西斯柯 (SYY) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to the Sysco reports first-quarter fiscal 2012 earnings conference call. As a reminder, today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Neil Russell, Vice President of Investor Relations.

Thank you, operator, and good morning, everyone. Thank you for joining us for Sysco's first-quarter 2012 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 2, 2011 and in the Company's press release issued earlier this morning.

On the call today, if you have joined us via webcast, you will notice that we are augmenting our comments with a slide presentation. You can download a copy of the presentation by going to the investors section of Sysco.com. This presentation was also filed with the SEC on Form 8-K this morning.

Non-GAAP financial measures are included in our comments today and in the presentation slides. The reconciliation of these non-GAAP measures to the applicable GAAP measures are included at the end of the presentation and can also be found in the investor section of our website. In addition, all comments about earnings per share refer to diluted earnings per share unless otherwise noted.

Lastly as many of you know, we recently rescheduled our Investor Day to May 17. We expect that the Investor Day will be held in New York City but we'll provide an update on meeting location early next year.

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 net earnings of $303 million for the first quarter of fiscal 2012 and earnings per share of $0.51. Sales increased 8.6% for the quarter, driven mainly by food cost inflation of 7.3%. This represents the sixth consecutive quarter of sequential increases in inflation.

Case volume for the quarter was positive but the growth rate remains modest and in this difficult macroeconomic environment.

Operating income for the quarter was $509 million, our highest first quarter on record. We are encouraged with these results at a time when the industry is as competitive as it has ever been. Our first-quarter performance demonstrates our associates' commitment to focusing on our customers and managing costs.

To get a clearer view of our underlying business performance, we believe it's helpful to exclude gross business transformation expenses and the impact of COLI. Looking at the results in this way, you will see that while reported EPS was flat year-over-year, adjusted EPS grew 7.8% for the quarter, which is a result we are reasonably pleased with. We continue to believe that the food service industry will experience modest volume growth over the medium term.

With that said, current industry trends appear to be flat at best, thus the approximately 2% case volume growth that we generated during the quarter in our business is encouraging. Looking forward, our focus remains on striking the right balance between volume growth, managing margins, and controlling costs.

Turning to our multi-year business transformation project for a moment, we are implementing this month a significant system enhancement at our Arkansas location. We will then assess performance, address any concerns, and move forward to our second facility. Once we have achieved a successful implementation at the second facility, we will update our rollout schedule and long-range projections of the cost and benefits of the project.

It is imperative that we remain disciplined in our approach as we move forward to ensure that the larger rollout of future waves will be successful.

Sysco is fortunate to have an outstanding leadership team. In that regard, last week we announced changes in the responsibilities and reporting structure for several of our senior executives. These changes reflect the strength and depth of the team and will enhance our ability to successfully execute our annual business plan, effectively implement our business transformation project, and accomplish our key strategic objectives.

The changes include Mike Green, Executive Vice President and Group President, will assume responsibility for leading all Sysco operating companies. And Larry Pulliam, also Executive Vice President and Group President, will lead several key business support functions including supply chain, information technology, and business transformation as well as contract sales and distribution services, which he currently has responsibility for. Both Mike and Larry will continue to report to me.

In addition, we also recently announced that Fred Langford, who previously serves as President of Sysco Eastern Maryland, was promoted to Senior Vice President Distribution Services for Sysco. Fred has over 30 years of operating company experience and will lead the development of an enterprise-wide approach to enhance our operational execution. In this new role, Fred will report to Larry Pulliam.

In closing, I should note that while the patient extent of the economic recovery remains uneven and difficult to predict, we are committed to being our customers' most valued business partner and to investing in the future growth of Sysco. This focus will serve us well by strengthening our competitive position and providing a strong foundation for success over the long term.

We believe that Sysco's capabilities are unique in the industry and position us well to achieve our financial and strategic goals.

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

Thanks, Bill, and good morning, everyone. For the first quarter, sales were $10.6 billion or an increase of 8.6% compared to the prior year, driven mainly by higher prices. Prices were higher due to increasing levels of food cost inflation which we estimated to be 7.3% for the quarter. In addition, acquisitions within the last 12 months increased sales by 0.7% and changes in foreign exchange rates increased sales by 0.7%.

As Bill discussed a moment ago, case volume for the quarter increased nearly 2% year-over-year, including acquisitions for a little more than 1% excluding acquisitions. SYGMA's case growth was flat compared to double-digit growth in the prior year quarter, so all of the case growth we saw this quarter came in our Broadline organization.

Turning to gross profit, I would first like to make you aware of a change that is reflected in the results we announced today. Last year we made the decision to reorganize our buying cooperative to streamline certain business functions and help us achieve the goals under our business transformation initiative. We completed the reorganization at the beginning of this fiscal year and the buying function now operate as a shared corporate call center.

As a result, we have reclassified certain centralized procurement costs from cost of sales to operating expenses. This change has the effect of enhancing transparency into our gross profits and operating expenses. The net effect of this change is an increase to both the gross profit and operating expense lines, averaging roughly $15 million to $20 million per quarter. Because these two increases net out to zero, there is no change to operating income or earnings.

We have made these reclassifications retroactively so the year-over-year variances previously reported on the gross profit and operating expense lines are not materially different. These changes are reflected in all financial information disclosed today. Tomorrow morning, shortly after filing our 10-Q, we will also file an 8-K that provides our financial results on this new basis for the last three years.

Gross profit increased 5.5% during the quarter while gross margin decreased 53 basis points year-over-year to 18.4%. The decline in gross margin was due to high inflation rates combined with only modest volume growth. However, gross profit dollars per stop and per case increased once again.

We remain focused on our cost structure. We understand that slow growth and high product costs may be a trend that stays with us for the foreseeable future, so we are committed to finding ways to improve our profitability in this environment. Managing our costs very tightly is one area of focus.

Historically Sysco has done a very good job of reducing its cost structure and we believe we continue to have opportunities to do more.

Operating expenses increased $98 million or 7.3% in the first quarter of fiscal 2011(Sic-see press release) compared to prior year period. The increase in operating expenses was primarily the result of a $40 million increase in salaries and related costs due to increases in delivery and sales compensation, acquisitions, foreign exchange and growth in our Canadian Broadline operations; a $16 million increase in gross project expenses related to the Company's business transformation project; and a $14 million increase in fuel expense. Although it's important to note that fuel surcharges offset this increase entirely.

In addition, as we discussed last quarter, we recently made changes to the investments underlying our COLI policies, which significantly reduced the volatility to our earnings. As a result, we had a $1 million gain this quarter, which was a period during which the market declined significantly. If we had not made this change, the impact from COLI during the quarter would've been substantially negative.

While this is a positive result, the $1 million gain compares to a $14 million gain last year, creating a negative $13 million year-over-year variance for us this quarter compared to the prior year.

The operating expense items I just discussed were partially offset by a $7 million decrease in expense related to the Company's corporate sponsored pension plan.

Reported operating income increased $3 million or 0.6% for the fiscal quarter. As we discussed during our fourth-quarter call, we believe it is important to focus on the performance of our underlying business, excluding the impact of the business transformation project. Excluding gross business transformation expenses and the impact of COLI, adjusted operating expenses increased 5.3% and adjusted operating income increased 6.1%.

Net earnings for the first quarter of fiscal 2011 were $303 million, an increase of $3.6 million or 1.2% compared to the prior year. EPS for the first quarter was flat year-over-year on a reported basis at $0.51. Excluding gross business transformation expenses and COLI gains, adjusted EPS grew 7.8% to $0.55 compared to the prior year.

So to summarize the first-quarter performance in our underlying business, sales were up 8.6% driven mainly by inflation. Gross profits were up 5.5% and adjusted operating expenses were up 5.3%, meaning we were able to leverage the gross profit growth and deliver more dollars to the bottom line. Adjusted operating income was up 6.1% and adjusted EPS was up 7.8%.

As Bill said, we are reasonably pleased with these results given the current environment.

Turning to the impact of the business transformation project for a moment, in the first quarter, gross project expenses totaled $37 million and we capitalized $45 million related to the project. In the prior year quarter, gross project expenses totaled $21 million and we capitalized $53 million related to the project.

Turning to cash flow, cash flow from operations for the first quarter was $255 million. In the prior year period, cash flow from operations was $227 million. We will pay the final $212 million in IRS settlement payments during the remainder of this fiscal year with $106 million to be paid in the second quarter and $53 million to be paid in each of the last two quarters of the fiscal year.

Capital expenditures totaled $227 million for the first quarter compared to $143 million in the prior year. The increase was primarily driven by investments in facilities. This year we are in the midst of constructing new facilities in Long Island, Boston, and Central Texas, as well as a major expansion in Lincoln, Nebraska compared to having only one such major project underway a year ago.

There are a few guidance metrics for fiscal 2012 that I would now like to update. First, as the price of fuel has eased somewhat over the last couple of months, we now expect an increase in fuel expense of $25 million to $35 million this year, which is roughly $10 million lower than our previous guidance. As a reminder, we implemented a fuel surcharge late during the third quarter of fiscal 2011, which is intended to mitigate the increase in fuel expense.

Second, we continue to assess the appropriate timing to start construction on our third redistribution center or RDC, given the macroeconomic conditions. As a result, it's unlikely we will spend as much on it during the fiscal year 2012 as previously anticipated. We are therefore reducing our CapEx estimates for the year by $50 million to a range of $700 million to $750 million.

Lastly, we now expect our gross business transformation expenses for the year to be in the range of $250 million to $275 million. We expect the impact will increase each quarter such that more than half of the total expenses will come in the second half of the year.

In closing, while the macroeconomic environment continues to pressure our business, we are focused on managing our margins and costs and also on productivity improvement to mitigate those pressures. Sysco has built a seasoned team of professionals over the years that has the skills and experience to manage through these types of challenges. We believe that our capabilities and the investments we're making in our business will enable us to build on our industry leadership position over the long term.

With that, operator, we will now take questions.

(Operator Instructions). Karen Short, BMO Capital Markets.

(inaudible) -- taking my question. Maybe can you just talk a little bit about more of an update on the pilot in Arkansas and just talk about some of the kinks that you obviously were focused on in the fourth quarter, how those worked out? And then also maybe some update on the timing of the rollout to the second Op Co?

Karen, it's Bill. We can tell you some things and we're obviously right in the midst as I mentioned of putting in some of these enhancements this month in Arkansas. So the last time we would've talked with this group and internally for that matter, we said we were going to focus on Arkansas. We had some performance issues there which kind of means speed in terms of order process and that type of thing, as well as some report issues and some inventory replenishment issues.

So those are three basic things that we are addressing and we are not addressing them all at this point in time. We've got a couple of those three that we are working through this month and we hope to see some good progress there.

Like I said in my prepared to talk, we will assess it at that point and when we think that we are ready to go to the second company in a way that will work for our salespeople and our employees and our customers, then we will go. But I would hope it would be at some point early in the new calendar year.

Once we go through that pilot, really the key to that pilot is just to confirm how well the system supports two companies and the hope would be to get through that in good shape and then we will reestablish what our rollout schedule will be.

Okay, that's helpful. Just talking about sales throughout the quarter, I know you kind of talked about the cadence in sales in the fourth quarter. Maybe it was looking a little bit better in June but it wasn't clear. Can you just talk about yourself cadence throughout this quarter?

I think what we said last time, we saw generally -- it's never the same in every company or every market -- but generally we saw a little bit of a flattening or leveling out after Mother's Day and it really didn't pick up in June. I would say that has continued into this quarter.

What we were also concerned about as we got into this quarter, was certainly the consumer sentiment that I spoke to from the standpoint of what went out in Washington in July and all that type of thing. So you guys all follow the consumer and many of you follow our industry, so if you have looked at that over the last two or three months, you have seen the optimism of the consumer decline to some extent and that has been a concern.

So we have experienced some of that. Although we are a little bit encouraged here by what we've seen here the last month with some of the things that the surveys where it appears the consumer is becoming more optimistic again. So that's critical to us. That's great. We need the economy to grow and that's very important. But what's critical to our customers is that the consumer be in the right frame of mind to go out and enjoy a meal away from home and hopefully people are gaining confidence again here ever so gradually and that should bode well for us and for our customers.

Great, thanks for taking my questions.

Ajay Jain, Cantor Fitzgerald.

Good morning. I just had a two-part question on the current incentive structure for your marketing associates. So the first part of the question is could you just maybe clarify some of the operating metrics that you think are the most relevant on how the marketing associates are incentivized right now?

Then the other part of the question is whatever those metrics might pertain to, whether that's gross profit per delivery or cases per trip or pieces per trip, did you see any improvement last quarter sequentially and also based on year-over-year comparisons, is that something you can comment on at all?

Let me take the first one, Ajay. You may have to come back to me on the second one. So really the way we compensate our MAs hasn't changed dramatically and it does coincide with at least what I would view as one of our top key economic metrics for the business. So there's a lot of key metrics but certainly one of the top two or three would be gross profit dollars per delivery and our MAs once they reach a point that they are on full commission, they are paid off of gross profit and off of gross profit per delivery.

So they are pretty well aligned in terms of the basic economics. Certainly there's opportunities over time to continue to assess that. And in addition to how we compensate people, we also recognize people. That's a big thing within Sysco and it's certainly a big thing with our sales managers and our MAs. So certainly growth and quality growth at the territory level has always been very much emphasized within Sysco and we continue to look for ways to keep that at the top of our list as well.

The second question --?

Bill, I think in terms of your prepared comments you mentioned that volumes are kind of like they decelerated a little bit since last quarter. So I guess in that context the metrics by which you incentivize the MAs, have those metrics improved like both in the context of last quarter (multiple speakers)?

(multiple speakers) try to be a little more bullish here in my comments but I actually don't think I said that. I think what I'm trying to say to you is that we saw some volume growth and we are pleased with that. We saw some -- the real volume growth as you can calculate was flats but we did try to show you that we saw some case growth in the core business and that's encouraging. But at the same time, it remains very competitive out there.

So I would say to you going back to Karen's question, that the volume trends we are seeing in our business are pretty comparable to what we've seen the last couple of quarters. The market is -- the market is I would say also about the same and the consumer sentiment like I mentioned, really did tail off here in July and August and it appears it might be coming back a little bit. So we didn't see any material changes in terms of gross profit per delivery or miles or any of that type of thing.

Okay, in relation to ERP, it looks like even based on your updated outlook for this year, it looks that you're already on track to maybe exceed that original $900 million budget by the end of fiscal '12. So it looks like between the operating expenses and CapEx, the cumulative total would be -- it would still be in excess of $1 billion by the end of the year. Is that correct?

You are kind comparing apples and oranges there, Ajay. The $900 million which we used to refer to was an overall cash number but there were a number of things as we've talked about including our Sysco business services that weren't included in that number because we always assumed there would be a netting against them from benefits. So what we are talking about, obviously we have spent an amount of cash already. We are continuing to spend cash on the project and the rollout but it's very difficult to compare where we are versus that number and draw a conclusion.

That's one of the reasons why we went to what I think is a totally transparent here are the gross expenses and we'll update you on the benefits as we go forward.

Okay, but on a gross expense basis, is that -- am I still conceptually right that you are sort of on track to be in the $900 million to $1 billion range by the end of this year?

The gross amount of expenses that we have incurred for the project will obviously be over $900 million. Yes. All I'm saying is I'm not comparing them back to that original $900 million. It's a bit of -- again it's comparing it against something that wasn't reflective of what we are now telling you the numbers are.

Yes, Ajay, I would just take you back to our last call where we talked about our timeline and we are six to 12 months behind and more than likely that could translate into additional costs, but until we get through Arkansas and the next pilot facility, it's very difficult to address that question with any accuracy.

Okay, thank you very much.

Ed Kelly, Credit Suisse.

Good morning. I'm sorry for this question up front, but I actually don't understand. So you're talking about case volume growth in the core business of 1%, 2%, whatever that number is, but real growth is being flat, which you can see if you take your sales and adjust for inflation and acquisitions and currency. So what is the difference between the two of those?

They are just different numbers. Real growth is an industry calculation that we had heard for years and years. We actually started putting it into our releases about maybe three or four quarters ago because we knew everybody did the calculations, so we thought we would make it easy.

It's not perfectly reflective of case volume growth. It's always directionally correct. It's sometimes very close but it's just not the same number. Case growth is a real number that we look at that -- we calculate how many cases we delivered this year versus last year and what you are looking at is just again a definitional calculation, which is sometimes pretty close.

I guess as the long-term guy here, for years, we have talked around real growth in terms of inflation and the impact of acquisitions. Once we had Canada, the FX impact, so it's a long-running statistic or set of statistics that we've always provided. We've run the business off of cases and so we are just trying to give you a couple different ways of looking at it. To Chris's point, they are not significantly different, but we thought it was worth at least sharing that with you.

One of the things -- not to belabor it, but one of the things that is in that real growth calculation is ForEx and you really have to scratch your head and think about whether ForEx should be in a calculation that tries to get to this underlying case growth.

But again, we provided you what we think you all calculate in the past and this time we thought we better provide you the real volume growth because it is pretty different.

And can you update us on your outlook for inflation over the next few quarters?

Sure.

Let us get out the crystal ball here.

It won't take long. Look, you have seen it gradually trend up from three to five to seven and it was -- we had across many categories again this quarter certainly the dairy and meat and seafood led the charge. But our largest categories are canned and dry and frozen and we saw meaningful inflation there as well, so that is how you end up with a number as high as seven.

So our best sense, and I wouldn't go out any more than a couple quarters is that it's with us here for a while. I wouldn't be surprised if it mitigated somewhat but I wouldn't expect it to dramatically decline here over the next couple of quarters.

Okay, and where do you see inflation from a product standpoint? Does that impact your ability to pass it through? So for instance, there's been some talk about I guess meat pricing going up beginning of the year. Is that a more difficult category to pass it through for you or is it pretty much the same everywhere?

Well, meat is tough just because those cases cost a lot to begin with. Those are expensive cases, so when you have 6%, 8%, 12% inflation, that just makes it a bigger ticket item for the customer. But in general, they are all -- it's all difficult when you've got 6% or 8% or sometimes by category double-digit price increases or cost increases for us at a time when our operators are still struggling to get traffic into their businesses.

So it's -- we are in a different time. We've managed inflation of this type in the past. We have managed it well. It's harder this time and as I've said before, I think there's an obvious reason for that, which is just the -- what we are coming back from in terms of the economy, people's psyches, it's just more difficult.

So I don't know that it's category specific, but when you get into high single-digit, low double-digit cost increases, those are difficult for people to swallow in a short span of time. We do pass it along over time, but the bigger the number, the longer it takes.

Okay, just last question for you, your D&A was down I guess modestly year-over-year. I know if you can help us there. And then you've been capitalizing costs on SAP and I was curious as to when the amortization on that would actually end up starting?

Yes, the way we're looking at the project or the machine, as I keep referring to it, is once we are out of the pilot stage and we are actually into the implementation stage, we will begin to amortize it internally. We have assumed that when we get past the second pilot that that's when it will happen. I think I said in the last call that in our internal plans, we do assume that we will start depreciating it this year. So in the numbers that we have given you, we do have an assumption that we will start depreciating the project this year. We have not been specific about what month, but we said that it will begin this year.

Okay, but that's when the second pilot is complete, right?

Yes, when we put the second pilot in and we have assessed that it does indeed work and we are going to start a rollout process, then that's when we will declare the machine to be ready and fit for implementation.

Okay, thank you.

Mark Wiltamuth, Morgan Stanley.

Good morning, thanks for the question. Just to stand back here, if you take the business transformation costs out, do you think you could actually grow earnings this year?

Yes. We grew it this quarter. That's the point I guess we're trying to make, Mark, that we did grow our operating income by about 6%. This quarter if you take that and the COLI out, which I think is fair in terms of this type of perspective. So look, I am a little cautious in terms of the environment and that type of thing, but that's certainly what we are planning to do.

And if you leave them all in, if we -- it's like almost a $0.26 to $0.28 drag, if you leave that in versus the $0.11 drag last year, do you think the earnings number is up on that basis?

Mark, that's not fair. I will let Chris take that one.

Yes, I think we would call that guidance. Mark, look, I will go back to your first question. You are hitting on the point that we have been trying to make, which is we understand we are responsible for business transformation and we got a lot of very, very quality people working on that. We are managing the costs appropriately, but we are not going to avoid spending money and do the wrong thing on that project. We're trying to make sure people understand or remember that there's an underlying business here. We have to keep that underlying business growing and so we are trying to give you numbers you need to show that we are indeed continuing to grow the underlying business.

It's hard, but as Bill said, we do believe we can continue growing the underlying business.

Okay, and by quarter here, so it sounds like a big back half waiting here on the remaining business transformation for the year. Can you give us any help on the individual quarters on what those are going to look like?

No, we're really not going to break it down by quarters. Look, this is just me talking. We have been doing pretty good to give you guys rough estimates for the year and some would say we haven't done that good a job at that. So to break it down by quarter, the ranges would be very, very wide.

Look, the meat of this year will be when we get through the pilot and we start to roll out, that's going to be where the expense picks up because that's where we will have both depreciation kicking in and implementation teams kicking in. So that's why we make the comment we will be heavier in the second half of the year than in the first half of the year.

And do you think the high water mark for expense is going to be next year or is it this year?

I'm going to have to hold off on that one only because we continue to relook at the numbers and it may sound like it's taking us a while. The reality is we need to get through this second pilot and reassess the implementation plan, the rollout schedule before we really have a good view on the next few years and our goal is to be able to talk about that in the spring as we said last time around. So you are going to need to give us a little more time before we can give you a multi-year look on that.

Okay, just outside of the gross margin pressure from inflation, how do you think the other factors there? What's going on with price competition and just the overall competitive environment?

Look, it's very hard to separate inflation from price competition from the challenge of the marketplace that our customers are working in. So I would stick with what he said here, Mark, which is I would characterize the competitive environment as strong as it's ever been and I've probably been saying that for the better part of a year and a half to two years. I don't think it has let up.

Okay, thank you very much.

John Ivankoe, JPMorgan.

Great, thank you. A couple of things, if I may. Firstly, I guess it looks like I guess being a restaurant analyst, what you are seeing is your customers are ordering less expensive food this year versus last year and that would explain the difference between case volume and real sales, I suppose.

Is that a phenomenon that you are kind of seeing across the industry? Is it located in certain pockets, maybe on the lower end? Is there anything that you can do to kind of prevent that and perhaps give some investments and the types of products that they are not ordering year-on-year?

John, Bill. I think from a logic standpoint, your theory is plausible, but it certainly is not necessarily the whole reason why you might see a difference here. Again, we're not talking about a large difference, so I would say over the last two to three years our customers have taken a very hard look at their spending budgets and focused very much on being economical with their purchases and still having a consistent quality of offering for their patrons.

So I don't know that I can tell you that they are offering less expensive food this year. There's other things that could be driving that as well like mix. And these calculations, we do them across all of our companies. They are not precise like a scientist would be precise, so I wouldn't overplay that difference there too much.

So that could be a contributing cause, but if that is, I don't think it's a new phenomenon, I guess is my point. The second part of your question?

Regarding SYGMA, assuming that inflation number is somewhere near right for SYGMA, it does look like it was at best flat probably negative case volume or real sales or whatever you want to call it in SYGMA in the quarter. And it's not really what we are seeing in the industry. It seems like traffic is at worst about flat across the industry for the September quarter. So I just wanted to get a sense of whether you are intentionally giving up some business or if there is some flow of customers in and out of that segment that we should be aware of?

No, I think our SYGMA business is in line with what you just said in terms of if you will our -- our comp for same-store sales, that type of thing. With SYGMA, we've had a nice little spurt here over the last year and a half or two years. We brought on some customers. We are running the business a lot better and SYGMA is going to ebb and flow a little bit based upon bringing in new accounts and that type of thing.

So we haven't lost any major customers. We've just kind of wrapped a period of time where we haven't brought any large ones either. But I would agree with you that the kind of the same-store part of -- comp if you will is about flat and what we are seeing on that side of the business.

Okay, thank you.

Greg Badishkanian, Citigroup.

Great. Why do you guys think maybe the Broadline business did a little bit better, particularly with soft consumer confidence? Are those -- some of those -- I would think some of the pricing might be a little bit higher than kind of more the chain business.

Better than SYGMA? Is that what you're getting at, Greg?

Yes, yes, better than -- I would think just from a pricing perspective, maybe there's a little bit higher price points in that Broadline business.

Yes, I think I will stick with the answer I just gave John. I don't think -- they are just two different businesses in terms of we are always bringing on new business in the Broadline, and SYGMA tends to be a little bit more volatile as far as that goes. So I don't have a great insight in terms of that.

It's not that much difference, to be honest with you, in terms of how we look at the numbers. But we are pleased with what Broadline is doing. We are growing it both on the contract side and in the street. We're just not seeing the volume growth that we'd like to see.

Right, right. Just from a business transformation purpose, is there any think next quarter that's different in this quarter? Is it going to be around $0.04 or -- without giving guidance, but I mean is there anything that we should consider that there's any type of step-up next quarter?

We are not going to give any guidance, so it's really hard for me to answer that question. I will go back to what I said earlier, and I'm sorry but we just can't give you much guidance. But as we've said and I will now weave in what Bill said earlier, we are this month making some upgrades and enhancements to Arkansas. And he said early in their calendar year we would hope to go into our second pilot site, so that actually gives you half the second quarter. And what I have said is that once we go into the pilot site and we make sure that that works, then we would start amortizing and then we would reassess the rollout, and that's where the expenses could really start to kick in. So to the extent that you want some sort of insight, that's probably the best we can give you.

Okay. Just generally, in terms of -- were there any changes in terms of mix or menu price over the last few months, or has it been pretty kind of status quo versus kind of what you saw in the second calendar quarter?

I don't think there's been any big changes one way or another.

Okay, good. Thank you.

Andrew Wolf, BB&T Capital Markets.

Thanks, good morning. I wanted to follow up on the trading down and the differential, and I know as it was nice of you to give that information. I know there's some estimation in such large organizations.

But I think from your answer to John, I would take away that you're probably saying there's a little stickiness in passing through some of this rapid inflation. Is that fair to say and that's sort of market-driven?

Say that again, Andy.

Well, the 1% differential that you talked about in case volume to the calculated real sales, if it's not from trading down, I was thinking about this too, if it's not from trading down, then it's probably because the inflation you are actually increasing your cost, your pricing buy is a little lower than your product costs.

Possibly. I think all I'm saying is we are talking about a directional move here that's comparable and the difference between the two is not to me overly significant. So I wouldn't overanalyze that particular difference. We are just trying to give you a feel for cases and so I guess I would just leave it at that.

I think we are seeing some case growth. We are having to invest in price a little bit to get it and we're managing our expenses reasonably well, but as I said in my comments, we have an opportunity to do all three a little bit better here as we go forward in the year.

Andrew, I want to jump in because I don't want folks to fixate on some 1% number. I think when you back out ForEx, we're talking less than 0.5 point that unexplained in terms of the difference between those two numbers. And as we keep saying, they're never exact. They've never been exact as long as we have watched them. They are usually directionally correct so I wouldn't spend too much time trying to explain away the 0.5 point differential.

But you do think the 1% real case estimate for the organization is pretty close. We don't have to -- we should consider that, right?

I would say that's closer than the other because we actually can see that.

Yes, it's a little better than 1 point after excluding acquisitions, and that's our real volume.

Got it, it is becoming more from penetration or new customers or could it just be your customers are doing better than the industry and you have a good selection, positive selection?

We'd like to think that but when you do the amount of business that we do, our overall results are going to reflect the industry to a large extent. I would say when you take it down to cases, I'd go back to -- it would appear to us that the market is relatively flat. We are seeing that at the customer level and so what you are seeing here is the new cases coming in faster than the lost cases are going out -- which is a good thing. We're working very hard on that.

Do you think it's your lines? You know, as you look at invoices, are the amount of lines going up, penetration?

We don't really share that number publicly, Andy. (multiple speakers)

Fair enough. I just wanted to ask the inflation question. You are not the only folks, some of the food retailers are also talking about mitigation and some are using the word hope and you guys talked about a crystal ball. I don't blame you for nobody really knows especially where things are at.

But is there any -- first of all, when you define mitigation, are you talking about just a lower rate of inflation or are you actually think there could be some sequential lower prices maybe in some of the big commodity groups? What would be mitigation to you?

If I said mitigation and I'll see it in the transcript here at some point, I probably should've said that it would subside, the rate of inflation. So we would -- I hate using that word hope -- so I think the best case for us as you know very well, the best case for our customers and for us is 2 to 3 points of inflation.

I don't see that coming in the next couple of quarters. But it would be nice if the 7% turns out to be the high water mark and it subsides here as we go through the next several months. So it's really hard to predict beyond that though.

Okay, and are any of the futures markets or in forward contracts that you can enter into? Are any of these at kind of lower inflation rates? Is there any hard evidence at this point that there might be some --?

Well, in some of the commodities if you go out and if you look at the numbers year-over-year, there's a little bit of lessening I guess if you will, of the inflationary pressures, but not a lot. So we typically don't go out and do a lot of forwards on commodities and I don't expect that we will do that anytime soon.

Again, our whole model is predicated on -- as a marketer and a distributor being able to pass along these cost increases and to some extent, we are in unprecedented times here but I wouldn't expect us to start doing a lot of forward speculating.

Thank you, I appreciate it.

John Heinbockel, Guggenheim securities.

So a couple of things. The lower business transformation expense this year, is that simply a timing issue that it gets pushed out to next year or is that a true reduction in cost?

That's really just firming up our estimates from earlier in the year. When we were putting together our plans and guidance for the year, we were kind of in the middle of still reading the results from Arkansas, so we put together the best numbers we thought. And as we've gone through the first quarter, we've been able to true those up. So at this point, I'm just going to say it is a true up on the numbers.

But you were conservative before and this is where we are coming out now?

I would say we were probably erring on the side a bit on conservatism and I'm not going to say that it won't be a timing issue. Again, we are holding off on giving you further out guidance until we've got a chance to read the second pilot and finish our rollout. But right now I will just say, it's a true up for 2012 and that is pretty much the best view I've got.

All right. Now Bill, on price elasticity, if we end up a year from now with inflation of 2% or 3% or something like that, what's your sense on price elasticity and how much that helps you to demand? Where in this macro does it not help much?

Well, historically it has helped, John, as you well know. Historically whether it's a mindset or elasticity or whatever, when you have lower levels of inflation, our trends would tell you -- our historical trends would tell you we're able to grow our boxes a little bit more. I think that is though because the operator that we are selling to is in a better place in terms of their business and in terms of their outlook.

So time will tell but I would still say that we would be better served and our customers would be better served if we can get to that lower level of inflation, the 2 to 3 points. I just think people's outlooks will be better in that kind of environment.

So I would much rather see that. It would be good to get there in the right way and not get there too fast, but I would think that that's a better scenario for us.

But there's not one to one relationship, right? So if inflation backs off 400 basis points, we probably don't see a 400 basis point improvement in unit demand.

No, I don't think you do and I would double line that given -- just given the world that we operate in today, which is much different than the one we operated in four or five years ago. So I would not make that leap.

All right, then finally, if you think -- you guys talked about other opportunities to reduce costs. When you look at the growth in payroll, is that primarily -- is that hours? Is it the cost per hour? And where is there opportunity if you think there is to bring that increase down?

I think there is a couple of levels of opportunity. One is, I mentioned Fred coming on board here and working with Larry on rolling out this enterprise-wide enhanced operational support work, if you will. So you have watched us over a lot of years, so we have gone from basically pretty much letting the operating companies do whatever they want to do operationally to best practice websites to integrated delivery models, to now we are just going to try to strike a better balance between what the Op Cos can see through their prism locally, where they can make improvements in terms of their productivity and what we might be able to see across the entire enterprise.

So I think over the medium term, there continues to be opportunity like we have created over the last three or four years, where you've seen our productivity improve nicely both in the warehouse and in delivery. I think there continues to be that type of opportunity going forward.

Keep in mind, that was all part of the umbrella, under the umbrella of business transformation. It just didn't happen to be part of the SAP component of it.

So I think that's kind of the medium term opportunity ongoingly for us. And then secondly, I've said this before and I don't mean to be oversimplified or trite, but I think anytime you've got 500 people coming to work together every day, any time you've got 200 people in operations and a salesforce of 100 people, there's always opportunity to mobilize those folks in a more efficient way. So we do a great job. I think we do better than most if not all. But when you have that many transactions, that many cases and pallets coming in, going out every day, there's always opportunities to manage the business a little bit better and that's certainly what we're working on very hard here.

Okay, thanks.

Meredith Adler, Barclays Capital.

Things are taking my question. I'm wondering if you could talk a little bit about your staffing for marketing associates. There was a time where I think everybody thought the economy was going to improve more quickly and I know you didn't want to be behind in terms of training marketing associates.

When you look where you are now, do you just think that you need to make some changes in the staffing?

Meredith, it's Bill. I actually think we're in a pretty good place there right now. We have gone through a transition to your point over the last 12 to 18 months, where I think some of our operating companies got behind or maybe cut a little bit more than in retrospect they would've liked to have cut. But as I look at our numbers today, we are up modestly in terms of MAs and we are up about what the cases are up and we're up about what our expectations for case growth are. So I think we are in a pretty good place there.

Okay, that's great. I think this is beating a dead horse, but if you were to start depreciating the business transformation cost, say let's just make this up in the fourth quarter, and you were also going to start to have the actual expenses of the rollout running through the P&L, can you give us some idea of just based on what you know today, what that would do to earnings per share?

We've given you the full year guidance on that, Meredith, which includes both those items. So we updated it today of course, $250 million to $275 million of expense for the year. You can make your own assumption on how much of that is the first half versus the back half of the year. Included in that is depreciation and the expensing of the items and so roughly $10 million per penny per share, that would be the impact on our earnings per share.

Okay, I'm sorry, I didn't realize that that included the D&A component in it.

Yes, it's all expense.

Okay, got it. I think everybody else has asked my questions, so thank you very much.

Erin Lash, Morningstar.

Thank you for taking my question. I had -- I wanted to go back to some of the strategic pricing initiatives that you've talked about over the past couple of quarters. I don't think that you mentioned it this time around and I was wondering if you could give us an update or a little bit more detail on that?

Erin, this is Chris. I didn't mention it, frankly, because it wasn't a significant impact at all. We -- that number or the impact of that number on our gross margin has declined the last couple quarters as we have discussed to the point where it's not really -- it's not something we're going to call out because it's not material.

So translation, we're starting to see the impact that we wanted to see. We're starting to see the benefit on those geographies that were rolled out earlier offsetting the geographies that were rolled out later in the process.

Great. Thank you, that's helpful. Following up, I'm pretty sure that you mentioned this about a year ago but could you remind us what the impact is regarding the timing of the holidays, meaning with Christmas and New Year's falling on Sundays for the upcoming -- in the current quarter, how that impacts your case volumes versus if they were to fall on a weekday?

Okay, I'll take a shot at that one. It's actually better if it falls on a Sunday, because that's a normal day off obviously for most of our people. The reality is though that they get holidays, so there's the expense side of this, so we will incur some extra costs any time you have a holiday week, especially a big one like Christmas or New Year's the following week.

So the reality is Christmas in particular is a time where at some point that weekend people stop going out, so in the case of Sunday, we will do a little better because you will have Christmas Eve, most people though pretty much shut it down by noon on Saturday. So it could help us a little bit.

I think the holidays fall at the same time this year as last year. I will have Neil come back to you on that if that's different, but I think in terms of what weeks they fall in, it's the same. And, Erin, that's probably more important, to be honest with you, in terms of the week as opposed to the day of the week.

I think that's where we gave you some guidance a year ago because they actually -- one of the quarters had one less holidays than the prior year. One had one more holiday than the prior year, so we did the adjustment to help you out with that.

Okay. That's helpful, thank you. And then just finally, any update on the acquisition pipeline or premiums that sellers are potentially looking at or should we assume that most of your focus is going towards the business transformation and not on acquisitions at this point?

We continue to spend a great deal amount of time working on acquisitions. We've got a small team of people and then we've got a large group of people out in the field that one of their roles is to continue to source potential acquisitions. So the pipeline is reasonably robust. We don't announce every deal that we do. We tend to make an announcement involving three or four deals that we have done.

We will continue to say that most of these are smaller-ish transactions given our size, most things are going to be smaller transactions. But we will keep doing them.

And the first part of your question in terms of pricing, it's really about the same. We are pretty disciplined in our approach. We don't feel we overpaid for anything. We like to be fair, but we continue to see owners of companies that are at a point where they are ready to exit the business come forward and we are typically able to get to an agreement on pricing and we move on down the path towards closure.

All right. Thank you. That's helpful. Have a good day.

Bob Commons, Wellington Shields & Company.

Good morning, Bill. My question just happened to be also on acquisitions. I see that you did spend $36 million on acquisitions in this quarter, so you are not standing still. But it also occurs to me in the current environment that there might be -- and particularly in areas of the country where you have a relatively small market share, there may be more acquisition opportunities and perhaps of a larger size that you might consider doing.

Could you kind of give me a sense of whether you see more people looking to sell out their businesses around the country and what your strategy would be? You still have relatively small market share nationwide.

Yes, thanks for pointing that out. But the reality is the market share moves around depending on the market, so if you go to 17% nationwide statistic, there's markets where we have considerably more than that and to your point, there's markets where we have less.

So we are seeing, to Chris's point, we are seeing and have seen over the last year or so and I think we're being more effective and proactive some fold-in opportunities, which, Bob, I think would be the more likely scenario for us. So there are some bigger players out there. We don't have a sense that they are overly interested in selling their businesses right now. But we certainly would be open to talking to them.

But I think the bigger opportunity is on the smaller to midsized competitors, and to your point, end markets where we do have more opportunity to grow our share.

I will weigh in there, Bob. We're looking everywhere. We've got folks looking everywhere. We will -- I hate to say it like this, but we will talk to anybody if they are interested in selling. So we don't necessarily focus on areas where we've got low market share, although in certain markets, Los Angeles or Southern California, we are under penetrated, we announced a deal there within the last year, a decent sized deal to help us out. We will certainly look in those areas but we don't look exclusively in those areas. We will look at transactions anywhere we can find them.

Okay, thanks a lot.

That concludes today's question-and-answer session. Thank you for your participation and have a wonderful day.