US Foods Holding Corp (USFD) 2016 Q2 法說會逐字稿

Good morning. My name is Chris and I will be your conference operator today. At this time I would like to welcome everyone to the Q2 2016 performance review conference call.

(Operator Instructions)

Thank you. Melissa Napier, SVP Investor Relations, you may begin your conference.

Thank you. Good morning everyone. Thanks for joining us today for our second-quarter FY16 earnings call. Pietro Satriano, our CEO; and Fareed Khan, our CFO, will provide a business update and speak about our Company's performance during the quarter. We will take your questions after Management's prepared remarks conclude and we ask you please limit yourself to one question.

During our call, unless otherwise stated, we are comparing our second-quarter and first-half results to the same as FY15. Earlier this morning we issued a press release regarding our second-quarter results. That release along with today's presentation slides can be accessed on the Investor Relations page of our website at USFoods.com.

Before we begin, in addition to historical information certain statements made during the call are considered forward-looking statements. Our actual results may differ materially on those expressed or implied in those statements. Relevant factors that could cause our results to differ materially are contained in this presentation and our report filed with the Securities and Exchange Commission, including our registration statement on form S-1 as amended.

Our slides and our press release contains certain non-GAAP financial measures and reconciliations to the most comparable GAAP financial measures.

Now I will turn the call over to Pietro.

Good morning, everybody. Welcome. Thank you for joining us. Welcome to our second-quarter earnings call and our first call since we began to trade as a public company under USFD on May 26.

Page 3, by way of headline we are in a very good quarter growing an adjusted EBITDA for the quarter by 10% and our just EBITDA growth year to date is 17%. This was driven by strong growth within the independent restaurants, the impact of the three acquisitions we completed in the first half, and good gross profit and operating expense performance.

Before I get into some of the key drivers behind our EBITDA performance with the particular emphasis on independent restaurants, I would like to spend a few minutes reviewing three slides which outlined the key elements of our strategy. For many of us this will be a refresher and (inaudible) key elements of our strategy that we will report our results in this and in future calls.

Slide 4. This reminds you that we are one of two players in the food services distribution industry and we bring considerable scale to the fragmented industry. It is this scale that has allowed us to invest in the product and technology innovation are part of our Great Food. Made Easy. strategy and have helped fuel our growth with independent restaurants. The fragmented nature of the industry has also provided a number of very attractive M&A targets and Fareed will comment on our progress on that front later in the call.

On page 5, our strategy of Great Food. Made Easy. is informed by this chart that depicts the upfront attractiveness of various customer groups. And while we serve all of these groups of customers our primary emphasis is on independent restaurants which has a greater appetite for our differentiation strategy and which present a more attractive margin profile. As you will see in a minute when we review the highlights from the quarter, our top line growth has been driven by our market share gains within independent restaurants.

Our other focus is on hospitality and healthcare where we have some technology and other historical advantages. As demonstrated by our recent signing of Brookdale, the largest senior living facility in the country with over 1000 communities just signed at the end of the last quarter, we are beginning to refill the pipeline following the slowdown caused by the merger. And last our decision to exit a number of very large, but lower contribution national chains in the last year, continues to be a drag on the topline growth.

The way by which we went share in particular within independent restaurants followed by upsell and healthcare is illustrated on page 5 by the strategy pyramid. On page 6, I apologize. Which is at the heart of our Great Food. Made Easy. strategy and informs all resource and capital allocations decisions.

Let me touch on a couple of highlights from the recent quarter. Page 7. On the product innovation side and in support of our win with food part of the strategy, in the June edition of the Scoop we launched 26 products under the Serve Good sub brand, these products met one of two pillars. Products that are responsibly sourced, such as our Harbor Banks Wild Caught Argentine red shrimp and our Chefs Line Organic Sprouted Grains Bread, or alternatively products that contribute to waste reduction, such as our Monogram All-Purpose Flax Towels or Monogram recyclable cups.

This scoop dedicates the sustainable products has more than met our expectations. The percent of customers to purchase at least one item from the Scoop over the period since they launched is 48%, which compares quite favorably with a 57% trial for all of 2015. This level of customer penetration illustrates that sustainable products are now mainstream effort and based on the success we will double down our efforts in that realm.

On page 8, on the technology side and in support of our differentiate with an easy customer experience part of the strategy, the percent of sales from independent restaurants that comes from our e-commerce platform is now 50%, up from 42% where we ended 2015. Two factors contributed to the continued growth and e-commerce penetration.

The first is a continued focus on adoption. Marketing the benefits to both our sellers and our customers.

The second is continued enhancements that keep our platform at the forefront of the industry. In the past quarter we enhance a level of personalization for customers transacting on our e-commerce platform.

For example, customers can now see personalized product recommendations when they order online. These recommendations are driven from our proprietary cookbook analytics and tailored to each chef or operator.

This compliments another enhancement where our sellers can now post notes for their customers to see when they order online. This not only further personalizes the online experience for our customers, it makes our sellers even more wedded to this great productivity tool.

The successes associated with our Great Food. Made Easy strategy, explain in part our continued growth with independent restaurants, which we show on page 9. For the quarter growth was 6.8% on an absolute basis and 4.6% on an organic basis.

We estimate that our growth rate is approximately twice the market, in addition to being fueled by our Great Food. Made Easy. strategy there's also our fuel by a number of markets doing fundamentals very well. Our focus in the coming quarter is on improving those markets that are growing at or below the industry.

When we normalize our first-quarter growth with independent restaurants where favorable weather and M&A and when we normalize our second quarter for modest labor disruption that we experienced, growth in the second quarter was close to what we experienced in the first quarter. Fareed will talk about the various drivers of gross profit, so let me spend a couple of moments updating you on one of the most significant contributors to our improvement in the administrative line with an operating expense.

On page 10. By way of a reminder, last August we announced moving from the single site approach to fuel management that is common to our industry to a multi-site approach to field management. As a result we went from eight regions to five regions and from 60 divisions to 26 multi-site areas. This allowed us to run the business in a more cost-effective fashion in two ways. We dramatically reduced the number of leadership teams in the field which was implemented in Q3 of 2015. And we consolidated three back office functions, namely HR, finance, and merchandising to a multi-site model.

As you can see from the attached timeline on the right we are nearing the completion with our last two regions. Once the [plan] is complete, which means people will be doing the work they have been trained to do in their new roles, every market will be able to bring a greater focus on sales execution.

Area presence in those regions that went first will tell you that the new model is working well. That has allowed them to upgrade the talented many positions, and is allowing them to uncover more opportunities for best practices as these new teams mature.

Let me now turn it over to Fareed, our CFO, for more detailed walk-through of our P&L.

Thanks, Pietro, and good morning everyone. Our strong second-quarter results show that our Great Food. Made Easy. strategy is working which you will see as I go through our financial performance. We saw solid momentum in our sales to independent restaurant customers, gross profit benefited from positive customer mix, our growth in private label products and from merchandising initiatives that lowered our cost of goods.

We also posted strong operating expense performance,, this reflected ongoing cost reduction actions, lower restructuring costs and planned reductions that are transformational investments. Adjusted EBITDA grew 10.1% in the quarter and 17.3% in the first half.

We completed the acquisition of a produce specialty distributor Freshway during the quarter that brings important capabilities and distribution assets. Lastly, following our successful IPO in May we made important and positive changes to our capital structure, proceeds from the IPO which exceeded $1.1 billion were used for debt reduction, and we took several refinancing actions immediately following the IPO that significantly decreased our interest expense and extended debt maturities.

Now let's take a closer look at our results starting with the second quarter ended July 2, 2016. Total case growth in the second quarter increased 1.2% over the prior year. Organic growth was flat, as Pietro mentioned, but we had solid growth with independent restaurant customers that was offset by planned national chain exits.

Net sales for the period were $5.8 billion, down roughly 0.6%. Sales trends reflected the volume dynamics I just mentioned. Sales growth was also impacted by deflation, particularly in beef categories and by product mix changes primarily as a result of lower chain business. Roughly two-thirds of the rate per case decline in sales was deflation and the other one-third related to product mix changes from the national chain exits.

Gross profit grew 4.1%, or $41 million to $1 billion in the quarter. The percentage of sales gross profit increased 82 basis points to 17.8%. Customer mix, private label brands and merchandising initiatives contribute to a solid result. And sales of our private brands increased 90 basis points over the prior year to 33% of total sales.

Excluding the impact of LIFO gains from product deflation, adjusted gross profit increased 3.2% or 66 basis points over the prior year. Our operating expenses were $936 million in the quarter and this result decreased of 3.6% or $35 million from the prior year. Restructuring costs were $13 million in the quarter, down from $38 million a year ago and transformational investments of $6.5 million were down $4 million from the prior year.

Also included in our operating expense for the quarter was a $31 million one-time consulting and management fee which was paid to our private equity sponsors as part of the IPO transactions and our agreement with them. Also impacting the year-over-year differences was $41 million in merger-related costs in the prior-year quarter.

Distribution, selling and administrative cost increases were held to less than 0.32% in dollar terms, this reflected several cost reduction initiatives that we implemented over the past year and favorable fuel rates.

As Pietro mentioned, during the second quarter we experienced intermittent labor disruptions primarily related to the closure of our Baltimore facility. These sympathy strikes occurred in several locations during the quarter some lasting just a few hours, while others extended several days. In situations like this our top priority. is always to serve the needs of the customer and this can mean incurring higher costs as we of bring in employees from other facilities to fulfill customer orders during the strike and also from shipping orders from neighboring facilities over greater distances.

Adjusted operating expenses for the quarter were $767 million, which were up 1.1% or $8 million from the prior year. Operating income increased $76 million from $22 million from the prior-year to $98.4 million. Adjusted EBITDA was $260 million for the quarter, as I mentioned this was 10% higher than the prior year, an increase of $24 million. Adjusted EBITDA margins were 4.5% of sales, up 44 basis points from the second year quarter.

Interest expense for the last three months were $70 million which is comparable to the prior year. We reported a net loss of $13 million for the quarter, equal to $0.07 per share versus net income of $165 million or $0.97 per share this time last year. Much of the difference came from incurring $42 million in debt refinancing charges in the current quarter and the $288 million acquisition termination fee we received last year.

Our first half results reflected many of the dynamics I just covered. Case volumes rose 1.8% with organic case volume up 80 basis points. Independent restaurant case growth was 7.3% of which 5.5% was organic. Net sales at $11.4 billion were flat, while contributions from acquisitions increased net sales by 1%.

For the year to date private label products represented approximately 33% of net sales, an increase of 80 basis points. Gross profit grew 3.7% over last year's first half to $2 billion. And adjusted gross profit increased $76 million, or 4% from the prior year.

Adjusted gross profit margins excluding the impact of LIFO changes, expanded 66 basis points to 17.3% of sales, that improvement came from higher volumes, a favorable customer mix, private brand growth and merchandising initiatives. Operating expenses were down 2.5%, to $1.8 billion. We benefited from lower merger-related expenditures, lower restructuring investments, decreases in fuel prices and the impact of cost initiatives. Sponsor fees partially offset these gains.

Adjusted operating expenses for 6 months were $1.5 billion, an increase of 58 basis points. Adjusted EBITDA reached $463 million for the year to date, up $68 million or 17.3% over the prior year. And adjusted EBITDA margins were 4.1% an improvement of 3.5% for the first half of 2015.

Year to date our interest expenses were $141 million comparable to last year. All of these factors led to a first half net loss of $81,000 or breakeven on the per share basis versus net income of $172 million or $1.01 per share.

During the quarter, we acquired Freshway Foods a specialty food service distributor in Ohio focused on produce. Freshway brings leading produce capabilities, a value-added product offering and highly complementary distribution network. This is the third distribution acquisition we have done since late December in addition to DIERKS WAUKESHA and CARA DONNA. All of the acquisitions fit well with our strategic objectives and we are pleased with both the financial performance of these acquisition as well as the integration progress into our business.

Here is an update on our capital structure and year to date cash flow. We successfully completed our initial public offering on May 26 which was priced at $23 per share. We directed the entire $1.1 billion of IPO proceeds toward debt reduction.

In June, we retired $1.3 billion in senior notes, we also entered into a series of transactions to refinance our $2 billion senior secured term loan and retire the remaining portion of our senior notes. We replaced this debt with a new $2.2 billion senior secured term loan and issued $600 million in unsecured senior notes. We also intend to repay our $472 million commercial mortgage backed security facility during the third quarter.

The refinancing actions I mentioned extended our debt maturities and lowered our interest rates. Net debt at the end of the second quarter was $3.8 billion. Our adjusted excuse me -- our net debt to adjusted EBITDA for the trailing 12 month basis dropped from 5.3 times leverage before the IPO, to 4 times leverage at the end of the second quarter.

Free cash flow from operations for the first half of 2016 remain strong, increasing $36 million to $301 million. CapEx for the first half totaled $67 million, with an additional $64 million of capital lease additions. We maintained $1.4 billion in available liquidity with born capacity under our facilities and restricted cash on hand.

Now let me briefly outline on how we expect to perform in 2016. First there are two considerations to keep in mind. First, we had a very strong first quarter, reflecting momentum returning to the business in a challenging operating environment we were in during the merger uncertainty of the prior-year.

Second, our fourth quarter 2016 reporting period will have 13 weeks, while it's 2015 comparable will have 14 weeks. This difference represents roughly 400 basis points in EBITDA growth in the quarter or 120 basis points for the full year. With that backdrop here's your outlook.

Net sales will be roughly flat, reflecting growth of independent restaurants, offset by planned exits of national chain customers and we expect to face modest deflation for the full year. Independent case volume should increase 6% to 7% over FY15 and adjusted EBITDA should grow between 8% and 9% likely at the higher end of that range and excludes any additional acquisitions that we may make.

Recent refinancing activities will reduce second half interest expenses by approximately $50 million to $60 million, compared to the prior-year. Second half interest expense will be in the $85 million to $95 million range. Cash CapEx are budgeted to range between $190 million to $210 million and in addition we expect capital fleet leases of approximately $80 million.

Depreciation and amortization should be between $450 million and $425 million. And we are not providing tax guidance at this time as our net operating loss begin to roll up and our tax valuation allowance reserve quarterly tax rate will be a bit choppy for the remainder of the year, so we do not believe those numbers are useful at this time.

Now I will briefly touch on our midterm outlook, this has not changed since we communicated these objectives during the IPO roadshow. Total unit growth should be 2% to 4%, this will reflect strong growth to our target customers and continued optimization as we address lower profitably business. We anticipate adjusted EBITDA margin growth of 7% to 10%, that will be supported by improved customer and product mix and private brand expansion, coupled with increased operation productivity. The lower end of this range would come from organic growth, with the higher end reflecting folding acquisitions very similar to those we have been making this year.

Solid cash flows will enable us to make CapEx investments in the business and target acquisitions. We also plan on continuing to reduce debt with the objective of achieving a leverage ratio in the 3 to 3.5 times range and we expect CapEx to approximate 1% of sales over time.

With that, Pietro, let me turn it back over to you.

Thanks, Fareed. Before we open for questions, I want to make a couple of comments on a number of executive changes. There are three I want to talk to.

First is Greg Schaffner who is Executive Vice President of Field Operations who has been with us 42 years, will retire at the end of the year. Greg accepted my invitation to stay on the next year to oversee the implementation of the new field model. And with that heavy lifting behind us we will revert back to the structure we had in place over a year ago which combined field operations with local sales.

Owen Schiano who is the -- leads our National Sales business and has been extensively involved in the deployment of the new field model, just like Greg, has been commuting extensively in the past year, so he has accepted a position closer to home. Owen will be replaced by Steve Guberman who brings 25 years of experience in our Company (inaudible) division president and extensive experience due to his time in sales and merchandising.

Lastly as we closed on Friday, Juliet Prior our General Counsel has elected to pursue a new challenge after nearly 12 years with the Company. I am very appreciative of Juliet years of service and the fact she leaves behind a terrific team. Juliet will be with us until the end of September to ensure an early transition.

With that, we are going to open it up for questions.

(Operator Instructions)

Vincent Sinisi, Morgan Stanley.

Good morning.

I wanted to ask more along the lines of the big topic that we are all getting of course is deflation. And it seems like you guys are continuing to manage through it well. But just wondering -- by our calculations it was around 3% deflation give or take this quarter.

And what you folks are seeing from a category standpoint if anything is changing in one direction or another, and then also what you are seeing from a competitive front and your reactions to that. That would be helpful.

Sure. It's Fareed. The big story in the quarter was really beef deflation across a lot of the categories. That was the primary driver and that was about 100 basis points of the difference between our case growth and our sales growth.

The other factor that played in for us was customer mix, so some of the chain exits were hamburger chains and they pulled a higher rate per case in terms of sales. That mix was also about 50 to 60 basis points. But beef was really the story in this quarter.

Okay. And Fareed, just on that quickly, have you expectations going forward as we get over the next couple quarters here?

I think we expect continued deflation through the balance of the year, but we do expect it to moderate. And I think the commodity categories are going to be choppy like we have seen. I would say six months or so ago we thought we might see more inflation coming back in the tail end of the year. That does not look like the case from where we sit today.

Okay. Very helpful. Best of luck, guys.

Thank you.

John Ivankoe, JPMorgan.

Hi. Thank you. First housekeeping question and then my question if I may. Firstly on the housekeeping question. Your fully diluted share outstanding post IPO assuming that you post income in the quarter, in other words what you expect a third quarter share count to be fully diluted? I'm sorry for such a basic question.

What is the number? 190 million.

And that is the post IPO fully loaded number with all options that we should be thinking about, or was that the FY16 number?

That is the fully loaded number.

Okay. We will look at that. In your FY16 outlook it says it is -- I think it says it's 204. So again, I want to make sure that everyone is on the same page in terms of what your going forward share account is.

(Multiple speakers) I misspoke. It's 204 million shares.

That is the full year number? So that would -- wouldn't that assume part of the year you're private, part of the year you're public? I am looking for a run rate number if you have one.

John, that is the run rate number. I will follow up with you after the call.

Okay, perfect. The question -- obviously you guys did 17% or so EBITDA growth in the first quarter. You are guiding high end 8% or 9% for the second half. Obviously understand that you guys had an extra week in the fourth quarter of 2015.

But if we were to think about that, that very significant change in trend between the first half and the second half, can you give some more color in terms of what may be causing that trend? And why the second half trend does not more reflect kind of your medium-term outlook which I think is 7% to 10% with the second half of 2016 obviously being much lower than that?

Sure, John. I think what is probably most helpful is if you look back to prior year of 2015 and recall that for the first half of last year we were in -- [while] the merger uncertainty, very challenging topline and a challenging operating environment, and so two things happened. One, we were comping pretty difficult prior-year quarters in the first half of this year, and we were also seeing momentum coming back pretty strongly in the business. And then in the first quarter on top of that, we had very favorable weather which I think everybody benefited from.

So I think the first quarter was clearly a strong rebound. I think Q2 reflects a lot of the positives coming through, and in the back half of the year what we are seeing is our [new] exit rate adjusted for the 53rd week is pretty close to our midterm guidance. We have not built in any additional M&A into the outlook for the second half.

Okay. Thank you.

Stephen Grambling, Goldman Sachs.

Good morning, Stephen.

Hi. Good morning. This is a bit of a follow up to John's last question, but your results continue to outpace what has been reported by many of the publicly traded restaurants. What do you think is driving that delta?

Stephen, this is Pietro. Are you referring to -- with respect to independent restaurants? I guess, you really have to look at the three ways I talked about in my comments. Within independent restaurants we believe that our outpacing of the market is driven by our strategy, primarily our technology innovation, our differentiation innovation; and we have markets that are performing very well and just executing on the fundamentals very well.

With respect to healthcare and hospitality we are growing -- we would say probably we're getting back to growing at the market as we refill our pipeline with prospects that really slowed down over the course of the merger uncertainty. And as you can imagine those lead times are longer. And then lastly, with respect to large national chain customers, we are [growing] below the market as we continue to prune those customers or accounts that we think are not big contributors to our bottom line.

Thanks. Another housekeeping question. What is the expected EBITDA contribution from the Freshway acquisition in your guidance, and what are you seeing in the M&A environment more broadly, or where do you think there is the most opportunity?

I don't know if I want to comment on the specific EBITDA from Freshway, but it is a -- the profitability of that business is in line with the typical M&A acquisitions that we do. I would say generally we feel good about the pipeline.

We have got a team that is actively cultivating relationships in the marketplace. We are pretty selective about the transactions that we do, and they are very in line with the strategy looking for strong businesses, typically local or regional, strong position with either independent restaurant or that bring specialty capabilities whether it's center of plate or produce.

And so Freshway brings very strong produce capabilities. Their distribution network is also very complementary in that part of the country, and we will leverage that with our broader produce strategy. We felt good about the pipeline in the environment, but we are going to continue to be very selective about getting good transactions.

Sounds good. I will jump back in the queue. Thanks so much.

Thanks, Stephen.

Jon Heinbockel, Guggenheim Securities.

Hi guys. This is actually Steve Forbes on for Jon today. Maybe expanding on the robust case growth you're seeing within the independent restaurant. Can you discuss the components of this growth and the 6% to 7% guidance for the year? Meaning, are you picking up new share or are your existing customers experiencing above trend growth and you are participating in that? Is there any way to break that down into the components?

The 6% to 7% includes M&A as we talked about. With respect to organic, it really comes from both the addition of new customers and growing existing customers, and some of that I am sure is due to the market being -- performing well.

But also, a lot of that is coming from a gain in share, as I mentioned to Stephen as a result of our strategy, and our technology, and our innovative products. We do not disclose how much is coming from existing versus new accounts.

Maybe looking at the revenue guidance for the back half, backing into it, it does suggest an improvement in the top line. Is there anything to call out there? Is it cycling out some of the national accounts rolling off or anything else to specifically call out?

You are right. That is a factor. We do -- we will start to cycle some of those chain exits partially in Q3 and then into Q4.

We do expect continued momentum with independent restaurant customers, and then some of the other areas growing more in line with the market. I think the biggest factor will be cycling through some of the larger discrete chain exits that we discussed.

Thank you.

Edward Kelly, Credit Suisse.

Good morning, guys. Good quarter here for your first [out of the box]. I wanted to follow up on the question on the guidance. You obviously had a great start to the year.

If we calculate EBITDA growth in the second half, even excluding the impact of one less week, it looks to be around [4%]. The topline growth is great, so -- and I know the full-year outlook is very much in line with the midterm guidance. I'm just trying to figure out why the slowdown in the back half, is it just conservatism on your part because obviously there is always moving parts to the business?

You are only halfway through the year, and do you think about it more holistically about full-year guidance relative to midterm guidance, that is a great way to start? Or is there something specific about the back half that would cause EBITDA growth to be a little lower than what your long-term to medium-term guidance would be?

I say nothing specific other than the 53rd week comparisons that I discussed earlier. I think the main moving part to the strategy will be to continue to execute events. The levers, we were having good success on that and we want to continue that momentum.

I think the exit rate is in line with our midterm guidance I talked about, and that's probably where we will be. And I also said we will probably be at the higher end of that guidance range that I gave you.

One quick follow up for you on the labor issues. Is it possible to quantify the impact that it had on the quarter? You mentioned some impact on topline, probably some impact on loss. Then just general color on the impact that it potentially could have on your business in the back half of the year, would be helpful.

I will take the first part of that. We have got a line of sight of what the impact was in terms of cost. I think we really don't want to get into specifics around what that was, but I will say that it did have an impact on topline fairly modest because we really pulled out all of the stops to make sure that our customers continued to get served.

And in those efforts we did incur additional expenses to try to do that. But overall the most important thing was to keep our customers with product and we felt good about that. The big part of the disruptions stemmed from the closure of the Baltimore facility, and that is now behind us. But at the same time we continue to be in discussions with various collective (inaudible) as a matter of course, and that is normal for our business. And I will turn it back over to Pietro for any additional color.

I think, Fareed actually answered the question. Our focus was on continuing to serve our customers, and so the impact was more on the cost side than on the revenue side. In terms of your question about the back half of the year, I will point back to our history of being able to negotiate with our partners without any disruption in the last five years.

Baltimore made that a little bit an anomaly this year and I think once we have Baltimore fully behind us -- so we have a closure agreement with the selectors, which [goes through about] half of the workforce. We accomplished that in Q2. Once we have a closure agreement with the drivers, which we are looking to accomplish in the near future, then that uncertainty goes away.

Thanks, guys.

Zack Fadem, Wells Fargo.

Hi. Good morning. On your topline guidance for flat year-over-year growth can you size up a little bit the impact of case growth on an organic bases versus M&A contribution versus inflation/deflation?

Let me take some of the pieces. We expect to see case growth. I did mention that we will be lapping some of the chain exits, which will help raise that in the second half.

We also expect to see deflation moderating, not -- we don't anticipate the levels that we saw in the second quarter, but consider that monitoring as the second half the year progresses. And we are not in that guidance factoring additional M&A that could be upside to it, in the sense we continued momentum with independent restaurants. Those are the main moving parts.

Just to dig a little deeper on the M&A contribution, I guess are we talking like 50 to 150 basis points? I am just trying to get a sense of the incremental step up in the back half of the year from the second quarter.

We do not have any M&A in there. They are always unpredictable, right? We do not have -- we've been fortunate to get some good deals done in the first half of the year, but essentially it is continuation of IND -- or independent restaurant growth. Other customers growing at or a little bit above market and then cycling through the chain exits.

Okay. I have another big picture question. Can you talk about the market growth rate for independent customers? With you and your peers all growing here and taking share, can you talk about your longer-term expectations for these customers and whether growth is concentrated in just larger cities or is this something pretty broad based?

The market for independent restaurants continues to be fairly healthy. If you look at what the same kind of sources that you probably look at, one industry source called for a small uptick in independent restaurants since their last forecast, another one called for a downtick in independent restaurants for the back half.

So call it even. While we also see from these sources is independent restaurants continue to be very buoyant, and more so than the larger concepts which is what -- which is helping us given our focus on independent restaurants.

Great. Thanks so much, guys.

Robbie Ohmes, Bank of America.

Good morning. Thanks for taking my question. A quick follow up on that. From your perspective with the independent restaurants, have you seen any sort of change in the overall tone of business for your independent restaurant customer in the second quarter versus what you were previously seeing?

And then separately, on the hospitality and healthcare you mentioned the pipeline in your commentary and obviously the technology advantages. Maybe a little more color on that? Are you guys feeling better about the outlook for that area of your business? Thanks.

On the first -- as I said earlier, Robbie, the outlook for independent restaurants is generally consistent with what we have seen. Different industry folks have slightly different points of view on that. I would say except for some few depressed areas around the country as a result of oil prices, what we see is fairly consistent across the country.

In terms of our prospects on the healthcare side as I mentioned, larger customers do take longer from a lead time perspective. Those are big, complicated changes, they affect multiple sites and they involve many order guide changes, and so it has taken some time to refill that pipeline. We work very collaboratively with our partners on this front.

The signing of Brookdale was a great sign that some of the things that have served us in the past, in terms of having over indexing and share on healthcare side, still apply.

Got it. Thanks very much.

Kelly Bania, BMO Capital.

Hi. Good morning. Thanks for taking my questions. Another one on the independent restaurants. I guess if you look at your outlook for that segment ex acquisitions, would it be in line with that 4% to 6% longer term target? I wanted to clarify that.

And as you talk to your independent restaurants, do you have any sense of how much of the growth that they are seeing is on a takeout bases versus a dine in basis, and any other color you have on some of the trends? Maybe you are seeing different categories or segments of food that is working well with that segment?

Kelly, let me answer each of those in turn. In terms of the outlook, I would point you to the guidance we are providing from a case volume growth, which is the 2% to 4%. The 4% to 6% number is around sales and that is impacted by inflation/ deflation, so the case growth number is one that we focus on more and we talk about more.

Given that, that outlook represents the outlook or guidance for our entire business, and let's talk about the performance relative to the market of healthcare and national chains. A good assumption for independent restaurants is to be at the high end of that range.

In terms of where it is coming from, and in particular your question about eat in or dining out, it is difficult to say. We do look at our categories of products that are more suited to take out, such as our [disposables], and we do not see any material trends there. And then lastly in terms of your question around trends -- we were really encouraged by our success with our Scoop in the summer, which was dedicated to all -- entirely to sustainable products.

We saw success with that Scoop across the country. And I think that just goes to show that sustainability is an important dimension for decisions with respect to our operators and their end consumers. And if you look back to our pyramid, we have a wedge in there, or a section with that is dedicated to [open] sustainable, and this (inaudible) Scoop just reaffirmed our desire to continue to strengthen our offering on that front.

Great. That is helpful. Then just another one I guess, you briefly mentioned the new field structure and the progress there. I was wondering if you could also touch on the new sales coverage model and where you are with that and any changes in either timing or expense savings associated from the sales coverage models?

The headline, Kelly, is we are on track. The way we have sequenced it is the field model comes first because that is fundamental to the way we operate moving from single site to multi-site. As you saw from the timeline we put forth, we are nearing completion of the deployment of the new field model, and the sales coverage model follows closely behind that.

Great. Thank you.

Bryan Hunt, Wells Fargo.

Yes, my first question, I was wondering if you have seen any sales trends or volume trends differences regionally throughout your system?

We have not really. First of all, we do not go into regional results, but I would say what we have seen has been fairly consistent. Some of the outliers, as I said, are partially explainable by -- there's a couple of spots in the country that are more depressed as a result of energy prices.

The biggest factor when we look at variation across the country really comes down to executing against the fundamentals. That is really our focus, that is what we can control, and that is why a big part of our plan -- of our long range plan, that Fareed has talked a lot about in terms of being balanced, is really focused on driving adoption of the differentiation and raising the level of execution to a more consistent level.

Okay. My next question, there has been a lot of conversation throughout the call about the extra week in a year ago. Can you talk about the impact from that extra week? My understanding is it is a slow volume week for you all anyway, but again, is it possible for you to frame it up?

One way to think about it is it is about 400 basis points of EBITDA in the fourth quarter and about 120 for the full year. You are right, in our case the extra week falls at the end of a holiday period, and that is generally a softer week.

Very good. My last question is when you look at your Cap structure, and I think you mentioned it in passing, but you've got your ABS facility coming due, is there any thoughts about what you're going to replace that with, whether it's secured debt or unsecured debt; basically what you're looking at? Thanks.

I think nothing to really report out at this juncture. But as you saw by what we did in this quarter, we leveraged the favorable market environment coming out of the IPO and made a lot of progress in extending maturities, reducing our interest rate, and then delevering.

The CMBS is kind of next on the list, and then we will continue to optimize it as we go forward. We don't have any specific guidance we want to give beyond what we talked about.

Thanks for your time.

John Ivankoe, JPMorgan.

Thank you for the follow up. I just wanted to focus on the cost side for a second. Slide 10 is very interesting in terms of the field reorganization nearing completion, but that slide [almost argued] that there was no cost benefit in 2016 that, that may bleed into 2017.

I just wondered if you could comment in terms of what kind of discrete cost savings you might get from the field reorganization in 2017 over 2016 and if there are any projects that you currently have on tap for 2017 that could drive 2018 over 2017 as we do think about that medium term growth?

Let me talk conceptually, and Fareed might give you some of the specific details, John. Here's how we think of it. You are right, the field, the climate has benefits that are throughout -- starting 2015. The work gets completed in 2016 and there's a [rack] effect in 2017.

Broadly speaking, there's kind of three areas we are looking from a cost perspective. The first that we just talked about is, the corporate cost side which includes the field. We have a three-year roadmap from an indirect spend perspective. We are nearing the first year of that and this is everything from tires to travel and we are looking at everything from reducing the rate at which we purchase those to reducing the consumption.

And then lastly, we are always looking to streamline our operation or -- our resources from a support perspective especially when we look at how the field and corporate interact together. So that's kind of corporate.

The second part is distribution. We are always there first looking at our networks. The closure of Baltimore was an important contributor to lowering our cost per case when it comes to selecting and delivery. But in addition to the network, we are always looking at making every one of our facilities more productive whether those are initiatives that cut across all facilities or more [bottoms up].

Just as an aside, we just hired, either late Q1 or early Q2, a Vice President of Continuous Improvement, and his mandate is to drive Lean and Six Sigma into our operation. And so there is lots of opportunity there to drive more effective and efficient operations.

The third area is from a selling perspective. We've talked a lot about the impact of e-commerce in terms of driving the productivity of our sellers. That continues. In terms of finding the right complement -- the right number of sellers that drives both a better experience for the customers and a more productive salesforce.

Similarly, and as part of the field, we work on the national -- and serving national customers. We're moving from a model that is about -- often served through local reps who are commissioned to moving to dedicated account managers who operate more on a salary basis; that has two benefits. The national customers get a more consistent offering and service model, and obviously has a benefit from an operating expense perspective. Whether it is corporate, whether it's distribution, or whether it is selling, we are very balanced in our approach and we are pulling all the levers and opportunities we see, and that is what contributes to our guidance for the next three years.

Okay. Maybe it is too early to commit to annual cost savings targets. Some of your peers I guess [seeing] broadly in terms of staples or distribution do that. But is there kind of a business transformation related annual cost savings number that we should have in our mind to be achieved outside of the regular case volume growth that you're working on, on the topline?

That is a great question. What I will say is that our guidance reflects all the initiatives that we are driving and as Pietro mentioned the plan is very balanced. There's been issues that target volume margin and operating expenses as well.

Coming out of the gate a lot of those were discrete initiatives, like moving to the field model, like moving from a defined benefit pension plan to a 401(k), as well as the network optimization items. And we will continue to pivot towards more of a continuous improvement type of model as we go forward.

But I think there's levers across each of those, and they are informed by how the plan sequences and also the organization's ability to execute against these. For example, you want to have a stable leadership and field organization before driving additional things on top of that.

Understood. Thank you.

(Operator Instructions)

Karru Martinson, Jefferies.

Good morning. When you guys look at the financial flexibility that you now have with the debt paydown, how do you balance that against the M&A opportunities that are out there, certainly realizing those opportunities can be a bit lumpy?

Yes. What I will say is that we benefit from the fragmented industry and feel good about the pipeline. If you think about our strategy, it really is about focus on specific set of customer groups. And our M&A strategy is very much in line with the overall strategy, and that means that we are careful and we are selective, and you can't always predict that.

But generally, the size of those transactions -- and if you look back what we have done this year as well as what we did pre-merger, we were able to make those acquisitions, integrate them into our business, capture benefit, and can do that really leveraging the cash flows that come from the business, and that's in addition to the CapEx into the business as well. We feel that type of M&A along with CapEx and debt reduction can all be adequately funded from the cash that the business generates.

In terms of a leverage target that you would like to be kind of from a long-term run rate?

Our target is to get to that 3.5 to 3 times range, and I think then we'll revisit a broader return of capital topics. But right now it is really a balance of CapEx, fold in M&A, and debt reduction.

Lastly, when you look at your crystal ball when it comes to protein costs and where we are in the cattle cycle, how long do you see, or how do you see this deflationary environment playing out?

It's a great question, and it has been difficult to predict. There has been a lot of volatility and we are still seeing a very choppy market. We have seen a lot of deflation in those categories. Will we see some stabilization near the bottom? It is hard to predict, but again what our baseline assumptions are going to be -- we will see continued choppiness, but we will see a moderating but still deflationary environment.

Thank you very much, guys. I appreciate it.

There are no further questions at this time. I return the call to our presenters.

I appreciate everyone's time and all the great questions. By way of closing, what I would like to say is just to reiterate, very good quarter for us with a 10% year-on-year growth, indication of two things -- our strategy is resonating with our customers, in particular our target customers in independent restaurants and healthcare, hospitality. And secondly our approach to gross profit initiatives and operating expense management are getting traction.

We really look forward to talking to you next time and updating on our progress against our strategy of Great Food. Made Easy. and our long-range plan. Thanks for tuning in today.

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