西斯柯 (SYY) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to the SYSCO's first quarter fiscal 2011 earnings results conference call. 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 Neil Russell. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Thank you for joining us for SYSCO's first quarter 2011 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 July 3, 2010, and in the Company's press release issued earlier this morning. On the call today, we will discuss certain non-GAAP financial measures. You can find the reconciliation of these non-GAAP measures to the applicable GAAP measures on our Investor Relations website at SYSCO.com.

Also, all comments about earnings per share refer to diluted earnings per share unless otherwise noted . Lastly, we would like to remind you that our Investor Day is scheduled is for December 2nd. If you haven't already registered, please do so prior to November 22nd. With that out of the way, I will turn the call over With that out of the way I will turn the call over to our President and Chief Executive Officer, Bill

Thanks, Neil. Good morning, everyone. This morning, SYSCO reported net earnings of $299 million for the first quarter of fiscal 2011. Our sales in the first quarter increased 7.4%, driven mainly by increased case volume and estimated food cost inflation of 3.3%. Case volume was higher across all regions in our broad line and SYGMA segments and the year-over-year increase represented the strongest improvement since the second quarter of fiscal 2007.

While the pace of the macroeconomic recovery remains sluggish, and restaurant traffic patterns continue to be under pressure, recent data suggests the industry is slowly recovering. SYSCO's gradual but consistent improvement in case volume confirms this trend and we believe we are continuing to grow our market share. We are pleased with our sales growth for the quarter, and I should also note that we achieved record first quarter operating income. Nevertheless, operating income growth over the prior year was less than our sales increase, as improved expense management was more than offset by a 46 basis point decline in gross margin percent.

Several factors contributed to the decline in gross margins. Approximately 10 points of the margin decline related to a change in business mix. While both our broad line and SYGMA businesses grew this quarter, SYGMA grew at a faster rate and since SYGMA operates a lower margin business, this mix shift impacted total margins. We do not view this as a negative outcome. As a matter of fact, we see a great deal of opportunity on the contract side of the business both in the broad line and SYGMA segments. The key is to strike an appropriate balance between street and contract sales growth over time.

The remainder of the gross margin decline was split about evenly between two drivers. The first is a set of ongoing strategic pricing initiatives designed to drive volume increases in targeted categories. While these initiatives are putting near term pressure on our margins, we are starting to see double-digit volume increases where these programs have been effectively implemented. We expect this specific pressure on gross margins will persist in the near term, but we also believe these initiatives will result in profitable market share gains over time.

The last component of the gross margin decline relates to the significant rate of inflation in the meat, dairy, and seafood categories, which together approached 10%. While we typically are able to pass through modest levels of price inflation on a timely basis, it is more difficult in the short-term to pass through double-digit price increases to our customers without negatively impacting their business. Our ongoing productivity initiatives helped to mitigate a portion of the gross margin pressure, with US broad line warehouse cases per man hour and cases per trip increasing compared to last year's first quarter. In addition, total sales per employee also increased year-over-year.

All that said, while operating performance in the first quarter is acceptable, it is not up to our standards. We recently held our annual Senior Leadership Meeting at which the importance of profitable sales growth was discussed. Our management team understands that we must find ways to grow earnings faster than sales during these challenging times.

Turning to our multi-year business transformation initiative for a moment, the project remains on track. We are preparing to begin the last of our four cycles of testing prior to go live at our pilot facility early next year. We are also beginning to staff SYSCO Business Services and have recently named Kirk Drummond to lead this strategically important part of our business. Kirk has been with SYSCO for the last 24 years, working in various capacities at our local operating companies and in corporate including five years as our Chief Information Officer and the last five years as our Senior Vice President and Treasurer.

This organization will centralize back office, administrative functions such as accounting, receivables, payables, billing, and call center support. I would like to close by thanking our associates and our management team for their ongoing contributions and commitment to SYSCO's success. This is an exciting time in our Company's history and our associates continue to deliver a high level of service and support to our customers. While our business is facing certain challenges, we remain dedicated to being our customer's most valued business partner, and to investing in the future growth of SYSCO. We know this focus strengthens our competitive position, and provides a strong foundation for success over the long-term.

Now I will turn things over to Chris, so he can provide additional details on our financial results for the quarter.

Thank you, Bill, and good morning, everyone. For the first quarter, sales were $9.8 million or an increase of 7.4% compared to the prior year, driven mainly by case volume growth and the impact of food cost inflation, which we estimate to be 3.3% for the period. In addition, acquisitions within the last twelve months increased sales by 0.6% and changes in foreign exchange rate increased sales by 0.5%.

Operating income increased $9 million or 1.8% to $506 million during the quarter. While sales increased 7.4%, gross margin increased only 4.8%, and operating expense increased 6%. Operating expense increased $75 million for the quarter, due to three main drivers. First, salary and related expense increased approximately $40 million, primarily from increased case volume during the quarter including increased commissions and incentives and delivery personnel costs. Total head count was down very slightly compared to the prior year, meaning we held our head count levels relatively steady despite increased case volume.

While total head count is down, we've increased MA head count over the last year. It typically takes one to two years for an MA to be fully productive within the sales organization, but we consider this investment in the business to be an important one that will enhance our ability to grow sales as the industry recovers and continues to take market share. Second, as we have discussed on last quarter's call, pension expense increased by $15 million year-over-year. Lastly, operating expense included a $14 million benefit from the impact of corporate owned life insurance or COLI which is an unfavorable comparison to the $21 million benefit we recorded in the prior year.

Net earnings for the first quarter were $299 million, declining $27 million or 8.3% compared to the prior year. Net earnings reflected $39 million year-over-year increase in tax expense, primarily due to the IRS settlement gain and the higher nontaxable COLI gains recorded in the prior year. Excluding the impact of COLI in both periods, and the IRS settlement gain, net earnings for the quarter as adjusted would have increased 3.4%. In addition, the $15 million year-over-year increase in pension expense impacted net earnings by another 2.8 percentage points. Earnings per share declined 7.3% to $0.51, which included a $0.02 benefit from COLI. In the prior year period, earnings per share were $0.55 and included a $0.05 gain related to the IRS settlement and a $0.04 benefit from COLI.

Turning to cash flow, cash flow from operations for the fiscal year was $227 million compared to $42 million in the prior year. Cash flow from operations increased year-over-year, due mainly to the timing of our IRS settlement payments. During the first quarter of this year, we had no settlement payments, however, in the prior year period we paid $316 million. We expect to pay a full $212 million in settlement payments during this fiscal year and again next year.

As a reminder, these scheduled payments include $106 million cash outflow in the second quarter period and a $53 million cash outflow in the third and fourth fiscal quarters. Cash flow was operations was negatively impacted during the quarter by an increase in accounts receivable and a decline in accrued expense. Receivables increased due to higher sales during the period and the decline in accrued expenses this quarter was due mainly to the payment of incentive compensation related to the prior fiscal year.

Capital expenditures totaled $143 million for the quarter, including facility expansion and replacement, fleet replacements, and investments in technology, including our business transformation project. In closing, while the business environment remains challenging we're seeing improvements and our operating companies continue to have a strong focus on growing cases, controlling costs, improving productivity, and successfully implementing our business transformation. As a result, we are confident that SYSCO is well positioned to take advantage of the economic recovery as it takes hold. With that, operator, we will now take questions.

(Operator Instructions).

We'll take our first question from AJ James with Hapoalim Securities.

Hi. Good morning. I just wanted to clarify a few things on the gross margin impact during the quarter. I think some of that decline I am sure is a little bit cosmetic because of the inflation impact, and, Bill, I think you already talked about the mix shift between SYGMA and broad line, but as far as the strategic price investments that I think you cited in your press release it seems at least to me a little bit unprecedented for SYSCO to have to resort to discounting, based on the way you guys have typically gone to market, so can you just talk about how far reaching these price investments will be over the rest of the year, and if you had to quantify how much of that 46 basis points decline was driven by price investments in this last quarter? Is that something you can quantify at all?

Good morning, AJ. I will give it my best shot and we'll see where we end up here. To repeat, of the 46 basis point decline, we think about 10 of that is a business mix with SYGMA versus the broadline, so that leaves you over a third of a point of margin decline, and our best estimate is about half of that is, we would attribute to some pretty significant inflation in those three categories I mentioned, meat, dairy, and seafood, and the other half, too, I don't know that I would call it discounting or pricing so much as what we would characterize is as what we said, strategic category initiatives.

Where we see opportunities, AJ, where we're somewhat under penetrated, and we think it is appropriate for us to get a little more focused and get a little more finely priced in those categories, so we have been into this year for a few months, and I would expect that to continue here over a good portion of the balance of the year, but it is not a random type of thing. It is distinct categories, and we're doing it in different parts of the country and over time throughout the country, and, again, I would expect us to maybe not in twelve months, but over a reasonable period of time, see a payback there on the sales line.

Going forward with the gross margin implications from these category management initiatives, would the magnitude be similar to the quarter?

It is really hard to predict. There is a lot of things that go into gross margin, AJ. I would say for this piece of the pie so to speak, I think as we said and I think as I said in the narrative, expect the pressure to continue here for at least a couple more quarters. With that said, I think there is other things we can manage better, including the inflation part and that's what we were alluding to in terms of our discussions with our management team, and there is opportunities for us to manage this inflation environment somewhat better.

Okay. Just this one quick follow-up, on a tax rate, I know there is variability each quarter based on stock compensation and COLI, but could you talk about what you were assuming as far as a normalized tax rate for the rest of the year?

AJ, this is Chris. I mean, obviously normalized rate for SYSCO is probably 38%, 39%. That's going on with the tax rate is primarily driven by the IRS settlement last year and the COLI both last year and this year. Those are the two main drivers and the difference in the tax rate.

Okay. But as far as what you're modeling internally, is 38% to 39% representative of what we should be assuming as well?

That's a normalized tax rate. I am not really commenting about what we expect for the year to be candid. We don't really know what COLI is going to be for the full year. We start the year off assuming COLI is going to be flat, and obviously it wasn't flat in the first quarter and we got a benefit from it, and we don't know what's going to happen for the duration of the year. I would say we start the year assuming 38 or 39%. We knew we were going to have a lapping issue in the first quarter because of what happened in the first quarter last year.

Thank you very much.

Thank you.

We'll take our next question from Meredith Adler with Barclays Capital.

Thanks for taking my question. I was wondering since you were kind enough to give us a sense of how much of the gross margin was due to the strategic price investment, maybe you could talk a little bit about how much of the volume the case volume increase you saw on also came from those specific categories. I think you said in the prepared remarks you did get a good response in sales in those categories.

Good morning there, Meredith. I will give it my best shot again. I think in terms of putting that together, what we did say here is that we are seeing double digit increases in those categories where we effectively roll these initiatives out, and we're not all the way through doing that. So it doesn't transcend the entire book of business so to speak from the quarter, but we're pleased with the sales growth that we are seeing. With that said, there is other categories as well, that contributed to the sales growth and some of which were the same ones that had pretty significant inflationary pressures, so it is mixed, I guess. There is not a direct correlation, is the short answer.

And then I have a question about inflation. I know you said that you think that the operators could have done a better job passing it along. Maybe you could talk a little bit about the conditions. I'm sure they all want to make money, so what the conditions might be that would be making it difficult for them to pass that along, and is it fair to call that price competition?

What I said, and I want to be really clear because a lot of our people are listening here, too, I said we need to do better going forward. We're fine with the quarter, and as I said, it was acceptable and these are very interesting times in addition to being exciting times, so you have a situation out here where a year ago we had about 3.5 points of deflation, cases were going the wrong way. A year later, we're seeing just the opposite amount of inflation and we're encouraged by the case growth, so if you look at it from a customer standpoint, our customer standpoint, if you go back three years, we have been through an environment of two years of pretty significant inflation, a third year of deflation, and now we're into our fourth year here where inflation is picking up in these certain categories, so I am not saying that we should have done better. I am really saying we need to do better going forward, and our folks understand that.

In terms of how you manage that, essentially you manage it territory by territory or account by account, and you look at each situation and you are always, at the operating company level, you're always trying to strike the right balance between opportunities for growth and opportunities to more effectively and productively service these accounts, with the reality that our customers are running a business as well and we need to be sensitive to what their high cost items are, and what their key concerns are. So that's why we have 8,000 commission sales people out there, and that's why we have Presidents in all of these operating companies is to make those decisions on an account by account basis and overall from an enterprise standpoint, we try to give them good guidance and feedback. And then on the contract side of the business, deflation as we talked before impacts a little different, and most of the categories are contractually linked to some type of pricing mechanism, and there typically is up to a 30 day time lag from the time the product comes into when the prices roll, so it depends on whether it is street business or contract business.

Okay. I just have a final question. You were talking about the SYGMA business growing faster and that you think you generally have opportunities on the contracted side. I was wondering whether the business transformation process is what part of what needs to be accomplished for you to go after the contracted business more aggressively, and make sure that brings at least a comparable financial benefit to the Company because it is obviously lower gross margin business.

I think the business transformation initiative is going to help us on both sides. It will definitely help us on the street side in terms of, I think our sales people have better tools to work with, as well as our customers and over time allowing our customers to participate more actively and what level of service they want and what types of price points and the whole standard opportunity there.

On the contract side, we're starting to see this already, but to your point I think we will see it more as we have better data and more integrated systems, is our big opportunity on the contract side is to create a more consistent face to the customer of all of SYSCO's capabilities. When you speak about we're effectively integrating our capabilities, we're talking about on a merchandising and sales side as well as across all of our different businesses, SYGMA, FreshPoint, the Meat Company, Guest Supply, all of those types of things, so I think the biggest opportunity on the contract side is just from an enterprise standpoint, being able to go after this business more cohesively and that's what we're looking forward to there.

Great. Thank you very much.

Thank you.

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

Good morning. On the business transformation process, when do you think we start to see some of the cost savings falling out of that because it seems like there is probably some duplicative efforts there at the operating company level versus the parent.

Mark, this is Chris. As we talked about, we finished the design of the business transformation process. We're going through testing, the fourth round of testing and we'll start the rollout sometime in the early part of next calendar year. We won't actually start to see reductions in costs until we get further into the rollout process, and that's the schedule of numbers that we put up back in December at the Investor Day meeting which we'll update for you this December at the same time. So while we outlined all the costs and the way we have been doing that is incremental net of benefits, you really don't start seeing significant benefits until fiscal 2013 and in that year our current estimate again will be updated in December, but what we showed you last December is the benefits would offset the costs in 2013, so about a break even that year and there after we'd see more benefits than costs.

Okay. So we'll watch for that update on the schedule. On the inflation, what do you think is a comfortable level of inflation to pass through where you can get it through and it doesn't kind of shock the system and you don't have problems passing through margin there?

I will let Chris start with that one, Mark.

That's fine. What we always talked about is small amounts of inflation are great for us. 1, 2, maybe even 3 points of inflation. We can handle that and our customers can handle that. When you start spiking above that, it causes some problems. We typically believe we can always manage those increases effectively, but they may take more time to pass through the system.

What we're commenting about this quarter is three categories where as Bill said, we saw inflation combined in those three categories of close to 10%, and that is more than we can pass through in any timely manner, so 1, 2, 3, we can handle that. Our customers can handle that. When he start spiking and across the board or in certain categories, it gets more difficult, and these particular categories are meat and produce and seafood especially are fairly high margin categories.

I think the other plan I think which I am sure most of the people on this call understand is this challenge is not unique to our industry and certainly not to us. There is a lot of companies that are dealing with this growing inflation issue and product mix right now, so we need to stay close to our customers and for that matter, our suppliers and make good decisions and I believe you will see that we'll do that.

Okay, thank you.

Thanks, Mark.

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

This is Jeff Hans actually on behalf of Greg. Following up on the strategic pricing initiatives tha you guys have rolled out as it relates to the overall environment, what are you seeing from your competitors I guess following those initiatives in those specific markets, and I guess just overall, is the environment still pretty competitive versus where it has been the last few quarters?

Good morning, Jeff. I would say the competitive environment is just that. I think it is comparable to where it has been. People are very still very acutely sensitized to case growth and volume growth and getting people into restaurants and operations and that type of thing, so I don't think there has been a lot of change there. It would be hard for us to gauge any competitive reaction to this. What I would just say again is that we're seeing good results on our end, so that's coming from some place, and we're just pleased with what we're seeing, and the only point we're trying to make today is it did in fact margin probably will for a couple more quarters anyway and we think it is an appropriate opportunity for to us take advantage of.

All right. And then just one last one, I guess, in terms of the trend in case volume growth into October and maybe early November. Did that kind of continue at the rate you saw at your fiscal 1Q, and also the rate of inflation I guess in October/November as well, that kind of accelerated or just stayed constant?

We don't typically give a lot of guidance or updates in terms of the quarter. I think I would say this to you. There has been, I think, a more favorable sentiments in the marketplace. We try to signal that in our comments here this morning. We're encouraged with the volume growth that we're seeing right now, and at the same time, I think from what we read and what we feel on our side of the business, I don't think the inflation is going to abate any time soon.

Thanks so much.

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

Good morning.

Hey, Andy.

I guess -- the question popped in my head as you were answering the last question, what is prompting price competition in an improving environment? It just seems counter intuitive to most industries, and certainly how foodservice distribution as I know it has historically, as the industry has allowed, as things got better, you know price competition eased -- seems counter intuitive?

I will take a shot at this and if I don't get it, Andy, come back to me. We need to put this in some type of context. This industry has always been highly competitive. There is a lot of competitors out there, a lot of different people with different business models and different agendas, so there is always competition.

I think maybe to your point, we're in an inflection point right now in this cycle and what I was trying to describe earlier, if you look at it over a three-year period, I am no foodservice historian, but I don't know that we have ever had a three year period like this where you had two years with a lot of inflation, a lot of pressure on our customers and a year of deflation and now we're finally starting to see case growth and we think the industry is showing a little bit of sign of recovery, but there is still a lot of sensitivity out there at the operator side, and the distributor side in terms of growth and how we continue to advance the ball in our respective businesses, so this favorable turn, albeit modest turn, let's be clear, we're talking about maybe 2, 3% growth in our line of business.

We're not talking 7% or 8%, so I think it is still very competitive out there and I think people's memories are long right now and everyone is doing everything they can to not just improve the business but to be prepared for any surprises that come down the road here over the next six to twelve months. I think it is more just a latent impact of what we have been through the last two or three years.

I will jump in and add one thing. I think we mentioned it, but it bears mentioning again. Last year at this time, we were reporting deflation of I think 3.4% in our number, but we went from a negative 3.4 to positive 3.3 that short period of type and that whip saw and volatility causes a lot of uncomfortableness in the market. So we're going at that as well.

But Andy, to your point, we have an opportunity to manage this better as I said, and we're committed to doing that.

Okay. Well, let me ask you specifically on this DMA, this consortium of regionals. They just want to -- I think McCormick and Schmidt contract from you guys, is that on price and if so, is that -- what I am trying to figure out is how deep is this price competition? Is that what you would consider just kind of normal give and take and there is plenty of stuff you want or is this -- is there something -- is there like capacity utilization of some distributors might be its own tipping -- inflection point where the marginal costs are de minimus and may as well be low in contracts? I am trying to understand a little more what the market dynamics the way they are.

That's fair. I think the only thing I will comment on specifically is the way it relates to the current space, we're disappointed we lost the business. It was good business for us. In terms of what triggered that decision, I am not exactly sure. Probably all of the above. With that said, we're real encouraged with what we're doing right now in the contract side both in SYGMA and on the multi-unit sales portion of our broad line business.

Ken and their team, we have a lot of momentum there. We have made some organization moves. We're much more focused on segments and that type of thing and we'll talk more about it in December. You never want to lose business. That's something we're working very hard on throughout our Company to minimize those situations, but I can tell you we're bringing on business as well and we feel very good about the direction in that area.

The last thing, is you are using pricing to win business and share. Is it more with getting actually new customers or is it more expanding into new lines with existing customers and kind of getting to sometimes in this industry to win customers, and then margins kind of normalized?

It is a little bit of both. I don't know that I can break that down for you. Certainly the most profitable sale we can make is an incremental sale with an existing customer, so I think there is plenty of opportunity there and it is also an opportunity to put our best foot forward with prospects, so I think it is both.

And last thing is I might have missed this. On the SAP, did you give us the impact, the earnings impact?

No. We actually didn't. We didn't comment about it, because it was not a material change quarter over quarter, and our guidance has not changed from the 10-K.

Okay, well, that answers that. Thank you.

Thank you, Andrew.

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

Great. Thank you. Just a follow-up on the previous question. Over the last couple of years, your case volume significantly exceeded that of restaurant traffic, as I understand it as reported about the chains, and so the question is where has your sales growth come from? Has it come from sales to existing accounts or as you just mentioned, lower margin sales to new accounts? What do you anticipate that mix in general going forward and do you have a good sense for your existing accounts, how your share changed over the past couple of years, and that's a medium term target we could possibly think about?

Is that it?

Yes. It is really one question.

John, similar to Andy's, I think it is -- I am going to need you to come back to me, I think, but essentially it is coming from both. We certainly want to participate in the growth of our existing customers. We are out there trying to improve our share of wallet with those folks and we do believe we have been able to do that. That's hard to quantify, and hard to sometimes say with a straight face when the industry has been in a decline for a year to two years, but we certainly think we have improved our share of wallet and taken share for that matter in all segments. I think what helped us a little bit in the overall numbers relative to the restaurant numbers is about 30% of our business, or a little bit more than that, 35 is non-restaurant business, so we continue to do well in the institutional side of things, and that's certainly been a buffer for us through these difficult times.

But our approach and our model hasn't changed. We want to grow with our current customers. We to want help them grow, but as we talked before and as we'll talk more in December, there is plenty of opportunity for us both on the street side as well as the contract side of this business to bring on new business. The last piece of this and the part that we continue to focus on even more is to protect the business that we have and cherish those customers that have been loyal to us over the years.

Understood. Thanks for the color.

We'll take our next question from Bob Summers with Susquehanna.

Good morning. I am just trying to get my arms around the variable labor component of the model a little bit and understand, and I appreciate this is a big picture look, but why an $84 million increase in gross profit dollars drives about a $40 million increase in salaries and related items? On the surface that seems a rather aggressive payout.

Well, I will start, but I think Chris is winding up here, so you have more specifics on this deal but essentially what we try to explain is you've got just in general you have some incentive increases there at the management side. When you hear us talk about productivity improvements, we're pleased and continue to be pleased with what we're seeing on the operational side of the business as well as on the admin side.

The one thing we have done, and we talked about this and we'll continue to do this, is we have more aggressively invested in our salesforce here over the last six months or so, and those numbers are beginning to populate themselves both in terms of number of MAs on the street as well as trainee's, so that does translate into higher commissions with the sales growth and into higher fixed investment on the selling payroll side, as we try to get back on track in terms of our head count and sales,so without being real specific here I am trying to bifurcate that for you in terms of, we're pleased with what we're seeing operationally and on the admin side in terms of productivity, but we are investing in sales folks and have been over the last three to six months. Chris you want --?

I think you actually have the numbers. Obviously we started with a gross margin number that was lower than we would have liked, and then the payout came out of that lower number. It comes back to leverage, and you're specifically focusing on the lighter side of the equation and I think that's the answer.

Okay. Second, can you just talk a little bit about SYSCO brand sales? As I am looking at this table have you in the back proper lean, did the penetration rate go down?

Yes. That's a trend that we're seeing for the better part of two years, so our brand sales are off, and as we have been talking, we're concerned about that, to a point. I would say you need to sell customers what it is they need and want, but we do have some opportunities there, and internally we're doing a lot of work in that area and I think you will see some progress there, but it take as while to move the needle on that, but we are very focused on that but again, we need to approach that in a way that works for the customer base, and that's the balancing act that we're dealing with at this point.

Right. Agreed. If I were to think of the, is there an attending gross margin drag associated with that change? Just trying to dig through another component of the gross margin.

There can be, but it tends to get woven into the other factors, the other two factors I was talking about, so I can't tell you that I can call it out specifically, but certainly, over time I think it is clear that when we are able to sell SYSCO-branded items that does translate to more leverage on the earnings line.

Great. Thank you.

We'll take our next question from John Heinbockel with Guggenheim.

A couple of things. If you think about managing the inflation part better, is that just kind of a willingness to pass through more and more quickly or is it something different in terms of how you buy, source, get product into the warehouse? Which of the two or is it all of those?

John, good to hear you. I know I sound a little like a broken record. It is a little of the latter and a lot of the former. There is always opportunities as we work with on our suppliers to make sure we're controlling our costs and we do a good job on that and certainly work very hard on that. The flip side of this is what we are signaling to you in terms of where we're at and what we need to do is it is really more about focus, I think, and we've got the best people in the industry out here, we've got great presence, we've got 8000 sales people and they have great DSMs working with them, so it is essentially what I was talking about earlier is looking at each customer, each territory, each operating company and making good decisions in striking the right balance in terms of what the customer's acute needs are and what we need, and how that translates into moving boxes, versus price versus cost efficiencies, so I am going to just leave it at focus internally where we think we can do better than what we have and I expect that we will over time.

Have you seen, has the inflation dampened demand yet particularly with what you had the 10% inflation or you haven't seen that yet?

No. I can't say that we have seen that. We're seeing pretty good growth in some of those categories.

On selected price investments, you have double-digit case volume improvement. Does that exceed the amount of price reduction or similar to it or how does that compare?

You need more than just double-digit to make that work in the short-term, so what you heard me say, John, is I think there is opportunities out there for us, but it may take more than a year to get the full payback on that type of initiative.

So sounds like the investment is in excess of the double-digit case volume you're hoping to turn into double-digit case volume you're hoping to turn into whatever the price investment was?

Let me try to be clear here. What I am saying is we see opportunities in these particular categories. We're making some investment in it. We're rolling it out in different parts of the country at different times, so there is somewhat of a cascading effect here, and it is not a six-month payback I guess is what I am trying to say.

Do you expect to get a lift where you're making those price reductions, get a lift not just in those categories but strategically important in terms of lifting the customers' total purchases with you or you haven't really built that into the focus?

Excellent point, and that's all part of it. That's why we use the word strategic here which is some of that opportunity is to solidify relationships with customers and grow not just on those items but within that category and ideally across categories, so that's exactly what we're trying to do here.

Final question. Three cycles you have done on the rolling out the enterprise package. What have you learned? Is there anything that jumps out negatively or positively that might have been different than you thought?

We learned it is a lot of hard work. We have people working a lot of hours down here, and there is just a lot of complexity, a lot of detail to it, and we're staying the course. We're doing everything we can to minimize the surprises once we go to the first pilot here.

All right. Thanks.

(Operator Instructions).

We'll take our next question from Bob Cummins with Wellington Shields.

Good morning, everybody.

Good morning, Bob.

I wonder if you can give us a broad overview on the state of the restaurant industry in general now? Are we in an early stage of recovery? Are the operators still complaining? Is their business still down? Where are we going? Are we in an up trend as yet?

There is a part of me that wants to say yes. Certainly the signs we have seen since late summer, Bob, are encouraging.

Some of the reports are coming out and data both in terms of what the restaurants are seeing in terms of their volume and getting folks into their businesses as well as the sentiment. We're seeing psychology tick up a little bit or the optimism pick up ever so slightly, but everything helps here, so I think we are beginning to see some things that hopefully will lead to more positive growth for the industry.

With that said, I think what we're also continuing to see is the strongest operators are doing the best as it is in our situation on the distribution side, so it is definitely better than it was a year ago, and we believe it is certainly better than what it may have been six months ago. It is still somewhat tenuous. If you're a good operator out there today, I think overall you're starting to see good signs.

Great. That's very helpful. Thank you. I will see you next month.

Great.

With that being our last question, that concludes today's conference. Thank you for your participation.