西斯柯 (SYY) 2010 Q3 法說會逐字稿

Good day, everyone, and welcome to the SYSCO announces third quarter fiscal 2010 earnings. As a reminder, today's call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Mr Neil Russell, Vice President Investor Relations.

Thank you, Kasey, and good morning, everyone. Thank you for joining us for SYSCO's third quarter fiscal 2010 conference call. On today's call you will hear from Bill DeLaney, our President and Chief Executive Officer, and Chris Kreidler, our Chief Financial Officer.

Before we begin, please note that statements made in the course of this presentation that state the Company's or management's intentions, beliefs, expectations or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ in a material manner. Additional information concerning factors that could cause actual results to differ in a material manner from those in the forward-looking statements is contained in the Company's SEC filings including, but not limited to, risk factors contained in the Company's annual report on form 10-K for the year ended June 27, 2009, and in the Company's press release issued earlier this morning. Please understand all comparisons given during the call refer to changes during the third quarter fiscal 2010 and the third quarter fiscal 2009 unless otherwise noted. Also, all comments about earnings per share refer to diluted earnings per share unless otherwise noted. With that out of the way, I will turn the call over to our President and Chief Executive Officer, Bill DeLaney.

Thank you, Neil. Good morning, everyone. For the third quarter of fiscal 2010 SYSCO reported net earnings of $248 million. Earning per share were $0.42, an increase of 10.5% compared to the prior year. Sales increased 2.4% for the quarter, the first year-over-year quarterly increase in sales since our September 2008 quarter. This increase was driven by improving case volume and benefits from foreign currency translation. Case volume grew year-over-year in the third quarter. The numbers week to week were a bit uneven, but we saw sequential improvement in each month throughout the quarter. As we indicated on our last call in February, March trends typically drive third quarter results and our performance for the quarter was favorably impacted by stronger sales growth in March than we originally anticipated. Deflation was 0.8% for the third quarter, which is substantially less than the 3.4% deflation we experienced in the first half of the year. Deflation subsided sequentially each month as we moved through the quarter with March coming in essentially flat. These changes were driven by higher prices in dairy, meat, and produce. Operating margin improved year-over-year to 4.8%. I am particularly pleased with our associate's ability to leverage the sales growth we saw during the quarter. All of our employees are dedicated to helping our customers succeed and remain focused on driving continued improvements in service and productivity throughout the organization. Our financial results reflect SYSCO's ability to execute effectively in a dynamic and highly competitive market.

We currently have a number of initiatives under way which are intended to improve certain operating processes, which we described at our Investor Day last December. Many of these initiatives have contributed to our operating margin performance over the last several quarters in our Broadline companies. These include efforts to standardize warehouse operating systems, utilize discreet engineered labor standards and implement activity based compensation. While the implementation of some of these changes is nearing completion, we have a pipeline of various other initiatives in the early stages of rollout that we expect to complete over the next 12 to 15 months. These include initiatives to implement new systems to determine the most efficient product placement on our trailers, scan orders as they're taken off the trucks and better manage fuel consumption and fleet maintenance.

In addition, we remain on track with our business transformation project. We have substantially completed the design phase and we are currently building and testing the underlying ERP system and processes. With extensive resources dedicated to this critical phase. We anticipate going live with the implementation of the ERP system at our first operating company in early calendar 2011. As a result, we're beginning the process of getting our shared services operation up and running to support the first location and the others that will follow. During the third quarter, we purchased a facility in Houston that will house this organization, which will be known as SYSCO Business Services. We expect to begin staffing this facility in the second half of this calendar year.

It is important to understand that we are not simply waiting for our ERP system to go live to realize benefits from this project. We're making numerous changes along the way to prepare for the transformation and many of these changes will provide modest benefits before we actually go live. An example is the standardization of the warehouse operating systems I mentioned a few minutes ago. Along the same lines, we have been piloting our new online order management system, which will replace our e-SYSCO platform and are now in the early phases of rolling it out to some of our contract customers. We're excited about the progress we're making and will continue to keep you informed of further developments along the way. Now I will turn things over to Chris so he can provide additional details on our financial results for the third quarter.

Thanks, Bill. Good morning, everyone, and thanks for joining us. As Bill mentioned, we reported net earnings this morning of $248 million for the third quarter of fiscal 2010, an increase of 9.5% compared to the prior year period and the highest third quarter on record. Sales increased 2.4% which was driven by year-over-year case volume growth, foreign exchange rates which increased sales by 1.6% and the impact of acquisitions which increased sales by 0.6%. Offsetting these increases estimated deflation was 0.8%, which is measured as the estimated change in the cost of products we purchase. Operating margin in the third quarter improved to 4.8% from 4.6% last year, a 19 basis point improvement. Operating costs were higher in the quarter by $20 million.

While there are multiple line item variances, the increase was primarily due to payroll expense that was $35 million higher in the current period. Approximately half of the increase in payroll expense was driven by higher incentive compensation accruals year-over-year. Last year in the third quarter, we released our bonus accruals when it became clear that we would meet our 2009 performance objectives. However, based on performance through the third quarter of this year, we believe it is likely we will meet our 2010 performance objectives and we continue to accrue for them accordingly. The majority of the remaining year-over-year increase in payroll expense was due to the impact of changes in foreign exchange rates stemming from the conversion of our Canadian results into US dollars. It is important to note that while payroll expense was up for the reasons I just mentioned, head count was actually down 2.6% year-over-year in the third quarter.

There were a few other notable operating expense variances compared to last year's third quarter. First, Company sponsored pension expense was $9 million higher in the current quarter, which is in line with the guidance we gave in our 10-K. Second, last year we had a $9 million loss in the third quarter related to COLI. This year we recorded a $5 million gain, resulting in a $14 million favorable comparison year-over-year. Third, fuel expense was $13 million lower than last year and, fourth, the provision for bad debt we recorded in the current period was $12 million. This compares to $31 million in the prior year period, resulting in a $19 million favorable year-over-year comparison. The current provision is based on recent activity and simply means that there are fewer customer accounts meeting our criteria for write off. For the current quarter our bad debt expense as a percentage of sales was 0.14%. Earnings per share for the quarter increased 10.5% to $0.42 per share. The $0.42 of earnings per share includes a $0.01 favorable impact related to an increase in cash surrender value of COLI compared to $0.38 of earnings per share in the prior year, which included a $0.01 negative impact from COLI.

Turning to a brief update on our business transformation initiative, today we're updating our fiscal 2010 estimate of the net impact of this project. The revised estimate I will provide you represents the net impact of the project on our financial results. This means it includes estimated benefits from the project as we define them and it excludes costs for those SYSCO employees that we have redeployed and dedicated to this project. As we've discussed previously, we do not consider the cost of employees that were redeployed to the project to have an incremental impact on our financial results. To be clear, this is the same basis underlying the estimates we provided at our Investor Day last December. We now expect the project will decrease diluted earnings per share this fiscal year by an estimated $0.03, which is lower than the $0.05 estimate we presented at our Investor Day.

As Bill discussed earlier, the project work is on schedule, and the change in estimate is not an indication that we are behind schedule. The change is primarily attributable to two reasons. First, the balance between expense and capital spend has been more weighted to the capital side than originally estimated. As a result, EPS has not been impacted as much. At the same time, our cash expenditures for the project are on track with expectations and, consequently, we have not changed the total estimated cash out lay of the project. Second, we're seeing slightly higher benefits than anticipated at this stage of the project. The benefits expected for this fiscal year are modest and come primarily from payroll savings. For example, when we redeploy people to the project we anticipated that we would back fill certain positions. However, we have not yet done this to the degree originally projected and this is resulted in a greater benefit.

Turning to cash flow, cash flow from operations for the first 39 weeks of the fiscal year was $466 million compared to $985 million in the prior year period. Cash flow from operations in the current period is net of IRS settlement payments which totaled $475 million. Working capital has slightly increased from the end of the prior fiscal year in June 2009. Receivables, payables, and inventory have all increased due to the increase in sales in the third quarter. In addition, receivables tend to trend upward at this point in the year. This is due to a seasonal shift in sales mix, with sales from multi-unit customers and school districts representing a larger percentage of our sales. The other significant category of changes within working capital relates to the decline in accrued and deferred taxes. These declines are driven by IRS settlement payments made during the year and correlate to declines in cash.

Capital expenditures for the quarter totaled $190 million. Looking ahead, we now expect capital spending for the full year to be in the range of $575 million to $625 million, as we continue to invest in our business. This spending includes maintenance items such as ongoing fleet replacement and facility repairs as well as growth items such as acquisitions, expansions of current facilities, potential fold outs and technology. Technology spending includes capital related to our business transformation project. In closing I would like to thank all of our associates for their hard work during the third quarter and for your interest in SYSCO. With that, operator, we'll now take questions.

Thank you. (Operator Instructions) We'll take our first question from Meredith Adler with Barclays Capital.

Thanks for taking my question. I would like to start by talking maybe a little bit about the growth you are seeing and whether there is anything in terms of the nature of the customers that are showing growth, is that -- is there some variation between them and are there any surprises there?

Good morning, Meredith. The growth we're seeing, first of all, it is just nice to see some growth, and I would say that we're seeing it across pretty much all the lines of restaurant segments for different reasons. So I think the quick serve QSR continues to be pretty strong on a relative basis, although the comparisons there are tough you are because they held up pretty well a year ago. What we think we're beginning to see with the consumer spending picking up somewhat is that the family style, which as you know, basically the family restaurant of all different varieties, that's generally drives our business, and that seems to be picking up as well. I would say even on the high-end where over the last year-and-a-half, maybe almost two years some of the high-end steak houses, those types of places, those numbers are beginning to improve as well, partially, I think, because the comparisons are relatively easy. We've had a really tough year and a half, or two years. Again, it is good to see the growth. It is still somewhat modest, but I would say it is across all segments.

I have a question about the shared services, whatever you call it, not just the facility but the operation.

You can call it shared services.

I am not sure whether you talked about it in those terms when you had your analyst meeting. Could you maybe just describe what functions will be moving to the shared services operation?

Well, we probably didn't talk a lot about it in detail at the analyst meeting because we weren't as far along in our design work. Generally, and obviously this is something that we're continuing to refine our thoughts on and communicate internally, but generally what you would find there would be more of your administrative type of services.

Administrative services that service lots of operating companies?

Yes.

Okay. My final question is just about the competitive environment because you do have a comment in your press release about it still be a highly competitive environment.

Right.

Any more comments?

We put that in there on purpose, or at least I did, from the standpoint that like I said, we're pleased. We have seen strength in the economy here for a while. We think we're beginning to see the consumer participate, and as a result we're seeing some growth with our customers and obviously in our top line. I want to temper that a little bit with just the reality that it is still very competitive out there, and I wouldn't expect that to change a whole lot in the near term.

Okay. Great. Thank you.

Thank you.

We'll take our next question from Neil Currie with UBS.

I just wonder if you can give us some insight on your outlook for deflation and any trends you're seeing in April so far, whether you're actually starting to move into inflation now?

Our track record and projecting inflation and deflation isn't really strong, but what we're trying to signal to you in our comments this morning is we believe that the deflation has subsided to the point where, as we say in March, it was pretty flat, and we don't have a lot of information yet so far this quarter, but it looks like it is starting to pick up modestly. So I think we're back in an overall net inflationary environment, albeit very modest.

Okay. In terms of the underlying demand, you obviously talked about easy comparisons because it was so tough last year, but I wonder if you can talk to what's going on behind the underlying volume growth that you're seeing right now, how much of it is share growth and how much of it is either how much have you seen a pickup in demand recently?

Well, we're clearly seeing a pickup in demand, and as I said we're real pleased to see that. Obviously it is good for our customers. It is good for our people, the psyches of everyone in the industries has been difficult for the last year-and-a-half to two years. So from that standpoint we're seeing an overall pickup in demand. We think we're still taking share. That's a hard question to answer at a given point in time, but we don't have any reason to believe that we're not going to continue to take share. So we're pleased with the year-over-year numbers and I think if you go back two years we would tell you we're a little below where we were two years ago, and that's consistent with our head count reductions and that type of thing as well.

Finally, just I wonder how fragile or robust you think this recovery is and if gas prices were to get notably higher over the summer, how would you think that might impact both demand and your customers?

We had fragile in one of our early drafts, and we took it out because we think we moved past fragile, but we're not quite to robust, so somewhere in between there. I think what we need to see -- personally I am encouraged we're starting to see the consumer start to participate. That's what we said all along would be the key for success, is we can see case growth and that allows to us do what we're really good at, which is leveraging that case growth. So that's our best read in that situation right now, I think.

Thanks very much.

Thank you.

We'll take our next question from Greg Badishkanian with Citigroup.

Great, thanks. In terms of a little bit on the food inflation and promotional environment, as you go into an inflationary period, how much does that help you relative to when you look back two quarters ago you were running, even last quarter, negative low single singe. How much benefit do you get as you get to inflationary environment?

Greg, it is hard to quantify. What we have consistently said, and for those of us who have been around this business a long time, it does hold up. The preferred environment, if we can pick an inflationary environment, it would be one of modest inflation, one, two, maybe three points inflation for a couple of reasons. That's a level that typically our customers have been able to handle over the years with their customers, and, two, we can manage that fairly well. So that's the more favorable environment. The environment we were in a year, two years ago, where we were looking at 6%, sometimes 8% inflation, that's not good. That's not good for anyone. It is not good for the customer, and certainly not good for the industry. What we think we're coming out of, the deflationary environment would be the lease attractive probably of the three, although I have to say we have been real pleased how our folks have managed through that over the last six it nine months or so. So it will help us some, but I think the main thing when you look at our business right now, where we're at right now is we need to see case growth. Our customers need to see volume increases, so relatively low levels of inflation that shouldn't be a barrier.

Absolutely. And then in terms of the promotional environment as you start to see inflation, as you start to see some decent volume growth and that only builds as the consumer gets stronger, do you think that that's going to abate the promotional environment?

I think it will affect it. There is always a lot of promotion activity that goes on in our business, both with our customers and we do some as do our competitors. I would hope that what it results in is a more targeted, more cost effective promotion environment. Where as what we were seeing six and twelve months ago is just across the board type of promotion activity that it is not clear that that really was successful for a lot of people that implemented that, and we really didn't approach it that way. We took a more targeted approach.

Great. Thank you very much.

We'll take our next question from Andrew Wolf with BB&T Capital Markets.

Thanks. Good morning. Bill, I think when you updated us last quarter you said January was cases were up, but it sounded like barely, and I think it sounds like from your tone in February sort of the same and March strengthened up. Can you tell us a little about how you think -- I am inferring, but I would like to ask you directly how April went. Did you see that follow through and could we expect perhaps an update on Mother's Day since May is a big month for the Company?

Now you're asking a lot there on Mother's Day. As far as April goes, Andy, that is why we took fragile out of the early draft. I think we have seen the month of April, and it is pretty comparable to what we saw in March. So we're, again, we're not out of the woods with this recovery yet, but we have seen two good months in a row, and April is encouraging. We'll see on Mother's Day. The tricky thing on Mother's Day is what I alluded to earlier. That is our biggest week of the year, and it is always an exciting week within the operating companies, but that in terms of what that number is, hopefully it will be up over last year. I think it will be interesting to see where it is relative to two years ago.

Great. Just on the SAP update, some of those things sound like getting some of the benefits perhaps above budget, sounds like they could be longer lasting than just this fiscal year, where as the accounting may just may not be, may just be the way the project is rolling out, but should we perhaps anticipate some updates to beyond fiscal 2010, perhaps when you present your fourth quarter numbers?

Yes. You can anticipate updates. Our current intention is when we come out with fourth quarter, we'll give, and I think SYSCO's traditionally given guidance on a few items for next year, capital expenditures, et cetera, and we have said that we will try to update you on the business transformation for 2011. We will also be taking a fresh look periodically and we're going through it now, on the entire chart that we presented in December. We may not present that in our fourth quarter update, but we would intend to present that certainly at our Investor Day later in the fall and winter, so you can expect updates as we go forward.

Should we -- it sounds like it is certainly coming in early yet, but it is being run tightly and some of the benefits are better than expected. Would we be getting ahead of ourselves if we took something away from that to the positive side?

Yes. I will echo what you just said. I think it is being run very, very tightly. I think the team that's running that is doing a good job of cost control. I wouldn't get too euphoric yet about seeing more benefits here. As we describe and we were pretty careful to describe it so you understood it, some of the benefits we're seeing right now is we didn't back fill yet some of the positions we thought we would back fill. That doesn't mean we won't back fill them. Obviously we don't hire people unless we need them, but there is a chance we still will back fill some of those people, so that benefit would then go away. We're giving you the best look that we have right now. That says that for this year we're not going to spend as much as we thought, but it was important that we noted that we're not changing the overall cost of the project. Eventually we're going to -- we believe we're going to spend the money and it will be broken down between the capital and the expense fairly similar to what we had anticipated when we described it at Investor Day.

Thanks. Just one last question as a follow-up on the -- now that there is some inflation coming back. As your sales people and your operators are seeing week to week sequential increases in protein and other categories, dairy, maybe keep produce out of this since it spiked, but sort of somewhere normal incremental inflation. Is the market basically absorbing that, which it normally does or are you seeing some sticky pricing and a little gross margin pressure?

Like I said, Andy, it is Bill again. We have done a nice job managing the margins I think through this last year or so. It has been very competitive on the street. I would say, especially right around the first of the calendar year, and we have continued to work on margins here over the balance of the quarter and into April. As far as the stickiness, I would say to your point, most of what we're seeing on the inflationary side is more commodity driven right now, but it is not radically up. Dairy is up, but dairy has been down for quite a while, and so I would say we're so far we have been able to pass along most of it.

Okay. Thanks a lot.

Thank you.

Thank you. We'll take our next question from Mark Wiltamuth with Morgan Stanley.

Hi. Good morning.

Good morning.

I wanted to ask a little bit about your operating expense progression. You just lapped the big cost cuts from last year, the operating environment is getting a little better. What do you think is a reasonable progression for operating expense growth in percentage terms?

Chris is hesitating, so I will start. I wish I knew the answer to that exactly. I think what we need to call out here, Mark, is I think we're at an inflection point. So for the last year, year-and-a-half, the way we have been having to look at the business is how aggressively can we, should we cut relative to the decline in volume. And as you can see, we have been able to manage our head count pretty much in line with the volume decreases, and that's necessary in this business given that people and people related is 70% give or take of our total cost structure. So I think we have said here for the last few months anyway that we have, short of continued productivity improvements, which we expect to continue to enjoy like I talked about earlier, we have cut a lot and it is really going to be hard to cut a whole lot more.

As we go forward with the premise we're expecting to see modest growth, I think you will see us and we actually for the first time here in several quarters, we are up year-over-year with our sales head count, marketing associates and so on. So we will add there and we have been adding there over the last six months or so, but I think the other areas, assuming we see a relatively modest pick up in cases, we still have quite a bit of capacity in our facilities and in our trucks to continue to leverage. So I think nothing really changes other than the environment here, so you could expect us to continue to try to drive the earnings faster than the top line.

And those changes you have made to the marketing associate head count, do you think they have had time to have an effect on market share or is it still too early?

I think it is a little early. The thing to keep in mind is even though the net number may have been flatter for a period of time, we're always refreshing the pool of sales people. So when we're at our best and things are quickening, there is always a percentage of that sales force that's in what you might characterize as a training mode. So the folks that were coming out of last year, they're a little better than last year and a little more experienced, but I would say what we're speaking to here today that it takes, generally to be honest with you, it takes 18 months to three years for people to fully hit their stride in the sales area.

Could you give us an absolute number on how much the volumes changed? We're doing back of the envelope math and we think it is around 1%. Is that about right for the volume gain?

Mark, as you know we have never really talked about specific volume increases. For the first time this release we actually indicated whether they were up or down. One of our goals is to try to get to a point where we're comfortable talking about volume increases, but there is math we have to play through before we can get comfortable releasing that number. There is a number that I know all of you get to called real growth, which you just takes the number that we put out in terms of sales and then you adjust it for the acquisitions, the 4X, and the deflation or inflation, and you get to a real growth number. I think that's what you were referring to when you got to the 1%.

Yes.

I think a lot of you do that calculation, and you can kind of see the trend in that number. We, again, we don't put that in the release because we're advised that it would be non-GAAP and we can't talk about it.

Okay. Thank you very much.

Thank you.

We'll take our next question from Ajay Jain with Hapoalim Securities.

Hi, good morning. Thanks for taking my question. In relation to the $0.03 dilution for ERP, can you confirm the earnings impact in Q3 and what you're anticipating this quarter?

We're not really talking about it on a quarter by quarter basis, Ajay, and that's kind of what we indicated back at the Investor Day. Our goal is to give you an annual impact from that so you can put it into the models, which I know are important to you. Trying to do it quarter by quarter is going to be very difficult for us to predict in advance because of the significant timing things that occur during the quarter. So we're not doing that today. In the 10-Q we do actually talk about ERP expense -- well, I am not sure if it is broken out of ERP expense data, it is probably not. We do indicate we spent I believe 70% of the range that we gave you.

Do you have any comment, Chris, on the lower interest expense and why it was down a little bit sequentially?

Yes. We have swaps which were not in place at this time last year. I didn't actually go back and look at the effective interest rate between this year and last year. I am not sure it is significantly different, so I am I am guessing majority of that difference was the swaps.

Okay. I know you mentioned that sequentially the volume trends improved each month in the March quarter and sounds like volume trends are still pretty solid through April. So with the improvement in case volume trends, are you any closer to making a decision for the Indiana RDC, because it sounded like a couple of months ago the only thing holding you back was a more material improvement in demand, so if you can comment.

Yes. Ajay, this is Bill. We are, and -- but we're just not quite there yet, and the one other factor -- to your premise here your question that's exactly right. We were looking to see some meaningful improvement because it is basically is a 24 month time period from the time you break ground until you're at full ramp on one of these deals. The, I won't call it complication, but the other factor that has entered the equation here is synchronizing the Midwest RDC with our ERP roll out to those companies that are impacted there. So I don't expect us to break ground this year to be honest with you, but I do expect later in the year to be in a position to be more specific on that, but it is kind of moved off of the volume issue and it's just trying to sync this thing up to where it is the most efficient relative to how we do the ERP roll out but with our operating companies.

Okay. Finally, I think you made some changes last year in your bonus structure, at least at the corporate level. So after you factor in the comparisons from last year and the changes in your incentive structure, I am wondering how material that impact could be on bonus accruals for this quarter because I am assuming that the corporate level the majority of bonuses are still paid out in Q4. Is that correct?

Well, yes. They're paid out at the end of the year. We accrue for them throughout the year. We really didn't make any changes last year, Ajay. Two years ago we made some changes relatively modest. Went to a return on capital relative to -- as opposed to return on equity and that type of thing, but the thing that hasn't changed is it is pretty much driven on improvement. Earnings per share improvement over the prior year and then the other access on the grid is three-year trailing average on return on capital. I think the substantive difference this year is we have earnings improvements and would expect to pay out bonus this is year where as last year we didn't pay them out at the corporate level.

Is it material enough that you think it is appropriate to call out?

We did, yes.

We called out the year-over-year change. The absolute amount of it, no, we have been accruing for it periodically, and it doesn't rise to the level of materiality to be honest.

Thank you.

We'll take our next question from Jason Whitmer with Cleveland Research Company.

Good morning. Bill, you've absorbed a few more responsibilities over the last quarter as Ken retired, so can you talk a little bit about some strategic, tactical and maybe people changes, whether in Houston or the field that you have been evaluating or executing?

Be happy to, Jay. As you expect, it is not really just Ken's retirement, although that's a significant event for us here as SYSCO, Steve Smith also announced his retirement. In conjunction with that we are making some changes. All of these changes are effective with the new fiscal year, so we're in what I would characterize as a transition period right now. We're also in a period where over the last week or two and in particular the next six to eight weeks, we're very focused on doing our profit plans with all of our operating companies as well as here at corporate.

Essentially what you will see going forward is Mike Green will take over responsibility for the US Broadline operating companies. Larry Pulliam will continue to oversee contract sales or distribution services corporate group as well as SYGMA and our specialty companies, so those two gentlemen will be overseeing the business. Reporting into Mike will be Scott Sonnemaker and Chuck Staes who currently report into Mike, and we have added a third gentleman, Mike Headrick, who will oversee our companies in the south. Mike is a long time SYSCO veteran, very astute business person and we're excited to have Mike step up here and in conjunction with that, we also identified eleven other folks, as well as what we're doing up in Canada, which I would characterize as more market VP's, and this is a little new for us, Jay.

If you go back to I don't know, fifteen years, I think around the mid-90s we went to the senior VP of ops structure which was a first for us and at that time and for many years after that most of those folks -- generally we had four regions. They might have fifteen, maybe as many as 20 companies which was effective but probably not overly manageable in some ways. As you known recent years last year or two in particular we have gone to more of a pod structure, which I think has been the transition to get us to where we're heading today which is more what I am going to characterize as a market structure. We're trying to be very customer centric, and so with this market structure we're going to have 11 plus Canada folks overseeing markets. They will not be running operating companies, and they will be working very closely with the operating company Presidents in their marketplace to drive out our go to market strategy, to effectively implement the 212 business transformation work, to enhance what we're doing on the talent management side of the Company, to better develop customer relationship that is might crossover local lines, as well as hopefully bring even more effective focus to our acquisition work. So I am excited about that. It is a new structure, and we'll begin to transition into it here as we go into the new year.

In addition to that, we have asked Kent Humphries, who has done a great job running our Canadian business, to pick up expanded responsibilities, and Kent is going to report into Larry, and head up our contract sales effort across the country, and Kent brings not just a lot of experience, but a lot of, frankly, enthusiasm and energy to that position and tremendous relationships both within SYSCO and with the customer base. And in addition to that Alan Hasty, who currently runs our Cleveland Company, is going to come down to corporate and work with Bill Day and his group to Alan's primary responsibilities will be to work in our BSEC merchandising area. So we have made several moves. There will be some more that I am sure you will learn of, which will be more replacing some of the folks that we promoted, and those will come out as appropriate over the next couple of months, but essentially to cut through it all, as we go through this change, as we transition through the retirement of Ken and Steve, I thought it was appropriate to leverage the talent that we do have in a bigger way, and we have a very deep bench in SYSCO. We have a lot of people that are more than capable and want to contribute more, and that's what's behind these changes.

That's helpful. Thank you. The shared service announcement, sounds like if you're doing a separate facility being down in Houston a number of times looks like have you a big campus to begin with, I am curious how big is corporate now and how big is the shared services and head count as you build that from scratch?

We're going to come back to you with the specifics on that. The difference between the campus that you have seen, which for the record is two buildings, but it is big, and there is plenty of square footage. So hopefully, Jay, it will be an opportunity for us to add capacity here over time. The difference in the facility that we're going to be moving into is it formerly was a call center for another major company, and we think it is best suited for our business going forward. It is quite large. It is several hundred thousand square feet, and we'll be able to speak to the numbers and all of that I think as we get closer to the end of the calendar year.

Okay. Thank you very much.

Thank you.

Thank you. We'll take our next question from John Ivankoe with JPMorgan.

Hi. Thanks. First just a housekeeping question on fuel costs. I think it was mentioned that it actually was a benefit in this quarter. If you could remind us or tell us how to think about the next six or twelve months and the second question may be a little longer. Just kind of the overall state of the industry in terms of health of competition, if you think most of the competition has gotten out of the woods and is going to benefit from this improving environment or there might be things that I don't understand, and there could even be closures or more share loss of the competition and whether this is the right environment for you to be looking at acquisitions as we begin the up turn.

John, this is Chris. I will take the fuel cost one first. Fuel costs, we look at it as a net between the cost of fuel and the surcharges. On a year-over-year basis we saw it benefit. The guidance that we have given is we expect the fuel costs to be as much as $50 million to $80 million better than last year, and the fuel surcharge to be about $60 million roughly worse than last year. So net net, depending on where we fall in that first range, we should see a benefit year-over-year. That's recent guidance, so that's where we believe the net fuel charge will end up for the year.

I think as far as the competitive side, John, look at the improving climates good for everyone. It is good for our customers. It is certainly good for us. I would expect it is good for our competitors. Now, I think going forward we're extremely well positioned to grow and to continue to invest in our business. The one interesting thing as we've talked before with the model for this business is, when you're not growing, assuming you can manage your receivables relatively well, you actually don't need a lot of capital unless you're going to expand our your business. When you do grow, that does put pressure on the working capital, and so I think from that standpoint if we have some competitors out there that are able to grow, then they will be dealing with that and I am sure they will be able to deal with that. I don't see a whole lot of change on the competitive environment. On the acquisition angle on that, we keep hoping for angles here, and perhaps a better environment will help us all come to more realistic terms on valuations on these situations and people will be more motivated to strike some common ground on valuation now that the business is beginning to improve. I think it could be a good thing.

Thank you.

Thank you. We'll take our next question from Bob Cummins with Wellington Shields and Company.

Good morning, Bill.

Hi, Bob, how are you?

Fine, fine, congratulations on your up turn and it strikes me that this is only the beginning. Obviously your numbers are up a bit over last year, top line I mean, but it seems -- as we all know, Americans love to eat out, and the environment I think, as it is developing, is going to encourage them to eat out even more, and obviously from your point of view as a company, you don't add a lot of bodies to your staff as the business increases, you just load more goods on the truck which is very profitable business. It seems to me that both top line and bottom line results over say the next four quarters or so should continue to gain substantial year-over-year. Am I right in thinking that?

Well, I will start first.

Don't comment if you don't want to.

I almost hate to answer that. I don't know if I could say it any better, Bob. I will start and let Chris clean it up here on the financial side. I think if you take a purely operational point of view, you're exactly right that with an improved environment out there our customers should see more traffic and that translates into more opportunity for us to grow and to be more efficient. We have done a nice job, Bob. We have done -- we have been able to grow our pieces per mile and all of that type of thing, but it is difficult to grow your pieces per stop when your customer's business is off. So certainly that would be a metric that we would expect to improve, so we have -- there is no way to know on these things.

If you go back and look at the psychology and over the last year or two years, we have kind of struck I think a reasonable middle ground. We have never said that we thought that the industry was just going to go totally south for an extended period of time. We certainly acknowledge that the last year to two years have been difficult, and the industry has declined. I think the reasonable case continues to be what we talked about in New York in December which is a modest nominal growth for the industry over time, and that would translate to good things for us. There is below the line things for next year that I think we have called out and that you would need to deal with and I will let Chris transition that conversation.

I hate to be the finance guy that dowses cold water on anything, especially since you stated it in such a nice way. I agree with everything Bill said in terms of the medium term, short-term where we're just looking at year-over-year lapse. We have gotten good benefits this year from COLI, which is not the way you want to make your numbers obviously, but that's just what's happened in the market. We certainly would not anticipate that type of benefit occurring every year. We have gotten some benefit this year from fuel. We have gotten some benefit year-over-year from bad debt expense. So some of the things we have talked about in these calls as being year-over-year benefits of course, we can't count on having those come back in our favor next year.

Next year is the year where we just need to have operating performance and I will go back to what you said, that the signs look good, the trends look good, and we're very hopeful. Bill alluded earlier we're this month, next month doing all of our profit plans with the operating companies and we're rolling all of that up to see what we really believe we can accomplish next year, and we're also anxious to see what our operators those closest to the customers believe. As we roll that up and bake it into our one-year forecast of all of these items, we'll have a better idea what 2011 looks like.

Good. Appreciate that.

Thank you. We'll take our final question from Meredith Adler with Barclays Capital.

Thanks. I just had two quick questions. The first is will you be making an announcement this year about sales for Mother's Day, and I wasn't sure if you did that last year?

I am sorry, sales from where?

Mother's Day. You used to make an announcement every year.

Did we do that last year? I don't think we did last year, Meredith.

No, I don't think so. Do you think you will do it this year?

Probably not.

My final question is just about that's a fuel expense. You do hedge in some fashion a certain percentage of it. Can you talk about how much of it is hedged through the end of the year? I was kind of surprised that you had such a big range on the cost given that you only have one quarter left for the year. So I was wondering is it less hedged now?

We do have -- we do put in place hedges. We essentially hedge a portion of our fuel. When we look at how much the hedge we factor in the fact a lot of our contract customers, whether they be SYGMA or contract customers, there is already effectively a hedge in those contracts in terms of a fuel surcharge. So we look at what effectively unhedged and we go out and put in place hedges on a substantial portion of that. I think the number is roughly 40% of our overall gallons are hedged. We roll those forward month to month. That just means we keep going out another month, another month, another month as we see the need to do that, so we're never completely hedged in terms of real financial hedges in the marketplace. 40% is roughly the number where we have been at. The guidance number comes from several things, one of which is we don't know what fuel costs are going to do in the next couple of months. So the guidance is still reasonably wide.

Great. Thank you very much.

Thanks, Meredith.

Thank you. Ladies and gentlemen, this does conclude today's presentation. We appreciate your participation. You may now disconnect.