西斯柯 (SYY) 2011 Q4 法說會逐字稿

Good day, everyone and welcome to the Sysco announces fourth-quarter and fiscal year 2011 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 Mr. Neil Russell. Please go ahead, sir.

Thank you, James and good morning, everyone. Thank you for joining us for Sysco's fourth-quarter and fiscal year 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.

As disclosed in our earnings release this morning, our operating results last year included an extra week of operations due to the timing of the last day of our fiscal year. As a result, the fourth quarter of fiscal 2011 included 13 weeks of operations compared to the fourth quarter last year, which included 14 weeks and fiscal year 2011 included 52 weeks of operations compared to the prior year, which included 53 weeks.

On the call today, we will discuss year-over-year comparisons that include the impact of the extra week of operations. However, to provide financial results that are more comparable on a year-over-year basis, certain metrics will be provided, which remove the estimated impact of the extra week. These adjusted metrics are non-GAAP financial measures. You can find a reconciliation of these non-GAAP measures to the applicable GAAP measures on the Investors section of our website at sysco.com.

Also, all comments about earnings per share refer to diluted earnings per share unless otherwise noted.

Lastly, we ask that you reserve December 9 on your calendars for our Investor Day in New York. Additional information will be provided in the next couple of weeks. With that out of the way, I will turn the call over to our President and Chief Executive Officer, Bill DeLaney.

Thank you, Neil and good morning, everyone. This morning, Sysco reported record sales for both our fourth quarter and fiscal year of $10.4 billion and $39.3 billion respectively. EPS for the quarter was $0.57, which was flat on a GAAP basis compared to the prior year. However, excluding the impact of the prior year's extra week of operations, adjusted EPS grew by 7.5% for the quarter. For the year, EPS was $1.96 compared to $1.99 last year. Similar to the quarter, adjusted EPS grew by 4.2% for the year after excluding the impact of the prior-year extra week, the current year's $36 million multi-employer pension plan charge and the year-over-year effect of certain net tax benefits.

Focusing on the fourth quarter for a moment, volume growth was positive, but remains at modest levels. At the same time, food cost inflation in our product mix remained high and in fact was higher than each of the previous three quarters this year and the prior year. Thus, due in large part to these two factors, we grew our gross profit dollars while once again experienced a decline in gross profit as a percentage of sales.

Turning to the fiscal year, we grew our case volume and generated nearly $40 billion in sales in a market that most industry observers believe is currently flat, resulting in about a half a point of share gain. We generated $1.9 billion of operating income, produced cash flow from operations of $1.1 billion and distributed nearly $600 million in dividends to our shareholders.

In addition, we invested significant capital in our ongoing business, improved our customer retention performance and improved productivity in our operations. We are also pleased with our progress to date in better integrating our specialty meat and broadline operations in a manner that more cohesively addresses our customers' needs.

Turning to our multiyear business transformation initiative for a moment, on our last call, we had just recently gone live at our pilot facility in Arkansas. We were pleased with the initial results of the go-live, but as we have moved into more of a steady-state mode, we have identified some performance issues. We plan to take additional time to further assess the new system's performance and make sure it meets our expectations before the initial wave of operating companies go live. We are evaluating the financial impact of the delay, but expect the result will be extended time and cost to complete the project.

We remain firmly committed to a successful business transformation implementation. But as we have said all along, we won't roll this out until we are confident the system will perform as intended. In just a moment, Chris will provide an update on the project's impact on fiscal 2011 and our expectations for fiscal 2012.

Taking a step back and looking at the overall business landscape, for some time now, we have characterized the current economic recovery as slow, choppy, uneven and even fragile. Our fourth-quarter results and the events that have played out in Washington and in the financial markets over the past two weeks certainly support that outlook.

Nevertheless, we continue to believe that our industry will experience modest real growth over the long term and that Sysco is particularly well-positioned to build upon its industry leadership position over time. Specifically, our commitment to enhancing our service to customers, improving productivity in all parts of our business and broadening our foundation for future growth are key to Sysco's ongoing success.

In closing, I would like to thank our entire leadership team and all of our associates for their efforts and engagement over the past year. Their commitment to the success of Sysco's customers is unsurpassed in our industry. Now I will turn things over to Chris so he can provide additional details on our financial results for the fourth quarter and fiscal year.

Thank you, Bill. Good morning, everyone. What I would like to do first this morning is provide a brief summary of the formal GAAP results. As Neil just mentioned, fiscal 2010 was a 53-week year compared to our typical 52-week year. GAAP results include the impact of that extra week of operations last year, which means the results I will discuss compare 13 weeks of operations in the fourth quarter of 2011 to 14 weeks in the fourth quarter of 2010 and similarly, 52 weeks of operations in fiscal 2011 to 53 weeks in fiscal 2010.

On a GAAP basis for the fourth quarter, sales were $10.4 billion, an increase of 0.7% compared to the prior year. Gross profit declined 2.3% to $1.9 billion and operating expenses declined 1.5% to $1.4 billion. As a result, operating income was $561 million, a decrease of 4% compared to the prior year.

Net earnings were $336 million, a decrease of 0.4% and earnings per share were $0.57, which were flat compared to the prior year. For the full year, on a GAAP basis, sales were $39.3 billion, an increase of 5.6% compared to the prior year. Gross profit increased 3% to $7.3 billion and operating expenses increased 5% to $5.4 billion. As a result, operating income was $1.9 billion, a decrease of 2.2% compared to the prior year. Net earnings were $1.2 billion, a decrease of 2.4% and earnings per share were $1.96 compared to $1.99 in the prior year, or a decrease of 1.5%.

As I mentioned, these year-over-year comparisons on a GAAP basis are not comparable because that extra week of operation in last year's fourth quarter impacts all the year-over-year comparisons. So what I would like to do next is discuss our results for the quarter and the year excluding the impact of last year's extra week. That means these adjusted numbers compare 13 weeks of operations in both quarters and 52 weeks of operations in both years. This should give you a better sense for what is going on in our business and it is the same way the management team tracks and analyzes our financial results. These numbers are detailed in two tables we included in the earnings release that I think you'll find helpful.

On an adjusted basis for the quarter, sales increased 8.5% compared to the prior year, due primarily to the impact of food cost inflation, which we estimated at 5.9% for the period. In addition, compared to adjusted sales in the prior year, sales from acquisitions increased sales by 0.9% and changes in foreign exchange rates increased sales by 0.7%. This equates to real sales growth of 1%.

Adjusted gross profit increased 5.3% during the quarter. However, gross profit as a percentage of sales decreased 57 basis points year-over-year at 18.6%, due in large part to high inflation rates and fairly stagnant industry growth during the period.

In addition while strategic pricing initiatives were also a factor, they were largely offset by the fuel surcharge benefit. As Bill mentioned, the 5.9% inflation rate was higher than any of the three previous quarters this year and significantly higher than the 1.5% deflation experienced in fiscal year 2010.

Adjusted operating expenses were higher in the fourth quarter by $78 million, or 6%. The increase was driven by several factors. First, salaries and related expense increased $24 million. The increase was due to higher delivery payroll costs, payroll from newly acquired companies, foreign exchange translation and sales compensation. These additional expenses were partially offset by a decline in annual incentive compensation.

Second, fuel costs increased $17 million. However, the fuel surcharge we implemented late in the third quarter was designed to mitigate this increase and did so. As a reminder, fuel surcharges are reflected in gross profit. Third, as we have seen all year, expenses related to the Company's corporate sponsored pension plan increased $15 million.

Fourth, expenses related to the Company's business transformation project were $12 million higher. This number represents the increase in gross project expenses, which is all project expenses, including all employees and consultants working on the project, severance costs and appreciation without any offset or credit for any benefits from the project.

Adjusted operating income increased 3.4% in the fourth quarter. Adjusted net earnings for the fourth quarter were $23 million compared to the prior year and adjusted earnings per share increased 7.5%.

Turning to the year-over-year comparison, sales increased 7.7%, or $2.8 billion for the year on an adjusted basis. Food cost inflation was estimated at 4.6% for the year. In addition, compared to adjusted sales in the prior year, sales from acquisitions increased sales by 0.7% and changes in foreign exchange rates increased sales by 0.5%. This equates to real sales growth of 1.9%.

Adjusted gross profit increased 5.1% during the year while gross profit as a percentage of sales decreased 46 basis points year-over-year to 18.6%. The decline in gross profit as a percentage of sales was due to high inflation rates, strategic pricing initiatives and fairly stagnant industry growth for the period.

Adjusted operating expenses increased $358 million, or 7.1% in fiscal 2011 compared to fiscal 2010. The increase in operating expenses was primarily the result of, one, a $129 million increase in sales and related costs due to increases in delivery and sales compensation, foreign exchange and acquisitions; two, a $60 million increase in costs related to the Company's corporate sponsored pension plan; three, a $36 million charge related to the withdrawal of an operating company from an MEPP; four, a $37 million increase in fuel expense; and five, $25 million in higher gross project expenses related to the Company's business transformation project.

As a result, adjusted operating income was essentially flat for the fiscal year. If the MEPP charge is excluded, operating income increased 1.7%.

Adjusted net earnings for fiscal 2011 decreased $4 million, or 0.3% compared to the prior year. Fiscal 2011 EPS was $1.96, which included a $0.04 negative impact from the MEPP charge and a $0.02 tax benefit. Adjusted EPS in the prior-year period was $1.95, which included a $0.05 benefit from the Company's IRS settlement. Excluding the MEPP charge and tax benefit in the current year, and the IRS settlement gain in the prior year, adjusted EPS increased 4.2% year-over-year.

Turning to a brief update on our business transformation initiative. We have previously estimated that the incremental EPS impact from the project, which is the incremental cost of the project net of estimated benefits, for fiscal 2011 would be from $0.02 to $0.04. The actual impact for the year came in at the low end of the range at $0.02.

For the past couple of years, we have provided the estimated impact of the business transformation project to our EPS using this incremental net of benefits concept. Going forward, we are going to use a different basis of presentation to give you more visibility into both the total project expenses and the underlying business performance. We will provide expenses and capitalized costs as we typically have. However, instead of providing the EPS impact of incremental expenses net of benefits as we have done in the past, we will provide gross project expenses.

Now gross project expenses include all expenses related to the project, including all the employees and consultants working on the project, severance costs and depreciation without any offset or credit for any benefits from the project. They also include additional costs such as those for our shared business services. We are sharing the numbers this way because we want you to be able to see and track the total costs of the project, which will decline over time, as well as how the underlying business is performing.

So using our new convention, for fiscal 2011 results, gross expenses related to our business transformation project totaled $102 million. In addition, we capitalized $196 million related to the project. The total cash outlay during the year, which, of course, is different than expense, was $279 million, roughly in line with the guidance we previously provided. However, as we discussed throughout this year, the nature of the work actually performed allowed us to capitalize more than we had originally anticipated.

As Bill mentioned earlier, we have experienced some delays in our rollout schedule for the projects. As we discussed in the third quarter, we extended our testing phase by about three months to ensure a successful go-live in Arkansas, which we achieved. Now that we are close to a steady-state environment in Arkansas, we have identified some performance issues. We plan to take some additional time, probably as much as three months, to assess and enhance the system's performance. Looking forward, we now believe it is more prudent to roll out to only one of the wave one companies initially to ensure we can operate successfully in multiple locations and then we will roll out to the rest of wave one. That will probably extend the timeline another three months or so. As a result, we are probably 6 to 12 months behind.

These delays will increase the total cost of the project. We are in the process of reevaluating the long-term costs, benefits and timing of the project and expect to provide updated guidance at our Investor Day in December.

For fiscal 2012, we expect gross project expenses to total approximately $280 million to $300 million. In addition, we expect to capitalize approximately $100 million to $120 million related to our business transformation project.

So if you look back at 2009, we reported EPS of $1.77. Our gross business transformation expenses in that year were $0.04 per share. So adjusted EPS without these gross project expenses would have been $1.81. In fiscal 2010, we reported adjusted EPS of $1.90, excluding the extra week of operations on the IRS gain. Our gross business transformation expenses that year were $0.09 per share, so adjusted EPS without these expenses would have been $1.99.

In fiscal year 2011, we have just reported adjusted EPS of $1.98, excluding the MEPP and tax benefit. Gross business transformation expenses were $0.11 per share, so adjusted EPS without these expenses would have been $2.09.

So the way we look at the underlying business performance over the last three fiscal years, EPS on an adjusted basis, excluding the costs related to our business transformation project, has grown from $1.81 to $1.99 to $2.09. This during one of the worst business climates any of us have ever experienced.

While we have indicated our business transformation expense will be higher in fiscal 2012 by between $0.18 and $0.20 per share, we believe we will continue to grow our underlying earnings, excluding these gross project costs. Going forward, we will continue to provide our results with and without gross project expenses so that you will be able to see that progress. We remain firmly committed to a successful business transformation implementation and we continue to believe that it will provide significant benefits to our customers and our business.

Turning to cash flow, cash flow from operations for the fiscal year was $1.1 billion, reflecting IRS settlement payments totaling $212 million. In fiscal 2010, cash flow from operations was $885 million and was net of IRS payments totaling $528 million and an extra pension contribution payment of $140 million. We have now paid the majority of the total IRS settlement amount and we will pay the final $212 million in this fiscal year 2012.

Capital expenditures totaled $182 million for the fourth quarter and $636 million for the year. Spending for the year included investments in technology, including our business transformation initiative; fleet replacement; the renovation of our shared services facility; and replacement or expansion of facilities in Pennsylvania, California and Central Texas.

Looking ahead into next year, there are several important items that we want you to keep in mind as you think about fiscal 2012. During fiscal 2011, we recorded $28 million in COLI gains. We haven't talked about COLI much this year because the year-over-year variances have been immaterial. Going forward, we do not expect to record any substantial gains or losses related to COLI as a result of changes we made during the fourth quarter and the underlying investments. While there will be a notable year-over-year COLI variance in fiscal 2012 of $28 million, we are pleased to be able to remove this volatility from our financial results going forward.

In addition, we are also providing a few guidance metrics for the year ahead. First, we expect capital spending for fiscal 2012 to be in the range of $750 million to $800 million as we continue to invest in our business. This projection includes $100 million to $120 million related to business transformation capital spending, as well as capital related to a number of facility expansions and new facilities in Southern California, Boston, Long Island and our third RDC.

We expect pension expense for the year, as measured on June 30, to be approximately $25 million lower than fiscal 2011. This decrease is primarily due to improved performance of our plant assets during the year.

Third, we expect fuel expense, which impacts operating expense, to be approximately $35 million to $45 million higher year-over-year, but we expect that increase to be substantially mitigated by fuel surcharges.

And finally, we expect share buybacks to increase next year to offset dilution from option exercises, but expect that the diluted shares in the first quarter of fiscal 2012 to be similar to diluted shares in the first quarter of fiscal 2011.

In closing, while the business environment in fiscal 2011 was challenging, our operating companies did a great job of managing through those challenges with a strong focus on serving our customers, growing cases, managing costs and improving productivity. And although the macroeconomic outlook remains uncertain, we are confident that our strong balance sheet, industry leadership position and solid strategy for the future provide us the resources and capabilities to drive continued success. With that, operator, we will now take questions.

(Operator Instructions). Meredith Adler, Barclays Capital.

Hey, thanks for taking my question. I would like to just ask a couple of -- maybe these are sort of housekeeping questions. Sales got a benefit from fuel surcharges. How much of a benefit was that?

Meredith, for whatever reason, you were breaking up. This is Bill. Could you just repeat that?

Sure. Sorry, is this better?

Yes.

Just wondering how much benefit to sales came from the fuel surcharges as a percent of growth?

I wouldn't say it was overly significant to the sales line. I think as Chris pointed out, it helped to defray our fuel expense in terms of the delta there, but I wouldn't say it was a big part of the sales percentage.

And can you talk a little bit more about the performance issues you are seeing at the business transformation process?

Sure. Essentially, I would say to you we, like I said in my prepared comments, we got into the pilot site in Arkansas in April. As Chris pointed out, we did do some additional testing. So we are probably three months delayed getting into that. And as we got into the conversion weekend, as you can appreciate, there is always a lot of things that go on on those weekends, but we got through it. We delivered groceries. We have ordered product and we are taking care of our customers.

As time went on, it became clear that we were still having issues with the ease of taking orders, the ease of processing orders both on the buy and the sell side. We had some speed issues from a performance standpoint in terms of how long it takes for the customer, for the sales person to put an order in. We have also had some issues with reports, that type of thing. So obviously as we went into this initiative, Meredith, we cautioned ourselves and everyone that we talked to to be prepared for the unexpected. And so while we were generally prepared for some challenges, these were things that we couldn't really anticipate until we got into the pilot.

So those are examples, kind of high-level examples of some things we were running into and where we are at right now is we are very focused on a combination really of a couple of things. One is, pardon the expression here, but fixing those things. And so to the extent that they were designed, and that they are working close to how they are supposed to work, we are attempting to make them work better and more efficiently for our customers and for our sales people and for all of our associates.

To the extent that we have tripped into some design issues or flaws, we are going back and re-looking at that. And then to the side, there were several, what we call, enhancements or additional features that were never targeted to go into Arkansas being a pilot and we are also working on those. And we would hope to have all that worked into the Arkansas company here as we get into November and early December.

I mean obviously you had some issues and you need to fix them, but would it be fair to say that the environment has turned out to be much more challenging than you thought it would be at this point in time and that it just is prudent to slow down this project because the expenses are very high? I mean if you kept ahead, the gross margin being this weak, aren't you running the risk of pretty weak earnings overall?

Well, I don't think it has gotten to that point. What I would say to you is basically what I said in my prepared comments, which is we need this system to work better before we roll it out to additional companies. And that is really what our focus is, which is to get it working as well as it needs to work. That is why you do a pilot and that is where we are at.

I don't think -- what you see Chris trying to do here in his comments is we are going to do as diligent an effort as we can as we go forward to separate for you how the core business is running and then what the project is costing us at any point in time. So clearly, we have to be aware of the project costs and sensitive to that. But at this point, I wouldn't say we are at a point where the expenses of the project are that big a concern. We just want to roll it out in a way that our operating companies will embrace it and engage appropriately and that it serves our customers in the way it is designed to.

Meredith, I will jump in also. Just picking up on your question, it is the classic issue of do you slow down a long-term strategic project because the short-term expense implications are too high, and clearly the answer we are going to give you is no. It is a very important strategic project to us. We are tripping over some of the stuff that frankly we expected would be there eventually. You don't know where they are going to come from, but you know they are going to come out of the woodwork once you turn the thing on and we will work through those and we will work through the expense related to any delays, but we are nowhere near a point where we would say we should slow this thing down because it is costing us in the short term in a difficult operating environment.

Great. That's a good way of thinking of it in my view. And then just finally, are there any benefits at this point in time to the business transformation process?

Yes, look, the way we measure benefits, which you have got to find some science to measure benefits and so the team established some science behind it in the way we measure benefits. Yes, there are benefits and what we call the hard dollar benefits. To do that you basically start with a point in time and you measure your headcount in the affected areas, those areas where you are going to be making some fairly dramatic changes. And then you track the headcount reductions over time and that is how you measure benefits.

Well, we have some of those benefits. But the struggle is some of those benefits come from attrition, as well as other means and you may get some attrition before you were expecting it and you just choose not to replace those people. So you are getting some of that benefit early. That doesn't necessarily mean it is going to stick because the system is only in Arkansas right now. So anything we have right now is, one, small and two, it is going to fluctuate because of the way we are measuring it.

The real proof will be, frankly, as we start to roll this thing out and we start to look at the overall expense reduction out in the field in the affected areas, that is where we are going to have the hard dollar benefits as we continue to talk about those and that is going to be a little while.

And benefits in terms of revenues?

No.

Nothing that we could even begin to measure, no.

Again, Meredith, to take you back to the business case, we have been really clear on this, there is a hard dollar business case here that is driven mostly by headcount reduction on the administrative side of the business and by leveraging our headcount more effectively as we grow the business and sales. So Arkansas is a pilot and at this point, we have our hands full in Arkansas and in the shared business center essentially getting through this transition. So we are not really -- we never were really looking for significant benefits at this stage of the project in Arkansas. That is why we call it a pilot. The benefits Chris is alluding to are some more structural things that we have done to prepare in terms of overall headcount management-wise and organizationally heading into this transition.

Okay, great. Thank you.

Neil Currie, Dahlman Rose.

Thanks for taking my question. I just wanted to, first of all, talk about the inflation trend. Obviously inflation was a little higher than it was in the third quarter, but you have more of a struggle passing it through than you had in the third quarter. So I was wondering what changed so meaningfully to put that much pressure on your gross margin compared to the third quarter, which looked as if it was very much an improving trend?

I will take a shot at that, Neil. Essentially, you are right. What we have seen is increasing levels of inflation in our cost of goods as the year has gone along and it was at least a point higher I think in the fourth quarter versus the third.

In terms of the reasons for that, it's a lot of the same categories that have been high all year. The meat, the dairy, the seafood, they have remained high and some other categories that represent a significant amount of our purchases -- canned and dry comes to mind -- have also begun to absorb higher increases in our purchasing costs here over the last quarter or two. So that has pretty much been the consistent trend.

In terms of why we struggled more in the fourth quarter versus the third, that is a difficult thing to answer in terms of specifics. I would tell you that, as inflation goes up, it is harder and harder to pass that along, as you can appreciate and I would also tell you that we see all the data out there that comes with the economy and some of the restaurant surveys and that type of thing, but we felt -- we certainly felt, our people felt that, after Mother's Day, the business slowed down a little bit, flattened out some in May, maybe picked up in June. Hard to tell depending on who you are talking to and what sources you read, but I would say the market environment itself got a little tougher here as the quarter went along.

Okay and without a crystal ball, it must be hard, but do you have a view on when inflation may peak?

Well, we have got a crystal ball actually; it just doesn't work and it is hard to tell. What I would tell you is it doesn't appear to be leveling out as we sit here today. Everything you read and feel is that it is probably going to be with us here for the foreseeable future. We will have to communicate that with you each quarter and that type of thing, but looking out the next couple quarters, I certainly expect it to stay relatively high.

And looking at your two-year real sales growth trends, it actually looked pretty good quarter. You saw some continued improvement in the two-year number. Did you say earlier that, through the quarter, sales moderated and then improved towards the end of the quarter? July was better than June, is that right? Did I hear you say that?

No, we actually didn't say that. I think what you are referring to is the two-year, year-over-year-over-year is actually fairly good on a real basis and I don't think we actually looked at that number in the last couple of days, but you are probably right despite the fact that, as Bill said, the industry is very stagnant right now. The calculations that we have done using external sources says we actually grew our share in the year or during the course of the year, we grew our share by another half a point, which we have managed to do consistently. So we continue to find growth even though the market is not helping us.

Yes, I think, Neil, I went back and looked at some of that as well. If you looked at the four quarters for the year, our best quarter for the real growth was the first quarter. I don't know. I think things may have felt a little bit better at that point in time, but there is some masks in that number too. We were comparing off of a very weak time from the year before. So when you look at this thing over the last four or five quarters, it really is hard to draw a conclusion from one quarter to the next in terms of the volume growth.

But intra-quarter, did you see -- what was the sales trend in the fourth quarter? How did that progress?

It was a tough quarter as you saw in terms of our numbers. All I can tell you is what, and this is anecdotal, and then what we all read, is that we felt like we started to flatten out a little bit here in May compared to April and others are saying there are some surveys out there that talk about the restaurant business or numbers improving somewhat in June. I don't know that we experienced that in June. So I would say it's soft beginning in May and stayed that way at least from our perspective through the end of the quarter.

Okay, thank you.

Andrew Wolf, BB&T Capital Markets.

Thank you, good morning. I wanted to circle back and kind of follow up on Meredith's question on the business transformation costs. I just want to make sure I understand, number one, if the gross cost was $0.11 and the net was $0.02, that is a $0.09 per share differential. But I am pretty sure it wasn't what you guys would call benefits from the project. So could you kind of just tell us what is in most of that $0.09? Is it really kind of the accounting that has been -- you talked about in the Q that is allowing you to capitalize more of the costs and things like that?

No, and actually -- I'm glad you asked the question because you are tripping over frankly the reason we are changing the method in which we report this. I have got to take you back in history. We reported this from the beginning at incremental cost to the Company net of benefit. So let me take first incremental. That meant only the additional cost to the Company. So all these people internally, and we have a large number of people that are dedicated to this project that were Sysco employees that we transferred into the project, we did not count as an additional expense. So when we added up the expenses, it wasn't $100 million in that particular way of accounting for it and then we netted benefits against that. And you are right; the benefits were not $0.09 a share. So that is where we got to our estimate, most recent estimate of $0.02 to $0.04 on an incremental net of benefits basis.

The problem with that is it doesn't give you full visibility to the actual cost of the project. So we just pushed that away and we said, look, we are just going to disclose everything. So it is all categories, all functions that are directly related to our business transformation project. That the $102 million that you are seeing today. I am not netting the benefits against that, as I said to Meredith earlier. They are not very large at this point in time.

Okay, all right. So I need to -- what was the fiscal '10 gross spend, so we can look at the net number there?

Fiscal '10 gross spend on a per share basis --.

Well, that's the $0.09?

Yes, that is the $0.09.

Okay. (inaudible)

Yes, we have got to go back to (inaudible). Yes, $0.09.

Thanks.

And again, Andrew, what we were trying to do in that is take you backwards so that you have got the same basis that we are reporting now, you have got it for 2009 and you have got it for 2010.

And that is the gross expense, not the gross spend per se.

That's right. That is the gross expense. It doesn't really apply to cash.

Got it. Yes, thank you. And Bill, as you were talking about slowing things down on functionality, I mean this is kind of normal for IT to have that. But as you talk about just things like order entry for example, is it -- is the issue more around the employees needing to get familiar with what they are doing and a new way of doing things and being trained or is it more kind of substantive that you feel that maybe the pages they are looking at on the computer or whatever actually need to be redesigned or is it somewhere in between? I am trying to figure out if the actual heart of the programming is something that is nonperforming or is it more around sort of normal things in IT (inaudible)?

I get it. That's a good question, Andy. I would say, look, there is always opportunities I think to improve how we train and prepare people for these changes and conversions and our [change man] per process. We felt we did a pretty good job there and I think if that was the only issue we had, we probably wouldn't be having a delay right now. So there is always issues like that. Some of it is screens. I think to give you an illustration of an example I guess of what it would be is we built this thing and obviously keep in mind that the whole mantra for this thing is we are trying to build a platform here that will help us be more productive in the selling exercise and help our customers be more productive as well and help -- and have the experience be a more positive experience. So as we went down that road and built in some of these enhancements, what has turned out to happen is, in certain instances, those have worked or most of them have worked, but there has been residual effects say on processing time or on the ability for the MA or the account exec to see the order as well as they'd like or maybe to modify the order, those types of things. So it is kind of a cause-and-effect thing. We did this to enhance it, but there was a side effect that we couldn't have anticipated until we got into the pilot. And so we are working through that. But there is enough of that that we need to slow it down here and address it.

Thank you. That flavor is helpful. And just lastly, you have been talking previously about acquisition pipeline getting a little better and does this delay in the ERP and business transformation, would that affect that or do you think that is something you could kind of carve out and do some acquisitions, either minor or major, regardless?

No, the way we think about acquisitions, there is the kind of small stuff we do every chance we get and that -- anything going on with our ERP project wouldn't affect that at all. We continue to do those. I think we grew sales last year. The amount of deals we closed last year represented a little over 1% of sales. We are reporting about 0.9% impact in the fourth quarter, so we are going to continue to do those without regard to the timing and sequencing and all that from the business transformation.

When you start to talk about larger transactions that would affect our broadline company, we are cautious about that. We have talked about that before. This is a very important strategic objective for us, this business transformation. We are not going to take risks and screw it up and so we are being very careful that anything we do would not get in the way of that rollout. And that will continue to be the case as long as necessary.

I think to just amplify that, Andy, what we have been real clear on is we would not take on a major acquisition that we felt going into it would significantly impact our core business in the near term as we are going through this 2012. So I guess to put my color on it, to the extent that we have got a delay here, that would extend that period for a little bit.

Great. Well, thank you. I really appreciate the added insight and clarity into the business. Thank you.

You are welcome.

John Heinbockel, Guggenheim Securities.

A couple of things. When is the first wave now scheduled do you guys think to be completed of the SAP rollout?

We don't have a point estimate for that at this point. Where we are at right now in order is we are very focused on Arkansas and the shared business center and getting that up to, as I said earlier, to where it is working the way we designed it to work or at least very, very close to how we designed it to work.

And secondly, to get our enhancements in, as well as the fixes that we have tripped over here going through this pilot. So those are the two priorities, getting the Arkansas and SPS working and getting the fixes and the enhancements in. We hope to be in a position to have accomplished a good part of that by the end of November, early December and then right now, our plan would be to go to one site -- you could almost call it a second pilot -- at some point after the first of the year and the whole goal of that site would be strictly to see that the system can support multiple or in this case two operating companies. If all goes well there, then we will come up with a revised schedule for the remainder of wave one.

And John, just a little more color. To the extent we can when we get together in December, we will give you additional color. To the extent we have at that point in time, we will give you everything we know.

Because you do think you will get to a point where all of the kinks are worked out, so you can go fairly quickly in subsequent waves that there will not have to be learnings, new learnings with each wave or do you think there will be?

Look, it's the good news/bad news of having 85 broadline operating companies that eventually we are going to convert. While they are all a little bit different, what they do out there is generally the same. And so I am not going to say that what happens in Arkansas is exactly the same thing as what happens in Dallas, as what happens in LA, but the underlying business processes are generally the same. So going to one and working out the majority of the kinks makes it much more probable that number two and number three will work just fine.

The reason that, as Bill said and I have amplified also, that we have decided we are going to go to one more operating company next is we actually want to nail the fact that we can do this, that it is up and running and works just properly at multiple operating companies. That is why we are going to take that added step in there and we know it is going to cost us a little more time, but that is why we are going to do it.

But there is nothing that we have seen that tells us that this thing is not going to work. These are problems, they can be fixed, they all have solutions. It is just a matter of getting the solutions implemented, tested and rolled and I am just going to keep coming back to the same statement. We don't want to roll this thing before it is ready because a problem in Arkansas, while it is a real problem for Arkansas, does not disrupt our business. What we can't afford to have is a problem when we've rolled it out to 40 operating companies and we are just not going to take that risk.

As a follow-up to that, if you think about, and maybe it is too early to get your arms around this, but when you think about the ultimate benefit, has that changed at all? And then when you think about -- you guys have sort of laid out how this would roll through the P&L and there was a point at which, and I think it was 2013, but a point at which where the benefits would begin to ramp. Is that all basically in place just later? So I guess two related questions, but can you get your arms around that yet or it's too early?

Well, let me tell you what we know. Again, we are trying to be as full disclosure as we can. One, do we still believe in the benefits of the project? Absolutely, we do. Two, is it fair to say that those benefits are probably delayed to the extent that the project is delayed? Yes.

And my third point is do we have a timeframe for those yet and we don't. That was my comment. We are reevaluating -- based upon everything we are learning in Arkansas, we are reevaluating the long-term cost and the benefits and the timing of that and again, to the extent we can, we will give you more insight into that in December.

But the magnitude of the benefits, whatever you thought would exist in whatever, 2015 or 2016, is it too early to tell whether that magnitude has changed?

Yes, we don't -- as we sit here today, we don't feel there is a significant difference in the magnitude of the benefits. The timing of the benefits of course will change, but there is nothing that causes us to believe that we can't get the benefits that we set out to achieve.

And John, I would just add to that. When we went into this thing, we were talking about a business case, which I took you through earlier, but we are also talking about a transformational case here, which we have chosen not to quantify because, frankly, it is impossible to quantify because you have to compare it to something that you didn't know what it was going to be.

So if anything, look, this is a little frustrating for everybody, but we knew these things were going to happen at some point in the project. But in terms of where we are, in terms of our commitment to it, the only thing I wish -- I just wish we had started this a year or two earlier because the marketplace we are in today requires us to be much more nimble and requires us to be even more customer-focused and engaged than what we have been historically and that is the transformational case of this work. So we are very, very committed to it.

All right. And then one final thing on inflation, how do you get your arms around elasticities and knowing whether taking pricing will -- it would seem to me like you could take more pricing than you have. Is there a way to get more comfortable with that and get a better sense of elasticity on the volume side so you can take pricing more quickly?

Well, to be honest with you, I think you know this, John, we don't talk a lot about elasticity when we are sitting around the table and certainly our [APCO]s don't talk a lot about elasticity. Where we are at today -- you are in a market right now that isn't growing. We are taking share, but we have had to make an investment to take share. So I would tell you my view on this thing is that, for the foreseeable future, it is about gross profit dollar growth and it is about cost per case. And if we continue to grow the gross profit dollars, we need to do somewhat better than what we did here this past quarter, then we will be fine. We have got to manage the cost per case and it is very difficult right now to determine how much of that gross profit dollar growth is going to come from inflation, come from case growth, come from margin mitigation, whatever you want to call it. And that is the charge that we put on our operating company presidents and their management teams and empower their people, their sales managers and their marketing associates, as well as the account execs.

We are all in this together here and we are just trying to make good decisions on a day in and day out basis at the customer level to strike the right balance between case growth, pricing and margin. And so again, where I come out of this thing is we are very locked in right now on our gross profit dollar growth and managing our cost per case.

But you seem as if you don't really want cases to go negative. Meaning if you took more -- if you got more price pass-through, say gross was down 15, 20 basis points, but case growth went negative, that would be in your mind a worse outcome. Even if it had the same gross profit dollar performance, a worse outcome than where we are today? Is that fair?

Well, it is a little bit of a loaded question, I think. What I am saying to you is, first of all, we have been very focused this past year and we will continue to be on improving our customer retention performance. It is good. It needs to be great. And so that ties into your cases, that type of thing. So I would say, yes, look, it is a very competitive world out there today and we have rolled up our sleeves and we are grinding out there with everybody else, but not at the cost of doing things that we think are shortsighted or unintelligent. So I wouldn't say -- it just depends on the situation in terms of that trade-off, but certainly long term, our DNA and our whole mode of operating is to grow the business, but we think we are making intelligent decisions out there. It is just from quarter-to-quarter, you are going to see some volatility.

Okay, thanks.

Mark Wiltamuth, Morgan Stanley.

Hi, good morning. I wanted to ask a little more about the nature of the inflation. You had hinted like the last quarter that there might be a broadening of inflation into some other areas beyond really the meat and dairy and seafood. Can you talk about that a little bit? And as we are getting into the first and second quarter where you lapped the big gross margin declines last year, is it that you have really already taken those body blows in meats and now we shouldn't see as big margin declines?

On the first part of your question, Mark, we are seeing broader inflation and by that I mean across more categories. It is difficult the way we define the impact from inflation. We basically look at which categories saw the most significant increase in terms of our product mix and our basket of goods. And we define those as the high inflation categories and when we have talked about how much of our gross margin decline is attributable to inflation, we point at those categories and all the rest kind of balance out. Some are up, some are down. This quarter was not the case. We looked at the high inflation categories and then you looked at all the rest and they were still up. And so we have got inflation across a broader spectrum, not nearly as high as the ones we are calling out, but across the broader spectrum. So that is the first answer to your question.

Second, looking ahead, it's very, very difficult for us to do. On the one hand, you would like to say it is very rare for us to go year-over-year with declines in gross margin. At the same time, we are looking at inflation and as Bill said earlier, we don't have -- well, our crystal ball apparently is not working very well. We can't tell you what is going to happen to the inflation rates. All we know is what we are seeing right now and it is not going back down. And so that is going to play into the next quarter one, two and three.

Okay. And maybe just talk a little more about what you're seeing anecdotally out there. The Nap Track data I guess turned negative in late July and are you getting any feedback from the operators out there what they are hearing after the stock market correction? Has there been any change in restaurant demand?

It has only been a couple weeks and I would say it is probably too early to make that call. Obviously, we are concerned about it, but the other thing I would say is I think, to some extent, this market is reacting to things that our customers and the consumer and our people have already experienced over the last year or so, which is this choppiness of the recovery. And again, I am not an economist or a politician or anything, but I think what you are seeing in the market is just a lot of uncertainty from day to day. There is not going to be any great solutions coming in the short term. And I think the market is kind of focused on that, as well as some things beyond the US.

So we are concerned about what is going on in the market, but I think we need to take a few weeks and sort of see how this plays out because I don't know that, in terms of the world we work in, that all that much has changed.

Okay, thank you very much.

Greg Badishkanian, Citi.

Great, thank you. So I guess over the last two weeks or so, really doesn't sound like it has changed all that too much for you, even with the stock market volatility?

Well, we don't typically comment, Greg, on interim quarter results. I am trying to paint you a picture here. So far, I think it is just too early to make that call.

Right, right. Okay, that's helpful. And just in terms of gross margins, sort of the impacts like this quarter, what was the biggest impact? Was it the high inflation, certain category, certain customer or product mix changes or just discounting by either you or your competitors? Was there one thing that was the biggest factor?

I think as this goes on, it is more and more difficult to attribute to any one factor. What we are trying to articulate today is -- Chris talked about the strategic price initiatives. There were still some of that, the fuel surcharge offset most of that, if not all of it. I think my message to you today is it is two things. One is the environment where the continuing and now the acceleration of inflation does make it difficult, as well as the market environment where essentially you have a flat to no growth type of -- low growth environment. It just makes it tougher on everyone who is out there competing from our customer, to the suppliers, to ourselves and our competition.

So I think part of it is the environment; that is continuing to really not improve a whole lot. It is better than it was two years ago, but it is not an easy environment to operate in. And then second there is areas where we just need to execute better and I touched on those earlier. We need to do a little better job growing our gross profit dollars relative to our expectations and we need to manage our cost per case better. And those are things we are very focused on here as we start the new year.

Right. Thanks for the color.

John Ivankoe, JPMorgan.

Hi, it's [Amod Gautam] for John. The past couple of quarters, you guys provided a breakout in terms of the gross margin impact between strategic pricing and commodity inflation. I was wondering if you could do that for the latest quarter.

We didn't really break it out for the quarter, and I will be honest, the reason we didn't is because the inflation broadened so much that the way we were coming up with the numbers, we didn't have as much confidence in. As we have said in the script, inflation was a significant impact of it and then the strategic pricing initiatives were still there, but they were offset by the fuel surcharge. So that is the best breakdown we can give you.

For the year, we are basically -- I think the numbers add up to about two-thirds of it is what we would call kind of inflation and the related issues around that and about one-third of it would have been strategic pricing initiatives for the year, which is I believe 46, 47 basis points.

Okay, that's helpful. And just in terms of building off of that, I mean the strategic pricing initiatives, if you could just give some qualitative color about how those have played out relative to what your expectations were when you implemented them. And then second to that is how much longer do you expect the pricing initiatives to continue to impact year-on-year margins?

Yes, I think we have said in prior quarters, we continue to get the benefit that we sought from strategic pricing initiatives, which is we are growing cases in the specific categories that we targeted there. We also acknowledged that, if anything, it is going to take longer to get the case growth than we originally had set out to achieve. Whatever estimate we did originally, it is just going to take us longer to get that, so you are going to still see the impacts on our numbers. At some point, there will be a lapping effect of that. I am not going to try to predict that for you here, but it is still in our numbers. There will be a lapping impact that will make it less of an issue and we certainly aren't sitting here today designing any new strategic pricing initiatives that we would put in place quickly. So hopefully we will continue to get the benefit as we go forward.

Okay, great. Thanks a lot.

Thank you. That will conclude today's conference call. Thank you for your participation and have a nice day.