Executives: Katie Turner - Investor Relations, ICR Dave Staples - President and Chief Executive Officer Tom Van Hall - Interim Chief Financial

Officer
Analysts: Chris Mandeville - Jefferies Scott Mushkin - Wolfe Research Ryan Gilligan - Barclays Shane Higgins - Deutsche

Bank
Operator: Good morning and welcome to the SpartanNash Company’s Second Quarter 2017 Earnings Conference Call. 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 this event is being recorded. I would now like to turn the conference over to Katie Turner.

Please go ahead.

Katie Turner: Thank you. Good morning and welcome to the SpartanNash Company's second quarter fiscal 2017 earnings conference call. On the call today from the company are Dave Staples, President and Chief Executive Officer; Tom Van Hall, Interim Chief Financial Officer. By now, everyone should have access to the earnings, which went out yesterday at

approximately 4:00 pm 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 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 amongst food, retail, and distribution companies, the uncertainties inherent in implementing strategic plans, and integrating operations and acquired assets 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 2016 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 their most directly comparable GAAP financial measures and 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 turn the call over to Dave.

Dave Staples: Thank you, Katie, good morning everyone and thank you for joining us today. The format of today's call will include my brief overview of the quarter and an update on our business. Tom will then provide additional detail on our operating and financial results before we open the call for your questions.

So, let’s get started. We continue to be very pleased with our distribution segments performance as we continued to deliver strong top and bottom-line growth. This strong performance helped fuel our sales and earnings growth on a consolidated basis, despite slower than anticipated contributions from the recent acquisition and challenging retail market conditions. Our second quarter consolidated net sales increased 3.7% to approximately $1.89 billion, due to approximately 15% sales growth in our food distribution segment, thanks to contributions from our recent acquisition and continued growth from new and existing distribution customers. From a consolidated earnings perspective, we achieved adjusted EPS of $0.60, an increase of $0.02 over the prior year, primarily driven by our sales growth and supply chain efficiencies.

And finally, we continue to return significant capital to our shareholders with $14 million in dividends and share repurchases in the second quarter. Now, let’s take a look at our performance and strategic initiatives across our operating segments during the quarter. In our food distribution segment, we generated our sixth consecutive quarter of sales and adjusted earnings growth over the prior year. We increased sales in both new offerings and with existing and new customers, and we realized benefits from favorable margins, supply chain improvements, and lower incentive compensation costs. Our ability to consistently present innovative distribution solutions to growth orientated companies and our expanding reputation in private brands continues to provide us with opportunities to grow with existing customers and to attract new ones.

During the quarter, we continue to focus on integrating our recent acquisitions operations and refining and expanding production in our new Fresh Kitchen facility. We began incorporating fresh-cut fruits and vegetables produced out of these facilities into our Open Acres private brand, and these value-added products are now available to both corporate owned and independent stores serviced by our Grand Rapids and Omaha distribution centers. As we continue to ramp up our product offerings and work on securing new business, we are testing the feasibility of rolling out these freshly prepared offerings to new and existing customers through our remaining western distribution centers by the end of the year. Turning to our military segment, second quarter sales continued to be impacted by ongoing commissary sales challenge. Our private brand initiative with DeCA is progressing nicely and we began shipping products to commissaries during the second quarter.

By the end of the quarter, we had approximately 250 items in the system and expect the number of items to increase to approximately 425 by the end of the year. With DeCA’s stated target of up to 4,000 SKUs in this program, we have the potential for substantial growth over the next two years, which will result in a significant improvement to our financial results. As we have previously noted, our strategy with the military segment is to be the best-in-class provider for DeCA in the exchanges while finding new opportunities for growth with both DeCA and other entities within the military retail system. To that end, we recently entered into an agreement to obtain additional commissary distribution business from a DeCA provider exiting their operations in the Southwest. The newly secured business, together with the incremental volume from the DeCA private brand program is anticipated to reverse the sales trend on an annualized basis bringing us back to positive sales and earnings on a year-over-year basis for the second half of the year.

In the retail segment, despite continued challenging conditions, we were able to maintain our overall comparable sales rate trend from the prior quarters. While we don't expect the environment to improve significantly over the next couple of quarters, we are intensely focused on improving our trend and have many efforts underway to make this happen. We are permitted to providing a great shopping experience for our customers and continue to pursue various ways of providing quality products in a convenient and affordable manner. Near the end of the quarter, we launched Fast Lane, our new online ordering and curbside pick-up service. The Fast Line service is now offered at 11 stores in Michigan and is expected to be rolled out up to 50 stores by the end of the year.

We’re excited about the benefits Fast Lane and an improved website experience offers our customers as well as providing a service that is right on track with the consumer's expectations for convenience. We continue to make targeted capital investments in our store base by converting certain stores with Family Fare banner and remodeling others. During the quarter, we completed one major remodel in Michigan and one remodel and banner conversion to Family Fare at Minnesota and have been pleased with their performance to date. We continue to enhance our private brand programs for both independent customers and corporate-owned stores. In the second quarter, we announced the launch of the Our Family brand into the Michigan region.

This brand will replace our Spartan brand and will provide us with a system-wide national brand equivalent or better quality program, providing a larger variety of product offerings at a lower cost to our customers and will allow us to streamline our supply chain. 30 retailers in Michigan already depend on the Our Family brand and have proudly offered its products to their customers for years. We’re excited to expand the brand and introduce it throughout our distribution network. Additionally, we continue to expand the Open Acres fresh private brand offering, and as mentioned earlier, have begun to incorporate our own fresh-cut fruits and vegetables into the brand. We also continue to enhance our expanded living well offering, which includes the Nashville and organic Full Circle private brand line and a significant number of new SKUs across organic produce and healthier specialty items.

We have expanded significant efforts to build an industry-leading private brand, and after recent wins such as the DeCA private brand worldwide program are now being contacted by new companies to potentially help them drive sales through a wide variety of private brand offerings. We embrace the opportunity to help both existing and potential customers meet their growth goals. For the second quarter, private brand unit penetration in our retail operations was 21.5%, up 30 basis points from the prior year quarter. Whereas the national average was flat to slightly negative during the same time period. We ended the quarter with approximately 4,800 unique private brand items as we continue to enhance our assortments.

Through these initiatives, we believe we are well positioned against the market backdrop and we will continue to evolve our merchandising efforts and customer personalization initiatives to deliver an even better experience for our customers. Before I end my comments here, however I would like to note how pleased we are to have Tom Van Hall back at SpartanNash as our Interim CFO. Tom has spent close to 15 years in key financial leaderships roles at our company prior to his retirement, and has extensive knowledge of our operations and the industry, and has been able to step right in where he left off. Also as announced yesterday, Mark Shamber will be joining the company as our new CFO, effective September 11, 2017. Mark previously served as the CFO for United Natural Foods and following his departure from UNFI at the end of 2015 has been working as an independent consultant and serving as the Vice Chairman, Board of Directors of Day Kimball Healthcare.

We look forward to Mark joining the team and believe his background and expertise in the natural and organic space, serving independent grocers and national chains, and overall M&A prowess will leave the continued success for both Mark and SpartanNash. We thank Tom for his continued contributions and are grateful he will remain on board to assist mark with this transition. And with that, I will now turn the call over to Tom. Tom?
Tom

Van Hall: Thank you Dave for the kind words and good morning everyone. Retirement has been everything I expected, but I am pleased to be back to re-energize and interacting with great SpartanNash team.

I look forward to continuing to help Chris’ transition until Mark has settled in his new role. I would like to begin with some highlights of our second quarter results and then review our guidance for fiscal 2017. In terms of overall operating performance, we had a good quarter. We grew adjusted EBITDA by $3.3 million or 5.6% over the prior year quarter and delivered adjusted EPS of $0.60, which exceeded the prior year, is quite the challenging environment we are encountering. Turning now to our operating segments, in Food Distribution sales were up $121.3 million or 14.8%, due to contributions of our recent acquisitions and organic sales growth of 1.9% as we continue to leverage our network and provide value-added services to our customers.

As Dave mentioned, results from the recent acquisition have been slower than anticipated for three major reasons. Our distribution center consolidation and efficiency efforts akin following the expected customer losses as a result of the acquisition. Our underway and gaining traction, but are not yet fully implemented. While we have finished construction, the new fresh kitchen facility and the rollout of limited production has begun, the facilities is still testing and refining processes and incurring start-up challenges as one would expect [indiscernible]. Lastly, the timing of implementing new manufacturing system rollouts is delayed and we’re implementing a new system to be up and running late this year or early Q1 next year.

That being said, we remain confident about what the addition of fresh-cut fruits and vegetables as well as the ability to produce fresh, protein, meal alternatives needed for our value rated product offerings and future results. We are continuing to be pleased with how these offering align our company with where consumer taste are trending and how they contribute to us being even more strongly differentiated in the fresh parameter. While we saw inflation through distribution of around 30 basis points in the second quarter, an improvement from 171 basis points of deflation in the previous quarter we’re still seeing deflation in certain categories that’s dairy and produce. Looking forward, we currently expect to see only modest overall inflation in the second half of the year. From an earnings perspective, second quarter adjusted operating earnings for food distribution increased 19.5% to $25.8 million, due to organic sales growth supply chain optimization efforts and lower incentive compensation cost.

In our military segment, sales were $471.1 million versus $505.4 in the previous year driven by overall sales declines at the DeCA operated commissaries we serve. Adjusted second quarter operating earnings for military were $2.5 million, compared to $2.2 million last year, due to favorable margin in operating expenses, which more than offset the impact of lower sales. Our team remains focused on operating efficiencies and we’re pleased with our efforts here. These efforts combined with the private brand program and our recently obtained business in the Southwest are expected to return sales and profit positive on a year-over-year basis in the last half of the year. In our retail segment, net sales were $482 million versus $501.8 million in the same period last year.

With $11.6 million of the net sales decline driven by the close - sale or closure of retail stores all with the decrease in comparable store sales at 1.8%, which despite the challenging retail environment was in-line with past quarter results. In connection with our continued store rationalization program, and to drive new distribution business, we sold two stores during the quarter and another store at the beginning of the third quarter to new food distribution customers. We now have a store base of 150 corporate owned retail stores compared to 160 stores in the prior year quarter. Second quarter adjusted operating earnings for retail where $13.1 million, compared to $15.5 million in the prior year reflecting the difficult sales environment and incremental margin investment in the fresh departments. From an operating cash flow perspective on a consolidated basis, we generated $38.4 million in the first half of 2017, compared to $57.2 million last year.

The decrease was primarily due to changes in working capital position and include higher accounts receivable balances at military as certain customers we’re dealing with system conversion issues and payments for temporarily delayed. For the second quarter, we also paid quarterly cash dividend of $0.165 per share and repurchased 300,000 shares of stock of $7.9 million. Our total net long-term borrowings increased $230.8 million to $637.5 million at the end of the quarter, compared to $406.7 million at the end of 2016, larger the result of forming the recent acquisitions, but also the timing of working capital payments. Our net long-term debt to adjusted EBITDA ratio was 2.7 times. We remain committed to our long-term target of two times and excluding any further M&A activity continue to expect this ratio to improve as we grow sales to improve operating efficiencies and pay down debt from free cash flow.

Turning now to our guidance, based on our current expectations regarding the integration of our acquisition and a continuation of the current retail environment for the second half of the year, we’re refining our previously issued fiscal 2017 guidance. We expect adjusted earnings per share from continuing operations to be approximately $2.18 to $2.28 and reported earnings from continuing operations to be approximately $1.83 to $1.90 per diluted share. For the third quarter of fiscal 2017, we anticipate earnings to be flat to slightly ahead of the prior year as continued strong performance and distribution operations will be partially offset by slower than anticipated contributions from the recent acquisition and the effects of the retail marketplace. We continue to see progress integrating the recently acquired operations have begun limited production at the Fresh Kitchen facility and remain confident about the ultimate growth potential and long-term vision for this business, and its ready-to-eat categories. We now expect the transaction to be accretive in the second year as we get the required systems in place over the last half of this year, adjust fully to the existing volume levels in produce distribution and attract additional volume into our Fresh Kitchen operations.

Regards to the retail landscape, we are continuing to invest in our store-based personalized marketing initiatives, customer convenience and experience to efforts such as the Fast Line and newer solutions and the launch of the Our Family brand into the Michigan region. For the military segment, the recently secured new business together with increasing contributions from the DeCA private brand are expected to return military sales and earnings deposit versus the prior year by the fourth quarter and for the second half of the fiscal year. As already mentioned, we continue to expect an easing of deflationary pressures with modest food inflation in the second half of the year. Accordingly, depending on the variability associated with inflation by commodity and its related impact on LIFO, we do not expect the deflation-related LIFO benefit of $0.07 per diluted share to realize last year to repeat in the fourth quarter of this year 2017. Lastly, due to changes in the timing of capital projects and several emerging long-term growth opportunities materializing more quickly than anticipated, we now expect capital expenditures for fiscal 2017 to be in the range of $75 million to $78 million, depreciation and amortization to be $83 million to $85 million, and total interest expense to be in the range of $23 million to $25 million.

Now, I’ll turn the call back over to Dave for his closing remarks. Dave?

Dave Staples: Thank you, Tom. In conclusion, we are committed to both top line and earnings growth. As we look to the back half of 2017, we believe our experienced team in sound strategic plan, focus sales building initiatives, and productivity gains will help us overcome the challenges in backing the industry. We believe that our expertise is both a food wholesaler and a retailer make us a better operator as we are uniquely positioned to anticipate and understand our food distribution and retail customer needs and deliver best-in-class solutions and experiences to them.

We have positive momentum in our food distribution business, as we continue to integrate our acquisition and expand our product offering in highly desired new categories. On-board new military and food distribution business will provide innovative solutions to growth oriented companies. While still in the early stages, we believe that our recent acquisition, our DeCA private brand program and the new business obtained in the Southwest will deliver the anticipated long-term benefits expected. These initiatives are a few of the many opportunities that we have to drive sustainable long-term growth and we remain confident in our ability to execute and deliver our expected results. With that, I would like to turn the call back to our operator Brendan, and open it up for questions.

Brendan?

Operator: Thank you. [Operator Instructions] Our first question comes from Chris Mandeville with Jefferies. Please go ahead.

Chris Mandeville: Hi good morning guys.

Dave Staples: Hi good morning, Chris.

Chris Mandeville: Can we just start off with the updated guidance, in terms of the revision here; can you speak to the primary drivers to the guide down? And then when it comes to some of the metrics provided, why is D&A going up roughly $3 million, while - excuse me D&A is going down $3 million, while CapEx is being ramped up about 5 million?

Dave Staples: Let me take that with you Chris. In the overall guidance, I would say the predominant driver is the integration of the acquisition not being where we anticipated for the reasons we discussed. That has the bigger impact. As we initially moved into that, we thought we would be somewhat further ahead and realizing more of the benefits from the kitchen and some of the other integration activities and we’re just not, but as Tom alluded to, we do expect that back on track and to have a real positive year again next year, and really see where we are going. So, I would say that would be the majority of the answer.

Also, certainly the existing retail environment is a little bit of it as well. So, those will be the two key factors in the guidance chain. From the explanation of the capital, if you look at the capital, what’s going to happen there is, we just -- I think we have done a great job of aligning ourselves with companies that are making things happen and going places in the industry. And when you do that, sometimes things happen more quickly than originally anticipated because you are aligning yourself with people thinking ahead and making one step further and taking one step further and faster than anybody else, and so part of what has helped us be successful is our ability to be nimble and work with them. In this instance, two really great opportunities are going to present themselves.

We will spend the capital this year quicker than we’d originally anticipated, won’t have any depreciation with that spend as it happens in the back half and the benefits don't really begin to incur until the following years. So that’s one reason you're not seeing an increase in depreciation because of the increased spend. From the overall decrease in depreciation, it is always such a hard thing to estimate because you’re putting forth your capital expenditure plan, and obviously when you depreciate it, things change, some projects get accelerated, some gets pushed back, and depending on the type of projects they are over the course of the year, they can affect your depreciation rates, so it’s as simple as that from the depreciation side. It is just, how the capital projects mix out.

Chris Mandeville: Okay.

And then as you mentioned in retail, it sounds like the competitive environment has gotten a little bit more intense latterly, can you just maybe help us understand how much of this is related to new store openings, opening up against you versus just the existing boxes [ph] simply getting more aggressive? And if willing, is there one specific region seeing greater challenges or can you at least maybe give us a sense of what tactics are being used and what categories your competition is primarily focused in on?

Dave Staples: As you look at the market, I think in general, I think you see a fairly consistent competitive impact as far as new store openings. That’s been, I think moving between that 15 to 30 basis point impact, and I don't think you are seeing any significant change in that type of an impact. So, competition is a reality and retail and as well now it’s never going away. So, I think we can continue to see a consistent impact from store opening. I would say - where I would see the overall environment getting a little tougher is really as you see the legal entrance into the market and the response that’s sparking from Aldi and then a Walmart, and then it brings Kroger and other players in.

So, I think you are seeing some price - increased price competition in various markets. Again, not that we’ve never seen before, this is a fairly common event in retail, as different events happen in different periods of time, and it’s nothing we've not experienced before and I don't think it’s anything we won’t experience again, and I believe the team is just doing a wonderful job in a number of areas to take care, you know take that type of battle on. This - our Fast Lane program, I think as we roll that out, we’re going to be very pleased with how that works, it’s so early right now, I don't have a lot of long history. It’s been under a month that we have had our first store out, but we’re seeing great things like, as the person comes back in their third and fourth times, their purchases keep going up substantially and they'd get into that $110 to $120 range by that fourth visit. We’re seeing 65% to 70% of the sales being new business, whether that be new customers or incremental purchases from existing customers.

So, we believe that’s going to be a strong tool for us to combat what’s going on is a number of these other competitors won’t offer that type of those service. And we continue to expand that private brand, and so we’re expanding the value offering into that fresh parameter more so than we’ve ever done before and that I believe combats a number of these type of new competitors and that they don't have that reputation in fresh. And our overall private brand offering when you get into the living well and the extensive nature of that I believe is more substantial than a lot of these priced competitors. So, we don't ever intend to be the lowest price retailer, that’s not who we are, we offer a lot more than price. We intend to be the best value retailer, and so we will combine these uniqueness’ with very, very fair price to be the best.

And so, I think that’s how we are combating it and that’s how we see the industry is shaping up.

Chris Mandeville: Okay, and just to clarify your review that some of the competition are may be being a little bit proactive in advance of a lead of them isn't necessarily in the markets that your servicing right now?
Dave Staples : Yes and that’s a fair point because they’re not in the market, but I think they’re just - they're sort of that fight for the low end. And I think you see everybody is fine tuning their game in that space isn't what they see happening.

Chris Mandeville: Okay. And then last one from me on the distribution side.

So, you did see a modest sequential slowdown in organic growth, but how should we think about the back half of the year, is there any net new business you can speak to or shall we just simply expect may be that any type of greater growth versus Q2 is going to be predicated upon inflation and maybe just the continued ramp of fresh kitchen?

Dave Staples: I think we would expect our organic growth to improve in the back half. The rates to be even better as we do have some new business coming on board, it is the central grocers event, we were the only one I think of the three or four or five people who competed for accounts there that don't have a facility in the market yet, we are still able to secure $20 million to $40 million. I think that’s a big win for us and I think that speaks to the type of reputation we’re beginning to build, when you can go into a market where every one of your competitors has a facility either in the state or right on the border of that market and still win a nice chunk of business that just speaks a lot to our new business team and the wonderful job they do out there connecting with existing and incremental customers. In addition, work - we are working with some really great retailers and we’re experiencing phenomenal growth with them and we think that will continue to go. So, we're just really optimistic about so many of those types of things we have going, as well as I have mentioned a little bit on the call enquiries we get in this private brand arena and what can we do to help other retailers and whether they’re customers of ours or not supplemented program or help them think about how they could create a program and how we could potentially become involved with that.

So we just have a lot of very, very positive things going on in that distribution world and you go to military and you rethink about what we have going on there in the positive direction and you know the effort our teams are putting forth integrate this substantial amount of business between private brand and the new business out West, it’s just a test of it for the quality of our team and really the resourcefulness and innovativeness of our associates in our distribution business is and it is just really a pleasure and you are really proud to be a part when you see these things take place. So, I think on a number of times, we have lot of really great things going on and then as you added, as we get this kitchen rolling and when we get more business being put through that that just does not, but help is going forward.

Chris Mandeville: All right. That's it from me. Thanks guys.

Operator: Our next question comes from Scott Mushkin with Wolfe Research. Please go ahead.

Scott Mushkin: Hi guys, thanks for taking my question and congratulations on snagging Mark. He is a really good CFO.

Dave Staples: Thanks.

Scott Mushkin: So, couple of questions. First of all distribution business continues to perform well, but I wanted to talk about like there's been a lot of news lately and some market news progressive grocers just how some of these regional chains, smaller regional chains and more mom-and-pop operations are really starting to struggle with the competitive environment, and I was wondering as you view your distribution business and your customer base there, how you view the current environment visa-a-via kind of how they are doing net of wins that of acquisitions but just how is your base customer doing and what can you do to help them?

Dave Staples: Well, I think our base customer is a buildup of people who are, if you think of the trends in the industry right, people want to shop local, people want smaller stores and when I say small, I don’t - I am not trying to buy like tiny stores. I am talking more or like that 20,000 to 40.000 square foot super market. They want that local, they want smaller size they want convenience. They want to know they are helping the community price, and that’s exactly what our customers are.

Our customers predominantly are those 2 to 3 to 20 store operators and they are their community right, and they are people who have survived the onslaught of Walmart. I think, if I replay the tape back to 2000, our independent customers where off the map as Walmart rolled out across the country, and independent food retailing was done, and that didn't happen. Our customers continue to pride and continue to do well and we’ve just got a lot of great customers. So in some of the challenges that will be out there, I think everyone will feel a little pressure, but I think we’ve got a great base and I think we’ve got some really savvy retailers and I think they will work through it. When you take the Internet challenge, you have to remember our customer base and our stores are more suburban and rural.

And so they are not really in the sweet spot of the Internet challenge and as you look at the new entrants into the market and some of the other things that are going on and that’s not necessarily a more world suburban strategy right up of that either and it is certainly not initially in the markets we serve. I mean it’s done gently in some of the markets we serve, but the bulk of our markets are not being impacted, it’s right out of the bat by the new entrants. So, I think we are well positioned, I think our customers are well positioned and what we can do to help them need and do a lot of things, and we are doing a lot of things, I think we have really worked hard on our promotional and value oriented offerings and programs and we worked with a number of customers to put a whole program throughout the store their store to accentuate a positive value their offer and what a good opportunity they are to Sharp versus other players given their breadth of product, as well as the value. This private brand program, we’re developing and continue to develop and the level that we’ve taken that gives them a really strong tool to help people come their way. Our new product offerings and a fresh direction we’re taking help them differentiate their perimeter of their store better than a lot of these new entrants, but I think we do these things better than a lot of other people out there and so I think we’ve done a lot to help our customers view it there, but certainly their innovation and their entrepreneurial mindsets are early what have allowed them to succeed.

Scott Mushkin: I appreciate the answer, and just one follow-up, just a clarification, are they comping positive and aggregate your distribution customers? And then I just…

Dave Staples: Yes, I mean I think if you look at our core distribution, we said our organic growth was 2%. So, I mean I think our business is positive on an organic basis in an aggregate core.

Scott Mushkin: Got it. And then I just wanted to comment and then I will yield scale, I mean how do you feel about the scale of the company and then I will yield? Thanks for taking my question.

Dave Staples: Well I mean I think we have a really nicely put together operation.

I mean think about what we have done. Our distribution business now is about $4 billion business with strength, a lot of strength on the perimeter. I mean our post-operation is approaching $700 million, our meet program is 0.5 billion. We really provide value and then we have vertically have integrated that with 150 retail stores and so I think that really provides a strong position from which we work with our vendor partners to go to market and provide value to consumer and value to our customers. I think in the military side, we are a gold standard.

There is nobody who offers the military system what we offer them. From a frequency of delivery, a variety of products, a simplicity of building, a ease of working with, I think we provide tremendous value there, and so I think as we activate the remainder of our strategy right, which is to continue to grow the business and to make strategic moves whether be in a core or continued in the adjacencies to expand even our strength in this parameter. I think the company is just incredibly well position to do what it needs to on a long-term basis to drive value.

Operator: Alright. Our next question comes from Ryan Gilligan with Barclays.

Please go ahead.

Ryan Gilligan: Hi, good morning. Thanks for taking the questions. I wanted to follow-up on these two emerging growth opportunities referred to, can you talk about what kind of projects they are and what type of customer you are working with?

Dave Staples: Without naming too many specifics because this stuff is still pretty competitive, but we in the kitchen operation have just been like I said pleased with the type of opportunities we are seeing out there. Now we have to execute on those opportunities, but one of those opportunities is really an exciting move into what we think is a really hot space and a space that is right on trend with where the world’s going and is going to take us some incremental packaging, some new types of packaging equipment to work on that opportunity with a significant customer.

I don't really want to go into any more details about that on the customer. The other opportunity, we do some things very uniquely in the space that has provided us with a substantial competitive advantage and it has allowed us to really service some customers very uniquely and very more efficiently than anybody else can. And because of growth opportunities use this kind of process that we have. We really need to put automation into another facility to allow us to continue to grow in that area, as well as service our customers grow. And so, part of this being a national change that can serve our customers where they go, both of these fall into that area, and so both of them are in the automation world, right.

New equipments automate packaging and new equipments allow us to continue new technology to continue really to have some state-of-the-art processes.

Ryan Gilligan: That makes sense. Thanks. And then I guess just on the working capital issue, you called out with the military customers, has that reversed already?
Tom

Van Hall: Yes that was just a temporary situation or through undergoing some system conversions and some payments were slowed for a payment period of time at quarter end.

Ryan Gilligan: Got it.

And then the new business in the Southwest, did that start completely at the beginning of the third quarter or does that ramp over time?

Dave Staples: Actually this week. So it’s sort of the middle-ish of the third quarter.

Ryan Gilligan: Got it. And then just lastly on, what the potential is for the private-label program over time, you mentioned getting to 4000 skews that’s obviously a great opportunity, but can you give us a sense for what the net opportunity is and I’m guessing you already supplied some of those skews that will be replaced.

Dave Staples: Yes, so that’s the real, the difficulty there is when you get into that question, but let me just try to frame the best I can and I’m using generalization.

So don't hold me depending on this, but if you look at the military business there are about $5 billion retailer and if you think of the things that we, that private brand really can't as they are structured today to be a part of from our perspective, so the universe is probably in that $3 billion world of what could be private brand, and so if you think of how they evolve to their target of 4000 skews assuming they can make that, which we believe they can, if they continue to put the effort they are into, you know the National penetration on average for private brand in that area of product will be 22%, and so you’re probably looking at a 600 million to 650 million opportunities if it was 100% incremental. Now I think two things are going to happen as a result of this. There will be some level of cannibalization of national brands, you know DeCA today already was selling a lot of packer labels and other kind of labels so that really shouldn't impact the National brand. So, I don't think it will be as much as people may have been concerned about. Secondly, I think the last lack of this offer has caused the DeCA systems sales and has caused some sales I believe in two ways.

I believe because of the prevalence of Walmarts and Krogers and Safeways off-base and because of the number of people who have moved off-base over the years this private brand is being consumed, they are buying private brand. Our DeCA consumers today are going to these channels and buying private brands because of the value. That is going to be truly incremental when they come back to DeCA. Because the decor offering is a great offering and it’s a good value and so they should be able to pick up incremental sales of people who are buying private brand elsewhere. And secondly, I believe that there are probably some patrons who may be had not shopped the commissary or weren’t shopping very frequently.

Now they have another reason to come back and do their full shop, there were new shops. So I think as DeCA continues to develop their program and roll it out, we’re really privileged to be able to serve them while they do that. There is just a lot of opportunity there between incremental sales between more sales to existing customers and yes there are probably some amount of cannibalization, I can't tell you what that would be. Because with the packer label they have quite a few that minimizes that impact.

Ryan Gilligan: That’s very helpful.

Thank you.

Dave Staples: Now don't tell Cathy I said. I don't want because she will try to change that in her budget. I want her budget on. I don't want her to sandbag on cannibalization and stuff like that.

Operator: [Operator Instructions] Our next question comes from Shane Higgins with Deutsche Bank. Please go ahead.

Shane Higgins: Hi good morning guys, thanks for taking the questions. I saw that you sold two of your stores to some new food distribution customer, is this something I know you guys have done some of this in the past, but are you guys looking to maybe place more of your own stores with some of your distribution customers and can you just kind of talk about some of the benefits of making that move and whether or not it is something you guys would consider may be accelerating going forward?

Dave Staples: As we have talked about - for a part of our strategy is to continue to put forth an outstanding retail operation and we’re committed to retail and retail as you all know, I think is the strong reason for why we’re successful as we are in distribution because we walk in the shoes of the retailer, we know what they experience and thus we’re able to, I think offer solutions that others don't do help them succeed. With that said, we’re also, we’re committed to having a right store base, the store base that fits our expectations, you know that’s an evolving thing and sometimes stores are in markets, they are not exactly ones that make sense for us, and sometimes the physical store isn’t exactly what makes sense for us.

Yet it makes tremendous sense for either of potential new distribution customer that we could attract with that location or our existing customer base that wants to grow and so this is really I think about a commitment to retail and a commitment to our customers and future customers that we want the stores where they will be the most successful. And so we expect to be in retail, I’m going and we expect to be good at it and great at it, and we expect to continue to evolve with the way the world is trending to be a great retailer, but that being said, where we have stores that could be better served by their new customer or an existing customer, so that they can make them great operations, we will place them there. So, we have strategically done that for ever and I think we will continue to strategically do that where it makes sense based on our store base.

Shane Higgins: Got it. That makes sense.

And I know you guys are obviously looking at stores each as an individual and based on the prospects whether or not it’s worth keeping some of those stores open. Do you guys anticipate closing some additional stores over the next year or two, as you evaluate your portfolio and lease expirations?

Dave Staples: Yes. I think we have said that. I think at the merger we said, there were a number of stores that we were either going to try to relocate or as they either weren’t cash positive any longer or the lease expired. And they just did not fit our portfolio.

If there wasn't another home for them, we will do that. And so, I think as any retailer does that just part of the business. We want to make sure our base is what we wanted, not just what we have.

Shane Higgins: Got it. Thanks guys.

That's it from me.

Dave Staples: Okay.

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

Dave Staples: Thank you, Brendan and thank all of you for participating today.

We look forward to speaking with you again over the course of the next quarter in our next conference call. Thanks everybody.

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