Scott Eckstein – Financial Relations Board Steven L. Spinner – President, Chief Executive Officer & Director Mark E.

Shamber – Chief Financial Officer, Senior Vice President & Treasurer

Gregory Badishkanian – Citi John Heinbockel – Goldman Sachs Meredith Adler – Barclays Capital Analyst for Scott Mushkin – Jefferies & Co. Edward Aaron – RBC Capital Markets Andrew Wolf – BB&T Capital Markets Scott Van Winkle – Canaccord Adams [Larry Giblin – Quinn Miller] Doug Thomas – JET Investment Research Ajay Jain – Hapoalim Securities USA, Inc.

Michael Krestell – M Partners, Inc.

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’d 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 Steve Spinner.

Steven L. Spinner I’m quite pleased with our results in the first quarter of our fiscal year 2010.

Earnings per share were up 16% over the prior year at $0.36 per share on sales of $885 million up 2.4%. Operating income was 3.1% up 17 basis points from the prior year.

During previous quarters we’ve talked about the volatility in sales and the unpredictable nature of our economic environment. Today, we are experiencing positive growth trends with consistency in each week’s sales.

Additionally, inflation which was running as high as 6% to 8% a year ago is now at more historic levels with 2.1% during the quarter. This data points to an improving top line and a more stable economic environment.

During the last several weeks UNFI sales have been averaging about mid single digits positive versus the prior year. While encouraging, it’s important to remember that we have now lapped the most significant sales decline which occurred last October through December.

The end result is that we’re beginning to feel more comfortable and more optimistic than confident that we have seen the bottom of the decline and things are beginning to improve. As such, we are prepared to provide top line revenue guidance of 2.5% to 5% for the year and remain confident of our previously disclosed annual EPS guidance of $1.48 to $1.58 per share.

As you know, we no longer break out our specialty sales due to our continuing integration of this business in to our core distribution business. We’re making very strong progress as specialty SKUs have now been added to three distribution centers in the west.

Most importantly we have signed contracts with several new specialty and organic conventional customers further demonstrating that the company’s strategy to acquire specialty was sound. This new business will begin during January of 2010 and roll out throughout the end of Q2 and Q3.

There will be start up costs associated with the implementation of these programs which I expect to be approximately $1.5 million or up to $1.5 million in each of these periods. I have a great deal of confidence that UNFI sales initiatives in this space will continue to drive top line revenue beginning in Q3 and running throughout the next fiscal year.

As additional guidance, it’s important to note that the gross margins for these large customers are traditionally lower than our core business. Alternatively, the cost to serve is also considerably lower.

There will be a shift overtime of lower gross margin percent offset by expense controls resulting in continued growth to our earnings per share. Gross margin during the quarter was down 79 basis points versus prior year to 18.6%.

This was driven by two main factors. First, moderating fuel prices resulted in significantly lower fuel surcharges which drove our gross margin and operating expenses down.

Additionally, during the quarter we experienced start up costs and gross margin charges associated with the ramp up for significant new business and process improvement at our Woodstock Farms manufacturing facility. UNFI’s Texas facility is now well underway with occupancy expected during fiscal Q1 2011.

Completion of this facility will result in a fully built out national network of distribution facilities enabling a low cost, high service model based on being close to the customer. In addition, we will convert our focus from bricks and mortar to systems deployment while managing overall cap ex to less than 1% of revenue on an annual basis.

During the quarter the company officially kicked off its new supply chain project which will result in national supply chain platform to include warehouse management, transportation management and category management. This is a long term project that will take three years to fully implement.

Following up on our Q4 call, market share operational excellence one company platform and continued innovation and sustainability will drive long term margin and revenue growth while remaining true to our core beliefs. On a divisional basis our core distribution businesses performed well during the period.

Several highlights include the opening of our new Charlotte Albert’s facility, continued growth at Select Nutrition and very strong results in all of our UNFI regions. Our performance during the quarter was consistent with our expectations and I’m pleased that the new business opportunities identified a year ago are beginning to mature in to more UNFI products being distributed in to a greater variety of new and existing customers.

Now, I’d like to turn the call over to Mark Shamber, UNFI Chief Financial Officer. Mark E.

Shamber As Steve mentioned, for the first quarter of fiscal 2010, net sales were $884.8 million which represents an increase of approximately $20.5 million over last year’s first quarter net sales of $864.2 million resulting in sales growth for the quarter of 2.4%. Inflation continued to ease in comparison to the prior year and was at approximately 2.1% for the first quarter.

The company reported net income of $15.5 million or $0.36 per diluted share, an increase of approximately 16% or $2.3 million over the prior year. Net income for the first quarter of 2009 was $13.2 million or $0.31 per diluted share.

In the first quarter sales to the super natural channel increased by 7.4% and continued to represent approximately 33% of sales. Independent sales declined by 1.6% for the quarter and independents now represent approximately 41% of our sales.

The supermarket channel experienced growth at 4.3% over the prior year and continue to represent approximately 20% of sales. Finally, food service declined by approximately 4.1% over the prior year and represents approximately 2.6% of sales.

Gross margin for the quarter was 18.6% which represents a 79 basis point decline from the first quarter of fiscal 2009 where we had a gross margin of 19.4% and also represents a 39 basis point decline from the previous quarter. The year-over-year gross margin decline was due to a combination of lower fuel surcharge revenues and a change in the mix of our sales by channel.

In addition, as Steve mentioned, we had some issues within our manufacturing division Woodstock Farms which negatively impacted gross margins as well. Operating expenses for the first quarter were 15.5% of net sales compared to 16.5% for the same period last year, a 96 basis point improvement.

Fuel had a positive impact of 41 basis points in comparison to the first quarter of fiscal 2009 as fuel represented 69 basis points of distribution net sales in the quarter. Sequentially, our fuel cost improved by eight basis points over the first quarter of fiscal ’09 and on a national basis diesel fuel cost in our first fiscal quarter increased by approximately 8% from the fourth quarter to a national average price of $2.66 per gallon using the Department of Energy weekly prices.

For comparison purposes this represents a decrease of approximately 31% over the prior year average for the first quarter of $3.86 a gallon. Share based comp during the quarter was approximately $2.1 million or 24 basis points compared to $1.7 million or 20 basis points in the prior year.

Operating income for the quarter was 3.1% a 17 basis point improvement over the prior year’s first quarter operating income of 2.9%. While this does represent a 28 basis point sequential decline compared to the fourth quarter of fiscal ’09 it’s important to note that there are some seasonal aspects to our business particularly with the additional of specialty and therefore we feel that the year-over-year comparisons of our operating margins are more applicable than sequential comparisons between certain quarters.

Our effective tax rate for the quarter was 40% and this represents an increase of about .4% over the fiscal ’09 first quarter and that’s primarily due to increasing tax rates and surcharges on a state level as well as some changes in our apportionment factors. Our inventory was at 49 days on hand for the first quarter in the middle of our target range of 47 to 50 days and a decrease of three days in comparison to the prior year.

Our higher inventory levels at the end of the quarter were higher than at year end due to the normal inventory build that occurs for the holidays. Sequentially, inventory levels increased by one day compared to the fourth quarter of fiscal 2009.

DSO for the quarter was consistent with the fourth quarter at 19 days which is favorable to our target range and a one day improvement over the first quarter of the prior year. Capital expenditures were $9.7 million or 1.1% of net sales for the three months just ended which is slightly above our target spending.

At $1.4 million, interest expense reflected an approximately 60% decrease on a year-over-year basis due to lower debt levels associated with continued use of free cash flow to pay down debt combined with lower interest rates during the quarter. The company’s outstanding commitments under our amended and restated credit facility as of the end of the quarter were approximately $207 million with available liquidity of slightly more than $200 million when including cash and cash equivalents.

Our leverage as of the end of the first quarter was approximately 1.7 times on a trailing 12 months basis and we generated approximately $7.8 million in free cash flow during the quarter compared to negative free cash flow of $42.6 million in the first quarter of fiscal 2009 or a change of more than $50 million. Finally, on a trailing 12 months basis our return on equity was 10.9%.

As discussed in this morning’s press release we have provided revenue guidance for our fiscal year ended on July 31, 2010. For fiscal 2010 we expect full year revenues to increase by approximately 2.5% to 5% over fiscal 2009 levels to a range of $3.54 to $3.6 billion.

Factoring in our growth of 2.4% for the first quarter, this implies comparable growth of approximately 3.4% to 6.7% for the remainder of fiscal 2010. At this time we have not changed our earnings per share guidance of $1.48 to $1.58 nor our cap ex guidance of $35 to $39 million which were both issued in September.

With that I’d like to turn the call back over to the operator to facilitate the question and answer session.

Just two questions, first is with respect to inflation this quarter versus last quarter kind of what were you seeing there, any main categories of deflationary pressure and also the impact to dollar profit? Then also from a fuel perspective, what type of fuel are you assuming in your current guidance?

Steven L. Spinner Greg, on inflation I think it was really a matter of a lot of categories moderating.

The biggest categories that I had what we would call deflation which was 10% plus reduction in cost was produce and dairy, they’re not particularly material in the overall scheme of all the categories that we sell. I think it’s more a factor of a wide range of products returning to more historical levels of inflation versus deflation in any one or two product categories.

Certainly if you look out over the course of the last 10 years you’d find that the historic rate of inflation is 2% to 4%. On the fuel, we don’t provide any disclosure on where we budget fuel.

I will tell you and I think we’ve talked about this in prior calls that we do have about 30% of our fuel hedged and we feel very confident with that. The reason we hedge 30% of our fuel is as you know most of our contracts with customers have fuel surcharge language which covers the largest share of increase if we get in to a market where diesel is rapidly accelerating.

The 30% hedge covers that differential between how much we pass along and how much we’re exposed to.

If I could throw one more question, the improvement that we’ve been seeing lately in terms of sales is that due do you think just primarily because you have easier comparisons and even if it is the case, which categories or is there any type of theme that you’re seeing the improvement with? Steven L.

Spinner As much as we’d like to take credit for all the growth, you’re absolutely right we’re comping a year ago that if you recall that’s where the sales really took a deep dive so that’s absolutely true. Most of the growth as Mark talked about earlier is coming in the conventional and super natural channel.

Any particular category or just across the board? Steven L.

Spinner It’s across the board.

Steve I know specialty is a little more economically sensitive, have you seen that bounce back and show stability alongside the organic product? Steven L.

Spinner No, I think that the specialty growth is still lagging the organic growth. Interestingly, what we found over the last year is the core organic products really did not have a significant fall off.

Where we did see significant fall off was in the periphery, organic pet food, paper products, but the core organic products did not fall off considerably. Specialty did across the board and I think that’s going to take a while to creep back to where it was.

So, the answer is specialty has not come back to the degree that it was a year ago.

But you’ve seen clear signs of the bottom I guess, is that fair? Steven L.

Spinner I would say that that is true, yes.

The new contract wins you talked about, what were the annualized run rate on all of those be, do you have a generalized rate on that? Steven L.

Spinner We talked a lot about that and we figured that was going to be a big question point this morning and we’re not in a position to disclose that yet. We’ve signed the contracts with these customers, we’re starting to gear up, we haven’t shipped a case yet.

So, what I think we’re going to do is we’re going to wait until we start shipping and that will put us in a position where we can kind of set the high water mark of giving guidance around the total amount of business that has actually come on board.

Is that primarily specialty or is it a little bit of organic as well? And, I guess all of these are totally new customers?

Steven L. Spinner It’s a little bit of both, it’s new customers, it’s extension of existing customers with new concepts under their umbrella and it’s natural, organic and specialty.

In some of the cases it’s more specialty than natural and in some it’s the other way around but in all of the cases it’s specialty, natural and organic.

Finally, the Woodstock costs, how material was that? Mark E.

Shamber I’d say its somewhere between six and 10 basis points impact on the margin for the quarter.

That will not repeat I take it? Mark E.

Shamber Correct.

If we could talk a little bit more about the new business, I think last quarter you talked about kind of having a pipeline, or people you were talking to I wouldn’t say a pipeline of new business but what you hoped to accomplish. Can you talk about whether you still have a lot of conversations going on and transactions that might be pending?

Steven L. Spinner The contracts that we’ve signed I think is a relatively conservative number of the total customer discussions that we’re having.

So, my expectation is that the contract wins are going to continue throughout the next 12 months.

I was just also wondering if you could talk a little bit about some of the things that you’re doing around private label and branding and I think you had particularly had an initiative to service independents better and give them something unique, maybe you could talk about that a little bit? Steven L.

Spinner Yes, we have pretty effectively rolled out a brand new blue marble brand called Field Day which is an independent brand and we’ve seen a lot of excitement around that category of products. I don’t remember how many SKUs we have under Field Day but they’re rolling out 20 to 30 at a time and then will continue to roll out over the next couple of years.

So, there has been a fair amount of excitement under that brand in the independent channel. On the blue marble side we are trying to determine – well, we know our go forward strategy is going to be to concentrate on a fewer number of core brands that we think are going to lead the charge for us as opposed to the 27 different brands that we have today.

There’s some movement going around within blue marble as it relates to what our real go forward brands will be as we look out over the next five years. But again, we have some exciting brands: Tomorrows; Tortillas; Rising Moon; and Pizzas.

We have some great brands it’s just a matter of really buckling down and determining how we go to market with each one of them.

My final question is about operational efficiency/expense control. You’ve done a very good job of managing expenses this quarter and recently.

Can you talk a little bit about what the potential is to continue that and obviously you’ve got a big technology project coming, it won’t be done you said for three years but will there be some benefit as we go along and are there other things that you can do before the technology is in place? Steven L.

Spinner Yes, that’s a great question and if you go back to some of the commentary that I made, as we take on more conventional business which we will do, it is going to drive our gross margin percentage down over time which means that we have to be taking advantage of the cost savings that come directly out of the implementation of the supply chain project as well as being more efficient in the way that we service that channel. The good news is that the additional conventional business forces us to make sure that we continue to reduce expenses slow and steady.

You’re not going to see any big movement in any one quarter. My hope is that as we get the technology implemented which will take place in pieces, and as we become more efficient in determining how to get the cost out of servicing lower margin business, that will continue to increase our EBIT margin and earnings while reducing expenses and seeing the gross margin percentage come down.

Just a few quick housekeeping items, on interest expense you guys beat us by a decent amount on that interest expense line so I just wanted to see if you had provided any guidance for that for the rest of the year? Mark E.

Shamber We historically haven’t but obviously if we continue to pay down debt and interest rates – I think Bernanke was quoted the other day of sort of saving Fed has the ability to keep interest rates at low levels for an extended period of time so as long as rates stay where they are and we continue to generate free cash I would expect that on a sequential basis interest expense would be relatively within the range of $100,000 to $200,000 of where it is each quarter and/or declining. I think it’s one area if you were to look quarter-to-quarter since the end of Q2 we’ve continued to pay it down and then rates being where they are have been to our benefit where our debt on the revolving credit facility is at LIBOR plus 75 so we’ve got an all in rate right now of a little under 1%.

Then for the revenue guidance, what level of new customer signings are you assuming in the 2.5 to 5? Mark E.

Shamber I guess what I would say is only the customers that we’ve already signed are in the guidance that we have given.

We would not have anything perspective in our guidance.

On the uptick in volume in the quarter, to what extent do you think that was replenishment of destocked inventories either within in the channel or do you have any views in to consumers’ pantries if you will? Do you feel like this is a real pickup in demand or sort of either at the customer side or at the retailers side a restocking?

Steven L. Spinner We don’t have any view in to the actual consumer per say and I don’t think we believe it’s a restocking going on.

I think it’s just a general perspective that things are improving and consumers are coming back to some of the products that they may have lived without for some time.

Two quick ones, fuel surcharge we kind of always struggle a little with the fuel surcharge timing, and you may have addressed this a little bit but I just wanted a little clarity, as you come through the surcharge sort of benefit do you expect continued headwind on that lap as we head forward? Obviously, if prices have already come down year-over-year but I know that there are some timing issues with the surcharge, I was just hoping to get a little color there.

Mark E. Shamber I think the important thing to remember is when you look at the fuel surcharge, when we have that in place we’re still netting out to the negative where the surcharge only recovers 70% to 80% to what we’re incurring from an expense standpoint so net/net to the operating margin it’s still a detriment.

So, to your point if we lap the headwinds where we had high fuel surcharges and they now go away in the current year, we will see gross margin take a significant decline because it’s basically a 100% pass through where you record the revenues, the expenses below the gross margin line in operating expenses but when you look at operating margins there is a net benefit to the margin of that remaining 20% to 30% that you’re getting a pick up in the quarter. So, there’s a headwind on the gross margin side but there is a tailwind from an operating margin standpoint as you look at fuel surcharge.

On the specialty business, you had alluded in the recent past about a few smaller customers that you picked up along the way, I wasn’t under the impression that any of those added up to anything hugely material. I know you’re not ready to quantify these new wins but do you think they’re big enough so that they can really get the ball rolling to help secure other businesses, other pieces of business as other customers see you supplying these retailers and recognize that you’re capable of performing in that specialty category?

Steven L. Spinner Yes, you’re right on.

The reason we had to have the small wins were we were in geographies where we didn’t carry the specialty products in the DC. So, the wins put us in a position where we now had the specialty mix in the west coast primarily so now that we have the product in the facilities and we’ve got a sales force to go out and promote it, it puts us in a much better position to be able to go to a large group of customers to sell the natural, organic and specialty mix of SKUs.

On the margins Mark maybe you can elaborate a little bit on some comments you made earlier about seasonality? I think they were down about 30 basis points sequentially at the EBIT line and I know you had a manufacturing issue that cost you six to 10 basis points but if I’m not mistaken in the fourth quarter you also had some startup costs that I think have since gone away so that would seem to explain that the entire sequential decline would be attributed to seasonality but that 30 basis points seems like a big number to be explained by just seasonality alone.

Can you help me understand what I might be missing there? Steven L.

Spinner Just let me make one comment on the manufacturing facility, we had two things going on. Number one, we basically doubled the size of that business in some customer wins so there was a fair amount of business retooling, inventory transition and startup costs associated specifically with Woodstock in the quarter that we think are one time that we won’t see again.

I’ll let Mark talk a little bit about the seasonality of the gross margin. Mark E.

Shamber Yes, are you talking on the operating margin or on the gross? You sort of asked the question starting with the operating margin where it was 30 bips down but then you referenced the gross and I guess you were maybe just backing that out and saying sort of net/net we still had 30 basis points down.

Is that the question?

Yes. I guess I’m looking for a bit more of a bridge to get to 30 basis points sequential decline in operating margin.

Mark E. Shamber I think what we have is there are some seasonal aspects to the business as we start to go in from our stand point a new fiscal year.

There are efforts that we undertake whether it’s from an operational stand point or SG&A stand point that may be a bit more front loaded where we’re getting the efficiencies for the whole year and in the back portion of the year and that really was what the driver was. If I look at any particular line item within our operating expenses, nothing is going to jump out where I can say hey it’s 10 basis points or it’s 12 basis points that led to that impact.

But, we do typically like many companies, when you go in to a new fiscal year you do have budgeted new heads, new projects, things of that nature. A lot of those things had been pushed back a little bit given the economic environment we were in in the back half of fiscal 2009 so I think from an expense stand point you’re seeing a little of investment on that side but it’s not anything again where I could sort of call it out and really give you a lot of clarity.

From a volume stand point we don’t see the same sort of pick up that we’ll get in the back half of the year from a sales stand point. If you look obviously Q1 and Q2 are usually sequentially flat or consistent with Q3 and Q4 of the prior fiscal year and then you see a significant jump up and so that obviously plays a role as well where you start making the investments in certain areas but you don’t really see the significant sales pick up until the third fiscal quarter.

I wish I could just point to a couple of items for you but that’s about as specific as I can get.

One more quick one if I could, Steve I’m guessing you’ve been working on these specialty customers that you managed to secure for some period of time. What was it that enabled you to finally get across the goal line there?

Based on at least what we’ve heard from the publically traded supermarkets that it doesn’t seem that they’re having an easy time with their business so I would imagine it’s not so easy for you or anybody else to win new business from a supermarket at this particular point in time with the deflation headwinds that they’re facing. Can you just help us understand how you actually got that across the goal line?

Steven L. Spinner I mean there are a couple of factors, one was convincing the retailers that the issues that we had in [inaudible] were behind us and so we’ve done that clearly.

The big plus that we have is that for retailers that want to have a presence in the natural and organic space we’re really the only option when it comes to SKU variety, merchandising capacity, the ability to provide a full service program, there’s really nobody that can compete with us in that segment, if a lead of theirs is natural and organic. So I think there’s a tremendous amount of interest on the retail side of getting UNFI to be a player in the space.

The obstacle in the past was that we didn’t have specialty and given their own structure they had to award natural, organic and specialty to one supplier and so I think we’re over that hump. There’s been some uncertainty in the market on the competitive front which I think is going to benefit us over time but I think it’s just a matter of being very proactive and aggressive and getting out there and demonstrating what we have and how we do it.

That will win these companies over. I mean all we need to do is get them in to see a couple of our new integrated facilities.

They’re big, they’re bright, they’re efficient, they have a lot of technology and that’s very attractive.

Follow up questions in the sales area, Steve given the mid single digit trend you’re running at this quarter kind of looking at the model and how that shakes out, is it fair to say that versus your sales guidance you’re really looking for very little of the sales growth contribution 2.5 to 5 to come from these new customer wins given they come so late in the year? Steven L.

Spinner I’d say that’s accurate.

As you start to get other contracts as you spoke to, would they potentially start to be in this year’s numbers or more likely in fiscal ’11? Steven L.

Spinner You know probably not, I’d say fiscal ’11 at this point. Mark E.

Shamber If you think from a stand point we talk about sometimes Andy that we’ll win a contract and it could be anywhere from a 60 to 120 day lead time before you start shipping them so if we were to be awarded something today we might not start shipping until fourth quarter at the earliest so there may be a nominal benefit in fiscal ’10 but more it would be an ’11.

On the customer segments, sequentially the numbers speak for themselves. The independents had a little positive delta, still negative but a little positive delta and then you’re saying obviously business is better now, can you give us a sense of the independents also continuing to show something of a positive delta versus where they were in the quarter you just reported?

Steven L. Spinner Very marginally, not to the degree that we’re seeing it in conventional and super natural for sure which is why we’re working so hard on the independent space to add a lot of categories, products that UNFI has not historically carried for them, specialty cheeses and protein as an example.

Just turning to your guidance you called out $1.5 million of transition costs for your new customers, was that anticipated in the current EPS guidance which you issued previously? Steven L.

Spinner No, it was not.

So should you interpret that you haven’t revised guidance for that as you feel the sales momentum is better than what you might have thought when you said your earnings guidance? Mark E.

Shamber I think that’s probably fair. I think there is probably a shift as to where some of that profitability may come from maybe in the second quarter and early part of the third quarter shifting more towards the back half of the year.

Some of these transition costs are going to be in Q2 as well as Q3? Mark E.

Shamber Yes because not all the business is starting in Q2, some of the business does not start until Q3. I think that’s why Steve gave it it’s up to $1.5 in Q2 and 3Q because we’re not sure exactly how we’ll ramp and the specific time lines haven’t been established.

So, it could be up to $1.5 million in both quarters, it could be more in Q2 and less in Q3.

Steve, this is a pretty general question but overall and I know the new customer wins of folks in specialty kind of vary kind of like they do in organic by size but in terms of gross profit and other metrics, but generally out of the gate once you’re integrated and you get through transition costs are these going to be despite the lower gross margin you said there’s lower cost to service these accounts, overall do they come out of the gate as around the current profitability margin for the company or are you relying on the systems and other costs enhancements coming down the road to retain the current profitability rate? Steven L.

Spinner Philosophically we’re not going to take business on that we know is going to be dilutive to earnings. So, if we’re forced in to a position where we have to price it such that we think it’s going to be dilutive I think we’re probably going to walk from that one.

We have enough kind of internal view in to where we think the expenses can get both in terms of the technology that we have today and in terms of the technology that we’re going to be putting in to feel pretty comfortable with how much less gross margin we can take in a customer and still have it be accretive to earnings.

I guess I was getting at operating margin when you bring in some of these customers. Obviously you’re not going to lose money on new business, I’m looking more at if it boosts your sales 2%, does it boost your earnings 2% or more?

Steven L. Spinner I think we’re saying the same thing, from where I sit today given the amount of new business that I know we have coming on board it’s not going to be dilutive to operating margins.

Mark E. Shamber There will be other initiatives and programs that we have in place that should allow us to keep margins where they are an expand.

Whether that expansion comes from new business or comes from our initiatives we wouldn’t really divulge from that stand point. Steven L.

Spinner If you go back to our stated three year targets, we’re still comfortable with those targets.

Mark, I just want to make sure I understand the answer you had on the seasonality of margins. It sounds like the seasonality negative impacted the gross margin and the offset that you normally have with the channel mix and lower operating costs was offset by new initiatives that kind of threw some additional expenses on there.

Is that the way to think about it? Mark E.

Shamber I guess I would say that I wouldn’t say the seasonality that the impact so much on the gross margin as it did on the operating expenses. The gross margin was really more impacted by lower fuel surcharge, the shift towards the growth that you saw from the supermarkets and super naturals and the decline in the independents and then some of the impact that we had from Woodstock Farms but I was focusing more on the seasonal aspect with respect to our operating expenses because as I said, a lot of [inaudible] companies, once it’s a new budget year folks who have put programs together they want to get those programs started as soon as possible.

They start hiring, they start incurring expenses and that’s really what we see in Q1 and Q2 where we don’t necessarily always have that significant sales lift during those two quarters. It tends to be a modest lift in sales in Q1 versus Q4, once in a while it’s flat.

That’s how I meant it. I’m not sure if that clarifies it any better.

Steve, on the startup cost with new business is there a time that you say if I’ve got a $3 million investment over a couple of quarters in this new business, how long does it take you to pay that back? Steven L.

Spinner Let me answer it two ways, the investment is primarily in human capital, right. Where we provide a full service program we have to go out and hire the folks to actually work in the stores.

There’s some additional equipment and related kind of stuff that we have to do but the largest amount if upfront training, hiring and getting people ramped up to serve new customers. If you’re talking about what’s the payback, when do you start seeing a new customer be accretive to earnings as opposed to dilutive to earnings, I’m not sure what the answer to that is quite frankly.

It’s probably at least 12 months. Mark E.

Shamber Probably pretty close, when you factor in what the investment is. I think we’re seeing from our stand point as we’re gaining more of the conventional supermarket business there’s a much greater investment because you are going to that sort of full service or partial full service model where you do need to have those folks on board for the day that you start shipping versus these scenarios where we might be cross docking or where you’re dropping it at the door and somebody else is putting it on the shelves.

That’s where we start to see a shift is we gain more conventional supermarket business.

I guess I assumed in the past when you had people in stores actually placing products on shelves rather than the back room that you used third parties for that so is that a change where it’s going to be UNFI employees handling that or was I just wrong about the historical? Steven L.

Spinner Historically we did have some third parties, most of that has gone away and we are doing it ourselves.

Any impact from the roll out of the supply chain initiatives either in cost or fulfillment levels or anything of that nature? Steven L.

Spinner We’re starting to get more and more suppliers signed up to our new clear view program which is our national category management initiative so we see a lot positive work being done there. The actual implementation of the software will not take place until I think the first part rolls in April/May time frame of next year.

So, we’re right now in the middle of implementation. I think it’s going to be there are some small steps that we are taking that are going to move us in a positive direction that will reduce costs, hopefully improve margin but the real benefit is a little ways out.

Given that the new business is approximately the same margin or potentially a little better on the operating margin line, I guess the question is you’re increasing the revenue guidance somewhat higher than where the street is at for the year and the quarter came in better than the street on revenues but your guidance isn’t going up so is that more general conservatism or is it more focused on the very short term impact of the new business? Mark E.

Shamber I guess from that stand point really where we’re saying is you’ve got the investment cost that you need in order to take on that new business so while – I’m not sure where the street numbers were so I’ll take you at your statement, if you say that we’re higher from a revenue stand point for the quarter and the year than where the street had us and you’re asking why we didn’t raise the earnings range that we had, we talked about the fact that there will be an investment of up to $1.5 million in the second quarter and the third quarter so from our stand point roughly $700,000 is $0.01 of earnings so while there may be additional sales that we’re picking up there could be anywhere upwards of $0.04 of additional expenses we didn’t have in the plan as well. I think that’s from our standpoint not necessarily being conservative on it but being realistic that until we start to hire folks, start to get the sales volume up and see where all that plays out and when it comes on board, we’re comfortable with what we had issued previously but we didn’t see any reason to change it with the business we had taken on.

This follows up on Andy’s questions, if you take a new customer, the typical new customer in the conventional supermarket side and project out 12 months after startup costs for that customer having been completed, is that customer going to have a higher than UNFI average company operating margin or equal? I realize the gross margin is lower but you’re also shipping full cases and full trucks?

Mark E. Shamber We’ve historically not and I would not now reference any individual customer or any individual agreement.

I think that Steve referenced we put our three year targets out there and we feel we haven’t backed off those nor have we changed them from what we said in June so we would expect on average over the next three years which would include fiscal ’10 that you’d see an operating margin expansion of 10 to 15 basis points. Whether that comes from the margins in our new customers, whether that comes from operational efficiencies, we’re not going to necessarily get in to that level of detail.

Certainly if you were a new customer coming on board and you said you had a higher margin than the average we would most likely be having them coming back to us right away and if they were lower existing customers would be approaching us saying, “Well, why aren’t we at that same margin.” For that reason we just don’t go in to individual customers’ profitability.

Or class of trade I guess? Mark E.

Shamber Correct. We’ve talked in generality about class of trades and that’s as detailed as we’ll get.

Most of my questions have been answered. Steve I was just wondering there doesn’t seem to be a day that goes by that we don’t see – last week it was an article about Salmonella in chicken, this week there’s been a lot of stories about school lunch beef and the issues that the industry is really facing and I’m just wondering from an awareness perspective, you’ve talked about exploring the possibility of getting in to the protein business one way or another and I’m just trying to figure out who you view the value proposition that UNFI brings not just to your existing customers, new conventional customers but what’s the possibility to use this as a platform to expand within for example food service or to use the blue marble brand to get you in to some of these businesses that appear to be ripe for a company like yours?

Steven L. Spinner Doug, you hit it right on that head and that is we’re using sophisticated refrigerated multi temperature equipment, we’re using sophisticated multi temperature distribution facilities in both our core UNFI business as well as our Albert’s business to deliver perishables.

Every one of our customers for the most part is buying some variety of natural antibiotic free protein and/or specialty cheese. Sometimes if you’re in an urban market these products tend to be easier to procure than if you were in a more rural market.

So all of our constituents have said on the supplier side, “Boy it’s natural for us to sell our product through you.” And our customers have said, “Boy, it would be great if we could buy these products through you as opposed to having to seek them out from many different sources regionally.”

I can’t tell you anything you don’t already know, that’s why it’s attractive to us.

I think a couple of people have alluded to the Kroger call this week which was flat out terrible and I’m not asking you to talk about a particular customer or potential customer but I’m just maybe in terms of further explaining the value proposition of what you bring to a conventional retailer, they’re buying from more than one supplier for organic and natural and specialty but can you sort of talk a little bit about what exactly the cost savings are or can you put things in perspective in terms of explaining what the top couple of financial metrics that a new conventional customer for example on the west coast would look for? Steven L.

Spinner Retailers look at organic in a couple of different ways. There are retailers that are unbelievably focused on organic because of demand, because of the profit margin contribution and then everybody in between.

Those who think yes we’ve got to have it to those who barely carry it at all. For the retailers that I would say fall within the middle of that range to the upper end of that range, organic is not an easy category.

Obviously you have to carry organic milk and you have to carry Koshi and you have to carry Cliff Bars but there’s a whole lot more to organic than those particular products. We use our own self created data to determine what are the high volume organic SKUs in each one of the markets in which we trade.

That’s obviously very valuable data so that a conventional retailer who wants to focus on organic has somebody to rely on that can say, “Look these are the sets that you need in the stores by geography.” Because if they don’t have the right products then the consumers are going to go somewhere else to get it.

As I said earlier, when it comes to the natural and organic space we’re the only company that has the full breadth of SKUs. Some of our competition carries 3,000 or 4,000 items of the highest volume products but they couldn’t begin to tell a retail customer about what is the appropriate mix that they should be carrying by geography.

We have a very built out marketing team, a very built out merchandising team that provides that service to retailers should they request it or should we offer it. That’s really the big draw and it’s a big draw.

Steve, in your prepared comments I know you indicated that supplier pricing is getting back to more normalized levels so I just wanted to ask if that’s also your assessment for the supermarket related business in general? I know you talked a little bit about this before but with all the discounting going on in the conventional supermarkets I’m just wondering if the price competition in the center of the store deflation just at the retail level starting to heat up from a supplier perspective as well?

Steven L. Spinner I really can’t intelligently talk to that one.

You’re talking more in terms of a more EDLC, everyday low price maybe collapsing of the margin, more discounting going on at the retail level. I don’t have a lot of clarity in to that so I can only comment about what we see from the suppliers’ perspective.

And what are you seeing from the suppliers perspective? Steven L.

Spinner Again, much more moderated inflation, back to that 2% to 4% range that we had referenced earlier. A lot of the pricing is pass through so the conventional retailer or the super natural or the super natural or even the independent pricing and discounting is done directly between the manufacturer and the retailer.

We’ll serve as a conduit but the actual change in the price occurs between those two. Mark E.

Shamber I think Ajay another way maybe from our standpoint is that last year when we saw things in the commodity prices rising, we saw suppliers trying to put through a price increase every quarter or twice a year when historically it had been once a year or every six months. So I think really we’ve seen that to a normal trend where okay there’s an annual price increase or its semiannual but you’re not trying to do it every quarter just to keep up with where your commodity pricing is going.

But within that class of trade it doesn’t seem like you’re seeing irrational pricing activity from a suppliers perspective, is that a fair assessment? Steven L.

Spinner That’s fair.

Then just lastly, on the new Texas DC is it fair to assume that since that facility doesn’t become operational until I guess August that there’s no incremental impact on D&A for this year is that directionally correct? Mark E.

Shamber If we don’t get a certificate of occupancy until August there will be no depreciation on that building in fiscal ’10.

Just two very quick questions, I’m wondering if you can talk about what the overall utilization or excess capacity and maybe excess capacity is the wrong word but what exists out there in the network right now? Mark E.

Shamber We’re still probably in the mid 60s, maybe low 60s of some of the expansions that we’ve done. I wouldn’t call it excess capacity because really it’s an investment for growth in some of this new business that we’re winning.

As we’ve said in the past there may be a particular facility that’s operating at 100% where somebody else might be closer to 40% to 50% and that really is a function of the newer facilities that are much larger and have growth that should handle the next 10 years, they’re probably closer to the 50 where some of the mature facilities that will either have an expansion five years from now or from that stand point are closer to 100. So, I’d say we’re probably a little bit lower than we’ve been the last few years but that’s really a function of getting the distribution network built out and position ourselves for not needing to do any new facilities or expansions for a number of years.

At what point do you think that would be? Are we talking is it a three or a five year window before you need to take a look at it again?

I know there is a lot of growth implied but – Mark E. Shamber If you can tell me what the demand is and where it will be, I can give you that answer.

It’s a function really of we think we’ve strategized where we’re good for the next three years but if you tell me that I can pick up $200 million of business in the DC, that DC goes overnight in to an excess fully utilized scenario where we need to expand it. Steven L.

Spinner I would tell you, and this might answer the question, the bulk of our cap ex spend over the next three years is not going to be on bricks and mortar.

One other questions, I know food service is still a relatively small portion of the business but it seemed at one point in time there was a lot of effort around the initiative to gear that up and capitalize on the opportunity and we haven’t heard as much about it recently so I’m just wondering where that stands? Steven L.

Spinner The overall food service category has been down considerably in the last year in the restaurant trade, in the business institutional trade, so wherever we look in the food service category they’ve been hit considerably harder than we have from an economic perspective. So relatively speaking our decline is much less than what it’s been in some of the other companies.

It’s still a focus of ours, I think we’re still trying to determine what our true go forward strategy is on food service, it’s a totally different model. We think it’s probably more redistributor base than it is direct delivery.

But, we’re still vetting through that. In the meantime it’s still a good category for us.

We certainly have a lot of resources attached to it but given the last 12 months I think we’ve been somewhat unscathed.