西斯柯 (SYY) 2011 Q2 法說會逐字稿

Good day everyone, and welcome to the SYSCO reports second quarter fiscal 2011 earnings conference call. As a reminder, this call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Neil Russell. Please go ahead, sir.

Thank you, Jennifer. Good morning, everyone. Thank you for joining us for SYSCO's second 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 states the Company'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. Also, all comments about earnings per share refer to diluted earnings per share unless otherwise noted. With that out of the way, I'll turn the call over to our President and Chief Executive Officer, Bill DeLaney.

Thank you, Neil, and good morning, everyone. This morning, SYSCO reported second quarter sales of $9.4 billion, operating income of $437 million, and EPS of $0.44 per share. Sales grew 5.8% over the prior year, while operating income decreased 5.5 %, and EPS was $0.01 lower than last year's second quarter. Volume growth was softer than what we experienced in the previous two quarters, and expense pressure increased in our selling and delivery areas. However, the primary factor in our producing lower earnings compared to the prior year was the decline in gross margins of just over 0.5 of 1 percentage point. For the second consecutive quarter, we experienced double-digit rates of product cost increases in three categories -- meat, seafood, and dairy, that comprised one-third of our total sales dollar mix. These are key product categories for many of our customers, and absorbing steep and rapid price increases is difficult for them, especially at this early stage of what we all hope is a sustainable, somewhat uneven economic recovery.

While we actually produced real volume growth in these categories, we were unable to increase our case growth enough to offset the fact that our product costs in these categories grew at a faster rate than our selling prices. While not impacting earnings as significantly as inflation pressures, the strategic pricing initiatives we discussed last quarter also contributed to gross margin erosion in the second quarter. We are, however, encouraged by the double-digit year-over-year volume growth we are experiencing with the items in these programs and we remain confident that the long-term benefits of these initiatives will meet our expectations for profitable market share growth. In assessing our performance for the quarter, and for that matter, the first half of our fiscal year, we clearly struggled to achieve some of our key business objectives. Market conditions definitely contributed to our struggles. However, there is no doubt that we have opportunities to improve the execution of our business plan as we move into the second half of our fiscal year. Such improvements is a top priority for me and our entire leadership team.

Looking forward, I am highly confident that SYSCO is well positioned to grow our business profitably and at a faster rate than our $210 billion market growth over the longer term. We do believe that we are in the early stages of an economic recovery based upon our trends throughout calendar year 2010. However, as we saw in the second quarter, that recovery and to some extent, our financial results, may be somewhat choppy due to the economic challenges that consumers continue to face. Our operating cash flow remains strong and our strategy, which we presented in detail at our Investor Meeting in early December, is sound. As you may recall, the strategy is customer-centric in nature, with a strong emphasis on operational excellence. Our associates throughout SYSCO continue to provide dedicated support and excellent service to our customers. Our business review process is more targeted than ever and the quality of these reviews improves each year.

While fuel cost increases and the impact of nearly 5% inflation in our overall product portfolio created pressure on delivery and selling expenses, we did experience productivity improvements in our warehouse operations and administrative support functions in the second quarter. We're also encouraged by the current level of quality acquisition opportunities in the marketplace. In addition, we recently welcomed Paul Moskowitz to SYSCO in the capacity of Senior Vice President, Human Resources. We are excited to have Paul join our team and look forward to his contributions and leadership as we further develop our human capital capabilities.

Two key goals reflected in our strategy are to grow sales faster than our market gross and to grow earnings faster than sales over the long-term. Successfully implementing our multi-year business transformation initiative is critical to achieving those goals. We are currently well into the testing phase of our work and are targeting implementation in our pilot site prior to the end of the fiscal year. Before turning today's call over to Chris, I would like to emphasize that we are committed to striking the appropriate balance between achieving both our near-term financial goals and investing in our business in a manner that will allow SYSCO to realize its full potential over the long-term.

While some of the unfavorable market conditions and operational challenges I discussed this morning will likely remain with us for the next few months, we expect the economy to continue to gradually improve. Our clear focus as a management team over the balance of the fiscal year is to both support our customers with their operational challenges and improve the execution of our business plan. Now, I'll turn things over to Chris so he can provide additional details on our financial results for the second quarter.

Thank you, Bill, and good morning, everyone. For the second quarter, sales were $9.4 billion, or an increase of 5.8% compared to the prior year, driven mainly by the impact of food cost inflation, which we estimate to be 4.5% for the period. In addition, acquisitions within the last 12 months increased sales by 0.6% and changes in foreign exchange rates increased sales by 0.4%. During the quarter, our SYGMA division grew sales more than 13% and broadline sales increased approximately 5%. Sales in the quarter were somewhat impacted by a holiday mismatch that's worth taking a minute to explain. This year's second quarter included two holidays, which are typically lower sales volume days, Christmas and New Year's, while last year's second quarter included only one of these holidays. At each quarter, it had the same number of holidays. In other words, if they were comparable, we estimate that sales would have been approximately 80 basis points, or $630 million higher year-over-year.

Operating income decreased $25 million, or 5.5% to $437 million during the second quarter, driven by declining gross margin as a percent of sales and an increase in operating expenses. While gross margin increased 2.8%, or $47 million during the quarter, gross margin as a percentage of sales declined 55 basis points year-over-year to 18.6%. Similar to last quarter, pressure from high inflation, strategic pricing initiatives, and changes in segment mix continued to be the main factors impacting gross margin performance. We estimate that about 10 points of the margin decline related to a change in segment mix. This is similar to the decline we experienced last quarter. As I mentioned earlier, SYGMA once again grew sales at double-digit rates during the quarter, and since SYGMA operates a lower margin business, this mix shift unfavorably impacted total margins. As we discussed last quarter, we do not view this as a negative outcome.

We see a great deal of opportunity on the contract side of the business, both in the broadline and SYGMA segments. Our aim is to grow both our street and contract sales over time. The strategic pricing initiatives we discussed last quarter also continue to pressure margins, with the magnitude of the impact estimated to be about 15 basis points or slightly lower than the impact we experienced in the first quarter. As a reminder, these initiatives were designed to drive volume increases in targeted categories. The positive trends we began to see last quarter from these initiatives has continued in the second quarter. As Bill mentioned, we are experiencing double-digit volume increases in markets for the strategic pricing programs that have been effectively implemented. We believe that this initiative, while admittedly putting near-term pressure on our margins, will create long-term benefits for us in terms of higher volume and increased market share. Results we're seeing in the early markets demonstrate that we're on the right path.

The last and largest factor impacting gross margin performance this quarter was inflation. Inflation is measured by the estimated change in SYSCO's product costs, 4.5% during the second quarter, even higher than the 3.3% reported during the first quarter of this year, and a significant swing from the 3.5% deflation reported last year. As Bill mentioned, dairy, meat, and seafood were again the categories that saw extreme levels of inflation, with each being in the 11% to 12% range during the quarter. We estimate the impact of inflation represented approximately 30 basis points of the decline in gross margin as a percent of sales. While gross margin as a percent of sales was down on a year-over-year basis during the second quarter, it's worth noting that total gross margin dollars, as well as the gross margin we generate on a per case basis were up.

Turning to operating expenses, we saw an increase during the quarter of 5.9%, or $72 million. The increase was due to three main drivers. First, as we have discussed previously, pension expense increased by $15 million year-over-year, primarily due to a decrease in the discount rates used to determine pension expense, which was in turn, driven by the decline in long-term interest rates. Second, salaries and related expense was higher by $13 million due to increases in sales compensation and other payroll costs. Total head count was down slightly compared to the prior year. Third, fuel expense increased $10 million over the prior year. Net earnings for the second quarter were $258 million, declining $10 million, or 3.8% compared to the prior year. Earnings per share declined 2.2% to $0.44, which included the $0.02 benefit from COLI and the prior year period earnings per share were $0.45 and included a $0.01 benefit from COLI.

Turning to cash flow, in the first half of the fiscal year, we generated $283 million in operating cash flow compared to $146 million in the prior year period, due mainly to lower IRS payments this year, partially offset by declining working capital. Operating cash flow during the first half of this fiscal year was impacted by several factors. First, during the first half of the fiscal year, we paid $106 million in IRS settlement payments. We also expect to pay $53 million in each of the third and fourth fiscal quarters of this fiscal year, for a total of $212 million during the year. In fiscal 2012, we'll pay the final $212 million in scheduled payments. Second, we traditionally build inventories towards the end of the second quarter for a pick-up in educational business after the first of the year.

Additionally, we typically deliver less inventory during the final weeks of the quarter, as sales are often lower during the holiday period. Due to the timing of the end of the quarter this year versus last year, the payables related to that inventory build are paid prior to the end of the quarter. As a result of these factors, we saw an increase in inventories and a decline in accounts payable during the period. Third, accrued expenses declined due mainly to the payment of incentive compensation in the first quarter related to fiscal 2010's performance.

Capital expenditures totaled $174 million for the quarter and $317 million for the first half, mainly related to facility expansion and replacements and investments in technology, including our business transformation project. In addition, we closed two small acquisitions during the quarter. As Bill mentioned, we are encouraged by the current level of quality acquisition opportunities we are seeing in the marketplace.

In closing, while we are making progress towards some important initiatives, this was without a doubt a very difficult quarter for SYSCO. The management team is focused on improved execution and we are committed to our long-term goal of leveraging our sales growth. We are making investments in our business that we strongly believe will generate long-term benefits to our business and our shareholders. With that, operator, we'll now take questions.

(Operator Instructions) And your first question comes from Meredith Adler with Barclays Capital.

Hi, good morning, This is Shaun Cross for Meredith. I have a quick question just -- can you comment on some of the trends towards [chains] taking shares from independent customers which can be less profitable business for you guys and I guess how the Company can offset the margin pressure from the mix shift over time? Thank you.

Good morning, Shaun. As far as chains taking share from independents, that's been a slow, but steady trend really since I've been in the business, which is over 20 years. So I think that continues. It's not a rapid change, but certainly continues to be the case. I think if you look at some of the industry data, you'll see in terms of restaurant closings, most of those are on the independent side on a net basis. With that said, I think it's always important to point out that there are a lot of independent restaurants out there and certainly we have tremendous relationships with many of them and when you have great operations or if you're a great operator, whether you're on our side of the business or whether you're on the restaurant side, let's say, you're going to do well. The better operators are continuing to do well, both on the distribution side and on the operator side, and we would expect that to continue. But there clearly has been a gradual shift from independent to chain. But I wouldn't say it's picking up steam or anything like that. The second part of your question again?

You pretty much answered it, but just maybe how the Company can offsets some of that pressure over time, the margin pressure implied by that. Thank you.

Yes, well, that certainly plays right to a lot of what we talked about in New York in December, which is that phenomenon, as I mentioned, has been going on for a while. For a couple of decades we had great demographic tailwinds in this business and the industry growth had slowed here in the late '90s and most of the new millennium. And I think we're all aware of the environment we've been in here the last couple three years. So essentially our strategy is two-fold. One is to continue to work as closely as we can with the customers that value a partnership with SYSCO and become more and more relevant to their success.

At the same time, continue to take costs out of our system, both in the short-term through a lot of key operational initiatives that we talked about in the past in terms of managing our miles and looking at our engineering standards in the warehouse, and all that type of thing. But even beyond that, over the last couple of years, we've committed ourselves to a transformational project here, which we believe will position us well to continue to take share for the years ahead, but also allow us to take some additional costs out of our system.

Appreciate it. Thank you.

And our next question will come from John Heinbockel with Guggenheim Partners.

Bill, a couple of things. If you look at that perishable inflation, do you think you can ultimately get passed through, and I would imagine we're getting to a point, it's been out there for a while where it could get passed through soon, or is that just something that you're going to have to eat a chunk of that, given the macro? What do you think it does get passed through eventually?

Well, I think eventually it allows us to get passed through, but we're 2.5 years here on a lot of these commodities I'm sure you follow regularly as well. As I mentioned in my comments, these are expensive boxes in these particular categories, especially in the meat and seafood areas, so they are a very significant part of the spend budget for our customers. So it's difficult for them to absorb price increases in the short-term and so as a result, we've struggled to pass them along in the right way. So I expect over time generally and gradually we'll be able to do that, but I think it will take a lot longer.

Do you think you're a price leader, meaning -- I look at your competitive position versus everybody else, and if you're hurting, everybody else has to be hurting a heck of a lot more. Where you could be in a position to push some of this through and others would follow, or is that a great concern that maybe others don't follow and you end up losing share?

It's a great question. I think you have to look at it in context over the years. I think how we've positioned ourselves still continues to be the case, that we want to be competitive. We think if you look at our overall offering to our customers, we feel we're competitively priced and the survey work that we get back from the customers that do a fair amount of business with SYSCO, they see us as being competitive. I don't know that I would characterize ourselves as a price leader per se, but with that said, John, in the environment that we've been in, as we've crossed over into an interesting time now where there's growth in the marketplace.

But it's modest growth, the psychology of the marketplace is probably as good as it's been in some time. But everything feels a little tenuous. It's still very competitive out there. I think the one thing you're seeing is we're trying to strike the right balance between obviously growing our earnings, but making sure that we hold our position with our customers and find a way to grow share where that makes sense. It's case by case and maybe a little bit more on the aggressiveness side over the last six to nine months.

If you look at the other non-third -- the other two-thirds, it looks like inflation there is 2% or less. Are you having any trouble passing that through, or that's going through pretty much as you get it?

You're right. It is pretty moderate in the other categories. Other than the -- I would say in the core grocery categories, let me focus on that, which is a good percentage of what we sell. It's modest and we've been able to pass that along. I think we have opportunity to grow our volumes on some of those categories and that's something I think that when I talked about it, us being more and more focused on executing our business plan, I think there's opportunity there.

All right. One final thing on the -- when you've taken pricing on those specific items and are getting double-digit volumes, is that following through and you're seeing increases in the drop size or total purchase the baskets that include those items, or is it not yet generating increased share, across some of these purchasing books?

You talking about the pricing initiative?

Yes.

Tough to answer. We certainly, as I said, we're seeing the volumes, as you point out. Our drop size, as I can't tell you that they have improved appreciably, but I don't know that it has anything to do with that. I still think it's a low volume growth, it's going to be tough to improve your drop size, as we've done a lot of good work in that area over the last two or three years. I think that's -- the whole key to that, John, is, we want to grow those categories and those particular product lines, but to your point, we want to become more relevant in those areas to our customers. So I would say that's more of a medium to long-term goal. So I think we've seen it in pockets, but I can't tell you that it's moving the needle at this point.

All right, thanks.

Next we'll take a question from Andrew Wolf with BB&T Capital Markets.

Thanks, and good morning. First, on the 80 basis points from the holiday swing, I gather that means on New Year's day the restaurants are closed. Maybe some of the fast food restaurants are open. So I'm just trying to -- could we just put that all in broadline, or should we spread it out pro-ratably between the segments or somewhere in between?

It's an estimated calculation and it's across all of our business. So we just put it across everything.

Okay. But do you think it's more in broadline, given that those independent stores are the most likely to absolutely be closed, whereas some of the fast food stores are still open, at least? Or am I just trying to find -- make it more fine than you're willing to because it's an estimate?

I think you're looking really, really hard. I don't think we would say that.

I think it's more about than people being out and about, Andy, than it is about who is open and who isn't.

Okay. So I guess last quarter, you were feeling pretty good. You said, I think it was, the best quarter in couple years or so, maybe more in case volume. As I look at this quarter, it seems like a fairly abrupt shift. I know you're not saying it's completely rolled over, but it slowed a lot. So what do you -- is that -- I guess my question really is, do you think that's more something competitively going on, where maybe you're being undercut in price or something, or is it more the behavior, which I think you alluded to in your press release, but I want to hear you talk about it. The behavior in the restaurant [tours], how they're ordering, maybe they're being more cautious with supply, or maybe it's a trickling down to their customers as the marketplace actually starting to change a little bit in terms of restaurant trips.

Okay. I think, Andy, if you go back and look at the last three quarters, what I was referencing, I think these are -- I think I'm in the ballpark here. Check with Neil. He'll clean it up later. But if you look at the fourth quarter, our real growth was around 2%. 3% in the first quarter. 1% this quarter, if you adjust for what Chris was talking about there, if you give us that on the holiday phenomenon. So it's falling off some, but you're talking about gradations of one point. Comparisons are tougher. We're now beginning to ramp at least a flat quarter, whereas in the first quarter we were going against the dollar. Some of it's in the math and some of it is the environment.

And we're out there with 8,000 sales people every day and with our account execs working with our top customers, and all of our customers across the country, trying to strike the right balance between price and growth and supporting their efforts to run their business. So I think it's more the choppiness that I referred to that you're in a recovery right now that, depending on what you pick up and who you read, the psychology is better. The underlying growth is a little uneven, depending on the source. You're not seeing a big pickup in traffic, but you are seeing bigger tickets when people go in. QSR seems to be doing a little bit better.

If you broaden the discussion to some of the articles you see on retail, there's a little bit of a bifurcated recovery going on here with your higher end consumers spending more than the regular people, if that's a permitable expression there. So I just think there's a lot of different things going on here. While we believe in the early stages of recovery, it's uneven and I think you're going to see some uneven results. But all in all, I'm still feeling good about certainly our people and the effort and our ability to improve as we go forward.

Okay, and so in the press release, just to read from it, it said inflation, I think, caused significant food cost inflation, negatively impacted our customers' purchasing budgets. So I understand that for a consumer, price of something goes up a lot, they got to cut back elsewhere, but I guess for a restaurant operator, if the price of meat goes up, why would they buy less canned goods or something unless demand was down, less people coming to the restaurant? I'm just trying to -- or is there some shifting in their buying habits, or did they just get -- I'm just trying to understand what that means actually.

Okay. Well, so what I was trying to explain there is it's about a third of what we sell in terms of dollars. And for the operator what I was talking about earlier, is these cases or boxes in these particular areas, they are expensive boxes. When you see 10% and 12% increases in significant cost items in terms of your inventory, it does force you to take a hard look at your spending budget in an environment where even if things are picking up, you're still extremely cost conscious. It's just a general observation. I think that the people -- I think you would agree with this, are still very, very focused on their bottom line and making sure that they are taking as much costs out, managing their costs as well as they can. These just happened to be high cost items. They are commodities. It's very easy to identify what's going on in these marketplaces, and so they tend to be highly competitive items.

Thanks, Bill. That did clarify it, because I know how much rapid inflation does change behavior, until people figure out where it's going to spread out. That helped. Thank you.

And our next question comes from AJ Jain with Hapoalim Securities.

Hi, good morning. Bill, I just wanted to follow up on that earlier question about in terms of whether there's anything specific you're seeing that's causing your customers to buy less than compared to the last couple of quarters. I want to just ask you specifically if you're getting the same type of customer response to the strategic price investments as you did earlier in the year?

Well, let me be clear. I'm not saying that our customer is buying less. What I'm saying because we believe we had real volume growth and what I'm saying is they are very focused on their spend budget and they are very, very meticulous in terms of how they do spend their money. On average, I'm not saying that they are spending less. I'm just saying they are pretty locked in on what they are going to pay and all that type of thing, and rightfully so. As far as the initiatives, could you give me that question again?

Yes, I mean, do you think there's -- that you're getting the same type of sales lift or customer response to the strategic price investments as you did when the program was first initiated earlier?

Well, again, these are different programs. There's different parts of the country that we're rolling these out in. I would say in the early stages, we're still seeing similar results. You heard me mention the word "execution" a few times, so it does come down to how well we roll it out. It's not constant in every rollout, but generally, we're still seeing good results, as you would expect, AJ. The competition does react to things, so to some extent we've seen some reaction and we've had to deal with that, but we're pleased with what we're seeing at this point.

Okay, and from looking at SYSCO for a while, I don't think it's totally unprecedented for you guys to have negative case volume trends when you're dealing with high single-digit inflation. I was just wondering if you could offer any comment on whether the inflationary pressures have gotten any worse in the current quarter, and is there a potential that negative case volume trends could be a reality in the near term?

Well, we hope not. I mean, what we're reading and what we sense is, like I mentioned a couple times, that actually the psychology in the restaurant community and the operators is as good as it's been for two or three years. We certainly hope that, that translate into higher purchasing levels over time. We're not at a negative level right now. We're, again, we're barely positive if you just look at the math, maybe about 1% positive if you adjust for the holiday phenomenon. So I still think that we'll see -- have a good opportunity to see volume growth here the second half of the year now. As far as this quarter in particular, I think as you know from following us for a long time, the month of March is a really important month as far as this quarter, both on the top line and the bottom line because of a lot of the seasonality.

That will drive a lot of the results and you haven't heard us make a lot of excuses so far on this call, but I think the bigger issue we're dealing with right now in the short-term is weather. Obviously, last week was a very difficult week in a good part of the country, including down here in Texas, believe it or not. I'm sure you saw Dallas. We had some issues in the southeast early in January, so we're actually -- when it's a level playing field, we're pleased with the start in January, but there are some weather issues out there. And the reality is that March is really going to drive the quarter.

One final question, I know you've been hiring some more marketing associates and making some adjustments in your headcount. But it looks like payroll costs were still up in the second quarter, but at a lower rate than in Q1. So if you could just talk about the pace of hiring right now, based on the market conditions and whether you might be looking to cut back on payroll costs even further over the back half of the year?

We -- payroll costs were up. I think we've been pretty candid I think with everyone. If you go back and look at the last couple of years, we've taken a lot of headcount out of this Company over the last two years, and so there's some limit on how much of that you can do in an environment where you still expect to grow, albeit at a moderate level. With that said, we continue to prune, and there will be some modest reductions throughout SYSCO late fourth quarter, early first quarter. So we continue to do our job and certainly look at headcount and productivity and all that type of thing.

As far as sales in particular, there's some operating companies where either they have great opportunity relative to the market, or perhaps they cut too far on the sales side and we have invested in those companies a little bit more than, say, the rate of growth this year, necessarily so. And I would certainly expect this as we go into the new year and our planning process, that our investment and sales people will be more commensurate with what we expect our volume growth to be.

Okay, great. Thank you very much.

Next we will take a question from Mark Wiltamuth with Morgan Stanley.

Hi. This is actually Joe Parkhill in for Mark. I was just wondering, I don't know if you mentioned this already, but in the categories where you're seeing double-digit inflation, are you seeing any volume responses when you are passing some of the pricing through?

Can you be a little more specific? You mean in terms of growth?

So when you're passing through a portion of that double-digit inflation, are your volumes getting affected by that?

Well, actually, to be honest with you, we're -- if you look at this on a relative basis, we're seeing decent volume growth in those particular categories, maybe even a little bit better than the other categories. I think we're out there very aggressive. These are standard play items. These are items that typically over the longer term are very important to holding traction with accounts and so it's an ebb and a flow. Obviously each situation is different, but generally we've been able to grow the volume. It's just that the rate of the cost increases is 10%, 12%, and it's hard to -- we're growing the gross profit dollars, to your point. It's just hard to grow the price point at that level and still make the sale. It's a catch-22 I guess is what I'm trying to say.

Okay. It sounds like your volume is doing well where you're making investments in price and then also these categories. I mean, is there a category out there that's weaker than what you expected?

Yes, there is, but I'm probably not going to get into that. There's always opportunities.

Right, okay. And then just finally, just from a modeling perspective, can you help us a little bit on what SG&A will look like in the future? I mean, is this something that you're going to grow in line with sales, or is there something -- some initiatives that you have that could potentially leverage sales in the future?

Yes, this is Chris. I'll jump in. I mean, obviously you've heard us talk about the European implementation, and over time we expect that we'll be able to leverage the SG&A line. That's not something that you should expect from us in the next couple of quarters. That's only after we roll out the initiative. I think one of the things you're seeing on the selling compensation line, of course, is the commission schedule basically pays on sales dollars to a great extent. So when you have high inflation, you're going to, unfortunately, be paying more on the commission line, and that's part of what's driving those sales costs up right now.

Okay, thank you. That was helpful.

Next we will take a question from John Ivankoe with JPMorgan.

Hi, thanks. Just a couple of quick follow-ups, I think. I remember last year when your sales looked a lot better than the restaurant industry, we talked about your non-restaurant accounts, which I think were about one-third of your business, doing a lot better. If there's some comment on the institutional business, whether we should expect it to grow in line with restaurants over time and just your observations there, and I have a couple of follow-ups as well.

Yes, John, I think you should. A lot of that business, as you know, is more on the contract side than the street, not all of it certainly. We're seeing good growth in those areas. We've got great relationships with some of the big players in those areas, and we certainly would expect to grow those segments at least as fast as the, as the traditional restaurant side of the business.

Okay, and just looking at the second quarter relative to the first quarter in terms of the real sales, much of the reported restaurant industry actually, and I think you're sensitive to this, did show improvement in the second quarter relative to the first quarter. And I'm sorry if you've touched on this in a number of ways. Do you think competition is even more aggressive incrementally as they are feeling better about their businesses? Are you noticing an uptick in competition?

I don't think I can say that. It's been pretty acutely competitive out there for the better part of year and a half, two years. I just think it hasn't subsided. I wouldn't want to say it's stepped up at all but sometimes you tend to think when the volumes come back and people start feeling a little bit better, that the competitive forces might lessen some. We're not seeing that.

And the final question, if I may, regarding some of the things that really hurt you on the gross margin line in the second quarter, has arguably gotten worse in the third quarter. I mean, some dairy, certain meats, certain sea foods, are setting new all-time highs. Should we just accept gross margin decline for the back half of 2011, or is there anything that you can do perhaps with your pricing architecture with your customers to allow you to get back some of that lost margin?

We're not accepting it. To the degree that we can mitigate it, that will be the [tail] of the tape here. But there are some structural things in the marketplace and just some basic market conditions that we've alluded to, but certainly 0.5 point of erosion for six months is not how we planned the year and it's not how we plan the second half of the year. We'll continue to look for improvement on the initiatives that we've talked about. We'll continue to work very closely with both our suppliers and our customers to find the right balance here on how all this pricing works its way through the system. So I would certainly hope that we would improve. I wouldn't expect it to totally dissipate.

John, one of the things we're watching for and you're starting to read it in the press a little bit is about the restaurant operators' willingness and ability to pass on some price increases to the ultimate consumer. That's not something that I think they were prepared to do during the very early stages of the recovery. You're starting to read in the press or at least some of them were thinking about doing that in 2011 and that's part of that shift that I think we would all like to see because that allows the supply chain to start passing through some of the cost increases as well.

Okay, thank you.

(Operator Instructions)Next we will take a question from Greg Badishkanian with Citi.

Guys, just wondering, in the second fiscal quarter, how much weather had an impact on your sales volumes?

There was some weather, Greg. I think you saw on some of the restaurant reports, and think the Northeast in particular bore the brunt of it in December. It's hard to compare weather year-over-year. I'm sure we had weather last year in December. I would say it was a minor factor, certainly not big enough to call out in terms of the quarterly performance, but like I alluded to, I think so far in January, it's been big enough to call out.

Right, right, good. And just looking out, when you do your price initiatives in certain segments, what's the competitive reaction to that? Is there like a delayed reaction where you maybe step up pricing, or do you just gain the volume and then over time does something else happen to change that?

Well, I think any time a Company that's positioned the way SYSCO is in the industry does something in a very focused way, there's going to be a reaction. So I think it takes a while probably. These are done, like I mentioned, in different parts of the country at different times, and we're essentially talking on the street type of business. So I think sometimes it takes a while for the customer, I guess in this case more the competitor, to understand what we might be doing or not doing, then respond. The short answer is, it depends, but as I mentioned earlier, there's always going to be reaction, especially in this type of climate, where the case growth is pretty modest.

Right, and can you maybe just give us a few examples of some of those pricing initiatives that you've done? I know you've talked about some of that in the past, but for example, just maybe just put -- just to make it a little bit more easier to understand.

Actually, I don't recall talking about it in the past.

For some reason I thought you did, but okay.

You don't find it too often, but there's some competitive issues here. I think we'll keep it right where we have it.

Okay, fair enough. I understand. Good. Thanks a lot.

Thank you.

Okay, and that does conclude our question and answer session for today, as well as our conference call. We do thank you for your participation and have a great day.

Thank you.