Sysco Corp (SYY) — Q3 2016 Earnings Call Transcript

Thank you, Lindsey. Good morning, everyone, and welcome to Sysco's third quarter fiscal 2016 earnings call. Joining me in Houston today are Bill DeLaney, Chief Executive Officer; Tom Bené, our President and Chief Operating Officer; and Joel Grade, our Chief Financial Officer. Before we begin, please note that statements made during this presentation that state the company's or management's intentions, beliefs, expectations or predictions of the future are forward-looking statements and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the company's SEC filings. This includes, but is not limited to, risk factors contained in our Annual Report on Form 10-K for the year ended June 27, 2015, subsequent SEC filings and in the news release issued earlier this morning. A copy of these materials can be found in the Investors section at sysco.com, or via Sysco's IR app. Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures are included at the end of the presentation slides and can also be found in the Investors section of our website. All comments about earnings per share refer to diluted earnings per share unless otherwise noted. To ensure that we have sufficient time to answer all questions, we'd like to ask each participant to limit their time today to one question and one follow-up. At this time, I'd like to turn the call over to our Chief Executive Officer, Bill DeLaney.

Thank you, Neil, and good morning, everyone. This morning Sysco reported strong third-quarter financial results. Our performance reflects both the commitment of our 52,000 associates to supporting the success of our customers and the improving execution of our strategy and three-year plan initiatives. During the quarter, Sysco delivered sales growth of 2% and gross profit dollar growth of 4% while limiting adjusted operating expense growth to 1.5%, which resulted in adjusted operating income growth of $60 million or 16% compared to the prior year. Adjusted earnings per share grew 15% to $0.46 per share. These results were achieved with the benefit of favorable weather conditions and an earlier Easter holiday compared to the prior-year third quarter. Consumer confidence data points, while still favorable compared to a few years ago, were somewhat uneven and tracked the volatile financial market activity quite closely. Lower fuel prices were likely a net positive, as the impact of consumer spending benefits and reduced delivery costs offset to some degree the economic slowdown we are experiencing in energy-driven economies in certain parts of Texas and in Montana, North Dakota, and Alberta, Canada. Turning to specific restaurant industry data, the overall sales trends remain mixed. According to the National Restaurant Association, restaurant sales have been uneven during the first three months of 2016 after steadily rising throughout 2015. Both NPD and KNAPP-TRACK have also shown recent traffic and sales declines. However, even with this recent shopping industry performance, the overall trend remains generally favorable for our customers, as illustrated by the U.S. Census Bureau sales data for the quarter rising 1% above the prior quarter, representing the 11th consecutive quarter of restaurant sales growth. Moving to our results for the first three quarters of fiscal 2016, I'm very pleased with the increasing momentum in our business. For the nine-month period ending in March, we delivered the following results. Total broadline cases grew 3.3% and local cases grew 2.9%. Sales were up 1.2% despite being adversely impacted by both deflation and foreign exchange headwinds. Gross profit dollars grew 3.3% and gross margin increased 35 basis points. Adjusted operating income increased $100 million or about 8% compared to the prior year, and adjusted earnings per share grew approximately 10%. These results are in line with our three-year planned financial objectives, to grow adjusted operating income by at least $500 million and to grow earnings per share faster than operating income. Our progress towards the achievement of these financial objectives is being driven by focusing on the following four key levers: accelerating local case growth; improving gross margin; leveraging supply chain costs; and reducing administrative costs. Regarding the reduction of administrative costs, we recently began to implement a workforce reduction of approximately 1,200 positions. We've taken a very thoughtful approach to this difficult process by focusing on prioritizing all existing work more effectively, reducing layers of management, and expanding spans of control. We believe our approach will allow us to continue supporting our customers with a high level of service, as evidenced by the fact that we are not reducing the number of marketing associates or warehouse and delivery associates who directly support our customers. During the quarter, we also announced our proposed acquisition of the Brakes Group, a $5 billion European foodservice distributor with a significant presence in the United Kingdom, France, and Sweden. We're very excited about this opportunity as we inherit an excellent leadership team and a business whose customer-centric strategy and culture is very similar to Sysco's, along with 15,000 highly capable associates. We expect this acquisition will provide a solid trajectory of EBITDA growth over time and an excellent platform for further acquisitions in Europe. Equally important, this transaction will not distract us from driving our three-year plan in our existing business. We continue to target a June or July closing. As we enter the final quarter of our fiscal year, we are executing our strategy at a high level. We have delivered consistent local case growth for the past two years, expanded gross margins for four consecutive quarters, reduced adjusted cost per case in the field, and put plans into place that will reduce administrative expenses. These actions and related results reinforce our confidence in our ability to achieve our business and financial objectives as we move forward. And now I'll turn the call over to Tom.

Thank you, Bill, and good morning. I'll begin my remarks regarding the third quarter by providing an update on some of the initiatives related to our three-year plan and how they've continued to positively impact our business results. As we have mentioned a few times before, our insights-based approach to understanding and meeting our customers' needs continues to guide our efforts and is clearly driving improved performance. For example, during the third quarter, our U.S. broadline operations delivered case growth of 3.6%, including local case growth of 3.4%, gross profit dollar growth of 4.8%, along with an improvement in margin of 39 basis points. For operating expense, we reduced our adjusted cost per case by $0.08, or $0.03 on a neutral fuel price basis. We had operating income growth of 11.5%. We are driving increased case growth through a variety of sales and marketing initiatives designed to deliver value to our customers while providing a more consistent experience of doing business with Sysco. I'm pleased to report that the third quarter represents the eighth straight quarter of local case growth. As you know, improving gross margin is another key driver of Sysco's success in achieving our three-year targets. Our strong performance this quarter indicates that we are making progress towards delivering our long-term objectives. During the quarter, we delivered solid growth in key center-of-plate categories such as beef, pork, and poultry. Additionally, we continued our growth in produce, reinforcing the benefits driven from a focus on fresh. We also saw a solid increase of more than 50 basis points in Sysco brand sales with our local customers. These efforts combined with other initiatives like our ongoing work in category and revenue management, along with the impact of deflation, contributed to an increase in U.S. broadline gross margin of approximately 40 basis points, marking the fourth quarter in a row with gross margin expansion. These improvements are especially noteworthy as we've managed through the current deflationary environment relatively well, due in part to our ongoing efforts to improve local case growth as a percentage of our mix as well as our continued focus on our category management process. Separately, the operating expense performance during the quarter was particularly strong. We limited total adjusted expense growth to only 1.5% despite case growth of more than 3%, and as previously mentioned, we reduced our overall cost per case in the U.S. broadline by $0.03 excluding the impact of fuel prices. From a supply chain perspective, we continue to make good progress towards our goals of improving overall service to our customers while driving higher productivity in our operations through our continuous improvement process. We've also seen good progress through a series of indirect spend initiatives. While there's still much more work to be done, we are seeing improved operating expense trends and we are targeting a continuation of this performance throughout the balance of the fiscal year. In conjunction with the series of initiatives to support our long-term strategy, we are implementing a new market structure that reduces the number of U.S. broadline geographic markets from eight to six, effective at the beginning of our fiscal 2017 year. Each market team will continue to be led by a market president and include key functional leaders across finance, merchandising, supply chain, and human resources to provide support to our operating companies to help drive solid execution of the various corporate initiatives. We believe that the work we've done in building the capability of the organization through the functional structure over the past two years makes this the right time for us to evolve our structure. This change will reduce overall administrative costs in the field, drive efficiency through a more standardized approach, and improve execution for our customers. Along with this restructuring, I'm pleased to announce the promotion of three strong Sysco leaders. Greg Bertrand has been appointed Senior Vice President, U.S. Foodservice Operations, with responsibility for all U.S. broadline operating companies. We also announced that Scott Sonnemaker has been named Senior Vice President, International Foodservice Operations, Americas, and Bill Goetz has been named Senior Vice President, Sales and Marketing. These are just a few of the key priorities and changes that are positively impacting our operational and financial results. While we need to continue executing at a high level, I'm confident we are on the right path to achieve our long-term objectives. In summary, our customer and operational strategies are being executed well in the field and our headquarters teams are doing a terrific job of providing our organization with field-ready tools and processes that are enabling our success. Now I'd like to turn the call over to Joel Grade, our Chief Financial Officer.

Thank you, Tom, and good morning, everyone. We had a strong quarter led by continued momentum from improved underlying business performance, strong local case growth, particularly solid gross profit dollar growth, and good cost management, achieved in an environment with continued deflation and currency headwinds. We continue to make solid progress towards our fiscal 2016 plan and our three-year goals. We grew sales in the third quarter by approximately 2% year over year, despite deflation of 0.4%. We saw continued deflation in center-of-plate protein categories such as meat, seafood, and poultry, as supply recovers from various events in 2015. This deflationary trend has been persistent over the past two quarters. Acquisitions increased sales by 0.9% while foreign exchange negatively impacted sales by 1% in the third quarter. The U.S. dollar strength against the Canadian dollar was responsible for the vast majority of the foreign exchange impact. The negative impacts we have been experiencing on a comparative basis are lessening as we began to wrap the initial decline in relative value of the Canadian dollar. On a constant currency basis, sales would have been up 3.1%. Turning to case growth, consistent with our three-year plan to achieve disciplined case growth, we had another quarter of strong performance. Total broadline case growth for the third quarter was 3.3% and local was also 3.3%. This is the eighth consecutive quarter of year-over-year local case growth for the total broadline. Looking at gross profit and gross margins, we grew our gross profit at a solid 4.1%, while also continuing to see expansion in gross margins which grew by 34 basis points. The key drivers of gross margin improvement included category management, a more beneficial mix of local business, higher Sysco brand penetration in our local business, and deflation. On a constant currency basis, gross profit growth was 5%. During the third quarter, we had a few certain items that impacted our results. These include restructuring costs such as charges related to technology changes, severance, and professional fees of $60 million and about $10 million of acquisition financing costs. On a GAAP basis, without excluding these certain items and the comparable certain items from the prior year, our operating income grew 15% and our diluted earnings per share grew by about 27%. The rest of my discussion will focus on the non-GAAP or adjusted for certain items results. Adjusted operating expense grew 1.5% during the quarter and by 2.4% on a constant currency basis. This increase was mainly driven by the previously mentioned higher case volumes and incentive accruals and is partially offset by various decreases, including reduced indirect spending, lower fuel costs, and foreign exchange translation. This progress is reflected in our reduced cost per case. As a result, adjusted operating income for the third quarter was $438 million, up 16% compared to the prior year and 17% on a constant currency basis. As it relates to taxes, our effective tax rate in the third quarter was 33.6% compared to 33.9% in the prior year period. Both quarters' tax rates were positively impacted by the favorable resolution of state tax matters. Compared to the prior year, adjusted net earnings grew 10% and adjusted earnings per share grew 15%. Cash flow from operations was $1 billion for the first 39 weeks of fiscal 2016, up approximately 15% from last year. Net working capital improved by about half a day during the third quarter compared to the same period last year. This was largely driven by improvements in both receivables and inventory. Net CapEx for the first 39 weeks was $348 million, and free cash flow was $641 million. Both cash flow from operations and free cash flow include the cash impact of certain items of $272 million in fiscal 2016 and $128 million in fiscal 2015. As a reminder, the certain items for 2016 are mostly related to the termination of the proposed merger with US Foods, and for 2015 include items related to the planning of the merger integration. Excluding the cash impact of certain items from both years, cash flow from operations grew by $273 million and free cash flow grew by $346 million. Now I'd like to close with some commentary on the remainder of the fiscal year. First, we're currently on track to hit our fiscal 2016 financial objectives. Second, we expect deflation to persist for at least another quarter. Third, we had a relatively strong fourth quarter last year, which will make fourth quarter comparisons this year more challenging. Finally, we now expect CapEx for fiscal year to be approximately $500 million or approximately 1% of sales. During the quarter, we also completed a successful debt offering, the proceeds of which are to be used for the acquisition of Brakes that Bill mentioned earlier. The very attractive coupons associated with this financing, approximately 3% on a weighted average basis, represent both the strength of our balance sheet as well as impressive work by our team throughout the process. In addition, Sysco put in place hedges during the quarter that protect approximately half of the purchase price over the Brakes transaction against unfavorable movements in foreign exchange rates. In summary, we had a strong quarter led by continued momentum from improved underlying business performance, strong local case growth, solid gross profit dollar growth, and good cost management. That said, we have more work to do to achieve the financial objectives for our three-year plan. We are committed to serving our customers and delivering a higher level of execution in all areas of our business that will improve our financial performance in both the near and long-term. I feel confident in our ability to achieve the financial objectives of our three-year plan, and we will aggressively continue to look for incremental opportunities to exceed our goals.

Hi, good morning. Thanks for taking my question, and congrats on a nice quarter here. Just curious if you could talk about the local case growth; it continues to accelerate. Maybe just, if you can, provide some historical perspective on when the last time it was this strong. Are you seeing it in both comp restaurant growth or new independent local customers coming into the mix? And then in terms of the private label penetration with that local segment, where do you think you can take that longer term?

Hey, Kelly, it's Bill. I'll start and I'll let Tom give you a little bit more color. I think in terms of historical context, this is by far the strongest quarter we've had over the last four or five years. That’s very encouraging and certainly something that is bringing the momentum of the business that both Tom and Joel talked about. So in terms of where it's coming from, I think it's the same answer as I would give you if you had asked about margin or even expenses at this point. It's coming from a lot of good work over the last few years on the commercial side of the business that Tom can give you a little more color on, and really good alignment I think with our leadership team throughout Sysco. I would say this particular quarter, we acknowledged there were some tailwinds. I don't like to talk about weather a lot; I think that the last two third quarters we've talked about weather. Two years ago we had a brutal winter at the beginning of the winter and last year I think it was at the end of winter, but this year was a pretty mild winter. So I think that helped a little bit. That said, I think I was also trying to get out there that the data out there right now is a little mixed in terms of overall industry growth. So I think we had some tailwinds that we took advantage of. More than anything, I think it's really good execution of key initiatives on the commercial side over the last three or four years. On the brand – and I'll kick it to Tom real quick – these things tend to go together. When you're growing your business, you're creating differentiation at the customer level, and that's what the brand allows us to do. So we've brought renewed focus on the brand over the last three years in conjunction with our category management work. I think we're doing it the right way. I don't know that we're really chasing a specific number here; I think we're saying the key to all of this is really growing those local cases. And as we do that, we should be able to grow the brand. I don't know that there's a particular percentage we’re targeting other than utilizing the brand as a way to differentiate ourselves more effectively. Let me kick it to Tom here to give you a little more color on that.

Thanks, Bill. I won't repeat much of what Bill said because he clearly articulated many of the key drivers. Let me just add on the local case growth. You had asked about current customers and new customers. We spend a fair amount of time looking at what we call new sales, lost sales, and penetration. Think about that as new customers, any customers that we may have lost some business at, or where we've done a better job of selling more to those customers. I would tell you that all of those metrics continue to head in the right direction as it relates to our local customers, meaning our new sales continue to be very strong. Our lost sales have declined a little bit over the past couple of quarters. Our penetration sales, which deliver more to current customers, have also been increasing. That's a key metric for us as it shows we are improving in all those areas with our current customers and ensuring that we're continuing to satisfy their needs. We feel good about all those metrics and where the business is heading. Lastly, on the Sysco brand, the only thing I'd add is that our focus – a lot of our category management focus is in fact driven towards that local customer. Based on that, the more we bring them differentiated solutions, as we've talked about innovation in the last couple of quarters, is when we're introducing them to new news and innovation, that actually helps us grow our Sysco brand because generally those products are in the Sysco brand lineup. So I think as Bill said, they go hand in hand, and I would agree with Bill, we don't have a specific number we’re targeting. We believe it’s important and will continue to focus on it quarter in and quarter out.

Thank you.

Great, thanks and congratulations on the quarter. Bill, I wanted to ask you about the sales count of the Marketing Associates. Is it up compared to previous quarters or year over year, or is the organization achieving good local penetration and overall growth with the same number of sales staff?

It's roughly the same. I think the mix is a little different. We've put a lot of trainees over the last year, and that's begun to level out. Tom, do you have anything?

No, I think that's the big change. Our base MAs were very much flat versus the past year and this quarter. Because we've seen good retention with our marketing associates, we're down a little bit in the number of trainees we have out there because we just aren't using as many in the pipeline. Overall, we're driving these sales with our existing sales force.

The reason it can be flat, Andy, is because of some of the work that we've done over the last two or three years with the CRM tool, with some things we're doing in terms of territory management to be more rifle-like in going after the business, and that will continue to be a point of emphasis in our sales strategy.

Okay, that's an encouraging change, I think, from the way the business has historically operated. Do you think, going forward, if you wanted to continue this momentum, you can at least leverage sales, get case growth, local case growth, in a multiple of – it sounds like you can. I just want to confirm how you think about that. It used to be a one-to-one relationship between sales headcount and internal sales growth; it sounds like you've actually gotten to a point where maybe it's a lot better than that.

I think it's a little better than that. I think you'll continue to see that.

And the other question I want is for Joel. On the $59 million net total restructuring costs, can you just tell us how much of that was accelerated depreciation related to SAP or anything else?

I would say maybe about a quarter of that was, I think even a little less than that. There was a part of that that was a one-time write-off of projects that were in process that were associated with the SAP conversion at the time when that decision was made. We took a one-time charge on some of those. Again, it was split up for the most part between, again, the one-time write-off which was quite a bit higher than the accelerated depreciation and then again, a couple of other severance-related costs that are part of a certain item.

Okay.

That's right. Then something you'll see in the third quarter, not part of the accelerated depreciation, that was a one-time write-off of project costs that were again associated with the SAP.

Okay. Because if you – yeah, so we should take about $15 million or so off of the D&A just to get to a normalized D&A for the quarter? That's what I'm trying to get to.

That's probably a reasonable ballpark, Andy.

So really looking at the change in the org structure, the eight to six markets, what changes does that necessitate for the levels below them right down into really out to the op companies? What are they going to have to do differently? Where do you think you pick up execution benefits? Do you think this is kind of the structure we're going to have going forward? Or do you think you'll play around with it a little bit more and look for some more efficiency?

I think, John – good morning. It's, again, the structure hasn't changed; all we've really done is consolidate it from eight to six. When we went to the structure, the structure's really evolved over the last few years. But when we went to the functional structure a couple of years ago, we felt eight was important. There's a lot of ramp-up work and change management work to do when you put this type of structure in place and you've never had it before. We just feel today that in conjunction with everything else that it's a good metaphor; if you will, for – I talk about in the expenses where we can spread our top people a little bit further. We're further along in a lot of our transformative work. We just feel we can run the business very well with six. It impacts not just the market presence, but all the functional leads as well in the four areas. But it doesn't really change that much at all; if anything, it’s at the operating company level. Tom, do you want to -?

The only thing that it adds is a little more geography for each of the markets, which means a couple more operating companies that report into that market level. As Bill said, the reason we're confident now is we've had enough time with this structure and the functional leadership that we feel like we're driving out consistency across the business. A few more operating companies for each market will not be a challenge for them. We're focused on creating a consistent design. That’s at the market level and within the operating company, helping to drive consistency, which we believe will improve execution. We've seen that so far, and we also believe that we'll create a better customer experience because it will be more consistent market to market and operating company to operating company.

Look, John, I think we'll continue to tweak things. But this structure we believe is vital and a key part of the beginning of the momentum you've seen here over the last several quarters. I wouldn't expect this structure to change. These are $5 billion and $6 billion markets. When you think about that, it requires a fair amount of focus between the corporate center and that operating company, so we think we've got it about right at six.

And then maybe for Tom, where are we now with the revenue management organization? How much of the benefit are we now starting to see flow through? And where do you think the biggest opportunity is if you think about the next 12 months to 18 months? And I guess both margin and case growth do impact either one.

Great question. So we literally had our training for our last dozen operating companies last week. By the end of the fiscal year, we'll be fully up and running, with a revenue manager in every operating company. The market structure that's been in place now for a quarter will be fully operational. We continue to believe that by leveraging that organization and creating a more standardized set of routines, they've partnered nicely with our business technology team in creating some tools for these folks to really focus on ensuring that the product costs in a market are competitive and consistent. We believe by leveraging those routines and tools, we'll see some margin-side benefits. It's really there as support for cases; it's not a direct driver of case growth per se, but ensuring that we have the right market pricing in place. We feel good about our current progress, though I'm not going to peg a number for you. We feel good about the work we've done, and we’re continuing to scale it across the organization.

Okay, thank you.

Hey, great, thanks very much for taking my question. Good morning, guys. I just wanted to ask for an update on the ERP rollout? I know a couple of months back you mentioned a different approach to that; just wondering if you can give us all an update there.

Hey, Vinnie. There's not a lot to report there. It's just been a couple of months, as you point out. We're putting together plans; there are 12 opcos that we're going to bring back to this enhanced SaaS platform. We're going to start with one company here in the next couple of months. But we're on target from a planning standpoint, with great coordination between the operating side of the business, the BT side, and shared services. So early days, but still very committed and on track.

Okay, great. Thank you. And then, just as a follow-up, maybe going back to your private brand sales that had a nice increase this quarter. I know you mentioned about the independent customer growth volumes coming through, but in terms of categories that you are seeing, kind of where do you think maybe some of the most opportunity is there? Any expansion plans from the private brands in general? Maybe where you see the bigger changes by product standpoint?

This is Tom. I'm not sure there’s necessarily any big changes by product category. It's a fairly developed side of our business. What it allows us to do is that as we introduce new products through the innovation pipeline, most of those are Sysco brand. That is maybe one new focus area. I wouldn't say that's necessarily in any specific category. A lot of what we do in the produce space, as you've heard me talk about, is in Sysco brand as well. That continued focus there and growth seen in some areas is also driving some of the Sysco brand momentum.

Thanks very much, Tom.

Hey, good morning. Thanks for taking the questions. Just the first on the trajectory of margins; you had the single best EBIT growth in over a decade. As we think about deflation moderating and inflation potentially coming back next year, how should we think about the recent level of top line flow-through, particularly if you see case growth come back overall?

Hey, Stephen. First of all, I wish I could tell you when we were going to cross over between deflation and inflation, as we were pretty cautious in our comments. We said we expect it to last at least another quarter; it could be longer based on what we're seeing. I'm not really sure when to make that call. As for your question, it's a great question that's hard to answer, regardless of whether I'm looking back or looking forward. If you look back and see some things we've said over the last several months and while putting the three-year plan together, our hope is when we can return to a more moderate inflation environment, we would grow the cases and at least hold margin flat, maybe grow it a little bit. That's the plan and will take a lot of cohesive execution, which we're quite confident in between cap management that Tom has spoken to, and we continue to grow those local cases. The key is the local cases and the mix; we need to grow both our local and corporate managed cases to have that in the right ratio, which will help us on brand penetration. If we do that, we'll be able to manage our margins well.

Great, thanks. And then as a quick follow-up for Joel, when you say that you'll be lapping this tougher fourth quarter, is that primarily focused on just the margin? Is there something else we should be aware of related to top line comparisons?

No, I think you've hit it. We had a pretty decent operating income quarter as well in Q4 of last year. The comparison for this quarter in particular is a bit tougher than we've had over the last three.

Hi, guys. Congratulations on a great quarter.

Thanks.

Question for you just from a top-line perspective; obviously, a lot of good strong momentum here in broadline's case growth. Can you talk about kind of where you are within the runway here, whether it's penetration with existing customers, private brand in general, and even new channels? There hasn't been much talk about areas like retail, which I know is something that's newer for you, and maybe the opportunity you see there. I'm trying to figure out sort of the sustainability of the momentum you're seeing today.

Let me start. It was a really nice quarter and we did a lot of good things leading to great results. From an external standpoint, there were some tailwinds that I don't think you can plan on every quarter in terms of favorable weather comparisons, etc. We may be seeing a little softening in the market right now based on what we're seeing in our business and the industry overall, but I think it's primarily driven by the book of business we have today with continued pipeline quality from existing customers. We have been doing some things on the retail side and have made progress with good work on ethnic food, particularly Hispanic segments. There’s further opportunity beyond that segment, and the whole area of fresh and organic also presents growth opportunities. To sustain what we've put up in recent quarters, we need to penetrate with our existing accounts more, which is the most profitable business. Additionally, we need to keep attracting new accounts and improving customer retention. The good news is we are managing these aspects well right now, and I wouldn't overreact to one quarter, but our year-to-date numbers are within range for our three-year targets, and we are quite confident that we can deliver.

Just one follow-up on something becoming a bigger part of your story, if you look at your free cash flow year-to-date; just reported to something like 50%, based upon what Joel was talking about; maybe it's up more. You’ve obviously had good EBITDA growth, and CapEx is now trending below your forecast. Can you share where the free cash flow and CapEx sits within your three-year forecast and what we should be expecting moving forward?

That’s great. Let me start, and Joel can add. One of the things we are careful about is the key objectives we define in our three-year plan that resonate with our investors based on feedback. We locked in operating income growth, expecting to grow our EPS faster than operating income over that three-year period, locking in our return on invested capital at 15%. That was before the Brakes deal, but we remain on track to meet or exceed the 15%. After we close the Brakes deal, we’ll provide color on the impact of that. We focus on return on invested capital. The free cash flow comes together with EBITDA growth, and while we don’t have a specific delta target for that right now, it has been strong and should continue. Regarding investments, you should expect us to invest in the business; we are currently under our CapEx expectations, around $500 million, which is about 1%. CapEx may fluctuate slightly based on timing, but we expect that around 1%, maybe slightly more sometimes. Continue to focus on assimilating Brakes, running the current business well while increasing the dividend modestly and opportunistically buying back shares.

Hey, good morning, guys. You called out some of the fresh categories in your prepared remarks as specifically produce and proteins. It seems these categories tend to have more specialty competition, particularly for local customers. First of all, would you agree that fresh is an area where you're taking share? I'm curious how you think about this as a longer-term opportunity given your scale versus the specialty mom-and-pop stores.

Why don’t I jump in? First of all, it's hard to tell if we're taking share, but we're certainly seeing good growth in these areas. We have our own specialty companies in these areas—FreshPoint on produce, and various specialty meat companies across the enterprise. While we’ve been focused on these categories, it’s not a new thing for Sysco. If we can perform well for our customers in these areas, which can be more challenging, delivering fresh meat and produce, it gives us the opportunity to do the other things well as well. Quality is our focus in ensuring we have the right products. We've got a great program in place regarding traceability, and we firmly believe that our size allows us to compete well in this space. We're focused on how we can be better for our customers every day. We feel good about our performance and continue to grow in this area; however, success requires ongoing management.

Got you. And just with the volatile inflationary environment, can you discuss pricing guardrails for your MAs? How much autonomy do they have on pricing? Can you discuss your approach to ensure you are not leaving money on the table while still being competitive on price?

We believe in pricing being local in this business for local customers. While MAs have some autonomy through our revenue management work, we're doing a better job of providing them the tools and processes to ensure we are competitive locally while also managing the business. We believe it is important for them to have that flexibility for our customers to keep the street competitive every day, and we are creating an environment where we work together toward these objectives.

Hi, thanks for the question. I wanted to get clarification on your outlook for the operating expenses in the fourth quarter and for fiscal 2017. So is $70 million still the right number based on your guidance for this year for total charges? If that is the right number, am I right in assuming you are looking at $10 million or $11 million in fourth quarter charges? Then the same for fiscal 2017, are you still looking at about $130 million in charges next year?

This is Joel. We've talked about our announcements that we anticipated around $70 million for this year and about $130 million for next year. Those estimates still hold. I don't know if that answers your question, but the numbers we discussed earlier remain on target.

Okay. And the severance is on top of those numbers, is that correct?

There's an element of severance built into those numbers. We made some estimates in terms of severance, which were part of those two years, so I would categorize those into four distinct areas: one-time write-off, accelerated depreciation, severance, and what we call conversion costs related to the move from the SAP system to our enhanced version of SaaS. Think of them as grouped into those four categories. We have a severance estimate that is actually built into those numbers for those two years.

Okay, and one final question if I could. Since you called out the Easter calendar shift in your prepared remarks, can you quantify that at all because of the sales impact?

I don't think the Easter thing – we called it out because it was real, but Easter, compared to previous years, is not as significant anymore. It’s certainly not a big factor like Mother's Day. I think the weather played a bigger role. When you look at the delta and case growth, it would be great to think it was all us, but a pretty mild winter in most of the markets we serve has likely contributed to it. I think that was a bigger deal than the holiday.

Great, thanks.

Sure.

Hi, good morning. I wanted to get a gauge for how big the pressure was from those oil-related states. How big is that for your overall mix of sales? When do you think you'll start lapping out of that?

I have no idea when we're going to lap out of it, just like I probably can't predict when we're going to move from deflation to inflation. We haven't talked about that publicly. We’re making an effort here to give perspective on what's going on as it relates to fuel impacts. On the good side, we believe there’s some flow-through at the consumer level, enhancing discretionary income. Prices have started to pick up a little of late. That helps our cost structure, although we've managed costs well outside of fuel. The downside is in portions of the Southwest, Montana, North Dakota, and Alberta, it goes the other way, so it's meaningful in these markets. If it persists, we might offer some color on it, but right now we haven't.

Okay, so what do you think the primary factors are to gauge your better performance on local case volume trends versus disappointing results from KNAPP-TRACK and other casual dining metrics?

That’s a tough question. I can only speak about our performance; we differentiate ourselves relative to competition. The local case growth focus is a key aspect of that. I feel there is a customer mix reconciliation as we continue to strive for improved performance.

Okay, thank you.

Sure.

Hi, great. Thank you. Firstly, could we talk about digital as a percentage of sales either in broadline or local case volume? If you've publicly stated where you think that can go by 2018 and the implications that it may have for your business?

We haven't discussed a specific target, but our approach is to provide options for customers to order in any manner they choose. As we know, our marketing associates are essential, and we continue to enhance our mobility platform. While online purchases are still under 10% of total sales, we see growth. We feel good about our progress without pegging a number by a specific date because we believe it will align with customer needs and expectations.

Thank you. And, secondly, is there any implication at all if the UK leaves the EU in terms of your Brakes acquisition? Are they separate, and would that have any impact?

It's hard to assess at this point since there will be an impact, John, in Europe and the UK particularly. I can’t give specific color at this stage; we're watching closely. We were aware of these factors during our discussions. People are going to continue to go out and eat, and we feel lucky to be closing a transaction with a well-respected, strong company with a great leadership team. We'll tackle whatever comes our way, but right now we're excited about inheriting their team.

I would add; we're in this for the long haul. We view this deal as integral to our long-term value creation. We're cognizant of the surrounding factors and will adjust our strategy accordingly.

Thank you for taking the question. I just wanted to follow up on the earlier discussion regarding CapEx. I got the impression the reduction this year was related to timing issues that potentially flow into next year. If you could confirm that? Also, regarding the Brakes deal, I realize the deal has not closed yet, but could you provide your initial expectations regarding whether there would need to be a step-up in CapEx to bring that business online?

Sure, this is Joel. Concerning the CapEx commentary, there's a timing element but I wouldn't say a lot; don't suspect a significant spike next year as a result. Bill discussed our CapEx being around 1% of sales and this year we expect around $500 million. There might be fluctuations based on timing, but that 1%, possibly slightly higher occasionally is what you should anticipate. For Brakes, we factored in some level of CapEx during our modeling for the acquisition, so I anticipate them being in line based on the investment they've made thus far.

Thank you; that's very helpful. As it relates to the earlier discussion regarding hiring truck drivers, do you still see benefits in attracting truck drivers or has that benefited less recently?

I think we have. Markets we struggled in 18 months ago have revealed better opportunities for talent. Some challenges were self-inflicted, and we’ve improved. However, I'll trade the business gains against hiring challenges, but to your specific question, the pressure has somewhat moderated recently and it isn’t a concern for us now.

Thank you very much. I appreciate it.

Thank you very much, everyone. We appreciate your time today.