US Foods Holding Corp (USFD) 2018 Q4 法說會逐字稿

Good morning. My name is Mary, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 earnings call for US Foods. (Operator Instructions) Thank you. I would now turn the call over to Melissa Napier. Ma'am, the floor is yours.

Thank you. Good morning, everyone. Welcome to our Q4 and fiscal year 2018 conference call. Joining me today are Pietro Satriano, our CEO; and Dirk Locascio, our CFO. Pietro and Dirk will provide an update on our fourth quarter and full fiscal year 2018 results and provide some perspectives on fiscal year 2019. We'll take your questions after our prepared remarks conclude. (Operator Instructions)

During today's call and unless otherwise stated, we're comparing our fourth quarter and fiscal year 2018 results to the same periods in fiscal year 2017. Our earnings release issued earlier this morning and today's presentation slides can be accessed on the Investor Relations page of our website.

In addition to historical information, certain statements made during today's call are considered forward-looking statements. Please review the risk factors in our latest Form 10-K filed with the SEC for these potential factors, which could cause our actual results to differ materially from those expressed or implied in those statements. We expect to file our fiscal 2018 Form 10-K later this week.

Lastly, I'd like to point out that during today's call, we will refer to certain non-GAAP financial measures. All reconciliations to the most comparable GAAP financial measures are included in the schedules on our earnings press release.

And now I'll turn the call over to Pietro to get us started.

Thanks, Melissa. Good morning, everyone. Thanks for joining us for our fourth quarter earnings call. Today, I'd like to cover two topics: first, an overview of our fourth quarter results; and second, a brief progress report on the initiatives we outlined at our Investor Day last March.

So let's begin on Page 2 with 3 takeaways that sum up the fourth quarter's results. First, from a volume perspective, we exited the year close to what we discussed in November. Independent case growth exceeded 4%. Case growth for all other customers was in-line with roughly flat. However, health care and hospitality fell short of the 2% exit rate that we expected. Second, we continued to grow operating leverage with growth in gross profit per case outpacing the growth in OpEx per case, driven by our actions to achieve more favorable customer and private brand mix.

And third, because of a few unanticipated items, EBITDA grew 2.4% for the quarter. As Dirk will later explain, the main contributors were unusual in nature. And without these items, our EBITDA growth for the quarter would have been closer to 4.5%. As a result, we are reaffirming our outlook provided on the third quarter earnings call that adjusted EBITDA growth for 2019 will be at least 5%.

Before delving further into the quarter's results, I'd like to spend a couple of minutes updating you on our progress on the initiatives we outlined at our Investor Day last March.

So moving to Page 3 and starting with the industry. We continue to see favorable tailwinds for food service distribution in general and independents in particular. The latest industry data shows that food-away-from-home continues to gain share from food consumed at home and independents continue to grow at a faster clip than large chains. Consumer interest in organic and sustainable products continues to grow, and I'm excited our upcoming Spring Scoop will be focused on expanding our sustainable offering, increasing the number of products under our Serve Good sub-brand to over 350.

Second, our differentiated strategy continues to resonate with customers. In 2018, we grew private brand penetration by 100 basis points, which along with our increased mix of independent customers, supported our growth in gross profit per case. We completed putting in place our team-based selling model, including the addition of over 100 local business development managers. And in 2018, we also made progress on our multi-channel strategy, opening 2 new CHEF'STOREs, adding 2 new Pronto markets and introducing US Foods Direct to 4 markets.

Third, on the cost side, we made substantial progress on our distribution initiatives. However, the higher-than-anticipated wage pressure, as a result of a very tight labor market, did offset some of this progress. Last year, for distribution, we discussed improving our processes and introducing new technologies. With respect to improving our processes, our initiative to reset routes and reduce miles was introduced to 1/3 of our markets.

On the technology side, the new scanning technology and dynamic labor scheduling that we referred to are both ready for rollout. The new scanning technology dramatically improves mispicks, which not only improves customer service, but it also improves the time to train a new selector, which is a big benefit when turnover is higher as it tends to be in a tight labor market like we are experiencing. And not contemplated last year, we have also piloted new receiving technology that further streamlines our operation.

Last thing on the distribution front, dedicated continuous improvement resources have been hired in about 1/3 of our facilities with plans to complete the rollout by the second half of this year. We believe that over time, the investment in continuous improvement will result in greater efficiency and higher employee engagement. So overall, good progress on our supply chain roadmap. Shared services was the other main focus area for reducing cost. And by applying the same continuous improvement tool set, we improved productivity by 8% and reduced error rate by 20% on 2 major processes.

The last on this page, on the M&A front, we agreed to acquire the SGA Food Group, which we believe to be one of the best regional distributors in the country. This is a great opportunity for us, one that gives us the platform to dramatically enhance our footprint in the Pacific Northwest. And we have used the last few months to achieve a very high level of readiness on our integration plan. More importantly, over time, we have gotten to know our future colleagues at SGA Food Group. And every interaction confirms this is a great company with great people.

And we are looking forward to the day when we can join forces in the marketplace, combining our differentiated platform with their COP and produce capabilities as well as their outstanding customer service platform to create an even better value proposition for customers in that part of the country. And now that the partial government shutdown is over, we are reengaged with the FTC. Unfortunately, the impact of the shutdown means that we now estimate we will conclude this transaction in the second quarter.

Let's now move to the usual discussion of the quarter, beginning with volume on Page 4. Organic growth with independent restaurants was 3.9% for the quarter, the highest for the year, with December coming in at 4.6%, above the 4% exit rate we called for on our third quarter earnings call. And growth with independents continues to be strong with January coming in well over 5%. We believe we are back to profitably gaining market share, having now addressed transitory issues with our service platform.

Fill rates and on-time delivery are now both higher than prior year and improved sequentially from the third quarter, this despite persistent headwinds with inbound service levels. Penetration with existing customers is also improving, which is further evidence that we are starting to put the transitory issues behind us. And we are confident that we can continue to grow volumes with independents at a rate of 4% to 5% for the year.

As you can see from the chart, health care and hospitality improved slightly over the prior quarter. However, our exit rate was below our 2% goal. When we look at same-store sales growth for this group of customers, it was around 1%, which means our shortfall was due to a combination of unanticipated losses, again due to some transitory service level issues that are now behind us, and a slightly longer-than-expected cycle to convert our pipeline of prospects. Our pipeline is very healthy. And we do expect to continue to accelerate growth with this customer type, targeting 1% to 2% for the year.

And lastly, with all other, growth for the fourth quarter was in-line with the third quarter. Following the wrap of a couple of large customer exits that you will remember occurred in December of 2017, we did exit the year at nearly flat. And we expect case volume for this customer type to continue to be roughly flat for fiscal 2019.

I will now turn it over to our CFO, Dirk Locascio, for a walk-down of our P&L and our balance sheet.

Thank you, Pietro, and good morning. Our business performance in Q4 was largely consistent with our prior expectations. However, we did have some unanticipated higher costs largely due to health care claims that we do not expect to recur. Adjusted EBITDA for the quarter was up 2.4% and would have been closer to 4.5% without these unanticipated costs. Adjusted diluted EPS of $0.56 for Q4 is up 27% over the fourth quarter of 2017.

Organic case growth continued to sequentially improve for the quarter. As Pietro mentioned, we had positive case growth for the month of December, and thus, we remain on track with our expectation to return to positive case growth for fiscal 2019. We also improved our operating leverage for the 12th quarter in a row as gross profit per case grew more than OpEx per case. Excluding the unanticipated cost that I mentioned earlier, our per-case improvement in Q4 would have been around $0.08 and more in-line with our year-to-date results.

On Slide 5, fourth quarter net sales were $6 billion, an increase of 80 basis points above the prior year. We experienced 160 basis points of year-over-year inflation and product mix increase. And that was partially offset by the 80 basis point case decline.

On Slide 6, we continued to deliver strong gross profit results for the quarter. Gross profit was $1.1 billion, which was a 1.6% increase over the prior year period on a GAAP basis and 1.7% on an adjusted basis. As a percent of sales, gross profit was 18.1% on both a GAAP and adjusted basis. This is 20 basis points higher than the prior year for both GAAP and adjusted basis. Our gross profit rate per case expansion was strong again this quarter, up $0.16 per case, driven by a continuation of initiatives we've discussed, such as private brand penetration and freight optimization. In the fourth quarter, freight was again a positive to the prior year.

Moving to operating expenses on Slide 7. OpEx increased 4.9% from the prior year quarter to $922 million, driven primarily by acquisition-related costs, higher depreciation and higher fuel, wage and benefit costs. Adjusted operating expenses increased $15 million or 1.9% over the prior year quarter. And the percentage of sales were 13.2%, an increase of 10 basis points. On a per-case basis, nearly 1/3 of the increase in adjusted operating expense was a result of higher fuel cost with the balance coming primarily from higher supply chain labor costs and higher health care expense.

Our health care expense is based on actual claims filed during the quarter and can vary significantly on a quarter-to-quarter basis. We continue to be impacted by supply chain wage pressures and higher fuel costs, similar to what we discussed in Q3. Our initiatives, such as day-over-day routing and administrative cost savings, especially in shared business services, as Pietro mentioned, are delivering meaningful benefits. However, the benefits do not fully mitigate the higher wage and fuel costs we're seeing in the supply chain. We have a number of supply chain initiatives that we believe can mitigate the higher wage impact.

On Slide 8, our operating leverage gain was $0.05 per-case this quarter as a result of adjusted gross profit per-case increasing $0.16 and adjusted operating expense per-case increasing $0.11. We remain very focused on opportunities to reduce OpEx as part of the ongoing focus on continuous improvement and by growing adjusted operating -- adjusted gross profit meaningfully faster than adjusted OpEx per case.

Now on Slide 9, adjusted EBITDA was $297 million in the fourth quarter, up 2.4% over the prior year and increased 4.3% for the full year. As a percent of sales, adjusted EBITDA increased 10 basis points to 4.9% for the quarter and improved 20 basis points for the full year. This is the 12th consecutive quarter in which we improved EBITDA as a percent of sales on a year-over-year basis.

Adjusted diluted EPS increased $0.12 or 27% to $0.56 per share for the quarter and $0.65 or 47% to $2.03 per share for the full year. And finally, on the far right, Q4 net income decreased largely due to a $150 million change in income taxes as well as the higher current year acquisition-related costs. The change in income tax is due to a prior year nonrecurring benefit I discussed last quarter compared to a more normalized tax expense in the current year.

Adjusted net income for Q4 increased $25 million or approximately 25% due to the lower federal tax rate as well as improved business results. And for the full year, net income decreased due to income taxes and on an adjusted basis increased $130 million or more than 40% to $442 million due to the lower federal tax rate, improved business results and lower amortization.

Turning now to cash flow and net debt on Slide 10. Operating cash flow for 2018 was $609 million compared to $749 million in the prior year. The drivers of the decrease are consistent with what I spoke about during the Q3 earnings call. Approximately $105 million of the decrease is from the combination of an increase in cash taxes paid this year and an incremental $35 million voluntary contribution to our defined benefit plan -- pension plan. Additionally, we increased inventory by approximately $50 million to $60 million to improve service levels to our customers as a result of the vendor service level challenges we've experienced through 2018.

Our business continues to produce strong operating cash flow and we've continued to decrease our debt levels and improve our debt leverage ratio. Net debt at the end of the year was $3.4 billion, a decrease of nearly $300 million from the prior year-end while our net debt leverage ratio improved to 3x at the end of the year.

Moving now to Slide 11 and 2019. For fiscal 2019, we expect adjusted EBITDA growth of at least 5%, consistent with what we discussed on our Q3 earnings call. We expect first quarter growth to be modestly below this number due to higher fuel cost and timing shifts in some OpEx and gross profit benefits to later quarters of 2019.

I'll now talk through our case volume guidance. We expect total case growth of approximately 1% to 2% for the full year. As Pietro mentioned, we exited 2018 with independent restaurant case growth in excess of 4%. And thus, we continue to expect case growth with these customers to be between 4% and 5% in 2019. For health care and hospitality, we expect growth of 1% to 2% with the growth rate improving as we move throughout the year. With all other part of the business, we expect case growth to be roughly flat in 2019. And with respect to sales inflation, it appears at this time that modest inflation will incur. However, it's difficult to give a specific number, given the volatility we've seen over the past couple of years in commodities.

In 2019, we expect gross profit per case to continue to increase faster than OpEx per case but not as much as 2018 due to the increased wage pressure and less gross profit rate gains. We expect positive benefits to gross profit per case from improved customer mix again in 2019 as a result of our continued growth with independents, health care and hospitality but not to the level we experienced in 2018 with the large chain exits. As a result of growing gross profit per case faster than OpEx, we expect to continue to increase our adjusted EBITDA margins.

Interest expense is estimated to be $170 million to $175 million and depreciation and amortization of between $340 million and $350 million. We expect cash CapEx of between $260 million and $270 million. And finally, we expect adjusted diluted EPS of $2.15 to $2.25 per share and expect our 2019 adjusted effective tax rate to be 25% to 26%.

I'll now turn it back to Pietro for a few comments before we go to Q&A.

Thanks, Dirk. So in summary, while the year did not meet expectations, the quarter, I would say, was characterized by good progress, especially with respect to growth with independents and the penetration of private brands. We also feel very good about our service platform. And lastly, we did make good progress on our multichannel strategy and on the OpEx initiatives we outlined at our Investor Day, all of which is to say we are confident in our EBITDA guidance of at least 5% for 2019.

We'll now open it up for questions.

(Operator Instructions) Your first question comes from the line of Vincent Sinisi from Morgan Stanley.

So first question, just wanted to ask particularly on the gross margin side, as you guys mentioned, you've got kind of some puts-and-takes in there, private label continuing to do well, some customer mix shifts, particularly during the quarter performance. And then also just wanted to ask versus your internal expectations how inflation as well as any change in kind of promotional activity by segment, kind of factored in and then importantly, of course, how you kind of look at that as we go through '19.

Vinnie, this is Dirk. What I would say is you're right there's always puts and takes. But I think from -- inflation from at least a few months ago, not all that different than what we expected. We did see some -- in the commodities again some different behavior year-over-year in the way certain commodity categories behaved, which obviously can have an impact on margins, but again largely in-line with expectations. And we expect continued modest inflation overall and then the commodities, it's harder to tell. And from a promotional perspective and such, again not that different than what we had expected and not that different than what we saw earlier in the year. So that really is what informed 2019.

Okay. And then maybe just a quick follow-up, of course, on the '19 guidance, a question that we've been getting asked a bunch, of course, today. So it was great to see the reiteration of the EBITDA and the overall guidance certainly met expectations. It sounds like you guys are certainly confident about achieving it. The one question that I've been getting from folks is just the kind of reiteration of the at least 5% organic EBITDA. As opposed to giving a range at this point, is that something that we should just expect kind of you feel very confident about that, let's see how the kind of year goes? Or just any other thoughts would be great.

Sure. Yes, I think at this point, we thought our at least 5% was the right outlook. And as Pietro commented, we're confident in that outlook. And as we would typically do as the year goes on, if things play out any differently, we would update accordingly. But we feel confident in the 5% and the levers that we've talked about in order to achieve that growth.

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

So Pietro, if you look at -- I know the last couple of months here with independent case growth, it's the best numbers you've had since the latter part of '17. As you look at it, whether it's geographic account -- I know lines-per-stop were an issue, right, where you were seeing some people go elsewhere. Where are we in terms of the recovery, right, from those self-inflicted issues? Are we 100% back to where you were, 95%, more? Where are we on that journey?

So I would say, as indicated by the exit rate in the January numbers, which also are quite strong, that is the surest test that our service platform is where it needs to be. Maybe a couple of other data points, our on-time delivery is the highest it's been since 2014. And our fill-rates are as high as they have been in several years. And we've got a goal to get back to where we were 5 or 6 years ago before we embarked down this journey. And we're very close to that. It's really just now about optimizing the platform even more.

And the thing I feel really good about, John, now is given the visibility we have into every market, better than we did before, into the root causes that affect our fill-rates, we think that this platform actually will be even better than what we had going into the centralization. So that's how good we feel about it. And you can see it in the growth numbers. And I think the other part of your question, the other indications, as I've mentioned, is that we are now getting growth from existing customers, which we weren't for some period of time last year, which again is indicative of the increasing level of confidence on the part of our customers.

And then if you think about the supply chain, you talked about some of those initiatives. You'd put a number on the potential savings back at the Analyst Day. When you just think about the percentage of realization, how much of that comes through in '19? And in light of the pressure on driver wages, is it possible or are you accelerating some of that so that a greater percentage comes through in '19?

Yes. So I'll let Dirk answer the computation part. But as you said -- so we're delivering on the initiatives that we outlined and we've also added some initiatives, as for the one -- the example I gave on [receiving] optimization to offset what is a higher operating -- a higher wage environment. And you may remember when we talked over the course of the summer, we thought that the impact of that higher wage operating environment would be primarily with starting wages, but it's actually manifested itself throughout the entire base.

So it's been very significant. And what we're doing now is looking for ways to mitigate that. The other thing, I would say, is we're not going to be in this very tight labor market forever, right? And so I think it's a bit like freight, we've reached a new normal. And from there, we can begin to improve and get back to the kind of net savings that we talked about last year.

And John, what I would add is we haven't talked about the specific numbers on phasing. But I think the pace at which we're deploying the initiatives and the value realization is consistent with what we would have largely contemplated last year at the Investor Day. And the big piece that -- the offsetting impact to that is the labor wage pressures and fuel that we've talked about.

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

Some of your peers have talked about a little bit better trends in the chain business, even actual growth in some customers, which I guess contrasts a little bit to guidance for kind of that all other segment being flat into next year. Are there some things that are not apples-to-apples in terms of customer exposure that would be weighing that down? Are there still some -- going to be some offsets from customer exits just as material? Just trying to think about the relative dynamics there.

Karen, this is Dirk. What I'd say is I think across that space, what you see is some concept-specific differences as far as growth or lack of growth. And so even when we look across some of our larger customers, you see some that are growing, some that are down. And that's really if you see diversity, I think, across folks, that's really largely what it's going to relate to. From our perspective, we continue to have on-boarded and continue to on-board some -- what we believe are some good chain partners that are much more profitable than those that we've exited.

And just believe also that we'll continue to optimize small things here and there like we've always talked about but we believe at this point, the large exits are behind us for the time being. And the roughly flat is really the balance that we're striking. And then to the extent that some of those customers, again behaviors change existing customers' penetration, then that could help or not.

Your next question comes from the line of John Ivankoe from JP Morgan.

Two questions, if I may. First, and maybe a little bit of an obvious one, the first quarter of '18 wasn't a particularly strong EBITDA growth quarter. And considering your current trends in independent restaurant growth in January, which is kind of like a best case type of number for a month, in other words, a very strong result, could you go through the pieces again why we should expect below 5% EBITDA in the first quarter, considering that "easy" comparison and considering the trends of independent restaurants? I'm afraid I might be missing something.

Sure, John. This is Dirk. What I would say is a couple things. One is an impact last year was around weather. And so it's pretty early in the first quarter still here to tell. So we know we've had some throughout the quarter last year. We had some significant weather early this year. So that one is really kind of hard to gauge until you get more towards the end of the quarter.

The other big thing is when you look around throughout our P&L in operating expenses and gross profit, and a company of our size, sometimes you have some things that hit at different times throughout the year, and so that's really what it is. There's not a particular large item. There are just several items that the gains or the benefits come at different points throughout the year, thus the little bit softer outlook for Q1.

And are you expecting a sequential slowing in health care and hospitality between the fourth quarter of '18 and first quarter of '19? Or is that similar?

No. We would expect continued acceleration at this point.

Okay. No, I didn't want to cut you off. So we expect continued acceleration in health care and hospitality from the fourth quarter levels? I mean, that's correct?

Yes, that's right because if you think of what happened, right, so existing customers -- and this was -- what we did is we have a number of very large customers. And what we looked at is the actual units that are part of those large customers. And those units that have been with us, those sites, those facilities that have been with us for a year, they're growing at 1%, right? So that's a solid foundation. The leaky bucket from the service issue, that's kind of being closed, right, so that's positive. And then the pipeline is healthy and that's on top of that. So that's why we believe that it -- that sequentially, things continue to improve. Does that help, John?

And yes, it does. And then the second question, in terms of at least what I heard your expectation of a new normal in terms of wage costs, in other words, there'd be a step-up for new employees, there'd be a step-up for existing employees and then it would normalize from there. I guess, how consistent is that expectation with the expectation that independent restaurants continues to be a very strong growth segment for the overall industry?

And I ask this in the context that a lot of people, including me, believe that a lot of the strength in independent restaurants is in fact driven by the strong labor market. So I wonder if it's possible to have one without the other. Or I mean, again are you expecting your wages to possibly increase with the actual number of hours of people that you use in distribution and people that you use in warehousing to actually decrease to allow that normalization to happen?

Look, there's a balance, right, between a labor market that's too tight and a labor market that's too soft. And you're right. Low unemployment rates, low fuel, high discretionary income contribute to end-user demand. I think what happened on the input side, for us anyhow, for the kind of labor we're looking at, which is not exactly the same as the kind of labor restaurants are looking for, right? So Class A commercial drivers, which are skilled, have certain license requirements, selectors have certain physical attributes we're looking for. Those markets became particularly tight over the course of last year.

Your next question comes from the line of Karen Short from Barclays.

Just a question. I'm looking at your EPS guidance versus your EBITDA growth guidance. I guess, as I model kind of the 5% level and using kind of the mid-point on your guidance on D&A, interest taxes, I'm getting much closer to the lower-end of your earnings range. So just wondering if you could give a little color on what the delta would be to get us to the higher-end of the range?

So Karen, this is Dirk. I think maybe Scott or Melissa could help you with that separately. I think ultimately, our outlook falls firmly within that range. And perhaps there's something on share count or the like that is a difference. But ultimately, the 5% and then the numbers that we talked about for the non-EBITDA numbers again get us solidly within that range.

Okay. And then I just wanted to switch gears to SGA a little bit. I mean, obviously you give us an EBITDA contribution when you announced the deal. And I guess, I was wondering if you could just give us a little bit of an update on how they ended kind of fiscal or calendar '18. Just given the fact that they've been in limbo for a little while and I know your outlook is obviously very positive for it, but I just want to make sure that that EBITDA is still kind of consistent with how we should think about the transaction.

Yes, I think you know, Karen, probably that we're not able to disclose anything with respect to SGA's performance. It's a private company. And they have no obligation to disclose anything. And we just have to respect that at this point.

Your next question comes from the line of Judah Frommer from Crédit Suisse.

Maybe, first, just a quick follow-up on the SGA deal. Is there any color you can give us on the conversations you were having with FTC before the shutdown in terms of key questions you were getting from them? Or do we just have to wait until this thing closes?

Yes, I think in the latter part, you answered your own question. We have to wait. It would be -- it's a very rigorous process. I think once you go through it, you -- I don't think you know what it's like until you go through it. It's a very rigorous process and it would be inappropriate for us to comment at this stage, especially that we've literally just reengaged.

Okay, fair enough. And then maybe back to the EBITDA guidance, it does sound like you had a little bit of a miss relative to internal expectations on the Q4 EBITDA growth. Is there a reason that you wouldn't be able to grow a little bit better than the 5% you anticipated if Q4 came in lower than you anticipated?

I think -- so Q4, the predominant item that we talked about on higher costs was around health care claims. And what happens is it seems like every few years, you will have one of these quarters where the volume and value of claims will come in unusually high. And that's really -- they're harder to predict. So that's really what drove the health care claims higher. And again, it's not something that typically happens quarter-to-quarter. I think the other thing is -- so if you put aside that, that was the -- closer to 4.5% growth.

The sequential -- when you think into Q1, so the core business drivers remain intact. Again, just when we look at the year-over-year and the timing of when we incur certain operating expense costs and gross profit gains, you just have a little bit of shift throughout the year. Just, as you remember, in a particular quarter, it doesn't take a whole lot of shift to have a 100 or 200 basis point impact. But overall, we do feel very, very confident in our ability for the 5% throughout the year. And it's really just this, again, modest callout in Q1 that we're making.

Your next question comes from the line of Kelly Bania from BMO Capital.

I guess, just one question -- a couple of questions on 2019. It seems like maybe a big difference between your comments in November and now is just diesel prices, which I think are about 10% lower than they were a couple of months ago, so was maybe thinking that would be a positive for the second half of '19. But maybe you can just remind us how that flows through and what's in your plan for 2019 with respect to -- with diesel and fuel costs.

Sure. As I think we've talked about before, we typically are locking a lot of our -- a good portion of our fuel in roughly 2/3 a year or more out. And so when fuel prices were higher, we do have a good portion of 2019 locked in at higher rates. So for the portions that are not locked in, we would, if -- assuming they stay there -- would generate potentially some benefit or closer to a more year-over-year neutral basis. So what we've built into our outlook is the combination of our commitments as well as a market outlook. But because of those commitments, it does drive a little bit higher rate still for the year.

Okay, that's helpful. And just in terms of the centralized replenishment program that was implemented this year, just maybe an update on how that's going. Is that complete? And maybe just -- do you have any color on the longer-term savings that you expect from that program as the organization is buying in a more centralized manner?

Yes, so essentially, it's complete. It's a very solid platform now we're just continuing to optimize, looking at market-by-market or category-by-category. The benefits that you alluded to, Kelly, are beginning to flow through the P&L. You may remember that it was primarily around the gross profit line. Whether it's better freight optimization in grocery, more opportunistic buying in center-of-the-plate, more truckload buying of produce for smaller DCs, those were all the things that we were looking to enable and that we are, now that the platform is being optimized, looking over time to put those in place. And one of the benefits, I think, we've called out before is I think the speed with which we were able to respond to the freight headwinds and turn them into a tailwind, I think, was indicative of the fact that this platform is a better operating platform for us.

Your next question comes from the line of Edward Kelly from Wells Fargo.

I just wanted to, first, ask one follow-up on case growth. Can you maybe give me a bit more color around the cadence during the quarter? I mean, obviously December was better. But I'm just curious as to why the business seemed to be so choppy during the quarter. And then to the extent that you can, more additional color on how Q1 has started so far.

Sure. I'll take those, this is Dirk. So in Q4, what we saw is October had a relatively soft month that I think at least one of our competitors talked similarly about that. It was pretty choppy. And then what we saw is closer to flat case growth in P-11 and then -- or November. And then in December, as we commented, we had case growth for the period. So it was really that, what I'll call, more anomaly in October that really caused the overall quarter to not show more improvement.

But since we -- but we saw that coming, so not a big surprise. And I think for 2019, the main thing, I'll just come back to Pietro's point, was really around independents started -- finished in January with over 5% case growth and health care and hospitality is right in-line with roughly a 1%-or-so gain. And we continue for all other to have that roughly flat outlook.

So if we just kind of take a step back here on Q1, I mean, obviously it's hard to predict weather. But is there the potential for Q1 that you could be close to the 1% to 2% range in total case growth that you provided for the year?

Yes. I think it's really just where you fall within there, again depending on the weather and the like.

Okay. And just one last thing for you also, a follow-up on SGA. Has the delay started to impact how you're thinking about the magnitude of 2020 accretion? Does the added planning help at all here? Could you give us any update on thoughts around synergies?

Sure. So I think at this point, we don't have an update on the amount of synergies. The time for that will be post close. But we do continue to feel very good about our ability to deliver synergies at or above the levels that we've discussed. I think from the close, there are -- we have used, as Pietro has talked about, the incremental time to do more planning. So we feel we'll be able to get out of the gate faster, which should mean some acceleration, although a number of the synergies are enabled by system conversions and things which can't begin until after the close. So what we would expect is some areas where potentially we can accelerate a little bit. In other areas, it just means we'll be more ready and expect to execute at a higher level as opposed to expediting the synergies.

Your next question comes from the line of Marisa Sullivan from Bank of America Merrill Lynch.

Just wanted to ask on inflation. Can you quantify what amount of the 1.6% inflation mix was actually cost inflation? And have you seen any challenges in your ability to pass that on to our customers at these levels?

I think out of the 1.6%, about 1.2% of that was inflation and about 40 basis points was the mix impact. And where you see -- so as we've seen in basic grocery, disposables, non-food, things like that, some very modest inflation, so no impacts there. In some of the commodity categories, when you see the volatility up or down, what you will see is, for a period of time, it's either a help or a hurt, depending on which direction it's going. And different categories have gone different ways. But as I've talked about a number of times before, when we work our way through those, that's what we focus on, is trying to mitigate -- maximize the gains and mitigate the losses as you work your way through there from an execution perspective.

Got you. And then just as a follow-up, on the day-over-day routing, can you just give us a little bit more color on the timing of the rollout to the remaining markets in 2019, when we should think about the benefits starting to flow through? And then any help that you can give us on quantifying what type of improvement you'd expect to see as you roll this out?

Sure. So we are continuing really sequentially throughout the year to continue to deploy to more and more markets and are through the bulk of our markets by the later part of this year -- by the end of this year. And the value comes from that accordingly. So we haven't talked about a specific value amount for that. But just like with the rest of the supply chain sort of portfolio of initiatives, it's ongoing and the value has begun and continues as we deploy these.

And the exciting thing about day-over-day routing is -- so it drives savings, but it also is a better customer experience because it's a strong partnership between supply chain and sales. And so the better we can continue to be in our on-time delivery and accuracy provides for a better customer experience.

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

I think you gave some commentary on the first quarter outlook. But I was wondering if you can give any additional color on how you expect the fiscal '19 outlook to ramp up. Like what would be the relative split in case growth and EBITDA in the first half and back half of the year? So excluding the impact of the SGA acquisition, I'm just wondering how back-end-loaded your expectations are right now both in relation to case growth and the 5% EBITDA growth?

Sure. So outside of the modest impact in Q1, the balance of the quarters are not all that different. So we don't have a significant ramp-up in the overall EBITDA plan as we go throughout the year. So that's that. I'd say the only other call I would have is health care and hospitality specifically, as we talked about earlier, is we would expect that to continue to accelerate as we go throughout the year. But again, back to an EBITDA perspective, relatively consistent outside of Q1.

Okay. And I had a follow-up. So on expenses, fuel wage and benefits were all mentioned as headwinds in Q4. So I'm just wondering if you're assuming any relief on any of those items or if you're mainly looking at other offsets to that expense growth this year, like the supply chain and productivity initiatives, for example. So I'm assuming you're not going to see any relief on wages anytime soon, maybe some of the recent increase in health benefits or in health care starts to roll off. But I'm just wondering what kind of percentage growth you're expecting in expenses overall this year.

So I think from -- the latter, as you pointed about, is continuing to identify other opportunities to mitigate that higher wage pressure, inflation in supply chain. Wage pressures, as you pointed out, that really continues onward as those higher pay rates stay intact. Fuel will continue to be a challenge. Obviously, there is -- we had some favorable fuel locks a year ago in the first half of the year. So in Q1, that will continue to be a headwind, although we will have some benefit from the market purchase portion being closer to what it was. And then finally, from the health care point of view is we don't really expect that to continue again. As I've mentioned, what we tend to see is every so often, you have a high quarter like that. But we don't expect that to be the new norm by any stretch of the imagination.

Your next question comes from the line of Andrew Wolf from Loop Capital Markets.

I wanted to ask you about mobile ordering, the penetration for the quarter, sort of what your expectations are for 2019. Is there any territory manager growth expectation for the year, up or down or flat? And sort of in a broader context, how do you see your team-based selling in mobile, the way you've executed and set up that way of going to market? Is that still capable of generating operating leverage? Or do you think at this juncture, it's become more of a pure variable cost?

So to start with the last part of your question, we're very happy with kind of the entire approach to team-based selling. And we completed the last element last year with the addition of new business managers to drive growth with new customers. The investment in specialists was done over the course of '16, '17 and '18. And the optimization of the size of the territory managers is, I think, is at a good level. We're always looking to upgrade the quality of the sales force as well as add sellers, where we think there's an opportunity to grow at an even higher rate in the market.

Elements of that team-based selling are more fixed in nature. Like the specialists, they'll have a variable component and other elements, like the territory managers, are more variable in nature. In terms of e-commerce, I think we're close to 60%, right? So the growth obviously has slowed as we've gotten higher. But we will continue to look at markets, [check out] markets where our territory managers are below a certain threshold and provide coaching and support to get them to a higher level because we continue to see that the best service experience for our customers comes from where you have the best territory managers leveraging the e-commerce platform, thus we have the best retention and the best growth.

Okay. Just wanted to ask, Dirk, if I could, just a quick thing on -- kind of technical, but I think it's -- there's a lease accounting change. Are you guys adopting that, first of all? And secondly, is there any income impact to your income statement? Or is it more going to be just a balance sheet item?

Yes, we are adopting that. There will be some disclosures in our year-end 10-K. But you won't see it on the financials until Q1. And to your point, it's less of a P&L issue, it's really more of a balance sheet gross-up, where you have operating leases that will go on the balance sheet and really show up as more liability.

There are no further questions at this time. Presenters, I turn it back over to you.

Okay. Well, thank you, everyone, for all the good questions, appreciate your focus today. I do want to take the opportunity, as I always do, to thank our 25,000 associates at US Foods for their continued commitment to helping our customers make it. Thank you for joining us today, and have a great day.

This concludes today's conference call. Thank you all for joining. You may now disconnect.