Executives: Katie Turner - Investor Relations, ICR Dennis Eidson - Chairman and Chief Executive Officer Dave Staples - President and Chief Operating Officer Chris Meyers - Executive Vice President and Chief Financial

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

Group
Operator: Good morning and welcome to the SpartanNash Company Fourth Quarter 2016 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 fourth quarter and fiscal year 2016 earnings conference call. By now, everyone should have access to the earnings release for the fourth quarter ended December 31, 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 fourth 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 statements. 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 with that, 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 fourth quarter and fiscal 2016 year-end 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 fourth quarter and the fiscal year; Dave will give an update on our business segments, and then Chris will offer you some additional detail on our financial results and guidance for fiscal 2017, before I issue some closing remarks, and then we’ll open up the call and take some questions. Our fourth quarter performance was a strong finish to an equally strong fiscal 2016 with growth and sequential improvement in many parts of our business. Despite the continued challenging inflationary environment, we achieved a 3.4% increase in net sales and adjusted diluted earnings per share of $0.53 and $2.19 for fiscal 2016, which exceeded the top end of the earnings guidance we issued last quarter. As in past quarters, our results reflected some of the execution of our strategy to leverage our supply chain network and successfully drive new and expanded customer supply business.

Despite ongoing deflationary headwinds, which were 2.3% in food distribution and 1.3% at retail, we grew sales in food distribution and military and also posted our fourth consecutive quarter of improved retail comp store sales front. We benefited from the shift of New Year’s Day, which positively impacted the fourth quarter, as sales leading up to the holiday benefited fiscal 2016, while lowering sales volume in Q1 of 2017 and shifting holiday and pay associated with New Year’s Day into fiscal 2017. Through our efforts, we made meaningful progress in the quarter and the year around expanding our high-quality service and product offerings, operating our retail stores and making improvements in our supply chain network. And these are [in efforts ][ph] still continue to yield improvements in our operating results going forward. Consistent with our objective to pursue strategic acquisition opportunities, we announced the acquisition of Caito Foods Service, a leading supplier of fresh fruits and vegetables and value-added meal solutions for retailers, and Blue Ribbon Transport, which provides temperature-controlled distribution and logistics services throughout North America.

In addition, we were competitively awarded by the Defense Commissary Agency to be the exclusive worldwide supplier of private brand products to U.S. military commissaries. We’re excited about these opportunities and look forward to expanding on them in 2017. As a result of our disciplined post operating in the business, we strengthened our balance sheet and our cash flow allowed us to reduce net long-term debt by $57.3 million from the prior year. With that, I’d like to turn over the call to Dave Staples.

Dave?

Dave Staples: Thanks, Dennis. I believe the results achieved in the fourth quarter continue to demonstrate our team’s ability to execute well in a challenging environment. In our Food Distribution segment, despite continued deflation in proteins, produce and dairy, we generated our fourth consecutive quarter of sales and adjusted earnings growth over the prior year, mainly due to business gains from new and existing customers, as well as operational efficiencies and supply chain improvement. While the independent food distribution industry remains highly competitive, we feel positive about our current sales pipeline, the strength and capabilities of our distribution network, and our ability to provide innovative supply chain solutions continue to enable us to win new business. During the quarter, as Dennis just mentioned, we announced a definitive agreement to acquire Caito Foods Service and Blue Ribbon Transport, and we’re pleased to have completed the acquisition on January 5.

Over the course of 2017, we plan to integrate Caito and BRT into our operation. And while we anticipate the acquisition will be accretive and have identified certain synergy opportunities, we view this as a very strategic acquisition. We believe Caito increases the size and scope of our customer base by strengthening our fresh product offering to existing and new customers, and we’ll also provide entry into the fast-growing freshly prepared ready-to-eat category through its Fresh Kitchen facility in Indianapolis. The Kitchen was USDA-certified in January and will commence production in the first-half of the year. In the Retail segment, while our sales trend continue to improve, net sales remain challenged as we continue to face ongoing deflationary pressures and depressed economic conditions in our North Dakota region.

The sales trend improvement was partially benefited by 50 basis points due to the timing of New Year’s Day, which shifted from the fourth quarter into the first quarter of 2017. In 2017 we’ll be making targeted capital investments by converting certain stores to the Family Fare banner and remodeling others, while also continuing our store rationalization program as we continue to evaluate individual store performance, fit with our format, and overall business strategy. In the first quarter, we anticipate piloting a new click-and-collect program in one of our Family Fare location. Assuming results are in line with our expectations, we would begin to roll out of the program during the second quarter and anticipate having up to 25 stores online by the end of the year. Open Acres, our new fresh brand that was launched earlier in the year continues to be well received by customers in both corporate-owned and independent retail stores.

For the fourth quarter, private brand unit penetration in our retail operations was 21.3%, which approximates the national average. We ended fiscal 2016 with over 4,500 unique items and 7,100 total private brand offerings as we continue to refine our stores. Turning to the Military segment, we generated increased sales for the third consecutive quarter as our new Fresh business continues to offset the ongoing commissary and deflationary pressures in the core business. We continue to work on expanding the type and volume of products handled with new and existing vendors to improve both sales and margins in our core business. We’re also excited to partner with DeCA and its new initiative to offer private brand products, the U.S.

Military commissary, and we’ll begin to roll out these products in the first-half of fiscal 2017. We expect the full Caito brand roll out will take several years and we’ll have the positive effect on our competitive positioning, sales, and profit. With that, I’ll turn the call over to Chris for further details on our financial results and our outlook for fiscal 2017.

Chris Meyers: Thanks, Dave. I’ll begin with a detailed overview of our fourth quarter results and then provide guidance for fiscal year 2017.

Consolidated net sales for the fourth quarter increased to $1.83 billion, or 3.4% compared to the prior year quarter. Consolidated gross profit margin for the fourth quarter was 14.2% compared to 14.6% in the prior year, which primarily reflects the mix of business operation. The ongoing deflationary environment resulted in a deflation-related LIFO benefit of $4 million this year versus $4.4 million in the prior year quarter. Reported operating expenses for the fourth quarter were $234.6 million, compared to $225.3 million in the prior year quarter. Fourth quarter adjusted operating expenses were $223.5 million, or 12.2% of net sales, compared to $222.9 million, or 12.6% of net sales in the prior year quarter.

This is an improvement of 40 basis points on a rate to sales basis. The decrease in operating expenses on a rate to sales was primarily due to improved operating expense leverage resulting from sales growth in the mix of business operation, partially offset by higher health care and other benefit costs. The adjusted fourth quarter results primarily exclude $8.4 million of asset impairment charges associated with our new performance stores, as well as $2.7 million of merger and integration activity, mainly associated with the acquisition of Caito and Blue Ribbon Transport. The prior year quarter sales primarily reflect $1.2 million of merger integration acquisition costs, as well as $1 million of restructuring charges. Adjusted EBITDA for the fourth quarter improved $50.8 million from $49.9 million in the prior year quarter, representing 2.8% of net sales in both periods.

Reported earnings from continuing operations for the fourth quarter were $12.8 million, or $0.34 per diluted share, compared to $17.2 million, or $0.46 per diluted share in the prior year quarter. Adjusted earnings from continuing operations for the fourth quarter increased $20 million, or $0.53 per diluted share, representing an improvement of $0.01 per diluted share over the prior year quarter. These results exclude net after-tax charges of $0.19 per diluted share primarily related to the adjustments previously mentioned, as well as net restructuring gains primarily attributable to a favorable lease buyout. For the prior year fourth quarter, adjusted earnings from continuing operations exclude net after-tax charges of $0.06 per diluted share related to the previously mentioned adjustment. Turning to our operating segments, fourth quarter net sales for the Food Distribution segment increased 8.4%, or $838.6 million from $773.7 million in the prior year quarter.

The increase was primarily due to new business gains and the timing of the New Year’s Day holiday, which more than offset the impact of continued deflation. Reported fourth quarter operating earnings for the Food Distribution segment were $21.1 million compared to $23.6 million in the prior year quarter. Fourth quarter adjusted earnings increased to $23.9 million from $23.4 million last year. Segment higher sales and supply chain improvements were largely offset by continued deflation, a lower deflation-related LIFO benefit compared to the prior year, and higher health care and other benefit costs. The LIFO benefit for the Food Distribution segment was $2.1 million in the fourth quarter compared to $3.2 million last year.

In our Military segment, fourth quarter sales improved to $510.4 million, primarily due to new business gains associated with the distribution of fresh products offsetting the continued lower sales of DeCA operated commissaries. Reported an adjusted fourth quarter operating earnings for the Military segment were both $3.4 million, down slightly from $3.6 million to $3.7 million, respectively, in the prior year quarter due to higher health care costs. In our Retail segment, fourth quarter net sales were $479.2 million compared to $489.6 million last year. Comparable store sales, excluding fuel improved to negative $1.2 million to negative – 1.2% from negative 1.8% a quarter ago as timing of New Year’s Day holiday helped mitigate the impact of ongoing deflation and continued challenging economic conditions in North Dakota. The decrease in net sales of retail was primarily due to lower sales attributable from retail store closures was negative comp store sales, partially offset by higher retail fuel prices and gallons sold compared to the prior year.

Reported fourth quarter operating earnings in the Retail segment were $200,000 compared to $6.8 million in the prior year quarter. Retail fourth quarter adjusted operating earnings improved to $8.7 million to $8.4 million last year. The increase was due to cost reduction, higher fuel margin and a closure of underperforming stores, which largely offset lower comparable store sales and higher benefit costs. From a cash flow perspective, our fiscal year 2016 operating cash flow was $154.5 million compared to $219.5 million last year. The decrease was primarily due to customer advances, higher inventory levels to support sales growth, as well as the timing of working capital and income tax payments.

Total net long-term debt decreased $57.4 million to $406.7 million compared to $464.4 million at the end of last year. During the fourth quarter, we amended our existing credit facility to provide more flexibility, including the ability to increase the size of the term loan, extend the maturity from January 2020 to December 2021, and eliminate the highest cost tier of our pricing grid. At the end of the quarter, we had net long-term debt to adjusted EBITDA ratio of 1.8 times, which is better than our year-end target of 2 times. Now, I briefly review the fiscal year 2016 annual results. Consolidated net sales increased $82.6 million to $7.73 billion.

The increase was primarily driven by business gains from food distribution and military, which more than offset the negative impact of food deflation in all segments, lower sales at the DeCA-operated commissaries, and a decrease in comparable retail store sales. Reported earnings from continuing operations for fiscal year 2016 were $1.52 per diluted share compared to $1.67 per diluted share in the prior year. Adjusted earnings per share from continuing operations improved to $2.19 per diluted share compared to $1.98 per diluted share last year. 2016 results were positively impacted by $0.03 per diluted share due to the shift of New Year’s Day, which benefited fiscal year 2016 sales and shift is related to holiday pay out of fiscal year 2016 and end of 2017. I will now provide further detail on our outlook for fiscal year 2017.

We’re excited about our opportunities for growth of recent acquisition of Caito and BRT. Partnership with DeCA that provides private brand products and targeted capital investment in ongoing merchandising and marketing enhancements in our Retail segment. However, we expect to face continued headwinds in deflation through at least the first-half of the year. For fiscal year 2017, we expected to grow in the year-over-year sales through distribution, continued challenges in sales at DeCA that also impact Military segment and slightly negative to flat comparable retail store sales have improved due to the course of the year. From a profitability perspective, the outlook for 2017 reflects Caito and BRT having combined sales of approximately $550 million being accretive to 2017 earnings with minimum contributions from the fresh kitchen that operation ramps up during the course of the year.

In the military, we expect limited contributions from the DeCA private brand program in the second-half of the year, as that program gets rolled out. Additionally, the company expects deflation to eventually subside in the second-half of the year, and as a result, not expect a similar deflation-related LIFO benefit of $0.07 per diluted share in fiscal year 2017. The company also anticipates benefits from efficiency initiatives to be realized in the second-half of the year. Specific to the first quarter of 2017, we anticipate flat slightly negative earnings due to the shift of New Year’s Day, which negatively impacted both first quarter sales and profits, the timing and recognition of benefit costs, unseasonably warm weather, and the seasonality of the Caito business, which is stronger in the summer months. As a result, we expect adjusted earnings per share from continuing operations for fiscal year 2017 of approximately $2.26 to $2.35, excluding merger integration costs and other expenses we gained.

We expect capital expenditures for fiscal year 2017 in the range of $70 million to $72 million and deprecation and amortization of $79 million to $81 million, total interest expense of $25 million to $27 million. I will now turn the call back over to Dennis for his closing remarks. Dennis?

Dennis Eidson: Thanks, Chris. In conclusion, we’re pleased with our performance in 2016 and in light of the challenging operating environment, we believe we are well positioned to continue to leverage our strong business model to grow both sales and earnings in 2017. We’re making clear progress on our priorities and we have a solid pipeline of opportunities in our distribution and military channels for our ongoing – to our ongoing business development efforts, the recent acquisition of Caito and Blue Ribbon Transport and our new partnership with DeCA for private branding products.

We also continue to enhance our retail business to improve the overall customer experience, primarily through the expansion of our consumer-centric merchandising and marketing programs. While we expect deflationary environment to continue through the first-half of the year, we remain confident in our overall strategy and believe our focus on providing value and innovative solutions to our food distribution and retail customers will continue to serve our business well. In closing, I would like to thank all of our associates for their hard work and dedication in order to achieve our 2016 results and look forward to another good year ahead. And with this, I guess we’ll open up the call to take some questions.

Operator: [Operator Instructions] Our first question comes from Chuck Cerankosky with Northcoast Research.

Please go ahead.

Chuck Cerankosky: Good morning everyone.

Dennis Eidson: Good morning.

Chuck Cerankosky: Could you first just repeat those deflationary numbers, as they hit the segments, I just couldn’t write fast enough when – at the start of your call and then I have another question.

Chris Meyers: Yes, inflation in the quarter in our Food Distribution segment was 2.3% and deflation in the Retail segment was 1.3%.

Chuck Cerankosky: Okay. Do that suggest you’re passing on a little bit less than one segment than the other or given that better said, sort of better pricing in one segment versus the other.

Chris Meyers: You know, Chuck, I think that’s an exact science. I mean there is maybe some truth to that at a macro level, but item-by-item that other ways the way I would think about it. It also depends on the commodity, fresh probably gets passed through quicker than center store, but not a simple answer, but there is a lot of response.

Chuck Cerankosky: Okay and then turning to Caito, what percent of its business if any did it already do with Spartan? And then as you observed this business, integrate this business, what is the opportunity over the next one to three years to add Caito products to your existing customers and then perhaps get some of their customers that are new to you to start buying more from total Spartan distribution?

Dave Staples: So Chuck, as you know in our, I guess, probably sort of a Midwest facility of line and we don’t have produce operations today in Caito that partnered with us to offer a certain number of our customers produce. It’s not a big percentage, so you know it’s not a significant component of their business, but it’s certainly there. We think obviously long-term not only in the distribution of produce, are there opportunities for us to either work to get Caito into existing SpartanNash customers, but also work to get SpartanNash into Caito customers. We actually think the real exciting part is going to be when we start to get into Fresh Kitchen and the fresh-cut and when we can begin to take these kind of programs out to market across a broader base and we are working… As you know the Fresh Kitchen isn’t even into full production yet and so that still want us to come and with the fresh-cut, it’s really not starting to work through the ideas of how can we transport it? What is the true limit of distance we can sent it, and some of the logistics involved. But, yes, we’re really excited as we get through this year and into next year with some of the opportunities we see out there to stay on these offerings.

Chuck Cerankosky: Dave, is there a number to put on that if you start with the $550 million in revenue that the upside other than what might be its initial growth might be 10%, 15% of that as you build out the business?

Dave Staples: Yes, I mean we aren’t going to give that kind of specifics over time, but I think it’s going to be a nice opportunity.

Chuck Cerankosky: All right, thank you and good luck in 2017.

Operator: Our next question is from Shane Higgins with Deutsche Bank. Please go ahead.

Shane Higgins: Hey good morning, and thanks for taking the question guys.

Just real quick, I jumped on a little bit late, did you guys quantify the accretion of Caito in 2017 or could you guys give us just some indication of what it might be?

Dave Staples: We did not quantify the accretion specifically related to Caito. We obviously have increased EPS during the course of the year and Caito is part of that, but it is part of our Food Distribution segment and we only disclose earnings at the segment level, so we did not specially disclose the Caito accretion to the Food Distribution segment.

Shane Higgins: Okay, great. And then just you guys had a nice quarter for the Distribution business, I was just wondering if you guys could quantify what the impact of Gordy’s was in the quarter and when do you guys cycle that win?

Chris Meyers: You know we don’t specifically give guidance for results on a customer-by-customer basis, but it was a very good win for us that we are very happy with. You know I would tell you that the business onboarded near the end of the first quarter of last year and so you’ll see a little accretion related to that in the first quarter of 2017 as well.

Shane Higgins: Okay, great. And then just – I just wanted to discuss your loyalty program, your yes Rewards, and just to get a sense of how that’s progressing and how you’re leveraging that consumer data to help you guys improve your merchandising and marketing programs, just an update on that would be great.

Dave Staples: Yes, I mean, as you know Shane, we have been working with that whole lot of personalization, now we are in probably our third year. And we continue to really be excited about where we see it taking us and the kind of information and data we can use from share of wallet and how we approach the consumer to get them to expand that with us in categories they are not shopping as fully as for possible. As well as just really beginning to understand the likes and dislike of individual customers and being able to tailor offerings to those likes and dislikes.

And I think as we rollout this click-and-collect it takes our whole sort of e-commerce and personalization efforts to a next level. I think it gets pretty exciting the things we can do from the tailoring the ad when you get onto a website, to really targeted promotion, to understanding how we segment our customers better, to make sure we have the right offers to the right segments, as opposed to clustering stores, we’ll begin to cluster customers. And so I think that’s going to be a real exciting year for us as we put more and more of this capability into play.

Shane Higgins: Okay and just is that the yes Rewards is available now in all your stores, correct?

Dave Staples: No, no. Well, I guess it’s available whether it’s used or not, we don’t require it in all stores.

And so if you are in a Family Fare, the majority of the Family Fares require the card, but not all of them even required at this point. And we get pretty good data and what’s – I believe it’s 82 Family Fare Stores. And so we’re getting feedback from all of those stores, our D&W Day & Night gets us another 12 stores, so we’re getting very robust that, I would say from 90 to 100 stores and then we’re getting some levels of data from the chunk of the remainder. As we continue to rollout our remodel program and the stores convert to Family Fare, the program goes into place more fully and it becomes much more of the offer.

Shane Higgins: Okay, great.

And then just a last one from me on your store closings, what you guys have in terms of leases coming up for expiration in 2017 and how should we think about modeling unit growth for the year and that’s it from me?

Dave Staples: Yes, I think Shane, as I look at that, we don’t really want to get publicly out there about those kinds of decisions, you know they impact a lot of our associates and it’s always a difficult decision to make, but I think we’ve been pretty open with everybody that we are going to continue to look at our store base and we’re going to continue to look at how our stores did with our store base and we’ll make what we think are the appropriate decisions based on all those things lining up. And so I think there will be more activity among those lines as we said, but I really – I don’t think it’s right to get into too much details on that.

Shane Higgins: Okay, got it. Thanks a lot guys.

Operator: The next question comes from the line of Ryan Gilligan with Barclays.

Please go ahead.

Ryan Gilligan: Hi, good morning, thanks for taking the questions. Can you elaborate a bit on the efficiency initiative that roll on in the second half of the year, so what types of initiatives or what segments are impacted, the size etcetera? Thanks.

Dennis Eidson: Yes, Ryan, we are not going to go into real deep specifics today, it is competitive, but our network is a critical advantage for us and we feel really good about our network, but [indiscernible] right, these are always pushing to make the battery, it is always pushing the – you know really be able to serve our customers better, so we are always thinking about how could we get a little more efficient? How can we improve our assortment? How can we work on our path? You know how do we manage the skews we have and get the most productivity out of them? So as we look through the shrink world, as we look at the efficiency of the network, as we look at the product assortment of the network, whether that extends into the retail operations or through the distribution. Those are all the types of things we’re working on.

So, I would say it’s a lot of the same that we talked about to you in the past. We continue to see opportunities to get better and better and we’ll be continuing to put those in place.

Ryan Gilligan: That’s helpful, thanks. And can you give us an update on the pipeline for non-traditional distribution opportunities. What are the biggest types of opportunities here?

Dennis Eidson: Well, yes I mean without letting anything out of the bag, we just continue to – it seems anyway get referrals from other customers, get referrals from things people have seen us do.

I think our name and our reputation for innovative solutions is expanding. And so we continue to be to sort out I think for some of the non, what we call traditional business. So that non-traditional business continues to put forth opportunities, as well as our conventional lines. I think we’re taking care of the customers we have and I think that’s been seen and respected and I think we just continue to have interest in really all facets of our distribution business. The DeCA program I think is a perfect example.

42 companies went after that private brand business. And we were able to work with DeCA show them the expertise that we bring to the table. We talk a lot about how we believe retail provides us with the differentiated approach to distribution. And I think you’ve got like a perfect example there. We were able to bring our expertise in private brands and how we’ve worked with our own stores, as well as our independent customers to really develop, I think a topnotch private brand program and DeCA was able to see that and really decided to what was worth going with SpartanNash exclusively because of that expertise.

, :

Ryan Gilligan: Helpful. And I know it’s early innings on click-and-collect but is it maybe a solution that you can offer your distribution customers down the road?

Dennis Eidson: Click-and-collect certainly is a solution our distribution customers can use, it’s depending on the technological disposition of a customer, whether this click-and-collect solution will be the one they use. But I think what we’re going to be able to do is, as a result of this is help them through the process should they desire that help. So, this system is pre, I guess I would say this is pretty technically advanced, it actually is going to take our website to new levels, it’s going to bring apps into the process. This will lead fully get the whole entire click-and-collect program we purchased in place it’s going to be very, very all encompassing so not all of our customers are going to desire a solution like that.

However, there are many options for them that can meet different levels of technical desires. And so we’re very well aware of those and we help our customers partner up with those different providers. But I think what we’re really going to be able to bring them are the learnings we get as we go deeper in the process. Now, we have click-and-collect and I think it’s up to nine stores today, but we have various different versions of it and as we took those learnings we just thought we needed a much more comprehensive solution and that’s how we landed on the program we decided to go with today.

Ryan Gilligan: That’s really helpful.

Thank you.

Operator: Our next question is from Scott Mushkin with Wolfe Research. Please go ahead. Scott Mushkin.: Hey, guys, thanks for taking my question. So couple of things I wanted to see where you think performance outside the acquisitions next year like kind of what the leverage are there to drive EBIT, it sounds like both DeCA and retail are going to perhaps, more challenges as we look at this year.

So, I was wondering what do you think leverage our available outside the acquisitions to grow the businesses is it primarily distribution?

Dennis Eidson: Yes, I think Scott the Food Distribution is going to be the primary driver of that segment. We expect continued growth from the Caito business, but also excluding the Caito business, we expect continued growth in that business. We also look – continue to look for opportunities to improve our efficiencies throughout all the different segments that we operate in. The headwinds that DeCA or something we would try to overcome with cost saving initiatives to degree we can possibly. There’s also the private brand program that we mentioned that will ramp up through the course of this year that probably won’t impact our earnings substantially at all in 2017, but we do have optimism for 2018 and 2019 where that will help us as well.

So, I don’t know, Dave, if you have anything to add.

Dave Staples: Yes, you know Scott, I think that and our continued efforts to refine our promotion and merchandising strategy in the Retail business and then take that through our distribution business, I mean we’re really working a lot with the CPG companies to get them to partner with us on their new ideas. And in Retail, obviously everyone wants to talk about parameter and that’s critically right, as the world changes and you want to be fresh and you want to be relevant and we certainly are focused on that. But also that reinvigoration of the center store and trying to use a full shop as a competitive advantage against some of these more narrow focused participants, we think is going to be a big deal. So we’re trying to get the CPGs to see us as that partner who is very willing to experiment with new ideas and new thoughts in the center store.

And we’ve had a couple of very nice programs come out of that that we’re able to take out for our distribution customers. So there’s still a strong focus by us on that, growing that core distribution business, these are to new accounts where we’re selling more of the existing accounts we have. And I think – well, you asked excluding Caito, I think when we partner that with Caito, that even gives us ability to drive even more growth into that core organic type thought process.

Scott Mushkin: So do you guys think that you’ll see profit growth outside the Distribution and the other two segments or is that not the expectation?

Dave Staples: We don’t specifically guide on the operating income on a segment-by-segment basis. We’re just guiding them at total overall basis.

So we didn’t really provide that level of granularity in our guidance.

Scott Mushkin: Okay, perfect. And then I just wanted to touch base on two of – just kind of current environment. Obviously, produce is very deflationary right now. But usually when we get deflation in a normal environment and some of these commodity categories actually helps profit dollars, is that – where are we in produce? Are we seeing some help from profit dollars in produce deflation or is it just a net negative at this stage? And then I have one last one.

Chris Meyers: The produce deflation is relatively new and we’ve seen all that, the January number was different more difficult than the fourth quarter, we were deflationary 5% in Q4 in the Distribution segment and 16% in period one, believe it or not, really driven primarily by that western bench, but it was like 39% deflationary on the PPI, I think you follow that. And if I would say generally speaking, as it relates to – I think we touched on this earlier that a kind of a stickiness of margin, produce tends to get passed through more quickly almost immediately than you see with center store product. So it has not been some big help to the margin rates with the margin performance subsequent to the deflation in produce.

Scott Mushkin: Okay, then my last one and thanks for that. And so my last one is just, you know our research has showed Wal-Mart now investing in price in some of your markets, retail markets.

And I guess my question is, what’s very new, what’s your outlook for them, when they do this they tend to be pretty aggressive, we’ve shown them taking share as this happens and then competitors respond. So, I want you to comment on what’s going on in Michigan? Has or have Myer and Kroger responded to the Wal-Mart’s activities and kind of what your outlook is as this unfolds over the next month or so?

Dennis Eidson: Scott, you know I mean as you know Wal-Mart’s note nothing new to us. I mean when you put Wal-Mart and Myer together, we’re in one of the most heavily penetrated state. So we dealt with this kind of activity, I think, over the course of our existence in it. You follow the industry, you know Wal-Mart has done this before and know it would again, and so you know just part of the competitive landscape, I mean I think we’re trying to use our tools because I think value is critical whether Wal-Mart has a price reduction or not, it’s about what value do you offer your customer and that that value equation is broader than broader than just price and I think that’s how we competed all along.

That being said, with our new insight into the consumers, we’re trying to figure out how we are more targeted with offers, so that we can target those people most impacted, more effectively, offering them that value and price they are looking for, but the value overall in a better shopping experience in different product quality. So, I think we’re going to continue to refine those types of strategy then work harder to isolate the opportunity where we can be more effective with our promotional dollars, it’s hardware where they matter most. And I think additionally, we’re experimenting with a number of different thoughts on how we bring a different thought-out value to the consumer whether that is an producer private brand and we are experimenting with that in other markets and we look to take those learning’s and really maybe change the game a little bit by ourselves here as we go forward. So, I think that’s how we look at it, I don’t think I can really get too much more specific than that because I don’t want to tip our hand, but I think we just look at it as the game we have been in and it is a business we are going to continue to be in and it is just part of how it flows?

Scott Mushkin: Perfect. And I actually just wanted to say, Walmart talked about things being a little slow so far and clearly the weather at the Michigan’s been warm, any comments on kind of what’s going on right now, and then I will yield, thank you.

Dave Staples: January Scott I think across the industry. I have not talked to anyone who has said they had a great January and you probably talk to even more people than I do. And there were a number of things, obviously the holiday shift that Dennis and Chris talked about impacted January the most. We’ve had no signal, it’s amazing, right. We had a very snowy December and that was a benefit and then I think the [indiscernible] operators in Michigan opened up earlier than they have ever opened and that’s now ended like December 22, and I don’t know if we had 3-inches since.

And so it’s been just a very, very unusual winter for us. I think yesterday was 66 degrees and sunny and today is going to be in the mid-to-high 50s, So, January got all tough. The good news is, while we got off on the tough January and the weather didn’t really improve that much in February. Our February has bounced back, what I would consider much more in line with the trend. So January was an unusual month.

I think we feel much better about the three weeks in February that is bouncing back in line with a little bit more of that we have been trending. So, it is a mixed bag I guess, it is the best way to describe it. But we’re kind of feeling like January was maybe the aberration at this point.

Scott Mushkin: Perfect, thanks guys.

Operator: Our next question comes from Chris Mandeville with Jefferies.

Please go ahead.

Chris Mandeville: Hi good morning guys. So, just for a point of clarification, I appreciate you are providing the color on the holiday impact for retail, but where there actually any sales effect for wholesale and DeCA and if so can you help quantify that for us just so we can adjust accordingly in Q1?

Dennis Eidson: Yes. Included in our three expense is a fewer different factors. One we call about is well is the $0.50 comp benefit that we saw in the fourth quarter related to the holiday shift, but it also positively impacted both our distribution and our military segments as well.

And the other component to it is really related to holiday pay, which in the prior year we incurred that expense in the fourth quarter. This year we will incur that expense in the first quarter. SO, if you add up that entire mix, so it did impact both retail and distribution sales, as well as our expense line when we quantify it $0.03 a share.

Chris Mandeville: Okay. And then I guess you guys had mentioned, you had some higher down growth at retail for Q4, can you may be just help us understand the change from Q3 to Q4 and what you are seeing possibly quarter to date at the pumps has been quite a popular discussion in recent weeks.

Dennis Eidson: Yes, so we did hit on the current tailwinds in the quarter, but we have been running positive comps downside. Q2 and Q3 were also positive on comp tailwinds. We did have a higher price for gallon on fuel in Q4 than we had a year ago as more concerns more downwind then we were slightly more profitable and cents per gallon versus prior year, so fuel was actually pretty good to us in Q4.

Chris Mandeville: Okay, so I guess maybe fair to assume that you did have a higher retail in Q4, a gallon growth was still positive, but yet maybe a little bit less than what you have observed in Q3.

Dennis Eidson: I think we will have this consistent quite important than what it was in Q3 Chirs, have a little some…

Chris Meyers: Gallon growth was again positive in Q3 and Q4, it was slightly less positive in Q4 than it was positive in Q3 on a gallon basis.

Chris Mandeville: Okay, very helpful. And then just turning really quickly to the pilot for click and collect, I am curious if you would help us understand the difference between what you are moving forward with versus the nine or so stores that already have a similar but somewhat different offering and maybe specifically what type of fee you will be attaching to such a service within your pilot?

Chris Meyers: Yes. So let me compare and contrast, I don’t know if I’m going to get into fees, yes, because I really don’t want to see if anybody can. But from a compare and contrast, I will say what we have in our other stores, we kind of picked up as we brought those stores on board, right. So they are very different systems and they range the gambit from a rosy, I didn’t believe, we – there is as couple of other different types.

One is a little even more home grown. The good thing is about that is the game is a sense of at least what we needed to do to be effective. And a number of these systems have worked fairly well for us and that’s how a couple of those alternatives were able to be good partners with our distribution customers on because we at least understand how they work. But the key is they are really, there is strong systems on a store or two or three or four basis. They don’t necessarily take your website to another level, or integrate an app with that, or integrate recipe offerings.

And that where we are going is a company called Unada [ph], it really is an integrated solution that is not just focused on the click and collect in store experience, but also how it does deals in your website, how it can bring and has to play, how it can really bring you a holistic offering and really take you e-commerce presence up on the notch. And so that is really the decision we made to go with Unada versus using one of the once that we had is that this really takes us to a different level overall in the experience.

Chris Mandeville: Okay and then, I guess just thinking about private label, not specific to DeCA per say, but maybe just the grocery industry as a whole. Where are we in terms of the cycle of penetration, where do you think it could go ultimately, is there any area of specific emphasis possibly and better for you and are organic and if in fact it is being focused in those types of categories are the margins any different versus kind of their conventional counter parts?

Chris Meyers: There are lot of moving parts to your question. Private brand has had a bit of a tougher time in the last year or so nationally, virtually all of the growth in private brand penetration has been in the perimeter, not inside our store, and in our specific case, in the Nash Finch part of the business, they now have in their private brand portfolio perimeter representation.

So Dave mentioned in his remarks today that we are happy with the open anchors launch. We have got about 200 items that we have launched in open anchors and all of those items are free and new to the Nash Finch wholesale and retail business that merged in with us. So we think there is pretty big upside. We have got a long way to go with open acres that there are hundreds of items that we are going to be adding to that. So I think that is a big upside.

We also continue to grow organics across our portfolio consistent with a national trend, our retail stores we were up 30.5% and organic penetration in Q4. Here we have a private brand organic program called full circle commenced through our relationship with DeCA. We have over 330 items of private brand organics and full circle issuing for growth. Overall in organics we are staking over 3000 items in our retail stores. And our distribution volume we might not penetrate [indiscernible] is something 40% versus prior year.

So I think as you’re thinking about the segment, the parameter, private brand, we’re very, very engaged in that and are really pretty optimistic about the results we are seeing. And it – some of it is like obviously say, it was demographically driven, and so you’re going to get a better penetration. But we get considerably surprised when we look at store by store. Our sold stores are really performing well with that kind of pilot that you wouldn’t expect if you were just confirmed by your buyers about your thinking buying that type of product.

Chris Mandeville: Okay.

And then last one for me just on the M&A front. Are there any specific areas that you guys are focused whether be it geography, or on offering, and then in regards to what assets maybe available if – how would you characterize the quality of that?

Dave Staples: I would say, first, that the market itself is remains very active in terms of the M&A front and we remain very active in that market. The focus of our M&A activities is more on the distribution front than it is on the retail front. We would be more optimistic on the retail front and more proactive on the distribution front in terms of how we look at things. But we think the market is very active right now.

And we believe in the continued philosophy that that market will continue to consolidate and we see that continuing to play out and I think that’s going to continuing to play out over the next few years.

Dennis Eidson: As said, when we did the merger with expansion, we had talked day one that this really would give us a foundation for being consolidator in the space. And three years later, our leverage came down just as we had kind of prescribed it would. So we’re 1.8 times net debt to EBITDA, and that’s how we ended the year. We included in the release that, we expect to be under 2.5 times this year and again we will be purposeful on paying that total.

But I think what’s happened here is by our ability to pay down debt, we’re prepared to do the next transaction and the pipeline is pretty robust. When you combine that with the fact that we put together a 9% earnings improvements last year. We performed it in the high-end of our guidance this year again 9% got the balance sheet in order plenty of the acquisitions in the pipeline for the right kind of transaction, we will be at the table.

Chris Mandeville: All right. Thanks, guys, and best of luck in 2017.

Dave Staples: Thanks.

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

Ajay Jain: Yes, hi, good morning. So in terms of Caito and Blue Ribbon, I know it’s obviously early with the integration process.

I was just wondering if there’s been any aspect of the integration, or what the conversion of the new Fresh Kitchen facility. Has any of that gone a little slower than expected? So I’m just asking if there been any initial unexpected debt bags and also just wondering if the timeframe to start shipping product from the new facility is still on track compared to what you were thinking around the time of the acquisition?

Dave Staples: Yes. From our perspective nothing is slower than what we anticipated in terms of the integration. The integration process and the deal in general for us was very much above how do we grow and develop that business over a long-term basis and that continues to be the focus. There will be synergies associated with the transaction.

But first and foremost for us, it’s about how we go to markets together as one company to realize the benefits out of that and how we take advantage of that. How do we continue to grow that business. And we are focusing on cost synergies as well, but it plays a secondary – takes a secondary position to growth opportunities. And in terms of the Fresh Kitchen, I think we – there’s no delay in that either. The building is complete.

I think there’s a lot of activity going on there. There’s a lot of effort that go – that’s involved in getting that up and running and getting that to be operational. And I think that continues to be on track and we continue to anticipate making that facility operational in the first-half of 2017.

Ajay Jain: Okay, thank you for that. And I thought at the time of the Caito acquisition was announced, the revenue contribution, I think, you indicated it was around $600 million annually and you’re assuming $550 million this year, so I would have thought the revenue impact would have been a little higher, especially since you’ve got the start up business that hasn’t really kicked in yet.

So, is there any core revenue softness a cater that’s assumed in the guidance or is the issue just that you’ve got a portion of the legacy business that you are not retaining for whatever reasons?

Dennis Eidson: Yes, the way I would say it is, it’s probably more of the latter to answer your question than the former. We do anticipate growth from Fresh Kitchen, but the way I would look at it is, $550 million is about what we anticipated the business to do when we closed the transaction in January, we still feel optimistic about it. We still think it’s a great growth opportunity for us, but $550 million stays out in the book of business that existed at the time we closed the transaction is what we anticipated and there has been no change to that estimation.

Ajay Jain: Okay and I know you are going to start to cycle a lot of Gordy’s accounts soon, I think you’re – or I guess you are cycling that in Q1 and your guidance assumes – still assumes growth in Distribution, but now that you are cycling Gordy’s and you’ve got tougher sales comparisons and you are also dealing with the 2% deflation, I’m just wondering if there’s a lot more distribution business that you’ve taken on recently or if there is new business that you expect to pick up that’s assumed in the guidance?

Dennis Eidson: You know Ajay, as far as new business, I think we’ve talked about pipeline and then our thoughts. I think we just see a lot of good opportunities out there and I think the team has done such a wonderful job of identifying and differentiating our offer that we see more opportunities as we go prove it.

So I think it’s more, what we see as opposed to what we’ve done. I also think we have a healthy book of business that continues to grow as well. We pointed out that there is deflation, we do have certain segments of our existing customer base that are growing and that we are very happy with as well.

Ajay Jain: Okay and I had one final question. I know you can’t give guidance on restructuring charges, so I’m assuming the difference between your GAAP and non-GAAP EPS guidance, it’s mainly based on integration cost.

But I’m trying get a better handle on where you are in terms of restructuring activities for retail overall? At this point, what percentage of the store fleet do you think is still subject to restructuring activities or I guess what percentage of the stores would you say are just disproportionately underperforming? If you can comment?

Chris Meyers: Yes, so this is Chris, I’ll take a stab at it and Dave or Dennis you can follow-up here. I think Dave alluded to in an earlier comment as well that we continue to look at our store base and continue to evaluate our store base you know and make sure it’s the right fit for us as a company from a lot of different perspectives and we continually valuate that store base and we will continue to do so over the next couple of years. I think we are not going to get specific about any particular activities, but we continue to evaluate it and we’ll continue to make decisions. I would say I think there is going to be some – we anticipate that there will be a modification in the store base from a small degree over the next couple of years yet.

Ajay Jain: Okay, great thank you very much.

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: Well, I’d like to thank everybody for participating today and that concludes our remarks for the quarter and we look forward to speaking with everybody next – at the end of Q1. Thanks.

Operator: The conference has now concluded.

Thank you for attending today’s presentation. You may now disconnect.