Executives: Katie Turner - IR Dennis Eidson - President & CEO David Staples - EVP & COO Chris Meyers - EVP &

CFO
Analysts: Scott Mushkin - Wolfe Research Shane Higgins - Deutsche Bank Mark Wiltamuth - Jefferies Ajay Jain - Pivotal Research Ryan Gilligan -

Barclays
Operator: Good day, and welcome to the SpartanNash Company's Second Quarter 2016 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mr.

Katie Turner, Managing Director. Please go ahead.

Katie Turner: Thank you, good morning and welcome to SpartanNash Company's second quarter fiscal 2016 earnings conference call. By now, everyone should have access to the earnings release for the second quarter ended July 16, 2016. 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 might 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 among food, retail, and distribution companies, the uncertainties inherent in implementing strategic plans and general economic and market conditions.

Additional information about the risk factors and the uncertainties associated with SpartanNash's forward-looking statements can be found in the Company's second quarter earnings release, fiscal 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 statement. SpartanNash disclaims any intention or obligation to update or revise any forward-looking statement. 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 their most directly comparable GAAP financial measures and the other information as required by Regulation G is included in the Company's earnings release, which was issued after market closed yesterday.

And it's now my pleasure to introduce Mr. Dennis Eidson, President and CEO of SpartanNash for opening remarks.

Dennis Eidson: Thanks, Katie. Good morning and thank you for joining our second quarter of fiscal 2016 earnings conference call. With me this morning are Dave Staples, our EVP and Chief Operating Officer; and Chris Meyers, our EVP and Chief Financial Officer, as well as other members of our executive team.

On the call today, I'll provide a brief overview and highlights of the second quarter. Dave will then give an update on our business segments and Chris will offer you additional detail on our financial results and guidance before I issue some closing remarks and then we'll open up the call and take some questions. We are generally pleased with our second quarter performance and continued traction in our overall business plans. We achieved adjusted earnings per diluted share of $0.58 which was $0.05 better than the prior year against a backdrop of a challenging operating environment as our efforts to drive new business and improved operational efficiencies helped to mitigate the impact of deflation on our bottom line. We continue to take steps to position the Company for growth for new customers, enhancements to our merchandizing pricing and promotional strategies and by improving operations and expense leverage through our supply chain optimization and merger and integration efforts.

We're excited about the initial rollout of open acres, a new private brand for fresh products and this will provide customers in both company-owned and independent store locations with quality fresh products at significant savings. We also continue to invest in slight retail markets and recently completed 8 remodels and re-banners for family fair in Omaha, Nebraska, improving our offering to the customer while highlighting our variety in value, especially as it relates to produce and private brand. On the distribution front, we continue to be encouraged by our diversified planned sales opportunities. I'm very proud of our dedicated associates who continue to work hard to drive greater customer engagement and improve the overall shopping experience and into our excellence for our retail food distribution and military customers in our organization as a whole and visibility to deliver upon our commitments to our shareholders. And with that, I'll turn the call over to Dave.

David Staples: Thank you, Dennis. The second quarter was another example of the successful execution of our key operating initiatives. In our food distribution segment, despite continued deflation, primarily in proteins and dairy, we generated sales growth over last year, mainly due to new accounts in our core business, as well as growth in alternative channel. We believe the sales pipeline continues to be strong as we remained focused on providing supply chain solutions for a variety of different industries. During the quarter we continue to expand our merchandise and marketing programs with our independent customers and we continue to work on initiatives to improve operations, including our supply chain optimization and asset utilization efforts.

As a result, we consolidated our warehouse in Statesboro, Georgia, with our facility in Columbus, Georgia, mid-way through the quarter which represents a fifth distribution center we've consolidated since the merger with Nash Finch in 2013. The organizational effort involved in these undertakings highlight our dedication to improving the efficiencies of our entire network and providing enhanced product freshness in selection, as well as lower cost to our customers. In the retail segment, sales are negatively impacted by the deflationary environment, also primarily in proteins and dairy, as well as competitive store openings, many of which were cycled by the end of the second quarter and will be cycled into the -- through the third quarter. We estimate that these factors combined had an impact of approximately 200 basis points on comparable store sales. From a geographic standpoint in Michigan, we've been extremely pleased with the customer response to our five remodeled stores and have seen positive returns from the improvements to our shopping experience, particularly in produce.

The grand reopening for our Grand Haven D&W store was held in mid-June, the very positive customer response. And we look forward to continue the application of these successful experiences and strategies through our other retail stores. In the West, although we cycled some competition, we negatively impacted comps and eight of our Omaha stores due to the significant remodeling efforts. Additionally, one of the more significant ongoing issues in this region remains the downturn in the oil account which has had a significant impact on our stores in North Dakota. Following the close of the quarter, on July 20, we celebrated the grand reopening for these 8 re-bannered and remodeled Family Fare stores and relaunched the Omaha region of 14 stores as Family Fare.

As part of this initiative, we have invested in programs and product variety to make these stores more in line with today's consumer expectations. While our focus was across the store, we have made strong investments in produce and our private brand products that ensure our customers have access to wide variety of organic produce and other such products. We're also focusing on value, particularly on key product and categories where we have some of the lowest pricing in the region. We also completed the rollout of our customer loyalty program and have launched an exciting and comprehensive marketing campaign with TV/Radio print and in-store signage [ph] that better highlights the variety and value that we offer across the Family Fare banner. Additionally, we continue to invest in our analytical tools and believe that our customer segmentation model will enable us to better understand our customers and personalize their offers based on the products and value they desire.

On the product side, we continue to expand our private brand programs for both, our distribution customers and company-owned stores with a focus on healthy and fresh products [ph]. During the second quarter, we began rolling out Open Acres, our new private brand for fresh products. We piloted the brand in Michigan and began rolling it out to other parts of our distribution and retail networks at the end of the quarter. We will continue to expand our product offerings with fresh chicken and other proteins in the third quarter. This new brand has been well received and closes the gap in our portfolio of private brands that existed in our non-Michigan footprint.

It also provides high quality products at a significant savings to our consumers. For the second quarter, private brand unit penetration in our retail operations was 21.1%, which continues to place us above the national average. We ended the quarter with approximately 7,000 total private brand items. Turning to the military segment, we were pleased to see positive sales growth of 1.7% over the prior year which significantly exceeded the performance of DeCA. The sale gains were primarily due to the expanded distribution of fresh products.

We continue to work on increasing our service offerings to new and existing vendors and to focus our efforts on sales and margins in our core business. With that, I'll turn the call over to Chris for further details on our financial results and an update on the outlook for 2016. Chris?

Chris Meyers: Thank you, Dave, and good morning everyone. I'll begin with the detailed overview of our second quarter results, and then review our guidance for fiscal year 2016. Consolidated net sales for the 12-week second quarter increased to $1.83 billion or 1.8% growth compared to the prior quarter.

Consolidated gross profit margin for the second quarter was 14.4% versus 14.6% in the prior year quarter, and primarily reflects the business operations and new business and deflationary impacts. Second quarter adjusted operating expenses decreased $1.5 million from $224.9 million and $223.4 million and improved 30 basis points on a rate to sales basis compared to the prior year quarter. When excluding charges primarily related to restructuring and merger integration for both period in net gains on primary sales and expenses related to business initiatives in the prior year. The adjusted second quarter results excludes $5.7 million of restructuring costs associated with warehousing consolidations and asset impairments of underperforming retail stores, $900,000 of ongoing merger, integration and acquisition costs. The prior year quarter excludes $300,000 of gains from the sales of assets and $200,000 of merger, integration and acquisition costs.

The decrease in the adjusted operating expenses as rate of sales was primarily due to lower depreciation expenses associated with fully depreciated assets, utility and occupancy costs and various operating expenses resulting from productivity and business initiatives partially offset by higher healthcare costs. Adjusted EBITDA for the second quarter increased $200,000 to $58.7 million or 3.2% of net sales versus 3.3% of net sales last year. Adjusted earnings from continuous operations for the second quarter increased $1.9 million to $21.7 million or $0.05 per diluted share increase from $0.58 per diluted share compared to $0.53 last year. These results exclude net after-tax charges of $0.11 per diluted share related to adjustments previously mentioned. For the prior year second quarter, adjusted earnings from continuing operations exclude net after-tax gain of $0.01 per diluted share related to a benefit associated with tax plan initiative while previously mentioned adjustments.

Turning to our operating segments; second quarter net sales for the food distribution segment increased to $820.3 million from $782.7 million in the prior year quarter, primarily due to new business gains but also growth of existing accounts. Second quarter adjusted operating earnings for the food distribution segment increased 15.7%, $21.6 million from $18.5 million last year. The increase was primarily due to new sales, supply chain optimization efforts, merger synergies and more depreciation expense, partially offset by higher healthcare costs. In our retail segment, second quarter net sales decreased $14.3 million to $501.8 million due to a 3% decline in our comparable store sales, excluding fuel; $9.8 million of lower sales due to the retail stores and fuel center closures; and $4.1 million due to lower retail fuel prices compared to the prior year. These were partially offset by contributions from stores acquired in the second quarter of last year.

Comparable store sales reflected challenging economic and deflationary environment as well as competition, particularly in our western region. Retail segment operating -- adjusted operating earnings for the quarter increased to $15.5 million from $14.7 million last year. The increase was primarily due to improved fuel margins, favorable retail programs and lower operating costs, particularly in utilities partially offset by the impact of lower sales. In our Military segment, second quarter net sales increased $8.4 million, $505.4 million, primarily due to new business gains associated with the distribution of fresh products, partially offset by lower sales and better operating areas [ph]. Military adjusted earnings were $2.2 million compared to $3.9 million last year; the decrease was primarily due to higher healthcare costs, lack of inflationary gain, exchanges in business mix.

From a cash flow perspective, our year-on-year operating cash flow was $54.7 million, compared to $123.4 million for the same period last year. The decrease was due to changes in working capital around the timing of vendor and testing, and increased working capital requirements for sales growth. The total long-term debt was $468.7 million at the end of the quarter, compared to $464.1 million at the end of fiscal year 2015. We ended the quarter at a net long-term debt to adjusted EBITDA ratio of 2.0 times which means for our stated targeted ratio. As we look through the second half of the year, we are cautiously optimistic given the deflationary environment.

We remain on-track to achieve our financial objectives for the year. Based on the first half results and our outlook for the remainder of the year, we are maintaining our previously issued 2016 guidance of adjusted earnings per share from continuous operations of approximately $2.07 and $2.18, excluding merger integration costs and other one-time expenses and gains. Our guidance is based on expectations of the second half of the year of sales growth and the food distribution segment, continued contribution from new fresh business in our military division which will lessen the volume impact with negative comp trends and better operating [ph] but negative to flat retail comparable store sales reflecting the deflation and competitive sales environment, partially offset by improvements resulting from capital investments, merchandizing initiatives and cycling of competitor gains. From a profitability perspective, we continue to anticipate that fourth quarter adjusted earnings per diluted share from continuous operations will be lower than the prior year due to significant inflation related benefits from LIFO realized in the fourth quarter of 2015 of approximately $0.07 per diluted share. We continue to expect that capital expenditures for the fiscal year will range from $72 million to $75 million, depreciation and amortization expense in the range of $76 million to $78 million, and total interest expense ranging from $18 million to $20 million.

I will now turn the call back over to Dennis for his closing remarks. Dennis?

Dennis Eidson: Thanks, Chris. In summary, I'm pleased with our continued execution on our strategy of delivering profitable growth and shareholder value despite the ongoing economic conditions and competitive headwinds, the underlying fundamentals of our business remains solid and we have a number of bulk initiatives underway, as well as a strong pipeline of sales opportunities. We continue to make investments in our business through projects and process improvement that we believe will drive earnings and free cash flow in the future years. We continue to implement initiatives to enhance our merchandizing, pricing and promotional strategies in order to drive greater customer engagement and improve the overall shopping experience.

We also continue to invest in slight retail markets and to expand our natural and organic offerings in private brands including our new fresh interest brands to provide our customers with all new products at affordable prices. We remain focused on our earlier business with a disciplined approach in driving improved operational efficiencies through this slight chain and our food distribution in military channels. With a strong balance sheet we will also proactively pursue financially and strategically attractive acquisition opportunities. With that, we'll now open up the call and take some questions.

Operator: We will now begin the question-and-answer session.

[Operator Instructions] Our first questioner is Scott Mushkin with Wolfe Research. Please go ahead.

Scott Mushkin: Hey guys, thanks for taking my questions and as I always say, like, wow, I mean talk about taking lemons and making them lemonade because -- I think last time we talked the industry was not doing well but it seems like we've really stepped down if you're looking for CPI numbers and of course some of the competitive climate. So -- I guess my question is, as you look at the back half of the year, what do you guys think are the biggest risks? We haven't seen Wal-Mart move into territories where you guys are in lower price. I don't think that company is on a sustainable path but I was wondering, if you guys look at your business is there any light at the end of the tunnel as far as the industry or environment goes? Do you worry about Wal-Mart expanding into -- the price cutting into your areas and just kind of your -- state of the union as we look at the back half?

Dennis Eidson: So I think we've provided some -- pretty specific guidance on the back half of the year.

When you look at the segments, we're calling out whose distribution is going to be positive in the back half and we identified retail comps were being slightly negative to flat. And that is the spike headwinds, and there are -- the deflation is kind of the elephant in the room, everybody is fighting with that as we were 2.1% deflationary in our wholesale business and 1.8% deflationary in retail. So we got to digest that, and we don't think that's going to fix itself in the back half of the year. I believe that we'll be deflationary and I believe the food retail will be deflationary for the whole year. We've got some positive things going; we talked about the relaunch of Omaha.

We rebranded in each stores in that marketplace and launched them early year in the third quarter and we built around the six stores that we rebranded a year ago to Family Fare stores; it's like a 14 store launch. We expect to get some benefits from that. And we also think we'll be cycling some competitive activity and hence cycle some that will also improve our comp run rate in the back half of the year so we're -- and as Chris pointed out, how cautiously optimistic we're going to think -- we feel pretty good about being able to maintain the guidance of 2017 to 2018 and despite of a pretty difficult environment, I don't think when we put those numbers out at the end of last year, we were expecting the deflationary or deflationary also. Pricing, this Scott is very dynamic; it's market specific. We watch all of our competitors every day on pricing, including Wal-Mart.

I think we stay very in tuned to that. We will act accordingly as the market dictates but right now I would not characterize the activity that we see with regard to promotion and pricing as being irrational in the markets we're operating.

Scott Mushkin: Thanks for that answer. Kind of a quick follow-up, I mean obviously you have your own retail business but then you have the distribution business where you're serving retail customers in multi business. But if we were to look in -- the current trends obviously, the deflation has gotten worse and retail, I think there is a lot of debate but we hardly ever see deflation in that retail unless the economy is poor but we're seeing at this time.

So as you look at your distribution business and we fast forward, say your customers are you're customers and that business come under a lot of pressure; how do we think about your contracts with them? How you deal with them? And if the business could deteriorate further at retail specifically, vis-à-vis your distribution business then how will you open? Thanks for taking the question.

Dennis Eidson: Thanks Scott, this is a -- well, I mean, I think as a dynamic rule out there all right, and so the way we look at distribution; there is multi-front that we focus on. So with our current base of customers, we're constantly striving to stay in tune with the best -- the latest and most important trends every retail and help offer them programs to combat and get in line with those trends and combat competitors and roll their business ally. So I mean one way we work with them is to sell them more and different items that change the complexion. So even though the retail world could be difficult, we're looking to sell more organics to them, or fresh products that we may not be selling or to provide them with programs that would help them drive their center store or fresh -- better or more effectively but have in the past and so that's what we've always done and so we've gone through tough times before and we've been able to come up with these kind of merchandising strategy and programs.

And we've been able to work our way through that and I would think we will continue to do that. In addition, we look at how do we get new customers and we've historically been very successful with that and we continue to be successful and we expect to be successful in the future. So I think from our distribution perspective, it's all about being more nimble, it's all about offering better products and services and helping our retailers succeed and getting through tough times by getting new customers as well as selling more existing customers as we find new ways for them to be more effective.

Scott Mushkin: All right, thanks guys, appreciate it.

Operator: Our next question comes from Shane Higgins with Deutsche Bank.

Please go ahead.

Shane Higgins: Good morning, thanks for taking the questions. Did you guys really see any meaningful change in week-to-week sales volatility during the quarter? And your comps did improve sequentially. Was that based -- was that fairly even throughout the quarter and have you continued to see that improvement third quarter to-date?

Dennis Eidson: Yes, and so our retail sales week-by-week, obviously, if retail, as we look at store-by-store everyday right, so there is always something going on and we think with the change and some of it is driven by pay, some of it pay cycle, some of it EVT, it's central, so that's the normal course. As we came through the quarter, the comps got better as we got to the end of the quarter.

We did this to wrap our own business frankly at Omaha in Q2. We had those eight stores really to -- those are pretty major remodels there that had a negative impact on the trend as we came through the quarter but I've given you to merits [ph], we've actually started out Q3 much better than we ended Q2.

Shane Higgins: Great, thanks for that color. I know obviously there is a lot going on out west, just looking at your business in Michigan; obviously you guys have some weather sensitive areas, northern Michigan, some of that vacation spots. How have trends been in that market? I mean obviously it's not impacted by oil, just trying to get a sense of kind of what's going on; competitive environment with the consumer and what not?

Dennis Eidson: There is a dramatic difference between our performance in Michigan versus our non-Michigan retail portfolio.

Chris talked a little bit about maybe some self-inflicted payment in Omaha in Q2 plus retail market that was extremely under-capitalized and we've been working hard to improve our position there in the market, really excited about what we're seeing early in the relaunch. We've done some pretty interesting things there. And North Dakota, another difficult market, that is a classic kind of bombast economy there with the oil industry and I think I've remarked the last time around and it remains true in Q2. If you look at the latest PBT [ph] food stamp numbers, the U.S. distributed 3.9% less dollars in food stamps and I think the latest month we have it reports May.

North Dakota, actually they increased food stamp distribution, it's the only state where we operate -- where there was an increase in food stamp distribution, just little bit of color on the economic environment there. I'll try reading the data, it is tough with North Dakota, lot of people lose their jobs, they just walk away and they go back to wherever they came, a lot of them went up there to work in their environment. Michigan, clearly is performing much better. Northern Michigan, I don't know what to say to you -- despite the fact that we had a good summer, I was relatively speaking from a weather perspective, I don't think any of us believe that we enjoyed that kind of summer that we were hoping. We didn't have any kind of meltdown out there but I was hoping from there -- we've got little bit of additional competitive activity but I'd balance, our real challenges are in the West.

Shane Higgins: Great, thanks for that color Dennis. If I could just squeeze in one quick one; the six acquired DEN [ph] stores, were those in the comp base in the second quarter?

Dennis Eidson: The DEN stores, they were not in the comp base in the second quarter but they will be for the third quarter.

Shane Higgins: Got it. All right, thanks guys. I'll get back in the queue.

Operator: Our next question is from Chug [ph] with North Coast Research. Please go ahead.

Unidentified Analyst: Good morning, everyone. I want to touch on Omaha, again, in that after the eight Family Fare stores opened; Dennis, how did you feel about their sales base and what did they do to the other stores in terms of cannibalization?

Dennis Eidson: Yes, as I just alluded to, we're pretty pleased; we're -- internally, I think we're the weak four right now, so I'll report. And we are actually slightly exceeding our expectation in the eight stores.

The first six stores we did about a year ago, so they joined in to the grand opening of launch there. And there isn't a lot of overlap between the stores. So we more look at it as a 14 store trend than never. And so that market is completely now repositioned and re-bannered. The Family Fare saved the three super Mercato [ph] stores, their merchandise is very well run, very good stores for us that add a little bit of an inch there in that orbit place but it's our only shop I'd say we feel pretty good.

Unidentified Analyst: Okay, that sounds great. Can you review where the competitive openings have been hit near throughout your retail territories?

Dennis Eidson: Dave, do you have it at the top of your head?

David Staples: Omaha, clearly has been a site of significantly counter efficient over the past few years and so one center where we've had the most openings over the past three or so years and clearly with Omaha -- sorry but with everything else going in North Dakota, couple of the fairly competitive hits there. And then I think we've seen maybe Northern Michigan with a few impacts that would have been surprising a little bit to us but I would say that's where we've spend is mostly centered.

Unidentified Analyst: Okay. And then could you review please how gas performed in the quarter, gallons, as well as profitability?

David Staples: We had -- actually we had a good fuel or despite the fact gas was down $0.31 a gallon from prior year, and it negatively impact our sales by about $4 million just the reduction in the price of fuel.

We were actually positive comp gallons for fuel in the quarter by about 0.5%. It was a good margin quarter for gallons, for us, and as far as $0.015 incremental benefit to our EPS in the Q.

Unidentified Analyst: Is that $0.015?

David Staples: Yes.

Unidentified Analyst: All right, thank you very much.

Operator: Our next question comes from Mark Wiltamuth with Jefferies.

Please go ahead.

Mark Wiltamuth: Hi, congratulations on turning the military to positive sales trend. I wanted to -- you mentioned there about the improved fresh sales through the military, is there something there beyond the poultry distribution you're doing for Tyson or is that the primary driver?

Dennis Eidson: We are distributing poultry for Tyson and many markets but we are also in the distribution of fresh beef and fresh pork as well. And so that's driving some nice incremental sales for us and got some nice incremental sales in the quarter. It feels good to get that business topline positive.

We were with you entirely and we'll be able to enjoy that going forward.

Mark Wiltamuth: Any thoughts on when the EBITDA performance starts improving directionally since you got the sales moving now?

Dennis Eidson: I wish you had an easier question. That has a couple of challenges and I think we don't exactly line up on quarters obviously with -- they were -- their stores were negative, say 5% plus in the quarter and they said the challenging property that servicing military resale and were included were fortunate that we've been able to bolt-on some new business and despite those headwinds have been able to get a positive top line and we're hopeful that we can build our net momentum and get that bottom line to come along with it as we move forward.

Mark Wiltamuth: That sounds like the decade got worse, it was doing like a negative 4% and now it's a negative 5%?

Dennis Eidson: Yes, that's all I got into, marginally it gets a little bit worse in Q2.

Mark Wiltamuth: Okay.

And then if you look over at retail, what are the next steps for you as you look at continuing to improve that acquired store base from Nash Finch?

Dennis Eidson: Dave, do you want to take that?

David Staples: Yes. I think as you look at what we've done, we've really worked hard to position our markets where we feel we have a strong concentration. So North Dakota, that market from a capital perspective, from a store base, we feel very good about. We just need to get some oil wells open it up again. We don't want oil to go too high but maybe we want it little higher than it is.

And so I think we're very well positioned there, I think with what we've done in Omaha, we feel very good about what that offer will put in forth, we're trying some really strong technique that the team has come up within that market to differentiate our business and I think that feels good. As the remainder of the market sort of in that Wisconsin and Minnesota zone where would be our next real concentration, we felt some capitals deployed there and to bring that base up and there is some stores that we're very intrigued by that we think we can make a difference with. But I think it's going to be now, while lot more about just continued blocking and tackling, getting Omaha and keep progressing in the manner we want and then targeted but impactful capital in sort of that Minnesota, Wisconsin there.

Mark Wiltamuth: Okay. And then a question on gross margins; the gross margins are down 20 bips here and one thing you mentioned there was deflation.

Is that in the distribution side that's hurting you on gross margin from deflation or just explain how that falls through because sometimes during deflation the gross margin percentage goes up but the margin dollars kind of hurt the weaker sales.

Chris Meyers: This is Chris. I will tell you deflation impacts every one of our segments in a negative manner, somewhat differently but they negatively impact every single segment. Distribution gets hurt because you don't get -- you get decreases on your inventory value versus increases, you have fewer forward-buy opportunities. I think in retail it's -- as the opportunities to increase your strength, so it affects negatively all of business segments.

Mark Wiltamuth: Okay. Thank you very much.

Operator: Our next question is from Ajay Jain with Pivotal Research. Please go ahead.

Ajay Jain: Hi, I actually just wanted to follow-up on Mark's question on the gross margin performance.

I thought that usually with any kind of incremental deflation, the gross margin percentage should typically increase even if there is no change in the gross profit dollars. But putting aside the deflationary impact, apart from the change in mix and the new business that you're rolling out with the fresh categories, is there any added pricing pressure that's impacting the gross margin performance. And my question on price competition would really apply to all three segments if you feel like you've needed to be sharper on pricing in any significant way based on the current operating environment?

Dennis Eidson: I think we answered a question earlier on pricing and Wal-Mart, and I will just tell you we are very tight on what goes on and everyday pricing, promotional pricing; we have a strategy and how we want to position our retail brands with regard to pricing. We believe in it and we think it's been relatively effective. So I don't see any sea change there and I just -- of the additional color on the margin piece, it's so you are right, that sometimes you can get some stickiness to margins when you're getting deflation at retail; and that would be true, -- maybe a really good example of what happened in the quarter where on the producing price index side, they were negative 75%, right? Although retail didn’t immediately go down 75%.

So there is an example of that. But in retail, when you look at your inventory not increasing valuation, and you take inventories, you end up with inventory worth less than it was the last time you took an inventory and it has a negative impact on your retail margins. So, we feel it -- even in retail where there is some stickiness to the gross margin on the cost/sell relationship but the devaluation of inventory went actually in our -- manifest itself in shrink. And as Chris pointed out, distribution would lack or forward-buys that inventory appreciation and likewise with military, where there is no appreciation of inventory values. We feel that on our P&L.

Ajay Jain: Okay. And as you're rolling out the new fresh categories, would it be reasonable to assume that gross margin percentage continues to get impacted for the rest of the year or the back half of the year?

Dennis Eidson: I think -- yes, I'm not sure it's large enough to make a big difference so these fresh categories that we're rolling out -- which by the way is a big deal and we should minimize it. We've got like 61 items I think in the field, now we've got another 86 coming out in Q3, then we're going to end the year with somewhere about 175 items. In the non-Michigan environment, the legacy Nash, we try not to use those terms; we just didn't have a private brand program on the perimeter, so we weren't getting the opening price point covered and now we will be able to do that and that has an impact, not only in our retail stores but significant impact with their independent retailers. We were forced to cover that with third tier brands that protect the price point, the Open Acres launch, I think it has been well done, we're really excited about the brand and packaging and the deliverables.

But if I were to say, Ajay, let's put X points of margin on that, I think that was pretty hard for me to do. We know when we enhance pay, there is a benefit.

Ajay Jain: Okay. And I also just have a question on the wholesale segment, if you adjust for the impact of Gordy's, do you have any sense for what your organic growth rate would be for distribution segment revenue? Like, either on a run rate basis or based on last quarter's performance?

Dennis Eidson: So I think what we discussed in the release with regard to the food distribution segment is that we -- we're $820 million of revenue compared to the $782 million of a year ago. And then we said it was primarily due to the new business but called out and both of existing accounts.

So I guess we're clearly saying there, we've been positive without Gordy's, we haven't put a number on that, I don't think we necessarily want to do that but we are very pleased to be able to say that, that make that statement that it is just a Gordy's business. So the team here has been working very hard, they've -- the things are earlier with regard to new business and being creative about the type of accounts that we can attract into the portfolio. So we expect that to continue.

Ajay Jain: Okay. And if I could just sneak in one final question, I think in response to an earlier question, you mentioned that your cycling out of some competitive store openings; and I think specifically in Omaha, can you just give an update on how things are looking for the rest of the year in terms of the pipeline for competitive store openings if you're expecting anything of any significance?

Dennis Eidson: Yes, we don't have anything out of the ordinary in the back half of the year.

Ajay Jain: Okay, thank you.

Operator: Our next question is from Ryan Gilligan with Barclays. Please go ahead.

Ryan Gilligan: Good morning, guys. Just quickly on retail, can you give us the split between traffic and basket?

Dennis Eidson: Yes, we were actually in the quarter with 3% negative, you might expect that.

We actually were negative both in traffic and in basket size in the quarter. Again, this really is being driven by the West retail but we're a little bit more in transaction than it was in basket for the quarter.

David Staples: I think on your earlier point Dennis, the significant trend change for that in the third quarter.

Dennis Eidson: Yes, absolutely. We're much, much better start for this year.

Ryan Gilligan: Got it. So there is an improvement on the basket side too in the third quarter?

Dennis Eidson: Improvement in the trend.

Ryan Gilligan: Got it, makes sense. Thanks. And then, I guess can you just give us an update on the merger synergies.

I know you said recently it will come in about [indiscernible] a share but can you just give us a sense by maybe how much and what kind of opportunities are remaining beyond that?

Dennis Eidson: As we talked about the synergies from day one in the merger, we called those that we would achieve $52 million on a combined over the three years -- we're getting to the end of the three years, we haven’t quantified the beat but we are going to beat the synergies on a three year and I think it's been meaningful, that's also for the team here, everybody worked really hard to harvest those, it will be a meaningful.

Ryan Gilligan: Will they still help margins in '17?

Dennis Eidson: Well, it will still help the margins in '17; I would say that -- the farther we go, the less impact it will have I think as a fair articulation of what happens with synergies. They don't go on forever, we do think there will be some synergies that we are going to accrue to the business in '17, however.

Ryan Gilligan: Got it, that's helpful. Thanks.

Operator: There are no further questions. So this will conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

Dennis Eidson: Thank you and I want to thank everybody for participating today. That kind of concludes our remarks, and we look forward to meeting and speaking with everybody at the end of the next quarter.

Thanks.

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