US Foods Holding Corp (USFD) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Sally and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2016 performance review conference call.

(Operator Instructions)

I will now turn the conference over to Melissa Napier. Please go ahead.

Thank you. Good morning, everyone. Thanks for joining us today for a third-quarter FY16 earnings call. Pietro Satriano, our CEO, and Fareed Khan, our CFO, will provide a business update and speak about our performance in the quarter. We'll take your questions after management's prepared remarks conclude. Please provide your name, your firm, and limit yourself to one question.

During the call, unless otherwise stated, we are comparing our third-quarter and first nine-month results to the same period in FY15. Earlier this morning, we issued a press release regarding our third-quarter results. That release, along with today's presentation slides, can be accessed on the investor relations page of our website at USfoods.com. We expect to release our 10-K later today.

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 in our reports filed with the SEC, including our registration statement on Form S-1, as amended.

Our slides and our press release contain certain non-GAAP financial measure, along with reconciliations to the most comparable GAAP financial measures.

I will now turn the call over to Pietro.

Thanks, Melissa, and good morning, everyone, and welcome. We're here in our hometown of Chicago, which is also hometown of the World Series Champion Chicago Cubs. So let's get right into it.

We had another strong quarter, and our progress on many fronts demonstrates our Great Food Made Easy strategy is resonating with our customers and generating the desired financial results. I'd now like to provide a summary of the quarter, which is on slide 2, entitled Third-Quarter Highlights.

We grew total volume of 4% over the prior year's third quarter, and top-line momentum continued to benefit from the growth with independent restaurants and other customer types. Our top line also benefited from the acquisitions we completed earlier in the year.

We expanded gross profit margins, despite significant deflationary pressures, and our efforts to streamline the business, improve productivity, and reduce cost remain on track. We posted strong operating income and net income growth. Adjusted EBITDA increased 8.4% over prior year. And as a result of our strong year-to-date performance, we are increasing the outlook for full-year adjusted EBITDA growth to 9% to 10%.

Let me also add a couple of words on our strategy, by way of summary, and our supporting initiative continue to support future financial results. We continue to enhance our innovative product offerings and grow our suite of e-commerce tools aimed at supporting top-line growth. And now that we have successfully completed the implementation of our new field operating model, I will outline two new initiatives aimed at improving both gross profit and operating expenses.

We closed two more acquisitions in October, for a total of five this year. That's three acquisitions we've previously discussed are now fully integrated into our operations. In closing, with my summary, we remain confident in our midterm guidance of 7% to 10% EBITDA growth.

Fareed and I will now walk down through a more detailed view of our results. I will start with a review of volume and how our strategy is contributing to volume growth. Fareed will cover gross profit, impact of deflation, as well as operating expense, and I will cover the two initiatives I just referred to.

Slide 3 highlights our top-line results. As mentioned, total case growth was 4%, our strongest growth since Q1 of 2012 after we normalize for the 53rd week in Q4 of 2015. The strong overall growth was fueled by three factors.

The first contributor to our growth was independent restaurants. We grew 5.5% with independent restaurant customers; acquisitions contributed 200 basis points to this growth; which means organic growth came in at 3.5%. However, when we normalize for the shift in timing as a result of the 53rd week, organic growth was approximately 4%, which is closer to where we have been for most of the year, and which you can see from the dotted line on slide 3.

Remember, as well, that the combination of bad weather in Q1 2015 and good weather in Q1 2016 had a significantly positive impact on Q1 results. We also believe that Q3 growth was slightly negatively impacted by the hangover from labor disruption we experienced in some markets in Q2. Having now concluded negotiations in a number of markets, we're seeing growth return to these markets.

The second contributor was growth with other customer types we are targeting, namely healthcare and hospitality. Last call, I discussed our win with Brookdale Senior Living, the largest senior living operator in the country, with over 1,000 communities. We started shipping this customer in the fourth quarter.

These large customer relationships have longer lead times, so Brookdale is a good example of the momentum we are beginning to see with prospective customers in the healthcare and hospitality space, where we want to grow at a rate above the market.

The third contributor to growth came from our national chain customers, where we have now lapped the headwinds as a result of some significant customers we chose to exit in 2015. We also started shipping to some new larger regional customers this quarter.

Before I talk about how our strategy continues to support our growth with independent restaurants, let me say a few words about the market. There are a number of sources providing insight on the restaurant industry. Most agree on a couple of trends.

First, overall industry growth is expected to continue in the moderate range of 1% to 2% real growth. On a segment basis, growth from chains is expected to continue in the 1% to 2% range, below that of independent restaurants, which are expected to grow closer to 3%. We share this perspective on the marketplace, and we agree that independent restaurants, on the whole, are growing and faring better than chains.

It is also important to keep in mind that the broader macro factors remain generally positive for food-away-from-home consumption in the restaurant industry. The continued health in independent restaurants reaffirms our strategy of focusing on this profitable segment. And our goal continues to be to outperform the market by leveraging our Great Food Made Easy strategy, and by continuing to focus on improving execution across our various markets.

Let's now turn to slide 4 and look at how our Great Food Made Easy strategy continues to enhance our offering to independent restaurants, in support of top-line growth.

Let me start with the Great Food part of the strategy, which is about bringing product innovation to independent restaurants, to help the chef capitalize on food trends or address the issue of rising labor costs. We continue to introduce innovative products, because customers who purchase these products buy 15% and churn 7% less than customers who do not.

On the last call, we discussed our Summer Scoop launch, which was focused on sustainable products and for which we had a 48% trial rate from customers, an impressive number given that sustainable products are still very early in their growth curve.

The theme of ours Fall Scoop was Steak Your Claim, with many of our newest products dedicated to helping restaurants of all shapes and sizes ride the trend we are seeing of the reinvention of the modern-day steak house. A good example is our all-natural Chef's Line beef chuck short ribs.

Short ribs are obviously in season and on trend. We braise ours for eight hours before the chef even sees them, allowing chefs to serve them with minimal prep and allowing restaurants who wouldn't normally have the operations to put these on the menu to expand their offering. Customer response has been excellent, and seven weeks into our Fall Scoop launch, we are on track to meet our goal of 50% of customers purchasing from this season's scoop.

Even more important than creating innovative products is finding innovative ways to encourage adoption on the part of our customers. To drive scoop adoption as part of this Fall Scoop, we rolled out a waitstaff training program called The Tipping Point. The purpose of this waitstaff training program is to help the waiter sell those scoop categories that more naturally lend themselves to increasing the check average, categories such as appetizers and desserts.

Having piloted this program in two regions over the course of the summer and having found that scoop products selected for The Tipping Point outperform the same product in non-participating restaurants by 41%, we have now rolled out this program for our best customers. This is one more proof point of our We Help You Make It campaign.

In this case, we help restaurants increase check size and waitstaff earn more. For us at US Foods, higher scoop adoption contributes to reduced churn, and since the scoop is focused on our own brand, it contributes to better margins.

Let me now turn to the Made Easy part of our Great Food Made Easy strategy. You can see the continued increase in sales to independent restaurants coming through our e-commerce engine now at 51%. You will remember that e-commerce customers purchase 5% more and churn 7% less.

We also experienced lower returns on the part of e-commerce customers. And e-commerce also in a sales force that is much more productive, meaning greater sales with fewer reps, and therefore, lower operating expense. Because e-commerce comes with a significant first-mover advantage, we continue to invest in maintaining our position at the forefront of the industry.

Last call, we talked out our enhanced level of personalization. In this quarter, I'd like to talk about our food-cost management solution, which is part of an exclusive partnership with Avero, the leading provider of web-based and mobile analytics solutions for the food service industry.

Our new food-cost management software is designed to make the challenge of managing a restaurant kitchen easier, and to make it easier to transact with US Foods. Our food-cost management solution incorporates a restaurant sales history from its point-of-sales system, weather forecasts, the timing of holidays, and promotional events to provide predictive sales forecast, real-time inventory, and reliable purchase pointing suggestions.

All orders to US Foods are seamlessly integrated with our e-commerce solution, and customers' inventory is automatically updated with the new purchases once they are received. This reduces the time the operator spends on both ordering and inventory counts, and helps with managing waste. The beauty of this food-cost management solution, as a result of our partnership with Avero, is that it integrates seamlessly with 65 different point-of-sales systems in the industry, a significant advantage compared to other competing solutions.

Let's now turn to slide 5. Also contributing to our top-line growth was the successful integration of three previously announced acquisitions. We have also completed two new acquisitions, bringing our total for the year to five.

Our primary target remains small broad-line distributors with a focus on independent restaurants, thereby strengthening our geographic footprint, bringing new customers into the fold, and reducing our operating cost as a result of distribution and administrative synergies. The acquisition of Dierks in Wisconsin and Cara Donna in New England, discussed in prior calls, both fit these strategic criteria.

In September, we acquired Jeraci Foods, an Italian specialty distributor in the Metro New York area. This acquisition expands our market share in that geography, and increases our presence with independent restaurants in the Italian and pizza segment.

Our secondary target is to acquire distributors that strengthen our capabilities in center-of-the-plate and produce. Our Freshway acquisition, announced in the first quarter, brings capabilities in value-added produce, a fast-growing category within produce. It also strengthens our produce distribution network.

We also recently announced the acquisition of Save On Seafood, a seafood processor and distributor located in Florida. Save On provides fresh and frozen seafood throughout the southeastern United States. This deal strengthens our capabilities in the seafood category, in which we see enormous upside.

M&A remains an important part of our growth strategy. Our success is only in part due to our ability to identify and acquire targets that meet our strategic criteria. Just as important is our ability to successfully integrate these companies into the fold.

As you can see from the attached chart, we are on track from a financial, operational, and systems perspective on all three acquisitions announced earlier this year. This is due to an integration team that we put in place late last year. Their mandate is to work with both our operating teams in the field, and the management of our newly acquired companies to apply consistent playbook and best practices as we continue our acquisitions.

Having covered volume, let me now turn it over to Fareed to walk down the rest of the P&L.

Thanks, Pietro, and good morning. As you can see on slide 6, we had a solid quarter for unit growth, which was helped by the strategic acquisitions we made. Third-quarter net sales were $5.8 billion, this result is up $45 million, or 80 basis points, over the prior year.

Case volume was up 4% contributing $232 million to net sales. Rate per case decreased 3.2%, partially offsetting the case volume impact by $187 million. The lower rate per case reflected two factors, the most significant of which was inflation.

Product deflation accounted for roughly two-third of lower rate per case, or about 200 basis points. All year, the most significant deflationary pressures have come in commodity categories.

Beef and egg prices in particular have declined significantly, and you can see this in the chart on the right side of slide 6, which shows our average index selling prices. And to a lesser extent, we've also seen deflation in cheese, and volatility and other proteins such as pork.

Second and the other third is attributable to product mix changes, primarily stemming from higher produce sales as a direct result of the Freshway acquisition. Freshway is a produce distributor with annual sales of approximately $130 million, and produce typically sells for lower average prices per case than grocery items.

Mix was also slightly affected by a transition away from certain national chain customers, whose purchases were more concentrated in protein categories. Acquisitions accounted for $85 million, or 1.5% of sales growth in the quarter.

Turning now to year-to-date results, net sales were $17.2 billion; this was up $49 million, or 0.3% from the prior 39-week period. Total sales growth in cases was 2.5%, which increased net sales by $434 million. This was offset by $385 million in lower selling prices per case, resulting from the product deflation and mix changes we just discussed.

Acquisitions year to date contributed $196 million, or 1.1%, to sales growth. And sales of our private brand product accounted for 33% of net sales, up from 32% in the prior-year period.

I'll now cover gross profit performance, which you see on slide 7. As you look at our results here, it's worth spending another minute on deflation, as this is a headwind to our gross profit growth.

Market prices move very quickly in food service, and customers are highly attuned to macro-driven deflationary or inflationary trends. In periods of deflation, we lose margin on products already purchased and in inventory. And we also see margin compression in certain customer contracts where pricing is tied to a percentage markup over cost.

We continue to deliver solid gross profit results, despite these deflationary pressures. For the third quarter, gross profit was $1 billion, or up $20 million over the prior year. As a percentage of sales, gross profit was 17.7% versus 17.5% in the prior-year period.

Gross profit increased quarter 2% in dollar terms over the prior year, and on the year-over-year basis, volume growth in initiatives were partially offset by a reduction of LIFO benefits. LIFO benefit was $7 million in 2016 compared to a benefit of $20 million in 2015. On an adjusted basis, excluding LIFO differences, gross profit increased $32 million, or 3.3%.

Year to date, our gross profit results reflect similar trends to the ones we saw in the quarter. Gross profit of more than $3 billion was up $91 million, or 3.1% higher than last year's comparable 39-week period. As a percentage of sales, gross profit increased roughly 50 basis points to 17.6%. On an adjusted basis, gross profit grew 3.7%. As a percentage of sales, adjusted gross profit of increased 58 basis points to 17.4%.

You'll recall that several important elements of our strategy are focused on gross margin performance. We made good progress on these levers during the quarter. Here are a few examples.

We improved our customer mix by driving growth to independent restaurants, as evidenced by our 5.5% growth rate. We expanded our private label brands; these had a 33% of sales penetration rate for the quarter, up from 30% two years ago.

We strengthened our category mix by focusing on produce and center-of-plate items, and our organic growth efforts will be accelerated by the Freshway and Save On Seafood acquisitions. So we continue to drive effective vendor management and sourcing programs, which optimize our cost of goods and assortment.

Lastly, I would say that in the volatile pricing environment, whether deflationary or inflationary, having strong alignment amongst our merchandising supply chain and selling teams is more important than ever. Our functionalized business model is an advantage, because it ensures our sellers are armed with the information they need, together with the selling and pricing tools, to manage volatility. In addition, it enables our merchandising and supply chain teams are working together to optimize inventory levels and purchases.

Switching out to operating expenses, which you'll find on slide 8. For the third quarter, these declined 2.5%, or $23 million from the prior year, to $917 million. As a percentage of sales, operating expenses were 15.7% in the current quarter, down 52 basis points from 16.2% in the prior year.

Distribution, selling, and administrative costs were $903 million in the quarter, a decrease of $8 million, or nearly 1% from the prior year. We posted solid results in selling and administrative productivity, fuel costs were favorable, and we continue to make progress on our warehouse and delivery productivity initiatives. These factors helped mitigate higher costs incurred in support of a few instances of labor disruptions linked to contract renewals. We also benefited from prior actions to optimize retirement plans and healthcare costs.

Costs associated with restructuring activities declined $14 million, or 48% from the prior year. We have substantially completed the implementation of the new multi-site field operating model we launched last year, and restructuring costs associated with this program were $8 million in the current quarter compared to $29 million a year ago.

Also in the latest quarter, we took a charge of $7 million to centralize replenishment activities. This initiative, like the field organization we just completed, will be rolling out throughout the year, and our targeted finish date is early 2018. We also recently announced additional cost-reduction programs related to our administrative and sourcing and logistics activities. More on this shortly.

For the year today, operating expenses of $2.7 billion we down 2.5%, or $69 million. As a percentage of sales, operating expenses decreased 45 basis points to 15.8%.

Adjusted for depreciation, amortization, restructuring, merger and other nonrecurring items, operating expenses increased 1% as a percentage of sales. Adjusted operating expense was 13.3%, up 10 basis points from the prior year. As a reminder, reconciliations of these non-GAAP measures are included in the appendix of the presentation and outlined in the news release we issued earlier today.

To bring more color to the successful implementation of the field model and to discuss the two new initiatives we've recently launched, I will turn the call back over to Pietro.

Thank you, Fareed. I am now on slide 9. As part of the journey to have a more effective and lower cost operating model, as you know, last year we reduced the number of regions from 8 to 5 and the number of field operating teams from 60 to 26. We've now successfully completed the rollout of the wiring and the processes that support the streamlined field model. The model is not only more efficient, but it allows us to be more effective in deploying various initiatives.

With the successful implementation of this model behind us, we are now turning our attention to two additional areas. In October, we announced a program called Fit for Growth, designed to drive further efficiencies in corporate and administrative costs.

Phase 1 is aimed at further streamlining the corporate organization, reducing layers, consolidating functions, and increasing spans of control. This work has begun, and we expect it to complete in the first quarter of 2017.

In phase 2, we plan to extend the scope of our shared services, taking a more holistic view of end-to-end processes such as order to cash and procure to pay. This second phase will take place over the next 12 to 18 months and will leverage process improvement tools, such as Lean and Six Sigma.

The effort I just described is focused primarily on creating a more efficient and effective organization. It is additional to and complementary to the indirect spending initiatives we have discussed and which we launched last year, targeting roughly $1.2 billion of addressable spend.

The second initiative I want to discuss is the resumption of the centralization of replenishment activities. About one-quarter of replenishment is already done in the centralized fashion. Based on the favorable margin and operating expense benefits we have seen and with the field organization now complete and behind us, we are going to resume this effort, which will take us to a desired end state by early 2018. As a result, we will benefit from reduced cost of goods via better sourcing and more optimal logistics, as well as a better management of inventory.

The benefits from these two initiatives I just described are part and parcel of the EBITDA growth plan and the midterm targets that we have shared with you.

Now back to Fareed to complete the walk-down.

Thanks, Pietro. I am now on slide 10. Operating income in the quarter improved to $115 million, or 2% of net sales. This was driven by improved gross profit and lower operating expenses. Adjusted EBITDA was $244 million in the quarter, up 8.4% over the prior-year period.

Our net income reflected solid operating results. Net income was also affected by a release of our valuation allowance against certain federal and state deferred tax assets. This is a one-time item -- this one-time item provided a benefit of $80 million to the net income tax provision in the third quarter.

By way of background, we maintain a valuation allowance on net operating loss and tax credit carry forwards, when we are not certain that we can fully realize these tax assets. We evaluate this position every quarter.

During the third quarter, we concluded it was prudent to release most of the valuation allowance. The factors that supported this included our prior performance, as well as the outlook for the business. In simple terms, from a tax accounting perspective, we believe our future earnings will be able to now fully utilize the deferred tax assets we have available, and this triggers the release of the allowance.

On an adjusted basis, excluding the impact of the valuation allowance and other discrete items, as well as factored outlined in the reconciliations provided, net income increased 58% to $87 million. You'll find more details on this on the Form 10-Q that we will release later today.

Moving to the bottom of slide 10, year-to-date operating income is up 118% to $298 million. Adjusted EBITDA of $707 million rose 14%, or $87 million versus the prior-year period.

Turning to cash flow and net debt metrics, which you'll see on slide 11. Year to-date cash from operations was $440 million. This result was up 48%, or $179 million from the prior year, excluding the one-time merger termination fee of $288 million we received from Sysco in the third quarter of 2015.

Cash capital expenses have totaled $105 million year to date, averaging about 0.6% of sales. In addition, we've entered into capital leases for fleet purchases for $77 million. Cash CapEx in the third quarter totaled $38 million.

Net debt at the end of Q3 was $3.7 billion; this is down $320 million from the prior year. We completed the defeasance of our collaterized mortgage back securities facility, as we first announced in Q2. This defeasment will result of lower interest cost and also gives us more flexibility with property management. Our leverage ratio stood at 3.8 times at the end of the third quarter, down from 5.3 times before the IPO.

Also note, recall that we made a special distribution of $667 million to shareholders at the beginning of the first quarter, which increased our debt. We also used all of the approximately $1.1 billion in IPO proceeds to subsequently lower our leverage. This debt reduction, coupled with significant positive changes to our debt maturities and interest rates achieve through the refinancing activities we've completed has lowered our run rate interest expense by roughly 40%.

Turning to slide 12, with all this background, here is our outlook for FY16. We expect unit growth to be supported by independent case volume growth averaging about 6% to 7% inclusive of acquisitions. We expect net sales to be flat to slightly down.

The growth we're seeing from independent restaurants will be offset by two factors. The first is deflation and the second is the planned exits we have made from certain chain businesses These exits will largely be complete by the end of the third quarter.

We revised our adjusted EBITDA growth estimates to a range of 9% to 10% over prior year, up from 8% to 9% that we shared in Q2, and we expect to be near the high end of this range. This outlook implies fourth-quarter adjusted EBITDA growth of 4% to 5% when adjusted for the impact of the extra week we had in the prior year.

We anticipate unit volume growth with independent restaurants to improve sequentially over the third quarter, and overall case growth will reflect the [lap of chain] exits, and we should be plus or minus 100 basis points to our third-quarter results. We expect continued deflation to be a margin headwind in the quarter. We're also lapping a strong fourth quarter in the prior year, where we had excellent results from merchandising initiatives, which do not anticipate repeating to the extent we saw a year ago.

On a full-year basis, cash capital expenses should range between $190 million and $200 million, and given our run rate, we should be on the low end of this range. Our diluted share count at the end of the fourth quarter will be approximately 225 million shares, and the rest of our guidance remains unchanged from what you heard on our August 9 earnings call.

Slide 13. We are also reiterating our midterm guidance targets, which remain unchanged. Case volume growth should be 2% to 4%, reflecting the impact of acquisitions on the higher end of the range.

Adjusted EBITDA is expected to grow between 7% to 10%, again with the lower end of the range organically drive, and the higher reflecting acquisitions. Solid cash flow generated from the business will continue to allow us to deleverage our operations, and cash expenditures are planned to average roughly -- cash capital expenditures are planned to average roughly 1% of sales. Lastly, as a reminder, our tax rate should be more typical of a domestic business into next year.

With that, thanks for your attention. Pietro any last words before the Q&A?

I'd just simply like to close by acknowledging that our strong quarter is continued evidence of the hard work and commitment on the part of our 25,000 US Foods employees. So with that, operator, maybe we can open it up to questions.

(Operator Instructions)

Your first question comes from the line of John Heinbockel with Guggenheim Securities. Your line is open.

So guys, I wanted to focus a little bit on Cookbook and three things around that. Number one, if you look at how the benefit is -- actual benefit is tracking versus what you thought it would be, maybe either top line or margin, where are we versus your expectations?

Two, if you think about longer term, that would seem to be a very significant opportunity, maybe more than we think. And then, thirdly, are there new things that you're finding you can do with that data that you might not have contemplated 6 to 12 months ago?

Thanks for the question, John. Just by way of reminder to folks on the phone, Cookbook is our analytics engine. It informs pricing recommendations to the sales force, it informs [assortment] recommendations to category management, and we also leverage it with our vendors on a subscription model.

In terms of where we are with respect to the implementation, or deployment of Cookbook throughout the country, I would say we are well underway. We obviously paused during the merger and paused during the field reorg to allow things to settle. And where Cookbook has the been deployed, and as a reminder, Cookbook looks at the [item in last] to see at the customer level to make pricing recommendations to our salesforce on the street. We see both positive volume and margin impact.

In terms of the ability to deploy that, we -- into other parts of our business, we continue to explore those and are doing some prototyping. But our main focus right now is on ensuring that we get the maximum value from those parts of Cookbook that are in the middle of deployment.

And just as a follow-up to that, do you see top-line versus margin, the bigger opportunity is where, from the deployment?

It's hard to tell. We do know, but it really varies by customer and rep, and I think the beauty of this tool is its customized to that particular customer. So where the impact [matches] in terms of volume or rate will vary by customer.

Okay, thank you.

Your next question comes from the line of Edward Kelly, Credit Suisse. Your line is open.

Hello, guys, good morning. I just wanted to start with gross profit per case. If we look at this quarter, it looks like profit per case down a little bit, It's been up. I know there's, like, impact of mix, impact of deflation.

I was wondering if you could just help frame all of that for us? Help us understand how it's actually impacted profit per case, and then how we should be thinking about this in the fourth quarter?

Hi, Ed. It's Fareed. We don't generally get into a lot of case economics. But what I would say is that the deflationary pressure that I talked about are a headwind to gross profit per case.

But offsetting that has been a lot of the initiatives that we talked through. We had favorable customer mix. We had favorable product mix with the growth of private brands, as well as COP and produce. And then we continue to have terrific results from our various merchandising initiatives. So I think the deflation was a little bit of an offset in this particular quarter, but we will continue to be driving positive rate per case growth in GP.

Just a second question for you on SG&A. SG&A cost control looks to be very good. You're clearly making good progress on your cost-cutting goal. I was wondering, could you give us an update on the size of the opportunity that you see out there for you guys within the next few years?

I know there were a couple of things that were announced that seem like they're now incremental. I just think it would be helpful for investors to maybe understand the size of the opportunity that you think is out there for you guys?

I would say that the initiatives that we've discussed, and have been discussing really are all reflected into the midterm guidance that we've given. We've always talked about us having a balanced plan where you see initiatives around top-line margin and OpEx. And all the actions that are in flight really contemplated in the long-range plan that we put together, and relaunched the business again.

So these are contemplated in the plan. Each of the different elements have a strong contribution, and we're managing about a dozen primary initiatives, some which are complete; some of them are in flight.

In terms of sizing specific initiatives versus the others, I think we're focusing back on the overall guidance these initiatives will drive, high single-digit EBITDA growth, and we see them working well.

One last follow-up for you. Restructuring and impairment charges were, I think, $15 million this quarter. How do we think about this line item going forward? Does it begin to wind down? And then the same thing for the business transformation cost.

Yes, I think our business transformation, we'll certainly see that winding down quickly. There's a few initiatives that will lap into next year. And then I'd say on the restructuring items, if you look back over the year, we had some fairly large one-time items when you look at the MEP program, the multi-player pensions from the Boston closure. We had the pension shift and then the field restructuring.

So those were fairly significant changes to our operating model, and for the most part, the heavy lifting is behind us. But we will continue to drive initiatives. So we may see one-time items continue to flow through. But on the transformational items, we see that winding down in 2017.

Great, thank you.

Your next question comes from the line of Zach Fadem with Wells Fargo. Your line is open.

Good morning. Can you talk a little bit about the just overall environment for independent customers? It looks like you are -- continue to take share, but given the choppiness in the overall restaurant environment, do you think independents are still well-positioned to go outgrow the national chains? And second, are you seeing any instances of heightened competition for these customers relative to the first half of the year?

Zack, it's Pietro. Thanks for the question. We would say the outlook is stable. We rely -- there's a number of industry sources, as I said. We rely a lot on Technomic, because they tend to break out independent from chain customers. As I believe I mentioned in my comments, the growth rate expected from independents is in the 2X range of chains. There's been a lot of press around declining traffic with respect to chains. So those trends that we hear about are consistent with what we see in the marketplace.

Independent restaurant is, I would say, alive and well, and faring well. And that is part of the reason, in addition to the fit with our strategy, why we are so focused on the independent restaurant.

Okay. And just a second question. Can you clarify your cash CapEx guidance of $190 million for the year? Is that on an apples-to-apples basis with the 105 year to date on the cash flow statement? And if so, would this imply a pretty meaningful step up in Q4? Could you just help clarify that?

Yes, so you're thinking about it the right way. It does imply a step up in Q4. As I mentioned, we'll probably be on the lower end of that range. And it's really just the timing of some of the larger projects that we have that's coming up.

Great. I appreciate the color, guys, thanks a lot.

Thank you.

Your next question comes from the line of Vincent Sinisi with Morgan Stanley. Your line is open.

Great, thanks very much for taking my question. Good morning, guys. I just wanted to go to your nearer-term sales outlook, both for the upcoming quarter, and then just the puts and takes as we maybe start getting into next year. Any further color you can give us all around expectations for deflation going forward?

And then within your accounts, I know you mentioned the exit of the national largely done by 3Q, but you just recently got some new ones within that as well. You maintain your independent growth outlooks. Maybe just any more color you can provide over the next couple of quarters, how we should think about some of those main factors?

Sure thing, Vince. It's Fareed. We expect a deflation environment to continue through Q4 and into the early part of next year. It's been very volatile, and frankly, hard to predict. But we don't see a recovery coming back anytime soon. So that's factored in.

The other factor is the year-over-year differences in Q4 with the extra week that we had in the fourth quarter of last year. So you have to factor that in, in terms of year-over-year growth.

But I'd say, the continued growth of independent restaurants that Pietro talked about, we see that continuing. We have essentially lapped the chain exits, and so now it's really puts and takes of bringing on attractive new customers and then potentially pruning around the edges. But we think we're in a more normalized run rate with chain. And we're seeing momentum building with healthcare and hospitality customers, and would expect continued growth there.

So I think normalized, apples to apples, with the extra week last year, we should see solid case growth. That will be impacted by deflationary headwinds on the sales volume. That's really the -- does that help?

That's always helpful, thanks, Fareed. Maybe just a fast follow-up here. I think you mentioned in your prepared remarks that the Scoop had about a 50% penetration. Can you help us put that in a little bit of a reference at the growth rate of that maybe versus last year, the last couple of quarters? And any marketing initiatives around that, how you see that growth going forward?

It's Pietro again, Vinnie. We set as a goal the for the launch period of every one of these scoops, which is three times year, that we want at least half our customers to try one of the products from that catalog or offering. And we've been fairly consistent in beating or being very close to that.

I think we've been there for a number of quarters, which is partly why we're now turning our attention to driving a higher stick rate, driving greater volume for those customers who do try. So it's the volume side of trying, and hence, why we think of this tipping point program, which is our most recent marketing program as the last mile, which is helping the waitstaff be more confident and more comfortable in terms of offering these products to their customers. That also drives their pay. It also helps customers with the check size, and so that's an initiative that we'll continue to ride for some time to help drive scoop reduction.

Okay, great. Thank you, Pietro, good luck.

Thank you.

Your next question comes from the line of Robbie Ohmes with Bank of America Merrill Lynch. Your line is open.

Hey, good morning guys. I was hoping we could get maybe some commentary on the competitive environment and maybe some thoughts on how regional momentum looks as well from some of the regional distributors, and how that -- basically, are your acquisition targets thriving or not thriving? And how does that look in this environment? Thanks.

Robbie, are you asking about the competitive environment with respect to sales or making acquisitions, just to make sure?

Actually both, maybe some commentary against your larger competitors, and then separately, how do the regional distributors look right now? Is it a -- are they getting more competitive, or are they under some pressure, which makes them easier acquisition targets and sets up for a nice 2017 for M&A for you guys? Any color you can give for us.

So let me talk about the market for customers and the market for acquisitions. The market for customers, in terms of the level of competitiveness, has not changed. It continues to be very dynamic, very competitive industry.

There tend to be some hot spots that move around the country. Those are often related to someone putting in new capacity. But it's -- I've been here six years now, and when we spend time talking to the field, they would say that the level of competitiveness is pretty consistent with what we have experienced. And hence, why these initiatives in terms of driving volume or margin are so important.

From an M&A perspective, what we find is we're an attractive buyer. Typically, the market sets the level in terms of price, but what we offer in terms of helping owners maintain their legacy, having a good home for their employees, we find that we're an attractive buyer.

You can see we've done five acquisitions this year; that's a pretty healthy number. And our pipeline would indicate that's a good run rate to be at for the next few years, and it helps support the EBITDA guidance we've given of the higher end of the 7% to 10% range.

Just a quick follow-up. How should we think about the pipeline in healthcare versus independent restaurant?

So the pipeline in healthcare, as I mentioned in my comment, has a longer lead time, so it's taken a little longer to get up and running. We signed Brookdale, I think in Q3. We just shipped now, and we're now a year after the uncertainty of the merger went away. So we believe that we will continue to -- that we see ourselves continuing to add to the pipeline.

The lead time with respect to independent markets is much shorter, as you know, and that's why our sales bounce back to the 4% range pretty quickly after the termination of the merger. I think the point I would leave people with is just a runway for growth that we believe we have, with respect to independent restaurants. There are a number of places we can go for growth.

One of the things we've seen is our technology and our product innovation and our analytics have really helped bring churn down to all-time lows and it's very consistent across the country. We have our segment and category strategies, whether it's COP, produce, or Hispanic are at their very early stages, and we believe provide some additional runway for growth.

And then the last thing is just on the fundamentals. We have about one-third of our markets growing near or above double digits, so three times the market. And the reason others are not at that level is because we just have an opportunity to better manage talent, better drive routines in order to get the level of execution to be more consistent across the country. The strategy resonates equally well with customers across the country. So hopefully, that helps provide a little bit of context.

That's very helpful, thanks so much.

Your next question comes from the line of Kelly Bania with BMO Capital Markets. Your line is open.

Good morning, thanks for taking my questions. Had a couple just also on the independents. First, I think you mentioned maybe the 53rd week impacted the organic growth rate for independents in the quarter. I just wasn't clear on why that would be. I thought that was a fourth-quarter issue. So maybe you can clarify that. And then also, just did the organic growth rate for that segment come in line with your expectations?

Kelly, Fareed. It was fourth quarter, so the 53rd week is a fourth-quarter factor.

For the timing on the first half, what happens is the whole year shifts, and so the first half tends to benefit a little bit more, and the back half of the year tends to get penalized a little bit more as a result of the whole year shifting, which Fareed was referring to the addition of the fifty-third week obviously affects the EBITDA results from an organic growth perspective. You have a win in the first half and a bit of a loss in the second half. So that's why when we look closely at our numbers, we see growth being more in line with expectations as a result of calibrating for that.

Having said that, based on the answer to Robbie's question, we believe that as long as the macroeconomic environment continues and the independent restaurant health continues, which we anticipate, we believe we can outperform the market to the degree we are, if not even more.

Got it, that's helpful. And then if we look at your independent case growth, it looks like your past couple of quarters that acquisitions are adding about 200 basis points to the growth rate, the case growth for that segment. So it implies that these smaller companies you are acquiring are also experiencing very strong growth with the independents.

Is that what you see broadly? Or do you think you're just targeting acquisitions for those independent distributors that are doing extra well with that independent segment?

It's the latter point, Kelly. The most important criteria in terms of strategic fit is the mix of their independent restaurant business. So when we look at all of these targets and we do our due diligence for our acquisition, that is the first gate. And so, we are focused on customers like the ones I talked about, either Dierks Waukesha or Jeraci, which is very high penetration of independent restaurants. So that's what's contributing to the difference between organic and absolute.

Having said that, once we do bring them into the fold, we see them taking advantage of our tools and accelerating their growth. We're seeing one of these acquisitions in particular really drive e-commerce and really drive our product innovation. So they have a new foundation, or floor to start with in terms of growth.

That's very helpful. And then just one last one on cost savings. I appreciate all of the color on the cost-savings initiatives. The question is, if you look back to the targets you set out early in the year for -- I think it was $225 million to $270 million in savings over the next three years, is there anything changing to that target? Or is this just initiatives that fall under that existing expense savings plan?

Kelly, what I would say is that we are still executing against the initiatives that we developed as part of our LRP, and then we communicated through the IPO process as well. And we feel really good about where those initiatives are.

They're phased and they're sequenced. We work through a lot of them, and these next two were always contemplated; they address new areas of opportunity. But they are factored into the midterm guidance that we gave.

Great, thank you.

Your next question comes from the line of John Ivankoe with JPMorgan. Your line is open.

Hello, thank you. When we look at the big three food service distributors, everyone is talking about growing EBITDA in excess of revenue. And I just wanted to ask, in the context of the restaurant industry itself, which is seeing a lot of supply growth and which is generally translating to same-store traffic being negative. And, of course, it's very well known that restaurants are seeing increases in labor costs generally in excess of the deflation that they're seeing through food. And, of course, labor costs were permanent and food may be somewhat cyclical.

The question, is just in terms of what you're seeing in terms of how restaurants are pushing back on you, trying to get some of that margin back to themselves in what is actually a pretty difficult operating environment from a restaurant operating industry perspective, and whether the industry as a whole, but more importantly, you, can withstand that pressure as we think about the next couple of years?

Thanks John, it's Pietro. So as I mentioned, we do not see a major change in the competitive environment, nor a change in how customers are interacting with us. Obviously, in some parts of the country where you have recent implementation of minimum wage, you have little bit more focus on addressing labor costs. But it's a pain point that is fairly prevalent.

What I would say is, our focus is really around these business solutions and value-added services, which help our customers deal with the challenges of the environment, especially independent restaurants who might not have the scale to do so as well as some chains. I will give you a couple of examples.

I talked about one, which is product innovation, a good part of which is meant to be labor-saving for the operator. And so in an environment of rising labor costs or labor shortage, that becomes even more -- that resonates even more with our customers.

The second thing is we've talked about how we have a team-based approach to selling on the street. We have reduced our salesforce from 4,000 in the last few years to 3,000. We have reinvested some of that in specialists who either really understand a complex category very well, like COP, or understand managing the back of the house.

We have a group of folks called Restaurant Operations Consultants, ROCs for short. We have doubled the number of ROCs in the country. And what our customers tell us is that these folks can really, in terms of helping them optimize their menu from a pricing or ingredient perspective, help them leverage our Avero tools in terms of traffic and scheduling. We're helping our customers mitigate the impact of the challenges you're talking about, John, and thrive in that. That's really what our differentiated platform is all about.

In the end, you've got to be there product cost. The market tends to even out in our Cookbook and other tools, help us be a little bit better in terms of margin and volume. But the stickiness, the retention, and the growth in share of wallet really comes from these business solutions and this product innovation that we've invested in.

Thank you.

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

Good morning and thanks for taking my questions. I just wanted to quickly just go through some of the recent independent restaurant case volume trends. They moderated a little bit on a two-year stack, and I think your guidance implies that the fourth quarter is going to look similar to the third quarter. Is that the right takeaway?

I think from an organic basis, the fourth quarter should be sequentially a little bit better than third quarter. And it will be in that 4 to 4.5 range we've been averaging if you take a look at about the last six quarters.

And another 2 points or so for acquisitions?

We'll continue to see the benefit from acquisitions that we already made and Jeraci will be folding in as well, so that's probably right.

Okay, great. Thanks. And then just a question on your sales-force productivity. You did mention that you guys have taken your salesforce down quite a bit over the last couple of years. How much more progress do you guys think you can make in terms of boosting the productivity there?

We -- that is something that has happened through very active management of the talent and our books of business. We haven't talked about -- externally about what that might look like in the future.

Okay, and then just a last quick one for me. Your leverage has improved quite a bit; you guys were at 3.8 times at the end of the quarter. Can you just remind me where you guys are aiming for in terms of your leverage target over the next couple of years?

Sure, it's Fareed. Debt reduction is going to be a continued priority for us. It's going to be balanced against investing in the business, doing acquisitions, and debt reduction. I would say this year it's probably right around the right balance we'd like to continue. We targeted getting in that 3.5 to 3 times leverage range before we start to step back and take a look at maybe other forms of capital deployment.

We haven't made any public guidance around what our dividend policy would be. But at least in the near term, we continue to drive toward more than three times leverage.

Got it. Thank you for the color.

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

Good morning. When you guys look at labor costs, certainly restaurants seeing the minimum wage pressure. Is that something that we should expect as we go forward for your operations as well, when we think about the warehouses in the base here?

Typically, there are increases that happen year to year, either as a result of our collective bargaining agreements, or in the nonunion distribution centers, similar increases. Those increases are calibrated based on the local market. So if the local market is escalating at a faster rate than in other markets, then that gets taken into consideration.

Back to some of the questions and the answers on our approach to operating costs, every one of our big cost elements, whether it's distribution, sales force, or corporate administrative, has a series of multi-year initiatives aimed at either mitigating those wage-rate increases, and/or driving better productivity and more consistent outcomes for our customers.

Thank you very much, guys, appreciate it.

Thank you.

(Operator Instructions)

There are no further questions at this time. Mr. Satriano, I will turn the call back over to you.

Thank you. Thanks, everyone, for all of your questions. Appreciate your time today. As you can see, a very strong quarter, the strategy is resonating with our customers. And thanks to the continued dedication of our people. I appreciate everyone joining us this morning.

Thank you, ladies and gentlemen, for your participation. This concludes today's conference call. You may now disconnect.