Executives: Katie Turner - Investor Relations, ICR Dennis Eidson - President & CEO Dave Staples - EVP & COO Chris Meyers - EVP &

CFO
Analysts: Ryan Gilligan - Barclays Chuck Cerankosky - Northcoast Research Scott Mushkin - Wolfe Research Shane Higgins - Deutsche Bank Chris Mandeville - Jefferies Ajay Jain - Pivotal Research

Group
Operator: Welcome to SpartanNash Company’s Third Quarter 2016 Earnings Conference Call and Webcast. [Operator Instructions]. I would now like to turn the conference over to Katie Turner. Please go ahead.

Katie Turner: Thank you Nicole, and good morning.

This is Katie Turner and welcome to the SpartanNash Company’s Third Quarter Fiscal 2016 Earnings Conference Call. By, now everyone should have access to the earnings release for the third quarter ended October 8, 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 amongst 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 third 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. It is 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 all for joining our Third Quarter of Fiscal 2016 Earnings Conference Call. With me this morning are Dave Staples, our President 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 third quarter; Dave will give an update on our business segments and then Chris will offer you some additional detail on our financial results and guidance, before I issue some closing remarks, and we’ll take some calls at the end. Once again we are pleased with our ability to generate sales and earnings growth in a challenging operating environment.

Our third quarter results reflect the success of our strategy to provide innovative and impactful solutions for both our Food Distribution and Retail customers, as well as our team’s ongoing efforts to offset the impact of the prolonged deflationary environment. These efforts translated into 1.4% top line growth and an improvement of $0.04 in adjusted earnings per diluted share and benefited from new business and growth in certain existing accounts in our Food Distribution and Military segments, and achieved our third consecutive quarter of improved comp retail store sales, improving 1.2% from a quarter ago to a negative 1.8% in the third quarter, but we still have work to do. We’re encouraged by this performance given that deflation accelerated from the prior quarter by 80 points to 3% at Wholesale and by 40 basis points to 1.4% at Retail. We’ve managed through deflationary environments before and have a number of positive initiatives underway that we believe will be serve our Food Retail and Distribution and Military customers. We continue to enhance our merchandising, pricing and promotional programs to drive greater customer engagement and improve the overall shopping experience for both our Retail customers and those visiting the independent retailers that we serve.

We also continue to expand our natural, organic and private brand offerings including the continued roll-out of our new fresh Open Acres brand to provide greater value to our customers. During the quarter, we celebrated grand re-openings for eight newly remodeled stores in Omaha with encouraging results. In addition, we remain focused on productivity and efficiency initiatives and realized further benefits from our ongoing investments in our supply chain network. Consistent with our objective to pursue strategic acquisition opportunities, we’re excited to announce that we signed a Definitive Agreement to acquire Caito Foods Service. The acquisition provides an opportunity to expand our presence in serving some of the industry’s fastest growing categories including fresh produce, value-added fruits and vegetables and protein-based prepared meals.

We’re excited to welcome the Caito team into the SpartanNash family and to serve a new group of customers as well as to provide new and existing offerings to our existing partners. Now with that, I’d like to turn over the call to Dave.

Dave Staples: Thank you, Dennis. The third quarter demonstrates our broad-based success in driving new business and improving operational efficiencies to help offset deflationary pressures. In our Food Distribution segment, despite continued deflation in proteins and dairy, we generated another quarter of sales and earnings growth over the prior year, mainly due to new accounts in our core business as well as growth in other channels.

While the independent food distributor market remains highly competitive, our overall sales pipeline is strong and we are confident in our ability to capitalize on the opportunities we have identified to provide supply chain solutions to a variety of customers. We continue to allocate resources to drive new business development which we believe will better enable us to pursue opportunities within both our traditional independent and military customer base as well as in other channels. We remain focused on providing highly relevant product offerings and services to help our retailers succeed in today’s challenging environment. During the quarter we expanded our merchandising and marketing programs with our independent customers and continue to work on initiatives to best position our distribution network and improve operations including supply chain optimization, shrink reduction and product assortment expansion. In the Retail segment, sales remain challenged as we continue to face ongoing deflationary pressures, again mainly in proteins and dairy, and continued difficult economic conditions in our western markets that are heavily influenced by the regional oil industry.

In Michigan, we are pleased with the performance and customer response at our remodeled D&W stores. These stores represent our newest offering for the banner with a heavy emphasis on fresh, healthy and prepared products. Though the grand re-opening for our Grand Haven D&W was held in June, it has been a year since we relaunched the Breton Village D&W store and we continue to see positive results, particularly in the perimeter departments. We continue to fine tune our presentation and pricing strategy to these stores and look forward to applying these successful strategies to other retail locations. During the quarter we celebrated the grand re-openings for our eight newly remodeled and re-bannered Family Fare stores and relaunched the Omaha region’s 14 stores as Family Fare.

Overall we’ve been pleased with the performance with this group of stores and our investments in merchandising and marketing. Improving our produce and private brand product offerings was a key initiative and I’m pleased to report that we are seeing a significant improvement in trends with respect to produce tonnage as well as private brand unit growth and penetration in these stores. In connection with the grand re-openings, we completed the rollout of our yes Rewards card to all of the Family Fare stores in the region. Sales and sign-ups from the loyalty program are tracking in line with our expectations. During the third quarter we continued the rollout of Open Acres, our new private brand for fresh product, and remain very excited about its potential.

Open Acres continues to be well received and closes a gap in our portfolio of private brands that existed on the perimeter of the store outside of our Michigan footprint. It also provides high quality product at a significant savings to consumers in both corporate owned and independent retail stores. We currently have approximately 150 SKUs of Open Acres product which includes the addition of fresh chicken and other protein, and we expect to end the year with approximately 200 items as we expand our product offering. For the third quarter, private brand unit penetration in our Retail operations as a whole was 21.9% which continues to place us above the national average. We ended the quarter with approximately total private brand items.

Turning to the Military segment, despite the headwinds being experienced by the commissaries, we generated increased sales as our new Fresh business offset the ongoing pressure in the core business. We continue to bid on new lines of business and work on expanding our service offerings to new and existing partners as well as improving margins through supply chain optimization efforts. With that, I’ll turn the call over to Chris for further details on our financial results and an update on the outlook for fiscal 2016. Chris?

Chris Meyers: Thank you, Dave. I’ll begin with a detailed overview of our third quarter results and then review our guidance for fiscal year 2016.

Consolidated net sales for the 12-week third quarter increased to $1.8 billion or 1.4% growth compared to the prior year quarter. Consolidated gross profit margin for the third quarter was 14.2% versus 14.6% in the prior year, primarily reflects the mix of business operations and the impact of continued deflation. Third quarter adjusted operating expenses decreased $4.1 million from $224.3 million to $220.2 million and improved 40 basis points on a rate to sales basis compared with the prior year quarter. The decrease in adjusted operating expenses as the rate to sales was primarily due to lower depreciation expense associated with fully depreciated assets and lower occupancy costs as well as improved operating expense leverage resulting from sales growth as well as ongoing productivity and efficiency initiatives. The adjusted third quarter results primarily exclude $2.7 million of asset impairment and restructuring charges associated with our retail store rationalization as well as $2.4 million of merger integration activities.

The prior year quarter primarily excludes $4.4 million in expenses related to merger integration and acquisition costs as well as $800,000 in net asset impairment and restructuring charges. Adjusted EBITDA for the third quarter was $53.4 million, or 3.0% of net sales versus 3.1% of net sales last year. Adjusted earnings from Continuing Operations for the third quarter increased to $20.1 million or $0.53 per diluted share, representing an improvement of $0.04 per diluted share over the prior year. These results exclude net after-tax charges of $0.08 per diluted share related to the adjustments previously mentioned. For the prior year third quarter, adjusted earnings from Continuing Operations excludes net after-tax charges of $0.09 per diluted share related to the previously mentioned adjustments.

Turning to our operating segments, third quarter net sales for the Food Distribution segment increased to $804.5 million from $762.3 million in the prior year quarter, primarily due to new business gains as well as the growth of certain existing accounts which more than offset the impact of continued deflation. Third quarter adjusted earnings for the Food Distribution segment increased over 16% to $19.8 million from $17 million last year. The increase was primarily due to higher sales, supply chain improvements and lower depreciation expense partially offset by costs associated with a water main break, inefficiencies associated with ongoing warehouse consolidation and the impact of continued deflation. In our Retail segment, third quarter net sales were $489 million compared to $507 million last year. Comparable store sales excluding fuel improved to negative 1.8% from negative 3% a quarter ago.

Despite the sequential improvements in comp store sales as well as higher fuel gallons, the ongoing deflationary environment and continued challenging economic conditions in certain of our western geographies contributed to lower sales. Specifically, the decrease was due to lower comp store sales excluding fuel, $7.9 million in lower sales resulting from retail store closures, $3.8 million due to lower retail fuel prices compared to the prior year. Retail segment adjusted operating earnings for the quarter increased were $12.4 million compared to $13.2 million last year. The decrease was primarily due to lower comparable sales volumes and the impact of deflation partially offset by favorable rebate programs, lower occupancy costs and the impact of store closures. In our Military segment, third quarter sales improved to $506.6 million, primarily due to new business gains associated with the distribution of new fresh products which offset the continued lower sales at DeCA operated commissaries.

Military adjusted operating earnings were $2.9 million compared to $4.5 million last year, primarily due to lack of inflationary gains and change in business mix. From a cash flow perspective, our current year-to-date operating cash flow was $78.6 million compared to $129.9 million in the same period last year. The decrease was primarily due to customer advances to support sales growth and the timing of working capital payments. Total net long-term debt was $468 million at the end of the third quarter compared to $464 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 remains in line with our target.

Now for the outlook for the remainder of the year. We are narrowing the range of our previously issued 2016 guidance for adjusted earnings per share from Continuing Operations from $2.09 to $2.15. Excluding merger integration costs and other one-time expenses and gains, guidance reflects continued negative comp retail store sales and the variability associated with deflation and its related impact on LIFO. We expect capital expenditures for the fiscal year to now approximate $72 million with depreciation and amortization in the range of $76 million to $77 million, total interest expense ranging from $18 million to $19 million. With respect to our recent announcement of the acquisition of Caito Foods Service, we expect to close the acquisition by early January 2017.

Despite the anticipated start-up costs associated with the new Fresh Kitchen, we anticipate the Caito acquisition will be accretive to full year 2017’s earnings. On our next call we will give fiscal year 2017 guidance which will include the impact of the Caito acquisition. I will now turn the call back over to Dennis for his closing remarks.

Dennis Eidson: Thanks, Chris. In conclusion, we’re pleased with our performance for the quarter in light of the challenging operating environment and while the prolonged deflation impact in our sales, we remain confident in our business model, solutions-based approach and ability to drive top line sales and improve operational efficiencies.

We’ve been through tough cycles before and we know that by remaining nimble and focused on value we’ll deliver on our key initiatives and exceed our customers’ expectations. We expect that our targeted [indiscernible] investments and enhancements to our merchandising pricing and promotional strategies will offset some of the deflationary and competitive pressures in the Retail segment. In our Food Distribution and Military network, we’re committed to pursuing business development opportunities and providing quality products and solutions to both new and existing customers. We continue to allocate resources to drive these efforts and as a result believe we are positioned to deliver against our key strategic initiatives and enhance shareholder value. With that, we’ll now open up the call and take some questions.

Operator: [Operator Instructions]. Our first question comes from Ryan Gilligan of Barclays. Please go ahead.

Ryan Gilligan: Hi, good morning. Thanks for taking the question.

So I guess our first question is on your dividend payout ratio. I know acquisitions are a part of the ongoing strategy and the plan is to acquire and then work your leverage back down, but you also generate a good amount of cash so I guess could you maybe talk about your dividend payout ratio and if there’s an opportunity to increase it, especially since it doesn’t seem like it would take a lot of cash to move the needle with your current share count.

Chris Meyers: This is Chris. I’ll take that question. First, we don’t anticipate a change to our dividend ratio on a go-forward basis but we will evaluate that when we evaluate our 2017 guidance that we provide.

We will provide a further update on that at the end of the first quarter.

Dave Staples: Ryan, just one other point. I think if you compare us to a lot of other rates, I think we stand pretty tall in our industry on the rate [indiscernible].

Dennis Eidson: I think we’ve been—I’m going to screw up this fact. Is it five consecutive years that we’ve actually increased the dividend modestly year-over-year.

Ryan Gilligan: Got it. That’s helpful, thanks. I guess can you just give us a sense for where Retail comps are now in the fourth quarter so far?

Dennis Eidson: Yes. Retail comps, we weren’t happy with the negative 1.8 as we talked about but at least it continued to go in the right direction and that’s three quarters in a row. We haven’t seen a material change early in the quarter.

Ryan Gilligan: That’s helpful, thank you. Just the last question on fuel margins. Can you talk about what their impact was on the quarter?

Dennis Eidson: Fuel margins were—we had a good fuel margin quarter a year ago; it was one of the better ones we had, so we actually are about nearly $0.04 a gallon less profitable on fuel. It had a negative impact on our EPS of about $0.005.

Ryan Gilligan: Got it.

Thanks.

Operator: Our next question is from Chuck Cerankosky of Northcoast Research. Please go ahead.

Chuck Cerankosky: Good morning, gentlemen. Could you in some way sort of break apart the Retail segment between the Michigan stores and the western stores in terms of comps and profitability? Would it be accurate to think that Michigan’s making money and the western stores are losing?

Dave Staples: Chuck, I think if you look at our Retail business, we’re not large enough and we don’t typically break all that out.

I think it’s fair enough to say our Michigan market is by far our strongest market, there’s no question about that, in all aspects of the business. I think we’re happy with what we’ve seen begin to transpire in our Omaha market but there’s still quite a bit of work to do. But as we said in the remarks, we feel pretty good about the direction that’s beginning to take and that was a nice contributor to our improving run rate.

Chuck Cerankosky: The run rate, Dave, is referring to the comps improving?

Dave Staples: Yes.

Operator: Our next question comes from Scott Mushkin of Wolfe Research.

Please go ahead.

Scott Mushkin: Hey guys, thanks for taking my question. I just wanted to [indiscernible]. The Military segment, Dennis, I think you mentioned that pressure in the core business obviously offset by some more fresh, but what is the pressure on the core business? I’m just trying to understand what’s going on with the core and why it’s having a hard time.

Dennis Eidson: DeCA has been I’d say dealing with challenging comp store sales now for the last several years.

I think actually we went through the government shutdown a few years back and I think it really started a bit of a swoon for them, so you know, it’s hard for me, Scott, to really opine very much about the DeCA business. We’re a supplier to those stores and we’re proud of the fact that we perform at very, very high levels with regard to on-time delivery and fulfillment, but yet we can only ship what they order. So, I think they have some core challenges in the business. We are available and discuss the industry with the better community that we supply products for to DeCA, and try and be of assistance wherever we can. We are really pleased that, despite the challenges they’re having on the top line, that we eked out a slightly positive revenue period, quarter, and we’re also very much convinced there are more things we can do inside of the Military resale system that will help that system operate more efficiently and effectively, and, you know, kind of stay tuned for things on that, we’re working hard on a number of projects.

Scott Mushkin: I mean, is it simply that’s been the Military’s been shrinking and that as people move away from those bases, it’s not as practical for them to go to those commissaries?

Dennis Eidson: I think there’s some of that. There’s been a shrinking Military. European forces are drawn a bit, and we supply all of Europe, as you well know. So, I think that’s part of it. Movement away, that’s very much a stack-up kind of shop.

The average transaction there is well more than double what a conventional supermarket would see. It’s a lot of protein that gets stacked up on in those shopping trips, and of course we’re dealing with the deflation cycle in protein that we really don’t—I’ve not seen in my career over this long, prolonged period of time. So, I don’t think there is any one thing, Scott. I think it’s an accumulation of variables.

Scott Mushkin: That’s great, and I have two more, so I want to make sure I get them in, and probably one last question.

The second one is just the light at the end of tunnel on deflation, and then the third one, if I get them both in here, is SG&A. You guys are pretty good at holding that number down. Labor costs are going up quite quickly. Healthcare costs are going up quite quickly. How should we think of SG&A going forward? So, light at the end of the tunnel, inflation and then SG&A kind of growth going forward.

Dennis Eidson: So, light at the end of the tunnel, I think you’re referring to deflation?

Scott Mushkin: Correct.

Dennis Eidson: Yes, yes. So, you know, Q3—let me just stick with our Distribution segment here for just a moment. So, Q3 was more deflationary than Q2, as I mentioned in my remarks, about 80 points worse, so that doesn’t feel very good. I went back to 2008, and looked at deflation by quarter.

We have not seen a stretch like this. We are now in—Q3 was our fifth consecutive deflationary quarter in our Distribution segment, and there’s no reason to believe that Q4 won’t be the sixth. So, it got worse from Q2 to 3. We don’t have an extremely early read on Q4. I would say the last period of Q3 was modestly better than the quarter run rate, but not materially.

If you look at the end of the year, and we’re basically on a calendar year, there was quite a bit of falloff and increased deflation, let me put it that way, at the very end of the year, particularly on proteins, beef being a big one a year ago. So, we hit the end of year, we’re going to cycle that. Having said that, Scott, I don’t think—we don’t see deflation going away early next year. The government’s got all kind of forecasts out there and they’re suggesting that it’s probably going to be inflationary for food at home. If that happens, I don’t think it’ll happen in the first half.

I don’t know if that helps you on that, and the second question was with regard the pace of SG&A. We’re going to give—we’re not giving you guidance on that for Q4, but we’re going to give guidance for next year when we get to the end of the year. I don’t know, Chris, if you wanted to add any other color on the SG&A question.

Chris Meyers: We try to aggressively manage SG&A whenever we can and make that a focus of our efforts going forward. We’re always looking for opportunities and have done a pretty good job taking advantage of cost-saving opportunities when they arise and when we proactively go after them.

But, I think there’s going to be a little pressure, given some changes in minimum wage and some other things going on in terms of regulation, in terms of wages next year, but we’ll do our best to try to offset that with operating initiatives.

Scott Mushkin: All right, guys, thanks. Thanks for taking all my questions. I really appreciate it.

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

Please go ahead.

Shane Higgins: Yes, good morning and thanks for taking the questions. The first question is just on traffic versus ticket in the third quarter. Could you guys just break that down on the retail side?

Dennis Eidson: In the third quarter, we were negative on both metrics, SPT, as well as transaction count. It was more heavily weighted toward a negative transaction count in the quarter.

Shane Higgins: Okay, all right, thanks for that, and just if you guys could give us a bit of an update on your retail store rationalization plan. I know you closed a retail store during the quarter. I’m just wondering how we should think about modeling out unit growth over the next several quarters.

Dave Staples: Well, I think if you look at—what we’ve said consistently since the merger is we’re going to continue to look at our store base and make sure it fits where we want to be, and so, you know, I think as you look forward, I wouldn’t see many new units, so I don’t think I would model anything really there. I think I would look more on it, you know, as some continuation of where we’ve been.

I mean, there’s probably a few more in the pipeline over the course of the next year, as we either find opportunities for them with someone else or determine if they just don’t fit the model we’re looking at.

Shane Higgins: Okay, thanks for that, and just if you guys could give an update on where you are with your merger integration activities, you know, when might those begin to kind of start to wind down?

Dave Staples: Well, you know, thankfully, there may be some lined up on some new ones, but if you’re talking about the old merger, I guess, we’re coming down the home stretch. We’ve got another year really, to wrap up some of the systems work, year, year-and-a-half, to really put a bow on some of the systems, but I think we’ve seen the majority of the heavy lifting is now behind us and I think we’re mostly focused now on some really big opportunities to make it even better for our distribution customers and the Distribution segment, as we can bring systems across our entire platform. So, I think that’s the heavy lifting you’ll see over the next year-and-a-half just related to the merger.

Shane Higgins: Got it, got it.

I’m just going to try and squeeze in one more here. It sounds like the competitive environment remains challenging, but not irrational. Do you guys have any color on Walmart’s positioning? Have they been doing anything different in any of your markets? Any color there would be great.

Dennis Eidson: We are aware that Walmart has been more aggressive with regard to everyday pricing in some parts of the county and we’ve actually done those price checks in other parts of the country where we don’t operate retail to kind of understand better what the implications might be of those moves, if they were to come, but in our core retail marketplaces today, we have not seen any changes in—material changes in Walmart’s everyday pricing strategy.

Shane Higgins: Great.

I appreciate it. Thanks a lot.

Operator: Our next question comes from Chris Mandeville of Jefferies. Please go ahead.

Chris Mandeville: Hey, good morning guys.

Chris, any ability to provide a pro forma leverage number post-Caito? Then, just generally speaking, you guys did provide a little bit of color there as it relates to the M&A environment, but what’s your appetite for additional deals going forward and, in terms of availability, what are you seeing out there and valuation expectations?

Chris Meyers: First, we haven’t changed anything with our overall capital structure targets or guidance. We’ve had a long-term suggested debt to EBITDA ratio of 2.0 times. Our ratios will go up post this transaction, but we feel pretty confident that we can get it back down to that targeted level in a reasonable timeframe. In terms of the overall environment for how—the M&A environment, I think that we—part of our strategic initiative is to continue to participate in the consolidation of this space because I think this space is going to continue to consolidate and there’s going to continue to be activity in the space, and I think it’s going—it’s been healthy and I think it’s going to continue to be healthy on a go-forward basis.

Dennis Eidson: I would just add on the M&A piece.

Three years this month, when we closed the Spartan/Nash Finch merger—and as Dave pointed out, virtually all the heavy lifting is behind us on that—that transaction was very foundational, and we talked about once we digested that, that we saw that the space was going to be consolidated and we wanted to be a player in the consolidation, and we still believe in all of that. Yet, we’ve also been discussing, as part of the strategy around M&A, that the perimeter of the store certainly is where the action is today and that we wanted to be even more influenced in our business by the perimeter and the increased volume that comes with that. We think Caito is very foundational as it relates to being able to look at this very fragmented part of the business in the industry and be able to take advantage of opportunities going forward. Caito, it’s a great company. We identified what we wanted to accomplish with regard to M&A and the perimeter, and did lots of work on this, but one company just jumped off the page and that was Caito.

It’s a great company. It’s got a great Management team. They have a great vision. This whole Fresh Kitchen opportunity that’ll come along with it is right on point, exactly what the consumer is looking. So, we couldn’t be happier with being able to reach an agreement with the Caito family, Phil and Joe, and are delighted the entire Management team is staying on board and are going to run that business.

So, we think we’ve hit a home run there.

Chris Mandeville: Okay, that’s all very helpful. Then maybe switching over to the retail front, is there any ability to parse out the actual comp performance by department, if you will, maybe center store versus pharmacy versus the perimeter, and then maybe even toss in how the fuel gallon comps were for the quarter?

Dave Staples: Chris, like I said before, we just don’t go into that detail by department, and the like, and so we’re not going to do that at this time. As far as fuel gallons, it was, you know, a dollar and a quarter …

Dennis Eidson: It was positive 3.5.

Chris Mandeville: All right, thank you, and maybe one last one, if I could sneak it in there.

On Caito itself, I’m sure you’re not necessarily looking to disclose too much, but if you could, is there any ability to talk about kind of general growth rates within the categories that you’ll actually be taking on, and then maybe compare that to Caito and how it’s been growing over the last several years, just so we get a sense of what to expect in terms of sales for 2017, maybe.

Chris Meyers: Okay. This is Chris. The categories that we’re growing—and I think Dennis alluded to it earlier, is the perimeter of the store is where the action is, and the perimeter of the store is growing at a faster rate than the center of the store. In particular, the categories they have exposure to in terms of the cut fruit and veg and the prepared food options, and what we’ll get more exposure to in terms of the prepared meal options when the Fresh Kitchen is operational are some of the fastest-growing categories in the space, and we expect that to continue on a go-forward basis.

So, we’re very excited about those categories and they’re growing faster than the rest of the store. Caito has had a good track record of growth and has capitalized on the growth that has happened in those particular departments over the past couple of years.

Chris Mandeville: All right, thanks again, guys, and best of luck in Q4.

Dennis Eidson: Thanks, Chris.

Operator: Again, if you have a question, please press star, then one.

Our next question comes from Ajay Jain of Pivotal Research Group. Please go ahead.

Ajay Jain: Yes, hi, thanks. With the Nash merger, I recall that you outlined kind of a three-year process for getting the synergies and I noticed that you had some acquisition costs this latest quarter. I was wondering if you can maybe confirm how much of that was related to the Caito acquisition.

Then going forward, do you consider this to be more of a bolt-on acquisition as opposed to Nash, which had a lot of integration work that was involved?

Chris Meyers: This is Chris. I would say we did have some acquisition-related costs related to the Caito transaction that hit our current quarter, our third quarter. We didn’t break that out between the other integration-related costs, some of which are related to the Nash merger and completing that process, so we did not break those out, but this deal for us is very much more about growth than it is cost synergies. There’s going to be cost synergies associated with the transaction. When you put two companies together, there’s an opportunity to benefit from that.

We’re going to more than double our produce business, which will help us out with a lot of synergies there. There will be cost synergies here, but this deal is very much more about growth and the future opportunities that we see for Caito in their existing accounts, in their existing categories, and also what we’re able to do in terms of helping some of our other existing customers out in terms of these categories as well. So, it’s very much about growth for us and that’s going to be the primary focus of the integration efforts is to capitalize on that growth and those opportunities.

Dennis Eidson: Just embellishing a little bit on the second part of his question, we see it a little bit like a mini-platform here. Obviously the volume of the business, and we talked about in excess of $600 million, it isn’t like merging the Spartan and Nash Finch businesses - they were both multi-billion - but we do see this as a platform for us to continue to grow on the perimeter, whether it’s organically, and I think there is big opportunity organically, as well as acquisitively.

Ajay Jain: Okay. Then can you comment on whether you’re expecting there to be a significant bucket for merger and integration expenses? I’m sure you’ll have some more color in a few months, but can you also just talk about what kind of timeframe you’re expecting for that integration process overall? Like, you know, three/four years from now, could you still be allocating merger and integration costs for Caito?

Chris Meyers: We don’t think the integration process associated with Caito is as long or nearly as expensive as what the Nash Finch/Spartan merger was. There will be costs associated with mergers and acquisitions, but it will be on a much more smaller scale than what you saw with the Spartan/Nash Finch merger.

Ajay Jain: Okay. Just a couple more quick questions.

This latest quarter you had some EBITDA softness in both Military and Retail, and I guess that wasn’t surprising on the Military side, but in terms of the outlook for the fourth quarter, do you expect some kind of EBITDA decline, and can you comment specifically on Retail, whether you’re going to see continued margin pressure in Retail?

Dennis Eidson: I don’t know if we’re going to give—we haven’t had a history of giving that kind of specific guidance quarter-by-quarter, but let me just tackle that a little bit in a different vein. With this deflationary environment, it has a negative impact in all of our segments, because we don’t get the benefit in Distribution and Military of inventory appreciation, where a wholesaler or most wholesalers have an opportunity to forward-buy in some way, or just the build the inventory going up, so that hurts our earnings, and yet we get a credit back in LIFO. So it’s a bit of a teeter-totter; it’s not necessarily a one-for-one. We called out in the guidance here that we have what could be a pretty significant LIFO event that could come in the fourth quarter,. So, that’s that EBITDA earnings teeter-totter that we’re on.

Similarly, in Retail, when we take inventories at retail—and retail prices are going up. We’re on the retail accounting method, and when prices are going down from the previous quarter, that also creates a shrink and a negative margin in our Retail portfolio. I don’t think this is unique to the SpartanNash Retail business. So, I think, until we get out of the deflationary world, it is going to have some pressure on earnings and EBITDA, and a good guide with regard to historical LIFO trends.

Ajay Jain: Okay.

So, it’s reasonable to expect a LIFO credit in Q4; is that correct?

Dennis Eidson: I think it’s reasonable to expect that, yes.

Ajay Jain: Okay, and then just one final question. On your prepared comment on deflation, for Wholesale, did I hear right, that deflation was 3%? So, your revenues would have been 3% higher without the deflation?

Dennis Eidson: Deflation was 3% in wholesale, correct.

Ajay Jain: Okay. All right, thank you.

Operator: Our next question is actually a follow-up question from Chuck Cerankosky of Northcoast Research. Please go ahead.

Chuck Cerankosky: Hey, guys, I just wanted to ask what is the distribution radius going to be out of the Fresh Kitchen facility once it starts operating?

Dennis Eidson: It’s not fully determined at the moment. They have a pretty good business plan in place and it is largely concentric to that DC, let’s say a couple of hundred miles or so, but there are some options with regard to packaging that could extend that distance quite appreciably, so I think that’s still a work progress. Of noteworthiness, as it relates to the whole distribution piece for Caito, we also got a business that Caito runs called Blue Ribbon Transport.

They’re very innovative with regard to being a third-party provider of logistics. We’re excited about that, and they partner with Caito on this activity, as well.

Chuck Cerankosky: Thanks a lot, Dennis.

Operator: This concludes our question and answer session. I would like to turn the conference back over to Management for any closing comments.

Dennis Eidson: Thanks Nicole, and I want to thank all of you for taking the time to join us today. That concludes our remarks and we look forward to speaking with everybody again at the end of next quarter. Thanks.

Operator: The conference has now concluded. Thank you for attending today’s presentation.

You may now disconnect.