Sysco Corporation

Neil A. Russell - Sysco Corp.

William J. DeLaney - Sysco Corp.

Thomas L. Bené - Sysco Corp.

Joel T. Grade - Sysco Corp.

Ryan Gilligan - Barclays Capital, Inc. Edward J.

Kelly - Credit Suisse Securities (USA) LLC (Broker) Zachary Fadem - Wells Fargo Securities LLC John Heinbockel - Guggenheim Securities LLC Kelly Ann Bania - BMO Capital Markets (United States) Vincent J. Sinisi - Morgan Stanley & Co.

LLC Marisa C. Sullivan - Bank of America Merrill Lynch Christopher Mandeville - Jefferies LLC Ajay Jain - Pivotal Research Group LLC John William Ivankoe - JPMorgan Securities LLC

Thank you, Lindsey. Good morning, everyone, and welcome to Sysco's First Quarter Fiscal 2017 Earnings Call.

Joining me in Houston today are Bill DeLaney, our Chief Executive Officer; Tom Bené, our President and Chief Operating Officer; and Joel Grade, our Chief Financial Officer. Before we begin, please note that statements made during this presentation that states the company's or management's intentions, beliefs, expectations, or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act, and actual results could differ in a material manner.

Additional information about factors that could cause 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 July 2, 2016, subsequent SEC filings, and in the news release issued earlier this morning.

A copy of these materials can be found in the Investor section at sysco.com or via Sysco's IR app. Non-GAAP financial measures are included in our comments today and in our presentation slides.

The reconciliation of these non-GAAP measures to the corresponding GAAP measures are included at the end of the presentation slide. They can also be found at the Investor section of our website.

Additionally, the results for our first quarter fiscal 2017 incorporates for the first time, the financial performance of the newly acquired Brakes Group. As such, we will reference throughout our presentation today Sysco's financial results both including and excluding this acquisition.

To ensure that we have sufficient time to answer all questions, we'd like to ask each participant to limit their time today to one question and one follow-up. At this time, I'd like to turn the call over to our Chief Executive Officer, Bill DeLaney.

Thank you, Neil, and good morning, everyone. I'm very pleased with our start in fiscal 2017 and this morning we reported strong first quarter financial results.

These results reflect our relentless focus on improving our customers' experience with Sysco that benefits a several key business initiatives that we've implemented over the past few years and the contributions from our new colleagues at Brakes who joined Sysco in early July. For the quarter, and excluding the impact of Brakes, sales grew 1%, gross profit grew 5%, while operating expense grew less than 2%, which resulted in adjusted operating income growth of 15%.

After reflecting the business results of Brakes, adjusted operating income grew 24% to $627 million and adjusted earnings per share grew to $0.67. While we benefited from some favorable year-over-year expense comparisons, which Joel will touch on in a few minutes, these results were achieved in an uneven economic environment that is impacting our customers' business.

Some metrics reflect positive implications for longer term consumer demand such as steadying unemployment levels, modest GDP growth, increased consumer confidence, and healthy momentum in the housing market. However, the restaurant industry, which represents approximately 60% of the foodservice market, is not currently experiencing the level of growth we've seen in recent quarters.

Restaurant traffic continues to show year-over-year declines and restaurant spend has decelerated as well. More specifically, recent data from both NPD and NavTrak show weakening overall sales trends.

That said, we continue to execute our business plan and key initiatives very well. I'm pleased with our progress to date toward the achievement of our three-year financial goals, and I remain confident in our ability to accomplish our strategic objectives over the long-term.

Our improved and increasingly consistent performance for the past two years is attributed to multi-year foundational work we have carried out in customer insights, category management, revenue management, supply chain efficiencies and administrative expense management. The benefits of these work streams have positioned us to continue to effectively support the needs of our customers and profitably leverage our volume growth.

Moving forward, we will build on this momentum by maintaining our customer-centric approach while focusing on targeted, disciplined and profitable growth. Both Tom and Joel will provide more detail about the specific initiatives we are currently implementing and their related benefits.

Turning to the Brakes transaction, we continue to work closely with our experienced and talented leadership team to support their growth, drive out there transformative initiatives and identify additional acquisition opportunities. I'm very excited about the long-term benefits that this business will provide Sysco.

In summary, we are off to a good start to fiscal 2017, and I am encouraged with the progress we are making as we approach the midpoint of our three-year plan. I'm especially appreciative of the efforts and contributions from all 65,000 of our associates, as we strive to fully realize our vision for Sysco, to be our customers' most valued and trusted business partner.

Now, I'll turn the call over to Tom Bené, Sysco's President and Chief Operating Officer.

Thank you, Bill, and good morning, everyone. Sysco's financial results announced this morning reflects solid operating performance and continued progress against several of our key multi-year initiatives.

Our favorable operating performance continues to be driven by our ongoing focus on the key levers of our three-year plan, including delivering accelerated case growth through a focus on local customers, improving gross margins and managing overall expenses both in our supply chain and administrative functions. This morning I'll be providing an update on our business results based on our new segment reporting structure which highlights U.S.

Foodservice Operations, International Foodservice Operations, SYGMA and all other. During the quarter, U.S.

Foodservice Operations, which is primarily comprised of U.S. Broadline, specialty meat, FreshPoint and our European imports business grew sales 0.8% driven by overall case growth in the U.S.

Broadline of 1.8% with local cases driving our growth at 1.9%. Gross profit in U.S.

Foodservice Operations grew 4.3% for the quarter and gross margin increased 68 basis points driven by a combination of factors including our ongoing category management efforts which is how we now go to market with an improved product assortment and centralized approach for majority of our product procurement, which in turn helps us drive out cost for ourselves and our suppliers. Second, improved Sysco brand performance with our local customers, the deployment of a suite of revenue management tools and processes that bring more discipline to our sales and merchandising teams, and ultimately more consistent pricing to our customers and the impact of deflation.

During the quarter, we continue to focus our sales teams on initiatives and activities that will help our customers succeed and grow their business. We have been implementing a variety of sales training and support tools that build overall capability within our selling organization and we have restructured some of the work within that organization to both free up our marketing associates' time and provide access to more targeted resources to better support our customers.

These efforts in conjunction with ongoing enhancements to our e-commerce tools, which allow our customers to choose how they place the orders with Sysco are enabling us to better leverage our marketing associates to spend more time supporting our customers with unique programs, innovative products and other business building solutions. From a cost perspective, our expense management for the quarter was solid and remains a key area of focus for us moving forward.

For U.S. Foodservice Operations, during the first quarter, we limited total adjusted operating expense growth to 1.8%.

Our supply chain performance is progressing well, and we are seeing positive momentum from our productivity initiatives and continuing process improvements that are driving efficiencies. For U.S.

Broadline, cost per case improved by $0.04 for the quarter, and on a fuel price-neutral basis, cost per case was flat. The continuous improvement efforts in our facilities and a continued investment in training for our warehouse associates and drivers has allowed us to build further capability throughout our supply chain.

One such example is the implementation of a labor forecasting tool that enables us to proactively manage hours at our facilities based on the anticipated workload for each shift. We also remain on track to deliver our previously-communicated administrative cost reductions both in corporate and within the operations.

Moving to International Foodservice Operations, which is made up of Canada, Europe, Bahamas, International Food Group and our joint ventures in Mexico and Costa Rica, sales were up $1.3 billion and adjusted operating income increased $50 million, both driven by our recent acquisition on the Brakes Group. We appreciate the Brakes Group early performance and continue to look forward to working with the management team on achieving our collective plans in the future.

During the quarter, Brakes performed reasonably well in the UK amidst the challenging environment, and performance in both France and Sweden was relatively strong. Our business in Canada is off to a good start for the fiscal year as we are effectively managing costs within a deflationary and somewhat soft market environment.

And lastly, our joint ventures in both Costa Rica and Mexico had solid performance in the first quarter fiscal year of 2017. SYGMA continues to make progress against their key business initiatives and had 4% sales growth for the first quarter.

We continue to feel confident in their ability to deliver their full-year growth goals and objectives. In summary, our customer and operational strategies are solidly aligned around improving our customers' experience, engaging our associates at the highest level to improve execution and delivering our financial objectives as part of our three-year plan.

We have continued to make significant progress in all areas for the first quarter of fiscal 2017, and I remain optimistic about the programs and processes we are putting in place that will enable our future success. Now I'll turn the call over to Joel Grade, our Chief Financial Officer.

Thank you, Tom, and good morning, everyone. As Bill and Tom have mentioned earlier, we are pleased with the results for the first quarter.

Our growth reflects continued momentum from our underlying business including solid local case growth, strong gross profit dollar growth and good cost management, as well as a solid contribution from Brakes. The results that I'll cover for you this morning include Brakes, which significantly impacted our results.

In summary, for the first quarter of fiscal 2017, sales grew 11.2%, gross profit dollars grew 20.3%, operating expense growth was 19.2%, all of which resulted in adjusted operating income growth of 23.8% and our adjusted earnings per share grew 28.8%. Sales during the quarter were positively impacted by the inclusion of Brakes in our results, though partially offset by deflation of 2.2% in our legacy Sysco business.

Continuing with gross profit and gross margins beyond the addition of Brakes, the key drivers of improvement included category management, revenue management, higher Sysco brand penetration in our local business and deflation. Categories impacted most by deflation continue to be the center-of-the-plate protein and dairy.

We expect the trend to continue into calendar 2017. That said, we continue to manage this environment effectively as evidenced by our strong gross profit dollar growth.

The increase in expenses during the quarter beyond the addition of Brakes were mainly driven by the previously-mentioned higher case volumes and a timing shift of expenses related to our option grants from the second quarter into the first and was partially offset by various decreases in indirect spend, fuel costs, favorable comparisons to the prior year, which included planned investments in technology spend related to our three-year plan, and foreign exchange translation. As it relates to taxes, our effective tax rate in the first quarter was 32.9% compared to 36.3% in the prior-year period.

The decrease in tax rate is driven by tax credits, lower tax rates in the UK due to new tax laws that were recently passed, and the mix of business as we grow in the lower-rate jurisdictions. Compared to the prior year, adjusted net earnings grew 20.7%.

Cash flow from operations was $249 million, which was $510 million higher compared to the same period last year. Free cash flow was $111 million, which was $492 million higher compared to the same period last year.

The significant improvements in both are due mainly to improved working capital performance and payments made in the prior year related to the proposed merger with US Foods. Net CapEx for the quarter was $138 million.

I am pleased with our net working capital performance for the quarter. We had a net two-day improvement versus the prior year and a 2.8-day improvement versus fiscal 2015 and are making good progress towards our three-year goal of a 4-day improvement.

These improvements are driven primarily by improvements in all three phases of working capital; payables, receivables, and inventory. Our first quarter results included some certain items that were mostly related to the Brakes acquisition including amortization associated with the transaction.

As a reminder, in the prior year, we had significant amount of certain items primarily related to the termination of the proposed merger with US Foods. Now, I'd like to transition to three business updates.

First, regarding Brakes, as a reminder, we initially guided that the acquisition would be modestly accretive to fiscal 2017 earnings per share by low-to-mid single digits. We are now updating that guidance due to finalizing the treatment of amortization as a certain item and believe this acquisition will be accretive to adjusted earnings per share by high-single-digits in fiscal 2017 with acceleration in subsequent years assuming constant currency.

For the first quarter, Brakes was approximately $0.04 accretive to our business on an adjusted basis. It is important to note that Brakes business does have some seasonality as the performance is more heavily weighted to the first half of the year.

Accordingly, we do not expect the same accretion each quarter and, in particular, in quarter number three. Second is regarding fuel expense, we expect the favorability we've had over the past two quarters to begin to lap in November.

Separately, we are enhancing our fuel strategy. In the past, we used a third-party to forward-buy fixed price contracts approximately 12 months out.

Going forward, we are transitioning the management of our fuel expense by using derivatives to hedge our exposure. By separating the management of our fuel purchases from our risk management, we will allow for more effective management of the risk.

We'll continue to cover approximately two-thirds of our needs with hedges in place to minimize volatility in price. Finally, we are announcing today the upsizing of our credit facility from $1.5 billion to $2 billion and we'll upsize our commercial paper lines accordingly to provide greater liquidity to support our growing business.

In summary, we had a quality quarter reflecting continued momentum from our underlying business including solid local case growth, strong gross profit dollar growth and good cost management. That said, we have more work to do in order to achieve the full financial objectives of our three-year plan.

We are committed to serving our customers and delivering a high level of execution on all areas of our business that improve our financial performance in both the near and long term. I am confident in our ability to continue to execute our plan.

Operator, we are now ready for Q&A.

Hi. Good morning.

It's actually Ryan Gilligan on for Karen. Thanks for taking the question, and thanks for all the additional disclosure.

It's really helpful. I guess first off, can you just give us the bridge in the year-over-year change in gross margins in the International segment?

It seems like Brakes is driving a lot of that improvement, and we're just wondering if this is a new level of gross margin that we should expect or if there's any one-time impact from there?

Hey, Ryan. I'm going to start here.

I think, look, we have given you a lot of information, and the Q will be issued this week. There will be a little more detail in there, but we're not going to get into bridging individual entities within those segments.

But obviously, Brakes did contribute a significant amount. And generally, I would tell you that in Europe, gross margins are higher and expenses are higher.

Got it. And is there an opportunity to lower your expense – or lower the expense margin to one that's closer to the U.S.

over time?

Well, they have a lot of good work going on over there in their own transformation, as we've spoken to a little bit before. So there is opportunity on the supply chain.

They're doing some things with their warehouses where they're moving from multiple warehouses to service a market to one, which is more similar to what we see, and there's always opportunities on the administrative side of the business. So I think there will be opportunities.

That's a big part of their plan. And I don't know that they'll get to our number necessarily because it is a different market, but there's certainly upside there.

Got it. That's helpful.

Thanks. And I guess just last question, can you comment on how cases trended throughout the quarter and the outlook for them going forward, I guess, just given the comparisons start to get tougher the next two quarters?

So this is Tom. So as I said, the local cases were up 1.9% in U.S.

Broadline, and yes, that's been a little bit of a fall off from what we'd experienced in the last couple quarters of fiscal year 2016. I think based on what we're seeing in the restaurant segment, I think we believe it will be continued to be a slight decline from what it's been at the end of last year, but we still feel fairly confident that we'll see continued case growth in the local segment of our business.

We're very focused on, as Bill said in his comments, profitable growth, and we want to make sure that we're focused on those right customer segments, but we still believe we can grow our local cases.

Got it. Thank you.

Hey, guys. Good morning.

Hey Ed.

Can I just start with a follow-up to that last question? Could you just help us understand what you're seeing from an organic case growth standpoint?

I don't know how it'd be if you could sort of frame that for us at all relative to the 1.8% and the 1.9%? I'm just curious as to the role that acquisitions are playing into this.

Well, let me start, Ed. I'm going to let Joel and Tom maybe add some color here, but I would say that is largely the organic growth that we're experiencing.

What Tom said was if you go back a year, I think we're in the mid-2%s to high-2%s in different quarters, not every quarter was the same. So if you go back to my comments, I mean basically we're seeing some slowness out there – softening, I guess, is a better word – in terms of overall growth in the restaurant segment, and ours is off a little bit as well.

So it just reinforces the importance of solidifying those customer relationships and getting penetration where there is that opportunity where customers are growing as well as continuing to stay really locked in on retaining our customers and identifying new opportunities as we go along, but I mean the 1.8% to 1.9% is largely the organic growth.

Okay. Great.

That's very helpful. And just one second question here that I wanted to ask you about and I kind of asked about it last quarter too, but you maintain your three-year target.

Your results so far had been really impressive. I mean this is a great quarter.

Can you just talk to us about how you're thinking about that goal at this point, whether you think we'll get an update at some point relatively soon? And as we just sort of sit back and try to consider how things play out from here, Bill, what are the moving parts that we should really be thinking about from here sort of like good or bad going forward?

Well, I think the moving parts, we've touched on here just now. I think we're seeing some softness out there.

I think other people are seeing the same thing on a relative basis, and so we're very focused on trying to get our case growth back up over 2%. I think that's very important.

We're real pleased with how we're managing the margins and still growing the business and taking care of our customers in the right way, and a lot of the steps we took back in the spring to initiate deeper expense reductions are benefiting us right now. So I think the things that we can influence and control we're doing a really good job with.

We're probably a little cautious in terms of the overall macro out there for our customers. We still got two points of deflation out there, largely driven by those center-of-the-plate categories, so those will be two areas where we're probably a little bit cautious.

Obviously, we're in our third year now of earnings growth and I think this is the fourth quarter of double-digit earnings growth on an adjusted basis. So obviously, the bar gets higher and we're ready for that.

So we feel very good overall about what we're doing, a little cautious on the environment. I think to your first question, the way I'm looking at that, Ed, is we're one quarter into this year and we're just not quite to the halfway point of the three-year plan.

So I want to get a little further into this year and get halfway through the three-year plan, and then I think we'll be able to reassess where we are on the goals.

Great. Thanks, guys.

Hi. So on the M&A impact in the quarter, first of all, was there any M&A impact to U.S.

Broadlines beyond Brakes? And then secondly for Brakes, total sales came in a bit higher than I thought.

Maybe you could talk about just volume trends there and what the impact of the FX was. And just with the high-single-digit accretion for the year, what are you anticipating for total sales growth for the year for Brakes?

Again, we're not going to get into bridges or trends on individual businesses within segments, but I think as Tom pointed out, I'm going to let Tom speak to this, obviously there're some challenges in the UK right now. We thought the Brakes Group performed well given the environment and very nicely in France and Sweden.

I think that's as much as I probably can add right now. Tom, you got anything?

Yeah, well, maybe the answer to your first question too, Zach, the very little impact on the U.S. cases from the acquisitions as we mentioned a minute ago.

So those numbers were basically kind of organic growth numbers. And the only thing I'd add on Brakes is that we think the team's off to a really good start.

Bill mentioned the transformational initiatives they've been operating against are all moving along nicely, and I think we feel very comfortable with overall how that business is performing. And the UK certainly has got some bumpiness in their economy driven by a lot of things going on over there right now.

I think we feel very comfortable with where they're at and how they're performing (26:09).

Yeah. And I would just add, I mean you asked about the FX part of that.

I mean, obviously, the weakening sterling certainly plays into this, so there is some FX impact on an aggregate basis for the organization. We had fairly minor impact from FX for this quarter.

Okay. Great.

That's helpful. And then just, I guess, let's all take it on a high level here on the operating environment.

Could you comment on the – just a little bit about underlying restaurant trends with them being a little choppy, are you seeing any change to the competitive environment here particularly with the impact of deflation versus food away from home – or food at home widening a little bit? Are you seeing anything as far as just continued challenges for your customers and then competition from your peers?

Well, I think the challenges are what I'd referenced. You've got several quarters in a row now where traffic is actually down, and while the spend is up, it's not rising at the same rate it was rising.

So there is clearly a softening out there. I mean whether it's because of the election or relative pricing between grocery store and restaurants, I'll let others kind of critique that.

Look, I think there's ebbs and flows in any cycles of economies, and I think we're going through that right now. But I think it just puts a premium on quality operators both in terms of our customer bases as well as ourselves.

I mean we feel good about what we're doing and we're doing everything we can to support our customers. As far as the competitive environment, I wouldn't say there's any change.

It's acutely competitive, as we've talked about before, all different types of competitors out there. We feel we're very well positioned.

It does play out differently in some markets, but overall I'd say it's about the same.

Great. Thanks so much.

Really appreciate your time.

Sure.

So maybe starting a question for Tom. When you think about moving case growth back up, is there a lot of clear things you can do to help your customers stimulate demand or is it really more taking share from other distributors in the environment we're in today?

Hey, John. Well, I'd say I'm not sure there's a lot work we can do to help stimulate demand.

What we can do is make sure that each of our customers is operating as effectively as they can and that they've got obviously the right products and the right pricing so that they can be successful, but as far as stimulating demand into their – our traffic into their locations, that's a little bit harder, I think, from where we sit. But I think there's a lot we are doing to help them be successful, and I think that's what we continue to focus and we believe very strongly that's as much our responsibility as theirs to help ensure that they're healthy and effective in what they're doing, and obviously with the tools that we bring them every day, we think, makes a big difference there.

What was the second part of your question?

Well, it was really that – if you're going to get case growth back up, it's more market share driven, which I guess, do you think from what you can see, is your share – the rate at which you're taking share from others in this space, maybe the smaller guys, it looks like it's accelerating. Is that fair?

Well, I think it's hard for us to obviously know that directly because, as you know, lots of competitors in this environment. We certainly believe we're continuing to grow at least at the industry if not outpacing that.

As we talked for the last couple of years, we've tried to focus our efforts in a couple of areas, one where there's natural growth taking place. We've talked in the past about some of the segments where you're seeing growth, whether it be the Hispanic/Latino segment out there where we've really focused some of our energy and efforts to provide support to those operators or certainly looking at geographies where we've got opportunities.

So I think we continue to execute our strategy and we feel like it's working and that we're hopefully gaining share from lots of different places based on how well we're taking care of our customers.

All right. And then just lastly, if you think about supermarket foodservice, maybe just remind us kind of relative size of that business for you, it's still pretty small, I think, and where you think as you look out three years, five years or longer, how much bigger can that get?

Well, it is still relatively small for us. I don't have the exact numbers from Technomic, but I think that they would say that that retail segment, I think, is about 7% of the market.

If my guess is – my memory serves me right. And I think that for us we certainly have opportunity to grow there.

I think it really is a matter of what's the best way for us to grow there. We talked a couple of years ago about our relationship with Kroger.

We feel like we continue to have opportunity as they grow in that space. But I think it really comes down to how consumers decide to purchase their food away from home, and that retail segment certainly, I know, is a big focus for a lot of the retailers see if they can pick up maybe some more share from that consumer.

Okay. Thank you.

Hi. Good morning.

Thanks for taking my question. Curious if you could just talk a little bit about the local case growth.

I know it's hard to really know exactly how much the market is growing there, but do you feel like you took some share there? I realize it slowed, but still pretty solid, so just any color around that 1.9%.

As we just were talking, I feel like it really is hard. We don't have a good view of the entire market.

I'd say what we continue to see is we're getting growth from new customers. We are seeing a little bit of softness in some of the penetration of existing customers.

We think that might be driven by some of the more external information that's out there around restaurant traffic, but broadly speaking we feel like we're just serving the broader independent restaurant segment well, and as we do that, we probably are gaining some share, but it's really hard to tell exactly where that might be coming from.

Got it. And then I guess just another question on the three-year target, so I realize you may not be updating those or feel the need to update those, but I guess given that Brakes is now just a significant part of the story over the next couple of years, do you have any color just on how we should think about that three-year target with Brakes included?

Kelly, I'm going to start and I'm going let Joel give you a little more on this. So one of the reasons we are providing more detail at this time on this segment information is to make sure that we are clear on the International versus the U.S., and then what we will do – so we have a three-year target and we have a three-year goal, and we will continue to track that in calls like this and investor presentations periodically and give you some sense on where we are in that original goal for the businesses that existed at that time, and then how we're doing on the rest of it.

So we're going to simultaneously track that three-year goal and also begin to build a new three-year plan here over the next few months, and then we'll put that out to you at some point in calendar 2017.

Yeah, I think, Kelly, the thing I would add to that is it's just as a reminder. Part of this target was to be very clear with all of you in the way that we are holding ourselves accountable, the way you can ultimately hold us accountable is this very clear and specific target to the legacy business.

And so as we go through this, again what you can expect from us is to continue to have a very clear delineation, again, of both how we look at the organization as a whole, but a continued very clear tracking on the things that we talked about on our original Investor Day, and again tracking our targets against that. So, that would be hopefully very clear and separate out for all of you.

Great. That makes sense.

Thank you.

Hey. Great.

Thanks very much for taking my question, guys, and congrats on the nice quarter here. Just wanted to kind of reconcile, obviously we know that there were some puts and takes with Brakes and tax and all that type of stuff this quarter, but you did, several times of course, again say today about the softening from the macro, which you had alluded to last quarter as well.

So I guess maybe anymore color you can give on that restaurant softness in terms of any particular types of customers or geographies, and kind of going forward, do you expect things to get kind of sequentially worse or more just kind of roughly stay around these levels which are off the kind of previous highs? Thanks.

Hey, Vinny. I'll start.

Look, the one thing I would point us to is on an adjusted basis, if you exclude the impact of Brakes, we grew our operating income 15%. And that's the fourth quarter in a row where we got double-digit increases on adjusted operating income.

So I think what we feel good about and hopefully what that tells others is whether we've got 2.5% or 3% case growth or 1.5% to 2% case growth, we're doing everything we can on the top line as well as how we manage it from there to deliver on our commitment. And so at this point, we feel very good about how we're managing the environment.

In terms of where it goes from here, I can just tell you, internally Tom and his team are very, very focused on penetration, on improved retention and where appropriate bringing on new quality customers. So we're doing everything we can in a disciplined way to grow that top line, but clearly it puts a premium on managing our expenses here and continue to find ways to price in a way that works for us as well as for our customers.

So, that's the part we can control and influence. As far as where the market goes, it's really hard to call right now given everything that's going on in the country, but we're preparing for where we are at.

I think to continue a while longer hopefully, it gets somewhat better, but we're not really – we're really not in the business of making those projections.

Yeah, okay. Thanks, Bill.

That's helpful. Maybe just a quick follow-up on Brakes specifically.

In the past, I think we're all kind of – given the impression that at this point at least it was more or less going to kind of stay on its own largely kind of be run separately over there. Can you guys, I know it's still early, but just kind of give us maybe more of a qualitative sense of kind of the last few months, how that overall integration is going and if you think there are opportunities to kind of bring it more under kind of one roof over time?

Again, the way we're looking at this strategically is, there's a lot of exciting things about Brakes. We talked about quality of their team, the part of Europe that they know bring us into and our ability to use that business as a platform for future acquisition growth and a lot of other things.

So strategically the way we look at it is, it's a – along with Canada, it's a two foundational parts of our international business, and we expected to continue to grow and to allow us to continue to find ways to do acquisitions, and that's basically it from my perspective. Joel, you want to add something?

Yeah, I think what I would just say for maybe a little bit of color, I mean, we certainly have regular ongoing conversation in the business reviews with their team, but again, as Bill mentioned, just to remind you, when we talked about this deal initially, it's again, they have a very strong management team, we feel really good about their people and the work that they're doing that continue to transform their business. We certainly see that, again, as an opportunity to run that business stand-alone.

Again, there's minimal overlap in the business we have. We certainly continue to look for opportunities though to bring upside in the deal.

But, I would just tell you, again, a lot of good ongoing dialogue, but certainly we got a strong management team running that business as a stand-alone entity.

Great. Thanks very much, guys.

Good luck.

Thank you.

Hi. Good morning.

Thanks for taking my question. I just wanted to ask about gross margin excluding Brakes.

It's still up very significantly in the quarter, and so I wanted to get your sense on what were the key drivers? You mentioned four.

How would you rank them during the quarter specifically and also how did deflation impact the gross margin this quarter? Thank you.

Good morning. So, this is Tom.

Let me – I did talk about four different drivers, and I think we continue to believe each of those is contributing to the work we're doing. It's hard to pull out the deflation component.

We know it certainly impacts the gross margin percent, but it's also I think probably most important to think about those other three areas that we're focused on, because that's how we manage the dollar side of it. Category management continues to be very positive for us.

As you know, we've been basically in that operating model now for the last three years, and it's – well we've gone through I'd say the major cycle with that, we continue to work with our suppliers and we look at long-term partnerships that continue to provide value for us, and ultimately for our customers. So category management continues to be a very important part of what we do and how we operate.

Revenue management has been something that now is fully deployed within our organization and I think we've got a really good set of processes and tools and ultimately routines for our sales and merchandising teams to leverage in the marketplace, and it allows us to be I think a little quicker on our feet, and be able to do the things that we need to do to make sure that our customers pricing is right on a regular basis, and it's driving really more consistency for our customers as well. And then lastly, partly with the work we do in category management, but a continued focus on Sysco brand, which brings value also to our customers and obviously delivers additional profitability for Sysco has been a key driver for us, and we continue to see improvement within our local customers, with our local business, and we again saw an improvement in Sysco brand this last quarter.

So it really is a combination of all of those, and it's hard for us to kind of tease apart each of them individually, but I can tell you that each of them is definitely playing a role.

The only thing I would add there Marisa is, the thing I feel the best about here is going back to Tom's prepared comments, we grew the gross profit dollars over 4% in U.S. Foodservice business, and so deflation hurts you when you talk about gross profit dollars.

So, all those things Tom just outlined I think are all key reasons why we were able to do that in an environment where you're looking at a meaningful deflation.

Got it. And if I could just follow-up on the revenue management, now that it's fully deployed, when do you anticipate seeing more of the benefit flow-through?

Well, I think it's – when I say it's fully deployed, I mean, it's been out there now for a couple of quarters, and so I think we're seeing the benefits right now. If the question is, does that have an endpoint?

I think it's too early to even know that. It's an ongoing process that we follow now, and I think it's really more about being disciplined and how we approach pricing in the marketplace.

Got it. Thank you.

Yeah, good morning. And, Bill, just kind of sticking with the gross profit dollar growth subject here, when I think about your $500 million EBIT growth goal for over the next three years or through 2018, if you will, can you remind me what the inflation or deflation assumption was originally?

Yeah, the original model, and I will take it, this is Joel, that was about a 2%. If you recall, we had a differential between our volume and sales growth that we rolled out.

We initially talked about at a 2% rate.

Okay. And then I guess suppose following up to that, now that we're in our fifth quarter of consecutive deflation, but also considering how well you guys have been driving your gross profit dollar growth despite this backdrop, how do we think about kind of you guys reaching that ultimate goal?

I believe the original mix was somewhere 55% to 65% of that $500 million EBIT growth goal came from a gross profit dollar growth?

Yes, I think I will take – I will start with that, I think, you guys can add in. I think we're still looking of that in a relatively consistent way as we had initially outlined.

I think the real important part of this though is to – one of the things we've talked about a bit externally is this gap or this delta between our growth in gross profit dollars and our growth in expense dollars. And so one of the things – again, we've certainly done a good job of managing through this deflationary times and still continued to grow our growth in gross profit dollars.

We've also done a good job, I think of focusing and driving expenses downward as both Bill and Tom have talked about. And I think, when we looked at that plan and sort of the puts and takes of what was going to drive it, we certainly knew there are – we could've had more inflation, could've had less inflation, some of those factors are what they are, but the reality of it is our continued focus on that gap and that delta between those two numbers I think is really important.

Yeah, I think where we're at right now and I think where we've been to your point over the last few quarters is, we're not on track to hit the sales number, okay? I think in that original goal, we were looking at 4% sales growth with two points of inflation and directionally about the same amount of GP growth.

So we've got to get the GP a different way, and that's what we've been able to do here so far. We're really encouraged by that as well as managing the expenses, so I think it's more of a play on the top line than anything else.

Yeah, just the one final thing I'd add to that is the – if you recall when we increased our targets from $400 million to $500 million, that was again primarily driven by some change in some of the way we viewed our expenses. And so, again, if you want to look at that shift again a little bit it was, again, as I mentioned earlier, a pretty good system over the top, it was again a little bit more of a shift towards some of the expense side as we roll out when we increased our targets.

Right. That's helpful.

And then just a quick housekeeping one for you, Joel. What's the reasonable tax rate to be assuming on a go-forward?

Yeah, so I think at the end of last year we guided somewhere in the 35% to 36% range. So with some of the – one of the things we've talked about of this was actually a tax law change in the UK that moved the statutory rate essentially from 18% to 17%.

I would say that would take our view of that probably on the low-end of the guidance that we put out before. A couple of things in this quarter that again we called out that we are seeing some one-time deals, and so I would say the rates you see in this quarter is a bit lower than you should anticipate going forward.

But I think the low end of our guidance is probably a fair way to look at that.

Yeah, hi. I had a question on the currency impact.

I think, Joel, you mentioned that the impact overall wasn't that significant in the quarter, and my understanding is that any hedges that were in place were terminated at the end of last year. And I'm also sure that you're very well aware that there was a pretty dramatic swing in the exchange rate for the pound year-over-year during the quarter.

So can you give any more color on why there wasn't any significant drag from currency in the quarter? I would've assumed that earnings would have been better without the currency impact, but I'm just surprised that you're saying there really wasn't that much of an impact at all?

Yeah, I think, Ajay, I mean, the point I was really making is – without a doubt, I mean, you're correct in your statement regarding the hedges. I think if you think about the magnitude of the Brakes business as a percentage of our entire business, it's really where my comment was targeted at.

What we've talked about over the past few quarters was a difference that was primarily driven by the Canadian exchange rate, but that has pretty much mitigated frankly, and again if you think about that business as a percentage of our total, certainly the Brakes earnings would've been higher and if you factor the weakness of the sterling in, but I guess my comment was really on the whole organization, the overall impact wasn't that significant.

I mean, to Joel's point, you're talking about 65% of 10% of the business.

Right.

Got it. And I also just wanted to follow-up on the earlier questions on the three-year plan, and maybe I'll just frame my question a little differently.

So I know you're going to be giving an update later in the year, but since you are tracking your progress pretty closely, can you just at least confirm where the things are right now on a run rate basis relative to that $500 million growth target? So if you were to give a current snapshot, can you confirm whether you're comfortably ahead of plan or if there's still supposed to be kind of like more back-ended loaded assumptions on those three-year objectives?

Thanks.

As I said, I feel good about where we're at. We're five quarters into it.

We've been trending 10% to 15% earnings growth every quarter, that's consistent with the plan. We've got some benefit next year with the depreciation as it relates to the business technology.

So from where I sit, I would say we're comfortably on track right now and looking to reassess here at the end of second quarter.

Yeah, I think the way, and I'll just add to that, I mean, I think at the end of last year we've talked about some initial percentage targets. I think at the end of last year we were slightly ahead of those targets.

I think what we've talked about, though, and again, we had a strong quarter this quarter, but on an ongoing basis we've – I've said it, Bill said it before, I mean we'd certainly like to get a couple of quarters under our belt before we think about doing anything differently there. And so that's really the way I would think about our progress.

We're feeling good, we're in a good place, but let's see how this plays out.

Okay. And finally, how would you describe if you could comment on the case volume trends at Brakes year-over-year in the UK market in particular?

I mean, can you confirm if they were positive or negative?

Again, we've got an international segment. We're going to give you some color on the components of that.

I would tell you that their business softened through the calendar year even before Brexit, and I think it's more about just the uncertainty in that economy, whether it was leading up to Brexit or post-Brexit. And if you read all the different accounts, so far it hasn't been as bad perhaps as people thought it might have been and I think we're seeing that as well.

On the other hand, there's still a lot of uncertainty here over the next two years or three years. So, I think as Tom said in his prepared remarks, I think they performed reasonably well given the environment.

Great. Thank you.

Hi. Thank you.

One quick one and then one question, if I may. Firstly, there seems to be some confusion about what non-GAAP D&A should be for the business in 2017 and maybe even 2018.

Bill, I think in the last question you mentioned some technology write-off that you had done recently that may benefit that D&A line, but I hate to ask such a specific question, because a lot of people are – do have some really different estimates. Can you give us a little more specific help on that specific line?

Well, so let me start with that, and then so I'll take a couple of things on that. So one of the things you'll see are certain item, reconciliation this quarter is that, you can see this in our Q, our D&A is up a bit for this quarter for a couple of different reasons.

Number one, as we talked about last year, we actually expected some due to the write-off of the SAP system, there was an acceleration of the amortization related to that, and so there is again say roughly $30 million I'd say of a certain item related to that issue that's part of our D&A. There's also as a result of the Brakes deal, there is both additional depreciation and amortization as a part of that.

And so I think if you look at our overall D&A expense for this particular quarter relative to where we've been, those are really the two primary contributors on that line as it relates to this. What Bill was referring to as in his comment earlier, if you recall at the time when we increased our targets from $400 million to $500 million at a while back, we had made a couple of comments as it relates to that.

Number one was the fact that a component of that difference was related to the fact that we – it was a changeover in our technology strategy, that there'd be some benefits once again the asset was fully written off. Again, there is accelerated amortization we will be experiencing at the end of last year and through this year, but there'd be benefit of that starting in 2018.

So I think that's really what Bill was relating to on that, and so hopefully that gives you some clarity on some of the comments and a little bit of a break down on that. But you should expect that accelerated amortization from that plus the Brakes to be present throughout the rest of this year.

I can confirm that's what I was relating to.

Yes. Okay.

Thank you, and I think I did understand that. But I think if you look at Street estimates you'll see that people have some pretty different estimates for D&A, like unusually different estimates for D&A in 2017 and 2018, and that's why I was wondering if you're willing to just give a little bit more specific guidance on that one specific line?

Yeah, I mean, look, I think you guys need to adjust this quarter, go through a certain item schedule, work with Neil, and I would expect it will get more consistency there.

All right. We will do our best as always.

And then the next question, obviously the restaurant industry just speaking from an operator perspective, slower traffic, higher labor cost, I mean, it's one of the obvious things that a restaurant company does is come to their food supplier and try to get as low as prices as possible. Are you seeing your restaurant customers may be asking even more from you than they have in the past, even if they see your gross margin results may ask you to get some of the gross margin back to them as they try to protect their own profitability?

Well, this is Tom. So I would say, John, a couple of things, as we said earlier, it continues to be very competitive out there, whether it's a chain restaurant customer or a street customer for us.

And I think the way we try to look at value we bring to those customers is certainly beyond just price. We offer a wide range of obviously products and services to these folks.

We believe we bring them value each and every day. We talked a little bit about Sysco brand earlier, Sysco brand is a great example of where we're able to bring basically lower cost of goods to our customers, and put them in a position where they can earn as much as they can from their offering.

But it's well beyond just products and pricing, and so I would say it's the whole portfolio of things we bring to them that's allowed us to be successful, and certainly what we believe is the right strategy for us going forward. But it doesn't take away from the fact that it's competitive out there each and every day, and we just have to make sure that we're doing those right things in the market.

We absolutely believe we need to be price competitive and that's one of the components of what we focus on.

And I think, John, just to reinforce that, this is happening in an environment of two points of deflation right now, so the customers, they're benefiting from a food cost deflation. What we're doing and what Tom addressed earlier with the revenue management is using a lot of tools to be more consistent, more targeted in our pricing.

But we still need to compete, as he points out, every day for that business. And interestingly to me, on the data that we see, to your point, whether benefiting from deflation, they've got some labor pressures, they've been out there for a while now, but the restaurants as a group continue to pass long about a two-point increase to their customers, and that has been incredibly consistent through every cycle that we've seen here.

So, I think right now they're managing it pretty well and the deflation is helping them. At some point, I guess it could become more acute if we were to see the deflation reverse, but as I think as Joel pointed out, we don't see that happening here, at least not in this calendar year.

Thank you.