Executives: Melissa Napier - SVP, Treasury and IR Pietro Satriano - President and CEO Dirk Locascio -

CFO
Analysts: Zack Fadem - Wells Fargo Karen Holthouse - Goldman Sachs Vincent Sinisi - Morgan Stanley John Heinbockel - Guggenheim Securities John Ivankoe - JPMorgan Edward Kelly - Credit Suisse Shane Higgins - Deutsche Bank Ajay Jain - Pivotal Research Group Robbie Ohmes - Bank of America Kelly Bania - BMO Harris Karru Martinson -

Jefferies
Operator: Good morning. My name is Kristen and I will be your conference operator today. At this time I would like to welcome everyone to the Fourth Quarter and Fiscal Year 2016 Earnings Call. 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 and Treasury and Investor Relations, you may begin.

Melissa Napier: Thanks Kristen. Good morning everyone.

And thanks for joining us today for our fourth quarter and fiscal year 2016 earnings call. Joining me for today's call are Pietro Satriano, our CEO; and Dirk Locascio, our CFO. Pietro and Dirk will provide a business update and speak about our fourth quarter and fiscal year performance. We will take your questions after management's prepared remarks conclude, please provide your name, your firm and limit yourself to one question. In fiscal 2015, we had 14 weeks in the fourth quarter and 53 weeks in the fiscal year, which impact our quarter-over-quarter and year-over-year fiscal 2016 comparable results.

Our press release issued earlier this morning presents our results both including and excluding the impact of the extra week in the prior year. Most of the slides that management will be discussing on today's call are normalized to remove the extra week and are marked as so. Our earnings release along with today's presentation slides can be accessed on the Investor Relations page of our Web site at usfoods.com. We expect to release our 10-K within the next two weeks. In addition to historical information, certain statements made during today's call are considered forward-looking statements.

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 then our report filed with the SEC, including our registration statement on form S-1 as amended. Our slides and our earnings release contains certain non-GAAP financial measures along with reconciliations to the most comparable GAAP financial measures. Now I will turn the call over to Pietro.

Pietro Satriano: Good morning, everybody and thank you for tuning in.

Given that this is the last call for 2016, I will spend some time reviewing some of the highlights for the year that was as well as reiterating our guidance for 2017 and beyond. So let me turn your attention to Page 3 of the presentation. So to start-off 2016 was a very good year on many fronts. Financially we had very good operating results with year-on-year adjusted EBITDA growth of 12.5% when adjusting for the 53rd week in the prior year. Secondly, we continued to make progress against our Great Food.

Made Easy. strategy continuing to expand our advantage and product innovation in eCommerce. Third, we successfully integrated five acquisitions which collective accounted for 2% of the 12.5% growth in adjusted EBITDA, and last as a result of our successful IPO and debt refinancing; we exited 2016 with a much stronger balance sheet than we entered the year. But, we have an outlook for 2017; we remain bullish on the outlook for independent restaurants, one of our target customers. We are continuing to invest in our differentiated strategy while staying focused on improving our cost positions and our execution.

M&A is off to a promising start. Yesterday we announced the acquisition of All American at $60 million broadline distributor in the Northeast. And lastly, we are holding to our mid-term guidance of 7% to 10% adjusted EBITDA growth. Let me turn your attention to Page 4, you will remember that there are three dimensions to our strategy of Great Food. Made Easy.

The first is about winning with true leadership. After all food is typically the largest single element on a restaurant's P&L and the menu is at the heart at how restaurant differentiate themselves. The second dimension is about offering an easy customer experience, making it not only easy for restaurant operator to do business with US Foods, but providing them the tools that make it easier for them to run their business. And third, it's about flawlessly executing on the fundamentals. Together these first two dimensions win with food and differentiate with easy are primarily about driving profitable volume growth and margin expansion.

To the levers we show on the right, customer and category mix, product brand growth, retention and saturation of existing customers as well as profitably adding new customers. The third dimension competing flawlessly on the fundamentals is primarily about driving cost out of the system while also driving better execution. Together they contribute to improving our operating cost per case as well as driving better employee engagement and more consistent customer service. Let's go to Page 5. I mean just to view how the strategy contributes to the key levers in our business.

Let's now spend couple of minutes reviewing a few of the highlights from 2016. Supporting volume and margin growth and integral to win with food and differentiate with an easy customer experience. First we launched 63 new innovative products including our served good line of sustainable products, developed by and exclusive to U.S. Foods. Products where we continue to get around 50% trial rate in a very high stick rate post launch.

We launched several new enhancements to our leading eCommerce and mobile platform aimed at creating a more personalized experience for the customer. With the latest being in the fourth quarter, the Did You Forget feature, which prompts customers who are ordering on our platform for items not on the order that they regularly purchase from us. We have seen significant increase in volume in those items. Last quarter, we talked about the launch of food cost management, in order to help customers plan their menus and reorder and what's different about this, they can do so on virtually any point of sale system. We grew the number of categories specialists that support our reps to support of our team based approach to selling.

And we have increased the number of food fanatic live events, which have turned traditional food shows in the industry show they are typically focused on deals to true learning events focused on innovation for the industry. Supporting our efforts at reducing our operating costs per case an integral to competing flawlessly on the fundamentals a few highlights of the year include. As you know we talked about the deployment of our multi-site approach to field management reducing the number of field leadership teams from 60 to 26. More importantly with every passing month we can see the positive impact on our operating model, as a result of fewer touch points for corporate initiative and better talent. Our indirect sourcing efforts generated significant savings on good enough for resale.

We saw a 4% improvement in our perfect order, which is a competitive measure of our service pyramids that includes not only fill rates but on time delivery, damage free product and an accurate invoice. And we are putting in place standard routines to run several aspects of our sales processes. As a result, as you can see on Page 6, 2016 resulted in strong growth in adjusted EBITDA. On the top left you can see our overall volume growth accelerated in particular with target customers, independent restaurants, regional chains, healthcare and hospitality and Dirk will provide some more detail in a few minutes. And while profitably growing volumes, we expanded those margin and did so faster than operating expenses with the resulting 12.5% growth in adjusted EBITDA for the year.

Let's now turn to 2017, on Page 7. Our EBITDA guidance for 2017 in the mid-term remains consistent with the guidance we have previously given. That was the 10% growth in adjusted EBITDA with the higher end driven by M&A. This guidance and adjusted EBITDA is based on the following, a continued favorable outlook for our target customers in particular independent restaurants in a series of multi-year initiatives, some of which are mature and some of which are newer balanced across volume growth margin expansion and operating expense improvement. Let me spend couple of minutes on those.

First, the outlook for independent restaurants, which is shown on Page 8. This is Technomic data which shows real growth of independent restaurants compared to national chain goes back to 2009 and as an outlook for 2017 and 2018 to 2021. As you can see, this outlook is consistent with other industry reports, we are focused on the recent softening of large restaurant chain. But, the outlook for independent restaurants for 2017 remains consistent with what we have seen in the last two years with independent out growing chains. We see this as a function of a fewer factors.

The first is the nature of consumer habits when eating out. When eating out, customers like variety, which favors independent restaurants. The second, is the increasing importance of millennials, who generally seek out different experiences, healthy alternatives and a local offering. And third, social media [eOut] [ph] provides independent restaurants easy access and recognition. Let me close on Page 9.

We are confident the guidance I just provided for 2017 and part to the favorable outlook that I just outlined, but primarily due to our Great Food. Made Easy. strategy and the supporting programs and initiatives. Some of them, I said are more mature and some of which in their early stages. Let me talk about these briefly.

Supporting volume growth and margin expansion, we will of course continue to focus on product innovation, leading mobile and eCommerce solutions, exclusive brands and specialty categories such as center of the plate. At the same time, however, we are also ramping our efforts on newer initiatives. The centralization of replenishment, which will give us better freighting cost of goods economics, as well we will complete the deployment of our cookbook pricing tools for reps. Remember that cookbook pricing is all about leveraging big data analytics to optimize pricing with smaller customers. Supporting efficiency and effectiveness and better operating expenses, we have already discussed our efforts to streamline our corporate structure, the first phase of which will be complete by the end of the first quarter of 2017.

We continue to improve the productivity and effectiveness of our sales force. By continuing to migrate accounts to our most productive reps. Ramping up in 2017 and as mentioned on previous calls, there are two major initiatives, the first is the introduction of continuous improvements and lean in our distribution network. This is in the very early stages, but we believe we have the potential to improve safety, service levels and productivity for years to come. And second is expanding the scope of our shared services, bringing greater consistency and efficiency to back office functions that are more transactional in nature.

Today, our shared services center in Tempe already includes such functions as payables and receivables and we're exploring other functions to add to this umbrella. I'd like to close by thanking each and everyone of our 25,000 employees for a terrific year. Now, let me turn it over to Dirk Locascio, our CFO for more detailed walk down of our operating returns. Dirk?

Dirk Locascio: Thanks, Pietro and good morning everyone Our solid fourth quarter's capped-off a strong year as Pietro noted. Our earnings growth came from a balance of profitable volume growth, gross profit expansion in our OpEx productivity as well as achieving significant improvement in cash flow and reduction in debt.

Before I get into our results, I'd like to remind everyone again consistent with Malissa's comments that we have calendar differences between 2015 and 2016. In 2015, we have 14 weeks in the fourth quarter instead of 13 weeks and 53 weeks in the fiscal year instead of 52. To provide apples-to-apples comparisons, we've normalized our 2015 fourth quarter and full year results to remove the extra week on most of the slides we'll discuss today. Now let's move to case growth on Slide 10, which was 4.1% for the fourth quarter and 2.9% for the year. Total case growth accelerated in the second half as we brought our new business and we're no longer lapping strategic national chain exits, which resulted in lower case growth in the first half.

The pipeline for larger customers is longer and we started to see some of those customer wins contributing to the strong overall second half case volume growth. Our independent restaurant growth was 6.1% for the fourth quarter in total and 3.8% organic. Also as we discussed before, our 53rd week in 2015 shifted the calendar for 2016 resulting in a modest negative impact on second half. If you adjust for that, we estimate our Q4 organic growth to have continued in the 4% to 4.5% range. Moving to Slide 11, fourth quarter net sales were $5.7 billion, an increase of 170 basis points over the prior year.

As I mentioned before, we made good progress on case growth with our target customers in the fourth quarter growing with independent healthcare and hospitality as examples and being selective on chains resulting in the 4.1% total growth. Deflation and mix were worth a negative 240 basis points for the quarter with two factors reducing our sales per case. The first was the widely discussed deflationary headwinds, which in our case reduced sales by approximately 200 basis points primarily in beef and dairy. The second was the impact of the Freshway acquisition, which reduced our average sales price per case about 40 basis points. This is because produce has a lower average sell price than the rest of our business.

Turning now to full year results, our net sales were $22.9 billion or an increase of 60 basis points for the prior year. Total growth in cases was 2.9% offset by approximately 200 basis points of deflation and approximately 30 basis points from the combination of Freshway mix discussed and the impact during the first three quarters of 2016 as a result of our transitional ways from these certain national chain customers whose purchases were more concentrated in the protein categories. We'll now move on to gross profit performance which you see on Slide 12. We continue to deliver good gross profit results despite the deflationary headwinds. For the fourth quarter, gross profit was $1 billion lapped to the prior year on a GAAP basis and up $47 million on an adjusted basis, which removes the non-cash impact of LIFO.

As a percentage of sales, gross profit was 18.1% versus 18.2% in the prior year period on a GAAP basis and up from 17.6% to 18.2% on an adjusted basis. The impact of LIFO was a negative 70 basis point impact year-to-year on the GAAP results. Excluding the impact of LIFO, Q4 gross profit dollars increased 4.8% over the normalized Q4 2015. For the full year, our gross profit increased 2.5% in dollar terms over the prior year. Volume growth and initiative benefits were probably offset by a reduction of LIFO benefits.

On an adjusted basis excluding LIFO, gross profit increased $155 million or 4%. Adjusted gross profit as a percent of sales for the year also improved 60 basis points from the prior year to 17.6%. The elements of our strategy focused on gross margin continue to make good progress and results for the quarter and year were similar in many ways to what we discussed during our third quarter call. We continue to improve our customer mix by driving growth to independent restaurants, 6.1% for the quarter. We continued our focus on private label brand growth with 33% of sales from private label on fiscal 2016, up from 32% in 2015.

We have an ongoing effort to drive effective vendor management and sourcing programs which optimize our cost of goods and assortment and our Q4 acquisition of Save on Seafood help further strengthen our category mix in center to deploy along with the continuation of the internal initiatives focused on improving penetration in these categories. And lastly, we continue to improve on our ability to optimize pricing with one example, the cookbook is deployed in about half of the country. In some ways, it helps to mitigate the impact of deflation. Now on to Slide 13, operating expenses decreased 6.9% or $67 million for the fourth quarter from the prior year to $911 million due to lower restructuring costs and productivity gains partially offset by cost related increased volume. As a percentage of sales, operating expenses were 16% in the current quarter, down 150 basis points from 17.5% in the prior year.

And on a full year, operating expenses were $3.6 billion which is a decrease of 3.6% or $136 million. As a percent of sales, operating expenses decreased 70 basis points to 15.9%. Adjusted for depreciation, amortization, restructuring merger and other non-recurring items, Q4 operating expenses increased 3.5% on a 4.1% increase in case volume. Adjusted operating expenses as a percent of sales were 13.5% up 20 basis points from the prior year. We continue to gain operating leverage by increasing expenses less than we increased gross profit.

For fiscal 2016, adjusted operating expenses increased 1.6% on a 2.9% increase in case volume and increased 20 basis points as a percent of sales to 13.4%. On a per case basis, adjusted operating expenses decreased year-to-year for both the fourth quarter and the full year. As a remainder, reconciliation of these non-GAAP measures are included in the appendices through our presentation and outlined in the earnings release we issued earlier today. I'm now on slide 14, operating income in the quarter improved to $116 million or 2% of sales. For the year, operating income increased 131% from $179 million to $414 million.

This is driven by the volume growth, improved gross profit and lower operating expenses already discussed. Adjusted EBITDA was $265 million in the quarter, up 8.6% over the prior year. For the full year, adjusted EBITDA of $972 million increased $97 million versus the prior year on a reported basis and a $108 million or 12.5% adjusted for the extra week in 2015. Adjusted EBITDA as a percentage of sales also increased almost 50 basis points to 4.2% for the year. Our net income reflected solid operating results and improved to $77 million for the quarter compared to a loss in the prior year period.

On a full year basis, our net income also improved to $210 million. Adjusted net income which removes the impact of our third quarter 2016 valuation allowance benefit, the 2015 merger termination payment and other unusual or non-recurring items more than doubled from $148 million in 2015 to $321 million in 2016. Turning to cash flow and net debt, our free cash flow is $392 million compared to $369 million in 2015, an increase of $23 million. 2015 included approximately $200 million from the merger termination fee, net of the cost incurred, so the year-over-year improvement when the free cash flow more than doubled if you exclude those amounts. Net debt at the end of fiscal 2016 was $3.7 billion, which is down over $500 million from the prior year and our leverage ratio stood at 3.8x at the end of the year down from 4.8x at the prior year end.

We remain focused on continuing to delever the business toward our mid-term target of approximately 3x leverage. We also significantly reduced our interest expense during 2016 as a result of using our IPO proceeds to pay down debt and by refinancing our debt facilities as we talked about on prior calls. You could see our interest expense in the first half of 2016 was approximately $140 million and decreased to $88 million in the second half of the year. We made significant progress in 2016 to improve free cash flow, reduce leverage and reduce our interest costs. Moving to Slide 16, our outlook for fiscal 2017 is consistent with our prior mid-term guidance.

We expect adjusted EBITDA growth in 2017 to be in the 7% to 10% range with the lower end of the range representing organic EBITDA growth in the higher end of the range with M&A. Our pipeline remains robust. We do expect our Q1 adjusted EBITDA to be approximately 200 basis points below this range due to prior year unusually mild weather year-over-year holiday timing and other factors. Our 2017 volume growth guidance remains similarly unchanged with unit growth of 2% to 4% and net sales growth of 1% to 3%. Similar to our adjusted EBITDA guidance we would expect to achieve the higher end of the range with M&A.

We expect adjusted diluted EPS of $1.26 to $1.40 per share as a result of the higher EBITDA lower D&A and lower interest cost partially offset by increased income tax expenses. We expect our effective tax rate in 2017 to be a normalized -- more normalized rate of approximately 39%. Although, cash income taxes are expected to still be relatively low in 2017 as we utilize our remaining federal net operating losses. We estimate cash taxes to be $25 million to $35 million. And finally, cash capital expenditure should range between $230 million and $250 million with an addition of approximately $100 million in capital leases similar to 2016.

As Pietro mentioned, we're also reiterating our mid-term guidance which remain unchanged. Our business is performing as we expected and as a result our previous target still hold. With that, thank you for joining us today. And we can now go to Q&A.

Operator: [Operator Instructions] Your first question comes from the line of Zack Fadem with Wells Fargo.

Your line is open.

Zack Fadem: Hi. Thank you. Good morning. So, I want to talk a little bit about the sales guidance for fiscal 2017, 1% to 3% slightly below the mid-term outlook of 4% to 6%, I know that includes some M&A, but can you talk a little bit more about the assumptions embedded here specifically on cases, what do you expecting on an organic basis versus M&A? And then, just given the weather benefits et cetera in Q1, how should we think about the cadence for sales growth throughout the year?

Dirk Locascio: Thanks Zack.

This is Dirk. As we think about 2017, so the 2% to 4% case volume growth guidance that we have given. What we expect is, in the first half of the year, it's still continue to have year-over-year deflation as a result of the deflation experience in 2016 and that moderates to modest inflation in the second half, so you would see lower sales number in the first half and we would expect to return to that -- more normalized rate later in the year. From an organic versus total, in cadence what I will tell you is, we expect to have strong relatively consistent overall volumes throughout the year with a little bit softer in Q1 like I said because of the unusually mild weather last year if you remember, it didn't slow any place where it was supposed to snow and this year, it's been a more normalized weather pattern throughout.

Zack Fadem: Got it.

And then, on your interest expense guidance, while down quite a bit year-over-year, it implies roughly $45 million per quarter which is actually pretty big step from the $39 million in Q4. Can you just walk us through the moving parts here? I know there was some refinancing but why such the big step-up here from Q4?

Dirk Locascio: Well, there are few things. It's a combination that we have assumed some modest level of rate increases over the course of the year as well as some contemplation of potentially better balance of our variable versus fixed through interest rate hedge et cetera over the course of the year. So, it's primarily as a result of the increase in rates.

Zack Fadem: Got.

So, it's a higher mix of or it has the mix changed of fixed versus variable or is that, it's just the -- the variable is stepping up?

Dirk Locascio: It's predominantly the variable stepping. There will be a little bit as we work our way through finding the more optimal mix of fixed and variable in 2017.

Zack Fadem: Got it. That makes sense. I will past it along.

Thanks for your time guys.

Dirk Locascio: Thank you.

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

Pietro Satriano: Good morning, Karen.

Operator: Karen, if you are on mute, your line is open.

Karen Holthouse: I apologize, I'm in airport, I was trying to ask is there any to background noise from security, from my associate. Yes, so I'm just curious seems like there is still some pretty low hanging fruit in terms of enhancements on the digital side that did you forget being the example. Just over the next 12 months or even a little bit longer, what else do you think, what other enhancements are you working on in the pipeline?

Pietro Satriano: Driving still, I hear you. I think the question Karen, what other enhancements to the eCommerce pipeline.

Karen Holthouse: Yes, yes.

Pietro Satriano: So, we have a whole pipeline, we don't typically disclose what is forthcoming or I think reasons you can appreciate but just to give you a bit of insight into the process. We have a tech counsel, which includes our CIO, commerce and sales reps based on customer feedback, based on feedback from the reps. They inform the future direction. We also use our own internal community and social media to get input from the reps.

So, we have good news. We have no shortage of ideas and that's really about the organizations and primarily the ability to adapt to absorb the change that governs the pipeline.

Karen Holthouse: Great. Thank you.

Operator: Your next question comes from the line of Vincent Sinisi with Morgan Stanley.

Your line is open.

Vincent Sinisi: Hey, great. Thanks very much for taking my question. Good morning, guys. Nice quarter, I just wanted to ask kind of more of taking the step back, it's nice to see kind of a step-up in some of your case growth numbers today.

Kind of once again maybe just a little bit different from some of the commentary we heard out there in the industry last week. So, just wondering if you guys can just kind of give us your sense of kind of overall in the industry, different customer ends, it sounds like independents are going well for you. But, just kind of basic health of your customer channels as well as kind of any changes that maybe on the competitive front that would be great?

Pietro Satriano: It's Pietro, Vinny. Thanks for the question. So, as yourself identified it, it really depends on which of the industry you focused on, so the reason we put Slide 8 in here, Technomic data is -- because that we use Technomic because they do a good job of looking at the various types of customers, we look at.

So, it's a very comprehensive. And Slide 8, shows you, what has been a recurring fee which is the softening of the largest customers and a continued strength with the independent restaurants on which -- our strategy of Great Food. Meaning it's focused. They also issued at the same time, that this was issued last week, their outlook for other segment health care hospitality and they are pretty consistent with what we've seen. So if you remember that the bubble chart where we have the Technomic outlook by different customer types.

Very consistent, changes couple of hundred basis points, up or down, but very consistent deal with what we have been seeing in the last year. And then, our feedback that we hear from our leadership in the field is very connected to the market, is very consistent with these numbers.

Vincent Sinisi: Okay. All right. That is helpful.

And then, maybe just one super fast follow-up, I'm sure most of the folks on the phone saw, just kind of the quick announcement on Monday night I believe about Mark Scharbo's departure. Obviously, you can achieve supply chain an important role, can you just remind us kind of the bench that's behind him and the other kind of color around that going forward?

Pietro Satriano: Thanks for the question. The part of the reason, the timing of the decision was such is that so we could talk about with you on the call, supposed to have it coming out in the next few weeks and months. So let me answer your question specifically with respect to supply chain, so the interim leader of supply chain will be a guy named Mike Ranchino. Mike has been in his role overseeing what I call core operation for the 60 DCs and the five region Vice Presidents have reported to Mike for the last four years.

And so Mike has been marked primary in QIC. The reason for the change is, we see an opportunity to take supply chain to the next level. We've talked about the introduction of lean and continuous improvement and we believe by bringing in someone who has got that kind of deep experience and who has been a practitioner, they can really help take our supply chain to the next level, but with Mike in the chair on an interim basis and the team below that, we have the luxury of time to identify the right leader for the long-term.

Vincent Sinisi: Great. Thanks very much.

Pietro Satriano: Thank you.

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

John Heinbockel: So Pietro on cookbook, right, so you're halfway rolled out. What we're seeing in terms of benefit to gross margin maybe versus the base case and are you seeing any benefit yet in terms of case growth where you've rolled that out.

Pietro Satriano: Sure, thanks for the question, John. And just as a remainder, cookbook had various -- it's called traditional recipes. There is a retention alerts that we've talked about those who are fully deployed across the company couple of years ago where there is also prior cookbook, which is around identifying opportunities for customers in terms of penetration. Pricing is kind of the last frontier promotion side of it, that was the first part to rollout. The pricing part was so -- cookbook is in many ways while entrenched, pricing was the last frontier probably because as you can imagine pricing is the most emotional part of the sales reps day-to-day activity.

We're not going to disclose the results for an understandable reason and I can take it the continued rollout and in some ways the faster rollout going forward than we've experienced as a result of both rate improvements and volume improvements. What cookbook done is it looks at the customers -- pricing elasticity for that item compared to other life customers in the geography, and then makes recommendation because the range of recommendations to the rep in terms of -- is there an opportunity to reduce price to drive volume surgically or is there an opportunity to optimize price on a way which maximizes the possibility of that customer. So we have seen those kinds of results which is why we are continuing with the rollout.

John Heinbockel: All right. And then, secondly, what is the plan, you think about the Scoop plan for 2017 in terms of number of waves, number of products, is that get expanded versus 2016.

And then, just remind us what type of growth you might be seeing in mature Scoop items right that have been out there couple of years, is this volume there is still growing.

Pietro Satriano: Yes. So the plan for Scoop is, we've at this part of the longest as part of the differentiation and the great Scoop of the strategy. And the approach we adopted few years ago has worked very well for us, which is three way of the year roughly 20 or 25 products around across the range of menus, across the range of day parts, across the range of commodities and more niche type opportunities and so that formula has worked well for us and that will continue. The other thing is each one of these launches, we've talked lot about the day off or the week off when we do the cutting for the rest been the focus on these items is anywhere from 4 to 6 weeks.

So the number of ways we added is the right balance. In terms of your second part to your question we've been really pleased typically when you launch new items what you do as you get a pretty quick reduction from the trial period, customers try that and than it settles at a matured level you might experience from retail is that the amount -- the reduction we've seen is less than what we experienced in -- I've seen in retail. But the really positive thing is the volume associated with older items is very steady, it doesn't continue to erode and wrote atrophy and it stays at levels that are very consistent kind of 4 to 8 weeks post launch. And so the accumulative benefit of these items and it's not surprisingly think about right post the trail period they get put them on a customers menu and so that creates lot of stickiness and so the accumulative impact of Scoop is goes far beyond the incremental aspect in any given year.

John Heinbockel: Okay.

Thank you.

Operator: Thank you. And your next question comes from the line of John Ivankoe with JPMorgan. Your line is open.

John Ivankoe: Hi, great.

Thank you. First just a housekeeping question, what were the run rate of D&A maybe when I think some of the amortization of intangibles of rolls off in 2017 if I'm correct about that?

Dirk Locascio: Sure, good morning, John. This is Dirk. So the guidance that we provided for D&A contemplates the midyear of runoff of that and that impacts benefits of 2017 by around $60 million and then 2017, sorry and then 2018 about another $60 million and actually as we do our 10-K filing you will see, we specifically outlined in there, what our expectation is for 2017, 2018 and beyond.

John Ivankoe: Great.

That would be helpful for all this. Thank you for that. And then secondly you've kind of talked about Phase I of some organizational restructuring you've talked about cookbook or you've talked about centralization of various different functions you've talked about lean, continuous improvement overall. So you kind of have a lot of different pieces all of which sound interesting and good for your employee and good for your customer, but is there a way to quantify what that dollar benefit it will be to 2017 over 2016 and maybe what you are expecting of 2018 over 2017 as obviously in a period of deflation just seeing your natural gross profit dollars aren't that easy to achieve.

Dirk Locascio: Sure.

So we haven't specifically talked about the individual benefits that come from those. But, what that work I will say is, the benefit that we expect from those 2017 beyond or how contemplated in our 2017 guidance and our midterm guidance. And really the point that we made for the important piece is that our growth comes from a balance of profitable growth with the right customers, volume perspective, gross margin expansion and OpEx and we expect that algorithm to really continue through 2017 and 2018.

Pietro Satriano: Anything I'd add John, we have the question before and I appreciate the desire for a more specificity and we'll make some of these conversations, a lot easier, but hopefully you can appreciate our desire to keep some of this, some of the actual quantified metric more senses to us. My hope is the specificity and the color that we provide you on each of these initiatives gives you a sense of the importance of these gives you a sense of the impact of the business and how we're managing and approaching that and happy to talk about some of those -- some of that color without getting into the specific numbers.

John Ivankoe: Yes. And even at your beginning we talk about it qualitatively has been helpful and then finally if I may -- we obviously read a lot about different warehouses kind of being designed robotically and different types of delivery systems, what -- have you that can be more efficient in the future than they are today. Is it the appropriate than you begun to talk about really what that the U.S. Foods delivery mechanism could look like or beginning to look at some of these next generation task.

Pietro Satriano: We're definitely starting to explore what the next generation looks like, but given our network of 60 DCs, the capital investment and also ensuring some of these technology that you are talking about, we haven't necessarily seen operate with the kind of scale on short lead times that we have in our industry, so the way we think about the roadmap for a distribution and supply chain there is kind of a short to medium term opportunities from the introduction of just basic process improvement as represented by lean and continuous improvement and then a longer term roadmap of technology and so again having a balance of short-term and long-term improvement which we rely on different levers -- different numbers.

John Ivankoe: Okay, thank you guys.

Pietro Satriano: Thanks.

Operator: Your next question comes from the line of Edward Kelly with Credit Suisse. Your line is now open.

Edward Kelly: Hi guys, good morning.

Just a quick follow-up to start on the first quarter comparison, when you say sales and volume a little softer, do you mean that sales and volume might be below the full year forecast or at the lower end of the full year forecast, how should we think about that?

Dirk Locascio: Good morning, Ed. This is Dirk. So I think what -- we wanted to callout the first quarter because just anytime we see sort of a quarter that's going to be outside of our full year guidance to really try to be transparent about what we're expecting. We will see some softness, I think in across and they would be make it at the lower end of the range, but it's really that mix of the weather along with the way the New Year's holiday fell this year compared to a year ago and then just some other practice including timing of some of one of our initiative benefits that combined for that 200 basis points, but overall we feel good about our volume trajectory and our volume performance with our right customer type this year.

Edward Kelly: Okay.

And then just a follow-up on cash taxes, after 2017 or where your cash taxes being more normalized?

Dirk Locascio: They should be much closer, in fact the effective tax rate and cash taxes should be much close, yes.

Edward Kelly: And then just last question is for Pietro, you've done a good job of layering in acquisitions, you did mention something about the pipeline being good or robust. Could you just maybe talk a little bit more about that what you are looking for, how competition for deals has been shaping up and how to impacting what you have to pay?

Pietro Satriano: Sure. The strategy on M&A is pretty enduring, so we target at the center the bulls eyes, as we've often said is, lot of mine distributors with the high mix of independent restaurants. All American that deal last year Dirk Locascio hit that bill? And then the second rung outside the bulls eyes capabilities and produce as we continue to grow our penetration of those categories where we are now offering to grow, the Freshway acquisition last year and the Save On acquisition last year kind of fit that bill.

And so those are the two times of targets that we've identified. And our M&A team is cultivating relationships with a large number of potential acquisition prospect, some are constant and some geographies more than others because it's about strengthening the geographic footprint. In terms of first part of your question in terms of competition, it really varies by deal this is where the very disciplined approach we have to identifying what's the best prospect, what the second best prospect in the geographic area combined with the nurturing of these conversations I met someone yesterday who are contemplating an acquisition with them we've been talking them for a year. Those relationships believe or not really help support a very disciplined approach to making sure we have -- we paid the right prices.

Edward Kelly: Thank you.

Operator: Your next question comes from the line of Shane Higgins with Deutsche Bank. Your line is now open.

Shane Higgins: Yes. Good morning, I just wanted to get a sense of how -- how you guys are thinking about gross margins in 2017, should we expect them to be up kind of 40 to 50 basis point range that you guys have achieved over the last couple of quarters.

Pietro Satriano: I think from a gross margin, many initiatives and focus areas that we've talked about from a customer mix, private brand, growth, cookbook pricing et cetera, all those drivers and levers continue to be an effect and we do continue to expect to improve gross profit year-to-year I think and we haven't guided on specific improvement but we do expect and continue to improve gross profit.

Shane Higgins: Okay, thanks. And as inflation starts to comeback into the business in the back half of the year, how should we think about that in terms of how it impacts margins in gross profit dollar growth?

Pietro Satriano: I think that's the best way to think about it is in our business is -- it is a modest headwind, one of the deflation, it becomes the modest tailwind as we go forward. Obviously, a severity of which it happens and the categories, which should happens can have different impacts, but we've got a good approach to managing through the impact of deflation or inflation to mitigate the impacts. And so I think when we think about our earnings guidance of the 7% to 10%, it really doesn't impact that significantly no matter if it's inflation or deflation because it's more of our -- we determine a self health plan, I think that we action it or to improve.

Shane Higgins: Okay, great.

And then just a quick question on your CapEx, looks like it's about inline and about 1% of sales. Could you just give us a sense of kind of how that breaks down maybe between IT, maintenance, new facilities, et cetera.

Dirk Locascio: Sure, it is about that 1% of sales and so we spend across it's -- of a good portion of it ends up supply chain related and then we do make meaningful impact was probably in different years that can vary, but it can be call it two-thirds supply chain related in referred IT, although I can say that it can vary, but I thought supply chain meaning it can be facilities, maintenance, and the LIFO across those areas.

Shane Higgins: I just want to get a sense of how you guys need the distribution center capacity today?

Pietro Satriano: So we do -- we do have expect we have two expansions going on right now, but one of the things from a capacity perspectives, we have a pretty rigorous review process of our capacity and as we talk about profitable volume growth that's terminology is specific because for us our growth is not the same. So we have a regular process where we will go through and look at our customer portfolio and those customers are just profitability is not at the level that we need them to be or we'll work with the customers and/or we do likely did on the two that we call out earlier this year what we'll choose this strategically exit those.

And then, we'll also balance capacity across our network with the benefit of our model of just delivering to the right customers out of the right center. And then, I can say we'll add capacity to what make sense through internal CapEx and/or some of our M&A comes with capacity as well so that the Dirk's example of that Pietro mentioned is a good example of that. So on a one through we feel those are the guidance we provided in that approximately 1% of net sales contemplate the growth that we've guided for the near-term.

Shane Higgins: Thanks.

Operator: Your next question comes from the line of Ajay Jain with Pivotal Research Group.

Your line is now open.

Ajay Jain: Yes, good morning. I just wanted to get some more color on your corporate restructuring if you could comment, I think that process is suppose to ramp-up in the current quarter or so, is there anyway you can quantify what the net benefit was.?

Pietro Satriano: We haven't quantify the benefit Ajay it is quite -- it is significant in terms of where we are in that process. What we talk about is two phases, the first phase which is will be completed in the first quarter I had to take as lot of it is largely done. It's really about simplifying the organization in both Rosemont and Tempe are two corporate headquarters.

And it has to do with the levers you'd expect like expand some layers. The second phase is around taking a more horizontal view of certain large processes like order cash, like hard to retire and doing that better job of leveraging shared services and through the introduction of similar lean, continuous improvement tools and providing more about holistic view of some of those horizontal processes. We see an opportunity to further improve productivity that was one of the two major initiatives I talk about in terms of the ramp of phase they are really just starting to be steady.

Ajay Jain: Okay. Thanks for that.

So I understand you can't breakout the restructuring benefits in dollars, but along the same lines, give a percentage of the total cost savings that were realized in Q4 and how that ramps up in Q1?

Pietro Satriano: Yes. We haven't done that either for the same reasons we haven't disclose other similar types of quantification initiatives.

Ajay Jain: Okay. And I had one final question I know that you've called out the calendar shift in Q1 based on whether comparisons and the holiday timing. But I think you are also cycling the sales force reorganization from last year that I think I had a pretty sizable benefit.

So is that a headwind or how much of a headwind is last year's reorganization if you can comment, thanks.

Dirk Locascio: This is Dirk. The sales force work that we have been doing is not a headwind, it was not a headwind. I think in the first quarter it's really at this around that -- abnormally mild winter last year that we saw in main parts of the country. And then, the fact is this year that's first week of January included a holiday that many businesses are closed that didn't a year ago more schools are off et cetera.

And then, like I said to a much lesser extent just some other timing factors with our initiatives.

Ajay Jain: Okay. Thank you.

Dirk Locascio: Thanks.

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

Your line is now open.

Robbie Ohmes: Hi guys, thanks for taking my question. Actually just two quick ones, the first can we get a bit of an update -- any update in the health and hospitality part of your business, both in terms of any kind of change in trends or how the stability looks there and maybe how you're thinking about M&A pipeline? And then, my second question is, just you started to see gas prices go up a little bit, how are you guys thinking about potential cost pressures if diesel keeps moving up and remind us how surcharges and such work for you guys? Thanks.

Pietro Satriano: Okay. I'll let Dirk to answer the gas price question.

With respect to healthcare and hospitality as I mentioned earlier the latest outlook from Technomic for those two particular customer types is very consistent with their outlook last year and what is in our prospects in that chart if you get the numbers but they are both in the 3% range or so. In terms of our pipeline in those two -- when you talk about M&A I presume you met the acquisition of new customers, they don't have any M&A focused on those particular segments as I explained to I think it had add earlier. Our pipeline is good, the sales cycle and with larger customers tend to be longer and as we look lumpier. But we are pleased with our pipeline, I think I'd mentioned before the acquisition or the addition of Brookdale Senior Living has provided some solid references for us as we go out there and talk to other potential customers in that space. Dirk, do you want to talk about the impact of gas prices?

Dirk Locascio: Sure.

So for 2017, we have a pretty significant portion of our fuel locked in already, we try to look out a year-to-year and half in advance and opportunistically we'll lock that in. So that mitigates a significant portion of the cost increases risk for us this year. As you know if we have a large number of our customers that do have fuel surcharges in place, so as fuel begin to increase we apply those surcharges which mitigates a significant portion, so as we think about 2017 we feel good with our guidance based on what the forward curve looks like from a fuel perspective.

Robbie Ohmes: Fantastic, thanks very much.

Dirk Locascio: Thank you.

Operator: Your next question comes from the line of Kelly Bania with BMO Harris. Your line is now open.

Kelly Bania: Hi, good morning, hopefully you can hear me okay?

Dirk Locascio: Yes, good morning.

Pietro Satriano: Yes, good morning, Kelly.

Kelly Bania: Good morning.

I was wondering if you could quantify either in dollars or percentages, just the impact from some of the plans strategic exits on the team's business. I think we're pretty much through the majority of that now, but as you look back at 2017 just any quantification of the dollar impact on sales and profitability and I guess related to that as you think about kind of the chain side of the business that continues to challenges there. How do you feel about that portfolio -- your portfolio of chain customers right now and is there any thinking of maybe some more strategic exits and just how do you feel about that?

Dirk Locascio: I'll start. This is Dirk. I think from a chain perspective just to clarify you are correct we fully lapsed those access by the end of the third quarter.

So the fourth quarter is a good run rate outside of those exits. We had lagged though in the first nine month of the year. As far as -- on the chains as we commented before, I think for us it's about opportunistically pursuing chain business and make sure, it's the right customers for us at the right profitability and product assortments, mix, and so we are going to continue to be very selective on that. And although we call out those two specific ones, that's my comment earlier was, we have a regular process where we are making decisions to move on from customers just those two were so significant, we have called them out separately. But that's just part of our ongoing testament in this process.

I think from a chain process -- chain outlook, Pietro, you can add on. But, one of the things we see is, so there will be overall industry data that you have all seen. But even when we look across our portfolio, it's really more a content specific and so some concepts that we have that are growing faster than other concepts. It's mixed and in our case, we are going to be smart about those that we work with going forward.

Pietro Satriano: The only thing I would add Kelly is, so even -- the reason we call those out, I guess in 2015, as they were so significant.

There was a constant reevaluation of the contribution of smaller customers and in fact in 2016, I can tell you is, we did exit some customers but we have placed them with customers who are higher contribution, number one. Number two, there were various -- if we are less satisfied with the contribution of a particular customers, there were a number of levers that we have in addition to simply exiting a customer. Product mix is an example. The importance of our private brands to that product mix, the economics of distribution. So, there are -- as we talk about reevaluating or valuing our portfolio of customers, think about the number of levers we have to continue optimize that beyond, beyond et cetera.

Kelly Bania: Great. That's very helpful. Thank you.

Operator: Your next question comes from the line of Karru Martinson with Jefferies. Your line is now open.

Karru Martinson: Good morning. When you guys look at the softness in the first quarter, how much do you feel would be some modest to rough disruption from the initiatives that you got underway. Would any of that carry into the second quarter?

Pietro Satriano: None of that can really. As Dirk said the softness in the first quarter, the three factors he talked about. There is a little bit of the phasing as well, that's a minor factor he talked about.

But, one of the things we tried to do and that's what we try to do with Slide 8 in the deck, take a balanced view right so as multiyear initiatives become settled then we wear on another initiative. And we have a very tight covenants here, every second Tuesday, the management team and whoever is responsible for particular initiative makes --we take stock of how that's going any different decisions we may want to make as a result of our progress against milestones. So, I would say very little penny impact on two one is a function of how these initiatives are being rolled out. Obviously, if we were to find out one of these initiatives were to take little longer than we -- otherwise, why would we do that because that's the right decision for the business.

Karru Martinson: Okay.

And just from a big perspective, how much should we be thinking about in terms of cash cost for the initiatives going forward here?

Dirk Locascio: This is Dirk. We haven't provided specific guidance on the cash elements of it. But, I think when you think of audit in the context of our historical results, there is no significant anomaly or large unusual impact that I would call out for this.

Karru Martinson: Thank you very much guys. Appreciate it.

Dirk Locascio: Thank you.

Operator: I think there are no questions at this time. I will turn the call back over to the presenter Pietro Satriano for closing remarks.

Pietro Satriano: Thank you. So, thanks for all the questions.

Really appreciate the time and the engagement. And so, I just want to thank everyone for your participation today. And hopefully, you can see from a business perspective, we were very pleased with the performance of the business in 2016 and we believe we are heading into 2017 with very good momentum. So thanks for tuning in. And we will be talking to you on our next call.

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