西斯柯 (SYY) 2016 Q4 法說會逐字稿

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

(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 of Investor Relations. Please go ahead, sir.

Thank you, Christy. Good morning, everyone, and welcome to Sysco's fourth-quarter FY16 earnings call. Joining me in Houston today are Bill DeLaney, our Chief Executive Officer; Tom Bene, 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 the 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 corresponding GAAP measures are included at the end of the presentation slides and 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.

Please note that the financial results announced today include a 14th week for the fourth fiscal quarter and a 53rd week for the FY16 ended July 2, 2016. In FY15, 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 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 nearly 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 somewhat of late. While consumer confidence and unemployment data points remain relatively favorable compared to a few years ago, the current sentiment for customer spending on meals away from home seems to be trending slightly downward.

Turning to specific restaurant industry data, overall sales trends weakened as reflected in current NPD and Knapp-Track traffic and spend data. That said, according to the National Restaurant Association, restaurant operator expectations remain somewhat favorable.

Moving to our results for FY16, 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 FY16, 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 full year.

I'm particularly encouraged by our progress to date toward the achievement of our three-year plan financial objectives, especially our goal to grow adjusted operating income by at least $500 million from FY15 to FY18. Our strong progress towards the achievement of 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 continued to build on that foundation throughout FY16 by accomplishing several key objectives, including leveraging customer insights to create new and enhanced sales and 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 has been accomplished by consistently improving the execution of our strategy that is centered on five fundamental points: partnership, to profoundly enrich the experience of doing business with Sysco; productivity, to continuously improve productivity in all areas of our business; products, to enhance offerings 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 closed 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. Joel will discuss with you in a few minutes the anticipated contribution of Brakes to Sysco's financial results.

As we enter the new fiscal year, we are executing our strategy at a high level, working effectively together as one Sysco, and we remain committed to the success of our customers. We have even bigger goals for FY17, and I'm confident in our ability to achieve our financial and business objectives in the year ahead and throughout the three-year plan.

The new fiscal year brings an 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 processes and 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 thank each of them for their effort to deliver a very successful year in FY16. And now, I'll turn the call over to Tom.

Thank you, Bill, and good morning, everyone. FY16 was a great year for Sysco and I'm proud of the contributions made by all of our associates throughout the year. Sysco's financial results announced this morning reflect a year of solid operating performance and excellent progress on several key multi-year initiatives that have begun to provide a strong foundation for success. Our favorable 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'll provide an update on some of the initiatives related to our three-year plan and how they have continued to positively impact our business results, the first of which is our focus on accelerating local case growth. During the year, we grew US broad-line local cases 2.6% on an adjusted 52-week basis, the strongest performance we've had in several years. Also on an adjusted 52-week basis, gross profit in US broad-line grew 4.7% for the fiscal year, and gross margin increased 47 basis points, driven by our focus on profitable case growth, revenue management activities, and improved Sysco brand penetration.

The focus our sales team has had on helping our customers succeed and grow has been further enhanced throughout FY16. During the year, we remained focused on improving our industry-leading category management practices, fully deploying revenue management in the field, and enhancing our sales training and support tools that continue to free up our marketing associates' time to better support our customers with business-building solutions.

We also rolled out various promotional programs and key initiatives throughout the year, including those that highlight product innovation and reinforce the Sysco brand, which delivers tremendous value to our customers. That value is delivered through an unrelenting focus on the highest quality products and best-in-class traceability from a food safety perspective. Finally, we continue to focus on delivering new and improved customer-facing technology solutions that add value to their business and allow our associates to be more efficient.

On the cost side, the expense management throughout the year was also solid and remains a key area of focus moving forward. For US broadline, during FY16, we limited total adjusted expense growth to only 2.2% on a comparable 52-week basis, compared to gross profit growth of 4.7%. We also reduced our overall cost per case in US broadline by $0.04 during the year. Adjusting for the impact of fuel prices, our adjusted cost per case in US broadline was flat.

As we've discussed, we have been very focused on reducing costs and improving productivity while continuing to deliver improved service levels to our customers. In FY16, we reduced expenses in a number of key areas. In the supply chain area, we have reduced indirect spend and will continue to focus on maximizing transportation and warehouse efficiencies. We've also standardized our organizational design and reduced the number of our markets in the US from eight to six. And throughout the organization, we have reduced overall SG&A costs.

In summary, our customer and operational strategies are solidly aligned around improving our customer's experience, engaging our associates at the highest level to improve execution, and delivering our financial objectives as a part of our three-year plan. In FY16, we made significant progress on all areas and I remain extremely optimistic about the programs and processes we are putting in place that will enable our future success.

Now I'd like to turn the call over to Joel Grade, our Chief Financial Officer.

Thank you, Tom, and good morning, everyone. As Bill and Tom have mentioned earlier, we are pleased with the results for the fourth quarter and the full year. Our growth reflects continued momentum from our underlying business, including strong local case growth, solid gross profit dollar growth, and good cost management.

I'll begin my remarks by speaking to our fourth quarter. For the purposes of matching your models, our fourth-quarter results, reflecting an extra week, include sales growth of 10%, 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 week on a comparable basis, the fourth-quarter results include sales growth of 2.2%, gross profit growth of 4.7%, adjusted operating expense growth of 1.7%, adjusted operating income growth of 14.6%, and adjusted earnings per share growth of 15.4%.

Sales during the quarter were negatively impacted by both deflation of 1.2% and foreign exchange of 0.5%, largely offset by an increase in sales from acquisitions of 1.2%. On a comparable 13-week basis, total broad-line case growth for the fourth quarter was 2.2%, local was 2.4%, and corporate managed growth was 2%.

During the fourth quarter, we had some certain items that impacted our results. In the prior year, we had acquisition costs of $390 million. In the current year, we had remeasurement of foreign denominated cash due to lower exchange rates at quarter end, as well as the premium on foreign currency option contracts for the Brakes acquisition. As a result, other expense, net for the quarter, was approximately $141 million, primarily driven by certain items from FY16.

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's tax rates were reduced primarily from the impact of certain items, which lowered net income and resulted in lower tax rates. A similar event occurred last year related to the US Foods termination costs, which drove an unusual GAAP tax rate. On an adjusted-for-certain-items basis, our tax rate would have been approximately 36.8% in both years.

Now turning to our results for the year. Our FY16, including the extra week, included sales growth of 3.5%, gross profit growth of 5.7%, adjusted operating expense growth of 4%, adjusted operating income growth of 12.1%, and adjusted EPS growth of 14.1%. To provide a relevant comparison to the prior year, all income statement measures I discuss from this point forward will be adjusted for certain items and presented on a 52-week comparable basis.

Looking at our full-year results, we grew sales by 1.5% year over year despite deflation of 0.7%. We saw continued deflation in center-of-the-plate protein categories, such as meat and seafood, along with deflation in dairy.

Sales from acquisitions increased sales by 0.7%. During the year, we closed five acquisitions, including Gilchrist & Soames and North Star Seafood. Foreign exchange negatively impacted sales by 1.3%, largely driven by the 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 the initial decline in the relative value of the Canadian dollar. On a constant currency basis, sales would have been up 2.7%.

Turning to case growth. Consistent with our three-year plan to achieve disciplined case growth, we had strong performance for the year. On a comparable 52-week basis, total broad-line case growth for 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 at a solid 3.6%, while also continuing to see expansion in gross margins, which grew by 38 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, adjusted gross profit growth was 4.8%.

Adjusted operating expense on a comparable 52-week basis grew 2% for the year and by 3.3% on a constant currency basis. This increase was mainly driven by the previously mentioned higher case volumes and incentive accruals and is partially offset by various decreases, including reducing indirect spending, reduced fuel costs, and foreign exchange translation. This progress is reflected in our reduced cost per case, at Tom mentioned, which was flat, excluding fuel price changes. As a result, adjusted operating income for the year was $1.96 billion, up 9.6% compared to the prior year and up 10.6% on a constant currency basis. Compared to the prior year on a 52-week basis, adjusted net earnings grew 8% and adjusted earnings per share grew 12%.

For the full year, cash flow from operations was $1.9 billion, up approximately 24% from last year. It is important to note that a timing difference in tax payments impacted our cash flow during FY16. Net working capital improved by [six-tenths of 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 FY16. 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 FY17. The deflationary trend has been persistent over the last four quarters and will likely continue for the remainder of the calendar year, creating a 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 FY17 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 FY18 to FY15, and we expect to complete our $3 billion, two-year share repurchase program during FY17. We anticipate a benefit of approximately $0.03 to $0.04 to diluted EPS in FY17, 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 their most recent fiscal year and in December of 2015, Brakes reported nearly $5 billion in revenue, up roughly approximately 6.5% from 2014. They also reported an approximately 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 low to mid single digits in FY17, with acceleration in FY18 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 of our three-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 Marisa 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 of the expansion was driven by deflation, and then how much was the result of other factors like increased private-label penetration or category management, et cetera?

Good morning. Always a great question. Challenging one to answer that specifically. I think you will see some correlation over the last four to five quarters where, as we've seen some deflation, the margins have moved up. We were making good progress on relative margin trends before that.

But I would tell you that we believe that a significant amount of the improvement is coming from a lot of these initiatives I refereed to 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 can't quantify it exactly, but I think it's coming from multiple sources.

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.

Got it. 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 restaurant industry trends, and specifically, what you're seeing from both your independent customers and your chain customers. Thank you.

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 past couple 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 traffic continue 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.

You're welcome.

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. A lot of your end customers are struggling a little bit with the value equation relative to eating at home. 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 looked out over the next two or three years, to help them deal with that?

So what are the opportunities as it relates to maybe more Sysco brand, selective price investments, and how do you think about helping them compete and maybe drive some market share for yourself?

Good morning, John. I'll start, but I'm going to let Tom get into the meat of that a little bit more. I think, just from my perspective, this marketplace 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 we're doing to differentiate ourselves with our customers.

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 in the 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 it's Sysco brand, where we bring not only value but also the 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 even 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 to 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 that we're focused on. It's really a combination of things, but it's -- you're right, there's a lot of things that they're dealing with. I think the more we can focus on helping them be successful, that's a good place for us to be.

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 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 got some feel for it in terms of 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, then things would bounce back a little bit. I think that assumed that the certainty would be to 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 extended period of time here, and I think it will play out politically, it will play out economically. So it is a little slower in the UK right now. The good news for us is we seem to be seeing some good things coming out of France and Sweden, albeit that's about one-third of their business.

So I think as far as Brexit is concerned, I think we're all watching it. And to this point, I don't know that I've seen any clear analysis in terms of what the specific impact is going to be at a certain point in time. 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 will be somewhat of a headwind in the context of uncertainty that our people will work through in their marketplace.

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

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. You know what? I'd like to start with just the outlook. You guided to 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. The first part of this question is 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 low. So how should we think about 2017, given that you're ahead of where you thought you'd be at this point? Thank you.

Ed, thank you. I'll start. I'll let Joel get into detail a little bit more. I would say in terms 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 then our execution was just very good.

If you put all this in 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, and put together the framework of a three-year plan and shared that with the investor group in September along the way with our Board. 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 recall, first quarter we had a very solid quarter in US broadline, but there was some tailwinds with incentives and that kind of -- or headwinds with incentives. The first quarter was a little flattish. 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, very good, and as we got deeper into the year, we were able to raise our estimate to $500 million. Not quite ready to do that right now. I'd like to get further into this plan. We're one-third of the way through it, so I'd like to see another quarter or two and see how we perform, see how the marketplace performs and reassess that outlook at that point in time. Joel?

Yes, I think that's really the context, Ed, that I'd put that into is that, again, we're through the first year now of our three-year plan. To the point that you made and Bill certainly reinforced, we've got good momentum in the business. In the end, against some -- 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 that Bill closed was what I would close with as well, is that, again, it's still early on and I'd like to get a little bit of time yet under our belt before we take a look at if there's anything else we wanted to do there.

Okay, and just wanted to follow up. One of the more impressive, 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. I know payables, there seems like there's a fairly large opportunity. Just thoughts on where we can expect that line item to play out over the next couple years.

Yes, sure. So I think a couple things on that. Certainly, number one, we've had strong operating performance, and so that's certainly, again, has generated a good part of the free cash flow. You talked about the focus we've had on working capital. We've had some aggressive goals at the start of our three-year plan, and I think one of the primary benefits this year was in -- a focus on inventory. We made some good progress in that area. And I think you'll continue to see opportunities there, again, both -- you called it out on the payables area, as well as inventory and some in AR as well. So we've got some continued focus on working capital that I believe we're making good progress on. We'll continue to drive that.

We did have some benefit this year, as I mentioned and some timing issues on cash taxes, things that were related to the timing of payments and the ability to accelerate some deductions. Having said that, we also did have something -- some stuff going the other way in the US Foods payments that we made in the first quarter this year.

So I would guess -- what I would say to you, in general, is I think the level of free cash flow you're seeing that we experienced this year is a pretty reasonable view of what I believe this business can generate here as we move forward over the next couple years. And so I think we're in a good place where we're going to continue driving the initiatives that we're driving to continue to improve that performance as well.

Great. Thank you.

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

Good morning. It looks like there was a conversion in total broadline versus the local case growth in the quarter. Can you talk about the drivers here and how trends played out just throughout the quarter? And you mentioned already the performance of chains versus independents, but what about your institutional customers like the healthcare and retail verticals? How are they trending?

Zach, could you be a little bit more clear on what you mean by conversion?

Well, when you look at the broadline case trend and the local case trend, they both converged at that --

The numbers, okay.

Yes.

Got it. So let me take the first part. I'm going to let Tom talk about the second just a little bit. I think it's just what you said; we and, obviously, anybody in this business understands that where we have the opportunity to bring the most value is in that locally managed, highly street-oriented customer base. And we continue to focus there in a myriad of ways that we spoke to in terms of commercial initiatives, supply chain, all that type of thing. And that's continued to pay dividends for us here over the last two years plus. So we feel good about that.

We also want to continue to grow that corporate managed business in the right way, and so you've seen the slope of that growth fall off somewhat. It's still positive. There's still very, very important relationships we have out there with some very large customers that work for us as well, from a profitability standpoint.

So balance is always key here and it's key if you're running an operating Company. It's key from the overall corporate standpoint. And what you saw here was a quarter with pretty good balance. So at any point in time, one segment, if you want to call it that for the moment, may be growing 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 we've been making great strides there over the last year or two. I'll let Tom speak a little bit to the segment performance.

Thanks. The only thing, Zach, I'd add is around this segment, you think you mentioned chains and also healthcare. We continue to feel good about each of the segments and their growth potential for us. Obviously healthcare continues to be, I think, a growth segment for this industry and I think the chain business, while it's going to have its 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 really, as Bill said, a balance. And so looking at different customers and their relative profitability and where we can actually add the most value is where we're trying to focus our efforts. And clearly that's in that local restaurant segment, certainly probably more so than in the chain restaurant segment. But overall, I think we don't see necessarily, other than some of the chain numbers you've seen from some of those companies, we see fairly consistent performance across these segments.

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

Well, as Joel said, we made a significant investment here and we made it for the long term. We certainly expect them to be able to grow their business on the top line. They have a very similar approach as we do, especially in the UK, in terms of a disciplined approach.

They are, as we've alluded to in the past, going through some significant transformative change of their own, a fair amount of which is playing 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 will create cost savings, improved productivity, that kind of thing.

So certainly, the supply chain, in particular in the 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 through the channels that they prefer. So they have a lot of the same opportunities that we have.

Great. Thanks, Bill. Appreciate the color, guys.

Thank you.

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

Hi. Good morning. Wanted to just follow up on the independents. I realize it moderated slightly, but still very solid growth, I think if you look over the past several years, at least. So just wondering if you -- when you analyze that segment, what are you seeing there that's really the drivers there? 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 dine-in trends? Just trying to understand what you think the real drivers are for the independent or local case growth.

Sure, I'll take a stab at that. If you think about the independent segment, there's been lots of discussion around whether it's growing or not growing. I think the way we look at it is we have significant opportunity to grow in that segment. And I think if you think about the fact that there are many distributors in the industry, there's opportunities for us to earn additional share of that business from our customers. So we're very focused on delivering the kind of things that they need, which we talked about a lot of those value drivers for our customers and whether it's things like Sysco brand or some of the tools that we're bringing them to help them manage their business better.

In addition, you mentioned some segments, and you've 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. So we continue to look at those types of opportunities where there's nice tailwinds that we can provide incremental value to those folks and also grow our business.

And then I'd just say that overall, that that segment feels like they're picking up some share potentially in this away from home. Whether it's additional opportunities for home delivery, as you talk about we hear 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, in fact, benefiting from some of those technology solutions as well.

Great. That's very helpful. And then in terms of deflation, I think 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 as a gross profit headwind for the first half of next year. I was 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?

Kelly, Joel will explain it to you better than I can. But I hate to say this: it's just the way you think about math. Gross profit is dollars. So when you're selling a case for whatever, 0.7% or 1% less than you did same time last year, you're obviously taking fewer dollars to pay your expenses with. With that said, on a percentage basis, it can contribute to an expansion of your margin percentage.

Yes, I think that's really the main point. If you think about a portion of our business, obviously being on cost plus and just in general where the cost of goods, there's, again, there's some margin percentage increase, but it is a -- typically a 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 to actually offset some of that to the extent we can.

Tom made an interesting point, which I think from our customers' perspective, while we're not a fan of deflation, we're now, as we speak to you in our fifth quarter of it. So that's -- we don't think that that's particularly a good thing for our customers or for us, certainly, over the medium to long term.

With that said, if it was going to happen, it probably came at the right time for our customer base, as they're dealing with some wage inflation as well. So it's probably been good on the customer side and 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.

Thank you.

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

Bill, in your prepared comments, I think you mentioned a slowdown in traffic from NPD and I think you cited Knapp-Track also. I think last week, case growth was also sequentially weaker, slightly at US Foods. So I just wanted to ask, apart from the softer industry-wide trends, are there any 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 and average check? Is there any incremental change in their trajectory quarter to date? Thanks.

Well, again, we're talking about earnings for the June quarter, and what I'm telling you is we've seen softening on the customer base, both from the data that you just cited, Ajay, as well as what we see. Obviously, what we're signaling here is there is some softening in the business. As I also said, we're still seeing growth, and I would expect that we'll continue to see growth, perhaps not at the same trajectory.

I don't see it as any big secular development. I think it's just you go through these cycles; time will tell whether it's a mini cycle or not. But if you read all the data that we all are exposed to, what you're seeing in this industry is pretty consistent with what you're seeing in the economy. Right now it's growth, but it's modest. I think that's what our customers are dealing with right now.

Our focus continues to be 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. We're going to impact and control what we can control, and we'll work through cycles as they come and go.

Okay. I just had one follow-up question on Brakes. I think you already got several questions on Brexit. Can you specifically talk about the currency impact? And just on restaurant spending overall in the UK, because the currency impact could be viewed as three-fold. You've got the direct P&L impact, which is fairly straightforward, but then the currency also impacts the purchasing power of the UK consumers and it also affects your purchase price for the acquisition.

I think you're partly hedged on the currency impact, but can you just comment on how big of an incremental impact there is from Brexit compared to what you anticipated when you consummated the merger? And then can you also just talk about current case trends at Brakes? I think you mentioned that they took a little bit of a step backwards. But can you confirm whether they're positive or negative based on year-over-year comparisons? Thanks.

Is that three questions or one there? Let me try, Ajay. Actually, I think what I said about Brakes is in the UK market, in general, what we've seen is from March and April on, and it was connected to Brexit, the uncertainty of the Brexit vote. And since the vote, we've seen some softening over there in that market, and the data and the government data will support that as well.

We're not in a position, obviously, to comment on their numbers. We've just closed that deal in the last month-and-a-half. We'll talk more about that certainly in November when we release for the first quarter. But we feel good about -- as Joel said, we feel very good about this acquisition, about the leadership, investment for the long term, acquisition platform, all the things we said from the beginning.

So Brexit, I'm going to let Joel take you through the currency issues. I think we managed it quite well, actually, as far as the transaction goes. As you said, there's the normal translation of earnings and that type of things. And while I'm not going to dispute all your points, I would just say from my perspective, the bigger issue as far as Brexit is concerned is always -- is what it comes down to 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've seen some softening over there.

The weather -- you hear all the same things, weather in London in the summertime and that kind of things. So I think there's going to be some ups and downs. We'll be in a better position to talk about it in November. But overall, we're very pleased with the acquisition. We have a lot of work to do there, and we're very excited about it.

I would just add a couple things. The translation impacts, again, certainly, will be something we'll be dealing with as we move forward. In terms of the -- the price itself, as we mentioned, there was actually -- we had a foreign currency remeasurement that basically resulted from the fact that at the end of the year, we're holding Sterling on our balance sheet for the purchase price. Of course the deal closed right after the year. And 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. 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, the recent softness question. If you had to, Bill, rank potential causes, 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 could rank any of that?

I don't know that I would rank any of that in my top three. But Karen, (technical difficulty) some of that, we obviously read a lot and try to learn as much as we can from folks that follow components of the industry. I just think it's a little bit of a malaise. I think you're going to have these cycles and subcycles at any point in time. And some of it, we're 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 wouldn't want to just conjecture here. But I don't think it's the Olympics, and 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 subcycles that we're going to go through, and time will tell whether it's a three- to six-month deal or longer.

Again, from our perspective, we've been managing through some pretty significant headwinds with deflation over the last 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 [seat and 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'm just wondering if you can give us some color on where you stand of mobile penetration as a percent of independent sales or just an update on where you're at with that.

I'll let Tom speak to it more specifically. I would just remind you that our strategy is really predicated on being that most valued and trusted business partner. So we're not setting goals, per se, for a certain percentage of Sysco brand or a certain percentage of orders through mobile or digital.

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 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.

Karen, I'd just [lob] Bill a little bit on that. I think in the past, we've talked about we've been somewhat in this high single digit, just below 10%. Now 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 continuing 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. There were also a few tools we needed to build to be able to 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 resource 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 pro progress but certainly we'll probably see that continue to grow. But we're very focused on that 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. Could you give us a little color on the deflation by category? And are there certain quarters where you're going to start lapping out of some of the bigger headwinds?

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

That's correct.

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

I'd say it's moved around a little bit the last three quarters, but I'd say relative steady from where we were half a year ago, six months ago.

Just to get into the softening of the backdrop a little bit, wanted to get your thoughts on restaurant store growth out there. Because a lot of those health indicators you're looking at are same-store sales measures. So I'm curious, do you think there's overstoring 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?

Mark, I think when you go back to 2009, 2010, clearly there was oversupply or 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 of what we saw four and five years ago. So there's maybe a little bit of a modest correction. I don't think that that's overriding issue; I think it's somewhat self-correcting.

We don't really track our sales new stores. The way we track it, Mark, is we track new business for us, which is making an account to an operator that we didn't sell a year ago this time. Then we track lost 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. The softening, if you will, is probably showing up a little more on the case penetration side right now.

Do you think the strength you've had in local is enough to 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. I think bottom line is we feel good about the momentum we have. We feel really good about the year just past, and if it is a little softer, we've got good things going on with gross profit. We're managing our expenses very hard right now and we're very committed to the plan.

Okay. Thank you very much.

Thank you.

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

Hey, good morning. Thanks for sneaking me in. A couple of follow-ups to earlier questions. First, related to Ed's 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 do you think that has impacted those buckets most and where is the biggest opportunity going forward?

Look, Stephen, I think both those lines are critical lines. But certainly, you have to start with gross profit. We make $9 billion in gross profit. That's more than the sales of many, many of the people that 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 that 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 [op-co].

Assessing the opportunity for growth by territory, by district, by op-co, taking advantage of some of the revenue management tools that Tom and his teams are -- have put in place over the last year that 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 work to be as current as we possibly can in terms of what needs of those operators are as they face the challenges. 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've 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 piece 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 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 -- keep 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 one thing I'd 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 we've remained 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 again, on a year-to-date basis, we were up a little over 1.5% in terms of that delta between those two.

And so it's the only other thing I may call out is just 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 just 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 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 change your ability to implement some of these tools? Thanks.

Clearly, a big part of our ongoing strategy here was to reallocate our -- 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're 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 assess the performance of the business.

We still have some good work to do here to improve and that will 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.

Thank you.

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

Nice end to the year, guys. Thanks for taking my question. 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 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.

Well, I think over the last several years, Vinnie, as you know, we've done a lot of with specialty meats, specialty produce, [guest] supply in terms of bringing those businesses into our Company. They're now what we think of as core. Five or 10 years ago, they would have been adjacencies.

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, in particular on the geographic side I think where we have some holes that we'd love to fill in geographically. But good momentum with the recent acquisitions.

Yes, I think I'd just add, Vinnie, as Bill said, we really view those specialty areas now to be more core to our business. I think our ability to round that portfolio of businesses out across the US will create those opportunities like with North Star in Florida. And so, we'll continue to look for those opportunities as they come up and -- but believe that's an important part of our growth. This whole fresh, local, focus that you're hearing about and seeing out there is something that we are very focused on through both our produce and specialty meat and seafood companies.

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

It's a 12-month process and we've done one. It went very well, and we're on schedule. So we're in a good place.

All right. Great. Thanks, Bill.

Thank you.

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 years. When we think about FY17, is the right run rate of cost of goods sold or gross margins, is it the fourth quarter? Or should we still consider that year on year might play an effect as opposed to taking just that fourth-quarter result and running that forward?

I would never take one quarter and extrapolate too much, John. I think you look at the year, you look at the trends, you look at the environment that we've just described. And obviously we have plans to grow the gross profit and manage the expenses very well. I wouldn't trend anything off of one quarter, good or bad.

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

I can't speak for that. As I've said, I think for a long, long time, it's a very competitive environment out there. There's a lot of salespeople out there on the street and a lot of very sophisticated customers. So pricing is always going to be a key part of how customers look at value.

I think what you've heard Tom say is as we look at revenue management, of which pricing is a component but not the only 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 where we have the tools to make sure we're highly competitive in their key items but also where there's opportunity to grow.

When you look at our economic model, it's really about having the right price for the right item on 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, become more efficient. So I wouldn't say that there's anything in particular going on right now that's different than what we've experienced over the last two or three years. I also think we still have opportunity to be more consistent in our pricing, and that should be a win for our customers and a win for us.

Very helpful. Thank you.

Thank you.

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