Sysco Corp (SYY) — Q4 2016 Earnings Call Transcript

Thank you, Christy. Good morning, everyone, and welcome to Sysco's fourth quarter fiscal 2016 earnings call. Joining me in Houston today are Bill DeLaney, our 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. Actual results could differ materially. 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 found 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 is included at the end of the presentation slides and can also be found in the Investors section of our website. Please note that the financial results announced today include a 14th week for the fourth fiscal quarter and a 53rd week for the fiscal year 2016 ended July 2, 2016. In fiscal 2015, the fourth quarter included 13 weeks, and the year included 52 weeks. Therefore, the results discussed on the call will include GAAP results and non-GAAP results adjusted for certain items. We will also share the adjusted non-GAAP results on a comparable 13-week and 52-week basis to provide reasonable year-over-year comparisons. 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 fourth quarter and fiscal year financial results. Our performance reflects both the soundness of our strategy, the commitment of our associates to supporting the success of our customers, and the consistently improving execution of our three-year plan. For the quarter, on a comparable 13-week basis, Sysco delivered sales growth of 2% and gross profit dollar growth of 5%, while limiting adjusted operating expense growth to less than 2%, resulting in adjusted operating income growth of approximately 15% compared to the prior year. Adjusted earnings per share grew approximately 15% as well. These results were achieved in a market environment that is experiencing uneven trends and appears to have softened somewhat lately, while consumer confidence and unemployment data points remain relatively favorable compared to a few years ago. The current sentiment for customer spending and meals away from home seems to be trending slightly downward. Turning to specific restaurant industry data, overall sales trends weakened as reflected in current NPD and KNAPP-TRACK Traffic and spend data. That said, according to the National Restaurant Association, restaurant operator expectations remain somewhat favorable. Moving to our results for fiscal 2016, I'm very pleased with our performance during the year. The improving momentum in our business is a result of strong local case growth, gross profit growth, gross margin expansion, and solid expense management. Specifically, for fiscal 2016, on an adjusted 52-week basis, we delivered total broad line cases grew 3%, and local cases grew 2.7%. Sales grew 1.5% to $50 billion, even with the unfavorable impact of deflation and foreign exchange headwinds. Gross profit grew 3.6% to $9 billion, and gross margin increased 38 basis points. Adjusted operating income increased 10% over the prior year to $2 billion, and adjusted earnings per share grew 12%. In addition, free cash flow approximated $1.4 billion, and adjusted return on invested capital was 14% for the year. I particularly encourage our progress toward the achievement of our three-year plan financial objectives, especially our goal to grow adjusted operating income by at least $500 million from fiscal 2015 to fiscal 2018. Our strong progress towards achievement of these financial objectives is supported by a foundation built over the past several years through a series of commercial, supply chain, and administrative initiatives. We continue to build on that foundation throughout fiscal 2016 by accomplishing several key objectives, including leveraging customer insights to create new and enhanced sales marketing programs, advancing our progress in several key commercial areas, including category and revenue management, and shifting our technology strategy and related spending to a more customer-centric focus, and restructuring our business to drive greater efficiency including streamlining our market structure, introducing a standard field organization model, and further developing a functional structure in key support areas such as merchandising, supply chain, and human resources. All of this has been accomplished by consistently improving the execution of our strategy, centered on five fundamental points: Partnership to profoundly enhance the experience of doing business with Sysco; Productivity to continuously improve productivity in all areas of our business; Products to enhance our offerings through a customer-centric innovation program; People to leverage structure, talent, and culture to drive performance; and Portfolio to continuously assess new market opportunities and current business performance. Regarding the latter point, we recently closed the acquisition of the Brakes Group, a $5 billion European food service distributor with a significant presence in the United Kingdom, France, and Sweden. Brakes is a highly regarded company whose management team and strategy are well aligned with our vision for Sysco, to be our customers' most valued and trusted business partner. This acquisition will serve as a platform for expansion in Europe. We're looking forward to working with the entire Brakes team to execute their business strategy, and we feel fortunate to welcome them into the Sysco family. Joe will discuss with you in a few minutes the anticipated contribution of Brakes to Sysco's financial results. As we enter the new fiscal year, we are executing our strategy at a high level, working effectively together as one Sysco, and we remain committed to the success of our customers. We have even bigger goals for fiscal 2017, and I'm confident in our ability to achieve our financial and business objectives in the year ahead and throughout the three-year plan. The new fiscal year brings expanded global presence, enhanced technology, and a continued focus on our customers. Specifically, we intend to deliver solid local case growth, increase our gross profit, reduce costs in the right way, and put the necessary tools in place that will further enable our associates to provide our customers with industry-leading service and support. Our past and future success is driven by the ongoing dedication and commitment of all of our associates. I thank each of them for their effort in delivering a very successful year in fiscal 2016. And now, I'd like to turn the call over to Tom.

Thank you, Neil, and good morning, everyone. Fiscal 2016 was a great year for Sysco, and I'm proud of the contributions made by all of our associates throughout the year. Sysco's financial results announced this morning reflect a year of solid operating performance and excellent progress on several key multi-year initiatives that have begun to provide a strong foundation for success. Our operating performance was driven by our ongoing focus on the key drivers of our three-year plan, including accelerating our sales with local customers by providing them with exceptional service, improving gross margins, and managing overall expenses. This morning, I will provide an update on some of the initiatives related to our three-year plan and how they have continued to positively impact our business results. The first of which is our focus on accelerating local case growth. During the year, we grew U.S. broadline local cases 2.6% on an unadjusted 52-week basis. This is the strongest performance we've had in several years; also, an adjusted 52-week basis gross profit in the U.S. broadline group grew 4.7% for the fiscal year, and gross margin increased 47 basis points, driven by our focus on profitable case growth, revenue management activities, and improved Sysco brand penetration. The focus our sales teams had on helping our customers succeed and grow has been further enhanced throughout fiscal 2016. During the year we remained focused on improving our industry-leading category management practices, deploying revenue management in the field, and enhancing our sales training and support tools to continue to free up our marketing associates' time to better support our customers with business-building solutions. We also rolled out various promotional programs in key initiatives throughout the year, including those that highlight product innovation and reinforce the Sysco brand, which delivers tremendous value to our customers. This value is delivered through an unrelenting focus on the highest quality products and best-in-class traceability from a food safety perspective. Finally, we continue to focus on delivering new and improved customer-facing technology solutions that add value to their businesses and allow our associates to be more efficient. On the cost side, expense management throughout the year was solid and remains a key area of focus moving forward. For U.S. broadline during fiscal year 2016, we limited total adjusted expense growth to only 2.2% on a comparable 52-week basis compared to gross profit growth of 4.7%. We also reduced our overall cost per case in U.S. broadline by $0.04 during the year. The impact of fuel prices on our cost per case in U.S. broadline was flat. As we discussed, we've been very focused on reducing costs and improving productivity while continuing to deliver improved service levels to our customers. In fiscal 2016, we reduced expenses in several key areas. In the supply chain area, we have reduced indirect spend and will continue to focus on maximizing transportation and warehouse efficiency. We've also standardized organizational design and reduced the number of our markets in the U.S. from 8 to 6. Throughout the organization, we have reduced overall SG&A costs. In summary, our customer and operational strategies are solidly aligned around improving our customers' experience, engaging our associates at the highest level to improve execution, and delivering our financial objectives as part of our three-year plan. In fiscal year 2016, we made significant progress in all areas, and I remain extremely optimistic about the programs and processes we are putting in place that will enable our future success. Now I'd like to turn the call over to Joel Grade, our Chief Financial Officer.

Thank you, Tom, and good morning, everyone. As Bill and Tom have mentioned earlier, we are pleased with the results of the fourth quarter and the full year. Our growth reflects continued momentum from our underlying business, including strong local case growth, solid gross profit dollar growth, and good cost management. I begin my remarks by speaking to our fourth quarter. For the purposes of matching your models, our fourth quarter results including the next week include: sales growth of 10.0%, gross profit growth of 12.7%, adjusted operating expense growth of 9.6%, adjusted operating income growth of 23.4%, and adjusted earnings per share growth of 23.1%. Excluding the extra weeks on a comparable basis, the fourth quarter results include: sales growth of 2.2%, gross profit growth of 4.7%, adjusted operating expense growth of 1.7%, adjusted operating income growth of 14.6%, and adjusted earnings per share growth of 15.4%. Sales during the quarter were negatively impacted by both deflation of 1.2% and foreign exchange of 0.5%, partially offset by an increase in sales from acquisitions of 1.2%. Our comparable 13-week basis total broadline case growth through the fourth quarter was 2.2%, local was 2.4%, and corporate managed growth was 2.0%. During the fourth quarter, we had certain items that impacted our results. In the prior year, we had acquisition costs of $390 million; in the current year, we had a remeasurement of foreign-denominated cash due to lower exchange rates, as well as the premium foreign currency option contracts for the Brakes acquisition. As a result, other expenses net for the quarter were approximately $141 million, primarily driven by certain items from fiscal 2016. As it relates to taxes, our effective tax rate in the fourth quarter was 35% compared to negative 6% in the prior year. Both quarter tax rates were reduced primarily from the impact of certain items, which lowered net income and resulted in lower tax rates. A similar event occurred last year related to the U.S. foods termination costs, which drove an unusual gap tax rate. On an adjusted basis, our tax would have been approximately 36.8% in both years. Now, turning to our results for the year; our fiscal 2016, including the extra week, included sales growth of 3.5%, gross profit growth of 5.7%, adjusted operating expense growth of 4%, adjusted operating income growth of 12.1%, and adjusted EPS growth of 14.1%. To provide a relevant comparison for the prior year, all income statement measures I discuss from this point forward will be adjusted for certain items and presented on a 52-week comparable basis. Looking at our full year results, we grew sales by 1.5% year-over-year despite deflation of 0.7%. We saw continued deflation in key categories, such as meat and seafood, along with deflation in dairy. Sales from acquisitions increased sales by 0.7%. During the year, we closed five acquisitions including Gilchrist & Soames and North Star Seafood. Foreign exchange negatively impacted sales by 1.3%, largely driven by the U.S. dollar's strength against the Canadian dollar. The negative impact we have been experiencing on a comparative basis is lessening as we begin to wrap up initial declines in the relative value of the Canadian dollar. On a constant currency basis, sales would have been up 2.7%. Turning to case growth, consistent with our three-year plan to achieve disciplined case growth, we had strong performance for the year. On a comparable 52-week basis, total broadline case growth through the year was 3%, local was 2.7%, and corporate managed was 3.3%. Looking at gross profit and gross margins for the year, we grew our gross profit on a solid 3.6%, and we also continued to see expansion in our gross margins, which grew by 38 basis points. The key drivers of gross margin improvements include category management, a more beneficial mix of local business, higher Sysco brand penetration in our local business, and deflation. On a constant currency basis, adjusted gross profit growth is 4.8%; adjusted operating expense on a comparable 52-week basis is up 2% for the year and up 3.3% on a constant currency basis. This increase is mainly driven by the previously mentioned higher case volumes and incentive accruals and is partially offset by various decreases, including reductions in indirect spending, cost reductions, and foreign exchange translation. This progress is reflected in a reduced cost per case, which, as Tom mentioned, is flat, excluding fuel price changes. As a result, adjusted operating income for the year was $1.96 billion, up 9.6% compared to the prior year, and up 10.6% on a constant currency basis. Compared to the prior year on a 52-week basis, adjusted net earnings grew by 8%, and adjusted earnings per share grew by 12%. For the full year, cash flow from operations was $1.9 billion, up approximately 24% from last year. It is important to note that a timing difference in tax payments impacted our cash flow during fiscal 2016. Net working capital improvement was six times better than the full year compared to last year. This was largely driven by improvements in inventory. Net CapEx for the full year was $504 million, and free cash flow was $1.4 billion. Both cash flow from operations and free cash flow include the cash impact of certain items of $280 million in fiscal 2016. As a reminder, the certain items for 2016 are mostly related to the termination of the proposed merger with U.S. Foods. Lastly, we improved our adjusted return on invested capital to approximately 14% during the fiscal year, up from approximately 13% in the prior year. Now, I'd like to close with some commentary on the outlook for fiscal 2017. The deflationary trend has been persistent over the last four quarters and will likely continue through the remainder of the calendar year, creating modest sales and gross profit headwinds for the first half of the year. The restaurant environment appears to be softening, and as a result, we anticipate modest case volume growth for the next quarter or two. Capital expenditures during 2017 are expected to be approximately 1% of sales, including Brakes. We intend to continue to improve working capital days to achieve our three-year plan goal of four days' improvement when comparing fiscal 2018 to fiscal 2015. We expect to complete our $3 billion two-year share repurchase program during fiscal 2017. We anticipate a benefit of approximately $0.03 to $0.04 to diluted EPS in fiscal 2017, driven by a reduction in average shares outstanding. Regarding the addition of Brakes to Sysco's financial results, we expect the combined company will have roughly $55 billion in annualized revenue on a pro forma basis. In our most recent fiscal year, ending December 2015, Brakes reported nearly $5 million in revenue, up approximately 6.5% from 2014. They also reported an approximate 5% adjusted EBITDA margin with a double-digit growth rate. Roughly two-thirds of their revenue comes from the United Kingdom, where they have a leading share. We continue to believe this acquisition will be modestly accretive to adjusted earnings per share by lower to mid-single digits in fiscal 2017, with acceleration in fiscal 2018 and beyond. This acquisition is also expected to reduce our normalized effective tax rate to about 35% to 36%. In summary, we had a strong quarter and year, reflecting continued momentum from our underlying business, including strong local case growth, solid gross profit dollar growth, and good cost management. That said, we have more work to do to achieve the full financial objectives in our two-year plan. We are committed to serving our customers and delivering a high 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 continue to execute our plan.

Thanks for taking my question. I just wanted to ask about gross margins and see how much pressure you're expecting due to deflation.

It's challenging to answer that specifically. I think you will see some correlation over the last four or five quarters, where as we see some deflation, margins have improved. We're making good progress on relative margin trends before that, but I would tell you that we believe a significant amount of the improvement is coming from a lot of these initiatives I referred to and that Tom spoke to in more detail along the lines of category management, revenue management, and the work we're doing in segmentation.

Yes, the only thing I would add is you heard me talk about fully deploying revenue management. We're now at a place where we've got it within our entire organization. I think we continue to believe that, as Bill said, a combination of all those things are allowing us to manage the difficult deflationary environment that we've been in.

All right, that's helpful. And then just as a follow-up, you mentioned the uneven environment. I just want to see if you can comment further on the restaurant industry trends and specifically what you're seeing from both your independent customers and your chain customers. Thank you.

Well, it's not just what we're observing; it's also what we're hearing from others regarding their results, both from operators and some of our peers in the industry. It seems to be a bit softer overall. The positive aspect is that people remain relatively optimistic, both in general consumer confidence and among restaurant operators. When you analyze those indices over the past couple of years, the general outlook is favorable, but we're noticing some softening in the growth rate. Specifically, traffic remains flat, while check sizes are increasing in some segments and staying flat in others. It's not isolated to one area; it's a relative observation. We are still experiencing growth, but it's not the same trajectory we saw a few quarters ago.

So let me start, either for Bill or Tom, I guess a lot of your end customers are struggling a little bit with the value of creation relative to eating at home, and if you think about the next several years with wage inflation likely to increase in the restaurant space, what do you do today or, more importantly, if you look out over the next two or three years, to help them deal with that? So what are the opportunities as it relates to more Sysco brand, selective price investments? How do you think about helping them compete and maybe drive some market share for yourself?

Good morning, John. I'll begin, but I'll let Tom delve deeper into this topic. From my perspective, this market has been highly competitive throughout my career, especially since 2009, and that trend continues. Some operators are performing well. The top operators and distributors will succeed, and I believe that will persist. Everyone faces their own unique challenges, but those who invest in their business, listen to their customers, and can effectively scale their strengths will continue to find success. You've touched on a few initiatives we're pursuing, and I'll let Tom elaborate on the various strategies we're implementing to stand out to our customers.

While there are reports indicating some traffic challenges for certain operators, the positive aspect for them is that in a deflationary environment, their overall product costs are not necessarily increasing. This has been beneficial for those in the restaurant industry. From our viewpoint, we dedicate a significant amount of our efforts to identifying ways we can assist them in achieving greater success. You pointed out the possibility of rising labor rates, which is indeed a major concern for many operators today. Through our Sysco brand, we provide not only value but also reliability, traceability, and high-quality products. This area is a major focus for us. We are also concentrating on tools and innovative products that help reduce labor costs for these operators. By offering labor-saving products in preparation, we enable them to offset some of the potential increases in labor costs. As Bill mentioned, we are also emphasizing technology and tools that help them manage their businesses more efficiently. It's a combination of various strategies, and you are correct that they are facing numerous challenges. The more we concentrate on aiding their success, the more beneficial it will be for us.

All right. And then secondly, I know it's early, but have you seen any reaction or change in Brakes' performance or their end demand post-Brexit? Or does that end up being kind of an overblown issue?

I don't think it's exaggerated, John. I believe it's just too soon to determine. As we approached Brexit, we started to notice some slowdown in their UK business around March and April, largely due to Brexit-related uncertainty. The expectation was that once certainty returned, there would be a rebound. However, that was based on the assumption that certainty would persist. With the vote going the other way, we are now facing ongoing uncertainty. I anticipate that this situation will take a while to unfold. Both politically and economically, developments will be gradual, resulting in a slower pace in the UK at the moment. The positive aspect for us is that we are observing some favorable trends from France and Sweden, which together represent about a third of their business. Regarding Brexit, we are all keeping an eye on it, and so far, I have not seen clear analysis regarding its specific impacts.

I want to add that while there is some short-term instability, we remain very optimistic about this situation as a long-term value creator for the company. We have a great management team and a solid platform for future growth, leading to a positive long-term outlook despite the minor short-term instability we are facing.

Hi, good morning, guys, and nice quarter. I'd like to start with just the outlook. So you guys took 20% to 30% of the $500 million EBIT target in 2016, I think, which at the high end of that would be $150 million. You just did $173 million, excluding the extra week, $217 million if you include it. I guess the first part of this question: So what drove that upside to how you were initially thinking about things? And then as we think about 2017, you talked about 50% to 60%, which is probably like $300 million at the high end of the range. That does now seem kind of low, so how should we think about 2017, given that you're ahead of where you thought you'd be at this point? Thank you.

Thank you. I'll start. I'll let Joel get into detail a little bit more. I would say in terms of why our performance for 2016 was better than originally what we projected, I think part of it is just having the time to refine the plan and to go deep on the plan. Our execution was just very good. So if you put all this into some type of context, our merger agreement with U.S. Foods was terminated in late June, we regrouped as a management team very quickly, and in July we put together the framework of a three-year plan and shared that with the investor group in September, along with our Board. I wouldn't say we were cautious, but we certainly were thoughtful in terms of what we were leading people to, and as we built some momentum, first quarter, we had a solid quarter, U.S. broad line, but there are some headwinds with incentives, it kind of flattened out, and then we had strong second, third, and fourth quarters. We built momentum as the year went along. To bring it back to numbers, we've managed this deflationary environment very well and created a good spread between our gross profit growth and our expense growth, by managing our expenses very smartly and thoughtfully. Overall, I'd just say the execution has been good, and very good. As we got deeper into the year, we were able to raise our estimate to $500 million. I'm not quite ready to do that right now; I'd like to get further into this plan; we're a third of the way through it, so I'd like to see another quarter or two, see how we perform, see how the marketplace performs, and reassess that outlook at that point in time. Joel?

Yes, I think that's really the context that I'd put that into. We're through the first year now of our three-year plan. A little bit of softness that we're seeing in the industry, but certainly feeling good about where we're at. I think the comment Bill kind of closed with is what I would close with, as well. Is that again, it's still early on, and I'd like to give it a little bit of time under our belt before we take a look at if there's anything else we wanted to do there.

Okay. And just, I wanted to follow up. One of the, to me, more impressed with sort of under the radar accomplishments for you guys is this dramatic improvement in free cash flow. Can you talk just a little about what's been driving that and the opportunity that you see left here, no payables, there seems like there's a fairly large opportunity. Just thought on sort of where we can expect that line item to play out over the next couple of years.

Yes, sure. I think a couple things on that, and certainly number one, we had strong operating performance. That certainly generated a good part of the free cash flow. You talk about the focus we had on working capital. We've had some aggressive goals at the start of a three-year plan, and I think one of the primary benefits this year was in the focus on inventory, and we made good progress in that area. I think you'll continue to see opportunity both on the payables side and in inventory as well, so we've got some continued focus on working capital. Did some benefit this year from some timing issues on cash taxes, things that were related to the timing of payments, and the ability to accelerate some deductions. We did also have some going the other way in the U.S. Foods payments that we made in the first quarter of this year. What I would say in general is that the level of free cash flow you're seeing that we experienced this year is a pretty reasonable view of what I believe this business can generate over the next couple of years. We're in a good place; we're going to continue driving initiatives that improve that performance as well.

Good morning, it looks like there was a conversion in total broadline versus the local case growth in the quarter. Can you talk about the drivers there and how trends played out just throughout the quarter? You mention already the performance of chains versus independents but what about your institutional customers like healthcare?

Zach, would you be more clear what you mean by conversion?

Well, I mean when you look at the broadline case trend and the local case trend, they both converged.

I would think for time to talk about the segments a little bit. I think it's just what you said. We manage a highly street-oriented customer base, and we continue to focus there in myriad ways that we spoke to in terms of commercial initiatives, supply chain, and all that type of thing. That's continued to pay dividends for us over the last couple of years. We feel good about that. We also want to continue to grow the corporate-managed business in the right way, and so you are seeing the slope of growth fall somewhat but it's still positive, and there are still very, very important relationships with some large customers that work for us from a profitability standpoint. The balance is always the key here. It's key if you're running an operating company, and it's key from an overall corporate standpoint. At any given time, one segment you called out for a moment may be going a little faster than the other, and that's okay, but generally we're looking to grow both segments in the right way with good discipline and we've been making great strides over the last one to two years. I'll let Tom speak more about segment performance.

The only thing I would add is, around this segment, you think you mentioned chains and healthcare, we continue to feel good about each of the segments in their growth potential for us. Healthcare's continued to be a growth segment for the industry, and I think the chain business is going to have its choppiness depending on which customer you're talking about. Overall that business, I think, is solid out there. For us, it's really about a balance; looking at different customers on their relative profitability and where we can actually have the most value is where we're trying to focus our efforts. Clearly, that's in the local restaurant segment, more so than in the chain restaurants segment. Overall, I think we don't see necessarily other than some of the chain numbers you've seen from some of those companies we see fairly consistent performance across these segments.

And then to touch on Brakes quickly, can you talk about just margin opportunities there? You mentioned it's a 5% adjusted EBITDA margin, but can you talk about some of the facility and productivity efforts there and how you think about the long-term margin opportunity, and how that can play out?

Well, Joe said, we made significant investments here for the long term. We certainly expect and will grow their business on the top line. They have a very similar approach as we do, especially in the UK, in terms of a disciplined approach. They are, as we've alluded to in the past, going through some significant transformative change of their own, a fair amount of which is played out in the supply chain in the United Kingdom where they're consolidating warehouses into facilities that look more like ours, with multi-capacity storage all in one building. This will create cost savings and improve productivity. So, certainly, the supply chain in particular and UK is an opportunity for Brakes to expand their margins, but there are other opportunities as well, starting with growing with the right customers and making sure that those customers are interfacing with them and ordering product in their preferred manner. They have many of the same opportunities that we have.

Hi, good morning. Wanted to just follow up on the independents. I realize it has moderated slightly, but still very solid growth. If you look over the past several years, just wondered if when you analyze that segment, what are you seeing there? Are there any specific drivers? Is it still pretty broad-based? Are there any ethnic categories or regions? When you talk to your customers there, is there any difference in takeout or dining trends? Just trying to understand what you think the real drivers are for the independent or local case growth.

Sure, I'll take that. The thing about the independent segment is there has been a lot of discussion about whether it's growing or not growing. I think the way we look at it is we have significant opportunity to grow in that segment, and I think if you consider the many distributors in the industry, there are opportunities for us to earn additional share of that business from our customers. So we're very focused on delivering the kind of things that they need, which we talk about a lot of those value drivers for our customers. Whether it's related to Sysco brand, some of the tools we're bringing to help them manage their business better. Additionally, you've mentioned some segments; there's been a nice tailwind in the Hispanic and Latino restaurant segment, and it's been a focus area for us. We continue to look at those types of opportunities where there's incremental value that we can provide to those folks and also grow our business. Overall, that segment feels like they're picking up some share possibly in this away-from-home segment. There are additional opportunities for home deliveries, and we hear, and see, that some of these trends are taking place. These have created opportunities for local restaurants, and I believe they are benefiting from some of those technology solutions as well.

Hi Kelly, Joel will explain it to you better than I can but it's obviously just the way you think about math. Gross profit is dollars. When you're selling a case for whatever, less than you did the same time last year, you're obviously taking fewer dollars to pay your expenses. That said, on a percentage basis, that can contribute to an expansion of margin percentage. I think that's really the main point. A portion of our business is cost plus. And just in general, given their cost of goods, there's again some margin percentage increase, but it is the headwind on the gross profit dollars themselves, of course. Having said that, there's been great work done by Tom and his team and our associates to actually offset some of that to the extent we can.

Tom made an interesting point, which I think our customers perceive well. We're now in our fifth quarter of this, and we don't think that's particularly good for our customers or for us, certainly, over the medium to long term. But if it was going to happen, it came at a right time for our customer base that is dealing with some wage inflation. So, it's probably been good for the customer side. We've managed it well but would certainly prefer to see no inflation, modest inflation, and a steady state environment.

Bill, in your prepared comments, I think you mentioned a slowdown in traffic from NPD and I think you cited KNAPP-TRACK also. And I think last week case growth was also sequentially weaker than U.S. foods. So I just wanted to ask apart from the soft industry-wide trends, are there any company-specific factors in terms of any slowdown in case growth? Has there been any change in the trend line quarter to date in terms of traffic in average checks? Is there any incremental change in trajectory quarter to date? Thanks.

Again, we're talking about earnings from the June quarter, but what I'm telling you is we've seen softening in our customer base, both from the data usage side as well as what we see. What we're seeing here is there are some softening in the business; as I also said, we're still seeing growth and I would expect we will continue seeing growth, perhaps not the same trajectory. But also has a major secular development. I think as we go through these cycles, time will tell. If you agree all the data that we also are exposed to what you're seeing in this industry is pretty consistent, you're seeing in the economy right now. It's growth but modest, and I think that's where customers are dealing with right now. Our focus continues to be on supporting our customers to grow their businesses profitably, and do the same for us at the same time. I've never felt better about our ability to do that. We've got a great team here, a solid strategy; we're executing well.

Okay, and I just have one follow-up question on Brakes. I think you already got several questions on Brexit. Can you specifically talk about the currency impact and just on restaurant spending overall in the UK? The currency impact could be viewed as threefold; you've got a direct P&L impact which is straightforward, but then the currency also impacts the purchasing power of UK consumers, and it also affects your purchase price for the acquisition. I think you're partly hedged on the currency impact. Can you just comment on how big of an incremental impact there is from Brexit compared to what you anticipated when you consummated the other merger, and can you also just talk about current case trends at Brakes? I think you mentioned that they took a little bit of a step backward. Can you confirm whether they're positive or negative based on year-over-year comparisons? Thanks.

There are three questions in there. What I've said about Brakes is that the UK market, in general, has seen a slowdown as we got into March and April related to Brexit; the uncertainty prior to the vote resulted in slowing their business. I think the government data supports that as well. The position I was to come in their numbers is; we will talk about that in November when we release our first-quarter results. We feel good about this push; we have a lot of work to do, and we're very excited about it.

I would like to add a couple of points. We will certainly be addressing the impacts of translation as we move forward. We had a foreign currency remeasurement due to the fact that at the end of the year, we maintained a strong position on our balance sheet for the purchase price. Our team did an excellent job of hedging to protect us on the upside and purchasing currency opportunistically to maximize our ability to mitigate foreign exchange devaluation. However, we did experience some of that devaluation, which was also reflected in the final purchase price. Overall, I want to emphasize that we will continue to manage these issues, and as Bill mentioned, we will keep focusing on our customers and the operational performance of the company.

Hi, I wanted to revisit the question about recent softness. If you had to rank the potential causes, I think the value equation being off might be one reason, along with recent domestic unrest, terrorism, the Olympics, and people choosing to stay home. Can you provide any insights on how to prioritize these factors?

I wouldn't necessarily rank any of those factors in my top three. However, I can share my perspective on the situation. We are constantly researching and learning from those who track various aspects of the industry. It seems like there is a general sense of stagnation. We naturally experience cycles and sub-cycles, and some of this softness may be due to comparisons with stronger numbers from a year ago. Overall, it just feels a bit weaker. I sense that people are being more cautious with their spending, which could be influenced by the upcoming election, though I'm not entirely certain. I wouldn't want to speculate too much, but I don't think it's primarily due to the Olympics or any single factor. It appears to be a broader issue, showing up in various areas. It's not limited to a specific type of customer; rather, it's one of those sub-cycles we're currently experiencing. Time will tell if this lasts three to six months or longer. From our side, we’ve been navigating through significant challenges this year, and I’m very pleased with our execution. We can’t control the overall industry performance, but I feel confident about our actions and our focus on driving earnings while maintaining strong relationships with our customers.

Okay, that's helpful. I'm curious about your competitor's recent data showing that 50% of their sales from independent restaurants come from their e-commerce platform. Can you provide some insight on your local penetration as a percentage of independent sales and give us an update on that?

I'll let Tom speak to that more specifically. I would just remind you that our strategy is predicated on being the most valued, trusted business partner. So, we're not setting goals per se for a certain percentage of Sysco brand, or a certain percentage of orders through mobile or digital. But we understand that we need to make the experience with Sysco as easy as possible, so certainly, being able to order online when you want to order, the way you want to order, those are very important and increasingly to our customers. We've got a lot of good work going on with our digital platform to make that experience more positive and productive for our customers. The numbers are modest but they're beginning to grow. But again, the overall target is here, to drive the business in the right way, and not necessarily to hit a particular percentage.

In the past, we've been somewhat in this high single-digit, just below 10%. Through the fourth quarter, we're now seeing over 10% of our orders for local customers coming through the mobile or digital platform. So we do see some progression continue, but as Bill said, it's really for us about creating the environment where they can order how they want, when they want, and where they want. We know from a lot of work we do that our marketing associates are one of the highest-valued resources we have to provide our customers, and we’re trying to make sure that we balance how they order with the service and support they need. We feel great about progress but we will probably see that continue to grow.

Hi, thank you. Can you give us a little color on the deflation by category, and are there certain quarters where you're going to start lapping some of the bigger headwinds?

We're lapping them, so it's started. Generally it's in meat, seafood, and some dairy.

So is deflation cooling for you now or is it still as heavy? I mean, it's a pretty big deflationary number this quarter.

Yes, I'd say it's moved around a bit these last three quarters but I'd say relatively steady from where we were say, six months ago.

Good morning. I appreciate the opportunity to ask a couple of follow-up questions. First, I wanted to inquire about the EBIT growth targets. Previously, you mentioned that you expected 55% to 65% of the goal would come from gross profit, with the rest stemming from supply chain and administrative costs. As you consider the improved execution contributing to the positive results, which areas do you believe have been most impacted, and where do you see the greatest opportunities moving forward?

Stephen, I think both those lines are critical, but certainly you have to start with gross profit. We make $9 billion in gross profit. That's more than the sales of many people we compete with head to head. So that's a huge number we've been able to grow very nicely on an adjusted basis over the last year to two years. How do we do that? It comes back to leveraging the tools we have and focusing on local case growth as part of our revenue management approach. So we have opportunities to refine our strategy and develop revenue management. We've done a nice job growing our gross profit, and I'd expect us to continue to do well.

Great, thanks very much. And nice end to the year, guys. Thanks for taking my question. I wanted to ask about the M&A landscape and in particular, with your entry into fresh and ethnic products like Trinity, North Star, to name a couple, this year. Just kind of how you feel your traction's going where you are from an assortment standpoint, and how that factors into your thoughts as you look at potential further opportunities moving forward.

Over the last several years, we've done a lot with specialty meats, specialty produce, gas supply. In bringing those businesses into our company, they're now what we think of as core. There is still opportunity out there, particularly on the geographic side, where we have some holes we'd love to fill in. But good momentum with the recent acquisitions.

As Bill said, we view those specialty areas now as more than a quarter of our business. Our ability to round that portfolio of businesses out across the U.S. will create opportunities like with North Star in Florida. So we'll continue to look for those opportunities as they come up; that's an important part of our growth.

It's a 12-month process and we've done one of them very well and around schedule. We're in a good place.

Hi, great. Thank you. Obviously, you ended the year at a gross margin high for the year, and it's actually one of your highest gross margins that you've had in many years. So when we think about fiscal '17, is the right run rate of cost of goods sold or gross margins, is it the fourth quarter, or should we still consider that year-on-year might play an effect as opposed to taking just that fourth quarter result and running that forward?

I would never take one quarter and extrapolate too much. I would say look at the year, the trends, and the environment that we just described. Obviously, we have plans to grow gross profit and manage expenses well, but I wouldn't bank on just one quarter, good or bad.

And are you at the level when you do look at that percent, where you're kind of in a competitively good place? Where it's a good gross margin for you and in terms of the relative value that your customers are getting and how your competition is competing against you? In other words, is there any risk like we've seen in previous periods that some of your competition starts to ease their gross margin in an effort to gain traffic share?

I can't speak for that. Pricing is always a key part of how customers look at value. What you've heard Tom say, as we look at revenue management, pricing is a component, but nothing more than a component. We're getting better in terms of strategically and tactically facing up with each customer one-on-one, and really understanding their needs more clearly. So I wouldn't say that there's anything in particular going on right now that's different than we have experienced the last couple of years. We have opportunity to be more consistent in pricing, and that should be a win for our customers and a win for us.

Very helpful, thank you.

Thank you.