well there’s one other national supplier of both specialty and natural which is Tree Of Life, has long been our number one competitor. There’s a few other specialty distributors who are trying to sell national but have a very small footprint, maybe just between one and four distribution centers, so that’s what I was kind of alluding to is that there are some competitors in this field that are going to come under increasing pressure with the price of fuel to try and service customers from such a large distance.

Glenn Primack – Broadview

How often does that customer base in the supermarket come back to the distributors in terms of hey there’s a contract potentially out for bid on X amount, so work like every two years that potentially there’s a piece of business up for bid?

Michael Funk

I’d say in general it’s every two to three years.

Mark Shamber

And they’re constantly cycling through. So there’s contract lengths anywhere from two to five years and so there are a number of contracts that come up in any given year.

Glenn Primack – Broadview

And is the specialty highly fragmented similar to the organic that there might be brands there that you could buy?

Michael Funk

Yes I’d say the opportunities there for, to add brands to our portfolio exists in some ways to an even greater degree, it’s a highly fragmented product assortment.

Glenn Primack – Broadview

So there’s no real [Hane] to the specialty that represent.

Michael Funk

Correct.

Operator

Your final question comes from Eric Larson – [Sunhurst Asset Management].

Eric Larson – [Sunhurst Asset Management]

Frankly the question I had was tied a little bit into the last question, Tree Of Life has about probably about an $800 million business, something in that neighborhood and Millbrook is not too far away from about half that size.

What is the difference between Millbrook, the way the operations run etc. versus what you see at Tree Of Life? I mean you are now a sizable competitor with Tree in the supermarket business, what are the differences between the two businesses and how they’re run?

Michael Funk

Well I guess overall I would say the product assortments are pretty similar so they have the same breadths of product assortment on the specialty ethnic products. Obviously now with UNFI being involved, there is a greater selection on the natural organic products that can compliment that and probably the other primary difference is just in terms of distribution center footprint. Millbrook had the four facilities to try and service and compete on a national basis.

Certainly they weren’t able to penetrate a lot of the chains, particularly on the West Coast and the Southwest, some of the markets that they didn’t have real good access to. Tree’s footprint was still much better in terms of national distribution. So by piggybacking Millbrook onto UNFI and increasing our capacity and being able to compete not only one but let’s call it a superior selection of products but a superior footprint in terms to service those national customers.

Eric Larson – [Sunhurst Asset Management]

Are the inventory turns on that specialty business comparable to your natural organic regular, your flagship business Michael?

Michael Funk

Most of the specialty business doesn’t carry, there’s not as much perishables that is associated with it so that would tend to keep the turns a little higher, more along the lines of our dried business and some of our Haba supplement business, I think the turns would be in that same range.

Mark Shamber

I would think they’d be similar as we mentioned in the script that you’re going to see that they’ll be a bit slower at least in the short term because we’re trying to build up some of the forward buying opportunities that are out there that Millbrook had previously taken advantage of.

So I think that in the near term, maybe the next three to six months, you’ll see that their turns would be even a little bit more slower than the rest of our business but then they should kind of revert back to close to the grocery dry business.

Eric Larson – [Sunhurst Asset Management]

Related to that, does Tree Of Life also take an approach like you do Michael and trying to maybe own some of those specialty niche brands? Would you be competing with Tree for some of those assets to add strategic value?

Michael Funk

I know that they have a branded portfolio of products. I don’t believe it’s significant, I think they’ve sold off some of that. But I would imagine they could be a potential competitor for a certain brand, but I’m not really aware of their current acquisitions on branded products right now, I don’t think it’s material.

Operator

At this time I show no further questions in the queue, please continue.

Michael Funk

Thank you for attending our third quarter conference call today, we appreciate your support and interest in UNFI and again we look forward to talking with you again next quarter where we will share out 2008 year end and outlook for 2009. So thank you and good day to you all.

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Source: United Natural Foods, Inc. F3Q08 (Qtr End 04/26/08) Earnings Call Transcript
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