Executives: Katie Turner - MD, ICR, LLC David Staples - CEO, President, COO and Director Mark Shamber - EVP &

CFO
Analysts: Scott Mushkin - Wolfe Research Aaron Eisenberg - Jefferies LLC Shane Higgins - Deutsche Bank AG Ryan Gilligan - Barclays PLC Kelly Bania - BMO Capital Markets Charles Cerankosky - Northcoast Research

Partners
Operator: Good day, and welcome to the SpartanNash Company's Fourth Quarter 2017 Earnings Conference Call and Webcast. [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 2017 Earnings Conference Call. On the call today in the company are Dave Staples, President and Chief Executive Officer; and Mark Shamber, Chief Financial Officer. By now, everyone should have access to the earnings release, which went out yesterday at

approximately 4:05 P.M. Eastern Time.

For a copy of the release, please visit SpartanNash's website at www.spartannash.com/investors. This call is being recorded, and a replay will be available on the company's website for approximately 10 days. Before we begin, we'd like to remind everyone that comments made by management during today's call will contain forward-looking statements. These forward-looking statements discuss plans, expectations, estimates and projections that might involve significant risk and uncertainties. Actual results may differ materially from the results discussed in these forward-looking statements.

Internal and external factors that may cause such differences include, among others, competitive pressures amongst food, retail and distribution companies; the uncertainties inherent in implementing strategic plans and integrating op and inquiry access 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, annual report on Form 10-K and the company's other filings with the SEC. Because of these risks and uncertainties, investors should not place undue reliance on any forward-looking statements. SpartanNash disclaims any intention or obligation to update or revise any forward-looking statements. This presentation includes certain non-GAAP metrics and comparable period measures to provide investors with useful information about the company's financial performance.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measure and other information as required by Regulation G is included in the company's earnings release, which was issued after market yesterday. And it's now my pleasure to turn the call over to Dave.

David Staples: Thank you, Katie. Good morning, everyone, and thank you for joining us today. The format of today's call will include my brief overview of the fourth quarter and fiscal year as well as an update on our business.

Mark will then provide additional detail on our operating and financial results and guidance for fiscal 2018, before we open the call for your questions. We were very encouraged with the cumulative effect of our operational and strategic initiatives, despite the challenging environment in food, retail. Our fourth quarter net sales exceeded the prior year with top line growth of 5.3%. The increase in net sales was largely a result of contributions from Caito and organic growth of 3.2% in food distribution, demonstrating our ability to both expand our existing customer relationships and also build new ones. In addition, we achieved our second consecutive quarter of positive sales growth in military with 2.7% increase in sales driven by new business and the expansion of the private brand program.

Our profitability, while in line with expectations for the quarter, was impacted by the performance of Caito and the significant LIFO benefits in the prior year quarter as well as industry-wide transportation cost increase. We have taken significant steps towards improving our performance in these areas as I will discuss shortly. We continue to focus on providing innovative solutions across our multiple sales channels and further leveraging our differentiated business model to improve our customer experience. I must say, I'm excited about the opportunities ahead as we continue to build on our solid foundation. Now I'll review each operating segment.

In our food distribution segment, we achieved another strong quarter of top line growth as we leveraged our network and supply chain capabilities to provide high-quality service and value to our wide array of customers. Our ability to innovate and provide impactful supply chain solutions enabled us to drive sales to new and existing distribution customers and help our customers enhance their operations. For example, in one of our metro areas, we recently introduced a merchandising initiative aimed at providing customers with promotional programs and products that are targeted to meet their unique needs. This type of flexibility and willingness to think differently will enable us to continue to grow in this rapidly changing environment. We remain focused on integrating our Caito operations, and increasing production and efficiency at the food processing facility.

2017 was a year of transition, and traditionally the fourth quarter is seasonally soft from sales and earnings standpoint. The fourth quarter seasonality is driven primarily by lower demand for fresh-cut fruits and vegetables and lower yield due to the geographic availability and sizing of certain fruits. While we continue to improve our processes, we are excited about our prospect, particularly following the recent additions to our Caito team including individuals with robust food manufacturing experience. We believe we ended the year with the right infrastructure and team in place to build the business. We are now incorporating fresh-cut fruits and vegetables as well as limited meal solution items produced in these facilities into our Open Acres and Good to Go! private brand offerings.

These products are offered in both independent and corporate-owned stores serviced by our Grand Rapids and Omaha distribution centers. In fiscal 2018, we will continue to leverage the capabilities of our production facilities to ramp up our private brand product offerings, including ready-to-eat meals, sandwiches, salads and sides. We are developing significant interest in our capabilities and appear to have a strong pipeline of prospects interested in the value offerings we can deliver. With a number of needle-moving initiatives in place, we are optimistic that 2018 performance will be much improved, and the new business will begin to materialize as we move into the spring and summer selling season when demand is high for fruits, vegetables and other on-the-go items. We're also exploring co-packing opportunities across the food supply chain with national and private brand products and we are adding multi-fill equipment to take advantage of these opportunities.

As we continue to build momentum in all these areas, we are excited about the significant long-term opportunities to offer fresh-cut produce and freshly prepared meal solutions to our customers, especially given the changing consumer habit and growing demand for convenient and healthy options. Turning to our military segment. At the outset of the year, we indicated that the benefits of our growth initiatives would be in the second half of the year. And consistent with our expectations, we ended the year with positive second half sales and earnings on a year-over-year basis. New business in the Southwest, along with the growth and expansion of the private brand program offset the base sales decline at the commissary locations we serve.

The overall trajectory of the business continues to improve, and I'm pleased that our team is realizing the opportunities to expand our top line with very encouraging results and has done such a good job of retaining key business at the same time. We will continue to partner with DeCA as it expands it's private brand products in order to provide our military heroes with even more choices. DeCA ended the year with approximately 450 private brand SKUs in the system and has stated it may add up to an additional 1,400 products in 2018 as they move towards their stated vision of up to 4,000 SKUs by 2020. We remain confident that DeCA's private brand program will lead to an even better benefit to their military patrons and an increase in commissary traffic, benefiting all of the constituents of the DeCA system. In the retail segment, sales remain challenged as we continue to face extremely competitive pricing environments in many of our regions.

Despite these challenges, we are focused on growing the top line and further improving our customer experience by investing in our store base and offering a more personalized shopping trip with greater consumer convenience, resulting from our new technological and product offering. We continue to roll out Fast Lane, our new online ordering and curbside pickup service, which was offered at approximately 40 stores at the end of the year; results have been encouraging. With the increase in the number of orders per store, a positive impact on our order size and more than half of the program sales being incremental to the business, we are currently piloting home delivery in several locations and expect to expand our offering during fiscal 2018. Additionally, we continue to invest in our store base by converting select stores, the Family Fare banner and remodeling others. We remain pleased with the return on these investments, and our locations in South Dakota continue to deliver better-than-expected results.

Our new version of Family Fare is more relevant to today's consumer with a more experiential shopping experience and increased variety in healthy and value-added options. This new format presents a significant improvement in our produce offerings, competitive market organics and value to an expanded overall variety. Additionally, local products have been expanded throughout the store as well as a more enhanced selection of prepared food. Our Fresh Divide station lets customers select their produce and have it chopped, diced or sliced on-site. We are offering value beyond price and the customer reaction has been very positive.

We will be launching many of our new concepts and several remodels during fiscal 2018, including 2 stores in Michigan and 1 in Minnesota, and intend to expand them to our other stores when appropriate. We will also incorporate these learnings into our distribution customer offerings. We are pleased to say that our remodeled stores are focused on developing solutions to reduce our carbon footprint; compost and recycle. We're very proud of our track record of social responsibility and environmental sustainability company-wide, and it was an honor to be recently recognized by Newsweek as one of the 500 most sustainable companies in the U.S. Our social responsibility and environmental sustainability programs are important parts of our broader corporate responsibility, and we are committed to the long-term well-being of the environment, our associates and the communities and customers we serve.

We continue to enhance our private brand offerings for both independent customers and corporate-owned stores, primarily with the conversion of our Spartan private brand to the Our Family private brand in our Michigan region. We remain encouraged by the strong sell-through in our stores and our independent customers. As we look to 2018, we are excited about the opportunities ahead, and believe we are well positioned to continue to build on our solid foundation by providing innovative solutions for our food distribution and retail customers. In addition, we expect to invest approximately half of the savings from the recently enacted tax legislation into our business, particularly into salaries and wages for our associates and certain competitive programs. And with that, I will now turn the call over to Mark.

Mark?

Mark Shamber: Thanks Dave, and good morning to everyone listening in on the call and on the webcast. I would like to start my comments by highlighting our fourth quarter sales growth and diluted EPS before covering our financial results in greater detail. Net sales for the fourth quarter of fiscal 2017 increased to $1.92 billion, an increase of $96 million or 5.3% over 2016's fourth quarter sales of $1.83 billion. Adjusted diluted EPS came in at $0.41 for the fourth quarter, which was in line with our guidance for the quarter. Adjusted diluted EPS for the fourth quarter of 2016 was $0.53.

On a GAAP basis, the company earned $0.94 per diluted share in the quarter compared to the diluted EPS of $0.34 per share in the fourth quarter of fiscal 2016. Shifting to our operating segments. Food distribution net sales were up $111.6 million or 13.3% to $950.2 million due to contributions from our acquisitions and organic sales growth of 3.2%. We experienced inflation of 1.41% in food distribution in the quarter, an improvement of 5 basis points compared to inflation coming in at 1.36% in the third quarter. On a year-over-year basis, we're up approximately 366 basis points over the prior year's fourth quarter.

From a department perspective, the primary drivers of increases in inflation rates occurring in meat and general merchandise, while inflation in dairy eased. The remaining departments were relatively flat. Consistent with our commentary in last quarter, we currently to expect to see inflation continue to increase sequentially headed towards normalized historical levels. From an earnings perspective, fourth quarter operating earnings of food distribution declined from $21.1 million to $14.4 million due to losses in our Caito business operations and start-up activities combined with higher healthcare and LIFO expenses. Adjusted operating income totaled $18.9 million in the quarter versus the prior year's fourth quarter adjusted operating income of $23.9 million as a result of the previously mentioned items.

Net sales in our military segment increased by $13.6 million to $524 million for the quarter, an increase of 2.7% compared to the $510.4 million in revenues for the prior year. Sequentially net sales increased by 3.6% or $18.4 million over the last quarter. Consistent with our commentary of the third quarter earnings conference call, increased sales in private brands and from the additional sales volume acquired in the Southwest more than offset core sales declines at the commissary locations we served. Operating earnings for military in the fourth quarter totaled $2.5 million compared to $3.4 million for the same period in the prior year. The decline in earnings from a GAAP perspective was driven primarily by LIFO expense and higher transportation and warehousing costs associated with the on-boarding of new business and industry-wide transportation cost challenges.

The military segment's adjusted operating earnings increased by $0.1 million on a year-over-year basis to $3.2 million for the fourth quarter of fiscal 2017. In our retail segment, net sales were $450 million versus $479.2 million for the same period last year, with approximately $18 million of the sales decline driven by the sale or closure of retail stores and a decrease in comparable store sales, excluding fuel of 3.2%. In connection with our continued store rationalization initiatives to drive incremental food distribution business, we sold the store to an existing independent customer and closed another store during the fourth quarter. On a GAAP basis, the retail segment reported earnings of $2 million compared to operating earnings of $0.2 million in fiscal 2016's fourth quarter due to lower incentive compensation and asset impairment charges compared to the prior year. Fourth quarter adjusted operating earnings for retail were $6.3 million compared to $8.7 million in the prior year's fourth quarter reflecting the challenging sales environment and higher LIFO expense.

From an operating cash flow perspective on a consolidated basis, we used $18.7 million in the fourth quarter, resulting in total operating cash flow of $52.8 million for fiscal '17 compared to $157.2 million in 2016. The lower operating cash flow was primarily due to investments in working capital largely driven by the timing of inventory increases to support new military business and food distribution volumes; the associated higher accounts receivable balances, and the shift annuity for one fiscal year to another. Working capital was seasonally high at year end, and we noted improvement -- we have noted an improvement of approximately $47 million in the first period of fiscal 2018 as working capital returned to more normalized level. During the fourth quarter, we paid a quarterly dividend of $0.165 per share totaling $6.1 million and we repurchased approximately 505,000 shares of our common stock for $12.5 million. In total in fiscal 2017, the company repurchased approximately 1.4 million shares at an average price of $25.60.

Our total net long-term borrowings increased $327.5 to $734.3 million at the end of the quarter compared to $406.7 million at the end of fiscal 2016 largely as a result of funding our recent acquisitions, and as mentioned previously, due to investments in inventory and the timing of other working capital needs. Our net long-term debt to adjusted EBITDA ratio was 3.11: 1, which improved to 2.95:1 in the first period of fiscal '18 as the company paid down long-term debt in connection with working capital returned to more normalized levels. We remain committed to our long-term target of approximately 2x, and we expect this ratio will improve in 2018 as we reduce our debt levels by utilizing free cash to pay down debt. As covered in yesterday's press release, we are issuing our fiscal 2018 earnings guidance. We anticipate continued sales growth in our food distribution segment as we onboard new business in our Fresh Kitchen facilities and continue to grow our sales with our existing customers as well as onboard new customers.

Our military segment will continue to benefit from the commissary business in the Southwest through the first quarter of 2018, while contributions from the ongoing expansion of the private brand program should continue to drive sales growth throughout the course of the year. We anticipate that our retail segment's comparable store sales will improve to flat to slightly negative by the end of the fiscal year as our stores benefit from our latest positioning and other programs. Furthermore, our sales outlook reflects the impact of the new revenue recognition standard, ASC 606, which upon adoption will reduce fiscal 2017 net sales by approximately $160 million to $170 million. Under this new accounting standard, certain contracts in our food distribution segment will be reported on a net basis compared to previously being reported on gross basis. The reduction in net sales on a quarterly basis is approximately $38 million to $40 million linked quarter of fiscal 2017 with the exception of the first quarter which will be reduced by approximately $46 million to $50 million given the extra period.

We anticipate 2018 adjusted earnings per share from continuing operations of approximately $2.20 to $2.32 per share excluding adjusted expenses and gains, an increase of 4.8% to 10.5% from adjusted EPS of $2.10 in fiscal 2017. This excludes approximately $5 million to $7 million of expenses associated with store closings and Fresh Kitchen start-up costs. We expect this Fresh Kitchen to transition out of start-up phase during the first quarter of 2018. From a GAAP perspective, we expect that reported earnings from continuing operations will be in the range of approximately $2.02 to $2.09 per diluted share compared to a loss from continuing operations of $1.41 in the prior year. This guidance reflects an effective tax rate of 23% to 24% in fiscal 2018 and estimates approximately half of the tax savings associated with the new federal tax legislation will directly benefit earnings.

For the first half of fiscal 2018, we expect adjusted earnings per share to be flat to modestly below the prior year, driven primarily by sequential improvements in Caito's operations and a change in the year-over-year timing of certain vendor programs. These items are expected to be partially offset by the company's overall sales growth and the benefits of tax reform. We expect that capital expenditure for fiscal year 2018 will be in the range of $60 million to $70 million. We project the depreciation and amortization will range from approximately $80 million to $88 million, and total interest expense will be approximately $24 million to $28 million. And with that, I'd like to turn the call back over to Dave.

David Staples: Thank you, Mark. We are pleased with our progress in 2017 as we expanded our food distribution customer base, diversified our sales channels, optimized our supply chain, expanded our private brand offerings and invested in our retail store base and our associates. While the competitive environment remains challenging and we'll be cycling a number of key events in 2018, including the Caito acquisition and new military business in the Southwest, our strategies and investments serve to strengthen our competitive positioning. We are well positioned to continue to build on our differentiated business model and leverage our supply chain capabilities to drive sales and profitability. And we will continue to take actions that we believe enhance the convenience and value that we provide our customers.

I look forward to reporting continued progress throughout the coming year. Before we open the call for questions, I would like to thank our customers and suppliers for their partnership, our shareholders for their ongoing support, and most importantly, our associates for their daily efforts to execute our strategic plan. Over 1/3 of our 15,000 associates have worked for the company for over 10 years, which speaks to our relationships and the high degree to which we value their contributions. Now I'll turn the call over to the operator to facilitate the question-and-answer session. Andrew?

Operator: [Operator Instructions].

The first question comes from Scott Mushkin of Wolfe Research.

Scott Mushkin: So two housekeeping questions before I get on to the main question. I was wondering if you could tell us the expectations for the level of debt pay down in '18? And what do you think the leverage would be at year-end? And then secondly, given the change in accounting for group distribution segment and the net sales impacting the sales last year, does that have any impact on EBIT last year as well? Or is it just a cost of goods offset? Two housekeeping and then I have a third question.

Mark Shamber: Yes. So I'll answer the first question.

And I'll obviously sort of give a range just because there was a lot of playing as we started the year. But when you do the math of what we would typically generate for free cash if we hit our -- if we hit the high end of the range, I guess, from that perspective. And I would say that we probably end somewhere in the mid-2s from a leverage perspective if we generate the results that we anticipate. You might move towards the higher end of the mid-2s. We come to the lower end of the range, and you might drop just little to the mid-2s from leverage perspective if we have the high end of the range.

Again, it depends on the CapEx and the timing of when that flows in. And things don't always work out as to when you plan to spend the money in that sense, but you can always shift into next year. So I think that's how I would try to guide you with respect to your first question. Could you ask the second question, again, I was following you, and then I apologize, but I lost?

Scott Mushkin: No, it's all right. It's probably me, not you.

So I think I was just trying to understand the impact of the change in sales. I know you guys outlined EBIT impact at all. Why don't you just -- I guess, how is it flowing through? So you are reducing sales, is there EBIT impact that...

Mark Shamber: No. It's strictly reporting the sales on a net growth basis, Scott.

And what we wanted to do is we wanted to highlight as we're giving our '18 guidance roughly what the impact would be, so as investors model their number that they take down the 2017 -- they can roughly take down the 2017 numbers now, so that when we report 2018, they will yield roughly the same comp growth that we will be reporting. So we announced our 2017 earnings, we filed our 2017 10-K. And everything we have reported with the sales as they have historically reported. But on January 1st of '18, we now start following the new accounting standard. And with that, what we reported last year is now already $150 million to $170 million off.

And so we just didn't want to be in a situation where we reported first quarter in the middle of May, and if somebody pulls a number off and thinks that our growth was, I'll say, 0.5% lower than what we reported just in food distribution it will be more than it might be closer to, I guess, just doing the math, real quick. But again, that might be 0.25% overall and 0.5% for food distribution. We wanted to be able to put that in their models now and highlight it. And then we will talk about it, we will give specific numbers when we report in the first quarter. So there is no impact on EBIT.

There's no impact on EBITDA. It's just sort of netting out the sales portion.

Scott Mushkin: Got it. So another just a housekeeping you don't have to answer the question basically. All activity was based after this considered into SuperValu, I think two C&S customers now [indiscernible] maybe headed to bankruptcy court.

You guys have always been acquisitive. But you've also have sorted through you just kind of hanging around the hoop or you tend to be selective. So just wondering if you can set up where we are? How you think you are positioned? And then any new [indiscernible] vis-a-vis M&A, and then maybe you've been winning just accounts? And then I'll yield.

David Staples: Sure. Well, I think as you look at the environment, it is a fastly changing exciting environment from our perspective.

I mean, yes, there is challenges, but with challenges come opportunity sort of as you alluded to. I think our company is incredibly well positioned to take any opportunity that come its way. I think we've always been on though of that way and that's how we think of ourselves. You mentioned a couple of customers that are not our customers, but customers of C&S that might be in some financial duress. I think part of that is, being a leveraged entity in our world doesn't ever help you, right? And these were leveraged by, I'd say, and when you go through some tumultuous times or times with a lot of change, that leverage is tough.

And so the good news is, our customer base, I think, has always been focused on not loading up with lever with that. They stay unlevered to keep their flexibility high. We've always been focused on managing our leverage and trying to make sure we can be opportunistic like you alluded to. And so I think these environments do provide all types of different opportunities, whether that's new customer acquisition, whether that's business acquisition. And I think our company continues to be well positioned for any of those.

So we're really excited about the times. I think this is where we've been able to make really good inroads in the past.

Operator: The next question comes from Chris Mandeville of Jefferies.

Aaron Eisenberg: This is actually Aaron Eisenberg on for Chris. I guess starting off with retail, 30:38 indiscernible]

curiously 47:09 how things are trending for you there quarter-to-date? And I believe you mentioned a calendar shift as well.

So assuming that's right, how are things trending and can that benefit?

David Staples: Yes, I think overall we feel pretty good about the change in our trend. But we still like to be better certainly. So we've seen a nice improvement in our comp trend as we moved into the first quarter. We're not quite in 2 periods done yet in a 4-period quarter. But I think the team is responding with the type of things we responded to these environments in the past.

It's a highly competitive pricing environment in our markets right now. And I think we're using our skills and targeting more personalization, better understanding our customers. We're really experimenting with a couple of significant changes to our Family Fare positioning, which I find really exciting, and the 3 stores we put most of those concepts and at this point we're doing really well. So we've got a lot of the exciting things going on. It's still a highly competitive environment.

I think that will continue for a while. But our comp trends feel -- they improve nicely. So we're better positioned, and I think the team's put together a good plan to keep pushing our efforts forward.

Aaron Eisenberg: Understood. And I guess then sticking with pricing.

How has your retail pricing been have weighed in your markets? You recently called out Walmart and all the -- and obviously, we heard from one of those this week. So I was curious to hear take, has there been any great rationality, or Aldi and Walmart -- Walmart's still weighing on things?

David Staples: No. They clearly are the leaders in this. And the pricing I would call in certain areas somewhat irrational. But they blend that out.

And we've lived through this before. The legal threat I think has those 2 battling it out a bit to try to make sure they pertain that low-price leadership. Did we see maybe a major loosening as the quarter went on, so maybe a little bit. But I would still classify it as a very competitive pricing situation, and over time those things have a way of working themselves out. I think these will improve to some degree over time.

But I think they're trying to set a new bar. I think it's up to us to compete with what our strengths are and not fall prey to that. I think as you look at what Family Fare stands for, and especially as we are rethinking Family Fare even bringing it more forward to the current times, we stand for affordable wellness, we stand for value behind price. We're going to lead and we're going to have some great value in our produce, in our private brands. But we stand for a lot more than that.

And we can offer things that these other competitors can't. And our remodels are showing us that even though those folks are in a competitive set, when we put forth this new thinking, we're able to reclaim market share in those markets. And so it will be really about continuing to perfect this process and roll out. So we're pretty excited about the changes we see. But yes, clearly, it will be a challenging environment for a while.

Aaron Eisenberg: Understood. And then lastly, two quick housekeeping items from me. I might have missed this, but what was inflation in retail? And then just curious, if you could quantify the DeCA trend in the quarter?

Mark Shamber: I'll answer the first question. From a retail perspective inflation was about 77 basis points. So it was up about 19 basis points over the prior quarter.

Although we did see some movement within the category. So it blended out, but we did see some categories have shifts from quarter-to-quarter of almost 140 basis points. And Dave, you want to the other?

David Staples: So just the trends in DeCA, so you're asking me the commissary trends?

Aaron Eisenberg: Yes.

David Staples: They continue to be in that mid-single-digit negative.

Mark Shamber: I mean, it's been a little tough because we had to shut down that was very fleeting, it does impact the ability of the commissary to sort of place orders and have to replenish on the regular schedules that we have.

And so, well, we think we're working our way through that even though one was less than 24 hours and one was only three days, it does sort of impact their trends a little bit from that standpoint.

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

Shane Higgins: So I just want to circle back on the distribution business. EBITDA, obviously, it dropped off a bit there after you guys had 3 really strong quarters of growth. Can you just really help me understand kind of what drove that decline? Was it just some integrate Caito and Fresh Kitchen integration? And then how should we think about how that profitability moved throughout 2018? That's my first question.

Mark Shamber: Yes. So Shane, so I would tell you that you're exactly on point with the reference to the Caito business. I would say that the legacy food distribution business, for lack of a better way of referencing it, was up high single digits, low double digits from an adjusted EBITDA standpoint. But with the Caito business and the losses they generated weighed on the business. And while we don't typically break it out exactly, I can't say that, that -- I'll give you sort of a reference as to where the legacy business was and what the impact Caito had.

I think as we look into 2018, we got some confidence that we'll see some improvement in the Caito business. We won't be carving it out anymore as we wrap the acquisition back in early January. But I think that we'll see some improvements in the business. But part of where we're guiding for the first half of '18 is that we expect there will be still some losses within Caito's business in the first half and that will weigh on the overall company, but also on the food distribution side. So I would say that the legacy food distribution business has solid growth from EBITDA perspective for the quarter.

But when you're reporting it out in the manner than we do, the Caito business really was led through to appear, it kind of will be down year-over-year.

Shane Higgins: Great. That's real helpful color. And just circling over to the tax reform related savings that you guys highlighted. Just wanted to see if you guys can just drill down little bit more into where exactly you guys are reinvesting some of these savings? I think you alluded to putting some money into your associates.

Is that wages, is that training? And then in terms of some of the additional other investments you'll be making, is that primarily in price? And will that be more in the retail segment or distribution? Any color there would be great.

David Staples: Sure. So I mean as you look at what we're doing, we're investing in our associates and really bringing them to the right compensation levels. That can involve some training as well. But I would say it's predominantly in the wage component of things.

We will have a one-time bonus that impacts pretty much all of our associates, when you look at the different ways we were able to factor that and for some of the things we were able to do in the past year, and then we will have more focus on making sure our associates are at the right wages in this ever-changing environment, in both, I think retail and distribution. But that's only a part of it. The other part of the investment is really going to be in bringing this Family Fare brand to life. And that's not just price. That's bringing together the brands, some of the -- a new positioning, how we stand in different areas.

So some marketing involved with that and it's launch, some marketing involved with the new programs inside the store, launching certain of those elements into the remaining pieces of Family Fare as we see fit. So it's not just price. It's broader than that. And it's also making sure that we're right around certain promotional times even in the distribution business. And so we're going to spread it out across our different -- both our retail and distribution business units, and it will be some in associates and it will be some in really bringing to light some of the programs we have and that we're going to offer out there to drive the business forward and differentiate ourselves more from the competition.

Shane Higgins: Got it. I appreciate that. And then on the timing of one-time bonuses, are those paid and accrued for in the first half of the year? Or is that something that gets spread out throughout the year? How should we think about that in terms of...

David Staples: So the one-time it was accrued for last year and it will be paid out in the first quarter. They were based on some impacts we have from the tax laws year.

And so we were able to benefit our associates from some really innovative tax planning that our financial folks did in anticipation of the tax law change.

Shane Higgins: Okay. So that was a 4Q '17 impact?

David Staples: Yes, correct.

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

Ryan Gilligan: Just following up on your answer to Shane's question on Caito.

The acceleration in earnings growth from flat to modestly down in the first half to 11% to 24% growth in the second half, is that all just Caito being less of a drag? Or is there anything else in there?

David Staples: I mean, it's part of Caito, and I'd like to say, getting to where we want. I mean, we've invested in that infrastructure, we've invested in that team. Our systems come online. And so we see Caito certainly turning. But we've got a lot of great things going on in our distribution business, in our military business.

And we see these efforts we're taking continuing to pay dividends. We've done a lot of work trying to be that first and that brings innovative thought, new ideas, helping different types of customers solve logistical issues that they face. And that really is beginning to pay off for us. I'm impressed by our teams. I mean, our group out there, our associates are figuring new ways to do things.

They are figuring new angles to help customers approach issues they're facing. And whether that's our independent customers with new programs on how to deliver value to the customers. We have 1 group of 15-plus store chain that we have implemented an entire value approach in their comps, it's been at low to mid-single digits since we put that in. So other types of customers where we're helping them solve logistical issues they have. We're helping, like in the military, develop private brand.

We're beginning to do that for others. And so it's a pretty exciting time here with the types of things we're doing for different customers. So our growth is more than just Caito improving.

Mark Shamber: And we also mentioned in the press release, Ryan, about some of the vendor programs and so some of the revenue recognition on our end is to when we have to take the income which shifted. And so that's a part of it as well.

So while some of those programs are still growing, they become more relatively spread over the year or they might have been more front-end loaded.

Ryan Gilligan: Got it. Okay. And what are you assuming for buybacks in guidance?

David Staples: Well, I mean, we don't ever really give any guidance with respect to where the buybacks would be in the guidance, because we tend to be opportunistic, even if we file [indiscernible] plans with that regard. So I would say that we still have fair amount of availability under our buyback programs, but I wouldn't be inclined to guide in that respect.

Ryan Gilligan: Okay. And then just on Caito, can you maybe comment on the facility productivity levels? And where you are with adding new customers? Dave, I think you said last quarter that you thought you'd be starting to add new customers by the end of the first quarter, is that still the case?

David Staples: Yes. So as we look at the pipeline, it continues to get stronger. We talk to the team regularly. And every week we have a new inquiry by somebody as to what are the types of things we can do.

And so as we track these opportunities, it continues to expand. Now that being said, we need to begin converting these opportunities into reality. And the team feels good to your point that we should start to see some of that begin at the end of the third quarter, early -- I'm sorry, end of the first quarter or early second quarter. And then our expectations at this point are that we will see that ramp up through the second quarter, third quarter. And then fourth quarter, again, it's tough, because it's not a time lot of people add new programs.

Just like the first quarter isn't the time a lot of people launch the new programs that -- the grab-and-go, the fresh-cut fruits and veg has really picks up a lot more in that April-May time frame, and tend to runs through August. And then once you start to get past Labor Day, it dips, again. And so there will always be a seasonality to this business, right? So I'd say, late, -- yes, mid to late May through Labor Day, strongest period of time. It starts to fade down a little bit by fourth quarter. And first quarter, you hit some of your lows.

And that's the cycling of it. So yes, we still expect to see new business beginning to pick up in that late first or early second, and then continue to accelerate from there. And it just seems like we have multichannels we can go. It's not just the retail segment. There's -- we've mentioned co-packing.

There's food manufacturing. There is another industry that seems very interested potentially in what we can do. And so the options are very limitless. It's really how we start to begin to coordinate those efforts and bring those into the house and start producing. So yes, we're still very excited.

I mean, every reason we did this deal, all the strategic benefits from on trend with the consumer, on trend with our customers, they're all there. They all continue to exist. And so it's there for us to pick. And we think we have the right team and the right operating network now to bring that to fruition. So yes, we're really excited about this year.

Ryan Gilligan: That's helpful. And then Mark, just quickly, what was impact of gas margins on retail operating profit?

Mark Shamber: Did you say gas?

Ryan Gilligan: Yes, gas margin.

Mark Shamber: Yes, it was de minimis. We're pretty flat overall on fuel profitability.

Operator: [Operator Instructions].

The next question comes from Chuck Cerankosky of Northcoast Research.

David Staples: Good morning, Chuck, you might be on mute.

Operator: I apologize. Actually, he had disconnected his line or his line disconnected. So we will go to the next questioner, which is Kelly Bania of BMO Capital.

Kelly Bania: Just want to go back to the reinvestment in 2018, reinvestment some of the tax dollars. Just how did you come up with the 50%? Did you kind of back into that in terms of what you think you needed in terms of the dollar investment? Or were you just trying to balance flowing some of that through? And then I just do not quite -- not sure if I understand the comment of bringing the Family Fare to life? What exactly does that involve? And maybe if you could talk about which of the 3 divisions are going to have the most investment? Which areas of the business need the most investment?

Mark Shamber: Sure. Let me start with the first part. I think we are very scientific and practical. I mean, we're a very return-orientated organization.

So when it came to defining where we should invest, I think we went through a very structured approach of saying, Hey, where is the best place that we can put a component of this money in and where are our needs? And then we tried to balance that out. And so I would say we work on a need basis first and then balancing the investment ensuring we're returning to our shareholders as well as invest in new business. On the second phase -- on the second point, the Family Fare banner, we run -- we've been retailers for a long time and we run really good stores. Our store quality is high. We have consistently invested in our stores.

But the world's changing and the demand of the consumer are changing. And I guess, what I really meant to say with Family Fare was, we want to bring it even more forward into what the consumer is evolving towards, and not be stuck in the past. And so, Family Fare is a great banner. But we can take it to be much more experiential. We can take it to be much more focused on health and wellness.

We can be the leaders in organic. And all those -- a number of those things we've been evolving towards. But we also need to have the consumer know how much we stand for local even more so than we have in the past. We need the consumer to see that they can get some level of craftsmanship at a traditional Family Fare that they can't get anywhere else, if and all via Walmart, Meijer, even a Kroger in a number of instances. So we need to bring some of that special experiential component back, and we are.

And then we need to have a very strong value component where we lead in that produce area with a great produce offering, great variety, best organics, but at a fair price. Same with private brand. And so, I think as we bring that type of the offering to experience, the focus on health and wellness and affordable wellness, and then, yes, a value orientation in key driving -- in your transaction driving departments, I think we'll really make a difference. And then as we make sure we're the local purveyor, I mean, we have a tremendous number of local products in all of our stores and how we bring that more to life. And we bring that in conjunction with our community involvement and our social consciousness, and we message that better to the consumer.

These are a lot of things we've always been doing, but we haven't necessarily packaged it all together and really brought it forward. So I think this is a lot about packaging that better and bringing it more clearly and samely to the consumer and really hitting on these big trends that I think we're well positioned to deliver on. And then when you combine now with things like our Fast Lane and technological advancements that we're going to make, we're going to offer a convenience in not just location, but in the types of products we offer, the grab-and-go, the meal solution, and the convenience of shopping whether it'd be in the store or with our state-of-the-art click-and-collect option, and even home delivery to some extent as we roll that out. So I think you've seen some of this in South Dakota. We launched a good part of that.

That's doing really well. We're beginning to bring that into the Michigan market and a lot of our investment this year will be in the Michigan market.

Kelly Bania: So would it be fair to say that most of the investments are going to the retail division?

David Staples: No. As I said, it's blended. I mean, there is investment in both retail and distribution.

Probably a little tilted for retail, but not overly.

Kelly Bania: Okay. I may have missed this, but in terms of the distribution segment, I think the year-over-year operating swing -- operating income swing was about $5 million. And I think LIFO was maybe just under $3 million of that. So would it be fair to say that the distribution segment would have got positive operating income if weren't for the drag from Caito, if they got the LIFO, does that makes sense?

Mark Shamber: Yes.

Kelly Bania: Okay. And what is the expectation for LIFO in 2018?

Mark Shamber: It's expected to be relatively positive, potential charge of the inflation rates come through as they've been trending. But it's not expected to be material one way or the other based on the current inflation rates that we have.

Kelly Bania: Okay. Got it.

And in terms of the retail, how -- any comment on how many stores you expect to be closing or selling in 2018?

Mark Shamber: No, I mean, we have announced a couple, that we've closed one so far, and we've announced another one in the process of closing, it may close this week or it may -- I think it closed earlier this week. But beyond that, it's really a question and we talked before and highlighted, Kelly, that in the fourth quarter we sold a store to a customer. And we're not looking to actively shrink the base. But we need to evaluate sort of where different stores are? And how they're performing? And if there is always been an interest from the customer in a particular market where a store is underperforming, we take that in consideration. But we're not necessarily looking to close a particular number for the year.

But we've guided with what we've already known and with the possibility that there's always another store or 2 during the course of the year. We don't have a set plan that it's 5 stores or 2 stores or 7 stores, in that sense.

Kelly Bania: Okay. That's helpful. And then just lastly I wanted to add or ask about the transportation cost, you mentioned that.

Just curious, it sounds like it maybe just in the third-party in-bound free, but if you can elaborate on that and just maybe quantify what the impact was for you in this quarter, and if there was any impact in Q3?

Mark Shamber: Well, I mean, I'll the answer to the second part of the question first. And I don't have it handy. But there certainly was in Q3 and we highlighted it on the third quarter earnings call, particularly in light of the hurricanes that have hit, we experienced a lot of disruption in that regard and certain pricing change significantly. At that point in time, I think if you go back and look at our commentary, we thought that it might settle down some as we get towards the end of November. But it didn't actually play out that way.

And so we've seen the trends somewhat continue in some regards with respect to the wholesale portion of the business, it gets built into the pricing and passed along, retailers are cost to us on the inbound side. With the retail portion of the business, we sometimes have challenges in passing it along if there is significant movement, particularly in fresh categories, where we're estimating in one region setting our pricing accordingly, and it comes in higher because the demand for drivers is so much. I would say that the impacts for the fourth quarter, that we would -- if you recall, anything would probably be in the mid-6 figures. But it's an estimate because we're going off of where we projected the rate to come in versus where it actually came in. And it doesn't necessarily mean that if it hasn't spiked up that we wouldn't have been able to pass on a greater portion of that.

So we wanted to highlighted it, that is a headwind and a headwind that is continuing. But we didn't want to try to carve it out so much because there is some variability in estimating that figure.

Operator: The next question comes from Chuck Cerankosky of Northcoast Research.

Charles Cerankosky: Dave, I was wondering if you could talk about the same-store sales weakness regionally within retail?

David Staples: We don't disclose them by region. But I would say Michigan, which is probably the hardest hit by some of the pricing activity we've seen, would be the one that we felt the biggest impact in.

But it's also one of the ones that's bouncing back the most in the first quarter.

Charles Cerankosky: Okay. And I guess gallons, how did they track?

David Staples: So in total, our gallons were up because we've opened a couple, at least one, I guess 1.5 facility at this point. And then in the comps, it's a little bit down.

Charles Cerankosky: Okay.

And you talked about some LIFO in the military segment. How did that work? Because historically, you don't take title of those goods. So I guess, it's tied to the new business?

Mark Shamber: No, we do take title. We do own inventory. I mean when you look at our working capital commitment, the military is in that, because we do take ownership for that inventory.

So yes, we've always had -- I mean, historically the military has LIFO, and it's a LIFO charge or a LIFO credit, if there is a LIFO credit. And I think the impact is somewhere around $1 million last year. So that was a big number for us in the fourth quarter in the military group.

Charles Cerankosky: And then my last question is with regard to interest expense, Mark. It's about $4 million range.

How does that reflect your desire to pay down debt as well as do stack repo? You talked a little bit about free cash flow before, but if some of that balancing debt pay down against repo?

Mark Shamber: Yes. It's our sort of internal projection as to how many rate hikes there may be during the course of the year and also the timing of when those rate hikes occur. So as much as we build the plan and we follow along as to where the real experts expect rate hikes to occur and how many rate hikes during the year, but that doesn't always necessarily align with what does experts predict. And so at levels that we're at now, 100 basis points during the course of the year to translate the $6 million to $7 million and they were all front-end loaded. So just giving a little bit of a wider range from what we have in the past puts us in a position that if rate hikes occur as we anticipated, we'll probably close it to the middle of that range.

If they happen earlier than we expect, we can trend towards the higher end of the range. And if they occur later than we expect, we're more profitable, trends towards the low end of the range. So that's basically how it's sits that up. But as the fed continues to raise rates, we just need to give ourselves a little more flexibility so that we don't get caught one way or the other in giving you folks some direction as to how we think things will play out.

David Staples: And I mean, Chuck, we've consistently done share repurchases every year in ebbs and flows.

I think you can expect there will continue to be share repurchases whether it opportunistically makes sense, as Mark said. And so, yes, I guess, it's always a balance, I guess. We expect to do some level of share repurchase and we expect to pay down some level of debt.

Operator: Due to time constraints, this concludes today's Q&A session and today's conference. Thank you for attending today's presentation.

You may now disconnect.