Sysco Corporation

Neil A. Russell - Vice President, Investor Relations, Sysco Corp.

William J. DeLaney - President, Chief Executive Officer & Director Robert Chris Kreidler - Chief Financial Officer & Executive Vice President

Edward J. Kelly - Credit Suisse Securities (USA) LLC (Broker) Ryan J.

Gilligan - Deutsche Bank Securities, Inc. Vincent J.

Sinisi - Morgan Stanley & Co. LLC Mark G.

Wiltamuth - Jefferies LLC Meredith Adler - Barclays Capital, Inc. Kelly A.

Bania - BMO Capital Markets (United States) John E. Heinbockel - Guggenheim Securities LLC Andrew Paul Wolf - BB&T Capital Markets Ajay Jain - Pivotal Research Group LLC John William Ivankoe - JPMorgan Securities LLC

Thanks, Don. Good morning, everyone, and welcome to Sysco's fourth quarter and full-year fiscal 2015 earnings call.

Joining me in Houston today are: Bill DeLaney, our President and Chief Executive Officer; Chris Kreidler, our Chief Financial Officer; and Joel Grade, our Chief Accounting 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 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 28, 2014, 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 applicable GAAP measures are included at the end of the presentation slides and can also be found in the Investor's section of our website. All comments about earnings per share refer to diluted earnings per share unless otherwise noted.

In addition, all references to case volume include total Broadline and SYGMA combined, unless otherwise noted. To ensure that we have sufficient time to answer all questions, we'd like to ask each participant to limit their time today to one question and one follow-up.

Finally, we will be hosting an Investor Day on September 15 in New York and look forward to seeing some of you there. At this time, I'd like to turn the call over to our President and Chief Executive Officer, Bill DeLaney?

Thank you, Neil. Good morning, everyone, and thank you for joining us today.

Sysco's financial results announced this morning reflect a year of solid operating performance, an excellent progress in several key initiatives that have begun to provide a strong foundation for value creation. Our favorable operating performance was driven by providing our customers with exceptional service, growing our business with both locally and corporate-managed customers, and stabilizing our gross margins.

For the year, we achieved record sales of $49 billion, an increase of 5%. We grew our adjusted operating income and earnings per share by 3% and 5%, respectively.

We generated $1 billion in free cash flow. We earned a return on invested capital of 13% on an adjusted basis.

We increased our dividend for the 46th time in our history and distributed nearly $700 million in dividends to our shareholders. In addition and subsequent to the end of our fiscal year, we announced a $3 billion, two-year share buyback program that will more effectively leverage our strong balance sheet and return additional capital to shareholders.

It is important to note that these accomplishments were achieved with minimal disruption from the U.S. Foods merger planning and litigation processes that continued throughout the entire fiscal year.

And I'm extremely appreciative and proud of all of our associates who performed so well on multiple fronts. Moving to our performance in the fourth quarter, we are encouraged by the following; we generated case growth of 3.6% in our Broadline business.

Gross profit grew 3% in an environment with no food cost inflation and gross margin expanded by 35 basis points compared to prior-year. Expense management trends improved from earlier in the year, and our cost per case in our North American Broadline operations was essentially flat compared to the prior-year on a constant currency basis.

Key drivers of our improved operating performance for both the year and the fourth quarter were following: increasing acceleration of local case growth; effective implementation of our category management process; improved Sysco brand penetration, especially with locally managed customers; significant progress in developing and growing our offerings for the Hispanic customer segment; collaborative and mutually beneficial joint business planning processes with a small, but growing number of corporate-managed accounts. One other meaningful factor that impacted our financial results was the degree of volatility and food cost inflation.

We experienced nearly 5% food cost inflation during the first three quarters of 2015 and we managed it very well. However, food cost inflation in the fourth quarter was essentially flat, which unfavorably impacted sales and gross profit growth.

Early trends in fiscal 2016 are similar, and we expect this to be a modest sales and gross profit headwind over the next quarter or two. We are committed to mitigate as much of this pressure as possible through ongoing gross margin stabilization efforts and improved expense management.

Moving to market and economic trends, as I speak to you today, the data is mixed. Consumer confidence and the outlook of food service operators are at historically high levels, but have slipped somewhat in the summer months.

Fuel prices at the pump remain at historically attractive levels, which should support higher consumer spending moving forward. Restaurant spend is up, but traffic is generally flat.

Overall, the market environment appears to be modestly improved from a year or two ago, but it is unclear what the go-forward trajectory for the industry growth is over the next several quarters. Whether the overall industry grows over the next few years at 1% real growth, consistent with the past few years or closer to the 2% in Technomic's recently released five-year forecast.

We at, Sysco, will continue to differentiate our products and service offerings in a manner that will allow us to both profitably grow our market share and provide an improved return on invested capital for our shareholders. I will offer some additional color in our future opportunities after Chris shares his perspective on our financial results for the year and the fourth quarter.

Thanks, Bill, and good morning, everyone. I'd like to begin by providing some highlights of our financial performance in 2015.

Then, I'll discuss our results for the fourth quarter, and I'll close with some guidance for fiscal 2016 around a few metrics. For the year, sales gross profits and adjusted operating expenses all grew about 5%.

Sales and gross profits benefited from high food cost inflation in the first half of the year, but were constrained in the back half as that inflation moderated and eventually disappeared. Expenses were growing too fast early in the year, but were being supported by high gross profit growth.

Expense growth moderated in the back half of the year, especially in the fourth quarter. Our adjusted EPS also grew by about 5% this year.

One thing to note is that our diluted shares for the year increased 1.1%, because we did not repurchase shares while the merger was pending as we typically would have done. If we had held our diluted shares flat, it would have added approximately $0.02 to our adjusted EPS and 1% to our EPS growth rate.

We achieved several of our objectives during the year. We exceeded our final three-year target for annualized business transformation benefits.

Our successful implementation of category management helped to enhance gross profits and mitigate gross margin pressure. For the year, gross margin was flat compared to 2014, after declining in each of the last four fiscal years.

We continued our prudent management of capital expenditures with net CapEx of $518 million falling well within our guidance range of $500 million to $550 million. We recorded another year of significant growth in free cash flow on an adjusted basis, which grew to $1.3 billion, up 22% over the last year.

With regards to cost per case, we achieved our revised goal of limiting the increase to $0.05 to $0.10 for the full year. Actual cost per case increased $0.09 per case for the full-year on a constant currency basis and decreased $0.01 in the fourth quarter compared to the same period last year.

It's important to note that our original objective, when we started the year, was to hold cost per case flat for the year. Because we didn't achieve our original goal, we also did not achieve our goal of growing operating expenses slower than gross profit for the year.

As the operating expenses were up 4.8% versus a gross profit increase of 4.5%. However, we were able to improve our cost per case performance in the second half of the year and achieved our goal in the fourth quarter, where operating expenses grew by 2.2% compared to gross profit growth of 3%.

Let's turn our attention now to our fourth quarter results. Year-over-year sales growth decelerated to 9% as food cost inflation declined significantly from 5.4% in the first half of the year and 3.7% in the third quarter to flat in the fourth quarter.

During the quarter, we saw relatively modest inflation in the meat, poultry and frozen categories; but produce, seafood and dairy were deflationary. Changes in foreign exchange rates continue to have a much larger impact than usual in the fourth quarter.

The strengthening dollar depressed our foreign sales as we converted them to U.S. dollars, and as a result decreased sales by 1.4%.

Acquisitions increased sales by 0.4% in the quarter. Broadline and SYGMA case volume grew 2.2% during the quarter including acquisitions and 1.9% excluding acquisitions.

This result includes a decline in SYGMA's case volume as we work to optimize that business. Broadline case growth, which excludes SYGMA, was 3.6% reflecting our solid performance with both locally and corporate-managed accounts.

We are especially encouraged that local case growth in our U.S. Broadline business has grown sequentially in each of the last five quarters.

Gross profit in the fourth quarter was $2.2 billion, a 3% increase, while gross margin increased 35 basis points to 17.9%. Our U.S.

Broadline business was responsible for the majority of this increase, driven by a stronger relative mix of sales for our locally managed business, benefits from category management and a very effective national promotion for our Sysco-branded products. Case growth for our corporate-managed customers remained strong, but competitive pricing in this segment pressured overall gross margin.

Expenses for certain items in the fourth quarter totaled roughly $430 million, almost entirely related to the termination of the U.S. Foods merger.

This included non-cash accruals for the two breakup fees paid to U.S. Foods and PFG totaling $313 million; $67 million in litigation fees and other integration planning expenses, interest on merger debt of $41 million, and then $11 million write-off on merger integration capital.

This was capital we spent on projects that would only be useful if the merger was completed. The vast majority of the merger-related capital we spent will benefit the company as we move forward.

We've included a table in our slide presentation to show the expense impact of these items. I will provide more details about the impact to our 2016 financials in a few minutes.

Adjusted operating expenses for the fourth quarter increased $36 million or 2%, mainly driven by the impact of higher case volumes, which increased our payroll and more specifically incentive compensation accruals. As I mentioned earlier, we made progress in reducing our cost per case during the quarter.

Cost per case was down $0.01 on a constant currency basis and down $0.07 when we include the impact from foreign exchange translation. Adjusted operating income for the quarter was $509 million, up 5.8% from the prior year.

And adjusted operating margin was 4.1%, up 19 basis points from last year. Turning to other income, there was an $18 million increase from last year, mainly driven by accounting for our JV transactions, where we consolidate 100% of the JV's results above the operating income line and then back out the non-controlling interest in other income/expense.

Our tax rate for the quarter was negative, primarily driven by the merger termination fees. Adjusting for these fees and other certain items, our tax rate for the quarter would have been closer to 38%.

Adjusted net earnings for the quarter increased 5.7% to $309 million, and adjusted EPS increased 6.1% to $0.52. Cash flow performance for the year was again very strong.

Cash flow from operations increased $63 million to $1.6 billion, while free cash flow increased $42 million to $1 billion. Both operating and free cash flow reflect the negative impact of two items.

First, the cash impact of certain items was $231 million in fiscal 2015, mainly due to merger-related expenses. Second, as we disclosed earlier this year, we made a $50 million pension contribution this year compared to none in the prior-year period.

This difference is simply driven by different timing regarding when we make cash contributions each year. After adjusting for these items, free cash flow was $280 million higher, or $1.3 billion in fiscal year 2015.

Capital expenditures for the year net of proceeds from asset sales increased $21 million to $518 million, well within our guidance and internal budgets. During the year we significantly increased our investment in business technology as we were planning for the merger integration.

While the vast majority of these additional investments will benefit the company, even without the merger, we wrote off $11 million, as I mentioned previously. We were pleased that our adjusted ROIC grew 70 basis points to 13.1% in fiscal 2015, reflecting the continued prudent and disciplined investments in our business and solid operating performance during the year.

Finally, a housekeeping item to point out in our segment reporting; we have reclassified our specialty meat company results out of the Broadline segment and into the Other segment, as these operations are no longer reporting to our Broadline leadership. We've provided a schedule in the earnings release this morning to show the quarterly and full-year impact of this reclassification to both fiscal 2014 and 2015.

Looking ahead, I'd like to provide guidance for a few metrics to set expectations for the coming year. First, fiscal year 2016 will be a 53-week fiscal year for us, with the extra week falling in the fourth fiscal quarter.

Second, as Bill mentioned, we are starting the year off with little to no food cost inflation, which will create a modest sales and gross profit headwind over the next quarter or two. Third, we will recognize additional merger-related expenses totaling $95 million in the first quarter of fiscal 2016.

These will include: $50 million related to the payment of the 1% call premium on the merger debt, which was redeemed in July; a $29 million write-off of professional fees related to the issuance of the merger debt; an $18 million write-off of the bond discounts on the merger debt; a $10 million gain on the termination of the interest rate swaps we put in place upon issuing the merger debt; and $8 million in interest expense incurred leading up to the July 14, 2015 redemption of the merger-related debt. These amounts will all be classified as certain items in the first quarter.

The negative cash impact of certain items during the first quarter of fiscal 2016 will total approximately $350 million, including: $313 million reflecting the payment of the break fees accrued this quarter; $500 million for the bond redemption premium; partially offset by approximately $15 million in proceeds related to the gain on the termination of our interest rate swaps. Fourth, we expect to issue $2 billion in new debt around the end of the first quarter to fund both the accelerated share repurchases announced previously as well as term out a portion of our commercial paper facility.

Adjusted interest expense for 2016 will be significantly higher because of this. Additionally, prior to issuing our merger debt in October of 2014, we entered into swaps that locked in a portion of the interest rates.

These swaps were settled in fiscal 2015, and we expect to amortize about $10 million of that interest expense in fiscal 2016. The share repurchase program we announced will positively impact EPS in fiscal 2016.

Because of the timing of the buyback implementation, we don't expect to realize a full year's benefit from the reduction of shares in fiscal 2016. We anticipate a benefit of approximately $0.03 to $0.04 to diluted EPS in fiscal 2016, driven by a 4% to 5% reduction in average shares outstanding, partially offset by higher interest expense on the new debt issuance.

In fiscal 2017, we would expect to capture the full-year impact of this buyback on an annualized basis. Fifth, with regards to taxes, a normalized tax rate for Sysco would typically be in the range of 36% to 37%.

And lastly, our forecast for capital expenditures, net of proceeds, for asset sales is $550 million to $600 million for fiscal 2016. Now, I'll turn it back to Bill for closing remarks.

Thanks, Chris. While pleased with our progress and accomplishments in fiscal 2015, we recognize that there's still much work to do, if we are to fully realize our vision for Sysco to be our customers' most valued and trusted business partner.

The good news is that we have a sound strategy that is predicated on profoundly enriching the experience of doing business with Sysco, enhancing productivity and innovation in all aspects of our business, attracting and developing the best people available and exploring opportunities for growth within and beyond our core business. The better news is that we have begun to realize the benefits of several years of transformative change to our business through a portfolio of strategic business initiatives.

And the exciting news is that we are now beginning to embed these initiatives in how we do business each and every day by putting the customer first and working cohesively as one Sysco. Following the termination of the U.S.

Foods merger agreement and utilizing the knowledge that we have acquired through our ongoing customer insights work, we have begun to update our three-year strategic business plan. Specifically, we see opportunities to further accelerate our case growth, especially with locally managed customers through more impactful product and service differentiation together with enhanced sales and technology capabilities.

We also believe that we can build upon our recent success in stabilizing gross margin through enhanced product innovation, growing our Sysco brand sales and improving our pricing analytics and support. In addition, we see significant potential to improve our productivity and reduce overhead costs throughout our supply chain organization and in the administrative areas of our business.

We will continue to invest in our business to fully realize these benefits and improve our return on invested capital over the next three years as well. We'll discuss these plans in more detail including financial impacts at our September 15, Investor Day.

Lastly, as most of you know, this is Chris' last conference call with us. I'd like to thank Chris for his numerous contributions to Sysco over the past six years, and all of us at Sysco would like to wish Chris and his family the very best as they move forward.

We also look forward to welcoming Joel into his new role in working with him as our CFO. And with that, operator, Chris and I will now take questions.

Hi, good morning, guys.

Hey, good morning, Ed.

Could we start with the cost control side? Your operating expense growth is better this quarter than it's been in a while, actually and congratulations on your flat number per case.

Can you provide a little bit more color here on, basically, I guess, what you're doing within the business? And then Bill, not maybe to steal too much thunder from the Analyst Day, but when you talk about significant potential to improve productivity and reduce costs, could you maybe give us a little bit more insight into what you mean there?

We won't steal too much thunder from Investor Day, so don't worry about that, Ed. I think on the cost side, the way I look at our numbers is, those of you who follow us know, I look at them in terms of what are the key things we look at here?

Volume growth, in particular, relative to the market, and within that volume growth it's very important that we see good local case growth, and we've seen that here over the last several quarters. We need the contract business as well, but we need that local business to grow as well to drive profitability.

And then I look at operating income growth, operating income is always going to be not just mathematically, but just from a business perspective, it's going to be a by-product of the environment that we're in. And at times, sometimes the gross profit will grow faster and sometimes the expenses will grow a little bit slower.

And so, I think, any given quarter there's always things that move around that could impact the numbers. So, I think as you look at the year, I think I would say to you that basically what we said in the prepared comments, we're pleased with what we saw in the fourth quarter on the expense side, in particular, in the supply chain side of the business and really the business itself in the field, where we had flat cost per piece.

Now for the year, we didn't. We were up almost a dime, and I would say to you we need to bring that number for the year back down into that flat – up a nickel zone.

I'm not saying that we will or we won't, I'm just saying that that's kind of where the numbers ultimately need to get to, to drive the earnings growth. So, our plan to go to your earnings, to your Investor Day, Ed, our plan is to become more consistent in terms of how we do that and to take the quarter we saw here in the field and to begin to put that up quarter-after-quarter.

Now with that said, I also said that we're going to continue to invest in the business here in terms of things that will drive some of the commercial initiatives that are really panning out for us now, both on the growth side as well as the merchandising side. So, it's always going to be a mix, I think, of timing of investment relative to what you think the value of it is.

And bottom line, I would say, there's some things in the fourth quarter, for example, bad debt. We had an exceptional year of bad debt this year, knock on wood, please.

So, that benefited our fourth quarter numbers as well as the year to some extent. So, I would say that somewhere between that 2% growth and the 4.8% is where we need to get to.

And I would say to you in terms of Investor Day, I think what you're going to hear us say there Ed, is we're running a business here. It's very important that we accelerate our case growth.

We see opportunities to do that, especially on the local side, that needs to turn into leveraging our operating income, which we did here in the fourth quarter, and we were up for the year. So, I look at the fourth quarter as hopefully a proxy for what we can do next year.

Quarters are going to have their own unique volatility, and I would think that you'll hear a message from us that says that we have opportunity on all sides including the cost side. But, the big opportunity here is always going to be for a company with our capabilities, with our footprint, with our people and with our technology today to grow faster than the market and to do that profitably and to provide a good return on capital.

So certainly, opportunities for cost reduction, they are significant, it'll take some time for that to play out, and we will talk about that more in Investor Day. But I don't want to leave this question without emphasizing how important it is for us to grow the business as we did this quarter.

I mean, this is a quality quarter for us both in terms of growth, leverage, and the mix of that growth. And I think that's really what you're going to hear at Investor Day.

It takes all facets of our business to be in sync for us to go where we want to go.

Great. Thank you.

And I'll let some other guys go on.

Hi, good morning. It's actually Ryan Gilligan on for Karen.

How would you guys characterize the competitive environment now that the deal is behind us and inflation is moderating?

I don't think the competitive environment has changed that much at all. I mean, there's still plenty of competitors out there of all types as we've talked about in great detail here over the last year or two.

So, I would tell you, I think competition is very, very acute. In the short-term, the way I would look at inflation, we have for years said and truly believe that the optimal range of inflation for our customers, and for us, is probably in the 2% to maybe 3% range.

That's a level that typically our customers can pass on and do pass on, and generally that's a level that the consumer will accept. So, when we're in those levels we're able to have the best of both worlds, if you will, in terms of a little bit of a tailwind on inflation at the same time.

It doesn't hurt demand to any large extent. We very seldom find ourselves in that zone, and right now, we find ourselves in a zone where there's little to no inflation.

As we said, there's some modest inflation and some modest deflation in the categories. So, I think the way I would look at that is, it's a little bit of a better environment right now in terms of our customer being able to manage their business, and when our costs aren't going up that much, obviously we don't have to raise our prices as much.

So from that standpoint, it probably does help in terms of case growth, but in terms of the competitive environment, I don't really think it changes that at all.

That's helpful. Thanks.

And then maybe, could you just talk about your labor cost outlook and if you think maybe there'll be a battle for talent going forward as U.S. Foods rebuilds its sales force?

Yeah. We'll talk more about labor cost, I think on Investor Day.

But generally, we've got 50,000 people out there and they generally get raises every year. And our whole goal as I was speaking to in Ed's question is, the closer we can get to improving our productivity every year in sync with the labor increase, the better chance we have of keeping that cost per case in that zone that I discussed earlier.

I don't know that I would – look, good people are always in demand in this industry, and we have a lot of good ones. And so, our people are always going to have opportunities.

I would tell you our retention has improved here in recent months as we've kind of matured in a lot of our transformation work, and I don't expect that to be a big issue for us in terms of retention. But, we work hard every day to provide our people with good careers, and we work hard every day to make sure that we're retaining our best people.

Hi. Good morning.

Thanks very much for taking my question, and Chris, best of luck to you.

Thanks.

Wanted to ask, you mentioned about some of the technology investments that were made in preparing for when the merger was a possibility. Can you just give a little bit more color in terms of how that does play in with some of your former initiatives that you've been continuing to execute on and kind of what we can expect going forward?

I think, Vinny, the biggest that you can expect, and we will talk more about this at Investor Day as well, is while there's been tremendous emphasis, and appropriately so, on implementing SAP and where we are in that, we've kind of turned the corner there. So, on the one hand we've stabilized that system.

We've improved the processes and we're moving more toward a modular rollout approach as opposed to an OpCo multi-modular rollout. And we're starting to see some good success there.

And the most recent example would be in our inventory replenishment system, which internally we refer to as DPR. So, in terms of the base core business, I think we're in a more steady state and mature place there.

We're running the business. We're running it well.

We'll continue to improve that. But I think where you're going to see us go – and this is not so much a learning, but just a point of emphasis that came out from a lot of the planning work, is that we need to accelerate some of our work on the online mobile platform area.

And we've got some things going on there that are very encouraging, and we will talk more about that. So anything we can do here to make it easier for our customers to order and order when they want to order and for our MAs to facilitate those orders would be a very high priority.

Great. Thanks, Bill, and just one other quick follow-up, if I may.

In the prepared comments, you had mentioned about working specifically on the corporate managed front. Anything just to call out there?

I think the one thing I did call out is this joint business planning approach that we've taken, and it really requires a different approach to doing business because it does require more transparency. It requires a commitment that needs to be a win-win for both organizations and we're at that point.

Over the last several years, we've worked very hard with all of our customers. But on the contract side, the large contract side, we're certainly trying to utilize our supply chain network and our footprint to optimize getting product to their facilities and to their restaurants in the most cost-efficient way possible.

But there are some limitations to that until you really sit down and open it up a little bit more in terms of what each organization is willing to do. So what I'm getting at there is where it makes sense, and it's not always going to make sense.

It depends on the nature of the relationship and the strategies of the respective companies. But we are starting to see some really nice progress with a couple key customers in particular, where by working together, we're able to reduce their costs and also reduce our costs at the same time, and – this is really the most important part – find ways to grow the business together.

So more to come, but that is something that we've been working on quite a bit the last year or two years.

Okay, very helpful. Thank you.

You're welcome.

Hi, thank you. I wanted to ask about the SYGMA decline in the quarter.

It was down 8% on sales. If you could, maybe talk about how that impacted the gross margins because the mix there has changed and obviously SYGMA is one of your lower margin businesses.

How much did it help the gross margin?

How much did SYGMA help the gross margin?

No, the fact that that's down, so the mix is lower there for SYGMA.

Okay, I'd say for the quarter a very, very modest impact, but probably some. I think to your broader question, SYGMA is in somewhat of a turnaround situation right now.

We've got new leadership there at the top, Greg Keller, who knows that business very, very well. And this is a year where we went through some changes with customers.

There was some business that we lost that we didn't want to lose. There was some business that we transitioned because it was the right thing for us and the customer.

And then there was some business where we had to adjust our pricing, which hurt our margins somewhat. So there's a little bit of everything going on there.

We also had some expense challenges there that we're working through. So this was not a great year for SYGMA, and I expect it to improve here as we go forward in the new year and in the following years.

I would say overall, we're trying to optimize that customer base in a way that obviously needs to work for the customer as well as us. And I think you'll see some more of that next year, but I also think you'll start to see improvement next year – excuse me, in the current year.

Were there notable losses that we need to carry forward as we model out Sysco in future quarters?

I'm not getting into specifics, but I would look more at the fourth quarter than the first three quarters probably.

Okay, thank you.

Sure.

Thank you for taking my question. Can you hear me?

Yes.

A quick question just first. You used to talk about street business, and now you're talking about locally managed.

Do you think you could just tell us what the definition is? Is locally managed the same as street business?

So, Meredith, that's a great question. It's one of those questions we get from time to time.

So no, it's not the same, but it's very close. What we did – this is about three years ago, Meredith.

We changed our terminology internally to, frankly, bring a little bit more clarity and accountability to the ultimate responsibility for these customers. So locally managed business is business where the customer generally – and there are exceptions to every rule in Sysco – but generally the customer, the decision-maker of that customer is proximate; i.e., within the selling radius of that local operating company.

So there's a high percentage of street business, but there's also a fair amount of what we call local contract business. And these would be chains.

And they could be of different sizes. They could be local chains.

They could be somewhat regional. They could even be across regions, and that's why I say there are exceptions.

But, in our world, it's street business plus what we call local contract. And then corporate-managed business is your very large regional chains and your national and international customers, for that matter, where the relationships are largely managed from corporate here and generally with the customer.

And then obviously, our operating companies are responsible for handling those relationships locally with the units and servicing those accounts. So that's as clear as I can make it, and there is some fuzziness there in the local contract.

But the key is really how we look at the business and it's how we sign primary accountability for these customer relationships.

That makes sense. I just wonder when you talk about growth in the locally managed business, you could be talking about either small chains or business where it's contracted or business when you actually call on the customer.

So the growth you talked about, is that coming from both kinds of locally managed business, or is there more growth in the independents?

I'd say it's coming from both kinds. This happened to be a year where we actually lost a couple of very large local contract customers that were spread across multiple OpCos, so that's in that fuzzy category, which we call them local contract because the history of those relationships is local, but they cross over multiple OpCos.

But I would say generally and even currently that growth is coming from both.

Okay, and then I just had one other quick question. I did notice that D&A was much lower this quarter than the recent run rate or lower than last year.

Obviously, fourth quarter is a true-up period. Is there anything to comment on?

And when you talk about cost per case, do you include D&A in cost per case, or is that just simply a corporate item?

D&A, are you saying depreciation and amortization, Meredith?

Yes.

Go ahead, Chris.

So depreciation and amortization to the extent that it applies to business technology, we would capture that at the corporate level. To the extent it applies to something that's at the local level, it's captured within cost per case because it's applied at the local level.

Generally, I don't think there's anything especially to call out this quarter about the change in that number. As you pointed out, there are some true-ups that occur at the end of every year.

We've had probably more than last year than we had this year, so that's going to help your growth rate a little bit. But in general operating costs were much better managed this fourth quarter than last fourth quarter.

The number we cited up $36 million happens to be the amount of the increase and incentives for the quarter as well. So, to the extent it went up, it went up for the right reasons.

We were selling a lot more cases and rewarding people accordingly.

And so the lower growth in case cost in this quarter wasn't particularly due to D&A?

It was a part of that mix, but there was no significant amount attributable to that, no.

To Chris's point, there wouldn't be a lot of amortization in that cost, but there's certainly a lot of depreciation in that number.

There is, to the extent that at the field level, that's exactly right.

Right.

Okay, thank you very much.

Sure.

Thank you.

Hi, good morning. Thanks for answering my question.

Just wanted to talk a little bit more about gross margin. You called out some of your initiatives, a little better growth with some of the local accounts.

But, if you just step back, how helpful was the flat food cost inflation, and where do you think gross margin has really stabilized at?

I'm not sure I can answer the second one, but let me start with the first one, Kelly. So, look, I think it depends on whether you're talking about gross profit or gross margin.

I don't want to be too anal on this thing, but that's the reality of it. We pay our bills with dollars, so gross profit dollar growth is very important here, and we had 3% gross profit dollar growth, which was less than what you saw earlier in the year, but at a time when there's no inflation, that was pretty good and we were able to manage our expenses pretty well.

That's why I was saying earlier, those numbers are going to move around from time to time. Obviously, what we need to get back to more consistently is where that gross profit is growing faster than the expenses.

I think on gross margin, when you're in an environment where your costs are not going up, there's not as much pressure to obviously raise your prices. And that allows you to manage your margin percent a little bit better.

So, there's no doubt that that helped on the percentage part of it; but, again, we need to manage both. And after three years of talking about how important gross profit dollar growth is, I'm not going to sit here today and take a victory lap on gross margin.

I think it's good that it went up, but I think it's more impressive that we were able to grow the gross profit at 3% with very little if any inflation and keep our expenses below that. That will be somewhat challenging here, as we said, in the first couple quarters, but we'll continue to work at that.

And we'd like to get the gross profit growth back up in that four to five zone over time like we saw, but that will be somewhat driven by inflation. I think the corollary here, Kelly, is, when we have inflation, let's say higher than normal inflation like we saw, particularly in the first half of the year, that's where it's very difficult to – and at times not even appropriate – to raise your prices as fast as your costs are going up.

And so, when you have an inflation environment of 5% or 6%, it's highly unlikely that your gross margin is going to keep pace on a year-over-year basis there. So, it's math, but it's more than math.

It's the environment that our sales people work in, and it's basically what's the right way to treat the customer. So, bottom line, I think it helped on the margin, but it hurt on the gross profit this quarter.

As far as stabilizing, let's take it a year at a time, okay? So, we have a year here where we had essentially flat margins.

And I think what I should say or reiterate here, because we've talked about that inflation or lack thereof, I mean we did a lot of good things this quarter and this year. So, category management really matured this year and helped improve our margins.

We'll see some more benefit there in the new year. Not as much, but a trajectory the slope will flatten out a little bit.

Growing local cases is very, very important in this business. I don't think I can say that enough.

So, what we said here is, we now had several quarters in a row where we grew our local business. That's where we provide the most value, that's where we make the most money.

And we don't have to grow them at the same rate as the corporate-managed necessarily, but we do need to grow them. And I think that contributed significantly to the margin as well as the gross profit growth.

And then this quarter and really the year to some extent, we saw the brand rebound a little bit, and some of that was through some promotion work. Some of it's just the natural by-product of connecting it with our category management work.

And anytime we can utilize our private brand to create value, that's also positive. So, I think there's a lot of things that led to it, there's a lot of things we need to keep doing well and we have some good things going.

But, look, it is competitive out there, and I think if we can stabilize margins at this level we'll be very happy with that.

Thank you very much.

Bill, one of the things we've heard is that post the U.S. Foods thing not happening, the promotional environment's got a little bit more intense.

Is that fair? Is that what you're seeing?

And then how might that tie-in with this disinflation? And does this – so, we've gone from plus four to zero in a very quick period of time.

Does that breed more aggressive competition, right? Because everybody's COGS is going down and they can be aggressive without giving up a lot of margin?

John, it's been a long time since I practiced accounting. I'm not sure that COGS are going down in the promotion.

I think their sales are going down and maybe their marketing expenses are going up depending on how they account for it. So, I don't think that's a COGS issue.

Obviously, cat management helped us there. As far as the question on promotion, I see there's been some chatter out there.

Yeah, I mean, look, you've got a transition that's going on here. I think in certain markets we are seeing some of that type of activity.

I've even read pieces where people are saying that we've stepped up our activity. And the reality is we haven't.

I think we're always out there selectively doing what we need to do to retain good quality customers and business and selectively going after potential new business. So, it's not that we don't promote; but I would tell you, I don't think our promotion activities picked up in any meaningful way from a year or two ago.

So, it's out there, I think we're going through this transition period, so it may be somewhat accelerated, but I think that's a little overblown right now.

And then, if you look at case progression, so take Broadline, up 3.6% this quarter, what had it been running? Is that an improvement?

And then if you look at locally managed on top of that and you said that has improved, so where has that improved from? Where was it a couple of quarters ago?

Where is it today?

Yeah, I don't know that we give – I'm not going to let you do the work on some of that, John. I don't know that we give guidance at that level.

But I can directionally tell you it has improved, okay? So, that 3.6%, that's total Broadline, it's got about a half a point of acquisition and everything.

So, you're looking at 3% organic growth, and I would tell you that that's – there's a little bit more there on the corporate side than the local, but the local has moved up nicely over the last, I think it's five quarters to six quarters, and it's continuing to grow. So, I think the important part there is that piece of it is growing and continuing to grow.

Okay, thanks.

Sure.

Thanks. Can you hear me this time?

We can.

We can.

All right. I don't know what happened there.

In the interim, most of my questions were asked, but maybe I could tie it together. I thought the gross profit growth with this inflation was pretty good.

So, and you're saying even from U.S. Foods you haven't seen an uptick, if I can be so impolite, your old dance partner there.

Have you seen an uptick from them specifically? Or I guess maybe you're saying if so, it's not enough to really change the nature of the market.

So, when you sound a little cautious on the first half of the fiscal year, is it more on the expense side? Because if the market environment's not changing, you have some internal initiatives to get the gross profit dollars at least going above sales, is it more of an expense issue?

It's just you can't – it's just hard to keep the expenses flattish or to get the leverage that you got this quarter?

If I came across as cautious, I guess it's just my nature, Andy. But I'm trying to be balanced here and...

Yeah. No, I appreciate just being straight, so I'm just talking to you.

But I think this is an important exchange here right now. So, I think, I'm really pleased with this quarter.

I mean, the quality of this quarter was very good. And we've got some good things going on here on the local case growth side, so we need to sustain that.

And I think we still can grow some of the other cases as well. So, I think that's a positive I feel good about that.

There's not much we can do about whether there's going to be any inflation or if there's going to be a little deflation, so that's where I'm a little cautious. That does impact our top line and our gross profit dollar line.

And then on the expense side, I would say encouraged by the fourth quarter, and I just would look for gradual improvement there. I don't think we can sustain 2% expense growth with 3% case growth.

Okay, I don't think that's a sustainable ratio. With that said, I expect our expense growth to – on a relative basis to be better next year than what we saw this year relative to case growth, relative to sales and GP growth.

So, I actually feel pretty good about the part that we're managing right now, and then my caution is that if you look at the quarter, I see that as something. We had three good quarters this year.

We need to have four next year, and they need to look somewhere around what we saw here in the fourth quarter. But, the lines are going to move around depending what's going on in the marketplace.

But, overall, I feel good, but yeah, I'm a little cautious on that top line and GP line for the first quarter, too. Chris.

Yeah. Hey, Andy, I'm just going to tie it back to some stuff we talked to earlier in the year.

We continue to say we'd like to see gross profit dollar growth of 4% or better. That sets us up very, very well.

Because of the level of food cost inflation, it's difficult right now. All Bill was really saying is, we're going to have some headwinds on the sales line.

We're going to have some headwinds on the gross profit dollar line. Obtaining that 4% is going to be difficult without some sort of reinflation in food cost.

The reason the 4% is 4% is because we acknowledge that we're going to drive cases, and that's going to drive costs. So as Bill just said I think very, very well, if we're going to have headwinds on the top line numbers, it means we have to control the cost even more at a time when frankly we're driving cases.

So that makes the math a little bit tough. So I'm with Bill.

I'm very pleased with the quarter. Neither of us are pessimistic about next year or even the first half of next year.

We're just, as Bill said, trying to be able to balance with the current inflationary environment and how hard that's going to be to drive our equation.

Good. No, no, I saw the quarter that way too.

And just lastly, back to U.S. Foods, they are the number two player, potentially at least in some markets if they were to really get aggressive, could squeeze some margins.

Are you seeing them being pretty normal, or are you seeing them ramp it up quite a lot?

Again, Andy, I think in certain markets our people are seeing some of that. They've got new CEO there now who we know and respect a great deal.

I think they've got a lot to get through here in the next couple, three months. I expect that they'll do it and do it well, and I expect them to be a rational competitor.

But in any given market, any of us could at times be a little bit viewed as being overly aggressive or whatever. So I'm sure there's some of that going out.

I'm not that close to it. But if it was overly significant, I think I would know about it.

And I don't have a sense that that's a big thing right now.

Okay, thank you. Congratulations on the quarter, I thought it was pretty good.

Thanks, Andy.

Thanks, Andy.

Hi, good morning. Thanks for the question.

Bill, in your prepared comments, I think you cited improved expense management and also higher payroll costs, higher incentive compensation. And so with respect to your expense outlook for this year, overall would you say comparisons are starting to ease?

And then can you give any additional breakdown on where you're expecting comparisons to improve and where you see continued pressure on earnings? Excluding the merger expenses and interest expense, I'm just still trying or struggling to get a big picture perspective on whether comparisons should improve this year or at least be a little bit more normalized in fiscal 2016.

Ajay, look, our plan is to grow our gross profit faster than our expenses. And as I said a couple times now, that may look differently in some quarters than others and there will be a little more pressure in the first quarter or two.

Our expenses this year were high, as Chris took you through, were higher than we planned. And we can't have 8%, 9%, 10% case growth on a currency-adjusted basis.

So we had a good number here in the fourth quarter. I expect this to continue to improve on the expense side in the field.

There are going to be some ups and downs there, but I'm confident that we're on the right track there. So I don't know that you can sustain flat every quarter, but certainly low single-digit case increases – cost case increases would be what we're shooting for here.

On the corporate side, it depends on the quarter. We talked about some true-ups.

I mentioned bad debt. So in any given quarter, there could be some things on the corporate side.

I would just say to you that as we continue, we have stood up a lot of capabilities here, from cap-man to a lot of things on sales capabilities. There's more to do there, and so we'll continue to invest in our people and our technology to position this company to grow its business and grow it profitably and compete very well and do great things for our customers.

So long story short, we'll talk more about this in Investor Day. But as I said, we expect to grow the cases.

I don't think 2% is sustainable with 3% case growth if we're able to continue to do that. At the same time, 4.8% is too high.

So I think you can assume from that that somewhere in the middle is what we're shooting for.

Ajay, this is Chris. Remember back early in the year when we were reporting very high gross profit dollar growth numbers, we were calling out the fact that we were not pleased with our expense performance even back then.

It was being supported by the gross profit, but we weren't happy with our expense management. Since that time, we've actually done better in the fourth quarter.

It's certainly the best quarter we had during the year, so I'm going to be repetitive here with Bill that we were not at all pleased with the overall year performance, but we were much more pleased with Q4; again, calling out the fact that it might be a little bit swung to the other side of being hard to repeat. So overall cost per case was higher than it should have been, higher than we wanted it to be.

We got it back under control in Q4. And certainly that's the goal as we look into next year, but it's something we have to continue to focus on.

But again, we saw real improvement in Q4. We just have to continue to maintain that and make sure that we don't allow the increases that got ahead of us in the first part of this year.

I think if I could maybe just add one other thing to put this in context. I've talked about quarters move around.

Years move around. And I think if you look at our cost and our expense management over the last two years, a lot of our initiatives matured last year, and we actually saw a reduction in cost per case last year.

And I think it was a low single-digit reduction, but it was up in the fourth quarter I believe last year. So we've cycled some of that now.

And I think if you look at the two years together, that's a pretty good proxy of what we're able to do, and we're working really hard and I expect us to improve from this year.

That's actually a good point, Bill. We were down $0.06 per case last year on a reported basis, and I think we're up $0.04 a case this year on a reported basis.

So you look at the two years together, and we're almost back to breakeven. And it's not a bad story, but frankly we were expecting better out of ourselves.

So, that's where we have to continue to work.

Hi, great. Thank you.

First just a housekeeping question. The Analyst Day is going to be on September 15, I had something else written down, so I just want to make sure I have that right.

We changed it to, I think the original day was September 24. We changed it to September 15, that's correct, in the afternoon.

Okay, thank you. And then secondly, the comments in the press release, we will also continue to evaluate opportunities to optimize our capital structure.

That's obviously a very interesting comment, and one's imagination can run wild just seeing a sentence like that, within a press release especially. So as you've talked and had more time to think about this with the board and perhaps even solicited investor feedback, what do you think that optimal capital structure is in terms of rating?

And whatever that is, I guess at this point, what are you waiting for to implement that optimized capital structure?

Actually, John, that's pretty much the same thing we said when we announced the share repurchase. So our view on that is pretty straightforward I think at this point.

We kept our powder dry here for quite some time because we've been looking at a lot of different opportunities on the acquisition front, some larger than others, and we ended up pulling the trigger on the U.S. Foods deal, and that required a lot of capital, and as we all know, that ultimately didn't play out.

So where we're at today is we just felt it was appropriate to return some capital in the form of share repurchase back to our shareholders here over the next year or two. But we still think we need to keep some powder dry here.

We continue to look for acquisitions, as I said in my comments, both within the core and potentially beyond the core, whether it be adjacency or continue to build our international platform here. So I would just say to you, we're going to do what we're saying here, which is from time to time we'll continue to look at our capital structure relative to what our other options are.

And for the most part, it starts with investing in the business. I think we've got a pretty good cadence there.

We've got pretty good – Chris has done a nice job coming in here and helping us get a little more structure and discipline around our CapEx spending. We've improved modestly, but we've begun to improve in our working capital management, so there are some good things going on there.

But I would always like to have the opportunity to do some strategic acquisitions if and when they present themselves. It's just at this point we don't need to keep quite as much capital available to do that.

Understood, thank you.

You're welcome.

Thank you.