Executives: Melissa Napier - SVP, Treasury and IR Pietro Satriano - President and Chief Executive Officer Dirk Locascio - Chief Financial

Officer
Analysts: John Ivankoe - JPMorgan Shane Higgins - Deutsche Bank Robbie Ohmes - Bank of America Merrill Lynch Edward Kelly - Credit Suisse A.J. Jain - Pivotal Research Group Vincent Sinisi - Morgan Stanley John Heinbockel - Guggenheim Securities Karen Holthouse - Goldman Sachs Zack Fadem - Wells Fargo Karru Martinson -

Jefferies
Operator: Good morning. My name is Crystal and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 Fiscal 2017 Performance Review. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Ms. Melissa Napier, Senior Vice President of Investor Relations and Treasurer, you may begin.

Melissa Napier: Thanks you.

Good morning everyone, and thanks for joining us today for our first quarter fiscal year 2017 earnings call. I am here with Pietro Satriano, our CEO; and Dirk Locascio, our CFO. Pietro and Dirk will provide a business update and speak about our performance in the quarter. We will take your questions after management's prepared remarks conclude, please give your name, your firm and limit yourself to one question. During the quarter and unless otherwise stated, we are comparing our first quarter results to the same period in fiscal 2017.

Our earnings release issued earlier this morning and today's presentation slides can be accessed on the Investor Relations page of our website at www.usfoods.com. We expect to release our 10-Q later this afternoon. In addition to historical information, certain statements made during today's call are considered forward-looking statements. And our actual results may differ materially from those expressed or implied in those statements. Relevant factors that could cause our results to differ materially are contained in this presentation and in our reports filed with the SEC, including our Form 10-K annual report for the fiscal year ended December 31 2016.

Our slides and our earnings release also contains certain non-GAAP financial measures along with reconciliations to the most comparable GAAP financial measures. With that, I’ll now turn the call over to Pietro.

Pietro Satriano: Thanks, Melissa, and good morning, everyone. Thanks for joining us on our first quarter earnings call. We are very pleased with the quarter choking up 6.1% adjusted EBITDA growth in line with the guidance we gave in our last call and this result is also in line with our 7% to 10% adjusted EBITDA growth for the year that we are maintaining.

Highlights for the first quarter include, continued volume and margin growth across all customer types, continued progress against our portfolio of cost reduction initiatives, and continued success with our M&A strategy. I will spend a few minutes discussing these highlights, after which I will turn it over to Dirk to walk down the P&L for you. So moving to Page 4. Total volume grew over 4% with its third consecutive quarter, evidence that our Great Food Made Easy strategy continues to resonate with customers. Let’s break this down by different types of customers as for the chart on the left.

Growth with independent restaurants was a very solid 4%, healthcare and hospitality also grew 4%, as we continued to benefit from the addition of some large new customers that came on board in the last six months. And lastly, other customer types, made up primarily of larger restaurant chains also enjoyed good growth. We are been opportunistic in adding a few larger customers, customers who value our ability to serve them in a consistent fashion across geographies and provide an acceptable margin profile. Now let’s move the chart on the right-hand side for a more fulsome analysis on independent restaurants which are at the heart of our Great Food Made Easy strategy. As I mentioned, total growth of independent restaurants was 4%.

Organic growth was 2.8%, down from 3.6% in the back half of 2016. Independent restaurant growth for the quarter was negatively impacted by three factors. Mild weather in Q1 of last year, holiday timing, both of which we discussed in the last call, and, to a lesser degree, the normal drag on organic growth, once an acquisition is incorporated into the baseline. This drag occurs because we do experience some modest loss in business in the first year or two following an acquisition. These modest losses which are built into our performance occur because our value proposition isn’t always a perfect for a few of the customers that we acquired.

You will remember that we acquired Waukesha at the end of 2015, and Cara Donna late in the first quarter of 2016. Both are now in the organic baseline as of the first quarter and this slight drag will continue through the balance of the year. In the box below the bar chart on the top-right, we present what we consider to be a more normalized view of independent restaurant growth for the last three quarters, namely the impact of the 53rd week on the back half of 2016 and the weather, holiday timing, and M&A impact that I just talked about. We believe that this more normalized view is more indicative of the organic growth that we expect with independent restaurants for the balance of 2017. Let’s go to Page 5 for a review of the industry.

Our forecast growth for independent restaurants continues to be positive in part because the outlook for independent restaurants is also positive. In its latest release, Technomic calls for almost twice the growth for independent restaurants as it does for national chains and while Technomic's outlook for independent restaurants did come down slightly from where it was in the last July that still compares very favorably to the outlook for national chains. Our belief is that the positive outlook for independent restaurants is driven by secular factors. This is further supported by some recently published research shown on the right-hand side of Page 5. This research shows that end-consumers express the preference for the experience, the variety, service, and value offered by independent restaurants.

These factors help explain the stronger growth that we continue to see amongst independent restaurants. Our growth with independent restaurants is fueled by more than external secular calculus. We believe we are gaining share as a result of our Great Food Made Easy strategy. Let me now give you an update on our recent successes with product innovation and technology, both of which are contributing to profitable market share gains. So moving to Page 6.

We continued to enjoy great success with the innovative products launched through our Scoop and core element of the Great Food for this strategy. This spring, we launched our 17th edition of the Scoop which was dedicated to food Millennials crave. We featured some new sustainable products of our Chef's Line fire-grilled chicken breast raised without antibiotics, as well as some on-trend products from around the globe, like our Indian and Thai curry sauce starters, which are not only authentic, but save many hours of preparation in the back of the house. Evidence of the continuing relevance of Scoop to customers is demonstrated by two statistics. For the first time ever, our trial rate or the percentage of customers who purchased at least one product over the promotional period came very close to hitting 60% up from the 50% we averaged in 2016.

This shows that both our sellers and our customers continued to be captivated by the innovation we bring to them. Second, close to 90% of the innovative products launched in the last four years continues to be sold today. An incredibly high stick rate in the food industry, we continue to focus on sustainable products and we now offer 250 products under our Serve Good brand that we launched last year. Lastly, based on analytics recently, weekly updated for 2016, Scoop customers churned 8% less and purchased 6% more, sorry, that reversed – have 8% greater basket and churned 6% less than customers who are non-Scoop purchasers. Let’s move to Page 7 for a quick discussion on our digital ecosystem.

I call it digital ecosystem, because it has the various elements work together. Our digital e-commerce and mobile ordering platform presents a foundation of this ecosystem and through which 53% of sales to independent restaurants and 71% of all our sales are transacted. This is due to two factors. The ability to transact any time anywhere on any device, combined with the best-in-class user experience, which includes product search capabilities and an increasing degree of personalization enabled by CookBook, such as the Did You Forget feature launched late last year. We are now working on extending some of the same CookBook powered personalization to our healthcare customers who transact online.

Secondly, integrated with this powerful ecommerce platform, an increasing number of applications that enable the restaurant owner to more effectively run their operations. Last quarter, we talk about our food cost management solution developed in partnership with Avero, and which plugs into 80% of point-of-sale system. It integrates seamlessly with our ecommerce order entry platform. Food Cost Management and the Avero toolset provides support on menu profitability and labor productivity, both of which are increasingly important in a world of labor shortage and minimum wage. Over the last few months, I see tremendous interest on the part of operators for these tools, especially those who operate multiple stores.

The third layer of this digital ecosystem is a set of business solutions that gives us the chance to engage with customers on yet another level on everything from using social media to drive traffic to designing menus that drive a bigger check once the customer is in the door. For example, thanks to our preferred partnership with a takeout app called ChowNow, a restaurant has the ability to generate incremental traffic that they could not before, and we have helped thousands of restaurants drive incremental traffic to those stores. Our restaurant operations consultants, or ROCs, and part of the team-based selling model play a critical role in helping our customers identify and install the right solution for them. Similar to Scoop, our most recent analytics on the impact of ecommerce, so that commerce customers churn 5% less and purchase 5% more than non-ecommerce customers. Having covered some of the programs that are driving profitable volume growth, let me now turn to operating expenses on Page 8.

As we have said before, our efforts to reduce operating costs are dependent on a portfolio of multi-year initiatives, each of which is at a different stage of maturity, taken together, this portfolio of OpEx initiatives still have significantly runway to continue to reduce our operating costs. Starting from the top of this page, our field reorg you will remember, whereby we moved to a multi-site approach to manage the field was completed late in 2016. It yielded significant cost reductions, and we are now beginning to see the effectiveness of a model that has fewer touch points. Following the completion of the field reorg, we engaged a similar cost reduction effort at corporate reducing layer of increasing spans of control. The first phase of this effort was completed in Q1 of 2017.

We are now turning our attention to streamlining specific corporate processes, the biggest of which is to further optimize and expand the scope of our shared services. We anticipate it will take through the end of 2018 to complete the implementation of this roadmap. Next, is centralized purchasing. At the end of 2013, when we paused this effort due to the merger, we had around 10% of replenishment done centrally. We resumed that effort in Q4 of 2016 and by the end of Q1, we were 40% deployed.

We expect deployment to be completed at the end of 2017 with significant benefits in terms of freight and cost of goods. The OpEx benefit will begin to show up in 2019, once the new processes reach maturity 2018 and 2019. Another cost reduction initiative is indirect expenses which includes everything from tires to travel. Our first pass-through all indirect categories will be complete by 2018. Last, and definitely not least, we know we had a significant opportunity to make our supply chain both more effective and efficient.

We are now beginning to deploy the first wave of lean initiatives that our continuous improvement team identified in Q4 of 2016. I will now turn to cover M&A on Page 9 after which I will turn it over to Dirk. We announced two acquisitions in the first quarter and another at the beginning of the second quarter. We remain on pace for about through the same level of M&A activity as in 2016. Our first priority is to find broad line distributors that strengthen our market share and density in certain geographies.

The acquisition of All American, a $60 million distributor base in Rhode Island meets that criteria and while it is still early, we are pleased with the progress so far. Our other focus is to acquire specialty distributors that strengthen our capabilities in COP or produce. Both SRA Foods, an $80 million meat operation in Alabama; and FirstClass Foods, a $55 million meat operation in Southern California saw much heated gap in our network of meat cutting facilities that serve our broadline operations. Just-in-time and specialty-cut steaks are an important part of the COP offering, not only because of the volume opportunity represented by these top categories. But even more so, because of the impact they have on the rest of the COP basket.

These anchor categories help increase the rest of the basket and drive increased loyalty. These two acquisitions will allow us to flow to smaller COP facilities that were not adequate for serving the large opportunities represented by Southern California and the southeastern markets, respectively. Let me now turn it over to Dirk.

Dirk Locascio: Thank you, Pietro, and good morning. As Pietro commented, we had a solid first quarter.

Our net income increased to $27 million from $13 million a year ago, and adjusted EBITDA increased over 6%. We experienced strong overall case growth and continued adjusted EBITDA margin expansion. Now let’s walk through the various elements of our results in more detail. Moving to Slide 10, our first quarter net sales were $5.8 billion, which is an increase of 3.5% over the prior year. This increase was a result of our strong 4.3% case growth, partially offset by approximately 80basis points of year-over-year deflation and negative acquisition mix.

As Pietro highlighted, we experienced solid case growth with our target customer types in the first quarter. Year-over-year deflation and mix of a negative 80 basis points for the quarter was an improvement from the 240 basis points we experienced in Q4 of 2016. As a reminder, similar to prior quarters, the mi impact primarily results from our mid-2016 Freshway acquisition. This is because produce has a lower average price per case on the rest of the business. We did begin to experience month-over-month inflation during the quarter in several commodity categories.

We expect deflation to continue to moderate and although we are encouraged by the modest inflation we’ve seen in some categories, we don’t expect any significant inflationary tailwinds to impact our full year results. We will now move on to gross profit performance which you can see on Slide 11. We continue to deliver good gross profit results, despite the deflationary headwinds from this past year. For the first quarter, gross profit was $991 million which is a $31 million or a 3.2% increase over the prior year on a GAAP basis, and up $52 million or 5.5% on an adjusted basis which removes the non-cash impact of LIFO. As a percent of sales, gross profit was 17.1% versus 17.2% in the prior year period on a GAAP basis and up 40 basis points from 16.9% to 17.3% on an adjusted basis.

The change in the LIFO reserve, negatively impacted our GAAP gross profit results by approximately 40 basis points. Gross profit dollars grew both as a result of the volume increases we’ve discussed, as well as rate expansions from a number of ongoing initiatives. The elements of our strategy focused on gross profit continues to make good progress. These include initiatives such as sourcing enhancements to improve our cost of goods and assortment and our deployment of CookBook pricing, which is now over 90% deployed up from 10% a year ago and will be complete by the end of Q2. Recall that CookBook helps our sales reps effectively price our products to customers.

Of course, less they are focused on private label growth. Additionally, our acquisition of SRA and FirstClass Foods in 2017 will also help gross profit rate, along with a continued focus on growing center of the player in the category. Now on Slide 12, operating expenses increased 4.6% or $40 million for the quarter from the prior year to $915 million primarily due to higher case volumes. Additionally, we did experienced some increased auto insurance charges, employee-related costs, partially offset by lower restructuring costs and productivity gains. As a percent or sales, operating expenses were 15.8% in the current quarter, which is an increase of 20 basis points from 15.6% in the prior year.

Adjusted for depreciation, amortization, restructuring and other unusual or non-recurring items, first quarter operating expenses also increased $40 million or 5.4%. Adjusted operating expense as a percent of sales, was 13.6%, up 30 basis points from the prior year. The increase in adjusted OpEx dollars was mostly due to higher case volumes. We also experienced higher than usual auto insurance charges related to accidents from prior years and higher executive severance and related costs, which combined, increased our OpEx about a 100 basis points for the quarter. Excluding these items our OpEx would have been even better – would have been better than the prior year on a per case basis.

These items masks the benefit of our cost reduction efforts, primarily field and reorg – field reorg and corporate streamlining that Pietro described a few minutes ago. Overall, our OpEx initiatives are on track and progressing. I am now on Slide 13. Adjusted EBITDA was $215 million in the quarter, up 6.1% over the prior year period. Adjusted EBITDA as a percentage of sales also increased 10 basis points over the prior year period to 3.7% for the quarter.

And just as a reminder, reconciliations of the various non-GAAP measures included today are in the appendix of the presentation and outlined in the earnings release we issued earlier today. Moving to the middle of the page, operating income in the quarter decreased $8 million to $77 million, primarily as a result of the $21 million negative year-over-year LIFO reserve impact, as well as the other drivers affecting gross profit and OpEx discussed already. Adjusted operating income which excludes the impact of LIFO, as well as other adjustments such as restructuring, transformation costs, and other unusual and non-recurring items improved $12 million or 6% to $215 million for the quarter. And finally, on the far right, net income improved to $27 million for the quarter compared to $13 million in the prior year, largely as a result of improved business results and lower interest expense. This improvement also reflects a $21 million year-over-year increase in the LIFO reserve and increased income tax expense that partially offset the business and interest improvements.

Adjusted net income increased from $28 million in the prior year to $40 million in Q1 of 2017. Turning now to cash flow and net debt, cash flow from operations for the quarter was $122 million, compared to $137 million in the prior year. The decrease in the prior year can be attributed to an increased accounts receivable balance and a related use of cash. This was primarily due to our sales growth over the prior year and banking holidays and the related cash receipt timing. The banking holiday difference relates to a holiday being in the last business day of our fiscal 2015, that resulted in more cash payment being received in early 2016.

The timing shift did not repeat in 2017 Q1. The core cash flow generation of our business remains very solid. Net debt at the end of the quarter was $3.7 billion, this is down over $1 billion from the prior year. Our leverage ratio stood at 3.8 times, down from 5.3 times in the prior year same period. Our capital allocation priorities remain the same.

We will continue to focus on internal investment in our business completing attractive acquisitions and paying down debt to delever the business toward our mid-term targets. Moving to Slide 15, our fiscal 2017 guidance provided on the February 15 earnings call remains unchanged at this time. We do however now expect interest expense and cash taxes to come in at the low end of the previously provided ranges. We are also reiterating our mid-term guidance which remains unchanged. Our business is performing as we had expected and as a result, our previous target still holds.

You’ve heard a lot today. I would recap the quarter as very solid with adjusted EBITDA growth of 6.1% and good overall case growth. This is even with the incremental approximately 100 basis points in OpEx for higher insurance and executive severance and related costs, and the 100 basis point independent restaurant headwind for the quarter from weather and timing that we discussed earlier. With that, thank you for joining us today and we can now open it up for Q&A. Operator?

Operator: [Operator Instructions] Your first question comes from the line of John Ivankoe from JPMorgan.

Please go ahead. John Ivankoe : Hi, thank you very much. I’ve got two questions if I may. First as, labor price strategy you pointed out is certainly existing at the restaurant operator level, and what's been at least six quarters of deflation is perhaps turning to inflation. Are customers coming back to you and pushing you up more on price and as we kind of think about the forecast and what's in your numbers over the next couple of quarters, can you continue to see gross margin expansion as deflation turns to inflation or is that even a goal?

Pietro Satriano: So, let me take those two questions and maybe, Dirk, you can help.

In terms of – as you refer to, John, labor pressure, the way that manifests itself is, when I am touring different markets is in those markets that have changes in minimum wage as an example like Arizona, where I was a few weeks ago, what you see is, operators looking for help in terms of how to mitigate with that. And the levers are menu pricing, menu portions, labor scheduling. So if that’s where we see the opportunity, that’s where our ROCs come in. We are not seeing pressure on our cost of goods or pricing as a result of any of that. It’s the level of competitiveness, I would say, is fairly constant.

And the other thing we would say, I think everyone in the industry recognize that slow modest inflation is the best environment for ourselves and for our customers. Second question – what was, remind me, John, sorry, what was your second question?
John Ivankoe : Well, I think you answered it, just in terms of do you anticipate the switch from deflation to inflation to potentially influence your gross margin percent as the deflation gradually becomes inflation. And actually I do have a second question in addition to that.

Dirk Locascio: This is Dirk. Good morning, John.

I think, so, our focus is going to continue to be to grow gross profit dollars and I think we are going to continue with the initiatives we have and our margin expansion, I think, the thing that could impact that going forward is depending on what categories the inflation comes in, et cetera could have a modest impact on how much or how low that expansion happens. But our goal is to continue to grow gross profit dollars and expand margins. John Ivankoe : Okay. Thank you. And then secondly, you and your larger competitor are both very clearly taking share in terms of independent restaurant case volume.

Where is that share coming from? And, do you see it as an opportunity, maybe – you said, if it's whether in regional food service distributors or the smaller food service distributors? I mean, do you see the amount of consolidation in the industry overall accelerating, given that you and your larger competitor are clearly taking share?

Pietro Satriano: With the smaller independent restaurants, John, it’s hard to tell where the share is coming for some of the larger customers we’ve acquired over the last six months is obviously much easier, but for the smaller one, and it varies by regions. In some region maybe some of our broadline competitors in the other regions they maybe the regionals and some at the smaller ones. So it’s honestly hard to tell. I don’t think in our conversations with our field leaders, this is something we talk about. There is no general pattern that emerges.

John Ivankoe : Thank you.

Operator: Your next question comes from the line of Shane Higgins from Deutsche Bank. Please go ahead. Shane Higgins : Yes, good morning. Just had a couple questions.

The first one just was on the organic case volume trends. How did those trends? I know there were some weather comparisons that were pretty difficult. And just want to get a sense of kind of how those organic volume trends kind of progressed throughout the quarter. And if you could give us any color on kind of where they are trending quarter-to-date?

Dirk Locascio: Good morning, Shane. This is Dirk.

I think, overall, as Pietro commented, what we try to do is, as it may for the impact of weather and timing, and so when you normalize for that, we were at around 3.8%. So fairly consistent with the four been running. I think we view just our overall case performance as healthy and as we get out of some of the weather and comparables, but we don’t expect a meaningful change through that. We expect to build a continuous solid healthy case growth in independent restaurants for the foreseeable future.

Pietro Satriano: Talk about where the 100 basis points comes from.

Dirk Locascio: Yes, I think as we look out of the 100 basis points, a little over half, almost two-thirds comes from the weather year-over-year. About a third comes from the calendar timing the way New Years and such fall, and then a little bit around 10 or 15 basis points from the M&A drag that Pietro commented on. So, I can give you a sense of where those components are.
Shane Higgins : Okay, great. I appreciate that color.

And then I just wanted to get a little bit more granular on the 2.8% organic case growth that you guys reported for the independents. How much of that was driven by increased penetration of existing customers versus the new customer wins? And has there been any change in retention rates among the independents?

Pietro Satriano: Yes, so we – as we have said before, Shane, we don’t disclose quantitatively how much comes from each of those two levers, but I can tell you that, the pattern of growth across new accounts churn and penetration has been very consistent over the last few quarters, which gives us, which is one of the things that gives us the confidence that in fact, the 2.8 we experienced in Q1 is really due to the other factors that are described and the runrate is still healthy and hovering in the 4% range.
Shane Higgins : Got it. Thanks so much.

Operator: Your next question comes from the line of Robbie Ohmes from Bank of America.

Please go ahead.
Robbie Ohmes : Good morning, guys. Actually, two quick questions for you, Pietro, maybe just first, just can you remind us in terms of when you think of the large chains overall, kind of the health of that group from where you guys are standing versus your willingness to take on some new large chain customers. And then the other question, just a quick one, some of your competitors, at least one large one is focusing more on digital initiatives in probably early stage, but just curious if you have felt or seen any impact from that? Thanks.

Pietro Satriano: Okay.

So the first question, in terms of the outlook, I think Page 6 Technomic did a nice job of describing the outlook for national chains as not as favorable independents and that’s not as favorable as that for independents. In terms of the types of customers we have been able to pick up, we are very opportunistic and I think in the end, the goal with respect to that third bucket of other customers is to optimize this portfolio, it’s less about growth. We had some good growth in the last couple quarters, but it’s really about optimizing which they mean replacing some customers who have below acceptable margins with customers that have more acceptable margins and what we’ve been opportunistic enable to do in the last two quarters is pickup some customers that like what we have to offer and I feel larger because they are not maybe national so much as multi-region. And so therefore, have a great appetite for what we have to offer and present acceptable margins. In terms of technology, we are – hope you can see, and this is why we organize the pace the way we did, what we wanted to convey is that, this digital ecosystem, which I can tell is a little bit of an overuse where it’s much more than order entry platform.

I mean, the order entry platform is foundational as I said and we have with 53% of sales coming through it, we believe we have an opportunity to increase that. Obviously, the growth – the rate at which that will grow is going to slow over time, it’s a classic S curve of adoption. But we believe that our user experience and level of personalization is still best-in-class in the industry. But we are more and more focused on to continue to increase stickiness and build them out around those customers. Although as applications that sit on top of this ordering platform – applications like I talked about which enables the customer to run their operations better whether it’s driving traffic, whether it’s managing their menu profitability or scheduling labor and the job of our territory managers whereby these ROCs is to figure out what’s the biggest pain points that customer is experiencing and to present the solution that is most appropriate for that customer in their life cycle.

Robbie Ohmes : Do you see digital going to 100%? Or do you see it topping out at 80%, just curious?

Pietro Satriano: I would say, some are in between those two. We have markets, so not, we have markets and territory managers who are in the 70s and 80s. So that gives you an indication of the potential and there seems to be now pattern with respect to rural versus urban or large versus small. It’s really a question of that customers’ profit. And having said that, we spend a lot of time coaching and educating that customer showing them that digital ordering has many benefits for them but if they don’t want to do it, they can still order it through our customer service on the phone or through the PM.

It’s really their choice, but we want to make sure they do have informed choices as to the Omni channel process that we present.
Robbie Ohmes : Got it. That's really helpful. Thanks so much.

Operator: Your next question comes from the line of Edward Kelly from Credit Suisse.

Please go ahead. Edward Kelly : Yes, hi, guys. Good morning. So, thanks for the color on the SG&A side, that gap between gross profit dollar growth and SG&A had narrowed, but I guess, what you are saying is that, it would have stayed at least 100 basis points or more ex the unusual items. Does that normal spread return in the second quarter or does it take a few quarters to work its way back?

Dirk Locascio: So we think, overall, when you are talking at individual quarters, it doesn’t takes – of what we cost, it doesn’t take too much to skew a particular number that’s why we wanted to call it out is we do continue to get better throughout the balance of the year.

So that healthy gap should remain probably similar for Q2 and then be in place for Q3 and Q4.
Edward Kelly : Okay. And then, Pietro, getting back to the chain customers, I mean, you had walked away from some business in the past. You are kind of back to maybe picking up some customers opportunistically. You are not the only one that's been sort of take in this view.

Has the margin overall in the chains business, is it finally beginning to come back a bit given the efforts of the large players here?

Pietro Satriano: No, what I would say is, within that top 100 or top 500, Ed, there is just a huge disparity in terms of margin opportunity and the customers that we walked away from were far below the acceptable level and the ones that we have been able to attract opportunistically as we’ve said has been more in line with what’s acceptable.
Edward Kelly : Okay, and just last thing for you. Free cash flow, as we think about this year, you have low cash taxes, so free cash flow generation is obviously solid. Just remind us of what your leverage target is and then, what happens once you get to that leverage target? What are the priorities?

Dirk Locascio: Sure, so, we haven’t stated a specific target for this year. We’ve stated that we want to work our way down towards approximately three times leverage and the reason that we’ve not stated a specific timeframe is not to be cute rather to maintain the flexibility as the right M&A opportunities present themselves that we can pursue those.

Outside of that, the focus remains on delivering the business and paying down debt. And as we get closer to the three times and that’s why we’ve come out with some additional guidance as we think about future capital allocation whether that – how that turns into another form of return.
Edward Kelly : Great, thank you.

Operator: Your next question comes from the line of A.J. Jain from Pivotal Research Group.

Please go ahead. A.J. Jain : Yes, hi, good morning. I think in the case of one of your competitors yesterday, they had the same situation where expense growth outstripped gross profits for the first time I think, in a couple of years and that may be a coincidence or completely unrelated. But I am wondering if there are any industry-wide factors that are starting to pressure wages and employee benefit costs.

So, can you comment on whether you are starting to see any significant shift with wage inflation and higher employee benefit costs on top of any cost of goods inflation? Thanks.

Dirk Locascio: Good morning. This is Dirk. We didn’t see any gross changes in the underlying core business and then cost pressures, healthcare increase on cost, I mean, that’s – what we’ve seen in the last few years and one similar for employee wages. The pressure around minimum wage, that we heard a lot in the market really hasn’t any impact for us since we have – our employee base is typically well above that.

So, it’s not – nothing unusual to talk to you about for the quarter as opposed to just continuing our focus on driving the initiatives that help us improve our cost and offset the inflationary cost that you do incur in the business. A.J. Jain : Okay, thank you.

Operator: Your next question comes from the line of Vincent Sinisi from Morgan Stanley. Please go ahead.

Vincent Sinisi : Hey, good morning guys. Thanks very much for taking my questions. Just wanted to ask about the pricing that you are seeing by category, I know you mentioned earlier that kind of some categories, you are starting to see a little bit of inflation. Can you give us any further color there? And just kind of your expectations built in to the rest of this year? I know you said kind of not expecting any real inflation, but should we think of it as flattish or slight inflation? How that may flow through? Thank you.

Dirk Locascio: Good morning, Vinny.

Yes, so, and it’s really what we’ve seen in the quarter when you think of not so much year-over-year, but sequential month-over-month. Things like meat, produce, seafood, we’ve seen some inflation for the quarter. I think what we would expect is that the year goes on, we continue to see deflation moderate and return to some modest inflation probably later in the year. Things as long as we see what we are seeing were, if that modest point we would expect that it would not have a significant impact on us for the year positive or negative. And just like we talked about last year and the deflation is our focus as we move the inflation is the same, is making sure that we effectively manage through any kind of inflation to ensure our cost of goods and our margins to our customers remain healthy.

Vincent Sinisi : Okay, that's helpful, Dirk. Thank you. And then maybe just a quick follow-up, just going back to the large chain side. Just wondering if any of some of the ones that you've added, I know you said it's kind of opportunistic if the margin levels are right. Just kind of curious, have you or do you think there would be opportunities for some of the folks that maybe you have relationships with that you walked away from in the past, have you gotten a sense of how they are doing not with you guys and if there is any kind of thought that maybe they could be once again customers, but at better margin rates?

Pietro Satriano: We have a sense of some are doing, some have experienced, I mean transitions are always difficult, but I would say more importantly than any of that as I said to – I think I want to add the profile of those customers and I mean, we are talking orders of magnitude difference and size – just there are sub-segments within that larger customer segment and where we’ve been opportunistic, because the customers we’ve brought in are very different than the type of customers that we walked away from, I guess, almost two years ago at this point.

Vincent Sinisi : Okay. That's helpful, Pietro. Thank you.

Pietro Satriano: Yes.

Operator: Your next question comes from the line of John Heinbockel from Guggenheim Securities.

Please go ahead.
John Heinbockel : So, Pietro, I wanted to drill down a little bit on existing customer opportunity. Do you guys have any way of sizing share or how big that opportunity is? One, secondly, when you look at what, I am thinking more where you are the primary supplier. Is the opportunity on the share side larger in taking business from specialty distributors or other broadliners? And then the third part, because you guys are pretty analytical, when you look at the incremental margin, right, of raising drop size versus taking on a new customer, I mean, how much bigger is that incremental margin with increasing drop size? I mean, I have to think it's, I don't know, two, three, four times as big. Is it that large?

Pietro Satriano: So, I mean, I would give you, John, a qualitative answer which hopefully gives you a sense of where we are.

So the economics of adding to an existing customer, as you point out are much more favorable. And that’s why – I think one of the things this industry does well is, the way sellers are compensated which is gross profit per drop really aligns the incentives – the seller who is on the street making decisions as to who to pursue and at what price with the – aligns that incentive with how we make money. Having said that, you always want to keep a pipeline of new customers coming in. The other thing I would tell you, from an analytical perspective, it’s hard to know where the share opportunity might come from, but what we do know is how big that opportunity is. So as this all – and I think we’ve talked about this.

We took what we focused on the pricing recommendations that we give to TM, the cross-sell opportunities that we give to TM, but at the foundation of that, if every single one of our independent restaurant customers, we obviously know how much we sell to them by category. But we have modeled what we believe is the opportunity by category. And this team-based selling model that we’ve talked about there is a function in each market called a DSS which is Director of Sales Support. They think about them almost as a dispatch and what they do is, they look at the analytics coming from CookBook and where the opportunities are higher based on looking at that customer compared to a light customer or and what categories they are buying from us or not and so to some degree, not completely, to some degree the sellers on the street are directed to some customers more than others where we think the opportunity is better and more profitable. And the team of specialists, whether they are COP specialists or equipment specialist, they too are directed to where we think the biggest opportunity based on our analytics.

And so that’s how we drive it. But where the actual might come from, specialty or broadline, it’s hard to tell. John Heinbockel : And then, just on a separate topic, so you are 90% rolled out on CookBook. When you compare what you had originally put in the three year plan for that particular initiative, versus where you are now or where you are thinking is now, is it about what you thought or as you gotten into it, it's actually ended up bigger than you thought it was?

Pietro Satriano: So, I would say, it’s about where we thought or a little bit better. Like a lot of things in this business, John, it’s really about execution.

And so, what we find is, those markets that have the highest adoptions from sellers, the benefit has been higher and those markets or those TMs that have lower adoption and we are able to track number of recommendations adopted by TM, by market. And so then that becomes a coaching opportunity to kind of raise the level of adoption which ultimately realizes in better pricing either to drive volume or to drive margins. And so, even though that’s 90% deployed, that we are nowhere near 90% of the benefit realized.
John Heinbockel : Okay, thank you.

Operator: Your next question comes from the line of Karen Holthouse from Goldman Sachs.

Please go ahead.
Karen Holthouse : Hey, one quick question on, just some moving pieces in guidance. So, with about an 80 basis point change in rate per case this year, the acquisition headwind moderating pretty significantly next quarter and going away in the back half and then commentary that deflation should continue to moderate as well, ending up at, call it, rate per case around down 50 basis points or so year-over-year, trying to bridge, though, case growth guidance of 2% to 4% to revenue guidance of 1% to 3%. That would kind of imply that you are not going to be at the high-end of the case growth guidance. Is that the right way to think about it?

Dirk Locascio: I think we are really still within our 2% to 4% growth target within there – with deflation in the first part moving into inflation in the secondary part and I think, as we get a little further into the year, we will provide a little – further clarity as we have more results concretely in place.

But we still believe that that range is very solid. Karen Holthouse : And then, one more sort of strategic question. On the restaurant side of things, a growing theme continues to be off-premise, and then in particular delivery and few companies have talked about actually changing product specs to improve the stability of – the stability of products once they are cooked to give them time to get to get through a delivery process. Is that an area of sort of investments that you are looking at? How can you come up with products that sort of more stable solution for customers?

Pietro Satriano: So, a little bit, Karen. So when we do our product development in Scoop, one of the things we are always looking for is not just the – obviously the commercial appeal or the consumer appeal I should say.

We also look at things like holding power of new French Fries. So indirectly, I would say that’s always a consideration. But a bigger part of the focus has been on – as I mentioned, through apps like ChowNow and menu designs helping our operators take advantage of this opportunity to drive take out traffic that you refer to. That’s where our focus has been and that’s where we’ve seen a lot of receptivity on the part of our customers. Karen Holthouse : Great.

Thank you.

Operator: Your next question comes from the line of Zack Fadem from Wells Fargo Securities. Please go ahead.
Zack Fadem : Hi, good morning. So, on the M&A front, you've been pretty active and I am curious if you could comment on the magnitude of synergies that you've seen from some of the deals over the past year or so and generally, when you acquire a specialty business like a meat or produce company, do you tend to see any cross-selling with your existing customer base to offset the attrition that you had mentioned?

Dirk Locascio: Good morning, this is Dirk.

So, yes, so what we see is, we will try to focus on acquisitions that are multiples that are similar to where we trade and then targeting taking out a couple of turns from there through synergies. So to ensure they are – are they accretive to the business. And I think the, on the specialty business, one of the key things is absolutely, so as we buy those, the focus is on how they fit into our broad network and that is really what that network of how they serve our broadline customers. So, as we are buying them, they are definitely considered as part of the overall and that’s part of the overall growth you get over time, is how you increase the volume that comes out of the specialty providers into our broadline operations.

Pietro Satriano: And I think the other thing, Zack is the attrition I was referring to that is planned is primarily with broadline distributors we’ve acquired and I’ll give you a couple of examples just so that you can see why it’s anticipated.

So, the large – mostly Italian distributor we acquired in the northeast, a significant percent of transactions, cash, no invoice, that’s not something we do. So, some part of the business to jobbers, not a good business. So that’s all planned and anticipated and it takes a year or two to cycle through that.
Zack Fadem : Okay, that's helpful color. And then just, on the cost initiatives that you have outlined here, the field operating model, shared service, you provided some helpful color on the long-term trajectory.

But how should we think about the cadence of these items as they layer in throughout this year and do you expect the continued impact from insurance and severance to have any impact in the next quarter or going forward?

Dirk Locascio: Overall, from a cadence perspective, how these contribute is, you will see the savings benefits especially from the field reorg and the corporate pieces through 2017 as well as indirect spend, I think what you will see is, for shared business services and continuous improvement as the year goes on and three years as when those benefits really continue to increase and come to life more and more with a lot of great opportunity over the next couple of years. I think from ongoing cost, it’s – we don’t expect, and that’s why we call these out, that these are more lumpy costs within the quarter as opposed to a core issue with the business on an ongoing basis. Zack Fadem : Okay, thanks, Dirk. That's helpful. I appreciate the time, guys.

Dirk Locascio: Okay, thanks.

Operator: [Operator Instructions] Your next question comes from the line of Karru Martinson from Jefferies. Please go ahead.
Karru Martinson : Good morning. As we come closer to that long-term, three times leverage target and do you feel that that opens up additional opportunities for larger acquisitions or is this more just kind of baked into continued rolled on tuck-ins as we go forward?

Pietro Satriano: I think, it really bodes, I think for us when we think about capital allocation going forward, we think of this from how should we think about if the right margin opportunity came along as well as continued smaller tuck-in acquisitions as well as other returns of capital forms.

So, we think all those and we want to make sure that as we approach that three time, that the strategy and the actions that we outlined, but the next step of our journey contemplate each of those and what we think may or may not happen in giving us the flexibility to best use our capitals with ours and free cash flow in the future. Karru Martinson : Thank you very much, guys. I appreciate it.

Operator: We have no further questions at this time. Pietro, I turn the call back over to you for closing remarks.

Pietro Satriano: Okay, thank you. So everyone, thanks for joining us. As you can see, we are very pleased with the quarter that we just completed, 6.1% adjusted EBITDA growth, despite a little bit of noise with respect to independent growth in the quarter and a little bit of noise with respect to some lumpy expenses. We would characterize as of being on track with respect to our initiatives and our strategy and I look forward to talking to you again next quarter. Thanks very much for joining us.

Operator: This concludes today’s conference call. You may now disconnect.