Good day, ladies and gentlemen. Thank you for standing by. Welcome to the United Natural Second Quarter 2012 Conference Call. [Operator Instructions] This conference is being recorded today, Tuesday, March 6, 2012. I would now like to turn the conference over to Scott Eckstein of Financial Relations Board. Please go ahead.

Thank you, operator, and good morning, everyone. By now, you should have all received a copy of this morning's press release. If anyone still needs a copy, please contact Joe Calabrese in our New York office at (212) 827-3772, and we'll send you a copy immediately following this morning's conference call. With us this morning from management is Steve Spinner, President and Chief Executive Officer; and Mark Shamber, Chief Financial Officer. We'll begin this morning with opening comments from management, and then we will open the line for questions. As a reminder, this call is also being webcast today and can be accessed over 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. Additionally, in today's press release and on today's call, we provide both GAAP and non-GAAP financial measures, including operating expenses, operating income, net income and earnings per diluted share. The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for any measure prepared in accordance with GAAP. For a complete reconciliation of GAAP to non-GAAP financial measures, please refer to our earnings release issued earlier today available on our corporate website, www.unfi.com under Investors. With that, I'd like to turn the call over to Steve Spinner. Steve, please go ahead.

Thank you, Scott, and good morning, everyone. Welcome again to UNFI's Second Quarter Fiscal 2012 and Midyear Results. Almost 3 years ago, UNFI began a drive toward building market share, coming together as one company, being operationally excellent and further driving our cultural commitment to sustainability and philanthropy. We refer to this strategy internally as MOOS, Market Share, One Company, Operational Excellence and Sustainability, and I'd like to make a couple of comments regarding our process -- progress. We have demonstrated terrific positive momentum toward building market share as evidenced by our over 15% increase in sales both for the second quarter and for the first half of fiscal 2012 versus prior year. This success was driven by a relentless focus on adding new customers, expanding existing customer relationships and building the infrastructure for new channels and categories of products. Market share improvements were especially positive in our core UNFI distribution businesses, as well as our Albert's Organics and UNFI Canada divisions. All 3 of our distribution channels exhibited strong year-over-year growth, led by our supermarket channel which saw over 32% growth. Additionally, our retail category management and iUNFI technology continued to demonstrate UNFI's very unique and capable expertise throughout our product categories and customer base. Continued improvement in the industry and sustained inflation over 4% helped our overall revenue numbers. However, we carefully watch a phenomenon aptly named The Rule of 4s very carefully. When inflation continues over 4%, combined with sustained fuel price at over $4 per gallon, based on history, we know this can contribute to a consumer slowdown. Both inflation and fuel are very close to 4 in each case. On balance however, despite rising fuel prices and inflation, this is a terrific time to be in our industry. Consumers have a passion for specialty and…

Thanks, Steve, and good morning, everyone. Net sales for the second quarter of fiscal 2012 were $1.29 billion, which represents growth of 15.5% or approximately $172.5 million over the prior year second quarter's net sales of $1.11 billion. Inflation continued to increase on a year-over-year basis although the rate of increase did moderate sequentially as inflation was 4.36% for the second quarter compared to 3.85% in the first quarter, an increase of 51 basis points. Year-to-date, net sales of $2.5 billion, yielding sales growth of $336.9 million or 15.5% over the first half of fiscal 2011. Excluding sales from acquisitions, our year-to-date growth is 14.3%. For the second quarter of fiscal 2012, the company reported net income of $22 million or $0.45 per diluted share, an increase of approximately 17.5% or $3.3 million over the prior year. Net income for the second quarter of fiscal 2011 was $18.7 million or $0.39 per diluted share. EPS increased by 15.4% as EPS growth was impacted by the higher average share count in fiscal 2012. On a channel basis, supernatural sales increased by 12.8% in the second quarter and now represent approximately 37% of sales. Sales growth in the Independents channel was 8.1% but declined from a mix standpoint and for the quarter represented approximately 34% of sales. The supermarket channel sales increased by 32% due to a full quarter of sales from our new national customer, and conventional supermarkets now represent approximately 25% of sales, while foodservice comprised approximately 2% of sales after growing by 22% in the second quarter. At 17.3%, gross margin for the quarter showed a 48 basis point decline over the prior year's second quarter gross margin of 17.8%, and a 49 basis point decline sequentially. Primary drivers of our lower gross margin with a continued shift in…

[Operator Instructions] Our first question is from the line of Ed Aaron with RBC Capital Markets.

I wanted to maybe start by asking about the independent channel. The growth there slowed a little bit on a sequential basis, and maybe it's just the tougher comparison, but that channel has always been kind of a barometer for the industry. And I'm just kind of wondering if maybe we should be at all concerned that The Rule of 4s might be starting to show an impact in that channel specifically?

Yes. We're not overly concerned about that, Ed. I'm not sure why it declined, just a little bit as I recall. We still feel very comfortable -- confident in the independent channel. So the short answer is we're optimistic there.

Okay. And then I wanted to ask about -- I know you said -- I think you said Ridgefield was kind of tracking for a Q4 implementation. That sounds maybe a little bit later than where we had expected it to be. Is that just sort of like crossing Ts and dotting Is, so to speak, or were there any sort of surprises as you kind of geared up for that?

The biggest delay was a conscious decision to push it out so that we could get through the holidays and also get through the customer onboarding. Both of those things required a tremendous amount of energy. And we didn't want to put those at risk so I think when you look at the delay, it was primarily driven by those 2 things. I think there are -- there is some kind of crossing the Ts, dotting the Is and making sure that we're ready to go. And I think we're in a position to feel pretty confident about fourth quarter go live. But those are the things that really pushed the date out.

Okay. Just my last question. This is, I guess, the second quarter in a row where you've had an inventory write-down issue. And, Steve, can you just maybe address at a high level in terms of kind of the processes that you have in place and just that this doesn't become more of a recurring theme?

Yes, I mean, our processes are actually pretty good. And if you look back over the course of history, look back certainly the last 3 years, our shrink was very well managed. I don't remember what the exact shrink number is as a percentage of our revenue, which is how we look at it. The last quarter was specific to one specific product category where we had some heat cause some problems, we made some changes to our facilities that will prevent that from happening again. And I think in this particular quarter, we made a very conscious effort to bring in a lot of inventory to support what we expected to be a very big holiday lift, and we did have a very big holiday lift. I think that it probably exposed some weaknesses in our own internal systems to take a look at demand and forecasting. But I'm pretty comfortable that we have good policies and procedures around managing shrink. Certainly, history has proven that we do. I think we just caught ourselves last quarter in a very unique situation in this one in a very specific scenario, driven primarily by an intentional increase in inventory support what was a big holiday period.

The next question is from the line of Scott Mushkin with Jefferies & Company.

This is actually Brian on for Scott. Just one quick follow-up on the implementation to the DCs. After Ridgefield, do you think you'll kind of keep running them one at a time or see how they go? Or will they start to kind of come in groups together?

Actually, with us this morning is Sean Griffin. He's our senior VP of distribution. I'm going to let him answer that question.

Sure. We expect coming out of the Ridgefield implementation, we'll have a period of time where we have built some specific metrics to gauge our success. Following on the success of Ridgefield, we would expect to do 2 to 3 implementations to the WM platform per year.

That's great, okay. And then maybe on a different note, we were hoping maybe you might be able to detail available business during the year. Is there a significant new business up for bid across the industry? And any color on your current business that might be available coming up for contract negotiation compared to last year, any color there?

Again, we don't get into disclosure of those customers that we're working on or those customers that are risk, that are not overly material to our total business volume. We think that the pipeline is still strong for new business. We think that there's a lot of opportunities for us in adjacent categories, specialty cheese, protein, alternative channels that UNFI historically hasn't participated in before. So there is a ton of opportunity for us to continue to grow the business on the top line at a rate that we've become quite accustomed to. As far as business is at risk, we always have business that's at risk, but where we sit today, we're pretty comfortable with our overall revenue plans.

Great. And then, I guess, one final question, if I may. Operating margin, you guys saw some nice expense leverage, and I know the plan is to have them fall more than the gross profit as you get the mix shift. Is 3.5%, is that still realistic? How long do we get there? Any thoughts on kind of any update there would be appreciated.

Yes. I mean, I think, Brian, we wouldn't necessarily put an ultimate target as to where operating margins can expand to, but we have put the 3-year guidance out there that says we'll get between 9 to 12 basis points of expansion in any given -- or an average of that over a 3-year period, and we still felt comfortable where we are in fiscal 2012 to achieve that X some of the nonrecurring items we had in the first quarter. And so I wouldn't want to look past that target for '12 and that target for '13 until we are in a position whether we have another Analyst Day, Investor Day and set future expectations at that point. But I would say we still feel that we can get 9 to 12 basis points of expansion over the next couple of years, and then we'll, at that point, we'll certainly update and look a little bit further out.

The next question is from the line of Greg Badishkanian with Citigroup.

If you could maybe talk a little bit about your core customer base excluding the new customer business that you got. That core business, I'm assuming is -- also saw a little bit of acceleration. And if so, anything that drove that acceleration?

Well, I'm not sure I understand the question. You're talking about by product category or...

No, customers. So your kind of the comparable customers last year that you've kept, if you exclude like the new business.

Okay. Yes, I mean, I think where we are, Greg, is if you back out the business we've taken on, the business that we disposed of and you adjust for inflation, we're probably -- we've said the industry's at 6% to 8%, some year 7% to 9%. I mean, I think right now, we're in an 8% to 10% growth range when you take out all the different moving parts and just truly look at the comp. So I mean, it's been spread across the channels and it's varied by quarter-to-quarter but when you get that back down to the core, we're probably in the 8% to 10% range, maybe at the midpoint or a little bit higher.

Okay, that's helpful. And just I would think with a little bit warmer weather, people are eating out more, eating less at, going to health food stores, going to regular supermarkets. So that would have hurt your business but yet you've seen that acceleration. So you think that's just due to a stronger consumer or is there anything else in the industry that's driving that?

I mean, we know that just by looking at the data that -- I forget whether it's 4 or 5 out of 10 families are buying more organic food in the household this year than they did last year. We know that -- we've talked about the crossover consumer, the consumer that buys both organic and conventional, that the rate of increase in organic food for those crossover consumers is increasing at a very nice pace. So I think that overall, it's just continued strong demand for our product. Organic produce in particular over the last several quarters, has just been incredible. The rate of increase in overall sales growth for truly organic produce. If you break it down a little further, the categories, they continue to do really well or the organic dairy, the grains, any of the value-packed products, where consumers can get into either specialty or organic at a less expensive price by buying a bigger pack and size. So all those things, I think, are helping.

Good. And I know Sysco would mention if they have double-digit type of inflation in certain categories, it's really tough to pass that on overall inflation, 4% something like that what you're seeing a little bit over that. That seems to be okay. Are there certain categories that you are seeing the double-digit increases? And what's your outlook over the next 12 months? What are you expecting there?

We have said for the last couple of quarters, that 3% to 4% roughly inflation was pretty good for us and that the consumer could deal with it. We start going north of 5%, 4% to 5% inflation, and it's going to have an impact. Generally speaking, we can pass through the inflation. It may take us a little while, but we pass it through because so much of our business is on a cost plus. But ultimately, the consumer is the one who decides on the overall ability for them to stay with the product. You get into 8%, 9%, 10% inflation, I mean, we're going to see some slowdown.

And I think, Greg, when we look at the next 12 months, I mean, it certainly can at least give you a look into the next 6 is that we would expect that inflation may top out in Q3. I mean, I think it may be at the point right now where it's turning over, barring any new increases from any of our suppliers. And if you look at fiscal 2011, this was really where we saw some of the biggest price increases in the third and the fourth quarter. We saw almost 250 -- 225, 250 basis points of increase in last year's Q3, Q4. So if we don't see similar levels of increases coming through from suppliers this year in that timeframe, we'd probably get maybe as a high as 4.5% in 3Q or it starts to come off. But I would expect 3Q is probably somewhere between 4% and 4.5%. And then if commodity trends don't force the suppliers push through or try to push through future price hikes, that probably drops below 4% in the fourth quarter.

The next question is from the line of Bob Cummins with Wellington Shields & Co.

Your company happens to be one of the few on my list that doesn't pay a dividend, and you're generating substantial amounts of profits, obviously. Have you considered establishing a regular quarterly dividend? I mean, there are some of my clients that won't buy a stock that doesn't pay dividends.

Yes, I mean, we really haven't with 15% growth. We're -- at this point, our viewpoint is to take all that free cash and put it back into growing the business. I think at some point if the growth rate were to fall off pretty significantly, we might have to look at it differently but that's our viewpoint today.

[Operator Instructions] The next question is a follow-up from the line of Ed Aaron with RBC Capital Markets.

Just wanted to ask a follow-up on CapEx. If you look kind of back pre-recession, you guys are running more like 2% of sales on CapEx and it's come down to about 1%. And, Steve, you mentioned in your prepared remarks that just with all the growth, you're kind of at the point where you need to add some capital. When you look out the next kind of 3 or 4 years just based on where the business is growing, I mean, do you still think that 1% of sales is the right number or do you think it might kind of creep back closer to where it used to be just given the growth that you're seeing?

I mean, that's a great question and we spend a ton of time internally talking about that. Certainly, for the fiscal year '12, we're comfortable with the guidance. We really haven't thought about '13 or '14 yet. So I would say I would much prefer to wait until we get through our budgets and look at our projects, both in terms of IT and construction before I would comment on total CapEx looking out into '13 or '14. We've got a pretty good discipline here around CapEx and the creation of free cash, and we like that discipline. But on the other hand, when you have the kind of growth that we have, our buildings are running out of capacity. We'll get into more color on that as we get towards the end of fiscal '13 and into discussions about 2013.

The next question is from the line of Eric Larson with EJ Larson Research Group.

Could you just give us a quick update? Obviously, your fuel costs are going to be working against you now for the next couple of quarters more so on a year-over-year basis. As I recall, there's -- I think there's a 60-day lag between when you actually see the fuel costs go up and then you can implement your -- a surcharge on that fuel. Is that correct and how do you kind of see the progression of that? And will you be able to get enough operating margin improvement to kind of help offset some of that fuel cost?

Yes. I mean, the first part of the question, we changed our fuel surcharge language about maybe one year or so ago to 30 days. So we make changes to our fuel surcharges every 30 days now, not 60, so that we don't have to deal with volatility in either direction. We continue to have forward contracts at about 40% of our fuel, which is significantly lower than the market. We think that the fuel surcharges cover the lion's share of the remaining balance. So barring any significant change in the price of fuel, a very volatile market where fuel was advancing $0.20, $0.30, $0.40 a gallon, we're probably in pretty good shape.

And, Eric, I would just add one note is that if you were to go back and look at the diesel prices last year, really as we sit here today, which is probably 5 weeks into our third quarter, this was the timeframe where things really ramped back up. I mean, we've probably been, since last March at this time, we've probably been in the range of $3.80 to $4.10 for national average for diesel. So there will be a bit of headwind on a year-over-year basis through the first half, first third, first half of the third quarter. But once we get to that point, we're kind of consistently in that range for the next 12 months. I mean, it's been like I said, in that $0.30 band during that entire timeframe.

[Operator Instructions] And the next question is from the line of Scott Van Winkle with Canaccord.

I joined the call a little bit late so I apologize if this was already touched on. But with the new business with Safeway, can you give us an idea of where you are, maybe a percentage along the way of getting to ultimate efficiency?

The business is fully on board. We feel pretty good with where we are. There's been some bumps in the road that we're working our way through, but we're confident with both them and their position in us and what we've accomplished thus far. I think it's probably going to be a little while before we become really efficient and understanding all the ins and outs of the deliveries and the items. As far as the timeframe, I mean, I would say typically, it's 9 to 12 months to fully vet out all of the operational efficiencies that you need to when you bring on a new customer. So we're probably 6 months away.

The next question is from the line of Michael Krestell with M Partners.

Steven, your opening comments, I think, you mentioned something about fleet management and the utilization increasing. Can you talk about where that is now, and just how much room left do you think there is to go before you sort of hit where you would like to be from a target perspective?

Yes, I mean, a lot of the heavy lifting's been done. We've centralized the acquisition of equipment. We've centralized the way in which we look at the primary transportation metrics, idle time, miles per gallon, distance traveled. The key and most significant win for us is in reroutes. And what that means is that we take a look at the existing routes from an existing facility, and we reroute the fleet to essentially to make sure that we're doing it in the most efficient manner, taking into consideration the fact that there are customers that have demands with delivery times, et cetera. We've done that rerouting in a couple of facilities, 2 or 3 facilities. It's a very big project, takes a long time. So we still -- most of our upside is in continued reroutes. All of the upside related to fleet acquisition, the way we manage the fleet and the driver force and the metrics have already been completed. But still lots of room as it relates to rerouting our fleet, and that's probably a 2-year project.

Okay. And does the rerouting -- can that happen independently what happens from the WM implementation or does it sort of [indiscernible]?

Yes, absolutely.

The next question is a follow-up from the line of Eric Larson with EJ Larson Research Group.

I just wanted a follow-up. Your divestiture, expenditures and -- your divestiture and onboarding expenses 1x this year, you've said, is a range of 6.5 to 7 and you're 6.8 year-to-date. I'm assuming that you won't have a lot of expenses in the back half or is there something in there that I'm missing?

No, that's accurate, Eric. I mean, we left little bit of room on the range to the extent that there are any late expenses that come in or if there's any other folks that maybe haven't yet left the company. And it could go down as we true up on some of the accruals that we made during the first half. I mean, if you noticed for this quarter, it was -- I think it was just around $100,000 to the positive, again just reflecting some true up of estimates.

There are no further questions at this time. I will turn it back over to management for any closing remarks.

Thanks. Thanks again for participating in our call to review our second quarter and first half results. Remember, eat more specialty and organic foods. Thanks, and have a great day.

Ladies and gentlemen, this does conclude the conference call. If you would like to listen to a replay of today's conference, please dial 1 (800) 406-7325 or (303) 590-3030 and enter an access code of 4515575. Thank you for your participation. You may now disconnect.