Sep 15, 2015
Executives
Katie Turner - IR, ICR Steven Spinner – President and Chief Executive Officer Mark Shamber - SVP, Chief Financial Officer and Treasurer Sean Griffin - Chief Operating Officer
Analysts
Joe Edelstein - Stephens Rupesh Parikh - Oppenheimer Ryan Gilligan - Deutsche Bank Andrew Wolf - BB&T Capital Markets Steven Forbes - Guggenheim Securities Kelly Bania - BMO Capital Mike Otway - Wolfe Research Marisa Sullivan - Bank of America Merrill Lynch Mark Wiltamuth - Jefferies
Operator
Greetings, and welcome to the United Natural Foods Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode.
A question-and-answer session will follow the formal presentation. [Operator Instructions] I would now like to turn the conference over to your host Katie Turner of ICR.
Please go ahead.
Katie Turner
Thank you. Good afternoon, everyone.
By now you should have all received a copy of the fourth quarter and fiscal year 2015 earnings press release, issued today at approximately 4:05 pm Eastern Time. The earnings press release and webcast are available under the Investor section at the company’s website at www.unfi.com.
On the call today are Steve Spinner, President and Chief Executive Officer; Sean Griffin, Chief Operating Officer and Mark Shamber, Chief Financial Officer. Before we begin, we would like to remind everyone that comments made by Management during today's call may contain forward-looking statements.
These forward-looking statements discuss plans, expectations, estimates and projections that might involve significant risks and uncertainties. Actual results may differ materially from the results discussed in these forward-looking statements.
In addition, in today's earnings press release and during today’s call, Management will provide both, GAAP and non-GAAP financial measures. These non-GAAP financial measures include, net sales, operating income, earnings per diluted share and free cash flow.
A reconciliation of these GAAP to non-GAAP financial measures can be found on our Company's investor site. With that, I would like to turn the call over to Steve Spinner.
Steven Spinner
Thank you, Katie. Thanks for joining us this afternoon to discuss UNFI's fourth quarter and fiscal 2015 results as well as our guidance for fiscal 2016, which began on August 2, 2015.
For the last five years, UNFI has grown at record levels in both, revenue and earnings. In 2009, UNFI's revenue was $3.45 billion, with $59.2 million in earnings.
Today, our fiscal 2015, our sales were 8.18 billion, with earnings of $138.7 million, representing growth of 137% and 134% in only six years. This growth was achieved by consistently increasing our top-line, through expansion of existing customer distribution programs, as well as the addition of new customer contracts.
Just as important, the strong cost efficiencies we delivered as our customer mix and the industry evolved. Several years ago, we embarked on a major shift in strategy.
We identified a changing market dynamic, migrating towards perishable products, including protein, produce, prepared foods, specialty cheese and gourmet/ethnic foods. This was a difficult decision, which required significant capital to build out our distribution center capacity and renewed acquisition campaign focused on these categories, including our acquisition of Tony's Fine Foods, an industry leader in perishable food products in the U.S.
As we previously discussed, UNFI has opened five new distribution centers across the U.S., all with perishable capacity to meet the needs of our future growth and product strategy. In late fiscal 2015, we began shipping to two significant new customers.
These new customers utilized UNFI's broadline offering and Tony's Fine Foods, both of which continue to exceed our expectations and this supports our strategic belief that there is significant value in UNFI's position as the leading provider of logistics, distribution and category management for both the center store and perimeter. Additionally, we believe that gourmet/ethnic and products and fresh foods represent significant incremental growth opportunities for UNFI.
With a market share of less than 6% in each of these fast-growing product channels, we believe there is considerable growth ahead for UNFI, and that we are still in the early stages of capitalizing on these opportunities. Our buildings are built, we have the talent and we have a strong and growing customer base to create a national footprint that carries a much deeper product assortment.
We believe the combined market size of fresh and gourmet/ethnic is over $10 billion and UNFI is poised to capitalize on this exciting and growing market opportunity. UNFI is also well-positioned with distribution centers close to the consumer, broad product offering across the country and a compelling economic model, which should drive additional traffic to our network.
Beginning mid-2016, we plan to begin reporting on our overall fresh and gourmet/ethnic sales as we develop the reporting and systems necessary to do so. What has changed?
During fiscal 2015, we did experience approximately 200 to 300 basis points of slowdown occurring from Q2 through Q3. Whether the industry slowed or the significant increase in the availability of our product negatively affected our top-line growth, we remain extremely well positioned to continue growing, especially in our fresh and gourmet/ethnic product categories.
Despite some challenges, in 2015, our overall sales grew 20.5% and Tony's Fine Foods delivered results better than expectations. In addition, our brands business grew earnings by 18%, driven by the rapid growth of our independent private label Field Day and Woodstock Farms brands.
Combined, these two brands are UNFI's six largest distributed products. Also contributing to our 2015 results is growth in our e-commerce business, which continued to build at a rapid pace.
As a business-to-business base provider, we believe, UNFI has the necessary infrastructure to deliver via fulfillment to a growing range of retailers and e-tailers. Operating income during the year grew almost 15% to a record $242 million.
Coming out of fiscal 2015, our team is energized and motivated to continue to grow throughout the next several years. Today our M&A pipeline is robust as we focus on new and exciting opportunities.
We remain an actively acquisitive company and stand poised to aggressively take action when the time is right. In order to facilitate any acquisitions, our balance sheet will remain strong in fiscal 2016.
With the completion of our capacity build out, we will focus on generating cash by managing our CapEx over the next several years at less than 1% of revenue. For fiscal 2016, we expect our CapEx will be approximately $50 million to $60 million or 0.6% to 0.7% of revenue.
Most of our capital expenditures in fiscal 2015 through 2018 will be applied towards expanding and improving our information technology infrastructure. We estimate that reducing CapEx will drive approximately $80 million to $100 million in free cash, in fiscal 2016.
This management team is focused on the long-term. Now, as I mentioned during our pre-release several weeks ago, our top-line numbers continue to reflect improving demand.
Overall growth during the last two weeks was approximately 7.6%, adjusting for the upcoming transition of Safeway Albertsons, our overall growth was approximately 8.4%. As we continue to build out our gourmet/ethnic and fresh portions of our distribution business, we should be in a position to update long-term guidance during this fiscal year.
We have also announced an executive team transition plan today. Mike Zechmeister has been appointed Senior Vice President and will succeed Mark Shamber as our Chief Financial Officer next month.
A separate press release details Mike's background. I want to thank Mark for his contributions to UNFI over the 12 years he has been with the company, and specifically the seven years that I have worked with him.
Mark's transparency in daily execution of our core values have been very much appreciated and Mark continue to work with us through the end of the calendar year as we further expand our corporate business development. Now, I will turn the call over to Mark to review the financial details.
Mark?
Mark Shamber
Good afternoon, everyone. Net sales for fourth quarter of fiscal 2015 were $2.06 billion, which represents growth of 16.8% or approximately $297 million over the prior year's fourth quarter net sales of $1.76 billion.
In Q4, sales growth related to acquisitions accounted for approximately $176 million. Inflation increased 29 basis points, sequentially, coming in at 2.81% versus the third quarter's average inflation of 2.52%.
On a full year basis, inflation in fiscal 2015 averaged 2.36%, an increase of 60 basis points over fiscal 2014's rate of 1.76%. Fiscal 2015 net sales increased by 20.5% to $8.2 billion or increased by 7.9% to $7.3 billion, excluding the impact of acquisitions.
Acquisitions contributed approximately $851 million or approximately 12.5% of our fiscal 2015 sales growth. For the fourth quarter of fiscal 2015, the company reported net income of $36.1 million or $0.72 per diluted share, an increase of approximately $2.7 million or 8.2% over the prior year's fourth quarter.
Net income for the fourth quarter of fiscal 2014 was $33.4 million or $0.67 per diluted share. Breaking down our sales by channel, supernatural sales increased by 14.3% in the fourth quarter over the prior year's fourth quarter or 10% excluding acquisition and represented 33% of total sales in Q4.
Supermarket sales growth was 15.5% in Q4 or 2.6% excluding acquisition and supermarkets were 26% of total sales in Q4. The independent channel grew at 14.6% in the fourth quarter or 3.6%.
Excluding the impact of the Tony's acquisition, the independents represented 32% of total sales in Q4. Finally, food service sales were up 54.5% or 23.7% excluding the impact of acquisitions and represented 5% of sales in Q4.
Gross margin for the quarter showed 109-basis point decline over the prior year's fourth quarter gross margin of 16.44% coming in at 15.35%. Sequentially, this represented 7-basis point decline over the third quarter gross margin of 15.4%.
A little more than half of the drop from the prior year was due to the impact of the lower gross margin associated with Tony's Fine Foods. The remainder of the drop was mostly due to customer mix and the declining fuel surcharges along with continued weakness in the Canadian dollar.
Our operating expenses for the quarter were 12.2% of net sales compared to 13.5% for the same period last year. This represents 135-basis point improvement over the prior year as operating expenses as a percentage of net sales benefited from a variety of areas.
For the quarter, fuel cost decreased by 16 basis points in comparison to the fourth quarter of fiscal 2014, as fuel represented 59 basis points of distribution net sales in the quarter. Our diesel fuel costs in the fourth quarter decreased by approximately 14% versus the same period in fiscal 2014 while the Department of Energy's national average was down approximately 27.3% or over $1 per gallon compared to the same period in the prior year.
Share-based compensation expense totaled $2 million in the quarter compared to $1.5 million in the prior year's fourth quarter. This led to share-based compensation expense, representing 10 basis points of net sales in the quarter compared 8 basis points in the fourth quarter of fiscal 2014.
Operating income for the fourth quarter was $65.1 million, an increase of $13.8 million or 26.9% from the prior year's operating income of $51.3 million. Our operating margin in Q4 was 3.2%, a 25-basis point improvement over the fourth quarter of fiscal 2014, when the operating margin was 2.9%.
Interest expense in the quarter of $3.8 million was more than double the prior year's expense of $1.8 million, due to the higher average debt levels following the acquisition of Tony's Fine Foods and capital expenditures associated with our D.C.' s and Hudson Valley, New York, serving the Twin Cities, Prescott, Wisconsin and Gilroy, California.
Inventory was $983 million at quarter's end as our days' inventory on hand averaged 51 days for the fourth quarter, consistent with last year's fourth quarter. DSO for the fourth quarter was also consistent with the prior year's fourth quarter coming in at 22 days.
Capital expenditures were approximately $31 million or 1.5% of net sales for the quarter, primarily related to our new facilities in Gilroy, California and Prescott, Wisconsin and technology investment. For fiscal 2015, capital expenditures were $129.1 million or approximately 1.6% of net sales.
Outstanding commitments under our credit facility were $401 million at quarter end, with available liquidity of approximately $200 million, including cash and cash equivalents. Our leverage at the end of fiscal 2015 was approximately 1.8 times on a trailing 12 months basis as of fiscal year end.
For the fourth quarter, we generated about $24 million in for cash, although we finished the year in a negative free cash flow position, due to the completion of the investment cycle and new facilities. As is typically the case, we expect leverage will increase in the first half of fiscal 2015 as we invest in inventory for the upcoming holiday season.
As discussed in the press release, we previously provided our financial outlook for fiscal 2016, ending on July 30, 2016, on August 19, 2015. For fiscal 2016, we expect sales in the range of approximately $8.51 billion to $8.67 billion, an increase of approximately 4% to 6% over fiscal 2015.
GAAP earnings per diluted share for fiscal 2016 are expected to be in the range of approximately $2.80 to $2.93 per share, an increase of approximately 1.3% to 6.2% over fiscal 2015 GAAP earnings per diluted share of $2.76. Included in our fiscal 2016 GAAP earnings guidance is approximately $4 million to $5 million of expected expenses associated with planned severance and working capital cost expected to be incurred primarily in the first quarter of fiscal 2016.
Adjusted for these costs earnings per diluted share for fiscal 2016 are expected to be in the range of $286 million to $298 million, an increase of 0.4% to 4.6% over fiscal 2015 adjusted earnings per diluted share of $2.85. We expect our capital expenditures to be in the range of $50 million to $60 million.
As Steve said, we are approximately 0.6 to 0.7% of expected fiscal 2015 net sales. Finally, we expect our fiscal 2016 tax rate to be in the range of 39.4% to 39.8%.
At this point, I will turn the call back over to the operator to begin the question and answer session. Operator?
Operator
Thank you. [Operator Instructions] Our first question comes from Joe Edelstein from Stephens.
Joe Edelstein
Hi. Good afternoon, everyone.
Steven Spinner
Hey, Joe.
Joe Edelstein
Mark, maybe just to clarify, but it does sound like a retirement. Is that really the right characterization of your plans going forward?
Mark Shamber
Look, I am only 46, so I would not say it is retirement, but I think once the transition takes place and work through a few things that are currently in process, I am going to take some time off then look at what is out there for my next opportunity. I do not think my wife could handle having me home for the next 20 years.
Joe Edelstein
You have some of your time for the sports as you follow all your sports teams certainly.
Mark Shamber
This is true.
Joe Edelstein
Steve, could you maybe talk - I apologize. I am at the airport, I apologize for the background noise, but Steve, where do you think is going to be the most opportunity for M&A?
Is it really in the protein, maybe, produce categories, items in the perimeter and also what are you seeing in terms of valuations for those types of businesses? Are they starting to move up now that you are being more vocal about your interest?
Steven Spinner
Yes. I mean, I think that the M&A is going to primarily be in what we would consider gourmet/ethnic and fresh.
Those are the two categories where we are spending most of our energy. I think that we have a pretty disciplined approach to M&A, so I think because of that we have been able to manage sellers' expectations.
There is a fairly robust pipeline for M&A. It is just a matter of timing, but I am very excited about that.
We finished Tony's over a year ago, so the team really feels like we are ready. As far as - what was the second part of the question?
Joe Edelstein
Just movement in valuation; whether or not that is moving up?
Steven Spinner
No. I do not think so.
I mean, we are certainly not going to acquire good companies for four times, but no, I have not seen any change in the general valuations that we would be willing to pay and sellers would be willing to accept.
Joe Edelstein
Okay. If I could just squeeze in one more, I was hoping you could just talk a bit more to the decision to delay the Gilroy, California facility opening.
How much of a drag does that really put on the business and really once it is opened up, I mean, opening it without perhaps a large single customer that certainly could put some stress on utilization rates there at least they would be quite a bit lower than what you might normally expect or could you at least talk to that please?
Mark Shamber
Joe, I will answer the first part of the question about the drag and then I will let Steve and Sean discuss the decision. We were ramping up the construction and we still had a few things left to do, so we slowed the pace at which you know we finished the construction getting the building open, so there will not be much drag if any during the first half of fiscal '16.
We will sort of take occupation of the building and finish the construction towards the end of the second quarter, so it will probably start to be a drag as any new building would be in opening at the start of Q3, but it won't have any significant impact on Q1 and Q2, sorry.
Steven Spinner
As far as the decision, it really was a factor of we are going to be terminating our distribution agreement this week, so to terminate an agreement and also start up a new DC at the same time, would just be way too complicated, so it really was a matter of logistics and saying, hey let us settle out, close out, one program before we jump into the opening, which will now take place in February. Sean, I do not know if you want to add there.
Sean Griffin
Well, with respect to Northern California and the distribution center at Gilroy, the customer that’s in transition has a very dense geography, terrain and revenue associated with California, so number one, we want to do a very good job in the transition. The number two, we want to exceed expectations for the current customers, our existing customers, our go-forward customers, so it's a little bit of a push in terms of how we roll into the February-March timeframe and get started in Gilroy, but we believe we are doing the right thing and that we are going to deliver a high level of execution through the upcoming holiday.
Joe Edelstein
Okay. Thanks everybody for all the comments.
Operator
Thank you. Our next question comes from Rupesh Parikh from Oppenheimer.
Rupesh Parikh
Thanks for taking my question. I am going to start with a housekeeping question and I apologize if I missed this in your prepared comments.
What was the organic sales growth rate in Q4?
Mark Shamber
For Q4 it ended up being 6.8. I think we had indicated that it was, when we had the preliminary call, we thought it was going to be a little bit higher, but when we split the days of the week as to when we lapped the Tony's deal, I think I said roughly 7% when we were on the call in August, so it ended up being about 6.8 just the way the days fell versus when we closed the deal.
Steven Spinner
And 7.6 of late.
Rupesh Parikh
Okay. Then the commentary on recent trends, the last time on your call, I think you guys said that there was an acceleration of in excess of 100 basis points.
It sounds like there is a little improvement even from that on a comparable basis. Is that the right way to think about it?
Mark Shamber
Yes. I mean, I think, I would agree with that.
I just know that ex the business that we are losing, so the overall business is still about 100 basis points, but backing out the customer transitioning away, it is better than that. We’ve started to see softness in their sales.
Rupesh Parikh
Okay. Then maybe just one more question then.
In your conventional segment, we have seen again continuing moderation, and I think a quarter or two ago, you guys thought there may be some lumpiness to that business. Any additional thinking in terms of what is driving that continued moderation in your conventional channel?
Steven Spinner
Yes. I mean, I think it is just a general - it was not just conventional.
I think it was across all three channels that we report and I think certainly for fiscal '15 it was just a matter of the product being available in so many additional locations. I think that was the key driver to the general slowdown and as we talk about access points, a lot of access points that today they are not a UNFI customer, but we have our expectation that they someday will, but I think that was the key driver.
Rupesh Parikh
Okay. Thank you.
Good luck for the back half.
Operator
Our next question comes from Karen Short from Deutsche Bank.
Ryan Gilligan
Hi. It is actually Ryan Gilligan on for Karen.
How should we think about the penetration or rollout of the ethnic gourmet and fresh SKUs at your facilities for next year?
Steven Spinner
You know what we are going to give you a lot more detail on both of those categories as we move through the fiscal year. We have got some reporting that we needed to develop regarding to both, so we will give you some more clarity around growth trends in both the categories as we move to the middle or the latter part of the fiscal year.
Mark Shamber
We want to be in a position, Ryan, where once we start sharing data that we can do it consistently and be able to take it to the next level. Some of the questions that we know will arise, so we are just making sure we are validating the information internally a bit further before we start to share publicly.
Ryan Gilligan
Makes sense, and do you think independent segment can regain momentum with the traditional product offering or has the environment gotten much tougher for them to operate in and the competition is just kind of increasing from conventional supermarket market.
Steven Spinner
Yes. I am the huge optimist, you know, especially as it relates to this group.
They are dynamic, a lot of the innovation within the channel tends to start in this channel. I think they got caught by surprise of like many of us in the beginning part of 2015, but I think that they will and I think that they will figure out a way to have a differentiated product offering whether it is prepared foods or perimeter or daily and whole bunch of other offerings, but I am optimistic that they are going to figured it out and we are going to see some significant growth from them over the next couple of years.
Ryan Gilligan
Got it. That is helpful.
Thanks. Just a last question on capacity utilization, what would you say the variance is across your facility.
Is there a minimum utilization that you would in order to open a facility?
Steven Spinner
Well, we do not anticipate opening a new facility for at least two, three years, probably closer to three. We have got extremely robust model that we use to pinpoint by geography by ZIP Code, where our customer locations are.
The only the only real place in the U.S., where we travel some miles is the Southwest, Las Vegas, Phoenix there is still enough [ph] density there for us to build the DC, so it is not something that we are going to be talking about for at least two to three years.
Mark Shamber
They generally open, Ryan, north of 50%. I mean, it might be - often they are in a phased approach, so we may do three or four phases, so the first phase maybe 10, jumping to 30 and then jumping to 50, but generally when a new DC is fully loaded to begin operations we are usually at least 50%.
Ryan Gilligan
That is helpful. Thank you.
Operator
Thank you. Our next question comes from Andrew Wolf from BB&T Capital Markets.
Andrew Wolf
Thanks. Good afternoon.
Steve, I think at a recent conference, is that something along the lines that you would be very disappointed if you did not have substantive conversations maybe for new business around you know with the Albertsons transition? I sort of thought maybe you were thinking there would either be some transition issues that might affect other customer, pricing or something along those lines, so I was wondering if you would like to elaborate on how things might be going in that regard or is it too soon and sort of you know, if are willing to talk about why would people you want talk - in regard…
Steven Spinner
Andy, I think, what I would comment on is that we are in the fortunate position of having capacity in market where the year ago we had no capacity, so we are able to have the kinds of conversations relating to new items, specific items for a particular retailer, private label, in markets that like I said we couldn't do, so weather it is related to transition or anything else, I would be disappointed if we were not able to win some significant business this year.
Andrew Wolf
Okay, so in way if this had happened a year ago, it might have been moved, because you wanted acquisition to address certain market?
Steven Spinner
That is correct. Okay.
Clear. Just a housekeeping question, on - you might said this and I am sorry if I missed it, but did you quantify the impact of Canadian dollar on sales for the quarter and I am also curious speaking of currency if that recent trend update of the Canadian dollar impact remained about the same.
Mark Shamber
I would say that for the quarter, Andy, I would say that it was probably about, on a year-over-year basis, is probably still a lot of 60 basis point headwind. I mean, I am going off the top, because I do not have it in front of me, but I want to say that it was in the range of $10 million to $11 million off $1.7 billion.
You get to be about 60 basis points. It got a little bit worse, because Canadian dollar softened a little bit further in the first quarter, but we have talked about we still are on track to lap the largest portion of that decline in currency as we get into the second fiscal quarter.
Andrew Wolf
Okay. Just the other housekeeping, on the trend 7.6, with the impact of the Albertsons bleed, but 8.4 on the base business on the go forward business?
Mark Shamber
I think it is 8 and 8 four were the numbers…
Steven Spinner
7.6 and 8.4.
Andrew Wolf
Okay. What was the time period?
Was it quarter to-date or the last couple of week?
Steven Spinner
…last couple weeks.
Andrew Wolf
Okay. Is fairly evenly distributed among the segment?
Specifically, the independent has also picked up that kind of magnitude?
Steven Spinner
I did not get into that.
Andrew Wolf
Okay. Well, thank you very much.
Operator
Our next question comes from Steven Forbes from Guggenheim Securities.
Steven Forbes
Hey, guys.
Steven Spinner
Hey, Steve.
Steven Forbes
Hi. Can you just go into a little more detail about the various opportunities with the e-commerce business?
You clearly have under capacity grown, so has there been a key business wins over the past quarter or increases in SKUs or anything you can comment including 2016 plan?
Steven Spinner
Yes. I mean, there is nothing that I would specifically on it on other than there are some pretty significant retailers that have started up over the last couple of years that are extremely well-funded that are all UNFI customers.
We also have a really active methodology for using e-commerce to satisfy retailers and customers who just aren't big enough to take a delivery by truck. Obviously, there is a lot of interest across a lot of our retail customers to be in.
E-commerce, it is growing exponentially, it is still relatively small, but it is growing exponentially and very optimistic about where it can go, but I would not want to get into any further detail than that. It is actually one of the categories that we are also considering now.
Steven Forbes
Okay. Then if we look at the growth within the independent segment, excluding Tony's, much of that growth is being driven by the larger supernatural chain, right, that are within that segment?
Is it most of it? Because, then just if you can touch on what is going on with the smaller independent operators and any specific details on categories?
Steven Spinner
Yes. That is not a data point that we break out.
Steven Forbes
Okay. Thanks guys.
Steven Spinner
Okay.
Operator
Our next question comes from Kelly Bania from BMO Capital.
Kelly Bania
Hi. Good evening.
Thanks for taking my questions. Best of luck to you, Mark, in your next step.
Mark Shamber
Thanks, Kelly.
Kelly Bania
I just first wanted to ask lots of moving pieces for next year on the margin line, with cycling Tony's, and the loss of Albertson's. Just curious if you can give a little detail, if you were to take out some noise from Canadian dollar and so forth and start-up costs, just kind of what is the underlying run rate of gross margin that we should be thinking about in 2016, if there is any color you could provide there?
Mark Shamber
Well, Kelly, I think if we were not having the business transition at the end of this week, I mean, I think that we are starting to get some consistency in the margin where we have been around at 15.4 level for a little bit of a stretch. There are some questions as we transition of the business and what happens in Q1.
As we referenced in sort of the guidance, gotten portion of that $4 million to $5 million, which we will breakout the impact from transitioning some of that lost business and some inventory to may be identify where we take some charges there, but I would say that I think that you will see a much smaller tick down as we go into fiscal '16. The big question mark, which has always been the case with our businesses where is the channel growth coming from, so to Steve's point, you know, where the independents rebounded and they start representing more of a historical trend as a percent of the overall industry growth, you know, the dilution on the margin may be in the single-digit if we continue with from the trends that we have seen the last couple quarters where they are being almost ex the acquisitions' impact, three or four times on the supernatural channel growth versus the independent growth that we may be looking at dilution into the high-teens, low 20s, but the challenge and part of why we do not guide on the gross margin is that while we have a reasonable amount of clarity as to where we are going to see the top-line growth.
It is challenging to see which customers and which channels will win in any given quarter.
Kelly Bania
Got that, very helpful. Then, I guess, just as we think about the independent channel, any discussion with them and just kind of what they are going through with all these new points of distribution.
Do you have any sense for what is embedded there square footage growth versus their comp growth, are you hear from any of them that they are thinking of growing square footage growth or where that is? Any though there?
Steven Spinner
I guess, the only thing I would provide anecdotally is, I think that the independents who are trying to compete in center store on a price per - dollar-for-dollar basis on cereal and commodity dairy that is not a good long-term outlook, so I think a lot of the independents are looking for exclusive products, local products, fresh products that are really differentiating whether it would be in gluten-free beacon, macro products and categories of products that are just never going to be provided by some of the larger competition. I think that there is certainly a track record of success for independents that have done that.
The only thing I would really point to is, independents really looking to differentiate themselves in differentiated product categories as opposed to trying to compete on price with Walmart.
Kelly Bania
Thank you.
Operator
Our next question comes from Scott Mushkin from Wolfe Research.
Mike Otway
Hey, guys. This is Mike Otway in for Scott.
Thanks for taking the question. Steve, you had talked about I think in your prepared remarks Tony's exceeding expectation.
As you kind of think back about the major drivers, the better result, what sticks out and then as you look to add growth for M&A are there things that the team is focused on based on these learning almost like a kind of playbook, an update to that when you think about bringing on future acquisitions on the new platform?
Steven Spinner
Yes. Sure.
Yes I mean, Tony's, I would say a couple of things happened. One, yes, we were really successful in communicating our core values, which were very similar to Tony's core values.
We had no turnover on the contrary. The company grew exponentially in our first year of ownership.
Tony's did also get the benefit of having the UNFI infrastructure as it relates to operations, operations' accountability, metrics and the last part of it is we did get, I think, a fair amount of growth related to customers that we shared, where our customers got a great deal of comfort in expanding the relationship both, with Tony's and UNFI because the customer were buying from both, so I would say those were the top three drivers, but just a tremendous cultural fit and the folks running Tony's just did a phenomenal job. On the M&A side, I would say go large.
The larger companies that have infrastructure and processes and standard operating procedures are much easier to acquire than the smaller companies. It does not mean that we would not acquire the smaller companies.
We would tend to want to merge them into existing facilities, where at all possible. Generally speaking a larger company with infrastructure, larger these days, are certainly much better for us than the smaller, the larger tends to have cultural alignment, similar benefits.
Smaller companies, they tend not to - and we treat everybody the same way, so if we acquire a smaller company, where the benefit plan is not as robust as you want to buy, it is not like we are going to allow the smaller acquired company to keep an inferior benefits package, so it just gets much more difficult to get the kind of accretion that we needed to our companies.
Scott Mushkin
That is really helpful. I guess for some of these things bringing them into your infrastructure, a lot of these are things that are repeatable that may give you more confident over time that as you add more and more M&A, you can kind of really improve the results under your own ownership than?
Steven Spinner
I think so. Yes.
I think so. We acquired Trudeau in fiscal '14 and it was just a smaller company, we integrated it in '15.
Again, that was a situation where we acquired it, because we knew we were building a facility in Twin Cities. Once it was ready, we close their building and moved it into ours.
Scott Mushkin
That is really helpful. Then just quickly, Mark, on the housekeeping side.
The other income, the $1.8 million, is there anything - I am sorry if I missed this, anything that sticks out?
Mark Shamber
You talking other income or other expense, sorry, the other expense. I mean, we had an investment that we had made many years ago from a technology standpoint that we wrote off during the fourth quarter, so I would say that of the split probably about $800,000 is some continued softness in the Canadian dollar, so to revaluing the balance sheet and then $1 million is the write-off of an investment that goes back probably seven or eight years, where the company just does not look to be headed in the right direction.
Scott Mushkin
Okay. I thank you both.
I appreciate it.
Mark Shamber
Okay.
Operator
Thank you. Our next question comes from Robby Ohmes from Bank of America Merrill Lynch.
Marisa Sullivan
Hi. Good evening it's Marisa on for Robby.
Just a quick question on the fuel and your expectations for both, fuel surcharges and fuel cost. I think you guys do some hedging, I do not know what your expectations are for next year, but any clarity on that would be great?
Steven Spinner
Yes. I mean just to spill it up a little bit, I mean, we tend to actually engaged in sort of some fixed price contracts versus hedging, so given that we are going to actually consume the diesel, there is no sort of mark-to-market aspect from our standpoint if that's the price we are going to actually use it.
I would say that in the fuel surcharges - look where prices are right now for oil, we are down. I think we are very close to the bottom bracket for where we have fuel surcharges and prices stay where they are.
Certainly if oil prices decline further, we would likely see a drop off on the fuel surcharges, because it is very much just grid [ph] so wherever the Department of Energy number comes in for four-week period that is where the fuel surcharges plays out. As it relates to our cost, we had locked in some pricing last year that for all of calendar 2015 at the time looked very advantageous.
Right now, it is a bit of a headwind and that will continue through the end of December, so into our first and second quarter. Then we have similarly locked in some pricing for fiscal 2016, which is a bit more favorable than certainly where we were for calendar '15, but at the moment with prices having declined further it will represent a little bit of a headwind.
I would say that on a year-over-year basis, we would expect the fuel would be more favorable on the expense line and you would see sort of maybe measurable take up if prices stay where they are beginning in Q3. On the fuel surcharges, if prices stay where they are, we are probably in the bottom bracket, so the headwind associated with margin should start to lap that in let us say the fourth quarter of fiscal '16.
Marisa Sullivan
Got it. That is very helpful.
Then on produce deflation? Anything to call out in the quarter or quarter-to-date trend?
Steven Spinner
No. I mean, I think, we started to see that we lapped a lot of the challenges that we had in Q3 and in the first half of Q4.
We have seen some benefit in the Albert's business having gotten that behind them.
Marisa Sullivan
Great. Thank you very much.
Operator
Thank you. [Operator Instructions].
Our next question comes from Mark Wiltamuth from Jefferies.
Mark Wiltamuth
Hi. Mark Wiltamuth from Jefferies, Steve, if you could just talk a little bit about the margins and returns on those parameter categories.
I think there are some perceptions out there that because Tony's was 100 basis points lower on operating margin, that is just the way it is going to go for the business as you build it out, if you just talk a little bit about that?
Steven Spinner
Yes. I mean the benefits of the long haul is able to combine the fresh product on to [ph], but where are through that it is wildly accretive to our operating margin, not only our operating margin, but our operating profit dollars, because we are all about scale, the bigger we can make the deliveries, the better it is going to be.
In the short-term, now there is going to be a lot of delivering on seconds, separate products, whether it would be produce to protein or core UNFI, but we have lapped it, so we do not anticipate that kind of issue as we move forward certainly through fiscal 2016, but the ultimate goal is to get as much consolidated onto one truck as we possibly can.
Mark Wiltamuth
It could still be gross margin dilutive, but you are saying it is not necessarily operating margin dilutive as you grow the business?
Steven Spinner
It will absolutely be gross margin-dilutive, but it will not be or most likely not be operating margin dilutive.
Mark Wiltamuth
Okay. If you could give us a few more details on cost mitigation and reaction to the lost Albertson business.
Is it just the delay of the Gilroy or are there some other steps that you got?
Steven Spinner
No. I think the cost to$4 million to $5 million that we talked about is solely related to severance.
We have some really good policies for associates and it is predominantly related to reduction for us, specifically related to the reduction in annual volume.
Mark Wiltamuth
Okay. Thank you.
Good luck to Mark on your next efforts.
Mark Shamber
Thanks.
Operator
Thank you. At this time, we have no further questions.
I would turn the call back over to Steve Spinner for closing comments.
Steven Spinner
Thanks everybody for joining us this afternoon and have a terrific evening.
Operator
Thank you. This does concludes today's teleconference.
You may disconnect your line at this time. Thank you for your participation.