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Edited Transcript of SPTN earnings conference call or presentation 7-Nov-19 1:00pm GMT

Q3 2019 SpartanNash Co Earnings Call GRAND RAPIDS Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of SpartanNash Co earnings conference call or presentation Thursday, November 7, 2019 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Dennis Eidson SpartanNash Company - Chairman, Interim President & CEO * Mark E. Shamber SpartanNash Company - Executive VP & CFO ================================================================================ Conference Call Participants ================================================================================ * Blake Anderson Jefferies LLC, Research Division - Equity Associate * Charles Edward Cerankosky Northcoast Research Partners, LLC - MD of Research, Equity Research Analyst & Principal * Karen Fiona Short Barclays Bank PLC, Research Division - Research Analyst * Kelly Ann Bania BMO Capital Markets Equity Research - Director & Equity Analyst * Scott Andrew Mushkin R5 Capital Ltd - Founder & CEO * Katie M. Turner ICR, LLC - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning and welcome to SpartanNash Company's Third Quarter 2019 Earnings Call and Webcast. (Operator Instructions) Please note, this event is being recorded. I would like to turn the conference over to introduce Ms. Katie Turner, Managing Director, please go ahead. -------------------------------------------------------------------------------- Katie M. Turner, ICR, LLC - MD [2] -------------------------------------------------------------------------------- Thanks. Good morning and welcome to SpartanNash Company's Third Quarter Fiscal 2019 Earnings Conference Call. On today's call are Dennis Eidson, Chairman and Interim President and Chief Executive Officer; and Mark Shamber, Executive Vice President and Chief Financial Officer. By now, everyone should have access to the earnings release, which was issued yesterday at approximately 4:30 PM Eastern Time. For a copy of the earnings release, please visit SpartanNash website at www.spartannash.com/investors. This call is being recorded and a replay will be available on the company's website for approximately 10 days. Before we begin, we'd like to remind everyone that comments made by management during today's call will contain forward-looking statements. These forward-looking statements discuss, plans, expectations, estimates and projections that may involve significant risks and uncertainties, actual results may differ materially from the results discussed in these forward-looking statements. Internal and external factors that may cause such differences include, among others, competitive pressures amongst food, retail and distribution companies. The uncertainties inherent in implementing strategic plans and integrating operations and general economic and market conditions. Additional information about the risk factors and uncertainties associated with SpartanNash's forward-looking statements can be found in the company's earnings release, most recent Annual Report on Form 10-K and other filings with the SEC. Because of these risks and uncertainties, investors should not place undue risk and then any forward-looking statements. Spartan asset claims any intention or obligation to update or revise any forward-looking statements. This presentation includes certain non-GAAP measures and comparable period measures to provide investors with useful information about the company's financial performance. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measure and other information as required by Regulation G is included in the company's earnings release, which was issued yesterday. And it's now my pleasure to turn the call over to Dennis. -------------------------------------------------------------------------------- Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [3] -------------------------------------------------------------------------------- Great, Katie. Good morning, everyone and thank you for joining us today. On today's call, I'll start with an overview of our operational progress in third quarter financial highlights and then Mark will provide some additional detail on our financials to review our annual outlook. Finally, we will open up the call for your questions. In the last 4 weeks, I've step back into the day to day role at SpartanNash. I've been grateful for the support the entire organization and especially the management team. We recognize that the operating environment has been challenging, however, we also acknowledge that some of our own actions have impacted our performance in fiscal 2019. We are committed to improving our results by focusing on the execution of our business plan in mitigating the impact of external factors. We're pleased with the growth we have continued to achieve and are encouraged to have delivered results in the third quarter that are consistent with our current year guidance and keep us on track with the full year outlook we provided in August as part of our second quarter earnings release. We remain confident in the strength of our platform, however, we recognize will take time for us to fully realize the benefits of our current initiatives and long-term strategy. For the third quarter, consolidated net sales increased 6% to $2 billion representing the 14th consecutive quarter of growth for the company. We're satisfied to have generated another quarter of sales growth, as well as to a realized profitability in line with our expectations for the quarter. We also continue to make progress on other strategic objectives during the quarter and are particularly pleased with our return to positive retail comp store sales. The ability to remain on track to achieve over $20 million in annual run-rate savings from Project one team and our ability to further improve on our reduction of both working capital and debt compared to the prior year. Since the third quarter of last year, we paid down over $95 million in debt, resulting in a $10 million reduction in the debt balance despite using approximately $87 million to fund the acquisition of Martin's at the beginning of fiscal my team. Our team is also significantly reduce working capital from the third quarter of last fiscal year while growing sales. I look forward to the improvement, we expect to make in the fourth quarter as we work toward our $30 million working capital reduction target. Moving to our business segments. In the Food Distribution segment, net sales were flat on a reported basis, however, increased 3.6% before the impact of the elimination of intercompany sales to margins and the rate of growth, improved sequentially from the second quarter. On the supply chain side, we remain committed to strengthening our systems and processes to private efficiencies and improve service levels. Recently, we invested in tools to better forecast demand and improved purchasing activities which will support the strategy and we're already seeing a reduction in our inventory requirements. In addition, we continue to play in meaningful investments in our warehousing, transportation operations to drive efficiency and manage costs. Next week, we will hold a grand opening event for our new fresh facility and Fargo North Dakota. This facility will allow us to centralize the fresh distribution operations in our Western region, which will generate efficiencies and will enhance the capabilities of our network. Investments are also being made in our associates as we sponsor initiatives to attract and retain tailwind in our warehouse and transportation operations to improve our execution and reduce costs. We'll continue to make strategic investments in our systems and supply chain operations and look forward to bring you more updates in the future. As we announced last quarter, we are exiting our fresh kitchen operations and shifting titles focus to the product distribution and fresh-cut operations, we will see fresh (inaudible) operations during the fourth quarter of fiscal 2019 and anticipate selling the facility and related assets as early as the first quarter of fiscal 2020. We believe this transition better aligns with titles past operational expertise and will enable us to improve quality and efficiency. In the military segment, net sales decreased nominally as our growth from new business and Decker's private brand program were offset by declining comparable sales at operated locations. We're happy to report that recently exercised their option to extend our private brand supply relationship and we remain the exclusive global supplier of decades private brand products. In the retail segment sales growth was driven by contributions from newly acquired markets business. As I mentioned at the beginning of the call, we reported a return to positive comp store sales for the quarter. We continue to experience a positive consumer response. So the relaunch of the Family Fare banner in West Michigan resulting in Favorable trend in sales for these locations. We're learning from this launch experience and we'll apply it to our ongoing marketing and merchandising strategies. We are also pleased to have started a new customer data and insights partnership with [dunnhumby]. Through this relationship will strengthen our assortment, positioning and loyalty programs to deliver better experiences for our customers as we meet their shopping needs and fuel future growth. Finally, with respect to our Chief Executive Officer transition, the Board of Directors has begun to a formal process to identify the next leader of SpartanNash. Spencer Stuart, an executive search and leadership consulting firm has been retained as an advisor in the process. With that, I'll now turn the call over to Mark for the financial review. -------------------------------------------------------------------------------- Mark E. Shamber, SpartanNash Company - Executive VP & CFO [4] -------------------------------------------------------------------------------- Thanks, Dennis, and good morning to everyone joining us on the conference call and webcast. Net sales for the third quarter of fiscal 2019 increased to $2 billion, an increase of $113 million or 6% over 2018's third quarter sales of $1.89 billion. Adjusted EPS for the third quarter of fiscal 2019 came in at $0.30 per diluted share compared to adjusted EPS of $0.50 per diluted share in fiscal 2018's third quarter. Our adjusted earnings for the third quarter include $4.1 million in operating expenses, or $0.08 per diluted share in transition costs associated with the CEO transition and a supplemental incentive program for eligible associates, both of which were specifically excluded from our guidance provided on August 14, 2019. I'll reference these expenses as transition costs for the remainder of my prepared remarks. On a GAAP basis, we reported a loss of $0.01 per diluted share in the quarter compared to earnings of $0.49 per diluted share in fiscal 2018. Shifting to our business segments, net sales and food distribution decreased by $1.1 million or 0.1% to $939 million in the third quarter of fiscal 2019. Excluding the elimination of intercompany sales to Martins, subsequent to the acquisition. Sales increased 3.6% driven primarily by sales growth from existing customers. Inflation accelerated to 168 basis points in food distribution during the quarter, an increase of 53 basis points from Q2, and up 166 basis points compared to the third quarter of fiscal 2018. Reported earnings for food distribution in the third quarter totaled $11.7 million compared to $19.8 million in the third quarter of fiscal 2018, primarily due to higher administrative expenses related to the transition costs as well as higher supply chain costs and asset impairments, partially offset by higher earnings from an increase in volume. Adjusted operating income totaled $15.5 million in the quarter versus the prior year's third quarter adjusted operating income of $20.4 million. Third quarter adjusted operating earnings in the current year excludes the $2.2 million in operating losses related to the fresh kitchen operations as well as other expenses, which are detailed in Table 3 of yesterday's press release. As covered in the earnings release, the fresh kitchen will cease production during the fourth quarter and we expect that the disposition of the facility and related assets could occur as early as the first quarter of fiscal 2020. Military net sales of 499.2 million in the third quarter reflect the decrease of approximately $1 million or 0.2% compared to prior year sales of $500.2 million. The decrease is primarily due to lower comparable sales at (inaudible) operated allocations mostly offset by incremental volume from new business with existing customers and the continued suppliers -- and the continued expansion of deckers private brand program. Military reported an operating loss of $2.6 million in the third quarter compared to earnings of $1.5 million in the third quarter of fiscal 2018, primarily due to higher supply chain costs and administrative expenses. On an adjusted basis, military's operating loss was $2.5 million for the third quarter of 2019 compared to operating earnings of $1.6 million in 2018's third quarter. Finally, our retail net sales increased 25.8% to $561.6 million for the quarter compared to $446.3 million in the third quarter last year. The sales increase was due to contributions from the acquired Martins business. Additionally, comparable store sales were positive 0.1%. These areas were partially offset by a decrease in fuel sales primarily due to a lower price per gallon, although total gallons who are slightly negative. Retail reported operating earnings of $6.7 million for the third quarter of 2019, increasing by $1.2 million compared to the $5.5 million in earnings in the prior year's third quarter. The increase was primarily driven by the contribution of the acquired loan stores combined with improvements in margin across several categories and the closure of underperforming stores. These increases were partially offset by higher administrative costs in transition costs. On an adjusted basis, retail operating earnings were $7.3 million for the third quarter of 2019 compared to operating earnings of $5.9 million in 2018's third quarter, an increase of $1.4 million. Interest expense increased by $0.3 million in the third quarter of fiscal 2019 to $7.4 million, largely driven by higher interest rate compared to the same period last year. Our actual interest rate comparisons improved sequentially after the pay down of our (inaudible) term-loan early in the third quarter. Also, we recognize pension termination costs of $10.2 million in the third quarter due to settlement expense associated with the distribution of the remaining assets of the Corporate Pension Plan, as previously announced, and we expect any further expenses associated with that plan will be immaterial. Year-to-date we generated consolidated operating cash flows of $140 million, which is relatively consistent with our 2018, year-to-date, operating cash flows of $145 million. Our total net long-term debt decreased by approximately $10 million from the end of fiscal 2018 to $670 million, as we have offset the acquisitions of Martin supermarkets and other capital investments with improvements in our working capital and the disposition of certain non-core close locations. For the remainder of 2019, we expect sales and profitability consistent with our current outlook provided on August 14, 2019. And we have now reflected the transition costs associated with the CEO transition and the supplement on incentive programs in our guidance. We expect that net sales will remain at mid-single-digit growth consistent with our original outlook provided on February 20. Retail comp sales are expected to be relatively flat for the fourth quarter, plus or minus 30 basis points. As outlined in yesterday's release, we expect full year earnings of $1 to $1.17 per share on an adjusted basis, excluding charges totaling $32 million to $36 million after taxes, as detailed in Table 7 of yesterday's earnings release. This guidance now reflects the $9 million to $9.7 million of transition costs, which have been specifically excluded from our August 14 guidance. With the supplemental incentive programs, partially offsetting a significantly lower payout for the company's 2019 Annual Incentive Plan. After factoring in the transition costs, we expect fiscal 2019 adjusted EBITDA will range from $173.3 million to $186 million. From a GAAP reported perspective, we expect fiscal 2019 earnings from continuing operations will be in the range of $0.20 to $0.29 per diluted share. We are updating our capital expenditures guidance to a range of $80 million to $89 million as lead time for certain purchases may impact whether or not there are considered Capital expenditures for GAAP purchases in fiscal '19 versus fiscal 2020.We now expect depreciation and amortization to range from approximately $88 million to $89 million, interest expense to range from $34.5 million to $35 million, and our reported tax rate will range from a benefit of 17% to 20% while our full year adjusted effective tax rate will range from 18% to 18.5%. And at this point, I'd like to turn the call back over to Dennis. -------------------------------------------------------------------------------- Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [5] -------------------------------------------------------------------------------- Thanks, Mark. In closing, we are pleased with our top line growth, a return to positive retail comp store sales and the ability to deliver on third quarter expectations and reaffirm our full year guidance. We recognize that much work still needs to be done to return to the profitability levels, we believe our organization as capable -- is capable of achieving over the long-term. Our team is focused and is executing on our objectives to get us back to profitable growth. And with that, I'll turn it back from back the call to Francesca and open it up for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) The first question comes from Karen Short Barclays. -------------------------------------------------------------------------------- Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [2] -------------------------------------------------------------------------------- Just wanted to ask a little bit about the guidance as it relates to the fourth quarter, maybe can you elaborate a little bit on the puts and takes to 4Q EBITDA, because the range that back into whether it's including or excluding transition is still pretty wide for 4Q? That's my first question. -------------------------------------------------------------------------------- Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [3] -------------------------------------------------------------------------------- Karen, I mean -- I think from our perspective, there were a couple of factors that were in play, I mean, we've had some -- we've had some items that are that I guess, I would fall into the uncontrollable areas such as health insurance and themselves, some of the self-insurance areas where we've historically performed well in those areas. But the way, the fourth quarter has started has exposed some risk and you can judge it by any given week or any period of weeks, but we've certainly seen on the health insurance side that we started off this quarter is one of the higher expense rates than we've historically had, and so that was a component of it, but then we're also -- we are also striving to make some improvements within our supply chain and while we've got some expectations that will -- we'll see those start to take hold and start to give us a good base leading into 2020. We're just being a little bit conservative on the range in that regard. So I know it's a much wider range than we would typically have, our going into Q4, but we felt that it was prudent to leave it that wide. We have some upside as well, but we felt that if we started to try to narrow we might lean one way versus the other and maybe give off a message that we weren't trying to send. -------------------------------------------------------------------------------- Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [4] -------------------------------------------------------------------------------- Okay. So, on that note on the supply chain. Can you just elaborate a little bit more on what exactly you're doing and also is there a kind of a $1 amount you could frame on the working capital opportunity? -------------------------------------------------------------------------------- Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [5] -------------------------------------------------------------------------------- Well, on the supply chain, I mean, I think some of the things that we've done and I think we've talked about some of these on prior calls, but we're certainly shifting away with some of the volume that we've taken on in certain of RDC is for customers and where we've been having some of the stronger growth. We had been supplementing our own workforce with third parties whether they're temps or contract higher, and we've started to move some of that business away and we've -- our HR team has done a great job of going out and identifying folks and getting them into the buildings. And so part of that opportunity comes from bringing instead of using temps selecting, you've got your own workforce now doing more of the selecting and, as we've talked for the last couple of years, where we were supplementing our own driver fleet with contracted drivers from third-parties. We're identifying and bringing on board more of the drivers, from that standpoint. So, there is a differential that could be 20% to 30% more on a cost per mile when you use a third-party. Now, we're not all the way to the point where we've got everything in-house, but we feel that we're making significant progress there. The challenge is that in the current low unemployment environment, the folks that we bring on don't always migrate down the experience curve at the rate that we've seen with historical folks that we brought on board. So there's a little bit of caution there, we may not get the same level of efficiency from some of these new hires that we would expect otherwise in the past. And then, on the second part of the question. I mean, we're on the working capital, I think it's primarily on some of the inventory side of things, where we feel there is opportunity within, what I would call, our turn inventory to reduce some of the levels there. I mean, it's a focus on all the different aspects of working capital, but between inventory AR and AP, I would say, more of it is focused on the inventory levels. -------------------------------------------------------------------------------- Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [6] -------------------------------------------------------------------------------- Okay. And then turning to retail, can you just give a little color on traffic versus basket and then inflation, what was that? I'm assuming you're going to give at retail in terms of versus cost for inflation. And then, what you're seeing specifically with inflation by category and outlook on that? -------------------------------------------------------------------------------- Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [7] -------------------------------------------------------------------------------- Yes, the makeup of the retail comps was a little bit negative on the transactions and slightly positive on the sales per transaction, obviously the sum of the 2 was the positive 0.1. The inflation at retail was 92 points in the quarter and that was better than or higher than Q3, which was 80 points. We saw some little bit more robust grocery inflation at retail, 1.4%, we still experienced inflation in the dairy. On the dairy side of the business, we're negative 87 points, eggs were negative in the quarter significantly, that was a big driver year-to-date, that egg category is negative double-digit. So that affected us. That's what we see on the inflation side at retail. Karen, on the question Mark answered the guidance being wide, part of that was, I insisted that we make it clear that the guidance we gave on Q2, at the end of Q2 that we reaffirmed it in this quarter. So, it's simply math taking out the transition costs. So, I think the companies can challenge a little bit, calling the numbers and so, we wanted to make sure everybody understood. We gave you a quarter we gave you a number, we thought we were going to hit and we are committed that we're going to stay in that range. I think, left to our own devices, we probably would have narrowed it a little bit, but blame that one on me. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- The next question is from Chris Mandeville with Jefferies. -------------------------------------------------------------------------------- Blake Anderson, Jefferies LLC, Research Division - Equity Associate [9] -------------------------------------------------------------------------------- This is Blake on for Chris. Starting on the retail segment, can you talk a little bit more about what drove the positive same-store sales, was that a matter of investments you're making? And just going forward, how should we think about your willingness to invest capital to try to sustain flat or even positive same-store sales? Are you willing to maybe prioritize that over margin? -------------------------------------------------------------------------------- Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [10] -------------------------------------------------------------------------------- I would say the team was incredibly diligent in managing us through the quarter, with regard to the comp store sales. So first, we have a new Senior Executive responsible for the merchandising and marketing, Laurie Ryan, she's brought a lot of insights from her past. And I think she is applying those to our business and I'd give Laurie credit for that. As we kind of we're going through the quarter, Blake, it became increasingly clear that we were going to be very close to positive comps and the organization was dogged about what they were going to do to make sure we got there. And indeed, we did. I would say, we were pretty aggressive on the promotional front, not irrational, but aggressive using all of the arrows in the quiver, whether it's social media, we use fuel quite aggressively in the quarter to drive comp-store sales. As Mark pointed out in his remarks earlier, we're feeling its run the same scenario here with Q4. So, if you were to look at our comp trend we bounced up and down, we don't see that bouncing down. We're hoping we can get to positive again, I know it's holiday period, so there's a lot of unknown, but we're feeling pretty good that baseline is going to be maintained. That's how I would characterize how we got there. And as it relates to maintaining that, I took the company has been pretty aggressive in expanding capital on the retail segment in the last couple of years. Last year really was a significant driver of our capital spend. I referenced the re-launch of the West Michigan Family Fare banner that we did in Q2, where we spent a significant amount of capital there. I think the execution of our plan is probably at the forefront of retail, just as it is in the supply chain side. So, strategically, I think we're well positioned as a company in both that distribution and retail segment and our focus is on the execution going forward. -------------------------------------------------------------------------------- Blake Anderson, Jefferies LLC, Research Division - Equity Associate [11] -------------------------------------------------------------------------------- All right, great. And then, maybe I missed it, did you say what your sales expectations are for distribution in the 4Q? -------------------------------------------------------------------------------- Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [12] -------------------------------------------------------------------------------- We didn't. But I would say that we have laid out the guidance at the beginning of the year as to where we thought we'd be for food distribution. So I would say that it's still consistent is that excluding or adjusting for the impact of the Martin's inter-company elimination. They're probably low-to-mid single digits as they've been all year so far. I would expect that trend to continue in the fourth quarter. -------------------------------------------------------------------------------- Blake Anderson, Jefferies LLC, Research Division - Equity Associate [13] -------------------------------------------------------------------------------- All right. And then last one for me is on the distribution margins. It looks like those have been declining for some time now. I know there's been several moving pieces in that, you've talked about elevated supply chain cost, we've had some distribution center issues as well as a Fresh Kitchen operations. Now that you're going to exit Fresh Kitchen, it seems like you're still making some investments in that business. And can you talk about if we assume you are able to continue low-to-mid single-digit margins in distribution, how soon can you start to stabilize or even expand the margins? -------------------------------------------------------------------------------- Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [14] -------------------------------------------------------------------------------- Well, I think the short answer would be that we'd like to do it as soon as possible. But in our business, we're doing thousands and millions of transactions and repeating them over and over again. And so, it's those small efficiencies that lead to big improvements on our end. And so the team, Walt and his team, have been focused on getting those, laying the foundation for us to start to get those improvements on the supply chain side. And as I mentioned in answering some of Karen's questions, the focus in trying to reduce the reliance on outside third-parties wherever we're capable will be one factor, because you're just taking true cost out of the system. But then, the shift in becoming more efficient in our routing and looking at using the different software is that we have the technology that we have to become more efficient from a routing perspective. Looking at engineered labor standards within the warehouses and having our associates be trained to be as efficient as possible, to help with the selecting throughput and the putaway throughput and the shipping throughput. Again, a single case increase per hour can have meaningful and benefits to our bottom line. I would say that that's where our focus has been and remains and we're not happy with where we are from a supply chain standpoint, but we're working to try and improve that. And I think by virtue of being able to maintain the guidance that we laid out in the second quarter, for the third quarter results and into year-end, we feel like we're starting to get a bit of traction that should hopefully benefit us as we go into 2020. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- The next question is from Charles Cerankosky with Northcoast Research. -------------------------------------------------------------------------------- Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [16] -------------------------------------------------------------------------------- Chuck, your line may be muted, if you want we can give you another second, otherwise maybe get back in the queue. We can't hear you on our end. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- The next question is from Kelly Bania with BMO Capital. -------------------------------------------------------------------------------- Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [18] -------------------------------------------------------------------------------- Wondering if you could talk about gross margin, it accelerated quite a bit in the quarter. And I was wondering if maybe you could help us understand by segment the driver of that? Particularly within the Distribution segment, just how customer mix shift is impacting gross margin as well? -------------------------------------------------------------------------------- Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [19] -------------------------------------------------------------------------------- Well, I think, typically we don't go into the gross margin by the segments to any sort of significant degree. I would say obviously from a year-over-year perspective, the improvement in our overall gross margin is simply a reflection of the acquisition of Martin's. I would say that -- when you're saying the improvement Kelly, you're talking sequentially or you're talking year-over-year for the gross margin improvement? The answers are little bit different as to what drove them. -------------------------------------------------------------------------------- Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [20] -------------------------------------------------------------------------------- The last couple of quarters have been closer to 50, this was I think closer to 90. I am just curious if it was just seasonality with Martin's or if there was any underlying changes? And just understanding what's underlying gross margin when you pull out Martin's? -------------------------------------------------------------------------------- Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [21] -------------------------------------------------------------------------------- I think I want to be just a little bit careful here just with some of the comments we've made, that Dennis made a few moments ago, about how we were competing in the marketplace for retail and what helped us on the comp sale side. I would say that from a retail perspective, we were selective in where we made investments and we feel that they were a contributing factor to the comps that we were able to achieve. I would say, from an overall perspective, sequentially, the Fresh Kitchen, as much as we talk about that it was losing money, the Fresh Kitchen was a significant drag on our overall margins, particularly as it relates to food distribution. Having that out of the mix was certainly a benefit from a sequential standpoint. As we look at it from a year-over-year guide where Martin's would have been in the equation, I would say that last year's third quarter we had some charges related to some inventory that we had brought on board from some customers, that didn't really move as quickly as we had thought. And we've taken some obsolescence charges there. But, I would say from a sequential standpoint, the exclusion of the Fresh Kitchen from the numbers was probably a much bigger driver sequentially than anything else. -------------------------------------------------------------------------------- Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [22] -------------------------------------------------------------------------------- Okay, and then just the mix shift, as you think about just the distribution 3.5% growth. How much is coming from larger customers, smaller customers and how that impacts the gross margin? -------------------------------------------------------------------------------- Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [23] -------------------------------------------------------------------------------- I mean, as it relates to it, I think we've talked about our core independence. We've said as an overall group that I think when we set the guidance for this year, we talked about them declining 1% to 3% and I would say that's still holds true, although maybe the number of shifts from year-to-year, based on the business we win, offset by any potential losses or closures. So, I would say that a lot of the growth is coming from the larger customers, and in that regard, they may have a lower gross margin, but they also have lower operating expenses. When we get to the operating margins, they play out similarly, but it's a function of how much (inaudible) we're able to put on a truck that's maybe going to some of those locations, versus other customers. I'd say any sort of pressure on the gross margins probably is being driven by larger customers versus smaller customers, but when we look at the sales, the topline sales, the independents that we've highlighted, they continue to be in that minus 1% to 3% range, and obviously, they're outright. We certainly have independents that the positive comps that are growing and we have independents that whether it's due to competitive openings or other reasons may have comps that are well below the minus 3% range that we just mentioned. -------------------------------------------------------------------------------- Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [24] -------------------------------------------------------------------------------- Okay, that's helpful. And I guess just a question on the transition costs. So you are not excluding that from your adjusted EBITDA guidance, maybe can you just explain that a little bit -- the thought process there? -------------------------------------------------------------------------------- Mark E. Shamber, SpartanNash Company - Executive VP & CFO [25] -------------------------------------------------------------------------------- There is 2 thoughts to it. One is that as we have the uncertainty and we mentioned that we have a search going for the next CEO, we don't know what that individual's compensation package might look like and so we're holding that it could be similar to what we're currently experiencing for our run rate, and we would adjust accordingly or factor into our budget for 2020 accordingly once that occurred. But then as it relates to the second half supplemental incentive program, obviously if you look at the guidance that we laid out at the beginning of the year and where we are currently trending in guiding towards we're well off of our original expectations and consequently, we're not -- we were unlikely to pay out much of an annual incentive, if any. There were some components from a strategic standpoint that people may have earned. But certainly from a financial performance standpoint, we were not going to have any payouts. So the supplemental program was put in place to try to drive some improvement, stabilize the business at the end of 2019 going into 2020 and give us some positive momentum there, but as we look at 2020 we'll have a significant bucket to fill in our 2020 guidance, to get back to sort of a standard payout or a target payout for AIP. And so it felt a little disingenuous to pull out the number for this year and then have an even bigger number for AIP next year. Like if I said -- let's say that the number for this year is maybe $6 million to $7 million of that $9 million to $9.7 million. If I exclude that from the guidance and adjust it out and then next year instead of having maybe $10 million to $14 million bucket, I had a $16 million to $20 million incentive bucket to fill it would be -- I don't think that would be well received from an investor standpoint or an analyst standpoint because it would seem as if we are using it for our purposes to help us this year and then not get penalized for it next year. So we felt it was better to keep it in the current guidance even though it is -- even though this particular program will not reoccur in 2020 there'll be some sort of annual incentive and targets for people next year that would be greater for that -- greater than that amount that we would have and so we felt for comparison purposes, we should probably leave it in. Does that make sense? -------------------------------------------------------------------------------- Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [26] -------------------------------------------------------------------------------- Yes, that's very helpful. So is that kind of the range? Because I think you said last quarter it was somewhere like 3 to 4.5 for the fresh kitchen and so I guess the rest is this supplemental. -------------------------------------------------------------------------------- Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [27] -------------------------------------------------------------------------------- Well, no. So I think we're mixing or we're -- you're switching between what is adjusted and what isn't. So the fresh kitchen we did adjust out and it's in that Table 7 on the earnings release as to what we think the fresh kitchen would be and we've left that range the same for this year, but the fresh kitchen operating results are adjusted out of the numbers that we reported. However, when we gave our guidance on the second quarter earnings call, the program -- the incentive program had not been finalized and who was going to be excluded and how it was going to be calculated and achieved. None of that had been determined yet, as well as the CEO cost because we hadn't yet had the formalized package finalized. Those are both excluded because they weren't quantifiable when we gave the guidance before, and so as they were subsequently firmed up and reflected that's where we put them into our guidance. Had we known or been able to give you a range for those numbers back in August, we would have done so then. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- The next question is from Charles Cerankosky with Northcoast Research. -------------------------------------------------------------------------------- Charles Edward Cerankosky, Northcoast Research Partners, LLC - MD of Research, Equity Research Analyst & Principal [29] -------------------------------------------------------------------------------- First off, could you give us an idea of what the cash inflow might be from selling the fresh kitchen facilities? And then secondly, what about a sense of timing in the improvement of the food distribution margin. You've got a lot going on there to get back to previous levels but how do you see that unfolding over the next 12 months to 18 months? -------------------------------------------------------------------------------- Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [30] -------------------------------------------------------------------------------- On the crush kitchen share guide, I'd love to be far enough along that I could give you a number. I think that we've got a process and we feel that we've got a number of interested parties and we're focused on moving ahead with one party at this point in time, but I'd be reticent to sort of offer up a number until we get to the point where signing is all but assured. I think it's still a little bit early in diligence for folks to be able to offer something of that nature. As it relates to the food distribution and supply chain, I think my comment from a few moments ago, is that as soon as we can, it's -- the challenge is that it's not that there are easy -- it's not that you could just make one change and you suddenly get a big lift. Is that our processes, it's modest improvements of individual things that folks are doing in the warehouse. So how you step off a power Jack and select the case. If you step-off in the side that the isle that you're picking versus having to step up in the other side and walk around the power jack doesn't seem like it's a lot, but you do that 2,000, 3,000 times a day and all of a sudden, you've lost productivity of 2 to 3 cases now which is meaningful. Similarly, you get those efficiencies and you see meaningful improvement. So I don't know that I am at a point right now, where I could say as to when we're going to see those improvements start to materialize. We're starting to see some "green shoots" that give us cause for optimism and we're certainly starting to see some improvements by virtue of eliminating the use of third parties. But to get back to the levels of where we were historically, I think we're a little bit premature to give you an exact timeframe, whether it's 12 months, 6 months or 18 months. I think we need to see a little more progress before we could commit to when we will be back to those levels. -------------------------------------------------------------------------------- Charles Edward Cerankosky, Northcoast Research Partners, LLC - MD of Research, Equity Research Analyst & Principal [31] -------------------------------------------------------------------------------- Mark, is it realistic to expect returning to those levels? -------------------------------------------------------------------------------- Mark E. Shamber, SpartanNash Company - Executive VP & CFO [32] -------------------------------------------------------------------------------- Well, I think it's real. And what I would say is that for the customers or for the types of business where things haven't changed over the timeframe. I think it's realistic, but we have picked up some non-traditional customers. We've added different types of business into our DCs and that changes the overall dynamics. So I think there is an element where I'd be cautious in the DC that's had a lot of change, to be able to say they can get back to the same levels. But if we've got distribution centers that are serving the same customers with the same mix I do think that in those instances, we should be able to return to historical levels. But picking an example, when we suddenly decide that we're going to put, we take a business from the military that we didn't have before, from a customer that changes the dynamic of how their entire DC works, if it's a large customer and we can't under-appreciate what that does to the folks work in the DC. And so if they've got the same mix of customers, they haven't changed much in 3 to 4 years, yes. I feel we should be able to get back there over a period of time where we've input -- where we've added complexity to a particular distribution center. I'm not sure that I'm willing to commit to get back to the same level, but they could probably still make improvements once we get back to a standard operation within that DC. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- The last question is from Scott Mushkin with R5 Capital. -------------------------------------------------------------------------------- Scott Andrew Mushkin, R5 Capital Ltd - Founder & CEO [34] -------------------------------------------------------------------------------- And really appreciate all the detail you guys have been offering, really helpful. So, couple of things. I was wondering, and this is like a soft question, but when you think about a CEO, what are you looking for? -------------------------------------------------------------------------------- Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [35] -------------------------------------------------------------------------------- That's a soft question. We operate in a difficult space and we afford a pretty complex business model, too. I mean we are a retailer, we are a distributor, we have the military segment, we dabbled in adjacent space a little bit. So, the executive that runs the business is going to have a pretty varied skill set and experience. I'd say it's kind of early in the phase of this planning process and we'll be very diligent in finding what we think is the right executive to lead this Company going forward. I don't know that I can add much more to that, but it's probably pretty special person to run this. -------------------------------------------------------------------------------- Scott Andrew Mushkin, R5 Capital Ltd - Founder & CEO [36] -------------------------------------------------------------------------------- That's good. Good luck with that. It sounds, Dennis, you're going to be in the seat for a little bit though. So, thinking about going to the wholesale business for a second. Inflation in wholesale, I think was is pretty noticeable and wanted the 2 part question. How are you dealing with that, with clients, with your customers that are in a marketplace where retail may not be seeing nearly as much inflation? That's part one of the question. And then, part 2 of the question, is there any large company or large customer risk that you see, as you get into 2020, 2021? I think a couple of your customers may be changing their models a little bit and I was wondering if you could talk to that? -------------------------------------------------------------------------------- Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [37] -------------------------------------------------------------------------------- Yes, on the year on the inflation side, it was noticeable in the quarter at 168 point. Our model, which I think is pretty typical of wholesale models in general, generally allows for pretty prompt flow-through of that inflated product value, probably in the fresh side of the business, it's a little more art than the science and sometimes are little stickiness in both directions, but generally speaking, hasn't been a significant problem for wholesalers to pass on that inflation, as it relates to our business model and larger customers. We understand kind of trajectory of the independent business from a macro level and we've been very purposeful and attempting to diversify our customer base. I think we've been relatively effective at doing that. As I indicated, it's 14 consecutive quarters where we've increased our sales and I think the 3.6% that we increased on the distribution side is a pretty good number, considering the space today. I think there are always risks with customers but I'm more focused on us doing what we do best, satisfying those customers, providing unique solutions for the supply chain challenges they have to actually grow that business. So sitting here today and looking at the trajectory of our business. The loss of those customers or potential loss of customers like that always is on my radar, but certainly isn't anywhere near the top of the list. And I think the fundamental blocking and tackling of what we need to do every day to improve our execution, to where Chuck was going, getting us back to a level of operating profit that we're more customary to seeing, is the most important thing that we can do. Am I allowed one more follow-up? I don't know how many people are in the queue, you tell me. Yes, we should be okay. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- (Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Dennis Eidson for any closing remarks. -------------------------------------------------------------------------------- Dennis Eidson, SpartanNash Company - Chairman, Interim President & CEO [39] -------------------------------------------------------------------------------- I want to thank you all for your questions and the participation on today's call and we'll look forward to speaking with you all again when we report on our fourth quarter and full fiscal year 2019 results in February. Thank you. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- The conference is now concluded. Thank you for attending to this presentation. You may now disconnect.