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Edited Transcript of SPTN earnings conference call or presentation 8-Nov-18 1:00pm GMT

Q3 2018 SpartanNash Co Earnings Call

GRAND RAPIDS Jan 21, 2019 (Thomson StreetEvents) -- Edited Transcript of SpartanNash Co earnings conference call or presentation Thursday, November 8, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David M. Staples

SpartanNash Company - CEO, President & Director

* Katie M. Turner

ICR, LLC - MD

* 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

* Christopher Mandeville

Jefferies LLC, Research Division - Equity Analyst

* Karen Fiona Short

Barclays Bank PLC, Research Division - Research Analyst

* Kelly Ann Bania

BMO Capital Markets Equity Research - Director & Equity Analyst

* Paul Trussell

Deutsche Bank AG, Research Division - Research Analyst

* Scott Andrew Mushkin

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

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Presentation

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Operator [1]

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Good morning. Welcome to the SpartanNash Company Third Quarter 2018 Earnings Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Katie Turner for opening remarks. Please go ahead.

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

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Thank you, Debbie. Good morning, and welcome to the SpartanNash Company's Third Quarter Fiscal 2018 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 yesterday at approximately 4 p.m. Eastern Time. For a copy of the release, please visit SpartanNash's 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 and 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 metrics 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 after market close yesterday.

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 include an update on our business as well as my brief overview of the third quarter. Mark will then provide additional detail on our operating and financial results before we open the call for your questions.

I'd like to begin the call by just saying how proud I am of the team's commitment to our long-term strategy. We are taking action to become a growth company that is focused on developing a national, highly efficient distribution platform that services a diverse customer base by leveraging our complementary business segments of food distribution, military distribution and retail.

During the quarter we continued to make progress towards achieving elements of our strategy related to increasing supply chain efficiencies and mitigating cost pressures, including hiring drivers and expanding and diversifying our fleet to take more of our freight in house and control rising freight costs. Additionally, we identified and began implementing opportunities to increase the capability and reach of our supply chain, including steps to better serve both the East and West Coast.

On the manufacturing front, we remain focused on improving the efficiency of our food processing operations and have seen some improvements during this latest quarter. We expect to see continued improvement as we are able to adjust to the incremental volume added in the Fresh Kitchen operations and develop a more experienced workforce.

In the retail segment we remain pleased with our customers' positive response to our new brand positioning and have recently relaunched 5 stores that feature these enhancements. Due to the rapid pace of change in our industry as well as the industry-wide labor and transportation headwinds and growth-driven challenges we currently face in some of our markets, we are working to accelerate our initiatives to best position our business for long-term growth and profitability.

To this end we have engaged a third-party advisor to guide us on a company-wide initiative designed to accelerate the transformation of our culture, empowering associates at all levels to drive substantial and sustainable improvements to our business processes and results. While not officially kicking off until next month, this effort has already begun to energize and excite the organization, and I can't wait to see the incredible results our teams deliver to position our company to achieve its strategic objective. I look forward to keeping you apprised of our progress and the significant results we should begin realizing in the back half of fiscal 2019 and throughout 2020.

Turning to our overall results for the quarter, we are pleased to continue to deliver sales growth driven by our food distribution segment. This strength 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. Our team has continued to achieve new business wins within our Fresh Kitchen operations, as customers are responding positively to our Fresh product solutions. We expect the financial benefits of these wins to be more pronounced in fiscal 2019 as we work through new business startup efforts related to adjusting our processing flow and establishing a more experienced workforce. Overall, we continue to be pleased with our ability to differentiate our value-added offering in a challenging operating environment.

Before shifting to our segment results, one other matter I would like to discuss is the impact of Hurricane Florence on our associates, customers and operations. I am proud of our team's response in the face of this natural disaster, to mitigate operational disruption, serve customers and keep our associates safe. Our teams went above and beyond what I could have expected to mobilize our fleet and associate base throughout our network to bring critical products to our military and food distribution customers despite the personal hardships so many of them experienced. So while the hurricane impacted our bottom line result by approximately $0.02 of earnings, it provided an opportunity for us to continue to show what a dedicated team of associates we have and to prove ourselves as a reliable and trusted business partner.

In food distribution, we delivered overall sales growth of 4.6% with both strong retention in our core customer base and expanded business with key customers. We continue to provide new programs that are helping our independent retailers succeed in this intensively competitive marketplace and are pleased with the growth in some of our larger existing customers, as is evidenced by the continued growth in our legacy food distribution business of 5.5%.

While we anticipated short-term margin pressure to accommodate the expansion of a significant program with an existing customer as well as incremental costs within our supply chain network, these headwinds were somewhat more impactful than expected. Our volumes under this program continue to ramp up, but at a slower than anticipated pace. And as a result, we haven't yet fully leveraged the underlying costs. We continue to be excited by this opportunity and we expect substantial upside going forward, with potential annual volumes of $150 million to $200 million.

During the third quarter we completed the transition from our Spartan private brand, to the Our Family private brand in our Michigan and Indiana markets. As you are all aware, it is never easy to replace a highly respected brand that was in existence for over 75 years. However, the current environment of consolidating manufacturers has required such an effort to continue to provide the quality and variety our customers expect. This strategic action has taken longer to roll out than we originally expected, which has impacted our result given the size of these markets. To accelerate the growth of our brand, we are deploying additional marketing and merchandising initiatives aimed at continuing to build awareness and supporting the reputation for high quality that Our Family has already established in so many markets. As such, we remain optimistic about our private brand growth opportunities as we build out this key category and expect this area to be an area of improvement as we move through fiscal 2019.

Turning to our military segment, we are pleased to see the continued growth of DeCa's private brand program, although not at the pace originally anticipated. During the third quarter we introduced approximately 90 new private brand products, ending the latest period with over 700 products in the system. We will continue to collaborate with DeCa in the release of additional products as they continue to roll out of their program in fiscal 2019.

Additionally, we are focused on building our sales pipeline and are excited about landing a significant new Fresh program with an existing customer. We continue to build and develop relationships with various areas within the military complex and remain dedicated to being the supplier of choice for their operations.

Lastly, we are focused on efforts to mitigate warehousing and transportation headwinds and expect to see benefits as we implement solutions over the next several quarters.

In the retail segment, despite a highly competitive environment, our comparable store sales remained consistent in the third quarter from the second quarter this year. We executed 3 remodels in the quarter and another 2 early in the fourth. We remain excited about our success and we're finding our brand positioning and the resulting improvements in sales and customer satisfaction, and will continue to roll out our positioning to additional markets.

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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Thank you, Dave, and good morning to everyone listening in on the conference call and to the webcast online.

Net sales for the third quarter of fiscal 2018 increased to $1.89 billion, an increase of $18.3 million, or 1% over 2017's third quarter sales of $1.87 billion. Adjusted diluted EPS for the third quarter of fiscal 2018 came in at $0.50 per diluted share, which compares to adjusted diluted EPS of $0.54 per share in fiscal 2017's third quarter.

On a GAAP basis the company earned $0.49 per diluted share in the quarter compared to a loss of $3.31 per share in the third quarter of fiscal 2017. I would also note that both our GAAP and adjusted EPS included a $0.02 per diluted share impact in the quarter associated with Hurricane Florence in the form of lost sales from impacted customers, stores and a variety of hurricane-related operating expenses.

Shifting to our business segments, net sales in our food distribution segment increased by $41 million, or 4.6%, to $940.2 million in the third quarter of fiscal 2018, primarily due to sales growth from new and existing customer programs. Sales growth in our legacy food distribution business, which excludes Caito, came in at 5.5%, a bit below our expectations as the ramp of our new customer program continued to progress more slowly than originally envisioned. We experienced essentially flat inflation of 2 basis points in food distribution during the quarter, a sequential decline of 32 basis points from Q2 and 132 basis points from fiscal 2017's third quarter.

From a department perspective, the split from inflation to deflation within the produce category drove the sequential decline, as most categories were relatively flat to slightly less inflationary, and meat recovered nicely from Q2.

Third quarter operating earnings for food distribution declined to $19.8 million, largely due to higher transportation and warehousing costs in general and resulting from the support of a significant new customer program and lower procurement gains, partially offset by administrative cost savings, lower healthcare costs and lower incentive compensation. Adjusted operating income totaled $20.4 million in the quarter versus the prior year's third quarter adjusted operating income of $23.7 million, as a result of the previously mentioned items.

Military net sales of $500.2 million in the third quarter decreased by $5.4 million or 1.1% compared to $505.6 million of revenues in the prior year third quarter. The decrease was primarily due to lower comparable sales at DeCA-operated locations, partially offset by incremental volume from the private brand program and the commissary business in the Southwest obtained during last year's third quarter and having now cycled.

Operating earnings from military in the third quarter increased to $1.5 million compared to earnings of $1.1 million in the third quarter of fiscal 2017 primarily due to a decrease in merger, integration and acquisition expenses combined with administrative cost savings, partially offset by higher transportation and warehousing costs. On an adjusted basis the military segment's operating income was $1.6 million for the third quarter of fiscal '18 compared to $3.1 million in 2017's third quarter.

Finally, our retail segment's net sales came in at $446.3 million for the quarter versus $463.6 million for the same period last year. Approximately $15 million of the sales decline related to the sale and closure of stores and fuel centers, with the balance driven by a decrease in comparable store sales of 1.9%, excluding fuel. Higher year-over-year fuel sales served to partially offset this decline. We finished the third quarter with 139 stores after consolidating 2 stores' operations within the same market.

The retail segment reported GAAP operating earnings of $5.5 million for the third quarter of 2018 compared to a loss of $215.3 million in the prior year's third quarter due to cycling a noncash goodwill impairment charge, lower asset impairment and restructuring costs, the closure of underperforming stores and lower healthcare and depreciation expenses, partially offset by lower comparable store sales and higher fees paid to pharmacy benefit managers.

As noted previously, we continue to see pressure from the increase in DIR fees in the pharmacy, which had an impact of $1.2 million on margin this quarter, consistent with our expectations provided on Q2 earnings call in August. As a reminder, DIR fees remain a growing issue in the pharmacy industry, generating congressional attention and legislation has been proposed to address or eliminate the ability to impose retroactive pharmacy DIR fees. We expect to continue to feel a similar impact in the fourth quarter of 2018.

Third quarter adjusted operating earnings in retail totaled $5.9 million compared to $8.4 million in 2017's third quarter. Interest expense of $7.1 million represented an increase of approximately $1 million in the third quarter of fiscal 2018 due to a combination of higher interest rates and higher average debt levels compared to the same period last year.

Year-to-date we generated consolidated operating cash flows of $142.5 million compared to $71.6 million during the prior year period. The higher operating cash flows were primarily due to the timing of working capital requirements, particularly improvements in inventory and accounts receivable compared to the prior year. We generated $20.2 million of free cash in the third quarter and $89.8 million year-to-date compared to $15.7 million in the third quarter of fiscal 2017 and $16.3 million in the prior year-to-date period.

During the first 3 quarters of fiscal 2018 we paid $19.5 million to shareholders in the form of cash dividends of $0.18 per share per quarter. Additionally, we repurchased approximately 952,000 shares of our common stock for $20 million, all during the first quarter, at an average price of $21.01 per share, while reducing our long-term debt balance by over 6%.

Our total net long-term debt decreased by $51.9 million, to end the quarter at $682.4 million compared to $734.3 million at the end of fiscal 2017, with increases in accounts payable being partially offset by higher accounts receivable and the share repurchases, as noted. Our net long-term debt to adjusted EBITDA ratio was 3.2 to 1, a slight increase from the second quarter of 2018 due to the year-over-year decline in the third quarter adjusted EBITDA.

As covered in yesterday's press release, we are updating our guidance for fiscal 2018, primarily due to the slower than initially expected improvement in our food processing operations, slower than hoped acceptance of our private brand consolidation, the rate of sequential improvement in the retail segment's same-store sales comparisons and the expectation of continued headwinds related to transportation of labor within the distribution segment.

We continue to anticipate strong year-over-year sales growth in the food distribution segment in the fourth quarter, driven primarily by sales to existing customers and the continued ramp of our significant customer program.

In the military segment we anticipate year-over-year sales to have slightly negative comparisons as we cycle the new commissary business obtained in the prior year's third quarter and we do not expect the new business within the military segment will completely offset the DeCa comparable-store sales trend headwind.

Within our retail segment we expect comparable sales to improve sequentially, benefitting from our current year store remodel and our brand repositioning, although we expect to end the quarter with negative same-store sales comparisons.

We now expect 2018 adjusted earnings per share from continuing operations to be approximately $1.89 per diluted share to $1.97 per diluted share, excluding adjusted expenses and gains, but including the $0.06 associated with the product recall in our second quarter. This excludes the expenses covered in Table 6 in yesterday's press release, most of which had been incurred in the first 9 months of fiscal 2018.

From a GAAP perspective we expect that reported earnings from continuing operations will be in the range of $1.66 to $1.75 per diluted share, in comparison to a loss from continuing operations of $1.41 in fiscal 2017.

We have updated our capital expenditures guidance for fiscal 2018 to be in the range of $67 million to $71 million, and we now believe that depreciation and amortization will range from approximately $82 million to $83.5 million. We expect interest expense will be in the range of $29 million to $29.5 million.

Finally, we continue to expect our recorded effective tax rate to range from 21% to 22%, while our adjusted guidance reflects an expectation of an effective tax rate of 22% to 23%.

And at this point I'll 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. Across our food distribution, military and retail business segments our teams are working diligently on key initiatives to generate the growth and efficiencies we know we are capable of achieving over the next few years. We have a robust strategic plan in place designed to enhance sales and generate cost efficiencies in order to drive sustainable business improvements.

I believe the next couple of years will provide continued opportunity for us to execute our strategy of participating in the consolidation of the food industry as companies decide to exit this competitive landscape at more reasonable valuations. This effort, along with the others noted, will help us take full advantage of our opportunities to generate value for all key SpartanNash stakeholders. We look forward to providing you with an update on our progress when we report our fourth quarter results in February.

With that, I'd like to turn the call back to our 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) The first question comes from Karen Short with Barclays.

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Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [2]

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A couple questions just on this initiative with the third-party consulting firm. Maybe can you talk a little bit about what you think can I guess get accomplished on the distribution side? It seems fairly obvious to me what the opportunities might be on the retail side, but I guess I'm a little less clear on the distribution part.

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

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Yes, Karen. You know, as you look at this initiative what's really exciting about this initiative in my opinion is the ability it has to engage your associates, whether that be on the retail store floor or whether that be on the distribution center floor, or whether that's in our service centers, or the field ops. It really is going to empower our associates from every level of the organization to coordinate all the ideas they currently have, value those ideas, prioritize those ideas based on impact and ease of implementation, and then implement them rapidly. And we expect to see benefits really starting to improve through next year, through the back half as we've identified these. So they will be from all different kinds of angles. And so in distribution it can be pit flow. It could be wrapping setup. It could be how we interact with customers. It could be spoilage issues that could be fixed just by a different flow process or different receiving processes. It could be reduced shrink through how do we handle dated product and is the rotation happening as it should be. The point of this exercise, it will be many different types of ideas that add up to very significant value for the company. And the value comes in dollars and cents from efficiency improvements, from revenue sources that have been sitting in front of us forever and you just didn't harvest them like you'd have expected, to process improvement that just makes the company more efficient and nimble. And as we look at what's going to occur in this industry over the next few years and how we're trying to build this national network -- efficiency, nimbleness, ability to service our customers as they grow and move, the ability to attract new customers, and then the ability to do that efficiently are going to be critical. And I think that then opens up a lot of our opportunities in the consolidation phase which I believe these type of environments create the opportunities that our strategy is designed around. So it's really a foundational piece. And you walk away with not only improved operations, but I believe an energized associate base with a culture of continuous improvement, which we've been really working hard to implement. So I just think the benefits are very widespread and the ideas come from all the places you'd expect, just they're given to you by the people that live thrm every day and see the opportunities. And it's really, as I said, just how do we harvest that in an organized, effective and efficient manner that gleans the results on a rapid and intense pace.

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Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [4]

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So in terms of benchmarking in terms of other companies that have used this third-party advisory firm, is there a rule of thumb in terms of percent of sales saving or opportunity? Any (inaudible) . . .

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

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Yes. I mean, just to give you a general expectation -- and, like I said, we're just kicking this off. But we expect this to be over -- $10 million to $15 million or more. And that's the expectation we're putting out there. We certainly have to do all the work. We still have to get the efforts kicked off, which we're going to start in December. But from the CEOs I've talked to and what we expect, that's the kind of numbers we're looking for.

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Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [6]

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And then my second question is just regarding Caito. So what do you think the timeline might be in terms of getting that business back to breakeven? If you could frame that a little bit, that would be helpful.

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David M. Staples, SpartanNash Company - CEO, President & Director [7]

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Yes. You know, Karen, we believe in this business. As we've said before, strategically it's on track. There is no lack of interest in what we do. We've just picked up a couple big customers. Target's now on board through the sales group we work for, RFG. We're now servicing them. And we're servicing another company in the Midwest that's a fairly nice size retail chain. Those have both come on. We've transitioned our central kitchen down there. And as we do that, we've really experienced considerable growth. Obviously it's on a lower base. But our run rate is beginning to approach $40 million in the kitchen, and that's from zero, what, just a little over a year ago. And so I think what we're finding in this environment is every time we put in new business it creates some inefficiency in the process because you're putting in significant amounts of new business. And so as we build up this base core that's going to be critical for the long-term success, we're creating, I think as you'd expect, some growing pains and inefficiencies as we adjust our processes and as we have to consistently recruit and retain new associates that we're having to train and develop a more mature and experienced workforce. So our goal is over the course of next year this thing is to breakeven or better and it's beginning to be what we thought it would be and so we expect quarter-over-quarter improvement. But I think this current labor environment that we find ourselves in and freight, because that impacts this business. Because this is fresh and it needs to be delivered frequently. And you're bringing a lot of produce in from around the nation. Those matters aren't just going to go away. So I believe it will be an effort that will take us over the course of next year. But with that said, I expect improvement every quarter.

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Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [8]

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Okay. And then sorry, last question for me. Just -- in terms of bigger picture consolidation, I guess there's a view out there that you don't really -- you're disadvantaged from a scale perspective. And I was wondering if you could talk to that with respect to, I guess, regional scale but also delivery scale from a full-truckload perspective and just maybe frame that. Because I think that's just a common perspective, is that you guys are disadvantaged from a scale perspective.

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David M. Staples, SpartanNash Company - CEO, President & Director [9]

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Yes. Well, I think that couldn't be further from the truth, especially on the distribution side of the business. In our distribution network we flow considerable amounts of product through our distribution centers. We buy a truckload. We represent over 2,000 stores. And our program with the manufacturers has been, "Look, you partner with us, we're going to be a great partner for you. And we're going to enable you to [roll product], new programs, new products, new thought, out to the customer base. And it's hundreds or thousands of stores that we can get this in -- get you into." And they've responded, and I think we've been a valued partner for a lot of these CPG companies because we're able to do that. Pet centers, P&G's laundry-type programs, coffee programs with Starbucks. It just goes on and on and on. And when you look at how we operate across that region, we provide a lot of value. And this industry continues to move forward, and I believe it will continue to consolidate. I believe we will be a party to that. I think we will just continue to improve that scale and clout. And as we're able to reach both coasts and service some exciting and growing customers and just continue independent base, which I think has a lot of power in it, especially in the regions we serve. I don't see that as a big impediment for us. And so I think we do have the scale and clout. And I think that scale and clout will increase, but I think it's going to increase because of our partnering ability and our innovative spirit with the manufacturers as well as the fact that we run significant volumes through our DC.

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Operator [10]

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The next question comes from Scott Mushkin with Wolfe Research.

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Scott Andrew Mushkin, Wolfe Research, LLC - MD and Senior Retail & Staples Analyst [11]

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So I just wanted to kind of talk about the current environment and inflation and deflation. I'm a little surprised it's slowing down as much and you guys pointed to grocery. So I was wondering if you could give us a little bit more detail on what's going on there, and then also expand a little bit on obviously your costs are going up and your ability to pass some of those costs -- freight, labor -- on to your customers.

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

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So Scott, I guess as you look at the food inflation as I think Mark had mentioned in distribution, yes, it's pretty flat. But you have to look at the categories. Our grocery inflation is fairly consistent at that slightly under 1%, you know, 0.3/4 of 1% to 1%, it's really the produce and the meat that vacillate between inflation and deflation. And that offsets it down to closer to 0 in the distribution. But it's still not what you would consider substantial. You know, 0.1/2 of 1% to 1%, if you take the fresh departments out and the way they vacillate. So, as it has been, and I think as we've heard pretty much, and that's on the distribution front, we're not in a wildly inflationary period. I think the (inaudible) manufacturers are pressured probably by the industry to keep their costs as low as they possibly can. And I think you see that continue to work. That being said, we are starting to see some cost increases come through and that obviously is beneficial from a distribution perspective, the way our business model operates. However, we're very committed to trying to keep costs down for our customers as well, because we want them to be successful. As far as how we pass on the fuel side of transportation or inbound transportation in the distribution business, put the manufacturing operations aside, freight is a part of our cost of goods. And so that part physically we can put through reasonably well. We typically have fuel surcharges. Now you have some accounts where you have fixed-cost contracts, especially in the food manufacturing side, and there that puts a little more pressure on us on the inbound side. The outbound side is a competitive issue, just like anything. And you pass it on where you can. But for the most part you work to find the efficiencies to offset those types of issues. And as the market moves on, it's just kind of like with inflation and deflation in products. Eventually things work their way through into the price if they stay inflated long enough.

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

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And Scott, I would just add one other piece to what Dave was saying about how meat and produce can bounce around. So for the period to date, or the quarter to date, which is only 4 weeks, the food distribution part of the business bounced back up to about 60 bps versus finishing the third quarter at almost flat. And so when we see big movement within those 2 categories it can really skew, even though we've got consistency in grocery and some of the other categories.

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Scott Andrew Mushkin, Wolfe Research, LLC - MD and Senior Retail & Staples Analyst [14]

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Then the second question is -- obviously and Karen poked at a lot of the good stuff coming up. But I was just trying to understand. You refer to the climate as very -- as challenging. Not really very; I think you said it was challenging. And I just wanted to understand a little bit what -- if you were going to size the challenges -- labor, transportation, competition -- I mean, I also wanted to understand a little bit about what click-and-collect is doing to your customers. Are they able to add those services or not? And how do you think click-and-collect is impacting the business overall?

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David M. Staples, SpartanNash Company - CEO, President & Director [15]

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Sure. So I think as you try to -- I think you wanted us to sort of order the challenges. I think labor is going to be a challenge for not just our industry, but the country as long as the economy remains strong. And so we, like everyone else, have to continue to really assess our processes, the way we go to market, and how we get more efficient. I think that's very achievable. And so we have to be that employer of choice. And I think if you look at our credentials, we've won a lot of recognition for being a great place to work, one of the 100 best companies in West Michigan, one of the best 100 companies to work for. I think we provide a good benefit program for our associates. We need to continue to accelerate in that area and be the company people want to work for, whether that's retail, distribution or our corporate offices. And so we have to be good there. We have to continue to be the most efficient. We have to continue to look for ways for our associates, to equip them to better every year in what they do. And we're committed to that. And we have to look for ways to add efficiency into the process in addition to those types of things. So I think labor is just a challenge that everyone is going to have. And the people best at addressing that will be the guys that get out in front of the industries they're in. I think transportation is a problem. It ebbs and flows like this. It's structural based on the number of new rules that went into place. And it's transitional in that as it creates driver pressure, it then gets more people interested in being drivers again. And I think some of this will, as it always does, takes place over -- fix itself over time. But in addition to that there's a lot of things we can do. As our business has evolved and as we've really gotten good at taking on new kinds of transportation -- for instance, we talked a little bit about this pilot to deliver produce to smaller-format locations. Well, we're already delivering things to smaller-format locations. And as we evolve that business we can use different kinds of trucks. We can use smaller trucks that get better gas mileage, that cost less to use. We could actually, then, go to a different class of driver if we go to a different size truck, which is more plentiful and more affordable. We can go from overnight routes on some long hauls to hand-off routes so we allow our drivers to be home at night, which is one of the key things we're finding in the new world of drivers they want. And so there's a lot of these types of initiatives we're putting in place. The problem is you don't just wave a magic wand and they happen. They're programs and they're efforts and they need to be rolled out diligently and efficiently so that they add to our efficiency and they don't create more inefficiency because of a haphazard rollout. So these are all the kinds of things I think we can do to address those issues as well. And so I think those are 2 of your tougher headwinds. Competition's always going to be there. I mean, we've gone through the rollout of supercenters. We've gone through every new type of thing that was going to put the independent out of business. The independent is a strong operator. The independents serve markets better than other people can do. And we have some independents that are doing really well and we have some independents that are struggling some, just like everybody. There's some national chains that are doing really well and there's some national chains that aren't. So I think that's the way it's been. It is competitive. It will be continue to be competitive. And it's up to us on the retail side and on our independent side to continue to come up with those programs that make our stores and our independent stores the places you want to shop because of what they offer you. And it will be up to us to ensure that that experiential side also can fund margin that you're using to invest in other parts of the store to address the need for value. So I think our positioning does that. We share that with our retail distribution customers and we're working hard with them to provide that thought leadership on the type of program that can help them drive more experience, drive margin in certain areas, while providing value in other areas. Give the customer what they want and they'll pay for it and you'll get rewarded on the margin there. In other areas where it's a little more commoditized you have to be more value. And we will. And so that's a lot of what's behind our positioning and why we're excited about where it's going. And I think we just continue to bring that thought leadership to our independents as well. And that's how we'll battle this current round of competition. From a e-commerce perspective, we're really pleased with our click-and-collect. We put in a high-quality platform. We get tremendous rating. If you look at our customer satisfaction ratings from those that rate us on their experience relative to industry standards, we blow them away. Our satisfaction overall with our product I think in the last period was over 80% of the people who used it gave us a 5 out of 5 on their experience. And we have it in over 55% of our stores. And we put it in a lot of stores on purpose just to see where it seems to be most accepted and valued and where it's least accepted and valued. And so there will always be more opportunities for us to roll this out to more stores. But I think we've got a pretty good bead on where people are willing to use it and those areas where it just doesn't seem to connect as well. But overall we're very happy with it. And what we're seeing is, is 50% of our business in it is new volume. And so I think if you think about our positioning and our customers' positioning and as you put these e-commerce solutions in it, in today's world people are shopping, what, anywhere from 3 to 5 locations to fulfill their grocery needs. We just have to capture more of our share of that business. We don't really even have to attract new people into our stores. Of course we want to do that and we continue to be focused on that, but for us to achieve our objectives it's just getting more out of the wallet that our current customers spend. And when we put the click-and-collect in, with 50% of that business being new, that's customers that we currently have that now are spending over $100 a transaction. That's new customers we're attracting that are spending $100 a transaction and really mixing out the cart well. And so I think our stores and our independent stores are incredibly well positioned for click-and-collect. We have built our chain on convenient location. And so has all the conventional players. And that convenience, when you associate that with you order your groceries online, have someone pick them for you and then have them put in your trunk as you drive by and all that happens from your interaction within a few minutes, it's in your trunk and you're on your way, that's an incredibly efficient model. And what we've found and what we've been told by others is if you start with click-and-collect you find even after you've put in delivery, which we have, people tend to stay with the click-and-collect. If you start with delivery and then you put in click-and-collect, which we've done that as well in a few markets, we find people stay with delivery. So the customer seems to value both sets, but they value what they become more familiar with. And I have to be honest, I think from a conventional grocer perspective, the ability to be profitable is much higher with click-and-collect than it would be, where our locations are located, with delivery, where you're suburban, rural, small-town America, trying to deliver products all over the world. I think we will have a great experience for our customer -- we do have based on their ratings with click-and-collect, and I think it will be a great tool for us as part of the arsenal of how we go to market and show that we're a better place to shop than some of these alternatives. That was a long, long answer, but you asked a lot of questions.

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Operator [16]

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The next question comes from Paul Trussell with Deutsche Bank.

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Paul Trussell, Deutsche Bank AG, Research Division - Research Analyst [17]

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You spoke about the retention you're experiencing in your core customer base. Maybe you can just detail that a bit more along with some of the wins you're having in expanding business and categories with those customers. And how should we think about what's transpiring from a new customer standpoint and the impact to profitability as you add new customers to the distribution platform?

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David M. Staples, SpartanNash Company - CEO, President & Director [18]

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Sure. Yes. So I think on business retention what we're finding is we continue to bring that thought leadership as well as an efficient model to our customer base. And one of our strategic planks has always been that being a retailer makes us a better wholesaler because we're consistently focusing on how do we develop programs that help our retail customers succeed. And that's really benefited across our entire operation base. In the military we were able to help and assist the military with implementing a private brand program that they wanted to do. In other customers of different types we've been able to assist them in developing private brands. In the food processing arena we're able to know the type of programs that people are looking for and influence the development there and help provide consistent programs. So that retention is important for us because as it is a competitive world, if you retain your base and you're able to overtake other people's base somewhat, that's the recipe for continued stability in the core while you find your new avenues of growth. And these past couple years we've been really good at that. As far as new areas of growth and things we're doing, you can see that in the pet area. You know, pet is the new baby in my opinion. More homes now have pets than have children. People aren't getting married till around 30. They're not having children until their early 30s, yet they will have a dog the minute they're out of college, if not while they're still in college. And actually some people even have cats, I guess. But these pets are becoming their children. And that's their family until they're in their 30s now. And there's big opportunity there and we're bringing some real innovative concepts. We now carry 3 of the top 7 brands you can carry nationally in dog food. They used to only be available in pet stores. And so we've been able to crack into those markets. We've been able to really have a great fresh offer, refrigerated offer. We're doing the same kind of things in coffee. We're looking at different things where we can bring to the customer base in HBC for sort of an indulgence-for-mom areas in our HBC. Candy is an area where we continue to make progress with the vendors in the sets and ways we can display the product, the different products we can bring to draw people down the candy aisle because there's a huge convergence there. In fresh, our Fresh Divide program where we'll cut your produce any way you want it in-store, that's a portable program for our customers. But if you don't want to do that fully, you only want to supplement it, we have the ability to bring you the Fresh Cut program out of our Caito operation. And we're bringing people a great value there as well as that's moved into our Michigan, Indiana and Ohio distribution platforms. And so we're bringing a lot of different programs like that whether it's in the fresh or center of the store. But we're really working with our customers to design the center of the store and make that more relevant and exciting. And that goes along with e-commerce. I mean, we've build partnerships with many different types of service providers so that our customers can put in the e-commerce platform they need, whether that's a click-and-collect program, whether that's a delivery program, whether that's big data that they can capture from their systems and do the analytics they need to power their knowledge of their customer or power their websites and their e-promotion capabilities. We're bringing a suite of programs available to them now that they can use to really capture that digital world and make themselves more relevant as the world moves forward no matter what their size is from 1 store to 10 stores to 50 stores. So we're really touching on a lot of the different aspects of how we have that thought leadership and bring them the rounded solutions for their success. And I think that's been a big key to what's helped us with that retention as well as what's helped us grow with some additional accounts.

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Paul Trussell, Deutsche Bank AG, Research Division - Research Analyst [19]

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And then maybe just focus a little bit more near term. You've updated your guidance. And in the fourth quarter you expect still strong growth on the food distribution side, but you also outlined some headwinds that you're facing. Maybe just help us understand what would lead you guys to be more towards the higher end of the plan versus the lower end of the kind of updated range? How should we think about the biggest swing factors there?

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

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Well, I think, look, there are always a number of puts and takes. And with the guidance that we gave for the fourth quarter it's a little bit wider range than I otherwise might normally give. And I think a portion of that is that we talked about some of the sequential improvements or year-over-year improvements we've seen in our Caito business as it relates to the food processing side. And I think that becomes one of the bigger drivers as it relates to where we fall within the range, is that to the extent that we continue to see progress we probably skew towards the higher end of the range. And if we have more success with our private brand penetration in the quarter that helps us as well. And on the flip side, if the Caito business sort of stagnates or takes a step back, it's a little bit toward the lower end of the range. And on the private brands, if the penetration continues to improve but not at the expected pace, that could also come into play. And then there's the things that you just can't control. Right? For this year we've had a relatively good performance on a year-over-year basis in health insurance, but all it takes is one claim where you can't control things of that nature. So the self-insurance side is always a risk in that respect. But we've made progress on a couple of the areas where we've had headwinds in the third quarter. We need that to -- we need to sustain those improvements in the fourth quarter to skew higher on the guidance.

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Operator [21]

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The next question comes from Chris Mandeville with Jefferies.

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [22]

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Can we circle back on the advisory firm you've hired? From where we sit, I'm not sure we can fully appreciate the long-term benefit from this initiative. So would you just be willing to provide who they are, and maybe then we could take a look at who they've worked with in the past and a few case studies? And Dave, I think you called out a $10 million to $15 million number. Is that cost savings, which could potentially then be reinvested in the business, or was that an actual EBIT dollar growth expectation?

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David M. Staples, SpartanNash Company - CEO, President & Director [23]

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So, yes, I should have negotiated probably some sort of a promotional fee for them if I give their name out. I guess I wasn't full-sighted. That could have been some more incremental benefit, I guess. But, yes, I have no problem with that. I assume they won't. Harvest Earnings is the name. I mean, they've done this for Heinz. They've done this for Pier 1 Imports. They've done this for banks, P and -- they've done this for a lot of different people. And a lot of those have been publicly disclosed, so I know I can mention those names. I've talked to a number of the CEOs for some of those companies, and the feedback I received was just incredible. And so I guess as you think about what the long-term benefit is, the long-term benefit is you make the company better and you engage your associates in doing that in a manner and process that doesn't go away. It becomes part of who you are, and it becomes part of the company. So I think there's an interesting quote, right, from an executive. I believe it was like in HP, and it said, "If HP knew what it knew, how much better we would be," right? And so every day, our associates are looking at something and they're saying, "Man, oh, man, if you did -- if we did it this way, we would save so much money," or, "If we did it this way, we could sell way more of this product," or, "If we put this kind of a price on this instead of that, we'd make more money." And so it's all of those types of things. But what it becomes, you put in a process to harvest those ideas, and that's why it's called, I guess, Harvest Earnings. Today, you have all those ideas, and they swim around. It's hard to prioritize and it's hard to quantify, and people just put them out there. And so because you don't quantify them, you don't prioritize them and you don't rank them based on ease of implementation, they're just ideas. And some get implemented and some don't, and you probably have people focusing on trying to implement the real hard ones while they let the real easy ones lie. That's the fundamental premise of this program. So as you put this in and you put in the architecture to harvest the ideas, quantify the ideas, prioritize the ideas based on their ability to be implemented, that becomes a living and growing part of the company, and it just continues to intensify that program. And out of the thousands of ideas we get, we will only implement so many in this first 12 to 24 months. You have all of those ideas now cataloged and ready to go that the organization can keep using to drive the company forward. So that I believe is -- the long-term benefit, in my mind, is not just how much better we make the company over the first part of this exercise, but how much more empowered and how much more our associates realize they can make the difference, and our culture retains that and we continue to grow off that as we move forward. So I think that's the long-term benefit here. These are ideas that -- they're not just, like so many programs, you just do a cost reduction and you take it out and then you find back -- over the next couple years, it grows back, right? It just kind of comes back into the organization. This is a much more fundamental shift in how you do your business so that that should not happen. Is that helpful?

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [24]

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Absolutely, it's very helpful, but I guess I'm still a little uncertain with respect to that $10 million to $15 million number you tossed out there.

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

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So I guess as you look at that, I think it's a combination -- well, it will be improvements in our business that will lead to improving results, so it should drive our bottom line performance. It can come in multiple categories, like I said. It could come in, hey, here are some great sales opportunities. I think that will be a part of it. It will be a smaller part of it that then will strain down to the bottom. And so the number I'm giving you doesn't include the revenue component. It would be the bottom line component. It can involve just pure cost reduction through efficiencies or other types of events, and it can involve waste reduction as you improve shrink and other types of things that associates will be focused on.

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [26]

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My second question -- I know it's a little early, but you've got some good momentum on the core distribution business. I suppose it wasn't necessarily up to snuff internally, but it still looks good to us. So I was just hoping maybe you could give us a sense of what to expect in 2019. And then, really, what's a plausible time horizon for overall margin stability in that business segment? You mentioned that your goal is to break even on Caito, but what about the base business? Does the moves that you're making on freight management get you to overall stability maybe in the back half of '19 or something along those lines?

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David M. Staples, SpartanNash Company - CEO, President & Director [27]

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Yes, I think I would look at it that way. I mean, we feel good. The growth we're experiencing is foundational growth. It's not fly-by-night projects. It's not things that are one-time pops. We're leveraging our network in many ways. I mean, we actually now -- it's pretty impressive, for those of you who've followed us for a while. We have trucks on the ground across the entire country at this point. We are taking product to the West Coast. We are taking product up and down the East Coast, which we have forever with our military side of the business, but we're expanding that leverage to other types of businesses. We're doing that through multiple things. We're hubbing-and-spoking our facility to be more effective in how we're doing that. But we're also working with partners to figure out ways that they can either carry inventory for us and then be our legs and arms on the ground in some of these farther-away markets, to how we can more efficiently get the product into their facilities and they just distribute it for us. So we're really putting together a lot of different ways to leverage our network, and that's generating a lot of growth opportunities because we're able to help some customers really expand their geographic presence. At the same time, we're growing into that in a period of rising transportation and labor tightness. And so, yes, I believe as we put in the types of things we're talking about in the transportation and labor side, we're going to see continued improvement there and, yes, I would expect us to be better in the back half of next year on those areas than we are today.

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [28]

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And then just thinking about what's underlying the solid growth and distribution, Dave, would you characterize it more of your sales force doing a great job at further penetration and picking up new accounts, or of late have you maybe seen some greater outreach from potentially new customers who could be going through some transition as some of your competition has exchanged hands?

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

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I just would say yes. I mean, I think our sales force is doing a great job penetrating existing customers and looking for more things we can do. I mean, like I say, we are now basically distributing product in every state of the country, except for maybe Idaho, I think it is, right? I think it's all but one state. And we're doing that through trucks, we're doing that through partnerships, and we're doing that with unique distribution methods where we don't have a single wheel on the ground. And every one of these different types of methods we have can leverage new categories to distribute and can bring some of this unique process to other companies. And I think our sales force is doing a very good job of looking for ways to further penetrate people we're servicing with these unique distribution methods and types of products that they could get. I think they're finding new people who would like to use some of these methodologies that we do, and I think we are attracting new customers in our general business because of some of the change that's going on in the industry. And I think there are also more opportunities to build out our store base in a contingent or more efficient fill-in opportunity. And I think there will continue to be more opportunities to build out our network or make it even more efficient through fill-in opportunities there, and I think we'll continue to see that accelerate because of the current environment we find ourselves.

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [30]

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And then a last one, if I could, on capital allocation. It doesn't sound like you're quite yet prepared to accelerate your remodel programs, despite being happy with your initial results. So just given your strong free cash flow generation, has there been any change internally around the conversation of how you approach dividends or buybacks?

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David M. Staples, SpartanNash Company - CEO, President & Director [31]

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Well, I mean, I think we're going to do 2 things. I mean, I think we are going to have more remodels next year for our positioning. I don't think we're going to do 140 of them, but I think we'll do more than we did this year, and I think they'll be more concentrated. I really don't want to go any deeper than that, because I don't want to kind of tip our hand. So we are backing down on the capital side of the business. And I think we'll find ourselves investing some in some of our network areas to improve our efficiency and allow us to handle the growth we're experiencing. So I think there will be some capital investment there as well, which may take our capital up a little bit. We'll have more guidance on that I think as we get into next year. Our dividend is like 3.5%, and I think we've grown that for 10 years, and I think we expect to continue to increase our dividend. We think it's at a pretty healthy level. We'd like to, with stock appreciation, maybe help mitigate that a little bit. But we believe in a dividend. We will do share repurchase opportunistically, like we always have, and so whether or not we do that will kind of depend on some of these other opportunities and how we feel about the existing share price. So I think that's how we've always handled repurchases, and that's how we'll continue going forward.

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Operator [32]

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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 [33]

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Could you elaborate a little bit, Dave, on the new fresh program you mentioned early in the call? And then I have a follow-up.

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David M. Staples, SpartanNash Company - CEO, President & Director [34]

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So you're referring to the military one, I believe.

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Charles Edward Cerankosky, Northcoast Research Partners, LLC - MD of Research, Equity Research Analyst & Principal [35]

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Yes, you were talking about the military segment.

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David M. Staples, SpartanNash Company - CEO, President & Director [36]

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We have a great partner there in Tyson, and they've just done a wonderful job for the military. They've been a wonderful partner for us, and they've had an opportunity to continue to grow some of the services they've offered through that network, and we've had the privilege of working with them to bring more products of a fresh nature into the commissary. So that's really what we've been doing there. They've just been a great partner to work with, and we've been lucky to be a part of their offering.

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Charles Edward Cerankosky, Northcoast Research Partners, LLC - MD of Research, Equity Research Analyst & Principal [37]

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On the prepared foods side, obviously, you made some big investments there with the Caito acquisition. Could you talk about the demand -- more from the demand side, what your wholesale customers are doing to expand their in-store prepared foods and how some of the initiatives you've taken in the corporate stores have worked out, including that branded smokehouse? I think it's Betty Faye's (sic) [Betty Kaye's] -- that you guys operate?

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David M. Staples, SpartanNash Company - CEO, President & Director [38]

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Sure. Obviously, fresh prepared foods and grab-and-go and convenience are big trends in our industry now. Our customers, they want to eat healthier, but they want to be able to have the convenience of either meals that are ready to just take home and eat or more simplistically put together because their ideas are all in place and the components are there and it makes it easy to do. And so the whole Caito acquisition was to drive us down those lines, right, between the Fresh Cut and the startup Fresh Kitchen that we've been going through for the past couple of years. So if you look at our retail stores or you look at our customers' retail stores, you're going to see more grab-and-go items, whether those are yogurt parfaits, whether they're lasagnas or salmon on rice or sandwiches or sushi programs or, to your reference, Betty Kaye, whether that's cut fruit, ready to go, done by a Caito or done in-store. Those are the kinds of things you're seeing being done, and those are all the kinds of things we're able to do at Caito. And so in the Fresh Cut area, we do fresh-cut fruit, veg. We make ingredients that other manufacturers may use in their process. We are trying to really look at our customer base and meet the demand of the end consumer in numerous ways, whether that's direct to our retailers with Fresh Cut programs or whether that's a component to manufacturers of meals, whether that be meal kits, whether that be cooked meals. We're trying to explore different avenues down that meal kit world, as I think meal kits have struggled a little bit as they've moved into mainline grocery with the amount of shrink, given the short date that lies on it. And so we're actually working with people on things like HPP meal kits, which is high-pressure pasteurization. We're trying to get involved in that concept, as that can bring real fresh-meal solutions to people that have a longer shelf-life. We're trying to work with manufacturers on can we be a component maker for them of some of the fresh type of meals they want to put together, so we can cook components of that, whether that be eggs or whether that be noodles, rice, other types of things that they may want in components, and we can get longer, higher productive runs of products as well. So not leaving behind the bases that we make today of the lasagnas or noodle dishes or pot pies or sandwiches or salads -- those are a good core business that we're helping with -- but also how do we diversify our customer base to also bring in some of those high production, highly efficient runs that can balance all of the type of efforts we're doing. So there appears to continue to be demand. We continue to have interest from all types of different areas on the things we can do for them. And we just have to get a big enough core in that kitchen part of the business that we have that stabilized workforce, that mature, now-experienced workforce and our processes are a little more streamlined and managed, so where you can start generating the operating profits we need. We still need some more volume, and we've got people working with us to come onboard to try to get it. We just had some pretty nice wins. We have a company we work for as a manufacturer, and they've signed up a Target and another pretty large regional retailer that we're now servicing. So we're getting some wins from some nice customers in that business. So the demand is there. We've just got to get enough of it in the house, and that's growing rapidly. Like I say, we're up 30%, 40% in the kitchen year-over-year, so we are building the volume. And we're beginning to approach that volume level we need, and now we just have to get the processes in line to go with it.

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Operator [39]

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Our last questioner is Kelly Bania with BMO Capital Markets.

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Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [40]

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Just a question on the guidance. I think the midpoint was cut about 5%. Just how much of that was Caito? And as you look at taking on new business in Caito or in the Fresh Cut, given what's going on in the external cost environment, do you think your pricing business right there? Or do you also think about slowing down the pace of taking on new business until you do have that workforce experience and kind of underlying operation running as smoothly as you'd like?

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Mark E. Shamber, SpartanNash Company - Executive VP & CFO [41]

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So I'll answer the first portion of it, Kelly, and then I will give Dave the chance to chime in on the second part of that question. I would say that the vast majority of the take-down was associated with Caito, whether it was where the performance fell in the third quarter versus expectations as well as where we think we're heading for the fourth quarter. So I wouldn't say that it was exclusively there. I mean, as I mentioned, there are some puts and takes, and so there are some things that came out a little bit better, things that came worse, but, net-net, I would say that it represented the lion's share of the guidance adjustment.

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David M. Staples, SpartanNash Company - CEO, President & Director [42]

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And then let me talk about the business side of it, the new business side of it. Kelly, it's a very fair question. I think what's important is that we continue to diversify our customer base and serve those we have incredibly well, and I believe we still do. But I do think it's critical we continue to build up the base of the business. And we have experts in the field running the manufacturing. And, yes, I think no matter what you do, when you grow by 10%, 20%, 30%, 40%, you're going to disrupt the smooth flow of the processing or operations, especially as you start up. And so this facility is only a year and a half old, and so it's not like it's -- it's still growing. It's still putting the process in place. So I think we're trying to manage the types of business we take on. I think we're trying to take on the right type of business, we believe, from an efficiency perspective, and I think we're prospecting for the right type of mix of business. But I think we have to continue to take that on as we achieve it. But we just have to keep really focused on our process as well, and I think we can do both of that. There's a component here that you just have to get to a certain level of volume at some point to be able to make money. You have a fixed-cost basis that you have to be able to absorb. And while I don't think $40 million is quite there, it's certainly a lot closer than we were a year ago, when we were closer to, at this point, I think maybe $10 million. And so we are growing that business with the customers we're trying to attract, and there's the right kind of opportunities out there that we're pursuing. But I believe we have to do both. We just have to continue to bring the right amount of volume in and get better and better in our processes, and I think we're committed to both of those. I don't think it would be in our best interest to just stop taking on new business, because you have to get to a higher level of volume to be at a true breakeven to begin with, so it's just kind of the way the leverage of the costs works.

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Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [43]

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And when you talk about Caito maybe swinging to breakeven next year, can you just remind us what kind of operating profit swing that would be next year? And I guess do you think about setting expectations a little bit more conservatively given that you do plan on taking on more business in the short term, which seems like it in the short term does kind of weigh on profitability, at least?

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David M. Staples, SpartanNash Company - CEO, President & Director [44]

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So I think, yes, we will be more conservative. I think, obviously, we're learning as we go as well, so we will be more conservative. I think it's a pretty significant number as we move that to breakeven. It would be a pretty significant number. I don't think we've ever disclosed that individually.

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Mark E. Shamber, SpartanNash Company - Executive VP & CFO [45]

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Yes. I mean, the only reason I'm hesitant, Kelly, obviously, is that to the question or the portion of the question asking about conservatism, so it doesn't mean that our expectations internally are that we hope that we don't expect them to hit breakeven, but from a guiding perhaps conservatively, we may not factor that full piece into the guidance. So that may be an element of my range that we give when we had the call in February. And so I don't want to try to have people backing into it or asking me, hey, if I say it's $5 million, if I say it's $6 million or whatever it is, that people say, well, how much of that number is baked in -- how much of that improvement is baked into guidance and how much of it is not, because I think that's a rabbit hole I don't want to go down because there are so many variables. But I think that the question is fair, and I would say that our expectation is for them to get to breakeven, and from our perspective, we will factor in some level of conservatism in giving the guidance next year on top of that.

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Operator [46]

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This concludes our question-and-answer session. I would like to turn the conference back over to Dave Staples for any closing remarks.

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David M. Staples, SpartanNash Company - CEO, President & Director [47]

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Well, I'd just like to thank all of you for participating today. And we've talked about many exciting things that are on the outlook and obviously some challenges we need to face and address. And as we've said, we're highly committed to all that, and we really look forward to updating you with our progress and speaking with you again as we report the next quarter in February. Thank you, everybody, and have a good day.

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Operator [48]

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