西斯柯 (SYY) 2016 Q2 法說會逐字稿

Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sysco reports second-quarter FY16 earnings conference call.

(Operator Instructions)

Thank you. Mr. Neil Russell, Vice President of Investor Relations, you may begin your conference.

Thanks, Melissa. Good morning, everyone, and welcome to Cisco's second-quarter FY16 earnings call.

Joining me in Houston today are Bill DeLaney, Chief Executive Officer, Tom Bene, our President and Chief Operating Officer, and Joel Grade, our Chief Financial Officer. We welcome Tom to our quarterly calls, and look forward to his comments in just a few minutes.

Before we begin, please note that statements made during this presentation that state the Company's or management's intentions, beliefs, expectations or predictions of the future are forward-looking statements, and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the Company's SEC filings. This includes, but is not limited to risk factors contained in our annual report on Form 10-K for the year ended June 27, 2015, subsequent SEC filings, and in the news release issued earlier this morning. A copy of these materials can be found in the Investor 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 applicable GAAP measures are included at the end of the presentation slides, that can also be found in the Investor section of our website. All comments about earnings per share refer to diluted earnings per share unless otherwise noted. To ensure that we have sufficient time to answer all questions, we would 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 a strong second quarter and a solid first half of the year. These results reflect the continuously improving execution of our portfolio of strategic initiatives by all of our associates. Further, our favorable performance over the past several quarters validates that our ongoing focus on improving our customer's experience with Sysco, and increasing productivity in all aspects of our business are key to our future success.

From an overall economic and industry perspective, calendar year fourth-quarter US GDP and consumer confidence data was mixed, as favorable unemployment trends and lower gas prices somewhat offset increased concern about near-term business conditions and global uncertainty. Most recently, the precipitous drop in multiple stock market indices bears watching, as it relates to potential adverse ramifications for consumers and our customers. As far as the restaurant industry data is concerned, the overall trend remained reasonably positive amidst sluggish consumer spending.

According to the National Restaurant Association, December marked the 11th consecutive month of foodservice sales growth. This closes out a strong year for the industry, where foodservice sales exceeded grocery store sales throughout the year. That said, both NPD and navTrack have shown some recent modest declines in traffic trends that we are closely monitoring.

With respect to product cost deflation, we saw an acceleration during the second quarter, driven by key center of the plate categories such as meat, poultry and pork, as well as dairy. This trend has continued into the third quarter, and we currently believe that deflation headwinds will persist for at least the remainder of the fiscal year.

Now moving to our second-quarter results. Total broadline cases grew 3.4% and local cases grew 2.9%. Sales were up 0.6%, despite being adversely impacted by both deflation of 1.2%, and foreign exchange headwinds of 1.7%. Gross profit dollars grew 3.4%, and gross margin increased 50 basis points. Adjusted operating income for the quarter grew $41 million or 10% compared to the prior year. Adjusted earnings per share grew 17%, and, importantly, we had solid execution across the business including US broadline.

Reflecting on the first half of our FY16 performance, overall our team executed well. And we are making good progress towards the achievement of our key financial objectives by focusing on the following four key levers: accelerating local case growth, improving gross margin, leveraging supply chain costs, and reducing administrative costs. Specifically, we achieved the following during the first half of the year. Total broadline local cases grew 2.8%. We grew gross profit by $121 million, expanded gross margin by 36 basis points, and grew gross profit modestly faster than expenses. We grew adjusted operating income 4% or $38 million, and we grew adjusted earnings per share 7.5%.

As we enter the second half of our fiscal year, we have strong momentum in the business. We do, however, need to continue to effectively manage the persistent deflationary headwinds that likely will challenge our performance going forward. Further, we are aggressively reviewing all aspects of our Business for incremental cost savings opportunities to improve our financial performance.

At our Investor Day presentation last September, we laid out three key results that our three-year strategic plan is targeting though 2018: improve our customer's experience with Sysco, enhance associate engagement, and achieve our financial objectives of increasing operating income by at least $400 million, growing earnings per share faster than operating income, and achieving a 15% return on invested capital.

I remain confident that we are well-positioned to achieve those goals. And now, I'll turn the call over to Tom.

Thank you, Bill, and good morning, everyone. I am glad to be joining the call this morning with all of you.

In my new role, I'm excited to bring our Business operations, commercial functions, and supply chain organizations together to drive improved execution, and a seamless approach to serving our customers. This approach will better position Sysco to provide exceptional service and support to our customers, and ultimately improve our returns to our shareholders.

I would like to begin my remarks regarding the second quarter, by providing an update on some of the initiatives related to our three-year plan, now they have already begun to have an impact on our business results. As we have mentioned before, our insights-based approach to understanding and meeting our customers needs continues to guide our efforts. Our improved processes and tools in this area are allowing us to leverage our very robust base of information to design a variety of initiatives to improve the retention and penetration of our current customers, as well as to accelerate the addition of new customers.

And while we have much work still to do, we're beginning to see positive results. For example, during the second quarter, our US broadline operations delivered case growth of 3.9%, including local case growth of 3%, gross profit dollar growth of 5.5% including an improvement in margin of 57 basis points, and operating income growth of about 9%, supported by solid operating expense performance.

From a geographic perspective, we saw solid year-over-year improvement in both cases and gross margin across the US, with specific strength in the Mideast, Southeast and the Pacific markets. This was somewhat offset by signs of growth slowing in our traditionally strong Southwest market, due to the impact of the downturn in the energy sector.

One example of how we are driving increased case growth is in the area of fresh and local products, where we're helping to educate our customers that we have significant capability through our broadline operations and our specialty companies to bring fresh and local produce to the market. As an example of how we differentiate ourselves in this segment in order to grow cases, our Sysco quality assurance team has partnered with the Produce Marketing Association to deliver good agricultural practices workshops to more than 800 small farmers since 2011, helping prepare our small local growers to meet our food safety standards.

As you know, improving gross margin is one of the key drivers of Sysco achieving our three-year targets, and our strong performance this quarter indicates we are making progress toward achieving our long-term objectives. To that point, I am pleased with how well we have managed the current deflationary environment, which has certainly slowed sales dollar growth. Our ability to manage this environment well is due in part to an increased focus on Sysco brand and our category management efforts, where we are able to use our purchasing scale, along with a more transparent process with our supplier partners to achieve our goals. We continue to see a variety of benefits for our customers, suppliers and Sysco, as category management has become a standard part of how we now operate our business.

There other areas that we know are improving our overall customer's experience of doing business with Sysco, as well, including the way we are improving the service and support they are experiencing through our technology solutions. Our mobile order entry platform, which has been in pilot with customers for the past few quarters has shown strong adoption rates with both customers and our marketing associates. Now that the pilots have been completed, we are in the process of fully deploying this ordering solution across the enterprise. Additionally, we soon expect to begin pilots for the next phase of our digital e-commerce platform, which will bring additional capability, tools, and information critical to our customers to help them better run their business.

Finally, from a supply chain perspective, we have made solid progress toward our goal to improve overall service to our customers, while driving higher productivity in our operations through our continuous improvement process. As mentioned earlier, while there's still a lot more work to be done, we are seeing improved operating expense trends, and we are targeting a continuation of this performance throughout the balance of the fiscal year. There are just a few -- these are just a few of the key priorities that are starting to impact our operational and financial results. And while we have much work to do, I'm confident we are on the right path to achieve our long-term objectives.

In summary, our customer and operational strategies are being executed well in the field, and our headquarters teams are doing a terrific job of providing our organization with field-ready tools and processes that are enabling our success. Now I'd like to turn the call over to Joel Grade, our Chief Financial Officer.

Thank you, Tom, and good morning, everyone.

We had a strong second quarter, especially in light of the increased deflation and continued currency headwinds. We also continued to make some solid, early progress towards our FY16 plan and our two year goals. We grew sales in the second quarter by approximately 1% year-over-year, despite going from inflation of 6% in the second quarter of last year to deflation of 1% this year, including deflation of nearly 2% in US broadline. We saw continued deflation in center of the plate protein categories, as supply recovers from various events in 2015. However, as Tom mentioned, we are managing this environment well, including improved processes and programs such as category management that have helped to lessen the impact of deflation.

Foreign exchange negatively impacted sales by 1.7%, with the US dollar strength against the Canadian dollar responsible for the vast majority of the impact. On a constant currency basis, sales would have been up 2.2%.

Turning to case growth, consistent with our three-year plan to achieve disciplined case growth, we had another quarter of strong performance. Total broadline case growth for the second quarter was 3.4% and local was 2.9%. This is the seventh consecutive quarter of year-over-year local case growth for the total broadline.

Looking at gross profit and gross margins, we grew our gross profit at a solid 3.4%, while also continuing to see expansion of gross margins, which grew by 50 basis points. The key drivers of gross margin improvement included category management, a more beneficial mix of local business, higher Sysco brand penetration in our local business and deflation. On a constant currency basis, gross profit growth was 5%. Adjusted operating expenses grew 1.8% during the quarter, and by 3.5% on a constant currency basis.

The increase was mainly driven by the previously mentioned higher case volumes, and planned investments in business technology. This increase in expense was partially offset by various decreases, including reducing indirect spend, reduced fuel costs and foreign exchange translation. This progress is reflected in our cost per case in US broadline, which was down $0.01 from the prior year.

Also note, while we experienced a relatively minor amount of certain items related to restructuring during the second quarter, we do expect to experience additional restructuring charges related to our three-year plan over the next few quarters. As you know, a key part of our plan is to effectively manage the gap between gross profit dollar growth and expense growth. We achieved that objective during the second quarter, and as a result grew adjusted operating income by 10.2% compared to the prior year, and 11.6% on a constant currency basis.

As it relates to taxes, in mid January at an investor conference, we disclosed the $21 million benefit to income tax expense as a result of the favorable resolution of some international tax contingencies. This had the same impact on both our GAAP and adjusted tax rates, [producing] both to around 31%. As a result, and as mentioned during that webcast, we recorded a $0.03 benefit to earnings per share during the second quarter. Compared to the prior year, adjusted net earnings grew 12.6% and adjusted earnings per share grew 17.1%, and 19.5% on a constant currency basis due to higher operating income at a reduced tax rate. The previously mentioned tax benefit increased earnings per share by $0.03.

The share count decrease of 24.5 million shares related to the accelerated share repurchase program positively impacted earnings per share in the second quarter by approximately $0.02 versus the prior year. At the beginning of the second quarter, we executed the accelerated share repurchase program, and therefore received the benefit from that repurchase for the entire quarter. Also note, that we resumed our ongoing practice of buying back shares to offset dilution during the last few weeks of December.

Cash flow from operations was $469 million for the first 26 weeks of FY16, up roughly 4% from last year. Working capital was a use of cash during the first 26 weeks of FY16, as it was during the first 26 weeks of FY15. The first half of the fiscal year typically requires a seasonal net investment in working capital that has been reduced during the second half of the fiscal year. Year-over-year the comparison is favorable, as we invested $143 million less cash in working capital during the first half of FY16 than we did in the first half of FY15.

Net CapEx for the first 26 weeks was $237 million, and free cash flow was $231 million. Both cash flow from operations and free cash flow include the cash impact of certain items of $264 million in FY16, and $102 million in FY15. The certain items for 2016 are mostly related to the termination of the proposed merger with US Foods, and from 2015 included items related to the proposed merger itself. Excluding the cash impact of certain items from both years, cash flow from operations grew by $179 million, and free cash flow grew $237 million.

Now I would like to close with some commentary on the remainder of the fiscal year. First, we are on track to achieve our FY16 plan. Second, we expect deflation to persist for at least the remainder of the fiscal year. Third, we had a relatively strong fourth quarter last year, which will make fourth-quarter comparisons this year more challenging. Fourth, we now expect CapEx to be near the lower end of the previously stated $550 million to $600 million range. Finally, we expect a normalized tax rate of 36% to 37% over the remaining 26 weeks.

In summary, we had a strong quarter led by continued momentum from the improved, underlying business performance. That said, we have more work to do, in order to achieve our FY16 financial objectives and our three-year plan, including effectively managing deflation over the near-term, and increasing our focus on expenses. We continue to aggressively review every part of the Company, looking for ways to reduce costs. Additionally, we have put in place a more rigorous process for managing expenses, including how we prioritize spending, and focus investment on areas or projects that improve our ability to serve the customer better.

And finally, we took advantage of continued lower fuel prices to increase the amount of fuel we locked in over the next 12 months. I feel good about our ability to achieve the first year target of our three-year plan, and we are working hard to be as aggressive as possible, in identifying incremental opportunities to exceed our Investor Day targets.

Operator, we are now ready for Q&A.

(Operator Instructions)

Zach Fadem, Wells Fargo.

Hi, good morning. So a question on local cases, with local cases up about 3% in the quarter, I'm hoping you can provide some color here, in terms of new customer growth, versus higher share of wallet for existing customers? And over time, do you think you can grow local cases in excess of the market rate?

Hey, Zach, it's Bill. I'll start, and let Tom give you some color from his perspective. I -- we've historically been able to take share year in and year out, and we do that both in the local side of the business, as well as the corporate side of the business. So yes, I would expect that we would continue to take share. Obviously, what Joel referred to in his comments is, we are trying to do that more in a disciplined way as we go forward here. So that we get more of a flow through to the bottom line.

The way I look at local case growth is, I talked about the lever of accelerating local case growth. The context there is, we've had I think, seven quarters in a row now, of local case growth, and the last few have been right around 2% or more. So that lever is relative to where we were the last two, three, four years, as we going through a lot of our change, and some pretty tough macroeconomics.

So that 2% to 3% range I think is what we are targeting. I think there is going to be some quarters where we're at the lower end of the range, and there will be some we're at the higher end of the range. And I think 2% or 3% is very solid growth, if you look at what the forecasts are for the industry.

But I'll let Tom to speak to -- from generally where it's coming from.

Yes, I would -- thank you, Bill. I would just add, we are seeing strong trends in restaurant traffic and restaurant sales. So that's certainly helping, but we're really focused on promotional activity that actually drives new business. And also if you think about some of the tools we shared at the Investor Day, around how we improve our penetration, we are seeing improved penetration with our local customers, driven primarily by some of those initiatives. Whether it's some of the local products I'm talking -- I have been talking about, some of the innovation we've launched, or even some of the additional services we are providing those local customers. So we see good performance coming out of them from a variety of areas, and believe we will continue to see that kind of growth.

Great. And just, you had discussed a more rigorous process towards expense management. Joel, I'm hoping you can elaborate a little more on this, in terms of potential focus areas, and whether this would be above and beyond what you laid out at Investor Day?

Sure. So a couple comments on that. Number one, the way I think about those types of costs -- and I think we talked about this at other places -- we think about it from the standpoint of processes, from people, from technology, from the types of investments that we put into our company again, in terms of how we think about prioritizing items. So in other words, one of the key things I called out in here, is the ability to really prioritize and focus on those spends that are going to drive these again, ultimately what's better for our customers.

And so, I think the -- some of the things that we put in place, for example, are different committees to review and focus on technology spend for example, in the ways to have -- again, a very tight process for making sure we are focusing on those projects that drive, again the best results primarily and focused on the customer. So I would say, and again, there's a lot of rigor around that.

And in terms of the second part of your question, all I can really say to that I think, is that we certainly will continue to focus on driving that. Certainly, with the deflation we are experiencing, and the fact that our gross profit dollars are harder to come by, that's -- increased focus on expenses is important. And so, as I again as I mentioned, and I think in my script, that's certainly an area we are going to continue to focus on, and certainly look to drive incremental improvements over and above our targets.

Yes, I think if I could just add there, Zach, to Joel's comments, maybe a little more of a historical perspective. I mean, this Company has always managed expenses very well, both operationally and corporate.

Now, over the last three or four or five years, we've invested a lot, in particularly on the corporate side, technology, processes as Joel mentioned, commercial activities, beginning to [enhance] the supply chain. So while those investments have been made over the last several years to create this path of transformation that we feel the Company needs to go through, in which we're pretty far down the road on.

What you see today, and what you've seen in the last few quarters is we're beginning to get the benefits of a lot of those investment. So I would expect that the trajectory of that expense -- and it's already happened -- will flatten out. To Joel's point, we will continue to get better and better at sequencing and prioritizing spend relative to customer needs, and relative to what we need to deliver for our shareholders.

I'd say, the one last opportunity we have particularly in the field is to just be more consistent in our execution, and we still see plenty of opportunity there. So again historically, we've done a good job, but what we're really telling you here is we think there is opportunity, both operationally, as well as on the corporate side.

Stephen Grambling, Goldman Sachs.

Hey, good morning. Thanks for taking the question.

I guess, just a follow-up on -- I think there was a comment on deflation making gross profit dollars a little bit harder to come by. There was also a gross margin benefit from a rate standpoint. Can you just elaborate on how deflation impacted the P&L as the quarter progressed? And if it's going to continue, do you anticipate any change in the way it impacts the business?

Well, deflation impacts the P&L -- I don't know that there was a big sequential impact -- a lot of variability around the sequential impact, as the quarter progressed. But what we're saying is, we saw a pickup from the first quarter to the second quarter. We're seeing some similar trends here in January, and we kind of felt mathematically that would begin to [wrap].

We began to see this, if you recall back in March, and then the fourth quarter of last year is when the inflation fell off. So we thought, just from a [wrapping] perspective, that we would see a little more -- a little less deflation as we got into the second half of the fiscal year. And I would say, what we're telling you today is, it's still there, and we probably will expect to see it, at least through the end of the quarter.

It affects you in different ways. Obviously, on the positive side, generally when our costs go down, we're able to pass that along to our customers. And that's good for them especially, as they're dealing with some of their labor challenges. It -- your percentages look better, so certainly it contributed to the gross margin expansion. But the reality is, it's not a great environment, because you end up with fewer dollars to pay your expenses with. So to Joel's other point, when you have this level of deflation, it just reinforces the importance of managing our expenses very tightly.

Thanks. And as an unrelated follow up, I know there was some comments about e-commerce. Can you just remind us, where the current penetration is, as it relates to the sales, and how you think about that as a driver of the business going forward?

Yes. So regarding the e-commerce work we've been doing, we have been very focused on a mobility solution. So think about it as an online ordering tool, where our customers can use an iPad type device or their phone to order. We've seen -- we've been piloting this across the last couple of quarters. We are now in most of our operating companies, with at least some of the customers and some of our districts. And so, we are going to be expanding it now to the rest of the country, in more of a full deployment.

We continue to see improved usage of the tool, but I'd say today, we're still on the low, probably 9% -- 8% or 9% of the orders going through that process. But we're seeing it -- basically double-digit improvements each quarter as we roll this. So the feedback has been very positive, both from our own associates who also use the tool, and from our customers. So we believe we are well on our way to significant increases in adoption, and ultimately a lot more of the orders being placed in that, and using that tool.

Andrew Wolf, BB&T Capital Markets.

Hi, good morning, and a good quarter. Back to the gross profit. So just sequentially, they grew better even as sales got worse, because of accelerated deflation. So I've heard the explanations around mix and so forth. But at least from my view, it looks like the deflation is at least kind of benign, or I mean, it -- I know it becomes a headwind.

But is there some element to sticky pricing, where when inflation was increasing the last three years -- it's tough for distributors to pass that through all at once, and is there some element where to some degree, it doesn't have to come down quite as fast? Or is -- do you think everybody is just chasing the business, and passing it through right away?

Good morning, Andy. Thank you. You covered a lot there. I -- look, I think what -- as I've said, I believe the deflation as you look at the gross margin i.e. to percent of sales is clearly helping. However, as we've said very consistently over the years, it's not an ideal environment to be in. If you look at this business historically, our customers generally are able to pass along a couple points of inflation to their consumers, year in and year out, and they generally do.

So to one of your points, what you're seeing here a little bit is some of the recovery, what we gave up. When we were dealing with 5 to 6 points of inflation, you can only pass along so much of that, so quickly. And it's only appropriate to pass along so much of that, so quickly.

So when you have deflationary trends, mathematically it helps you little bit. Perhaps there are situations where you can bring your prices down a little slower, but ultimately it's an incredibly competitive environment. So we're out there, compete for that business everyday, and we want to do right by our customers. So I wouldn't put a lot of weight on that. I just think we're doing a very good job managing it.

I've seen different cycles of the deflation here over the last -- you know how many years, but a lot of years -- and this is by far and away, the best we've ever managed it. And I think it goes back to what Tom covered, and I'll let him speak again, we are actively -- we've been working at several commercial initiatives here for the last two, three, four years, where there's segmentation, back to basics, revenue management, category management. These are all things that are allowing us to be more laser-like, in terms of how we work with our customers, and bring more consistency to our pricing. There's more to do there, but so I would just say, I think we're actually managing it quite well.

Yes, Bill, the only thing I would add is, we've talked about the impact of the category management efforts we have been embarked in over the last few years. That continues to be a significant driver for us. And we also shared with you all the importance of our Sysco brand growth. And we're very focused on that Sysco brand, because we that know not only is it a great quality product for our customers, but obviously there are margin benefits for Sysco as well. And so, I think really, that's just one additional things I would add that helps.

I wouldn't underestimate this mix. We don't have to grow the local faster than the corporate. I mean, I think corporate still grew a little bit faster than local this quarter, but we bring more value to the street customers.

We are able to leverage our Sysco brand offerings in a broader way, with our local case growth. And so, if you go back to Investor Day, and some of our commentary there, that first lever of accelerating local case growth -- and if we can keep it in that 2% to 3% range, that's a very powerful lever for the throughput or flow-through, if you will to the bottom line of the Company.

Thank you. Can I just follow up briefly on the category management? That seems to be driving profits nicely. I think earlier on, it was really focused for you guys on your vendors, and some of the things you were doing there to bring down costs. It sounds like it's more focused now on getting it into the sales side of the business, and bringing it to the restaurants? And am I hearing that right as well?

Well, I'd say it's -- so yes, the initial wave you go through, and you are obviously doing all the hard work and heavy lifting around the categories, selecting the right products, and the right partners to do business with. Now that we're deeply into that, and we've been through all the categories, and the majority of them, now we're very much focused on optimizing what we have. So you've heard us talk about innovative products.

We've had some innovation that has been out over the last couple of quarters now, that are starting to drive some incremental benefit for our customers, and obviously for us. We're also starting to do much longer range planning with a lot of these supplier partners. So it's become more of the way we operate and I guess, based on that, or because of that, we are seeing the consistent year-over-year benefits, while maybe not as great as they were in the early days as we started it, we're still seeing consistent benefits from that work.

Edward Kelly, Credit Suisse.

Hi, good morning, guys. Congratulations on a nice quarter.

Hey, Ed.

Hey, Bill. Can I -- just start with a big picture question. So last quarter, you walked us through how the underlying business was better than the bottom line results sort of showed, right? And that was I think about more like corporate costs and stuff. And now, this quarter you've got -- it's like your strongest EBIT growth quarter in recent memory despite deflation. You've got case growth, and better profit per case, and lower expense per case, sort of all lining up.

Do you feel that you've kind of reached that inflection point that you were hinting at last quarter? I guess, what's the big picture takeaway from this quarter, if there is one at this point?

Yes, Ed, I think it's a little bit like golf. We got a little bit more out of this quarter than we did in the first quarter. I think when I talked about that first quarter, and we -- that's when we really talked more about the US broadline than we have in the past. I wanted you and the other investors to understand the quality of the underlying quarter.

I think part of what we're seeing, we've done some work on this is, the trajectory of the corporate spend coming out of last year, coming out a proposed merger that ultimately was terminated, we still had some -- and we still do -- we still had some trajectory of our spend here at corporate, in particular on the technology side, and in particular in some of the areas that Tom's speaking to, with the digital and mobile platforms.

So those comparisons were not quite as tough in the second quarter as they were in the first. So our corporate expense increase was a little bit less acute. We got a little bit more margin improvement, as you can see on the gross margin side, even though we did see more deflation, and perhaps that helped us a little bit in the short-term.

But we also managed, I think a little bit better. And you saw better cost management I think operationally as well. We're right around that flat cost per piece. Fuel helped us a little bit there.

But so I just think everything got a little bit better, and I just think this quarter is somewhat more reflective of really the quality of the earnings that we've seen. Now look at, what I would do, or what I would encourage you to do, is look at the first half that I spoke to. And what I see there is, is I see 4% operating income with improving trends. And that's kind of how we are looking at it.

So we think we are in a good place for the first year piece of our three-year goal. Joel can speak to that, but I think we talked about hitting 20% to 30% of our goal here in the first year. And we've got more work to do to hit or exceed the rest of that goal, both as it relates to continuing to address the deflation, in particular, grow those cases locally the way we are and have been.

But we've got some more work to the side expense side as well, and you've heard us allude to that here. So I wouldn't quite call it an inflection point, but I would call it a validation of what I talked about in the first quarter

Okay. And just a couple quick follow-ups. One just on case growth, do you think weather helped case growth out at all? And then, a follow-up on deflation, the last period we saw more meaningful deflation, profit per case was down, and it doesn't sound -- it sounds like this period, you think you can manage through that without seeing it? And I just want to confirm, that's how you are thinking about things?

I don't think weather played that large a role. It's always hard for us to talk about good weather. December was relatively mild, so it might have helped a little bit.

I would tell you as far as this quarter goes, we had -- we finally had winter, and we had it in the mid-Atlantic area here a couple weeks ago. So that's hitting us a little bit our last week of January, first week of February. But so far, nothing crazy on the weather side this quarter either.

And I just think -- I'll let the other guys chime in here -- I think on the gross profit, look, deflation is a very challenging environment to manage, in terms of growing your gross profit dollars. And I just think we're doing a better job there -- for the reasons that Tom has taken you through. But the reality is, we grew it 3.4%, which is not 4% -- on to Joel's point, it was better than that when you adjust for currency.

So I just think a lot of these commercial [issues] that we been talking about for the last two, three, four years, they're at different stages of development and maturation, and you're beginning to see the benefits of them. But it is definitely a challenging environment, and that's why we're just being a little bit cautious in our wording, as it relates to the second half of the year.

Joel, do you want to add anything?

Yes, I think the only thing I would just add to that, in terms of the way we think about that is -- again Bill said it, the headwind is there, but the combination of solid volume growth, and some of the margin expansion that's caused us, coming from some of the initiatives that Tom has talked about again, the category management, the brand. The brand within our local case growth, so in other words we are growing our local cases, and our brand within that is growing. And so, that's all positive.

And so, I think at the end of the day, again certainly, obviously we'd say we've certainly love to take a little bit of inflation, to pass even more of that through. But I think those are the key levers that we think about, as we combat inflation. And I think we've done a pretty good job of it.

Yes, and we've talked a lot about local, and we need to because, I mean, that really is what's driving a lot of this, along with the initiatives. But we also grew the corporate business this quarter as well, and we grew it in a profitable manner. So we actually feel good about the overall quality of the case growth.

Kelly Bania, BMO Capital.

Hi, good morning. Thanks for taking my question. Lots of questions on gross margin, but was just curious, the factors that you called out, category management, local case growth, your private brand, deflation, is that order of magnitude the right way to think about it? I mean, do you kind of go item by item of those four factors, and say, here is what the impact was? And just wondering, if you are willing to share any more detail with us on those?

Kelly, just to be clear -- is that the way we think about what?

The impact of those factors on gross margin, category management, the local case growth, the private label penetration and the deflation?

Yes, well, again just for no other reason to make me feel good, I think about gross margin, but I also think even more about gross profit dollars. So we're trying to address both here. You pay your bills with the dollars.

I think on your point on the margin, certainly deflation of this magnitude is meaningful. There's very -- it's impossible to quantify what that is, but we would be less than genuine, if we didn't say that was contributing to some of the margin improvement. But I would quickly go to the other things we've talked about here today, which is the importance of local case growth.

Again, it doesn't have to be faster than the corporate, it just needs to be significant. The importance of growing the brand, and that's easier to do when you were growing your local cases. And the maturation of the category management work that we're doing, along with some of the work that Tom has continued to develop here on revenue management.

But I'll -- you could talk to 10 people or 100 people at Sysco and probably get a little bit different answer on the question. So I will let Tom and Joel jump in here as well.

Well, again, I think the question is really more around, is the prioritization of that, the way we look at it? I think we look at all them coming together. At the end of the day, this local customer, if we are meeting or exceeding their needs, we're going to get the kind of growth that is required there and we're focused on a lot of initiatives that in fact, help them be successful. And I know we've said that a few times.

But I think what's important for you to take way is the more they are successful, and therefore the more we are successful with them, that is a big lever on our business. Because of the -- what we bring to them, and the percentage of their business that is, in fact Sysco brand, and the way we partner with them. So I think, I would say they all come together, and that's what makes the impact that you are seeing. I don't know that it's one necessarily higher than the other, it's really more about making them work together.

I think the other point that Joel has made, and I will make it again is just -- obvious point we've had some challenges in the last few years, but to keep the right spread if you will between the gross profit growth and the expense growth.

Yes, I think that's the other point I would continue to emphasize is, as inflation goes up and down, as our gross profit dollars are driven by the things we've talked about. Again to Bill's, the point Bill just made, one of the really strong focuses we have is to drive the gap between gross profit dollar growth and expense growth. Which again, certainly this quarter, we did a good job of, because together when we have more inflation or less inflation one way or the other, that spread is really important to us. Which is why were going to continue to keep driving, certainly on the gross profit dollar growth, and but focus on the expenses as well.

Okay, that's very helpful. And then, I guess, what -- in terms of expense growth, what was the impact of technology spend this quarter on your expenses?

I don't think that we historically have really gotten that detailed, Kelly. What I would tell you is we still have some expense growth here at the corporate side. It's planned, and virtually all of it's in the technology side.

Karen Short, Deutsche Bank.

Hi, there. Just -- I don't know this is something you would be prepared to answer, but it would help just because if and when we do return to an inflationary environment, it's just something to keep in mind in terms of puts and takes on the gross margin. So I guess, the question is, what percent of your sales are priced at cost plus a percentage markup, versus a cost plus fixed penny per case? Because obviously, I mean, a fixed penny per case customer, you're going to be benefiting in an deflationary environment from a gross margin perspective?

Yes, Karen, good morning. I would just say that, you can presume that -- you talk about our corporate customers, those large customers, those are all on some type of a cost contract. Some are marked up, some are margin, some are -- some lines are down a penny or dollar per piece, whatever, dollar per pound. And on the local side, a lot of that is priced by the MA, some of it is contractual. But we have, and we don't plan getting into a lot of detail on how we price customers.

Okay. And then, I guess, just switching gears, I had two questions. I guess, the first is, what do you cut back on in terms of CapEx this year, in terms of you're coming in at the low end of the range? And then, the second question I had is, just obviously your stock is reacting to your strong results this morning. I'm just curious how you think about the remaining buyback, in light of the fact that, obviously, the stock was at a better entry point during the quarter than it is now?

So I'll take the first one, and then I'll maybe clarify your question on the second one.

The first part of the CapEx, I don't know I'd really think about it as something we're cutting back on. I think the way I would just say it is, we target our CapEx spend as not based on some fixed number that we need to achieve or not achieve, but it's really truly driven by the needs of the business. And so, I think the way I would just think about that, is that as we've talked about before, we have a pretty rigorous process in terms of identifying and prioritizing our capital spending needs.

And I would just say it to you this way, that the way we look at the required spend this year for what our business is needing, just happens to fall near the lower end of that range. So again, I don't necessarily look at our target as something that we have to achieve, or some number we have to get to. It's just based on the needs of our business, and we have ability to flex as it relates to that.

And then, the second -- Bill, do you want to add anything to that?

Let me take a shot at the second one, and if I don't hit it, Karen, clarify it for us. I -- first of all, it's nice to have a quarter beat, so it's nice to see the stock reacting. Our experience is, it will take two or three days for things to kind of level out, in terms of how investors see the quarter. We've announced our intention to -- we've done the $1.5 billion that needs to be settled as Joel said, and we, today it would still be our intention to do the remainder of the program next year. So if things were to change, we will let you know. But right now, that is still our intention.

I would just reiterate though, going back to the first part of your question, we're always looking to invest in our business, and we will continue to do that in a way that supports the disciplined growth that we've talked about. Modestly growing our dividend continues to be very important, and we continue to look for good solid strategic acquisitions. So we're looking at all four of those opportunities. But sitting here today, two hours into this thing, I think we haven't changed any plans.

Mark Wiltamuth, Jefferies.

Hi, good morning. I wonder if you can give us an update how things are going on SYGMA on improving profitability there? And just also, just a little more detail on what you were talking about there for the fourth quarter comparisons, why fourth-quarter is going to be a difficult comparison for you?

I'll speak briefly, and let Tom give you a little bit more color. SYGMA, as we've said is in somewhat of a turnaround mode and we're continuing to see some better trends there, as it relates to the customer mix, and the expense management and that kind of thing. I would tell you there is still plenty of work to go there, but we are encouraged by the beginning of some trends that we are seeing, but we're not there yet.

I'll let Tom take the rest of SYGMA, and I'll let Joel talk to you about the fourth quarter.

Yes, the only thing I would add on SYGMA is, we're very focused on specific customers and profitability, as well as improving our operational excellence in that business. And so, the combination of those two things is how we're going to improve and get this thing back on track. We've had certainly over the last year, some challenges regarding drivers and driver retention, which is something that we've come out of, and we're in a much better place now than we were probably six months ago. But it really is those two areas, making sure we got the right customer mix, and also that we're operating at the highest levels.

Okay

Yes, sure. And Mark, it's Joel. On the -- and on the your question on the fourth-quarter, I think the comment there really relates to the fact that last year in the fourth quarter, our adjusted operating income grew nearly 6%, and certainly, we had picked up nearly $30 million of operating income from the prior year.

And so, I think it's -- the comment was really focused around the, again I often talk about growth on top of growth. And certainly, as I've mentioned in my part of the script, I said we certainly, we are certainly feel very good about how we're looking towards achieving our FY16 planned objectives. But again, it's really more a call out of the fact, that the fourth quarter last year, we had quite a strong performance, and that's where the comparatives we're up against, that we were referring to.

Okay. Thank you

Meredith Adler, Barclays.

Hi, this is Shaun on for Meredith. How is it going, guys?

Good.

I have a question on the lower commodity costs, and to what extent that is maybe resulting in restaurants, [maybe] investing some of that into being more promotional, versus them using it to offset higher labor expense? I think that's been some of the driver of case growth to some extent?

That would be hard for us to assess, and probably not even appropriate. I think Tom sees more customers than I do, but I see a few. And I think the labor cost thing is top of mind for them right now. I know, it's been a the subject of some recent industry meetings, and I think that's where it's helping them. But Tom, do you have anything to add to that?

Not really. I can't say there is a big theme, around more promotional activity that I am seeing. They have lots of concerns out there in right now, not the least of which is the labor environment.

Sure, makes sense. Another question I have too, is just on the driver or maybe drivers of non-broadline inflation? Just because it seems like there was deflation at the broadline at about negative1.9%, which is approximately [80]% of the business. So I'm just wondering, what's driving the [inflation] for the remainder of the business?

Well, I think what you were saying really is the deflation at the US broadline is driving the deflation. And some of our other businesses, Karen's question on cost, SYGMA has more of the cost per piece, that type of a fee type of pricing. So that's not going to be impacted as much. Some of our other guests apply different type of product line altogether, so Canada not as much. And so, I think all we are saying is, the US broadline is [80]% of our revenue stream, and that's where the bulk of the deflation is.

Vincent Sinisi, Morgan Stanley.

Hey, great. Good morning guys, Thanks very much for taking my question. I just wanted to circle back a second on deflation. Bill you said earlier, I know that -- something to the effect of deflation, of course, remaining a headwind. You initially thought it might subside in the back half of the year, but still kind of there. So just to clarify, are you guys thinking for the next quarter or two, that very similar levels to what you are seeing today, which I guess, is similar to the quarter that was just reported? Or do you think it could get a bit more of a headwind, before then moderating?

Yes, Vinny, I wish I knew. I think all we are signaling is, we think it's going to be with us at least a quarter or two longer at least -- and it was almost 2 points in the US broadline this past quarter. I don't know that's going to get a whole lot worse than that. We'll just have to see. But I think the real message -- and let me be as clear as I can be is it -- I think probably, if I had been talking to you as I was six months ago, I would have thought by the fourth quarter, we would have been back more to neutral. And that's really not our assessment right now. But I am not necessarily saying, it's going to get worse. I'm just saying it's probably not going to get a whole lot better for another quarter or two.

Okay. Okay, that's fair enough. And maybe just one quick follow-up. You mentioned about that the private brands a couple times, also some of the newer fresh mix. Just any updates, either qualitatively, or more hopefully quantitatively, a current percent of the mix where you may see that going, maybe some new categories that are coming on board?

Well, I think as long as we continue to grow the local cases. And continue to -- even as we go through the second round now with [catman] with a lot of our suppliers, and we work more and more on innovation, that type of thing, it gives us an opportunity to partner with our suppliers with -- both certainly their brand but also ours.

So it's hard to move a number, but you will see, in the attachments from the earnings release, that we had a nice move this quarter. So I don't -- I'm not going to try to predict how much more it could go up. But there is a high correlation between local case growth and brand movement, and Tom can give you some color on that as well.

Yes, the specific numbers that I think were communicated in -- for US broadline total, this is total US broadline -- it was about 36.5% of the mix, and for the local business was 43.5%, And the local, it was [up] about 43 basis points. So we continue to see growth there. We believe it is a differentiator for us and it's something that our customers also see value in, both price value, but I think also from a quality perspective.

I think the other thing that Bill just mentioned, we're doing more innovative work and as we do work with our supplier partners on Sysco brand innovation, that's going to help continue to contribute to these numbers. And I think I mentioned in the first couple of quarters, we had 16 items that we launched basically, innovative items in the marketplace. And these are all generally Sysco brand items -- not all of them, but a lot of them are and they will continue to be a focus for us going forward.

Yes, I would just add, I mean, this falls into that category of the disciplined -- driving disciplined growth and profitable case growth. And certainly, across both in the local side, and again, in our multi-unit side. So again, that disciplined approach in growing profitable cases, certainly encapsulates everything that we've discussed here.

Ajay Jain, Pivotal Research.

Yes, hi. Thanks for taking my question. I was wondering if you could talk more specifically about the ongoing benefit from fuel, in terms of the net benefit? If you can comment on the actual earnings impact in Q2 year-to-date, and also your outlook for fuel maybe in the back half of the year, after you've netted out the hedges that you've got in place, and along with the impact of lower spot prices, so any kind of quantification would be appreciated? Thanks

Sure. I think that from a quantity perspective, we look at that as a couple pennies per case on the fuel side, in terms of the impact on what that is. Obviously, as I talked about in my area, certainly we are taking advantage of the fuel prices of where they are today and buying -- we typically have executed forward buys, and we've continue to do that. And in fact, we continue to increase the percentage of our fuel consumption that, as we've brought ahead on, so that is certainly something again that we've seen.

We're not in this thing, in terms of speculating on fuel prices. It's something we certainly take advantage of, where we have an opportunity both from a cost certainty perspective, and then what we feel is a good solid fuel prices. So again, we're -- as I mentioned in my script, we're certainly have a fairly sizable portion of fuel we've bought forward for over the next year. And so, certainly, we anticipate some continued benefit there.

Okay. But on a year-to-date basis, how would you say the pennies per case improvement, how does that translate into earnings?

Yes, again, it's pretty consistent and again, the point I would -- we think about it as a couple pennies per case that's impacted overall.

John Heinbockel, Guggenheim Securities.

Hey, guys. So I wanted to touch on private brand and gross. When you think about the ability to use the private brand portfolio to drive share -- and I know there are a lot of things that you're offering to your customers, but just maybe isolate that one -- how effective is -- can that be at bringing on new customers, and I guess, part of that is the inertia that they might have to the brands that they are using today? And do you think you are using those brands as effectively as you could?

What -- are there things that could be done maybe a little bit differently to drive -- to use those brands to drive some increased share gains? Any thoughts particularly from Tom on that?

So I'd -- maybe reiterate a few comments I made, and maybe add a few points. So the Sysco brand --if you think about Sysco brand, it's a value for a couple of reasons. One, generally the cost to our customers is a little less than some of the national brands, so there's a natural benefit for them. But more importantly, we are very focused on the quality of these items. And I had mentioned innovation.

So we're always looking to ensure that the Sysco brand items are in fact, not only value-added, meaning they bring increased value to the customer, but that they are also driving kind of the base business component that these customers need. So I'd say, are we getting everything we can? I think we feel pretty good about where we are at today. We feel like certainly, we're not out of runway.

But I think the more we can continue to focus on quality products, bringing innovation to those items, and making sure that we keep them in front of our customers. And we used -- I think we talked about it at the Investor Day, the business review process that we use. It's a great way for us to actually do [cuttings] of our products, allowing them to see Sysco brand, and compare that to something else they might be using and it's how we spend a lot of that time, is to help those customers see the value that's there, and the opportunity that they have to improve their overall profitability by using the brand.

All right. And then, maybe for Bill, if you think about some bigger secular trends, right? So local private brand, catman. I mean, you would think -- and I know this isn't fully built into your plan -- but you would think that there may be a good chance here for secular gross margin rate to be up pretty consistently. But obviously, if the top line is healthy, GP dollars could grow at a nice rate, maybe even higher than what you have targeted over the last three. How do you think about that?

I'm all for it, but it's a little early to make that call, I think, John. So I think -- you're thinking is always as logical. We're six months into this three-year plan. I would just reiterate some things we talked about in September.

The overall industry I would say, the overall environment, and the outlook for our customers is better today, than it was two or three years ago. Now it goes up and down by quarter, and you can actually see in some of this stuff, when the stock market goes down, some of the RNA numbers fall off the next month or next quarter. So but I think of you look at it secularly, and go back two or three years, we're in a better place. So that's a positive.

It's still an incredibly and acutely competitive world up there, so we need to be very responsive to that. And I would just echo, what I've been trying to articulate here over the last two or three years, but in particular the last several months, post the merger termination, we're extremely well-positioned today because of the work that we have done over the last two, three, four years on the commercial side to compete effectively. Do the right thing by our customers, but also grow in a disciplined way as Joel talks about, and manage our margins.

So if you look at those four levers, we're talk about improving how we manage it. Ideally, we'll at least hold margin over the next two or three years, right now we are up. Hopefully we will grow it, but I certainly feel we are much better positioned to manage it well than we were two, three, four years ago.

John Ivankoe, JPMorgan.

Hi, thank you. At this point, just a quick one for me. A follow-up on the fuel question, I think you kind of have a cost of fuel that's both embedded in your cost of sales and your operating expenses, so correct me if I'm wrong about that. But my question was, your suppliers that deliver food to you, how much fuel savings maybe was embedded over the past couple of quarters, and what you anticipate over the next couple of quarters? Just that their delivery costs are less to you, and therefore your price of product could be lower, and that could actually be helping your cost of goods sold, if you've thought about it in that way?

Yes, it's a good question John. What we're speaking is our outbound cost of fuel. It's a little harder, and we really don't get into that level of detail, in terms of our components of our cost of goods. But let me say it this way, lower fuel is good. Okay? It's generally good for multiple reasons.

One, is it gets -- on the margin, generally, people gives them more discretionary income and they'll spend it -- historically spend it more going out to eat. Now I will say this, we really haven't seen a lot of that until perhaps lately, and we don't have a lot of hard data on that. So the most powerful thing on the fuel is, to the extent translates to a greater discretionary income, and the consumer uses it to go out to eat, that's a good thing for us.

Haven't seen quite as much of that, but we're hopeful that we will see more. But you're absolutely right. It helps us on the cost of goods, and to Joel's point, it helps on outbound. We weight-average the outbound. So it's definitely a modest tailwind, and we're taking advantage of it, and hopefully, it will stay that way.

Thank you.

Greg Badishkanian.

Great, thanks. Yes, just a quick one. You mentioned that the competitive environment, or the environment is very competitive. And I'm just wondering has that changed any over the last few months? Is it a pretty similar, because obviously, you picked up some share. So I'm just wondering if you've noticed any change there, or if -- who you think you are taking market share from? Is a broad-based, or maybe there's a retailer, or a more national player that you are taking that share from?

Well, we've been able to grow, as I've said historically, take share for many years. And certainly, we kept the local case growth moving again here the last several quarters. We don't have the data for 2015. My sense is we probably have taken some share.

I think a lot of the larger multi regionals are doing well. And so, if I were to conjecture -- which is always a dangerous thing on calls like this -- my sense is that some of the better operators, larger folks are taking share and it maybe coming from some of the smaller players.

But the bottom line I think in this business, is good operators are going to take share. The large, small, good restaurant operators are going to continue to grow and do well, whether they are independent or corporate=-owned. And so, I think our overall point of view would be, the competitive environment remains very acute. It remains very similar to what we've seen the last two to three years, and the best operators, both in terms of customer base, as well as on the distribution side are going to do the best.

Great. Thank you.

Thank you.

Thank you. Ladies and gentlemen, this does concludes today's conference call. You may now disconnect.