Sysco Corporation (SYY) Q4 2016 Earnings Report, Transcript and Summary

Good morning. My name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fiscal Fourth Quarter Fiscal Year 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the call over to Neil Russell, Vice President, Investor Relations. Please go ahead sir.

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 within the meaning of the Private Securities Litigation Reform Act 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. 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. As such, 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% which resulted 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 somewhere off-late, while consumer confidence in 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 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, with gross margin expansion and solid expense management. Specifically, for fiscal 2016, on an adjusted 52-week basis, we delivered the following results. 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 today 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 the achievement these financial objectives is supported by a foundation that was 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. Shifting our technology strategy and related spend 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 is been accomplished by consistently improving the execution of our strategy, that was centered on five fundamental points. Partnership, too profoundly and receive experience of doing business with Sysco. Productivity, to continuously improve productivity in all areas of our business; Products, to enhance our friends through a customer centric innovation program; People, Leveraging talent structure and culture to drive performance and portfolio, continuously assessing new market opportunities and current business performance. Regarding the latter point; we recently close the acquisition of the brakes group a $5 billion European food service distributor, with significant presence in the United Kingdom, France and Sweden. Brakes is a highly regarded company whose management team and strategy are well aligned with the vision we have for Sysco, to be our customers most valued and trusted business partner. This acquisition will serve as a platform for future expansion in Europe. We're looking forward to working together 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 anticipated contribution of Brakes to Sysco 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 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 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 crosses in 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. And I think each of them for their effort to deliver a very successful year in fiscal 2016. And now turn the call over to Tom. Thomas Bené: 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 begun to provide a strong foundation for success. Our payroll 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 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 grow. During the year we grew U.S. broadline local cases 2.6 % unadjusted 52 week basis. Strongest performance we've had several years, also an adjusted 52 week basis gross profit in U.S. broadline group 4.7 % for the fiscal year in gross margin increased 47 basis points driven by our focus on profitable case grow, revenue management activities and improve Sysco brand penetration. The focus our sales teams had on helping our customers succeed and grow has been further enhanced throughout the school year 2016. During the year we remain focused on improving our industry leading category management practices, only 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 that values delivered through an unrelenting focus on the highest quality products, investing class traceability from a food safety perspective. Finally, we continue to focus on delivering new and improved customer facing technology solutions, that value to their business and all our associates to be more efficient. On the cost side, the expense management throughout the year was also solid remains a key area of focus moving forward. For U.S. broadline during fiscal year 2016 we limited total adjust expense growth to only 2.2 % on a compatible 52 week basis compared to gross profit growth of 4.7 %. We also reduced our overall cost per case U.S. broadline by $0.04 during the year. I just think of the impact of fuel prices are just a cost per case in U. S. front line 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 and a number of key areas. The supply chain area, we have reduced indirect span will continue to focus on maximizing transportation and warehouse sufficiency. We've also standardized organizational design and reduce the number of our markets in the U.S. from 8 to 6. And throughout the organization we have reduced overall SG&A cost. In summary, our customer and operational strategies are solidly reclined around improving our customers experience, engaging our associates of the highest level to improve execution and delivering our financial objectives as a part of our three year plan. In fiscal year 2016 we made significant progress in all areas, now 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 grow, 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 reflecting 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%, sales 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 a 15.4%. Sales during the quarter 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 go through the fourth quarter was 2.2%, Local is 2.4%. And corporate manage growth was 2.0%. During the fourth quarter we had some certain items that impacted our results. In the prior year we've acquisition costs $390 million, in the current year. We have re measurement of foreign denominated cash due to lower exchange rates a quarter as well as the premium foreign currency option contracts for the Brakes acquisition. As results other expenses net for the quarter was 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 reduce primarily from the impact of certain items, which lord of net income and resulted in lower tax rates. A similar event occurred last year related to the U.S. suits termination costs which drove an unusual gap tax rate. On an adjusted for certain items basis our tax it 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 12.1%, and adjusted EPS growth of 14.1%. To provide a relevant comparison 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 bases. Looking at our full year results; we grew sales by 1.5 % year-over-year despite deflation of 0.7%. We saw continued deflation and sat in center of the plate protein categories, such as meat and seafood along with deflation in diary. Sales from acquisition increase 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 US 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 initial decline in relative value to 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 discipline 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% we'll also continuing to see expansion in gross margins, which grew by 38 basis points. The key drivers of gross margin improvements include a category management, 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 2% for the year and by 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 reducing indirect spending; it is still cost and foreign exchange translation. This progress is reflected in a reduced cost per case as Tom mentioned which is flat, excluding fuel price changes. As a result adjusted operating income for the year was $1.96 dollars, up 9.6% compared the prior year, and up 10.6% on a constant currency basis. Compared to the prior year on 52-week basis, adjusted net earnings grew 8% and adjusted earnings per share grew 12%. For the full year, cash flow from operations was $1.9 billion off approximately 24% from last year. It is important to note that a timing difference in tax payments impacts our cash flow during fiscal 2016. Net working capital improvement by six times a day for 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 US 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 headwind for the first half 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 year 2018 to fiscal 2015. And 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 roughly 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 in order 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. Operator, we are now ready for Q&A.

[Operator Instructions] And our first question comes from the line of Merissa Sullivan from Bank of America Merrill Lynch. Your line is open.

Thanks for taking my question. I just wanted to ask about gross margins and see how much [Technical Difficulty].

It's challenging when to answer that specifically. I think you will see some correlation over the last four or five quarters, where as we see some deflation, the more margins moved up. 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 and that Tom spoke to in more detail along the lines of category management, revenue management, the work we're doing in segmentation, tools we're providing our sales force, so I can't quantify exactly but I think it's coming from multiple sources. Thomas Bené: Yes, I think 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. And so 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. Thomas Bené: Well, it's not just what we're seeing -- I think it's what we're hearing from other folks that are speaking to their results, both in the operator side and some of our peers in the industry. So I think it's just a little bit softer. I think the good news here: People are still relatively optimistic, both the consumer confidence in general and the restaurant operators. When you look at those indices and compare them over the last couple of years, generally, the outlook is favorable, but we're just seeing some softening in terms of the slope of the growth, and specifically, we're seeing it in traffic continuing to be flat, and check size up in some segments, flat in other segments. So it's no one place, it's a relative comment. We're still seeing growth but it's just not the same trajectory that we saw a couple quarters ago.

Got it. Thank you so much.

Our next question comes from the line of John Heinbockel from Guggenheim. Your line is open.

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 start but I'll let Tom kind of get into the meat of that a little bit more. I think just from my perspective, this market place has been extremely competitive for most of my career and even more so since 2009, and we continue to see that. I think some operators are doing fine. And the best operators are going to do well and the best distributors are going to do well, and I think that will continue to play out. So I think it's -- everyone has their own unique challenges, but if you're investing in your business, if you're listening to your customer base, and if you can scale what you're good at, I think you're going to continue to have good success here. So you hit on a couple things that we're doing, but I'll let Tom take you through and remind the group here all the different things that we're doing to differentiate ourselves to our customers. Thomas Bené: John, maybe just to build on a couple things; while you're right, there are some reports out there, some traffic headwinds for some of these folks. The good news for them obviously is that in a deflationary environment, is their cost of products in general are not necessarily going up. So that's been a good thing for those restaurant operators. But from our perspective, we spend a lot of our time trying to think about what are those areas where we can help them be more successful. You mentioned labor rates potentially going up; that's obviously a key concern of many of these operators today. And so whether its Sysco brand, where we bring not only value but also things I talked about which is great reliability and traceability and high-quality products. That's a big area of focus for us. The tools, think about some of the innovative products we're bringing. We're focused on how do we reduce the labor costs for these operators. So if there are products that are labor-saving type of products in the preparation, that allows them to leverage some of those things that offset -- maybe some potential labor increases they're seeing. And as Bill said, I think technology and tools in general that allow them to manage their business more efficiently are also things we're focused on. So it's really a combination of things but it's -- you're right, there's a lot of things that they're dealing with and I think the more we can focus on helping them be successful, that's a good place for us to be.

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 that ends up being kind of an overblown issue?

I don't think it's overblown, John, I think it's just too early to tell. Heading into Brexit, I would say as we got into March and April, we did see through their eyes or get some feel for it and the data out there, there was some slowing in their business in the UK just in general, and a lot of that was attributed to the uncertainty of Brexit. And I think the implied thought would be that once there was certainty, that things would kind of bounce back a little bit. I think that assumed that the certainty would remain. And obviously the vote went the other way, so now what you've got is continued uncertainty. So I just think it's going to be an extended period of time here. And I think it'll play out politically, it'll play out economically, so it's a little slower in the UK right now. The good news for us is it seems to be -- we seem to be seeing some good things coming out of France and Sweden; I believe that's about a third of their business. So I think as far as Brexit's concerned, I think we're all watching it and to this point, I don't know that I've seen clear analysis in terms of what the specific impact is going to be at a certain point in some. My judgment would say that it's going to play out over the next two or three years; it will become business as usual here over that period of time and it'll be somewhat of a headwind in the context of uncertainty that our people will work through in their market place.

Yes, and I think this one thing I could add -- it's Joel -- I'd just remind you, certainly while there's some short-term instability that this creates, to some extent, we certainly again remain very bullish of this, as a long-term value creator for this company. And a great management team, great platform for future growth, and again, just an overall good long-term view, despite some of those slight -- again, some short-term instability as a result.

Okay, thank you.

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

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 bout 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. And our execution was just very good. So if you put all this into some type of context, our merger agreement with US Foods was terminated in late June, we regrouped as a management team very quickly, in July we put together the framework of a three-year plan and shared that with the investor group in September, along the way with our Board. And so 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, if you'll recall, first quarter, we had a very solid quarter, U.S. broad line, but there's some tailwinds with incentives and it kind of -- or headwinds with incentives and the first quarter was a little flattish and then very strong, second, third, and fourth. So we built momentum as the year went along. To bring it back to numbers, we've been able to manage this deflationary environment very well and create a good spread between our gross profit growth and our expense growth, by managing our expenses very smartly and thoughtfully. So overall, I would just say the execution has been good and -- very good, and as we got deeper into the year we were able to raise our estimate to $500,000. 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 and see how we perform, see how the market place 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. Is that we're through the first year now of our three-year plan, to the point that you made and Bill certainly reinforced. Good momentum to business, and in the end, 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 the 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. And so that's certainly generated by a good part of the free cash-flow, you talk about the focus we had on working capital. You know we've had some we aggressive goals the start of a three year plan, and I think one of a primary benefits this year was in focus on inventory and we made some good progress in that area. And I think you'll continue to see the opportunity there again both on the table's area as well as inventory and someone they are as well so we got some continued focus on working capital of that I believe we're making good progress on and will continue to drive that. We did some benefit this year of as I mentioned. And some timing issues on cash taxes, things that were related to of the timing of payments and ability to accelerate some deductions having so that we are we also did have something in some going the other way in the U.S. foods payments that we made the first quarter of this year. so I would guess what I would say in general as I think the level of free cash-flow you are seeing that we experiences years is a pretty reasonable view of what I believe this business can generate here as we move forward, over the next couple years and so I think I think we're good place we're going to continue driving initiatives that were driving improve that performances as well.

Great, thank you.

Next question comes from the line of Zachary Fadem from Wells Fargo. Your line is open.

Good morning, it looks like there was a conversion in in total broadline versus the local case growth in the quarter can you talk about the driver's hearing how trends played out just throughout the quarter and you mention already the performance of chains verses independence but what about your institutional customers like the healthcare and WeCare vertical power they trending.

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 at that but you know.

The numbers okay. And. So I would think for times about the segments a little bit. I think it's just what you said. You know we and I would say by this business understands that where we have the opportunity to bring the most value, it isn't that look we managed highly street-oriented customer base and we continue to focus there in a myriad of ways that we spoke to in terms of a commercial initiatives, supply chain, and all that type of thing. And that's continued to pay dividends force or less than two years plus. As 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 the growth of the fall of somewhat but it's still positive and there is still very, very important relationships with others with some very large customers, That work for us as well from profitability standpoint. So the balance is always the key here and it's -- this is key if you're running an operating company and its key from a -- from the overall corporate standpoint which as you saw here's quarter with pretty good balance, so in any points time one segment you called that for a moment may be going a little faster than the other and that's okay but generally we're looking to grow both in the right way with good discipline and that we've been making great strides are last a year two. So I'll let Tom speak a little about this segment performance. Thomas Bené: Yes. The only exact I'll add is, around this segment you think you mentioned chains and also healthcare, we continue to feel good about each of the segments in their growth potential for us, honestly healthcare's continued to be growth segment for this industry and I think the chain business while it's going to have it choppiness depending on which customer you're talking about overall that business, I think is going to continue to be solid out there. For us I think it's a really is built on a balance in so looking at different customers in their relative profitability and where we can actually have the most value was where we trying to focus our efforts. And clearly, that's in that local restaurant segment certainly, probably more, so than in the chain restaurants segment. But overall I think we don't see necessarily other than some of the chain number you've seen, from some of those companies we see fairly consistent a performance across these segments.

And then to touch on breaks out 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 do you think about the long term margin opportunity, and how that can play out.

Well Joe said, we made significant investment here for the long term, we certainly expect and will grow their business on the top line, they have 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 and going through some significant transformative change of their own, a fair amount which is played out in the supply chain in the United Kingdom, where they're consolidating warehouses into warehouses that look more like ours where you have multiple capacity -- storage capacity all in one building which in and of itself what will create cost savings, improve productivity that kind of thing. So certainly, the supply chain in particular and UK is an opportunity for Brakes to expand their margins. But there's 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 the way that they want to the chances they prefer. So they've a lot of the same opportunities that we have.

Great, thanks Bill, appreciate the color guys.

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

Hi, good morning. Wanted to just follow up on the independence, I realize it is moderated slightly but still very solid growth I think if you look over the past several years the lease, so just wondered if you when you analyze that segment what are you seeing there that's really the drivers there that is it still pretty broad based, are there any ethnic categories or regions or when you talk to your customers there is there any difference in take out or dying in 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 there's been a lot of discussion around whether it's growing or not the growing, I think the way we look at it is we have significant opportunity to grow in that segment and I think if you think about the fact that there are many distributors in the industry, there's opportunities for us is 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 and whether things like Sysco brand of some of the tools that were bring them help them manage their business better. In addition you mention some segments you heard us talk about some of the ethnic segments, we obviously there's been a nice tailwind in the Hispanic Latino restaurant segment, it's been a focus area for us and so we continue to look at those types of opportunities where there's nice kind of tail winds that week can provide incremental value to those folks and also grow our business. And I just say that overall that segment feels like they're picking up some share potentially in this away from home and whether it additional opportunities for home deliveries you talk about, we here and we all see some of these trends taking place with some of these folks who are creating that opportunity for those local restaurants, and I think they are back benefiting from some of those technology solutions as well.

Great, that's very helpful. Then in terms of deflation I think you know it was called out as one of the drivers or maybe not drivers' one of the factors that favorably impacted gross margin this year, and I think you called it out of the gross profit headwind for the first half of next year. So just curious is that just because of the sales impact or is there a change in how you expect the deflation to impact your gross margin in the first half of 2017. Thomas Bené: Hi Kelly, Joel will explain it to you better than I can but it's just the way you think about math. Alright so gross profit is dollars, so when you're selling a case for whatever 0.7% or 1% less than you did same time Lasher you're obviously taking fewer dollars to pay your expenses with that said from on a percentage basis so that they can contribute to an expansion of your margin for saying, I think that's really the main point I mean if you think about portion of our business is being on cost plus. And just in general they were the cost of goods, there is again some margin percentage increase but it is a tip of the headwind on the gross profit dollars themselves of course. Having said that certainly there's great work being done by Tom and his team and our associates actually offset some of that to the extent we can.

Tom made an interesting point, which I am I think our customers perspective well we're now a fan of deflation and this is -- we're now as we speak in our fifth quarter of that so that's we don't think that's particularly give thanks for our customers or for us certainly over the medium to long term with that said, if it was going to happen try came the right time for customer bases are dealing with some wage inflation as well, so it's probably been good on the customer side we've been able to manage it well, but we would certainly prefer to see no inflation, modest inflation that type of thing in a more steady state environment.

Thank you.

The next question comes from Ajay Jain from Pivotal Research. Your line is open.

Bill, in you're prepared comments I think you mentioned a slowdown in traffic up from NPD and I think you cited nap crack also and I think last week case growth was also sequentially weaker slightly U.S. foods. so I just wanted to ask apart from the software industry wide trends are there any kind of company specific factors in terms of any slowdown in case growth and has there been any change in the trend line quarter-to-date in terms of traffic in average check, is there any incremental change in the trajectory a quarter-to-date, thanks.

Well, again we're talking about earnings from the June quarter, but what I'm telling you is we've seen Softening and the customer base, both from the date usage side as well as what we see, so well obviously what we're seeing here is there there's some softening in the business, as I also said we're still seeing growth and I would expect that will continue to see growth, perhaps not the same trajectory but also has a big secular development I think it's just we go through these cycles of time will tell whether so many site we're not, but if you -- if you agree all the data that we also are exposed to what you're seeing in this industry is pretty consistent, when you're seeing in the economy right now that its growth but it's modest, and I think that's where customers are dealing with right now. So our focus continues to be you know how do we support our customers to grow their business profitably and do the same for us at the same time and I've never felt better about our ability to do that, we've got a great team here a very solid strategy, we're executing well also you were going to impact and control what we can control and will work through cycles as they come and go.

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 restaurants spending overall in the UK because I guess the currency impact could be viewed as threefold you've got to direct P&L impact which is fairly you know straightforward but then the currency also impact the purchasing power of the UK consumers and it also affects your purchase price for the acquisition. so 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 that at Brakes, I think you mentioned that they took a little bit of a step backwards. Can you confirm whether they're positive or negative based on year-over-year comparison, thanks?

There are three questions in there; actually I think what I said about Brakes is the UK market in general. What we've seen it is as if from March and April and I was connected to Brexit the uncertainty of the Brexit vote by and instant the vote you know we see some softening over there in that market and the data in the government it will perform -- support that as well [indiscernible], the position I was to come in their numbers you just a because that -- last month but will talk more about that certainly in November when we release for the first quarter, we feel good about this show so we feel very good about this acquisition, about the leadership investing for the long term, acquisition platform all the things we said on from the beginning, so Brexit I'm going to let Joel take you through the currency issues I think we manage it quite well actually as far as the transaction goes, as you said there's normal translation of earnings and that type of thing. And I wound up in dispute all your points I would just say from my perspective the bigger issue as far as Brexit concern is always is what it comes down to here in our markets as well, is what's the impact on the consumer. I think it's less about foreign exchange at the consumer level. And because of some of the uncertainty we see some softening over there. The weather I mean you hear all the same things whether in London you know in the summertime there kind things, so I think there's going to be some ups and downs will be the better position to talk about in November but overall we're very pleased the acquisition. We have a lot of work to do there and we're very excited about it.

Yes, I would just add a couple things I mean the translation impacts again certainly will be something will be dealing as we move forward in terms of the prices also as we mention there was actually we had a foreign currency re-measurement that basically resulted from the fact that, at the end of the year, we were holding strong on our balance sheet for the purchase price. Of course, the deal closed right after the year, so we had -- the balance sheet needs to be revalued to the exchange rate that exists at that point in time. Our team did a great job of hedging to protect us on the upside and purchasing currency opportunistically to maximize our ability to minimize that foreign exchange devaluation. But we did experience some of that, and some of which was also reflected in the end purchase price. But overall, again, I would just tell you we'll continue to manage through that stuff and, as Bill said, continue to focus on driving -- focus on the customers and the operational performance of that company.

Great, thank you.

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

Hi, just going back -- sorry to harp on this softness -- recent softness question. I guess if you had to fill -- kind of rank potential causes, I mean, I would think value equation maybe being out of whack is on the list, but maybe recent unrest, terrorism domestically, Olympics, people staying home…any way you can kind of rank any of that?

I don't know that I'd rank any of that in my top three, but Karen, I'll share a view[ph part 14 1;29] on some of that. You know, we read a lot and try to learn as much as we can from folks that follow all the components of the industry. I just think it's a little bit of a malaise. I just think it's -- you know, you're going to have these cycles and sub-cycles in any point in time, and some of it, we've been going up against some stronger numbers a year ago, so there's some math in it. But it just feels a little bit softer out there. I think people are being a little more cautious with their spend. Maybe the election, maybe -- I'm not sure. So I guess I wouldn't want to just conjecture here, but I don't think it's the Olympics, I don't think it's any one thing in particular. I just think it's a little softer and it seems to be showing up in multiple places, so I don't think it's a certain type of customer per se or anything like that. I just think it's one of these sub-cycles we're going to go through and time will tell whether it's a three- to six-month deal or longer. But again, from our perspective, we've been managing through some pretty significant headwinds this year, and I couldn't be more pleased with how we've been executing. So, again, we can't totally control the industry top line, but I feel good about what we're doing in our space and how we're driving earnings and at the same time, staying very close to our customers and focusing on what's important to them. So that's the best I can probably give you from our stance.

Okay, that's helpful. And then I'm just curious. One of your competitors recently gave some data on percent of sales from independent restaurants coming from an e-commerce platform -- from their e-commerce platform: at a pretty high 50%. I guess I'm just wondering if you can give some color on where you stand on local penetration as a percent of independent sales and just an update on where you're at with that.

I'll let Tom speak to that more specifically. I would just remind you that our strategy is really predicated on being the most valued, trusted business partner. So we're not setting goals per se for certain percentage of Sysco brand or certain percentage of orders through mobile or digital. With that said, we certainly understand that we need to make the experience with Sysco as easy as possible and certainly, being able to order online when you want to order, the way you want to order, that those are very important and increasingly important to our customers. So we've got a lot of good work going on with our digital platform to make that experience a more positive one and a productive one for our customers. So our numbers are modest but they're beginning to grow but, again, the overall target is here, is to drive the business in the right way, it's not necessarily to hit a particular percentage. Go ahead. Thomas Bené: So Karen, I'll just build a little bit on that. I think in the past, we've talked about we've been somewhat in this kind of high, single-digit just below 10% through the fourth quarter. Now we're seeing over 10% of our orders for these local customers coming through this mobile or digital platform. So we do see some progression continue to happen, 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. And so there were also a few tools we needed to build to be able get in place, to enable them to do that more effectively. And we've got some of those tools now in place, and that we believe we'll continue to see that number grow as more customers have that interest. But we also know from a lot of the work we do that our marketing associates are one of the most highest valued resources we have and that we provide our customers. So we're trying to make sure that we balance the how they order with the service and support they need to get day in and day out from our selling resources. So we feel good about the progress but certainly we'll probably see that continue to grow, but we're very focused on the overall customer experience and letting them choose.

Great, thanks.

Your next question comes from the line of Mark Wiltamuth from Jefferies. Your line is open.

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 at some of the bigger headwinds?

We're lapping them, so it's started. I think generally it's in the meat, seafood, and some dairy. Joel, is that about right?

That's correct.

So is the 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 half a year ago, six months ago.

Okay. And just to get into the softening of the backdrop a little bit. I wanted to get your thoughts on restaurant store growth out there. Because a lot of the health indicators you're looking at are same-store sales measures, so I'm curious: Do you think there's over-storing going on out there as part of the problem? And what's been your percentage of business from new stores over the last several years?

You know, Mark, I think when you go back to 2009, 2010, clearly there was oversupply and overcapacity, and I think there's been a pretty good correction since that time. I believe we've seen some modest reduction in restaurants -- number of restaurants here over the last year or so. But nothing to the degree we saw for or five years ago. There may be a little bit of a modest correction, but I don't think that's an overriding issue, I think it's somewhat self-correcting. We don't really track our sales to new stores. The way we track them, Mark, is we track new business for us, which is make an account to an operator that we didn't sell a year ago this time, and we track watch business, which is just the opposite where we had a sale a year ago and we don't have any. And then we track penetration. So the softening, if you will, is probably showing up a little bit more on the case penetration side right now.

Okay. And do you think the strength you've had in local is enough to kind of overpower some of the broader industry softening?

I feel very good about our three-year plan and I feel very good about how we're executing the business and if that's your question -- the bottom line is we feel good about the momentum we have, we feel really good about the year we just passed. And, if it is a little softer, we've got good things going out. We're handling expenses very hard right now and we're very committed to the plan.

Okay, thank you very much.

Your next question comes from the line of Stephen Grambling from Goldman Sachs. Your line is open.

Good morning. Thanks for sneaking me in, a couple of follow-ups to earlier questions. I guess, first, related to -- I had a question on EBIT growth targets. I think you had previously looked for 55% to 65% of the goal coming from gross profit and the remainder in supply chain and administrative costs. As you think about the better execution driving the upside, where you think that has impacted those buckets most and where is the biggest opportunity going forward?

Stephen, I think both those lines are critical lines, but certainly you have to start with gross profit. I mean, we make $9 billion in gross profit. That's more than the sales of many, many of the people we compete with head to head. So that's a huge number that we've been able to grow very nicely on an adjusted basis over the last year to two years. And how do we do that? It comes back to the levers we've talked about. Case growth, with a particular emphasis on local case growth, managing the margins, utilizing a lot of the tools, many of which are technology-based today, and taking a good hard look at where our potential is in terms of territories within each district, within each opco. So assessing the opportunity for growth by territory, by district, by opco; taking advantage of some of the revenue management tools that Tom and his team are -- have put in place over the last year and are just now beginning to mature; continuing to utilize the category management process, both from leveraging our spend but also bringing innovation to that product; staying close to our customers, refining our customer insight where -- to be as current as we possibly can in terms of what the needs of those operators are as they face the challenges, so you have to start with gross profit and the ability to grow those dollars, and we've done a nice job there and I expect us to continue to do well. With that said, as I said in terms of the pillars of our strategy, we need to be more productive in everything we do. And we set some goals out there and certainly running the business at a flat cost per case for yet another year here is a very appropriate yet aggressive goal and it's going to be paramount for us to have success this year to do that. So we've got some good momentum there in the supply chain. We're managing our SG&A very well. So I feel very good about our corporate spend as well. We're still spending some money in business technology to kind of create those tools that we've been talking about here in particular on the commercial side. So I think we're spending the money in the right place. Over time, we'll continue to flatten out that corporate spend, try to keep the flat cost per case flat in the field. And that combination of good, solid gross profit growth and well-managed expenses should serve us very well.

I think that one thing I would just add to that even -- if you think about the model and how we looked at that spread between gross profit dollars and operating expense dollars, I think one of the things that we remain focused on is that delta between those two. So even in times when we've had some impact of deflation on the gross profit dollars, again, we've continued to focus on driving the expenses to where we look at that spread. And on a year-to-date basis, we're up a little over 1.5% in terms of that delta between those two. And so the only other thing I may call out is just that to think about -- because that's certainly the way we think about that. And again, whether deflation goes up or down, that relative spread between the two is certainly a key part of our model and something we've done really well on the point Bill has made.

Yes, and I think the difference in this conversation we're having today versus three, four, five years ago is what I spoke to in terms of the foundation that we've built with a lot of our transformative work, a lot of the initiatives that we put in place. We have tools today, we have structure, we have the right people to do this. It's not easy, it's still a very competitive environment out there, but we're in much better position today to accomplish these things than we were five years ago.

Thanks. And within that, you talked about the good work on the digital platform. Where do you think your systems are relative to peers and does this shift away from SAP changeability to implement some of these tools? Thanks.

Well, clearly a big part of our ongoing strategy here was to reallocate what we call our business technology spend more to the customer-facing side of the business. So I think the direction is right, the spend is right, we've making good strides. But we've got some work to do to get the -- not just the digital platform but all the tools we use behind the scenes, both to operate the business and to assess the performance of the business. We still have some good work to do here to improve and that'll be a perpetual opportunity. So good work to do, but I think strategically we're spending the money in the right place and we'll continue to invest appropriately in that part of our business.

Thanks so much.

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

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 more of an entry into the fresh and the ethnic products, 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 any potential further opportunities going forward.

I think over the last several years, we've done a lot with specialty meats, specialty produce, gas supply. In terms of bringing those businesses into our company, they're now what we think of as core. Five or ten years ago, they would have been adjacencies. So certainly we've got the foundation there as well and what you've seen here over the last three to five years is we're integrating it much better. I'll let Tom speak a little more specifically, but there's still opportunity out there, particularly on the geographic side, I think, where we have some holes we'd love to fill in geographically but good momentum with the recent acquisitions. Thomas Bené: I think I'll just add that as Bill said, we really view those specialty areas now as more than a quarter of our business and I think our ability to round that portfolio businesses out across the U.S., we'll create those opportunities like with North Star in Florida. And so we'll continue to look for those opportunities as they come up, but I believe that's an important part of our growth. This whole fresh, the local, those that you've been hearing about and seeing out there are something that we are very focused on through both our produce and specialty meat and seafood companies.

Okay, great. Thanks, guys. Maybe just a superfast follow-up here. On the ERP, the 12 that are being converted back to the enhanced ERP systems. I think you were at kind of the first, second one a couple months ago. Just a quick update there. Where you are in that process?

Yes, it's a 12-month process and we've done one of them very well and around schedule. So we're in a good place.

All right, great. Thanks, Bill.

Thank you.

And we have time for one last question. And our last question comes from the line of John Ivankoe from JPMorgan. Your line is open.

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 year. 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 we can -- that year-on-year might play an effect as oppose to taking just that fourth quarter result and running that forward?

I would never take one quarter and extrapolate too much John. I think you look at the year, you look at the trends, you look at the environment that we just described and obviously we have plans to grow the gross profit and manage the expenses very well but I wouldn't try anything off in 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 you're customers are getting and how you're 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. I mean as I've said, I think for a long, long time; it's a very competitive environment out there. There is a lot of sales people out there in the street and lot of very sophisticated customer, so pricing is always going to be a key part of how customers look at value. I think what you've heard Tom say, as we look at revenue management in which 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 what is key for them but we have the tools that make sure we're highly competitive in their key items but also where there is opportunities in growth. So when you look at our economic model, it's really about having the right price for the right item and the right day for that customer for the street business and remain very competitive with our contract customers. And to do that you need to continue to take cost out and become more efficient. So I wouldn't say that there is anything in particular going on right now that's different than what we've experienced sort of last two or three years. And I wouldn't -- and I also think we still have opportunity to be more consistent in our pricing and that should be a win for our customers and win for us.

Very helpful, thank you.

Thank you.

And ladies and gentlemen, this does conclude today's conference call. Thank you so much for joining us today. You may now disconnect your lines.