SYSCO Q3'16 Earnings Conference Call: Full Transcript

Operator:

Good evening and I will be your conference operator today. Welcome everyone to the SYSCO Earnings Call. Placed on mute to find any background noise. After the speaker remarks question-and-answer session. If you like joining this time star then the -- on telephone remarks -- thank you Mr. -- began your conference.

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

 

Neil Russell:Investor Relations:

Thank you and welcome to Sysco's third quarter fiscal '16 earnings call. Joining Bill DeLaney, Chief Executive Officer and Joel Grade, Chief Financial Officer.

Before please note during this presentation the company intentions, beliefs, expectations or predictions of the future are forward-looking statements and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the company's SEC filings. This includes but is not limited to risk factors contained in our annual report on Form 10-K for the year-ended June 27, 2015, subsequent SEC filings and in the news release issued earlier this morning. A copy of these materials can be found in the Investors section at sysco.com or via Sysco's IR app.

Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures are included at the end of the presentation slides and can also be found in the Investors section of our website. All comments about earnings per share refer to diluted earnings per share unless otherwise noted. To ensure that we have sufficient time to answer all questions we would like to ask each participant to limit their time today to one question and one follow-up.

At this time I would like to turn the call over to our Chief Executive Officer, Bill DeLaney.

 

Bill DeLaney:Chief Executive Officer:

Thank you, Neil and good morning everyone. This morning Sysco reported strong third quarter financial results. Our performance reflects both the commitment of our 52,000 associates to supporting the success for our customers and the improving execution of our strategy and three year plan initiatives.

During the quarter Sysco delivered sales growth of 2% and gross profit dollar growth of 4%. While limiting adjusted operating expense growth to 1.5% which resulted in adjusted operating income growth of $60 million or 16% compared to the prior year. Adjusted earnings per share grew 15% to $0.46 per share. These results were achieved with the benefit of the favorable whether conditions and an earlier Eastern holiday compared to the prior year third quarter.

Consumer confidence data points was still favorable compared to a few years ago where somewhat uneven and track also financial market activity quite closely.

Oil field prices were likely in that positive as the impact of consumer spending benefits and reduced re-cost offset to some degree the economic slowdown we're experiencing in energy driven economies in certain parts of Texas and in Mount Ena, North Dakota and Alberta Canada.

Turning to specific restaurant industry data, the overall sales trends remain mixed. According to the National Restaurant Association restaurant sales have been uneven during the first three months of 2016 after steadily rising throughout 2015. While -- track have also shown recent traffic in sales declines. However, even with this recent choppy industry performance the overall trend remains generally favorable for our customers as illustrated by the US Census Bureau sales data for the quarter rising 1% above the prior quarter, represent the 11th consecutive quarter of restaurant sales growth.

Moving to our results for the first three quarters of fiscal 2016. I'm very pleased with the increasing momentum in our business. For the nine month period ending in March we deliver the following results. Total Broadline cases grew 3.3% and local cases grew 2.9%.

Sales grew up 1.2% despite being adversely impacted by both deflation and foreign exchange headwinds. Gross profit dollars grew 3.3% and gross margin increased $0.35.

Adjusted operating income increased to $100 million or about 8% compared to prior year and adjusted earnings per share grew approximately 10%. These results are in line with our three year plan financial objectives, to grow adjusted operating income by this $500 million and to grow earnings per share faster than operating income.

Our progress towards the achievement of these financial objectives is being driven by focusing on the following four key levers. Accelerating local case growth, improving gross margin, leveraging supply chain cost, and reducing administrative cost. Regarding the reduction of administrative costs, we recently began to implement work force reduction of approximately 1200 positions. We have taken a very proper approach to this difficult process by focusing on privatizing all existing work more effectively reducing layers of management and expanding spans of control.

We believe our approach will allow us to continue supporting our customers with a high level of service as evidenced by the fact we are not reducing the number of marketing associates or warehousing and delivery associates, who directly support our customers. During the quarter we also announced our proposed acquisition of the Brakes Group, the $5 billion European food service distributor who's significant presence in the United Kingdom, France and Sweden.

We are very excited about this opportunity as we will inherent an excellent leadership team, our businesses customer centric strategy and culture is raise -- Sysco's and 15,000 highly capable associates. We expect this acquisition will provide a solid trajectory of the EBITDA growth overtime and excellent platform for further acquisitions in Europe. Equally important, this transaction will not distract us from driving out our three year plan in our existing business continue to target at June or July closing.

As we enter the final quarter of fiscal year, we're executing our strategy at high level. We've delivered consistent local case growth for the past two years. Expended gross margins for four consecutive quarters. Reduced adjusted cost per case in the field and quick plans into the place that will reduce administrative expenses.

These actions and related results reinforce our confidence and ability to achieve our business and financial objectives as we move forward.

And now I will turn the call over to Tom.

 

Tom Bene:President and Chief Operating Officer:

Thank you Bill and good morning. I'll begin my remarks regarding the third quarter by providing an update on some of the initiatives related to our three year plan, and how they have continue to positively impact our business results.

As we have mentioned a few times before, our insights based approach to understanding and meeting our customer's needs continues to guide our efforts and is clearly driving improved performance. For example, during the third quarter, our US Broadline operations delivered case growth of 3.6 % including local case growth of 3.4%. Gross profit dollar growth of 4.8% including an improvement in margin of 39 basis points. And for operating expense, we reduced our adjusted cost per case by $0.08 or $0.03 on a neutral fuel price basis.

And we had operating income growth, of 11.5%.

We are driving increased case growth through variety of sales and marketing initiatives that are designed to deliver value to our customers while providing a more consistent experience of doing business with Sysco. I am pleased to report that the third quarter represents the eighth straight quarters of local case growth. As you know improving gross margin is another key driver of Sysco achieving our three years targets. And our strong performance this quarter indicates that we are making progress towards delivering our long-term objectives.

During the quarter we delivered solid growth in keys center-of-the-plate categories such as beefs, pork, and poultry and we continued our growth in produce reinforce in the benefits driven from our focused on fresh. We also saw a solid increase of more than 50 basis points in Sysco brand sales with our local customers. These efforts combined with other initiatives such as our ongoing working category and revenue management as well of the impact of deflection contributed to an increase in US Broadline gross margin of approximately 40 basis points. The fourth quarter in a row with gross margin expansion.

These improvements are especially noteworthy as we have been able to manage through the current deflationary environment really well. To impart to our ongoing efforts to improve local case growth as a percentage of our mixed as well as our continued focused on our category management process. Separately, the operating expense performance during the quarter was particularly strong. We eliminated total adjusted expense growth only 1.5% despite case growth of more than 3%.

And as mentioned we reduced our overall cost per case in the US Broadline by $0.03 excluding the impact of fuel prices.

From a supply chain perspective, we continue to make good progress towards our goals to improve overall service for our customers while driving higher productivity in operations to our continuous improvement process. We have also seeing good progress to a series of indirect spend initiatives and while there is still a lot more work to be done. We are seeing improved operating expense trends and we are targeting a continuation of this performance throughout the balance of the fiscal year.

In conjunction with the series of initiatives to support our long-term strategy, we are implementing a new market structure that reduces the number of US Broadline geographic markets from 8 to 6 effective at the beginning of our fiscal 2017 here. Each market team will continue to be led by our market President and include key functional leaders across finance, merchandising, supply chain and human resources to provide support for operating companies and help to drive solid execution for the various corporate initiatives. We believe that the work we have done in building the capability of the organization through the functional structure over the past two years makes this the right time for us evolve our structure. This change will reduced overall administrative cost in the field, drive efficiencies to a more standardized approach and improve execution to our customers.

In conjunction with this restructuring, I am pleased to announce the promotion of three strong Sysco leaders. Greg Bertrand has been appointed Senior Vice President US Food Service operations which responsibility for all of US Broadline operating companies. We also announce the Scott Sonnemaker has been named Senior Vice President International Food Service operations Americas and Bill Gates has been named Senior Vice President Sale and Marketing. These are just the few of the key priorities and changes that are positively impacting our operational and financial results.

While we need to continue to execute at a high level I am confident we are on the right path to achieve our long term objectives. In summary, our customer and operational strategies are being executed well in the field and our headquarters team are doing a terrific job are providing organization with field ready tools and processes that are enabling our success.

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

 

Joel Grade:Executive Vice President and Chief Financial Officer:

Thank you, Tom and good morning everyone. We have the strong quarter led by continued momentum from improved underline business performance, strong local case growth, particularly solid gross profit dollar growth and good cost management achieved in an environment with continued deflation and currency headwinds. We continue to make solid progress towards our fiscal 2016 plan and our three year goals.

We grew sales in the third quarter by approximately 2% year-over-year despite deflation of 0.4% in center-of-the-plate protein categories such as meat, sea food, and poultry and supply recovers from various events in 2015.

This deflationary trend has been persistent over the past few quarters.

Acquisitions increased sales by 0.9%, our foreign exchange negatively impacted sales by 1% in the third quarter. US dollars strength against the Canadian dollar was responsible for the vast majority of the foreign exchange impact. The negative impacts we've been experiencing on a competitive basis is lessening as we began to ramped the initial decline and we're also value of the Canadian dollar. On the constant currency basis, sales would have been up 3.1%.

Turning to case growth, consistent with our three year plan to achieve disciplined case growth we had another quarter of strong performance. Total Broadline case growth for the third quarter was 3.3% and local was also 3.3%. This is the eighth consecutive quarter of year-over-year local case growth for the total Broadline.

Looking at gross profit and gross margins, we grew our gross profit at a solid 4.1%, while also continuing to see expansion in gross margins which grew by 34 basis points. The key drivers of gross margin improvement included category management and more beneficial mix of local business, higher Sysco brand penetration in our local business, and deflation. On the constant currency basis, gross profit growth was 5%.

Turning to third quarter, we had a few certain items that impacted our results. These included restructuring costs such as charges related technology changes, severance and professional fees of $60 million and about $10 million of acquisition financing costs. On a GAAP basis, without excluding these certain items and the comparable certain items from the prior year our operating income grew 15% and our diluted earnings per share grew about 27%.

Rest of my discussion will focus on the non-GAAP or adjusted for certain items results. Adjusted operating expenses grew 1.5% during the quarter and by 2.4% 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 translations. This progress is reflected in our reduced cost per case.

As a result, adjusted operating income for the third quarter was $438 million, up 16% compared to the prior year and 17% on a constant currency basis.

As it relates to taxes, our effective tax rate in the third quarter was 33.6% compared to 33.9% in the prior year period. Both quarters tax rates were positively impacted by the favorable resolution of state tax matters. Compared to the prior year, adjusted net earnings grew 10% and adjusted earnings per share grew 15%. Cash flow from operations was $1 billion for the first 39 weeks of fiscal 2016, up approximately 15% from last year. Net working capital improved by about half a day during the third quarter compared to the same period last year.

This was largely driven by improvements in both receivables and inventory.

Net CapEx for the first 39 weeks was $348 million and free cash flow was $641 million. Both cash flow from operations and free cash flow include the cash impact of certain items of $272 million in fiscal 2016 and $128 million in fiscal 2015. As a reminder, the certain items for 2016 are mostly related to the termination of the proposed merger of US Foods and for 2015, include items related to the planning of the merger integration. Excluding the cash impact of certain items from both years, cash flow from operations grew $273 million and free cash flow grew $346 million.

Now, I would like to close with some commentary on the reminder of the fiscal year. First, we are currently on track to head our fiscal 2016 financial objectives. Second, we expect deflation to persist for at least another quarter. Third, with relatively strong fourth quarter last year which will make fourth quarter comparisons this year more challenging.

And finally, we now expect CapEx for the fiscal year to approximately $500 million or approximately 1% of sales.

During the quarter we also completed a successful debt offering the proceeds of which are to be used for the acquisition Brakes that Bill mentioned earlier. The very attractive coupons associate with this financing approximately 3% on a weighted average basis, represents both the strength of our balance sheet as well as impressive work by our team throughout the process.

In addition, Sysco put in place hedges during the quarter that protect approximately half of the purchase price of the Brakes transaction against unfavorable movement in foreign exchange rates. In summary, we have a strong quarter led by continued momentum from approved underlying business performance, strong local case growth, solid gross profit dollar growth, and good cost managements. That said, we have more work to do in order to achieve the financial objectives for our three years 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 am feel confident in our building to achieve the financial objectives of our three plan and we will aggressively continue to look for incremental opportunities to exceed our goals.

Operator, we are now ready for Q&A.

 

Question & Answer

 

 

Operator:

At this time I would like to remind everyone in order to ask a question press star then the number one on your telephone keypad. We will pause for just a moment to compile Q&A roaster. First question comes from the line of Kelly Bania form BMO Capital and your line is now open.

 

Kelly Ann Bania:BMO Capital Markets:

Good morning, thanks for taking my question and congrats on a nice quarter here. Just curious if you could talk about the local case growth continues to accelerate maybe just could if you can provide some historical perspective on when the last time it was the strong, are you seeing it in both comp restaurant growth or new independent local customers coming into the mix and then in terms of the private label penetration with that local segment in where do you think you can take that longer term.

 

Bill DeLaney:

Kelly it's Bill I will starting all the time to give little more, I think in terms of historical context this is by far the strongest quarter we've had over the last four-five years and that's very encouraging and certainly something that is bringing the momentum of the business for full time and Joel will talked about. So in terms of where its coming from, I think its the same answers I would give you if you would ask about margin or even expenses at this point it's coming from a lot of good work over the last few years on the commercial side of business that Tom will give you little more color on and really go alignment, I think with our leadership teams throughout Sysco and I would say this particular quarter and we acknowledge it there where some tailwinds and I don't like to talk about weather, I think so that the last two, thirds quarters we've talked about of whether last two years ago we are global winter at beginning of the winter and last year I think it was up the end of the winter and this share was pre- winter so I think that helped a little bit. With that said I think, I was also trying to get out there that the date after and as well they mixed in terms of overall industry growth.

So I think we have some tailwinds that we took advantage of but more than anything I think it's a more and more of good execution of key initiatives that --commercial side over the last three, four years and the brand and I will -- time little quick. These things tends to go together. When you are growing your business you are creating differentiation at the customer level and that's what the brand allows us to do and so we've brought renewed focused brand over the last few years in conjunction with our category management work and I think we are doing at the right way and I don't know we are not really chasing a number of hit Kelly I think what we are saying is the key to all this is really grown those local cases and as we do that we should build to grow the brand I don't know that there is a particular percentage that we are trying to to rather than to utilize the brand as a way to differentiate ourselves more effectively and let me get I will kick at the time here and give you little more color on that.

 


Tom Bene:

Thanks Bill and I won't repeat a lot of what Bill said because I think he hit pretty clearly on what are the key drivers are. Let me just me just add on the local case growth you had asked about kind of current customers and new customers. We spend a fair amount of time looking at what we called new sales, last sales and then penetration and think about that is new customers any customers that have loss in business that or where we kind of job of selling more to those customers. And I will tell that all those metrics are continued to hit in the right direction as it relates to our local customers meaning our new sales continue to be very strong, our last sales have declined a little bit over the past couple of quarters and our penetration sales which is what is delivering more to those current customers has also being increasing and that's a key metric for us because that tells us for improving in all those areas with our customers our current customers and making sure that we are continue to satisfy their needs.

So we feel good about all those metrics and were the business is heading and then lastly, on the Sysco brand the only thing I will add what Bill said is our focus allowed the category management focus is in fact driven towards that local customer and based on that the more we bring them differentiated solutions we've talked about innovations in the last couple of quarters is when we bring that new news and innovations that actually helps us growing to grow our Sysco brand, because generally those products are in the Sysco brand line up. So it just I think as Bill said they go hand-in-hand and I think this continued focused by us and bringing new and differentiated products to our customers just helping us to growth that and I would agree with we don't have number of for say that we are targeting we know its important we continue to focus on quarter in and quarter out.

 

Kelly Ann Bania:

Thank you.

 

Operator:

Our next question comes from the line of Andrew Wolf from BB&T. Your line is now open.

 

Andrew Wolf:BB&T Capital Maarkets:

Great. Thanks and congratulations on the quarter. Just want to Bill just wanted to ask you on the up sells count the MAs up and down the street. Is that up sequentially or year-over-year little bit the organization driving good local penetration and general growth with the same headcount and sales side.

 

Bill DeLaney:

It's roughly the same I think the mix is little different we put a lot of treaties over the last year and that's begin the level out. Tom you add anything.

 

Tom Bene:

No I think that's the big change from base MAs were very much flat versus the past year and this quarter. We actually because we've got good retention with our marketing associate we are down a little bit on the number of trainees that we have out there we just stock using any of the pipeline. But overall driving these sales with our interesting sales force.

 

Bill DeLaney:

I mean reason can be flat Andy as because of the some of the work that we've done in over last two three years with the CRM tools something we are doing in terms of territory management to be more rifle like in terms going after the business and that will continue to be a point of emphasis in our sales strategy.

 

Andrew Wolf:

Okay. That's an encouraging change I think from the way the business is historically operated. Do you think going forward as you wanted to continue keep this momentum going forward. You can at least leverage sales get case growth local case growth at a multiple of sounds like you can just want to confirm, well, how you think about that? Use to be a sort of a one-to-one relationship between sales headcount and kind of internal sales growth it sounds like, you've actually gotten to a point where maybe it's lot better than that.

 

Bill DeLaney:

I think it's a little better than, I think we will continue to see that.

 

Andrew Wolf:

And the other question, I just, want to it's for Joel, on the 59 million the total restructuring cost, can you just tell us how much of that was accelerated depreciation related to SAP or anything else?

 

Joel Grade:

Yeah. I would say maybe about a quarter that was, little less than that there was a part of that was, is that softer than we all call a one time right off, our project that we are in process or associated with the SAP conversion at the time when that was decision was made, we took a one time charge on some of those service. The split up for the most part between the right one time right off which is quite a bit higher than the accelerate depreciation and then to give a couple other severance related cost ----- an item.

 

Andrew Wolf:

Okay, so, the project cost didn't go through it, accelerated depreciation just the one quarter of that?

 

Joel Grade:

That's right you that will then something you will see in the third quarter. Not part of the accelerate depreciation that was a one time right off, of project cost that we're getting associated with the SAP.

 

Andrew Wolf:

Okay, because you know if did. So we should take about 15 million or so after DNA just to get a sort of normalized DNA for the quarter. That's what I am really trying to get to.


Joel Grade:

I prior reasonable ball ----

 

Andrew Wolf:

Great. Thank you.

 

Operator:

Thank you and our next question comes from the line of John Heinbockel from Guggenheim. Your line is now open.

 

John Heinbockel:Guggenheim:

So, really looking at the change in the odd structure, the ---- six markets what is that what changes does that necessitate for the levels below them right down into really out to be up companies, what are they are going to have to do differently where do you think you pick up execution benefits and do you think this is kind of the structure we're going to have going forward or do you think you'll play around a little bit more and look for some more efficiency?

 

Tom Bene:

I think John. Good morning. Again the structure hasn't change what we've all we've done really is consolidated from eight to six when we went out structure. Structure is really -- lesser years than we went to the functional structure a couple of years ago we felt eight was important there is a lot of ramp up or can change in as were to do when you put this type of structure in place you never had before we just feel today that in conjunction everything else this a good it's a good ----- if you offer while talking abut the expenses were we can spread our people our top people little bit further, we are further align a lot of our transformative work and we just felt that we can run the business very well with six and it impact not just the market presence but all the functional lease as well in the four areas but it really doesn't change that much at all if anything if the operating company.

Bill do you want to.

 

Bill DeLaney:

Yes the only thing that I would add is a little more geography for each of the markets which means the couple of more operating companies that report into that market level. As Bill said, the reason we're confident now is we've had enough time with the structure on the functional leadership that we feel like we're driving out consistency across the business and few more operating companies for each market is going to a challenge for them. I think that's the only one thing I will add is the we're very focused on a consistent design and what I mean by that is both hit the market, but also at the operating company and trying to drive a little more consistency which we believe will improve execution and we've seen that so far and we also believe that will create better customer experience because of we more consistent market to market and operating company to operating company.

John I think we'll continue to two things point where this structure we believe is vital and I think it's been key part of to beginning of the momentum that you are seeing over the last several quarters. So I wouldn't expect the structure changes and these are $5 billion or $6 billion market. So when you think about that is requires a fair amount of focus between the corporate center and that outcomes and so we think we got a about right here at 6.

 

John Heinbockel:

And then maybe for Tom where we now at the revenues management organization. How much of the benefit we are now starting to see flow through and where do you think the biggest opportunity is you think about the next 12 to 18 months to and I guess both margin and case growth due impact either one.

 

Tom Bene:

So great questions. So we now literally last week had our training for our last dozen operating company. So basically by the end of the fiscal as we've said will be fully up in running meaning revenue manager in every operating company and the market structure it's been placed now for quarter will be fully operational. So what we continue to believe is that by leveraging that organization and creating a more standardize setup like call routines and they've partnered nicely with our business technology team and creating some tools for these folks to really focused on ensuring that the product cost in a market is competitive and consistent and we believe that by leveraging those routines and some of those tools out there, that we are going to continue to see some benefit on the margin side.

Its really there as a support or enable for cases its not drive of case growth for say other than ensuring we've got the right market pricing put in place. So we feel good about where we are at I am not point where I am looking take a number for you but I think we feel good about the work that's been done and we are continuing to scale it across the organization.

 

John Heinbockel:

Okay. Thank you.

 

Operator:

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

 

Vincent J. Sinisi:Morgan Stanley:

hey great, thanks very much for taking my question. Good morning guys. So I just wanted to ask also for an update on the ERP rollout, I know a couple of months back you folks have mentioned a bit of different approach to that, just wondering if you could give us a little update there.

 

Bill DeLaney:

Yes. There is lot to report there I mean it just on a couple of months as you point out. So we are putting together the plans and we've there is 12 up goes that we are going to bring back to this enhanced sales platform and we are still serve -- company here in the next couple of months. And but we are in target from plan standpoint we put the teams in place and that great coordination between the operating side of business and the BT side as well as share services. So early days but still very committed in a contract.

 

Vincent J. Sinisi:

Okay great thank you. And then just as a follow up maybe just going back to your private brand sales that had a nice increase this quarter. I know you mentioned obviously about the kind of the independent customers growth, volumes coming through but just in terms categories that you are seeing, kind of where do you thinks maybe some of the most opportunity is there and you know expansion plans from the private brands in general may be kind of where you see that the bigger change by a product standpoint?

 

Tom Bene:

This is Tom. I am not sure those necessarily any big changes by product and category, its a fairly developed side of our business, and so where I think it allows us to do is as we introduce new products through the innovation pipeline most of those are Sysco brands so that as maybe one new focuse area, and I wouldn't say that's necessarily in any specific category. I think the only other thing I'd say is that a lot of what we do in the produce space you heard me talk about the produce growth and this focus on fresh is in Sysco brand as well and that certainly that continued focused there, that growth that we are seeing in some of those areas are also driving some of this SYSCO brand momentum.

 

Vincent J. Sinisi:

Okay. Thanks very much Tom.

 

Operator:

Our next question comes from the line of Stephen Grambling - Goldman Sachs & Co.Your line is now open.

 

Stephen Grambling:Goldman Sachs & Co.:

Good morning. Thanks for taking the questions. Just the first on the trajectory of margins you had the single best EBIT growth I think in over, about a decade. As we think about deflation moderating and inflation potentially coming back next year.

How should we be thinking about the recent level of top-line flow through particularly if you see case growth momentum hold.

 

Bill DeLaney:

Hey Steve. Well first of all I wish I could tell you when we are going to cross over between deflation and inflation as we are pretty cautious in our comments that I think we have said that, we expected to last at least another quarter to be longer than that based on what we are seeing so I am not really sure when to make that call. As far your question goes that's one of those great questions is hard to answer even whether I am looking back or looking forward but I think if you go back and look at some of things that we said over the last several months and putting the three year plan together our hope here would be when we can return to a modern inflation environment that we grow the cases and at least hold margin flat maybe grow a little bit and that's the plan and that's going to take a light of cohesive execution which we are quite confident right now between ---- and Tom spoken ---- here little bit ago and continue to grow those local cases. So the key is the local cases and the mix we need to both grow both our local and corporate managed cases kind have that in the right ratio that will help us on the brand penetration and if we do that I think we will do mange our margins well.

 

Stephen Grambling:

Great thanks and as a quick follow up for Joel. When you say that you're going to be lapping this tougher fourth quarter I guess is that primarily focused on just the margins is there something else that we should be aware as it relates to top-line comparisons? Thanks.

 

Joel Grade:

No I'll start. Thank you. I think we had a pretty decent operating income quarter as well in Q4 last year so I think we are just rolling out that the comparison for this quarter and particular is a bit tougher than we have had over the last three.

 

Stephen Grambling:

Got you. Thanks so much I will jump back in the queue.

 

Operator:

And your next question comes from the line of Edward Kelly from Credit Suisse. Your line is now open.

 

Edward Kelly:Credit Suisse:

Hi guys congratulations on a great quarter. Question for you just from a top-line perspective obviously a lot of good strong momentum here in ----- case growth can you maybe just talk about sort of like where you are within sort of like the run way here whether it seen a penetration with existing customers have it ran in general and even new channels I mean there hasn't been not much talk about areas like retail for instance which I know something that's newer for you and may be the opportunities you see there. So I am just trying to figure out sort of like the sustainability of the momentum that you're seeing today.

 

Bill DeLaney:

Let me start, I think again on the momentum part of it there is a really, really nice quarter and we did a lot of good things and benefited from that. I think from the external standpoint there were some tailwinds that I don't think in plan every quarter in terms of some of the favorable weather comparisons and that kind of thing and we made the same little bit of softly out there right now in terms of what we're seeing in our business and in the industry. So I think there is the external aspect of that we can't to much to manage that, but I think obviously we're managing within that environment very well right now and we expect to continue to do that.

I'll get to your question here in a second, the key I really think is what Tom spoke to you earlier in the earlier question. In terms of sustainability it has to come from the book of business that we have today. In terms of our ability to do that. So certainly our ability to continue to full a pipeline with quality new account business and that may come from different segments to your point and we are doing something on the retail side and we have talked to fair amount about some good worked we've done over the last couple of years on the -- side in particular Hispanic we have some more opportunity there beyond Hispanic and within Hispanic the whole area is fresh and organic is an area that provides a lot of opportunities.

So whether it's a customer segment, private segments trends in the industry those are all opportunities for us that we are exploring and beginning to traction there. With that said for us to sustain what we've put up over the last several quarters and then particular this quarter, we need to continue to penetrate with our existing accounts that's the most profitable business for us bringing some new accounts from that quality pipeline and do a little bit better and we're starting to in terms of customers retention. So we need to do all of those things and the good news is we are doing those things right now. So I wouldn't over react to one quarter or another, but when you look at the year-to-date numbers those are well within the range what we've targeted for the three years and we remained quite confident that we can deliver that.

 

Edward Kelly:

And just add one follow-up for something that's kind of like quietly becoming the bigger part of your store I guess as if you look at your free cash flow year-to-date just kind of like before -- something like 50% I think based what Joel was talking about it maybe its more. But you always had good EBITDA growth CapEx now sort of trending below your forecast can you maybe just talk about sort of like where the cash free flow and CapEx sort of sits within you are focusing on in terms of improvement within that sort of like three years forecast and kind of like what we should be expecting going forward.

 

Bill DeLaney:

Let me start and Joel will give you color on it. One of the things we are very careful about meticulous about in terms of the three year plan was to lock in two or three key objectives that we have financially that we probably resonate with our investors and potential investors based upon feedback that we have got. So we locked in operating income growth and we also acknowledge that we would expect grow our EPS somewhat faster over that three year period when the operating income growth and we locked in our return investor capital and we sort of go out there for 15% obviously that was before the ----- deal, but we're on track today within the business as it's today at to hit you surpassed the 15%, once we close them Brakes deal we go to bring that and you give you some color the impact of that but we are very-very focused on return invest to capital and obviously they come together to your point in terms of free cash flow and EBITDA gross.

So, we don't have a particular delta target if you will free with that growth or free cash flow right now but, it's being strong here for sometime and we expect it to continue to be strong and in terms of how we're going to invest it, I think you'll continue see it's invested in the business. You're right we're little underway where we thought we would be on CapEx this year.

I think Joel, commented that we expected to be around $500 million for the year, it's about 1%, in any given year that could go up or down a little bit based on timing. But I think that 1% maybe slightly more every now and then is what you should expect there and we're going to continue to obviously we're going to be very focused on Brakes in the right way and even more focused on continuing to run the business here, as we have laid out.

So, --- I think you'll continue to see as investing the business by 1% CapEx increased the dividend --- probably not quite as faster the earnings go up continue look for good acquisitions and optimistically looking buying back shares. Joel?

 

Operator:

Our next question comes from the line of Zach Fadem from Wells Fargo. Your line is now open.

 

Zach Fadem:Wells Fargo:

Hey. Good morning guys. You called out some of the fresh categories in your prepared remarks that's specifically, produced and proteins, seeing to these categories tend to have more specialty competition particularly for local customers. First of all, would you agree that fresh is an area that you're taking share and I am curious how you think about this is a longer term opportunity just given your scale versus the specialty moment?

 

Bill DeLaney:

Yes, why I didn't jump in. The first of all it's hard to tell whether we are taking share but we are certainly seeing good growth in these areas. So we as you known we have our own specialty companies in these areas Fresh Point on the produce side and also a variety of specialty meat companies across the enterprise. But we are very focused on these categories and I don't think it's necessarily using for SYSCO but what we known is if we can perform well for our customers in this may be more challenging categories at times of delivering fresh meat and produce then that allows us to do the other things also do them well.

So we have had a focus on quality and making sure we always got the right product out there. We got a great program in place through our SYSCO brand around traceability which is also very important so we definitely believe that even as large we are we're able to complete in this space and we're continuing to focus on how we can be better everyday for our customers and so I think we feel good about our performance today if we like we can continue to grow in this area but it's an ongoing kind of day-to-day management of that business to be successful.

 

Zach Fadem:

Got you. And just with the volatile inflationary environment right now, can you talk a little bit about pricing ---- for your MA's. How much economy do they have on pricing and can you talk a little bit about just your approach to extend it can to ensure that you aren't leaving money on the table yet still being competitive on price.

 

Tom Bene:

Well what I would say is that we still believe in pricing is local in this business for a local customers and so well they have some ---- through our revenue management work we're continuing to do a much better job of giving them kind of tools and process to ensure that we're competitive locally, but there were also managing the business.

So I would say we continue to believe it's important for them to have that flexibility for our customers. We want to make sure we're competitive on the street each and every day and we're trying to create the environment were we're doing that kind of together meeting the sales person and the company with both customers and our objectives in line.

 

Zach Fadem:

Got it. Thank for the color.

 

Operator:

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

 

Ajay Jain:Pivotal Research:

Hi, thanks for the question. I've been and wanted to get some clarification on your outlook for the operating expenses in the fourth quarter and for fiscal '17. So is $17 million still the right number based on your guidance for this year for total charges and if that is the right number is am I right in assuming that is you're looking like $10 million or $11 million in fourth quarter charges and then the same question for fiscal '17 are you still looking at I think that was the $130 million in charges for next year?

 

Joel Grade:

Yes I think this is Joe. We talked about on the when we talked about the couple of recent announces that we have had that we anticipated around $70 million for this year and around 130 for next those estimates still hold. So I don't that answer your question but those the numbers of what we talked about earlier we are still feel good about in terms of our as we look forward.

 

Ajay Jain:

Okay, and the severance is on top of those numbers in that correct?

 

Joel Grade:

There is an element of severance actually build into those number of AJ. So I mean we need some estimates in terms of severance really. Yes the 70 and 130 basically we are comprised the way I think about really four different things, it was onetime right off this year in this quarter which we've talked about in terms of the construction of the products right off so its accelerated depreciation, its severance and what we called conversion costs things that essentially are due to moving from the SAP system to enhanced version of SAP. So I would think about really is grouped in kind of those four of different areas as severance again we have severance as with -- part of that number for those years.

 

Ajay Jain:

Okay and I had one follow up question, I think its follow up to one of the questions that was asked earlier on the transition from deflation to inflation. So assuming that the there is some inflation that appears next year in fiscal '17. So I understand the gross margin percentage increases when you have deflation but would you see there is also some underlying benefit when you are seeing your cost of good going down -- going down over the past two or three quarters both from Q1 deflation. So would you say its possible that your input costs are going down at a faster rate that you're passing some of your broadline customers and does any of that benefits start to get offset as you start to deal with inflation again whenever that happened?

 

Bill DeLaney:

Yes. There is an element of that AJ and there is -- like others and then there is an element of that obviously in our business we returned to inventory of 20 days. Its you can't hold their prices for to long given the competitive environment that we're answered with the Tom's earlier point we are ways trying just the accurate balance with what customers needs are so that certainly part of it. But I would also you say that I am not big fan of deflation so I think the longer goes the more challenging it becomes people start to expect prices continue go down so its not good place to be but its expandable I mean a lot of it.

The way we kind of got here is the certain play these protein categories are flat to now down, where as a year 18 months ago they were up double-digit and the rest of the categories are roughly flat maybe up a little bit or down a little bit. So its primarily being driven within protein area and that's what, that it's the area that you were up a largely close in terms of when we come out.

But I would just that go what I have said for years and I think with SYSCO even longer than that. The best environment for us and for our customers is when you have a moderate level inflation ideally across multiple categories 2% to 3% whatever. And I would say it gets more challenging if you go towards the 5% or 6% inflation we have seen that and it's certainly challenging over the medium term when you have deflation.

So bottom line, I feel really good about how we are managing that, I think a lot of these commercial initiatives I spoke to earlier and as Tom as spoken to have come at just a right time in terms of managing through this process and yes there is some short terms benefits with deflation to your point but medium to long term not where we want to be

 

Joel Grade:

And I would just ad one thing if I could it's Joel. Just as a reminder the way it impact our financials there is some margin benefit to that however the ultimate lead to dollars on the gross profit side will go through our ---- when we have deflation typically so that certainly the headwind for us just as reminder of that.

 

Ajay Jain:

Okay and one final question if I could ask. Since you called out the Easter calendar share in your prepared remarks can you quantify that at all in terms of sales impact.

 

Bill DeLaney:

No. I don't think the Easter thing we called it out just because it was but Easter my experience is not quite as big the as it used to be years ago so many hours bigger factor is as mothers' day but it was a factor. I think the weather is a bigger factor. Ajay. I think you have to when you look at the delta in the case growth to be great to thank it was all us but I think part of it I think was driven by just a pretty ---- winner in most of the markets that we serve.

So to me that was a bigger deal than any holiday.

 

Ajay Jain:

Great thanks.

 

Operator:

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

 

Mark Gregory Wiltamuth: Jefferies LL

Hi good morning. I wanted to get a gauge for how big the pressure was from those oil related states how bigger that is that is that for you overall mix of sales and when do you think it will start lapping out of that?

 

Bill DeLaney:

I have no idea when we're going to lap out of it just like I can predict we're going to move for deflation to inflation. Yes we haven't the thoughts like that publicly. I think again we're making an effort here to give you our perspective what's going on as it impacts as field impacts.

So I think and the good news on the tailwinds side of it there is some flow we believe at the consumer level it's hard to quantify that from what we see but certainly is enhancing discretionary income and the prices start to pick up here little bit of late, it is certainly help us on our cost structure out of that we've managed cost extremely well outside of that impact and we're just pointing out that the down side of it is in good portion of the South West as well as you get up ----North Dakota and ---- Canada it goes the other way. So it's meaningful in those markets and I think it if persist and becomes a more meaningful number we will probably we'll give you some color on that but right now we haven't.

 

Mark Gregory Wiltamuth:

Okay so what you think the primary factors are that kind of give you your better performance on a local case volume trends versus these disappointing results we're seeing on a net track as some of the other casual branding metrics.

 

Bill DeLaney:

Mike that's the hard question for me to answer. As I can speak to our performance and I think our performance comes from yes continuing to differentiate ourselves relative to our competition and that remains a very competitive market place and so time spoke to the penetration and that's big and as well as improved retention. Obviously as I said now two or three times and as we have said really since there has been a Sysco that local case growth and street case growth is a key focus for us, where the some of the data that your siding there is more change driven. So I think there is a little bit of customer mix reconciliation there as well.

 

Mark Gregory Wiltamuth:

Okay. Thank you.

 

Bill DeLaney:

Sure.

 

Operator:

Our next question comes from the line of John Ivankoe from JP Morgan. Your line is now open.

 

John William Ivankoe:JP Morgan:

hi great, Thank you. Firstly can we talk about your digital as a percentage of sales either in Broadline or local case volume just kind of where that is and if you I don't remember I am sorry if you have if you publically stated where you think that can go let's say nu 2018 and the implication of that may of your business.

 

Tom Bene:

So we haven't talked about where we think it can go. We have talked about is that our approach here is to provide the options to our customers they order in whatever manner they choose and so we continue to believe that's the right approach and we feel great about our marketing associates and the work they have been doing. We know that we need a good vital online system and that's we have been rolling out for our mobility platform and obviously we still have orders that are placed in other means you know called in or faxed in. Having said that we continue to feel about the work we are doing the mobility piece I think about mobility as more the handheld or the iPad, iPhone type of or android device. We obviously have desktop and so our as I think we've said before our online purchases are still relatively small and street just slightly under 10%. So, but growing and we feel really good about the progress we are making there but we haven't take the number uncertain desk as we really believe that's going to find its kind of level placed based on what the customers needs and expectations are.

 

John William Ivankoe:

And thank you and secondly, is there any application at all if the UK lease that you in terms your Brakes acquisition in other words, Brakes which has operations in a UK and EU on are they completely separate and would that have any impact on your business at all?

 

Bill DeLaney:

Well hard to access at this plan, and there will be the impact John can be an impact in Europe obviously in the UK and particular right. So hard to me to tell at this point where we are with Brakes to give you any specific color on that. So we're watching it and we're certainly where we are breaks it when we entered into those discussions. So, I don't I just there is no point in conjunction and I think we just have to watch wait for the vote and see where it goes.

But again just in this country people going to go up and we've very-very fortunes we're getting ready to close to transaction with very well respective strong company with the great leadership team that's go lot of good things going on. So, we'll deal with whatever comes there, but right now I think we're very excited about the about the team that we're going to inherent.

 

Tom Bene:

Yes. I'll just add just deserve by and we were in the thing for the long howl I mean that's we look at that, that deal is very much part of our long term value creation and so again as Bill said we certainly knew that was out there and when this is but we are in this we're certainly in this for the long term .

 

John William Ivankoe:

Thank you.

 

Operator:

Our last question comes from the line of Erin Lash from Morningstar. Your line is now open.

 

Erin Lash: Morningstar:

Thank you for taking the question. I just wanted to follow up on an earlier discussion regarding CapEx I got the impression that the reduction for this year was related to more timing issues and that would potentially flowing to next year so if we could confirm that and then also as it relates to the Breaks deal and I realize that the deal has not closed yet but the extend to what you can provide on some of your initial expectations in terms of whether there's going to need to be a step up in CapEx as you bring that business online that would be very helpful?

 

Joel Grade:

Sure it is Joel. I think that the CapEx commentary I mean there was there is some element of timing in that but I wouldn't say a lot so I mean I wouldn't think about that there is some despite next year result that is Bill talk about we certainly see this area around 1% of sales from CapEx being at very normal and reasonable number for us and we've got very disciplined process for the way we manage that and based and then needs of our business and so there is some element of timing in that but again I wouldn't expect something significant changing moving forward on that and then from a Breaks perspective the one thing I think we've talked about is that in general area this company's is been well invested in and so certainly as part of the modeling we did for this deal we factored in some level of CapEx as you would expect but again I think the level there anticipating in level we are relatively in line. So I would certainly again anticipate, we'll give some more clear guidance on that once the deal has done but just at a high level I think we are getting pretty well invested place and look at CapEx in relatively in a similar way that we do.

 

Erin Lash:

Thank you that's very helpful and then just following up at the CAGNY conference earlier this year you discussed that the challenges facing the oil industry were actually benefiting you in terms of your facing some of the truck drivers shortage issues that had added to your cost over the last few years and I wondered if you could discuss that whether you still seeing a benefit in terms of an enhanced pool from which to a truck drivers whether maybe some of that benefit has been moderating.

 

Bill DeLaney:

Yes I think we are I mean I think in the markets that we struggle in the year ago 18 months ago we certainly have close the gap there. Now some of those challenges were soft inflected we've gotten better on the ---- acquisition side as well over that period of time. So if we were in the business of hiring truck drivers we have been in a better place right now I would have trade off so I will take the business and struggle with hiring truck drivers but to your specific question that certainly has mitigated or muted over the last several months and it's a not a real bid issue for us right now.

 

Erin Lash:

Thank you very much I appreciate that.

 

Operator:

There are no further question at this time. I will turn the call back over to the Presenters.

 

Neil Russell:

Okay thank you very much everyone we appreciate your time today.

 

Operator:

This concludes today's conference call. You may now disconnect.

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