西斯柯 (SYY) 2017 Q4 法說會逐字稿

Good morning. My name is Christina, and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter fiscal year 2017 earnings conference call. (Operator Instructions) As a reminder, today's conference is being recorded. Thank you. Neil Russell, Vice President of Investor Relations and Communications, you may begin your conference.

Thanks, Christina. Good morning, everyone. Thank you for joining us and thank you for your interest in Sysco. With me in Houston today are Bill DeLaney, our Chief Executive Officer; Tom Bené, our President and Chief Operating Officer; and Joel Grade, our Chief Financial Officer.

Before we begin, please note that statements made during this presentation that state the company's or management's intentions, beliefs, expectations or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act and actual results could differ in a material manner. Additional information about factors that could cause the results to differ from those in the forward-looking statements is contained in the company's press release issued this morning and in the company's SEC filings.

For a discussion of additional factors impacting Sysco's business, see the company's annual report on Form 10-K for the year ended July 1, 2017, which we expect to file shortly with the Securities and Exchange Commission and the company's subsequent SEC filings with the SEC. A copy of these materials can be found in the investors section at sysco.com or via Sysco's IR app.

Please note that our fiscal year 2016 results included a 14th week for the fourth fiscal quarter and a 53rd week for the fiscal year ended July 2, 2016. In fiscal 2017, the fourth quarter included 13 weeks and the year included 52 weeks. As such, the results discussed on this 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.

The reconciliation of these and other non-GAAP measures to the corresponding GAAP measures are included at the end of the presentation slides and can also be found in the investors section of our website.

Additionally, our results for fiscal 2017 incorporate the financial performance of the Brakes Group. As such, we will reference throughout our presentation today Sysco's financial results, both including and excluding this acquisition. (Operator Instructions) 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. Earlier this morning, Sysco reported strong fourth quarter and excellent fiscal year-end financial results. For the quarter, on a comparable 13-week basis, we delivered sales growth of 14% to $14.4 billion, adjusted operating income growth of 14% to $667 million and adjusted earnings per share growth of 20% to $0.72.

For fiscal year 2017, on a comparable 52-week basis, sales grew 12% to $55.4 billion, adjusted operating income grew 20% to $2.4 billion and adjusted earnings per share also grew 20% to $2.48. These results were driven by our 65,000 associates, providing our customers with the products, services and business solutions they need to run their businesses successfully.

I'm especially pleased with our local case growth performance in the United States, our overall gross profit growth while expanding gross margin in the right way and our focused expense management throughout the company. In addition, our European acquisition of the Brakes Group at the beginning of the fiscal year contributed meaningfully to our sales and earnings growth.

Our results for the quarter and the year were achieved in a modestly growing U.S. economy, disparate regional economic conditions in Canada and mixed economic backdrops in the United Kingdom, Ireland, France and Sweden. While we continue to transition some large contract customers in our U.S. Foodservice operations, our case growth with local customers in that business segment improved during the second half of our fiscal year.

Favorable consumer confidence throughout much of the country contributed to restaurant check size increases even though year-over-year traffic trends were unfavorable in certain customer segments.

Taking a moment to reflect in our steadily improving and strong business performance over the past few years, there's no doubt that our customer-centric strategy with a One Sysco approach is being executed at a high level, and that we are well positioned to deliver disciplined, profitable and sustainable growth moving forward.

We aspire to be the most valued and trusted business partner for all of our customers and are committed to delivering on our targeted financial objectives for Sysco shareholders. We will continue to develop new and refined current key strategic initiatives, such as category management, revenue management, enhanced customer facing technology and multiple productivity improvement measures in order to further differentiate our industry-leading customer offerings.

We will do this by deepening our customer insight work, continuing enhancing our technology capabilities and by attracting and developing highly capable and increasingly diverse leaders and associates.

In closing, I would like to thank all of our associates for contributing to our success this past year and for driving our strong performance through the first 2 years of our 2016 to 2018 3-year plan. I'm confident that we will achieve the high end of our $600 million to $650 million adjusted operating income growth goal, which excludes the impact of Brakes. Further, we look forward to presenting our new 2018 to 2020 3-year plan later this calendar year.

In the spirit of looking forward and positioning Sysco well for future success, we recently announced that Tom Bené will become President and Chief Executive Officer of Sysco effective January 1, 2018. Tom is a strong, accomplished leader and most deserving successor. I look forward to working closely with Tom, together with our senior leadership team over the next few months to ensure a smooth transition process. And with that, I'll turn the call over to Tom.

Thank you, Bill, and good morning, everyone. Fiscal 2017 was a successful year for Sysco, and I'm proud of the results our associates have accomplished this year. They're executing at a high level as we continue to achieve the key strategic levers of our current 3-year plan, including delivering accelerated case growth through a focus on local customers, growing gross profit dollars and managing overall expenses.

Fiscal 2017 was marked not only by our strong performance, in which we continued our relentless focus on the customer but also because of some important highlights that include: the addition of the Brakes business in Europe; the completion of a successful transition of 12 operating companies from SAP to an enhanced version of our legacy ERP system; and validation of our customer-centric approach to our business as reinforced by the improvement in our customer loyalty scores.

An example is our approach to giving customers a choice in how they want to interact with us, whether it's through our best-in-class sales force, via our mobile platform or through a phone call.

I'd now like to discuss our segment results, starting with U.S. Foodservice operations, including some highlights of key strategic initiatives that are helping to differentiate Sysco in the marketplace. In addition, I will speak to the performance of our international Foodservice operations.

Our U.S. Foodservice segment had a solid year, with fiscal year 2017 results on a comparable 52-week basis of sales growth of 1.5% and gross profit growth of 4% while adjusted operating expenses grew 1.7%, resulting in operating -- adjusted operating income growth of 7.8%. We once again experienced strong growth in our local business, up 2.4% in U.S. Broadline. This was partially offset by declines in case volume for our multiunit business due to our efforts to deliver disciplined, profitable growth. This resulted in approximately 1% total case growth overall.

As we progress through the next year, we expect to see those trends around our multiunit business begin to improve. Importantly, as we strive to provide value to our local customers through innovative product offerings and value-added services along with e-commerce capabilities, we are seeing them reward us with growth for the 13th quarter in a row.

Looking at gross profit growth for U.S. Foodservice operations. On a comparable 52-week basis, we delivered growth of 4% and gross margin expansion of 48 basis points as we managed the deflationary environment in the first part of the year very well and are now working our way through an inflationary environment.

Poultry, produce, seafood and dairy are driving the current inflation, and we expect inflation to continue for the balance of the calendar year. Our strategic focus on accelerating growth with local customers is working. It all starts with an insight-based customer-centric approach that permeates everything we do.

For example, we have improved the capabilities of our sales force through investments made in training, technology and targeted specialized resources, and as a result, our marketing associates are spending more time working with our customers on value-added activities and consultative services such as menu analysis, inventory management and business reviews. These services foster a deeper relationship with our customers and further enforces the importance the sales force plays in helping our customers succeed. From a cost perspective within U.S. Foodservice operations, our expense management was solid as we limited growth to 1.7% on an adjusted 52-week comparable basis for the year.

Looking at U.S. Broadline. Cost per case for fiscal 2017 improved by approximately $0.01 compared to the prior year, and on a fuel price-neutral basis, cost per case increased by $0.01. The consistent performance we've been able to achieve is driven by key strategic initiatives, which are supported by the expansive network of dedicated hard-working front-line associates in the warehouse and those team members delivering our products. Through their efforts, we have consistently been able to deliver a high level of service to our customers.

Looking at the overall performance for the U.S. Foodservice operations. On a 52-week comparable basis, I'm pleased with how all of our associates executed our plan as our adjusted operating income performed well, and we were able to improve adjusted operating margins by 45 basis points for the full year.

Moving to international Foodservice operations. On a 52-week comparable basis, sales and adjusted operating income nearly doubled, both largely driven by a recent acquisition of the Brakes Group. During the year, Brakes performed reasonably well amidst the challenging environment in the U.K. as they exceeded our expectation for EPS accretion, contributing $0.14 per share.

They're also making good progress in their supply chain transformational efforts as they move to multi-temp capability across the U.K. Growth in France remain steady and Sweden continues to produce favorable results. We also continue to see long-term opportunities for growth across our new European business.

Additionally, we are in the process of integrating our Ireland businesses and things are progressing well. We expect to achieve modest benefits from these activities. Looking forward, we're excited about the long-term opportunities to create value for our customers in the European business.

Over the next few years, we'll invest capital and resources to build on the existing foundation of the business as we continue to work on key strategic initiatives that will position us well for the future.

We remain pleased with our performance in Canada despite the continued softness in Alberta, which has been driven primarily by the energy market decline. Our Canadian business is seeing positive momentum in the growth of its local business, driven by improved sales execution and implementation of our customer-focused initiatives such as category management and revenue management.

In addition, we are effectively managing costs by streamlining administrative expenses to improve productivity. As a result, we expect the Canadian business to continue to deliver positive performance.

Turning to Latin America. We are excited about new facilities in both Costa Rica and Panama. Specifically in Costa Rica, we recently opened 180,000-square-foot state-of-the-art facility with a test kitchen and training facilities. This new space is enabling new products and full product lines to be available to our customers, and we're excited about the accelerated growth potential those offerings will deliver.

As we enter the new fiscal year, we do so with strong momentum, and I believe fiscal 2018 will bring opportunities for Sysco. Our ongoing focus on customer insights and delivering against their needs for innovative products and consultative services will enable our sales force to continue to add significant value and deliver growth with those local customers.

We'll need to effectively manage the ongoing transition to an inflationary environment with our customers while staying focused on gross profit growth. And we'll continue to focus on driving efficiency from our supply chain for our expansive network that is built to provide a high level of service to our customers.

In summary, fiscal 2017 showed important progress against our customer-centric strategy for Sysco. Our customer and operational strategies are firmly aligned around improving our customers' experience, engaging our associates at the highest level to improve execution and delivering on our financial objectives.

Finally, as I work through the leadership transition with Bill, I am personally honored to be given the opportunity to lead this amazing company and I'm incredibly excited about the future for Sysco. Now I'd like to turn the call over to Joel Grade for further details.

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

This morning, I'll start with our quarterly results on a comparable 13-week basis, excluding Brakes, where we delivered sales growth of 3.4%; gross profit growth of 4.2%, which included margin expansion of 14 basis points; and adjusted operating expense growth of 2.6%, resulting in adjusted operating income growth of 9%.

As Tom mentioned earlier, we saw inflation of approximately 2.6% in our U.S. Broadline business for the fourth quarter of fiscal 2017. The pace of the transition from deflation to inflation has been fairly rapid, as produce, poultry, seafood and dairy were increasing and driving overall inflation. We do not see a negative impact on our ability to grow gross profit dollars. However, it is important to note that this change from deflation to inflation pressures gross margin as a percentage of sales.

Shifting gears, I'd like to transition to our results for the year on a comparable 52-week basis, excluding Brakes. Sales grew 1.6% and gross profit dollars grew 4.1%, which included margin expansion of 43 basis points; and adjusted operating expenses grew 1.7%, which resulted in adjusted operating income growth of 12.4% and adjusted earnings per share growth of 13.6%.

We continue to maintain a healthy gap between gross profit dollar growth and adjusted operating expense growth, which translated into strong adjusted operating income leverage and continued progress toward achieving our 3-year plan objectives.

Cash flow from operations was $2.2 billion for the year, up approximately $309 million from last year. Free cash flow for the year was $1.6 billion, which is about $150 million higher compared to last year. These changes are largely due to improved business performance, improved working capital management and favorable year-over-year comparisons due to the US Foods termination payment last year, offset by higher fiscal 2017 cash taxes due to prior year deductions related to the US Foods payment and a deferral from flood relief.

Net CapEx for the year was $663 million or about 1.2% of sales, which is $159 million higher than last year, primarily due to ongoing capital investments and the addition of Brakes. Net working capital performance has continued to improve. We have nearly achieved our 3-year goal of 4 days and have improved our net DSO by 3.8 days compared to FY '15, driven by improvements in all 3 areas: payables, receivables and inventory.

Our fiscal 2017 results include certain items that were related to the Brakes acquisition, including amortization associated with the transaction and accelerated depreciation related to our enhanced business technology strategy. The accelerated depreciation related to technology has concluded and will not be part of our fiscal 2018 results.

Lastly, I'm pleased with our adjusted return on invested capital performance, which ended the year at approximately 13%. Excluding Brakes, our ROIC was approximately 16%, which exceeded our original 3-year plan objective of 15%.

Now I'd like to close with some commentary on the outlook for fiscal year 2018. After 2 years, we've been able to achieve $417 million of operating income growth since fiscal 2015, and I share Bill's confidence that we will achieve the high end of our $600 million to $650 million adjusted operating income growth goal, which excludes the impact of Brakes.

As such, we anticipate another solid year in fiscal 2018, driven by gradually improving results throughout the year. The return to an inflationary environment will likely continue for the balance of the calendar year, creating a gross margin headwind as a percentage of sales but it should not hamper our ability to grow our gross profit dollars.

As we've previously stated, our capital allocation priorities include a key focus on investing in our business. Capital expenditures will increase during fiscal 2018 and are expected to be approximately 1.3% to 1.4% of sales, including Brakes. The increase compared to our recent run rate is driven by a few factors including: increased investments in facility expansions and improvements, and increased technology investments to accelerate the success we're having with customer-facing technology and increased investments in technologies to support our shared services organization.

Even with increasing capital spend, we still expect continued strong cash flow performance for fiscal year 2018. As such, we expect to continue to grow our dividend in fiscal 2018. And finally, we have completed our $3 billion 2-year share repurchase program during fiscal 2017. Our share buybacks in 2018 will align with our capital allocation strategy and will involve opportunistic purchases and buybacks that offset dilution.

In summary, we had a strong year, reflecting continue momentum from our business, driven by strong local case growth, excellent gross profit dollar growth and good cost management. We achieved a healthy spread between gross profit growth and expense growth that has led to strong leverage for our earnings. We also have been able to effectively turn those earnings into cash and grow our free cash flows.

These results are due to the ongoing commitment of our associates to serving our customers and delivering a high level of execution in all areas of our business. We remain committed to those high levels of service and execution, translating into enhanced financial performance in both the near and long term.

Operator, we are now ready for question-and-answer session.

(Operator Instructions) Your first question comes from Kelly Bania from BMO Capital.

Just wanted to go back to the comment about the operating income targets and the confidence in reaching the high end, I guess, implies an acceleration. You mentioned kind of some gradually improving results in terms of expectations for next year. So I was just wondering if you can elaborate on that, where that is? It sounds like maybe some of the multiunit trends maybe could improve next year. Just could you walk us through the thought process there?

Sure. Absolutely. This is Joel. And so yes, I think number one, I think the key point as I've talked about is we certainly, as Bill and I both said, are confident in our ability to hit the high end of that target. And I would say the acceleration that I talked about through the year really is partially related to some of the improved multiunit volume throughout the year. In addition to that, in terms of timing, there's some elements of incorporating the Brakes business into our business that will result in some level of increasing transition between the first half and the second half of the year. And so again, it's -- I think you'll just, as we've kind of talked about here, I wouldn't look for anything dramatic there but just a gradual acceleration, I think, over the course of the year is what we're really talking about.

Great. And then just to ask also about the independents, the growth with independents again was strong. Just curious if your -- in your discussions with them, if you're sensing any change in their confidence or any change in how their outlook over the next couple of years?

Kelly, it's Tom. I think we continue to feel like the independent segment is well positioned to continue to perform at a decent level. Obviously, there's been some -- as we talked, there's been some, I'd say, some softness in restaurants in general. But I think we still feel like the independents are well positioned, whether it's the product offering that they have, their ability to be flexible to meet the changing consumer needs. I think the other thing just as always as a reminder is because of our -- whether it's our current share of the market or the fragmentation that exist generally in foodservice, we continue to believe that there's lots of opportunity for us to grow, and whether that's in the independent restaurant segment or the other segments of our business.

Your next question comes from John Heinbockel from Guggenheim Securities.

So Tom, I'm curious, if you look out the next year or two, what's the prognosis on accelerated growth in some of the center-of-the-plate categories? So seafood, meat and also produce, given that you'd made some changes organizationally? Is that -- may we see an acceleration in that part of the business? Or is that going to take a little while longer?

Well, what I'd say specifically to those areas, we're fortunate because we've got an organization and a business structure that exists around specialty meat and produce that positions us well. And so I think we continue to believe that center of the plate is an important category. And I think we look at that and say whether it's the way we've structured ourselves now or the fact that we've got those capabilities that we're well positioned to grow. And so whether or not that's going to be a significant acceleration or not has probably as much to do with what's going on broadly in the marketplace. But I think, we feel like we're well positioned and we continue to work on improving even our current position in that -- those areas.

Okay. And then something completely differently. If you think about the international business, relative to again, frame it first relative to the U.S., what are sort of -- I know the goal has been right, U.S. to grow GP 100 basis points above SG&A. Is that something that you can duplicate internationally? Or given where Brakes is, can the spread be wider for some period of time?

John, it's Bill. I've not sure that we've spoken to 100 basis point gaps going forward, but we certainly have talked a lot about that we're pleased with the way we are growing the GP relative to the expenses, and we certainly do need to continue to grow that faster. I think when you look at the international, continue to report that segment, you got a mix of things going on there. Certainly, you have a mature business in Canada, where as Tom just said, in U.S., we still see a lot of opportunity for growth up there and to leverage some of these strategic initiatives that we've rolled out for the most part in the United States, to do that over in Canada more swiftly here moving forward. Brakes itself, you heard Joe kind of allude to it. We've owned them now for about a year. We're really pleased with that acquisition. There's a lot of upside potential. We are in a normal part of a transition process now where we're going to be continuing to invest in some of the transformation work that they've already started to make their warehouses more efficient to put the -- a big merger that they did in France together and to continue with our integration work in Ireland. So I think Europe is a little harder to call but certainly growing the bottom line the right way, both in terms of top line as well as leveraging the GPs is that mantra will continue there just as it will in U.S. And then in Latin America, smaller market to be sure. And we're really building for the future there with some of the countries that we're in with the management teams that we're partnering with down there. And as Tom mentioned, we've got a new facility or two coming along. So I would look at international as a little bit more variable relative to the U.S. side, but certainly, our overall levers that we talk about here over the medium to long term, which is to grow volume and to leverage that volume and to give a good return on invested capital, those will continue throughout the company.

Your next question comes from Bill Kirk from RBC Capital Markets.

I wanted to go back toward the inflection of inflation in food. It looks like restaurants -- their pass-through or their pricing hasn't been as strong in the last couple of months as it had been over the last, call it, 2 years. And that's happening the same time their food product inflation has now arrived. So that sounds to me like something that's hard for the vertical to manage. Can you help me understand if that dynamic's important and maybe what tier of the vertical it would impact the most?

I'll start, Bill. It's Bill here. I'm not as familiar with some of that data that you were just referencing there. I would just tell you generally what we've seen over the years and we've talked a lot about this on calls like this. When you have an inflationary period and where that overall inflation is in the 2% to 3% area, it's usually at a level that the customer, and in a particular the restaurants, are able to pass along. So generally, that 2% rate is kind of a sweet spot for our customers and not a huge challenge for us. Now we did point out here earlier that the transition from deflation to inflation has been a little more rapid than normal. And there's certainly some categories where we're seeing more than 2% to 3% inflation. So that becomes a challenge both in terms of how we work with our customers and they work with their patrons. But I wouldn't say we're seeing anything out there today that would be overly difficult for our customers to pass along.

Okay. And related to that, if during this transitionary period, gross margin percentage comes under a little pressure, would there be any way to discern if increased competition is a part of that or if that's just a natural pressure during the inflection?

Yes, let me just address that. It's Joel. I think the main reason we're really calling that out is really more of, we'll call it, a mathematical function of the inflationary pricing. And so I think even in the previously deflationary periods, we've talked about the fact that there was an element of that, that was driving a margin as a percentage. But -- so I think the main thing for you to take away and just to remember, our key focus is on gross profit dollars. And so while again there may be some mathematical pressure on the margin percentage, at the end of the day, we feel good about our ability to generate gross profit dollars, which is ultimately the focus that we continue to go after.

And I think that's a really key point. We continue to make it -- we're going to be going through -- we are in the midst of going through a transition now in this environment in our revenue management tools. This'll be the first time that we've really utilized those in an inflationary environment. So that's an opportunity to continue to manage the price movements more effectively than perhaps we have in the past. But I really want to emphasize, our ability to grow the gross profit dollars here at 4% in a deflationary environment that approach 2% -- deflation of 2% over most of our fiscal year, it's really an extraordinary achievement. And it's one that, in my judgment, we would have not have been able to produce those numbers if we didn't have the tools available to us that we do today in terms of CatMan and RevMan and a lot of the sales consultative work that Tom was speaking to. So obviously, our job is to manage and to work closely with our customers through these dynamic periods. But we're much better positioned today to work through this. But the key here really is gross profit dollars. That is what we pay our bills with, and that's what drives the earnings growth that John Heinbockel has referenced earlier.

Your next question is from Marisa Sullivan from Bank of America.

I wanted to touch on Brakes and to get your thoughts on accretion that you're expecting for next year and where you see opportunities both on the top line and then also in productivity.

Yes. So I'll start with the accretion number. I think as we talked about when we originally had announced the deal, we had anticipated in the first year a mid-single-digit accretion, and the second year, I think in the low double digits of accretion. We certainly believe that to be -- continue to be the case. So I think I would look at that as probably roughly similar to the current year as far as that goes. Tom, I don't know if you want to talk about the top line and the...

And then regarding just generally how we're feeling about it, as I mentioned, the U.K. market has been -- certainly had some choppiness in it but I think we're feeling good about where we continue to be positioned there. We had good movement in growth in France and we feel good about our business in Sweden. And obviously, with what we're doing in Ireland, we continue to feel pretty good about that as well. So I think overall, we feel like we remain pretty well positioned. And I think we're just obviously going to have to keep an eye on what's going on from a market perspective. But I think where we're positioned and how we're performing, we feel pretty good. We do have some investments we need to make over the next year there and we feel like that's an important part of us continuing to build on the work they had started pre-acquisition and we shared and talked a little bit about that earlier.

Got it. And then just to change topics. I wanted to touch on the SYGMA business. Can you comment on the sales growth trends excluding the 53rd week question and also was curious to see the gross margin up a little bit year-over-year, wanted just to -- if you could give some more context on that?

Sure. Related to SYGMA, I mean, we had good top line growth from a SYGMA perspective. We had some new customers that have come on board in that business over the last year, and so I think that's driving some of that top line. Obviously, it's very competitive out there still in this space, and we continue to work through that part of it. From a margin standpoint again, I think that has as much to do with some of the -- think about how that business is managed on a cost-plus kind of basis. There's some margin impact of that, but it's mostly driven by new business that is driving the improvements there.

Our next question comes from Shane Higgins from Deutsche Bank.

Just wondering if I could get a sense of how local case -- or both U.S. Broadline and local cases kind of trended during the fourth quarter and what you guys are seeing in terms of trends. Any color you can give 1Q to date?

Well, as we said, we had solid -- what was it, Joel, 2 -- 2.4%?

2.4%.

2.4% for the year. And up...

2.7%.

2.7% for the quarter coming off of a third quarter where we were over 3% on the local side. So we were pleased with that. As I had mentioned and Tom alluded to, I think, as well, we have been transitioning some large contract customer business. Some of it our own choice, some of it not. We're in the midst of continuing to do that but we're in a good place there and we would expect those trends to gradually improve as we talked earlier -- later in the year. So overall, cases, flat to 1% but local cases, 2.5% to 3%.

And I would just remind you too, I mean, as part of our -- again, this is now the 13th quarter in a row we've grown our local cases. And in addition to that, if you think about the range that we'd set at the time and we thought about this original 3-year plan, I think this range of this 2.5%-ish is right close to where we're at. And so I think we feel good overall about that.

Great. And just a follow-up on the gross profit dollars and the impact of the transition to inflation. Did that actually benefit that 4% type number that you guys put up for the quarter, the return to inflation? And how should we think about that impacting your gross profit dollar growth in the first quarter?

Yes. So I think the way I would think about that for this quarter, I think certainly again, we're pleased with the 4%-plus growth. I think the transition, as I mentioned and Bill has mentioned as well, was fairly quick. And so while we don't have a real significant lag in terms of turning over pricing, there is some lag. And so what I would just say in general is that in a fairly rapid uptick in a few categories that, I would say again, slowed a little bit the acceleration in the gross profit growth. So that's how I would think about that in terms of how it impacted this quarter. But again, as we talked about going forward, we certainly are confident in our ability to grow our gross profit dollars despite that inflation, as Bill talked about. The overall inflation number is well within the range of moderate inflation that we think works in this industry well. And so feel good in general, but to answer your question directly, there wasn't, I'd say, a major impact on this quarter on that.

Your next question comes from Karen Short from Barclays.

Joel, just to clarify one thing in terms of the Brakes accretion. Mid-single-digit year one, I think you said low double-digit year 2. Is that pennies or percent?

Pennies.

Okay. And then I guess I was curious, a couple of things. One of your competitors last week commented on Technomic's outlook for independent restaurants. And it just seemed very counterintuitive. I mean, when you talk to any restaurant analysts that independents are actually slowing. So wondering if you could give some color on that. And then I had just one other housekeeping question.

I'll take a shot at that, Karen. Technomics is -- there're a lot of different sources, as you know, in the industry that we all rely on to get as much data as we can. A lot of the data crosses over between customer segments and is somewhat defined differently by different people. Technomics has been kind of that consistent barometer that has been out there for years. And they do a good job, but the reality is a lot of their data comes from people in our industry that they interview and talk to. And so I would characterize it as directional. I would tell you 6 or 9 months ago, people were saying that the independent was going to grow a lot faster, being in the upper 2s, and I don't know that I totally bought into that, and now we're seeing that their forward view in the medium term, even short term, is lower than 2%. So from my perspective, I think it's good information, it's consistently done. You've got an economy out there that's growing at about 2%. And I think in industry, there's no big shocks in this industry right now. So there's nothing going on anywhere as close to or similar to what we saw in 2009. So what I'm trying to say is I think there's no big secular trends going on. There's some cyclical things, there's always weather, there's comparisons. But I think a 1.5% to 2.5% range out there at different points in time is where we've historically been. And that is certainly how we're looking at it in terms of how we work through our strategy and how we plan the business. so I wouldn't get too excited about it being where it was 6 months ago, and I wouldn't be too excited about the most recent forecast. The key is growth here, and the business is still growing and it's growing -- those check sizes are growing. And we're well positioned to take advantage of that growth as Tom pointed out.

And then I just was curious. I know you don't want to be pinned down to a spread between gross profit dollar growth versus OpEx growth. But as we look kind of to the next 3 years once we finish '18, just maybe qualitatively, could you give us a sense of where you think operating profit growth will come from more? Is it more on the OpEx opportunity side? Or do you think it's still fairly balanced between gross profit -- or growth margin/gross profit opportunities and OpEx?

Yes. I think the way I would think about that, Karen, first of all again, and as we talked about, we'll certainly give more guidance on our next 3-year plan later in this calendar year. But I would look at this as a very balanced approach to growth, which certainly we've talked about over this 3-year plan and I would certainly think about as we move forward. Again, I think both from the focus on local customer, local -- growing local cases and overall profitable cases, we're focused on growing our gross profit dollars and again being very effectively -- aggressively and thoughtfully managing our costs is really a very -- again, a balanced view and how I'd really think about this moving forward.

Your next question comes from Ajay Jain from Pivotal Research Group.

Joel, I think you mentioned that you're at $417 million in operating income growth towards that 3-year target. So I wanted to first confirm that number. And I was also wondering if you can confirm how much incremental growth you had in the latest quarter? Correct me if I'm wrong, I thought you were already close to around $410 million at the end of Q3. So that might imply not much incremental growth in the fourth quarter.

Yes. So first of all, $417 million, Ajay, is the number. Now keep in mind, when you're looking at comparatives, there's the -- you're looking at a quarter of last year that had the additional week versus this year. So the incremental growth on a quarter-to-quarter basis purely is not something you're going to be able to look at just directly. And so the incremental growth, Neil, if you want to take that during the quarter?

Sure, Ajay. You're right, if you're looking at the 13-week versus 14-week, it's relatively modest. But if you look at a 13-week versus a 13-week comparable, the rate of operating income growth is pretty much in line with what you're seeing throughout the year.

Yes...

Got you. I was asking about the sequential increase from Q3 to Q4.

We added $52 million ex Brakes. So if you're comparing the $417 million again, is the 3-year plan. So $52 million on a comparable quarterly basis is what we added in the fourth quarter this year, when you factor 13 to 13.

Okay. And I just had a question about the U.S. case growth. Can you talk about the sequential decrease? I thought typically, total case growth should be higher compared to case growth in the street business and that wasn't the case in Q4. And I know you mentioned in your prepared remarks that there was that transitioning of the less profitable business about 1%. But if you adjust for the calendar shift and the transitional impact for those multiunit accounts, what was the case growth for the nonlocal portion of U.S. Broadline? Can you quantify that or at least confirm if it was positive or negative?

Yes, a couple of things. So we -- as we talked, we've had consistent improvement in the local growth over the last 13 quarters, quite honestly. But we talked about the 2.7% in the fourth quarter for local. The contract business or the CMU business we talk about, it was, in fact, negative for the quarter. And that's consistent with what we've talked about as we've looked at our portfolio and as Bill mentioned earlier, we had certain customers that that we have made some decisions on and other customers who had made some decisions around doing business with us. But we continue to feel really good about the overall number, that 1% comes from the combination of the contract business declining and the local business continuing to be strong. And my comment about improving is we do see some lapping of that happening in fiscal year '18 and we also have some new business that will be coming on later in the year.

Your next question comes from Chris Mandeville from Jefferies.

The majority of my questions have already been asked. But I guess I was hoping you could touch on wage pressures and the availability of qualified labor. Has that worsened at all over the last 12 months? Or what kind of level of growth can we expect as we've looked to 2018?

Chris, I'll start, but I'll let Tom and Joel kind of jump in here too. I think there're 2 things going on as it relates to labor. Certainly, with our customers and in certain parts of the country, there continues to be some pressure to source employees as well as labor wages and rates of pay and all that. So that continues to be a phenomenon out there that we're working closely with our customers on. On our end of it, and when you hear us talk about flat cost per piece, in the most simplistic way what that really is about, especially on the supply chain and operations side of the business, is to keep our wage and benefit increases in line with our productivity increases. And productivity obviously comes in a lot of different ways. But it's largely productivity in the warehouse and on the truck, how we manage over time all those types of things. And so we're pleased with where we are there right now. I'd say most of our contracts and most of our annual increases are in line with the productivity goals that we set. But it's something we have to manage very aggressively and very hard but over the last few years, we've done a nice job with it.

I think Bill covered kind of the financial part of that. From a retention standpoint, we measure employee retention and we feel good about where we are today and where we've been as it relates to a lot of those types of roles. So I think the marketplace is, I guess, in a decent place. And obviously I think we, as an employer, are doing a nice job of attracting and retaining the people we need.

The only thing I'd just add is a lot of the questions we get are questions on minimum wage laws and this and that and the other thing and that really is more -- that's an impact on our customers in terms of things they're dealing with. That doesn't necessarily or doesn't really impact us at all in that most of our labor is well above the minimum wage rates.

All right, that's helpful. And I guess I've got a random one for you. I'm curious if the Brakes business has been affected by the recent egg recall in Europe. And if so, can you help us understand how and whether or not that is incorporated into the new outlook?

I don't know if we can help you with that one today, Chris. So let us look into that and we'll come back to you.

Your next question comes from John Ivankoe from JPMorgan.

Two questions if I may. Firstly, the restaurant industry, or at least some of the public data that we see, showed June is kind of one of the softer months of the quarter and that softness continuing from June into July, if not actually getting a little bit worse. So just wanted to get a sense in terms of what you're seeing just in terms of the broad industry and independent restaurants specifically?

John. Look, I think what we see is that it moves around. So there's periods where you have a couple of months where it spikes up or at least goes up somewhat and then it comes back down and sometimes it's hard to explain from 1 quarter, or even a 1- or 2-month stretch to another. So I don't know that I would get overly excited about 1 or 2 months of data, especially when it's still somewhat mixed out there. Consumer confidence is positive. For the most part, our restaurant operators and customers are still feeling good about their business, not quite maybe as effusively good as they were a few months ago. But my experience tells me that these numbers move around and they are still very much in a range that, as I said earlier, translates to growth for the industry and that is certainly good for us.

Okay. And then secondly regarding the CapEx, so I think the guidance is 1.3% to 1.4% of sales. And I do understand for you that, that moves around. To be maybe a little bit forward-looking on that comment, I mean, is that the new level of CapEx as the percentage of revenue as we think about your capital needs over the next couple of years? Or might '18 be kind of a peak or a trough, I guess, and the level changes in the years after?

John, it's Joel. Yes, I don't know that -- I think your first comment was probably the right one in that, that does move around somewhat. I don't know that -- I wouldn't look at that necessarily as the new norm. I think I would characterize it as the fact that we have strong cash flows. We have opportunities to invest, as I talked about both in some -- in things -- and to continue to transform the Brakes business as well as technology initiatives and some facility opportunities we have. So I would certainly look at that. I would call it as much opportunistic, and again, just really consistent with our priority of continuing to reinvest in this company, if that is the long-term rate.

And is there anything discrete -- I think you said a number of things in your prepared comments. But is there anything discrete that we can point to in terms of capital spend on '18 that will be a material benefit in '19 or beyond?

No, I wouldn't look at it that way. I don't know if there's -- it's again, this -- across the categories I talked about, we certainly -- again, our return invested capital continues to grow. We certainly feel good about the investments we're making but there's nothing I would finger point as just one discrete item.

I would say in the aggregate, John, that the incremental part of that will be a benefit in '19 and probably more beyond '19, to be fair. These are capital investments we're making.

Your next question comes from Andrew Wolf from Loop Capital Markets.

Just a quick housekeeping to start with. And I might have missed this. But did you say how much acquisitions helped sales in the U.S. Foodservice segment?

No, we did not.

Are you providing those numbers?

Andy, I guess the biggest acquisition -- we certainly talked about Brakes, which has clearly been a significant acquisition for us. But in terms of any small fold-ins, we didn't get any -- it's minor. We'll tell you just in general, it certainly remains a point of focus here for us going forward in terms of our teams and we see opportunities. There are different opportunities as we talked earlier. We still see some fold-in opportunities in this country and in Canada, both on Broadline but in particular on the specialty side of the business. Certainly with Brakes, we have a platform over there now in the countries that we're in as well as some other countries to grow and invest over time. It's a long-term investment. And then what I'd spoke to as it related to Latin America, that's probably a little modest in size at this point in time, probably the most wide-open area that we have for acquisition opportunities.

Okay. So I mean, I'm sort of throwing in the number of somewhere less than 1% from the whole business, not just for the U.S. Is that reasonable?

It's well less than that. Again, when you actually -- when you take the Brakes number out, again, for this year, that was our key focus. But again, as Bill talked about, that certainly being a focus for us going forward.

So on the inflation side, so the case growth slowed, yet the gross profit dollars were the same as last quarter. So clearly, there's some pass-through or a lot. Could you speak to the cadence of that? Did it improve? Or are there any other players out there who might be struggling, looking for share and maybe using price as a lever? Could you just give us a sense of what's going on in the market as you see it on price pass-through?

Andy, this is Tom. I think the first thing I'd start with is, and we've talked a lot about this, it remains very competitive out there. We have lots of competitors in general. And from a market perspective, I think we continue to look at leveraging all of the capabilities we have, whether it's things like the category management we've talked about to make sure we've got the best cost on products or it's the revenue management tools so we make sure that we're pricing product appropriately in the marketplace and making sure we're taking care of our customers. We still feel really good about obviously our ability to grow and our ability to do it in the right way. And I think that's really what you're seeing. I don't think there's any specific thing that's happened in addition to that. This is really about a balanced approach, making sure we're focused on the right levers of the business. That starts with that local customer where we can add incremental value and doing the things that help, basically get recognized and be rewarded by them for providing the right products and the right services in the right way. So I don't think there's anything beyond that, that you should read into it.

No, I don't think so either, Andy. And I guess I'm just going to go back and reiterate a couple of points I made in my prepared comments that as you know, the way we look at this business is we're in it for the long haul here and we've got a very customer-centric strategy that's predicated on more and better growing customer insights in terms of what they need to run their business better, how do they deal with commodity pressure, how do they deal with price increases, how do they deal with nontraditional competitive forces in the marketplace. And so that customer insight work that we've done over the years, we're going to continue to invest in that, deepen it, broaden it, accelerate it where necessary, and that's what brings us to where we are today and where we've come over the last several years, which is a strategy and a platform here that starts with the customer, but very much is about differentiating ourselves in the marketplace from all types of competitors. And in particular, utilizing our sales force more efficiently, more productively, providing them tools they need to provide that consultative service that Tom referenced earlier to our customer base. And leveraging our supply chain. We've got a footprint globally now today and growing brand and differentiating our products and services in a way that provides value to those customers but also providing that wide range of products; fresh, frozen, dry, whatever folks are looking for, utilizing the brand in a way that provides value for them but also, where we can source from all around the world. And then obviously, technology is another area that we continue to hear from our customers that anything we can do to help them run their businesses more efficiently, we need to do. And that's where you've seen us pivot here over the last couple of years and on the margin invest more of our spend on the technology side, in the customer-facing side, in things like Supplies on the Fly, CAKE, Sysco labs, that type of thing, to stay current at least with the evolving needs of our customer base. So clearly, it's a competitive business and clearly a lot of competition but we feel we're very well positioned here not just for today, but to continue go forward as long as we stay close to our customer base.

Just a similar question, this is a follow-up. On the multiunit side, sounds like you're expecting better trends there, both sales and profitability. And it sounds like some of the other large players, at least one of them, sounded -- sort of has the same expectation. Is it -- it's been a tough market for, I think, the distributors, but for lacking price discipline. But it seems like -- just wanted to get your sense. Do you think that might be changing somewhat either from your own perspective or again from the market perspective?

I think what we've been really consistent on, Andy, is that we continue to see opportunities for growth. We're about growth, but we look at growth a little differently than we probably did 10 or 15 years ago. It's about profitable, disciplined, sustainable, i.e., repeatable growth, and doing it the right way in the communities that we serve. So I don't know that there's anything really different out there. This is a strategy that we've put together and have executed, I think, increasingly well over the last few years. It's going to remain competitive out there and we all go after the business hard but I think everybody understands it. We've got shareholders out there that we need to provide returns for as well.

Your next question comes from Vincent Sinisi from Morgan Stanley.

Wanted to just go back to the comment that you made that -- you've made in prior quarters as well, of course, about some of typically the larger customer exits, some that you decide, some maybe not. Just trying to get a better sense of kind of the dynamics of the competitive environment. Like are you able to kind of follow some of those customers, like where do they go? Or if you're getting them from others, where do they come from? Is that more kind of shifting between the 3 larger players? Or are there any other dynamics to be aware of?

So Vinnie, I assume we're back talking about the role of the contract side of the business here. What, I guess, we've said and what I'll reiterate is that, and Bill just said this as well, we're very focused on kind of disciplined profitable growth and wanted to make sure that we're making the right decisions. And sometimes, those decisions that we make drive the customer to make a different decision. We certainly know when we lose a customer, where it goes and we certainly know when we gain a customer where it came from. But I wouldn't say there's anything unique or different going on in the marketplace. It's always been competitive, it continues to be competitive. And it's really about making sure that we're making the right decisions for Sysco and for our shareholders and that's how we try to approach this business. And so aside from that, I wouldn't say there's a whole lot else to say.

Yes, and we stay close to them, Vinnie. This business, what goes around comes around in this business. Sometimes the net part of it takes a while but we certainly maintain a relationship as best we can. And we're in this thing for the long term. So it's not unusual for a customer perhaps to move on and then come back to Sysco at some point in time in the future.

Okay, okay. And then just a quick follow-up to the comments on the 2018 CapEx. I know that you guys had said in the prepared kind of facilities expansion, tech investment, things of that nature. I'm sure we'll get more color in the fall, but anything that you could tell us today in terms of anything that we should kind of be expecting with any of those? And also maybe a split between the U.S. and the international sides of the business?

Yes. Again, this is Joel. I think as we talked about before, I think it's, again, a pretty broad portfolio of investments we're planning to make that we certainly anticipate benefit from in aggregate over the upcoming years. Again, it's really focused around -- again, just broadly opportunities to reinvest in our facilities and add capabilities and expansions there. Technology, again, really focused for the most part around our customer-facing technologies and the customer experience as well as opportunities to enhance our shared services platform to drive further efficiency. And then from the standpoint of investing in the continued transformation opportunities in Brakes, I think again, that would be broadly characterizing the high points of that. And so I don't know, I think you got a little bit of a sense from this year's earnings where the amount of investment that we put into Brakes. We called that out as we talked about our FY '17 CapEx. That's probably reasonable to assume that's fairly consistent here over the next year.

And your next question comes from Zach Fadem from Wells Fargo.

Quickly on the 3-year plan, you said you're tracking at the high end of the $600 million to $650 million range. But as you look at the year ahead with a little more clarity on the current operating environment, is there still potential to come in above the high end? And if so, what are the drivers that need to happen to get there?

There's always potential. But I think where we're at right now is we're trying to signal that we feel good about the high end, and that's where we would like to leave that for today. But certainly, we're not going to stop at $650 million if we don't have to and that's really our message for today. We've said now several times that, look, the markets are going to be somewhat fluid here. But overall, we now operate in several large markets and we're well positioned, if not the leading player in all of those markets. And we see plenty of opportunity for growth and we're much more disciplined about how we go after growth today. So if you put this into some type of historical context, that $650 million is about $200 million higher than where we started 2 years ago, so I'm not ready to go above that today, but we certainly feel good about the number.

Fair enough. And is there any directional commentary you could provide on Broadline case growth in the next year? For the national account level, should we anticipate further culling here? And then second, should we think about continued share gains for the local customers in '18?

So on the contract side, as I said earlier, I think you'll see us showing some improvement in those numbers as we get into fiscal year '18 because we're both lapping some of the decisions that were made last year and also we have some new business that will be coming on. So I think you should feel like there will be some improvement there. Regarding the local business, I mean, we continue to feel really good about how we're positioned. And as we talked about why we feel like we're able to succeed in that space is really more to do with how we're focused on delivering the value for those customers. I did say in my prepared comments about our loyalty scores going up, and I think one of the things as we think about what drove that, we talk to our customers a lot and what we heard was everything from they're feeling good about our marketing associates and continuing to add a lot of value to our selling resources and that means we're accomplishing the things we said, which is making them much more capable or I'm going to be more consultative in how they're working with our customers. We also heard good things around our technology platform, so I think we feel really good about the types of strides we're making, these strategic initiatives we've been talking about. And so I think that's -- to us, that's confirmation that the things we are trying to do for these customers is working.

Our last question comes from Bob Summers from Macquarie.

I just wanted to dig a little more into the deflation/inflation dynamic and better understand and maybe you have something here from the customer insight work that you've done. But this situation seems unique in that overall product costs have been coming down in aggregate for the last, call it, 20 months against that backdrop. Restaurants have generally been taking pricing. I'm not really sure what that pass-through has been to the end operator. But as you think about the resistance to price increases, what's the risk that there's more margin risk here than you've seen at historical inflection points?

Bob, I think the risk is that it spikes in some high-cost box. In other words, in your commodity areas if it were to spike into double digits as it has in the past with meat or poultry, that type of thing, that would move the number overall, and that's -- those boxes tend to be expensive and that puts a little more pressure on our customer and we have to manage that the right way. So I think, as I said earlier, I think the range that it's in right now is still in that range that is manageable, but I think the bigger issue is 1 or 2 key categories that are high-dollar categories may spike, things like produce and dairy, they're going to move around. They move around multiple times within a 12-month period generally. So that would be maybe my contingent caveat there that if it were to spike up in meat, poultry, seafood, not as big a category obviously. That would put more pressure on the customer. But right now, it's in the manageable range.

Thank you for joining us today. This concludes today's conference call. You may now disconnect.