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Edited Transcript of SPTN earnings conference call or presentation 20-May-19 12:00pm GMT

Q1 2019 SpartanNash Co Earnings Call

GRAND RAPIDS Jun 4, 2019 (Thomson StreetEvents) -- Edited Transcript of SpartanNash Co earnings conference call or presentation Monday, May 20, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David M. Staples

SpartanNash Company - CEO, President & Director

* Mark E. Shamber

SpartanNash Company - Executive VP & CFO

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Conference Call Participants

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* Charles Edward Cerankosky

Northcoast Research Partners, LLC - MD of Research, Equity Research Analyst & Principal

* David Michael Lantz

BMO Capital Markets Equity Research - Associate

* Renato Oscar Basanta

Barclays Bank PLC, Research Division - Research Analyst

* Scott Andrew Mushkin

Wolfe Research, LLC - MD and Senior Retail & Staples Analyst

* Katie M. Turner

ICR, LLC - MD

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Presentation

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Operator [1]

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Hello, and welcome to the SpartanNash's First Quarter 2019 Earnings Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I now would like to turn the conference over to Mr. Katie Turner. Please go ahead, ma'am.

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Katie M. Turner, ICR, LLC - MD [2]

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Thank you, Keith. Good morning, and welcome to the SpartanNash Company's First Quarter Fiscal 2019 Earnings Conference Call. On the call today from the company are Dave Staples, 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 today at approximately 7:00 a.m. Eastern Time. For a copy of the release, please visit SpartanNash's website at www.spartnnash.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 formation 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 in the company's other filings with the SEC. Because of these risks and uncertainties, investors should not place undue reliance on any forward-looking statements. SpartanNash disclaims 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 comparable GAAP measure can be found directly in the company's earnings release as followed by Regulation G, which was issued earlier today.

And now it's my pleasure to turn the call over to Dave.

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David M. Staples, SpartanNash Company - CEO, President & Director [3]

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Thank you, Katie. Good morning, everyone, and thank you for joining us today. Our call will begin with an overview of the progress we made during the first quarter on our strategic objectives. Mark will then provide additional detail on our first quarter operating and financial performance, which were consistent with the preliminary net sales and earnings results we announced on May 9. Finally, we'll open the call for your questions.

In a dynamic and evolving operating environment, I am pleased with our ability to continue to find opportunities that grow our top line. We continue to be extremely focused on translating this growth to the bottom line, and our team is addressing key market and performance areas within each of our business segments to best position us to sustain this growth while improving profitability. In addition, we believe that the objectives we have identified for the fiscal year will help provide focus to the organization as we progress toward implementing our longer-term strategy.

During the first quarter, our team delivered on many, but not all, of the key components of our 5 top objectives for 2019, which include: growing net sales in the mid-single digit range; realizing an annual run rate of at least $15 million of earnings improvements through Project One Team over the next 24 months; strengthening our management teams, systems and supply chain operation; reducing debt and working capital, while lowering financial leverage ratios; and improving adjusted operating earnings and EBITDA. We believe the execution of these objectives during the current fiscal year will help us develop national highly efficient distribution platform that services the diverse customer base by leveraging our complementary business units of Food Distribution, Military Distribution and Retail consistent with our long-term strategy.

Now I'll summarize our performance versus these objectives in a little more detail. First, we continue to be pleased with our ability to consistently achieve growth in net sales. For the first quarter, consolidated net sales increased 6.6% to $2.54 billion compared to the first quarter last year. Our first quarter growth was generated across all 3 segments. In the Retail segment, growth was driven by contributions from the newly acquired Martin's business, while sequentially improving our comparable store sales trend. In the Food Distribution segment, we maintained the strong growth we've seen for the last several quarters, realizing growth of 5.2% before the intercompany elimination of Martin's sale. In the Military segment, net sales increased 1.2% despite a broader commissary environment, which continue to contract in the current quarter. In addition, our annual consolidated sales outlook projects continued mid-single digit top line growth.

Next, our entire organization is working together on Project One Team, our company-wide initiative to drive growth while increasing efficiency and reducing costs. We exceeded our initial expectation and have identified more than $20 million in annual run rate savings opportunities over the next 24 months versus our original target of $15 million. The effect of implementing these cost-savings opportunities are not expected to be material to earnings in 2019 due to the efforts required for implementing the ideas and initial start-up costs associated with some of the initiatives.

I am proud to say that associates and leaders from across the entire organization engaged in developing these ideas and implementation plan, which span all areas of our business and include initiatives such as supply-chain efficiencies, efficiencies within our retail operation, administrative process improvements and enhancements to the products, services and experiences offered to customers to generate future growth. The hard work and enthusiasm from our associates has been tremendous. And together, we plan to accelerate the transformation of our culture to drive substantial improvements for business processes and results.

Our third objective for 2019 is to strengthen our management teams, systems and supply chain operation. As we have mentioned previously, we added new executive talents to our team to include a new Chief Merchandising and Marketing Officer, a new Chief Information Officer and several other key additions throughout the IT and supply chain operation. Other strategic additions to the management team at various levels are in process as we made meaningful additions to our teams for the future growth of our business.

During the first quarter, we continue to invest in enhancements to our systems and supply chain operation, however, some improvements are developing more slowly than we initially expected partly due to the competitive environment for both warehousing and transportation associates.

We are also internally working towards strategic objective of reducing debt and working capital, while lowering the company's financial leverage ratio. During the first quarter, adjusted for the funding of the Martin's acquisition, we paid down over $20 million in debt and also reduced our inventory levels by approximately 2% from the first quarter last year. We are pleased to have made progress on this objective in the first quarter without any negative impact to customer service levels even as we continue to generate solid growth in net sales. Our team will continue to focus on debt and working capital improvements for the remainder of fiscal 2019.

Our last top objective for the fiscal year is to improve adjusted operating earnings and adjusted EBITDA growth, which we did not achieve. Our below expectation performance was primarily due to increased cost in the supply chain, inefficiencies within our Fresh Kitchen operation, a challenging retail environment and the effect of the voluntary recall at our fresh-cut fruit operation. We remain focused on improving these results through initiatives aligned with our organization's overall strategy, many of which I just mentioned.

Turning to segment results for the quarter. As I mentioned, we are very pleased to continue to deliver sales growth in our Food Distribution segment. The first quarter represented our 12th consecutive quarter of sales growth, an accomplishment we are very proud of. This growth has come from our ability to attract new accounts and to continue to provide a strong partnership to existing accounts through offering expanded services and geographical reach. We continue to look for ways to grow the perimeter and center store as well as sponsoring programs to partner with independent retailers to help them succeed in this intensely competitive marketplace.

Included in our sales increase for the Food Distribution segment was a 3.7% increase in sales at our Caito and BRT business, before the elimination of intercompany sales related to Martin's. This improvement reflects new customer growth and increase sales to existing customers with our fresh distribution and Fresh Kitchen operation partially offset by the impact of the voluntary product recall in our fresh-cut fruit operations. We expect continued top line pressure in our fresh-cut operations in the second quarter as we cycle through the impact from this year's recall. Consistent with our top 5 objectives for fiscal 2019, our operations team is working closely with an on-site external advisory team to improve the profitability of the Fresh Kitchen operation.

As we have discussed the last few quarters, we continue to experience industry-wide cost pressure in our supply chain and food processing operation, including increases in transportation costs, shortage of available labor and significant price volatility in certain produce category. These pressures have been compounded by the significant growth experienced in certain of our facility. We will continue to implement solutions to improve our overall supply chain efficiency and processes to address these pressures.

A couple of examples of these actions include introducing straight truck to our fleet to create a more efficient delivery model for smaller, low sizes and to expand the availability of labor by increasing the categories of drivers we can choose from. A second action step will be to reflow distribution centers, where we've experienced significant growth to ensure we have the most efficient pick path. We believe these steps along with improved recruiting and retention programs will result in better future performance.

In the Military segment, we're pleased with our net sales growth for the quarter, particularly given we are operating in an environment where commissary sales continue to have declining comparison. The growth we achieved was driven by incremental volume from a customer program we on-boarded in the fourth quarter of last year as well as further growth in DeCA's private brand program. We finished the first quarter as the exclusive supplier of the over 750 private brand products in the DeCA network. We continue to expect the contribution of these 2 programs as well as incremental new business obtained late in the first quarter, to provide increased sales for the majority of fiscal 2019. We remain focused on growing our sales pipeline as we build on our relationships with the military and food manufacturers to remain the supplier choice for their operation.

In our Retail segment, we continue to navigate through a tough operating environment, which was compounded in the first quarter by the significant shifts in the timing of government SNAP benefit payments and the Easter holiday. However, at the same time, we're pleased with the improvement in our comparable store sales trend and with the look and feel of our stores, included in the new brand positioning initiative.

Our brand positioning was tested in several stores last year and a more significant implementation was just completed Sunday into working additional West Michigan Family Fare stores. This positioning will be key for the differentiation of our operation and sharpening our focus on affordable wellness, value beyond price, a fun and indulging shopping experience with a focus on local products and providing a socially smart community focused store operation.

Key elements of our offer including in-store cut to order fruit and vegetable, new meat cases featuring in-store butcher crafted bratwurst sausages and other seasonal flavors, homemade doughnuts crafted in-store, expanded meal solution, better for him and her, health and beauty department as well as special marketing and pricing strategy. We continue to be happy with the consumer response thus far and believe these efforts will increasingly position us to win in the current retail environment.

While we will incur additional marketing, promotional and labor costs associated with these launches during the second quarter, we expect to begin realizing benefits later in fiscal 2019 and through 2020. And lastly, we're pleased with the contribution from Martin's for the quarter, which was consistent with our expectation. This is a quality operation and fits perfectly with our brand positioning for Family Fare.

In summary, we're pleased with what our team has accomplished with respect to sales growth and ability to track new business. Our team remains highly focused on deploying strategies to translate this growth into increased profitability, despite the challenges we faced across our business segments. And we believe our 5 strategic objectives for fiscal 2019 position us well for long-term sustainable growth in sales and profitability.

And with that, I will now turn the call over to Mark.

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Mark E. Shamber, SpartanNash Company - Executive VP & CFO [4]

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Thanks, Dave, and good morning to everyone joining us on the conference call and webcast.

Net sales for the first quarter of fiscal 2019 increased to $2.54 billion, an increase of $157 million or 6.6% over 2018's first quarter sales of $2.39 billion. Adjusted EPS for the first quarter of fiscal 2019 came in at $0.24 per diluted share compared to adjusted EPS of $0.55 per diluted share in fiscal 2018's first quarter. As we expected, Q1 was negatively impacted by the operational performance of one of our warehouses, the lapping of changes in the realization of rebates and dividends from private brands, the changes in direct and indirect remuneration pharmacy fees and the slower than previously anticipated rate of improvement in the company's food processing operations. Q1 was further impacted by increased cost in the supply chain and a difficult retail environment, and our food processing operations were largely dragging performance than expected partly due to the voluntary recall at our fresh-cut fruit operation.

Both our adjusted and GAAP EPS reflects an impact of approximately $1.1 million or $0.02 associated with the fresh-cut recall. On a GAAP basis, the company had earnings of $0.21 per diluted share in the quarter compared to earnings of $0.31 -- $0.34 per share in the first quarter of fiscal 2018.

Shifting to our business segment. Net sales in Food Distribution increased by $14 million or 1.2% to $1.2 billion in the first quarter of fiscal 2019. Excluding the elimination of intercompany sales to Martin's subsequent to the acquisition, sales increased 5.2% primarily due to sales growth from existing customers. Inflation accelerated to 82 basis points in Food Distribution during the quarter, an increase of 10 basis points from Q4 and declined15 basis points compared to the first quarter of fiscal 2018.

Reported operating earnings in Food Distribution in the first quarter totaled $24.6 million compared to $24.5 million in the first quarter of fiscal 2018, largely driven by higher sales volume and a gain on the sale of real property from a previously closed site, offset by lower margin rates and higher supply chain costs.

Adjusted operating income totaled $21.3 million in the quarter versus the prior year's first quarter adjusted operating income of $29.5 million. First quarter adjusted operating earnings in the current year exclude $3.2 million of net pretax gains as detailed in Table 3 under the Food Distribution segment in this morning's press release. Fiscal 2018's first quarter adjusted operating earnings excludes $5 million in expenses, which are also detailed in Table 3 of the press release.

Military net sales of $671 million in the first quarter increased by $7.7 million or 1.2% compared to prior year revenues of $664 million. Incremental volumes from new business with an existing customer and DeCA's private brand program drove the sales increase, which is partially offset by the lower comparable sales at commissary locations. Military Distribution reported an operating loss of $1.6 million in the first quarter compared to earnings of $1.5 million in the first quarter of fiscal 2018 primarily due to the previously noted warehouse operational issue and increases in general, distribution and transportation cost, partially offset by improved margin rate.

On an adjusted basis, Military's operating loss was $0.8 million for the first quarter of fiscal 2019 compared to operating income of $1.6 million in 2018's first quarter, largely due to Project One Team costs.

Finally, our Retail net sales came in at $702 million for the quarter compared to $566 million in the first quarter last year. Excluding the impact of the Martin's acquisition, sales decreased 3% due to lower sales associated with store closures totaling $12.4 million and a decrease in fuel price on a per gallon basis. Our comparable store sales improved to negative 0.3% for the first quarter of fiscal 2019 compared to a decline of 1.9% in the fourth quarter of fiscal 2018 and a decline of 2.2% in the first quarter of fiscal 2018. Comparable store sales benefited from a greater number of snowstorms in the current year compared to fiscal 2018's first quarter.

First quarter adjusted operating earnings in Retail amounted to $2.7 million compared to $4.7 million in 2018's first quarter. Retail reported a GAAP operating loss of $0.8 million for the first quarter 2019 compared to a loss of $0.3 million in the prior year's first quarter. The decrease was primarily attributable to lower supermarket margin gain -- margin rate, merger, acquisition and integration expenses related to the Martin's acquisition and higher fees paid to pharmacy benefit managers partially offset by the contribution of the acquired Martin's store, lower occupancy cost and a favorable impact of closing underperforming stores.

As expected, we experienced pressure from the increase in DIR fees in the pharmacy as pharmacy margin was $2.6 million lower than the first quarter of 2018. As we progress through fiscal 2019, we expect pharmacy DIR fees to represent a headwind, but not a significant of a headwind as we experienced in the prior year.

Interest expense increased $3.1 million in the first quarter of fiscal 2019 to $11.9 million due to higher interest rates compared to the same period last year and interest associated with the borrowings to fund the Martin's acquisition. In the first quarter of 2019, we generated consolidated operating cash flows of $13.5 million compared to $60.4 million in the prior year period. The year-over-year decline was primarily related to the 3 week shift in the timing of the Easter holiday to the end of the first quarter and the corresponding impact on accounts receivable balances.

During 2019's first quarter, we returned $6.9 million in the form of cash dividend.

Our total net long-term debt increased by $70.3 million to end the quarter at $749.8 million compared to $679.5 million at the end of fiscal 2018 due to the acquisition of Martin's. During the quarter, we paid down $24 million in debt after adjusting for the acquisition of Martin's. Our net long-term debt to adjusted EBITDA ratio increased to 3.8:1in the first quarter from 3.2:1 at the end of fiscal 2018, largely driven by our borrowings to fund the acquisition of Martin's whereas only one quarter of Martin's EBITDA is currently reflected in the calculation.

As covered in our preliminary financial results press release on May 9, we are updating our fiscal 2019 earnings guidance. We have reiterated our initial net sales guidance, which was originally provided on February 20, 2019. From a profitability perspective, these expected net sales increases will be offset by the challenges initially described in our May 9 press release, including a supply chain environment which will require us to navigate historically tight labor markets and a higher cost of transportation. We also expect greater dilution from our Fresh Kitchen operations than initially anticipated as we engage outside consultants to work with our team to generate profitability in this business. The unfavorable impact of the kitchen operations along with the recall in our fresh-cut operations and our Food Distribution segment represent important opportunities for us to realize profitable growth.

Relative to the prior year, we expect EPS comparisons to improve at a gradual rate, which will accelerate each quarter for the remainder of fiscal 2019. We expect 2019 adjusted earnings per share from continuing operations to be approximately $1.20 per diluted share to $1.50 per diluted share, excluding charges totaling $16.5 million to $18.5 million after taxes primarily related to the termination of our frozen pension plan, as detailed in Table 6 of today's earnings release. From a GAAP perspective, we expect that reported earnings from continuing operations will be in the range of $0.70 to $1.04 per diluted share.

Finally, we are maintaining our capital expenditures guidance range of $85 million to $93 million, our depreciation and amortization range of approximately $89 million to $92 million, our interest expense range of $36 million to $37.5 million and our reported and adjusted effective tax rate ranges from 23% to 24%.

And at this point, I'd like to turn the call back over to Dave.

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David M. Staples, SpartanNash Company - CEO, President & Director [5]

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Thank you, Mark. While we are not satisfied with our bottom line performance in the quarter, I am pleased with the progress the team made in the first quarter on many of our key strategic objectives for 2019. We believe these are necessary to move our organization forward, and they will enable us to win over the long term. We believe the execution of our strategic objectives will help us increasingly develop a national highly efficient distribution platform that services a diverse customer base by leveraging our complementary business units, Food Distribution and Military Distribution and Retail again consistent with our long-term strategy.

So with that, I'd like to turn the call back over to the operator and open it up for any of your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from Scott Mushkin with Wolfe Research.

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Scott Andrew Mushkin, Wolfe Research, LLC - MD and Senior Retail & Staples Analyst [2]

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So I just wanted to, if you could think about the challenges in the quarter and think about what was in your control and what was out of your control and kind of size them up a little bit? Like, I guess, so what was more operational? What was more environment? That's my first question.

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David M. Staples, SpartanNash Company - CEO, President & Director [3]

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Scott, I think, the 2 intersect, obviously. I think the Fresh Kitchen is one I would put in our control in some degrees and it's up to us to make sure we have the efficiencies and the processes and everything in place that will continue to make this kitchen grow and be what we think it can be. But certainly the availability of labor and some of those type of issues as we consistently bring on new business complicates that desire. So it's a mix of items. In our distribution and supply chain, I certainly think as we mentioned in the discussion, there's things we can do. I believe our distribution centers can certainly be reflowed to some extent where we're experiencing large growth to make them more efficient. I believe we can address some of our differentiated business opportunities that have shorter run, smaller load sizes with different types of trucks, open it up incremental access to drivers and alleviating problems that way.

So I think there's a number of things we certainly can control, and then the availability of labor and the cost of supply chain, while we can't control those directly, we can certainly put in strategies to overcome them. And so in the end, I think all of these things we can make impacts on and make change.

In the retail environment, sure it's a tough environment, it always is and certain of the players have chosen to be pretty aggressive on price. I think they moderate that a little bit over the longer term, but I think our positioning puts us in a place where we can take these kind of opportunities to bring craftsmanship back into the food business, offer more alternatives than some of the newer competitors, have a pride in craftsmanship whether that's in our cut fruit and vegetables made to your order or whether it's in gourmet doughnuts or whether it's in a butcher focused meat department that so many others have abandoned. So I think like always, it's a mix of things, and we've put a lot of efforts in place to change the things that are under our control.

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Scott Andrew Mushkin, Wolfe Research, LLC - MD and Senior Retail & Staples Analyst [4]

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David, as a follow-up, I appreciate the answer. The upper Midwest have been real competitive, I mean all of the -- our data which show Meijer has also just really come pretty heavy. As you look at it, I mean obviously it affects some of your Retail operations, but overall affects some of your distribution, how are you dealing with that environment, I guess, both on the Retail side and on the distribution side from your clients' perspective? Because they got to be struggling a little bit with that environment too and then I'll yield.

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David M. Staples, SpartanNash Company - CEO, President & Director [5]

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I mean Meijer and Aldi, we're obviously very experienced with both of those operators and both are obviously very good in the things they do, but both also have their limitation, right? Aldi's very limited assortment, obviously incredible price. Meijer, great assortment, better pricing not to Walmart's level, but a better food operator. And so we lived in that environment for the past basically 20 years, they've both been competitors of ours, Meijer for all that time, Aldi more pronounced over, say, the last 15 years -- 10 to 15 years. And so what we really try to do in our business is use things we learn and tactics we've deployed at retail and provide them to our distribution customers along with all the great ideas they have to put together a program to compete in this environment.

So it's not new to these competitors we put forth programs that have been successful against them in the past and we work with our distribution customers to do that and a lot of this new positioning we're deploying in our retail operation is just that, how do we help them with differentiated center store programs that emphasize [path] and candy and some of the areas that we can differentiate from an Aldi or a Meijer. How do we bring the light -- the fresh side of the business where we do have the butchers and we do have the ability to offer a great produce solution some things that Aldi isn't as well known for. So Scott, I guess, that's how we would do it. I think everybody feels competitive pressure in an environment like this, but our independents are very resourceful, and they worked through competitive incursions with Walmart and others before, and I think we've been pretty good at figuring out solutions more through that.

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Operator [6]

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And the next question comes from Chuck Cerankosky with Northcoast Research.

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Charles Edward Cerankosky, Northcoast Research Partners, LLC - MD of Research, Equity Research Analyst & Principal [7]

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Could you please go through where you're at with the Gordy's repositioning and which stores you've sort of repossessed and resold? And was the real estate gain in the quarter part of that whole process?

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David M. Staples, SpartanNash Company - CEO, President & Director [8]

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So Chuck, with Gordy's at this point, we have taken possession of 2 of the stores in Chippewa Falls area, and one of our other customers will take over 3 incremental stores here as we speak over the next few weeks, I believe. And so all of the stores will then reposition -- I think in total, we were -- we probably now between the 2 we have and our customers are somewhere around 10, 11, 12 stores, something like that, I believe. And so that will be pretty much transitioned out here over the next month. The gain in real estate really didn't have anything to do with that transaction. That was from the sale of a warehouse we had decommissioned probably about 1.5 years ago or 2 years ago.

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Charles Edward Cerankosky, Northcoast Research Partners, LLC - MD of Research, Equity Research Analyst & Principal [9]

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Okay. On the Project One Team cost that we're seeing this year, what will those total during the year? And I guess they'll be completely offset next year. And are they all-cash cost that we see as adjustments in the...

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David M. Staples, SpartanNash Company - CEO, President & Director [10]

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So what you're seeing right now would be the fee, so those would not recur next year. They are cash. It's really the fee that we paid for the assistance from the Harvest Earnings crew. So they won't be recurring next year.

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Charles Edward Cerankosky, Northcoast Research Partners, LLC - MD of Research, Equity Research Analyst & Principal [11]

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And they'll be relatively little in the form of benefits this year to offset those fees?

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David M. Staples, SpartanNash Company - CEO, President & Director [12]

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Correct. It is basically because of timing.

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Mark E. Shamber, SpartanNash Company - Executive VP & CFO [13]

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And as Dave mentioned, Chuck, some of them will get benefits for the investment that goes with it whether on a technology front or some of the upfront costs associated where might generate a $0.5 million return, but there might be a $100,000 investment and that $100,000 is offset in this current year. So we estimate this is like that as well.

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Operator [14]

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And the next question comes from Kelly Bania with BMO Capital Markets.

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David Michael Lantz, BMO Capital Markets Equity Research - Associate [15]

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This is David Lantz on for Kelly Bania. So I was wondering, could you give us some more color on maybe what you've learned so far with the outside team that you've brought in, that outside team of experts for Fresh Kitchen to improve execution there?

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David M. Staples, SpartanNash Company - CEO, President & Director [16]

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Well, I mean we've heard a number of things as you'd expect. I think so much of this is just continued focus on how do we not only streamline the processes we have, but really position the kitchen to be able to accommodate growth. And so what it's helping us to do is really put in those type of processes that not only result in day-to-day running -- the day-to-day improvement of our operations, but also that ability to onboard new business, and that's where a lot of the focus is. And in addition, as you would expect with any Fresh Kitchen where you're really building from scratch, your scrap component or your waste component is always much higher than you'd like, and we think there is quite a bit of opportunity to reduce that.

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David Michael Lantz, BMO Capital Markets Equity Research - Associate [17]

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Great. And then on the Retail side, I think you had given 82 basis points of inflation in the quarter for Food Distribution. I was wondering what you're seeing in Retail? And if you could give us your outlook for both Retail and the Food Distribution segments for the rest of the year?

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Mark E. Shamber, SpartanNash Company - Executive VP & CFO [18]

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Yes. So for -- on the Retail side, we actually took a step backwards, it was [about 18 basis points]. So from a sequential standpoint, a decline of like 36 basis points. I think we're at 52 -- 34 basis points. I think we're at 52 in the fourth quarter. And on a year-over-year basis, we were down almost 66 basis points. So I mean I think we've seen some price increases come through on the distribution side, and as we've talked about in the past, there has been some challenges in being able to get it to pass through on the Retail front. And so I think we feel that we may see a little bit more on the distribution side as we go through the year, I wouldn't necessarily expect that I'm going to be 1.5% to 2%, maybe if we get to 1%, 1% plus.

And on the Retail side, I think, it still varies as to how much of that is going to get passed through. But this particular quarter, we saw dairy take a big step backwards, and we were hurt as I'm sure a number of other retailers were this year with regards to eggs, where eggs were deflationary leading into Easter where they are typically inflationary and then it continued coming out of Easter, which is more typical. So I think that it's tough to tell on the Retail front is how that's going to play out.

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David Michael Lantz, BMO Capital Markets Equity Research - Associate [19]

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Okay. Great. And then the last one from me. Do you have anything more that you can share on kind of potential synergies now with the Martin's acquisition?

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Mark E. Shamber, SpartanNash Company - Executive VP & CFO [20]

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Well, I mean I think from the Martin's acquisition when we gave our guidance for the full year, I mean I would say that for the most part, we're tracking in line with those synergies. We've exceeded in some areas our initial expectations, and we've backed off in a couple of others where we felt from a systems and process perspective that we would rather approach it a little bit differently, but I think net-net, we're in line with our expectations which were in the initial guidance. So I'm not sure I'm going to break it out any further than that.

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Operator [21]

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And the next question comes from Renato Basanta with Barclays.

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Renato Oscar Basanta, Barclays Bank PLC, Research Division - Research Analyst [22]

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Just quickly to follow-up on Scott's question earlier. My question really has to do with the competitive environment, specifically in Food Distribution. You talked about 1% to 3% attrition for customers in the past, it sort of declined in same-store sales for your customers. So just curious what you are sort of seeing out there? It seems like maybe sales growth coming at an overall higher cost. So I think it would be helpful if you provided just some color on what you're seeing from a competitive standpoint and specifically, if it's actually getting worse or sort of steady state here?

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Mark E. Shamber, SpartanNash Company - Executive VP & CFO [23]

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Yes. I mean I'll start off, and then I'll maybe let Dave sort of chime in. I think -- I mean I know there was a research report out that sort of talked about the environment becoming more costly, and I think that look, we've always been in a tight margin business and you don't typically win and lose business strictly on cost it's your service levels and how you operate that really drives that cost is a factor, but it's not always the factor. So I mean I think that we haven't seen anything dramatically change with regards to competitive environment in that regard, but it's always environment where you're only as good as your last day's delivery.

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Renato Oscar Basanta, Barclays Bank PLC, Research Division - Research Analyst [24]

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Okay. All right. That's helpful. And then just on Retail, hoping you can just provide more color on the new brand positioning? Maybe talk about the lift you're seeing from the program. How many stores you expect to have it this year? And then how you think of it from a perception perspective? In other words, the risk that perception that Family Fare is going to be more upscale, but then -- upscale and service, but then also higher on price? How do you deal with that risk?

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David M. Staples, SpartanNash Company - CEO, President & Director [25]

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Sure. Let me walk you through it. So it's been a lot in one day since we've launched it. So we had a very good first day, and so we were very happy with our sales in day 1. But obviously leading up to the launch, you're making change and improvement and it's been very favorably received by our customer. And we're not doing this in a way that is expensive. We're doing this in a way that we're trying to make it much more experiential, but a targeted experience that is really for that Family Fare customer. So the objective here is not to make it feel expensive, is to make it feel more fun.

And when we use the term indulgence, right, indulgence, I think, to your point sometimes implies expensive, but indulgence doesn't have to be expensive. Starbucks coffee is an indulgence, having your produce and vegetables cut the way you like it is an indulgence in a way and that you could do that yourself, but instead you chose to let someone else do it. Buying gourmet doughnut that is a little more fun and a little more tasteful than just a normal doughnut, that's an indulgence. Having a butcher shop where we have store-made sausage and marinated meat and things you can't find other places, doesn't have to be more expensive, but it allows you to know where your food came from and know who made your food.

And so I think the way we're doing this isn't going to speak expensive at all, it's going to speak for fun, it's going to speak for much better shopping and experience, and it's going to speak for more differentiated shopping experience. We're experimenting with smoke houses in some of these facilities, where sushi is now a mainstay, which is doing incredibly well. We're working with an Asian hot bar, regular hot bars, taquerias will be in a few of them. And so we're bringing a lot of the trends that people are looking for. We're bringing this grab-and-go, this prepared food, taking -- bringing to the customer that ability to have a quality meal quickly. They trust us more than they trust fast food. Our food will be more wholesome.

We're bringing in affordable wellness. So you're going to be able to get to your grass fed beef, your hormone-free, antibiotic-free beef, you're going to be able to get gluten-free, you're going to have thousands of natural organic option. In our produce department, you're going to have more organic produce operations than anyone else in our market, but yet start it in an affordable way, an affordable way, where now it's going to be a real high priced operator like some of the people in that space. And so you're going to see us focus on affordable wellness. You're going to see us focus on value beyond price which are some of the things that we talked about.

You're going to see us be very local. We'll have 1,000 plus local items with very focused displays of local and based on the success of those products, our customers can help local businesses become successful and become part of our normal side. There is many experiences where our customers have really allowed some local companies to grow on a pretty significant basis. And we're going to be much -- we're going to be really bring forward the commitment we bring to being socially smart and part of that social fabric of our communities, whether it be carbon footprint, whether it be the type of products we sell, whether it be our involvement in the community. I mean our associates volunteered 57,000 hours last year for local events. We raised over $3 million between our consumers and our associates and other ways that we put funding together to give back to our community. And so we're going to emphasize more of that. So I really think that you're welcome to come visit our stores at some point, you're going to find we've done this in a very fun, very experiential way, but it does not feel more expensive at all. It actually feels more engaging.

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Operator [26]

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(Operator Instructions) And the next question comes from Chris Mandeville with Jefferies.

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Unidentified Analyst, [27]

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This is Greg on for Chris. I wanted to start on Caito's Fresh Kitchen. You mentioned you've hired now a third party to help with the progress there and then making some changes not only on the day-to-day improvement for the processes, but also in a more growth-oriented, getting new business. Can you talk about kind of what the continued issues are? Are they the same as recent quarters? Or are new ones you're experiencing? And then if you can just talk a little bit more about the changes you're exactly making to fix them? And then just specifically, do you think you have the right leadership in team? Are you looking to hire management here? And then may be any update on the expected timing of profitability?

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Mark E. Shamber, SpartanNash Company - Executive VP & CFO [28]

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You're probably have to repeat yourself a little just given that you've -- I think, Dave has 5 questions.

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David M. Staples, SpartanNash Company - CEO, President & Director [29]

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Let's try to move through it, right? So as we look at the kitchen operation, as we grow one of the things we've experienced in the kitchen is it's been a significant number of products you grow as well. So it's not just more of the same, it's more and different. And so that has put forth a lot of unique pressures on an organization that is trying to build from the ground up. And so one of the things I think we've learned and one of the things we're working on is how do we focus the organization on the type of products we do well and what products are bringing turns and the efficiencies that they should. So we will rationalize some of the products that we stopped taking in, and we'll focus more on some of the products that can grow profitably. So I'd say that's a big learning, right? You can't be all things to all people, and sometimes, as you're starting up an operation, you're on the hunt for growth and all types of products being great and you learn, that isn't always the case.

I think we've seen very clear efforts to reduce waste. I think as we put that operation together, we need a much more focused effort on that and the teams we put in place from a reporting and measurement perspective are really focused and helping the team focus even more clearly on the points in the production process where we can eliminate waste, whether that's product waste or an inefficient use of our labor resources. Probably the next big learning really is getting the consistency of that supervisory team and getting that supervisory team trained to the level they need to be because consistent employee turnover and the tough environment makes it really hard to be productive. So those are the areas we're most focused on, those are the areas that we put process in place in the fresh cut operation and really saw a nice improvements in those.

As far the team, I think our leader down there is a strong operator. We will, structurally, when we bring in our President of Distribution, move that operation up under him, and we're making good progress in that area. So I'm hopeful over the next month or so, we'll have an addition in that area. So I think we'll make some management reporting structure changes, but overall, we believe this team with this kind of help and maybe a few tweaks will be what we need to make that work. And with that, I'm not sure I've answered all of the 5 questions that Mark alluded, but I think probably got a good number of them. If I missed one, let me know.

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Unidentified Analyst, [30]

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No. That was good. I appreciate it. And then secondly, you continue to talk about reducing your debt leverage and making pretty good progress there. But given some of the challenges on the costs, have you considered alternative methods to generate cash to help such as real estate monetization? And then on that front, when was the last time you had your real estate valued?

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Mark E. Shamber, SpartanNash Company - Executive VP & CFO [31]

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So to answer the question, I mean we actually use our real estate as part of our collateral pledged against our revolving credit facility in the program that we have there. And so when was it last revalued is the second part of the question, as part of the Martin's transaction, we amended our debt agreements to that point in time, and so it was done as part of that. So there would be perhaps a short-term opportunity but with a much more expensive long-term cost, if we were to try to take it out from the revolver and then do some sort of sale-leaseback for other transaction.

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Unidentified Analyst, [32]

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All right. And then the last one was on Retail. You talked a lot about the initiatives you're making there, and it seems to be making some progress on the comp side. And you mentioned also you've been closing some more challenged stores on a profitability front. Maybe just talk about the core profitability, if you were to back out those 2 items, how do you feel about the margin progress in Retail? Because I'm wondering if some of these investments you're making are maybe weighing on the ability to see improved margins, maybe just talk about the Retail margins?

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David M. Staples, SpartanNash Company - CEO, President & Director [33]

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Well, I mean and I think right now in the current environment, Retail margins are feeling pressure, and I think you've written about that and so most of your peers. I think it's a difficult pricing environment right now. I think when you look at what we're doing with our positioning and again, like I said, we're in the very early stages, we have a total of 18 stores with this positioning and it really just launched yesterday, so it hasn't really been able to have an impact. But one of the big things we're working on with this positioning is how we mix the products we sell in the store and how we offer the consumer really great values in produce and some other areas like that, but how we also offer them really great value beyond price in other areas like a fresh-cut fruit and veg or a butcher shop with more custom-made products or gourmet doughnuts or better HBC for him and her, essential oils, better haircare products and things where the consumer can choose to buy products that help our margin balance out.

And so part of this positioning is how do we structure our store to give that consumer the balance they're looking for while helping us improve our overall margin base. And so we really haven't been able to see that part of the positioning yet and that's something we're looking forward to as we continue to roll it out, a better experience for our consumer that blends a profitability picture that works well for us.

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Operator [34]

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And as there are no more questions, I would like to return the floor to Dave Staples for any closing comments.

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David M. Staples, SpartanNash Company - CEO, President & Director [35]

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Well, again, I'd just like to thank everybody for your questions and participation on today's call. And we look forward to speaking with you again when we report our Second Quarter Fiscal 2019 Results.

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Operator [36]

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Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.