西斯柯 (SYY) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to the Sysco Corporation Sysco reports second quarter fiscal 2012 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Neil Russell. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us for Sysco's second-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 once again 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 Investors section of our website.

All comments about earnings per share refer to diluted earnings per share unless otherwise noted. In addition, all references to case volume growth include total broadline and SYGMA combined.

Lastly, as many of you know, we will be hosting our Investor Day on May 17 in New York City. Additional information will be provided in the next couple of weeks. At this time, I would like to turn the call over to our President and Chief Executive Officer, Bill DeLaney.

Thank you, Neil, and good morning, everyone. This morning, Sysco reported sales of $10.2 billion for the second quarter, a 9.2% increase. Net earnings for the quarter were $250 million and EPS was $0.43. Excluding the year-over-year impact of gross business transformation expenses and COLI investment income, EPS was $0.46. On this basis, which we believe is more representative of the performance of our underlying business, EPS grew 2.2% for the quarter.

Overall market conditions remained soft for much of the second quarter, but appeared to strengthen during the holiday season. Our case growth trends improved as the quarter progressed as we aggressively supported our customers, protected our business, grew our share of wallet with existing customers and brought on new accounts. As a result, case volume growth during the second quarter was 2.8%, excluding the impact of acquisitions, and 3.6% including acquisitions. Based on recent industry data, we believe we grew our market share by about a half a point during calendar year 2011 to approximately 17.5%.

Food cost inflation remained at historically high levels and approximated 6.3% for the quarter. While slightly lower than the level we experienced in the first quarter, this type of inflationary environment is difficult for our customers and provides us with significant pricing challenges.

Although we are encouraged by our recent volume growth trends, earnings growth from our underlying business for the quarter fell short of our expectations as expenses grew at a faster rate than did gross profit dollars. Our leadership team is addressing the internal factors that limited our earnings growth and we expect to see gradual improvement over the next few quarters.

In addition, we are currently developing several key strategic initiatives that will better position Sysco to profitably grow our market share in the years to come. One such initiative that is now in the early stage of implementation is our multiyear Business Transformation Project. Last April, we went live at our pilot facility in Arkansas. Following a successful weekend cutover, we subsequently experienced several system performance challenges, including the following -- timely order entry processing; effective balancing of service and inventory levels; as well as sufficient and user-friendly reports.

This past November, we implemented several enhancements, and Arkansas has subsequently seen improvement in all of these areas. We are now more comfortable with the system's performance and recently went live at our second pilot facility in Oklahoma.

The key goal of this pilot is to ensure that the new system can support multiple operating companies. While we are still assessing early results, preliminary indicators from Oklahoma are encouraging. Assuming system performance remains satisfactory, we will continue our preparation to launch the first wave of multiple operating companies before the end of the fiscal year. Upon concluding that the system is capable of supporting a broader rollout, we will update our timeline and long-range projections for the cost and benefits of the project. We hope to provide that update at our Investor Day in May.

Reflecting for a moment on the first half of fiscal 2012, we are most appreciative of the efforts of our 47,000 associates who support the ongoing success of our broad and diverse customer base. To a large extent, our performance in the second half of the year will be heavily influenced by how much the recent uptick in consumer confidence translates into increased consumer spending on meals away from home, as well as our ability to better leverage our case growth.

Looking beyond the current fiscal year, we remain bullish about our opportunities as the preeminent leader in the $225 billion US and Canadian food-service market. Specifically we remain committed to strengthening our customer relationships, reducing our cost structure and pursuing attractive opportunities to expand beyond our core business.

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

Thanks, Bill, and good morning, everyone. For the second quarter, sales were $10.2 billion or an increase of 9.2% compared to the prior year, driven mainly by food cost inflation, which we estimated to be 6.3% for the period. In addition, acquisitions within the last 12 months increased sales by 0.7% and changes in foreign exchange rates decreased sales by 0.1%.

Case volume for the quarter increased 3.6% year-over-year, including acquisitions, or 2.8% excluding acquisitions. We saw solid increases in volume across all areas of our business.

Gross profit increased 4.8% during the quarter. Even though gross margin decreased 75 basis points year-over-year to 18%, gross profit dollars per stop and per case increased once again.

Operating expenses increased $94 million or 7.1% in the second quarter of the school 2012 compared to the prior-year period. The increase in operating expenses was primarily the result of a $58 million increase in salaries and related costs. The most significant factor impacting this variance was an $18 million increase in management incentive accruals, and last year's second quarter, we had reduced these performance-based accruals, which now creates a meaningful year-over-year difference when compared to this year's accrual.

In addition, we saw increases in salaries and related expense due to delivery and sales compensation, acquisitions and volume growth that is increased pay for activity-based positions. Also impacting operating expenses were a $12 million increase in gross business transformation expenses, a $10 million increase in fuel expense -- it's important to note that fuel surcharges offset this increase, although they are reflected in gross profits -- and a $9 million lower benefit from COLI.

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

Reported operating income decreased $10 million or 2.3% and net earnings for the second quarter were $250 million, a decrease of $8 million or 3.1% compared to the prior year. As we discussed during our first-quarter call, we believe it is important to focus on the performance of our underlying business, excluding the impact of the Business Transformation Project and the impact of COLI, which had a minimal positive impact this year, but had a significantly more positive impact in fiscal 2011 periods.

Excluding gross business transformation expenses and the impact of COLI, adjusted operating expenses increased 5.5% and adjusted operating income increased 2.5%. Net earnings on this basis grew [3.3% to $272 million], and EPS grew 2.2% to $0.46 per share.

Turning to the impact of the Business Transformation Project for a moment, in the second quarter of fiscal 2012, gross project expenses totaled $36 million, and we capitalized $33 million related to the project. In the prior-year period, gross project expenses totaled $24 million and we capitalized $51 million related to the project.

As Bill discussed earlier, we have made a lot of progress over the last few months. We installed enhancements to the system in Arkansas, our first pilot location. We went live in Oklahoma, our second pilot location. And we have begun preparations to move forward with our first wave of multiple operating companies, which should occur prior to the end of our fiscal year.

While we are continuing to assess the results of the Oklahoma implementation, which will ultimately determine the timing of our deployment plans, I wanted to remind you that once we are confident that the system in Oklahoma is operating as intended and it is ready to deploy more broadly, we will begin to depreciate the project costs that have been capitalized to date. We currently anticipate that we will reach this point late in our third fiscal quarter. Once we do, project expenses will ramp up quite significantly and capitalized costs will similarly decline significantly. I will provide our late assessment for 2012 expense and capital in just a few minutes.

Turning to cash flow, cash flow from operations for the first half of the fiscal year was $539 million. In the prior-year period, cash flow from operations was $283 million. As a reminder, we are paying the final $212 million in IRS tax settlement payments during this fiscal year. Due to the timing of these payments during our fiscal year, there was no cash impact on our first fiscal quarter, a $106 million cash outflow occurred in the second fiscal quarter and a $53 million cash outflow will occur at each of the third and fourth fiscal quarters.

Cash flow from operations improved by $227 million in the second quarter compared to the prior year, due mainly to improved working capital and the redemption of COLI policies. Working capital improved during the quarter due mainly to improved days outstanding for accounts payable. The redemption of the COLI policies was an element of our previously discussed plan to reduce the market-driven COLI impact on our earnings. The redeemed COLI policies were replaced by less volatile corporate-owned real estate assets.

Capital expenditures totaled $207 million for the second quarter and $434 million for the first half. This year, we are 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.

During the quarter, we renewed on favorable terms our $1 billion credit facility, which supports our highly-rated commercial paper facility.

Before closing, there are a few guidance metrics for fiscal 2012 that I'd like to update. First, we now expect an increase in fuel expense of $30 million to $40 million this year, which is roughly $5 million higher than our previous guidance and is primarily driven by higher projected fuel prices. As a reminder, we implemented a fuel surcharge with a broader customer base late during the third quarter of fiscal 2011 which is intended to mitigate the increase in fuel expense.

Second, we now expect the capitalized spend on our Business Transformation Project this year to be $125 million to $145 million. This is roughly $25 million higher than our previous estimate, primarily because we have been able to capitalize more cost than anticipated and we are purchasing more hardware than originally forecast. In addition, we expect gross Business Transformation expenses for the year to be approximately $230 million to $250 million, which is roughly $20 million lower than previous estimates because of a slower ramp-up of our shared services center, requiring fewer resources than originally projected in this fiscal year. Increased capitalization of costs also contributed to this decline in the estimate.

In closing, while trends in our business continue to be uneven and difficult to predict, we are encouraged by the level of case growth this quarter and our continued ability to increase our market share. We are taking actions in many areas to improve profitability in both the near-term and the long-term and believe Sysco's unique capabilities and commitment to ongoing investment in our business provide a solid foundation for future growth.

With that, operator, we will now take questions.

(Operator Instructions) John Heinbockel, Guggenheim Securities.

A couple of things. So first thing, so business picked up toward the end of the quarter. Has that continued thus far in January? Obviously, weather has been good in a lot of parts of the country, and sentiment has been good. So has that persisted here or have we slid back?

I would say it's persisted. It is early, John. You know us real well, so you know this quarter is a hard quarter to trendline anything this early. March drives a disproportionate amount of the volume and the earnings for the quarter.

But there are some phenomenons going on. You haven't heard us talk much about weather last year or this year in terms of it hurting us or helping us. I would say a couple things this year. We had some bad weather where you normally don't have bad weather last year in the south. So that is going to help us here -- or did help us in January.

We did have the holiday kick in into the first quarters, so those kind of offset. So I would say net-net, the weather has been good relative to last year. The only caveat would be we haven't seen a lot of snow in some of the ski resort areas, so some of those opcos that depend on that business, they are not seeing that. But net-net, I would say the trends have continued on the top line.

And then the -- so you talk about things you can do to improve profitability near- and long-term. So talk about two things. One, away from SAP, where do you think there might be some cost-containment opportunity? And then secondly, is there anything pre-SAP that can be done on pricing in terms of where you may not be optimizing your pricing geographically by customer, category, whatever?

Okay, those may connect here, but if I don't handle the second one, come back to me on that. What I am really alluding to there, John, is as you look at this thing, clearly this is not a typical Sysco quarter in terms of what we were able to leverage or not leverage. So in the short term, there are just some basic things that we need to readdress and to bring a little bit more intensity to.

So basically, we need to flip the gross profit dollar growth and the expense growth. So if we can get to where the gross profit dollars are growing 5 to 6 to 7 and the expenses are growing 4 to 5, then we'll be fine. Now how do you do that? Clearly we need to continue to work really close with our customers and understand that the value package is working both ways in terms of the service and the pricing.

And then internally, we saw pressure on productivity in operations in particular in the transportation side, even ex-fuel and to some extent in selling. So the selling, potentially some of that is continue to invest in the salesforce. But there is opportunities for us just to manage the business a little bit better here, I think, on the cost side and get our productivity improvement to go along with the cost improvement.

So I don't want to sound too clicheish here, but there are some blocking and tackling fundamentals here that we need to improve somewhat here over the second half of the year.

As far as the pricing, we are in different ways and have been for the last year or two working with some different forms of what I guess would be characterized as scientific pricing. We have -- as we've moved into this stage of the Business Transformation work, we have looked at opportunities to decouple some of the things that were essentially integrated into the software, whether it be on a CRM; we've talked a little bit about inside sales. Pricing will be another one. I'm not going to tell you today there is anything imminent there, but that certainly -- I would put that more to the long-term strategic initiative bucket that I talked about, along with strengthening some of our supplier relationships, a more fundamental look at our cost structure overall, as well as obviously what I did speak to, which was Business Transformation.

I also think you will see us continue to improve our understanding of our customers and customer engagement. We hired a gentleman here this quarter, Bill Goetz, who is going to start up our marketing department with a lot of focus initially on the customer side of things. So there are several things we are working on there for the medium-term, and we will be able to explore those a little bit more with you here later in the year.

And as a follow-up to that, to what degree are you still doing reviews with your customers? And is that -- are you still getting a top-line benefit like -- it probably is not what you were getting, but some kind of benefit from that process?

We definitely are. I would say that's an area where we are very pleased. We are continuing to do them. I think we are doing them better in terms of the planning, the targeting of the actual review itself. A lot of these people have been through this now several times, so you need to raise the quality of the review each time, as well as the follow-up.

So we definitely get better retention, which is the main goal here, and ultimately penetration with the folks that we do review. And those tend to be our larger accounts and/or accounts with high potential. So that is definitely a positive for us right now.

All right. One final thing. First wave, remind us that's going to be how many operating companies per week or per month?

Per week?

I guess it is per month, right?

It is per cycle. I'll let Chris kind of jump in there, John.

We haven't actually talked about how many, and to be honest, John, that is something that we are still working through. But ultimately we would like to be able to get to more than a handful per wave. I would guess say that the first one is probably a bit smaller than that. But it's going to be enough to prove the next set of things we need to prove, which is we can roll out multiple companies at the same time.

All right. Thanks, guys.

Greg Badishkanian, Citigroup.

Great. Thank you. Two quick questions. First is just when you talked about taking some share, being aggressive, how much of that is due to price versus maybe having your reps out there just maybe calling on customers more? And have there been any reactions in the marketplace from your competitors?

Okay, Greg. I'll start with that. I think it is more of just an attitude or a mentality. If you go back and look at the numbers, as I'm sure you have, we have seen kind of a plateauing out in terms of real growth over the last two, three quarters at a pretty low level. And we just -- we've mentioned here for the better part of a year or two that the pricing environment is pretty acute. And our whole business model is predicated on case growth, in terms of driving productivity, driving strengthening relationships with customers and that type of thing.

So I think it is more of an internal mentality across our geography that we were just going to get more aggressive. And where people were coming after our business in aggressive ways, we, I think, have fought back a little bit harder than maybe in the past, and maybe in ways that we don't really like in the short term.

But the bottom line right now for us is -- I would've liked to have seen a better bottom line this quarter -- but it's better for us to get the cases in overtime, work on improving our productivity, than to continue to accept the kind of real growth that we were looking at in a market that looks like it is growing a little bit right now, but is still going to be, we think, somewhat uneven.

So we are just trying to be more aggressive out there in a smart way. There are certainly things we need to improve upon, but we just felt that we needed to kind of take it to the market a little bit here.

Right. Is that more in the street or more on kind of a multi-chain -- or multi-unit chains?

It plays out different. In the street, you have 8,000 salespeople, and on the big CMU accounts, you tend to be working one-off with the larger customers. But I would say it is both.

What I'm really trying to say here is we are trying to be highly responsive to our customers. This inflation environment doesn't appear to be going away anytime soon. That is very difficult for the customers. From the data that we see, it would appear that the inflation at the operator level, that they are absorbing or passing along to their customers, is 2% to 3%. You see our numbers around 6%. So that is something that we have to work through with the customer level. But to answer your question, it is on both fronts.

And what do you see your customers as doing to absorb some of the higher costs that they have, besides trying to push back on you? Are they -- menu or what are they doing to be more creative?

I think all the things that they've been doing. Certainly, the menu analysis and trying to work with us and work within their own shops in terms of how to make the menu more attractive, more profitable. They're trying to find ways to -- there is a lot of different vehicles out there to increase traffic in their restaurant, manage their labor staff more effectively, all the things that you would expect a good business person to do in that type of operation.

Great. Thank you.

Meredith Adler, Barclays Capital.

Thanks very much. I guess I would like to just continue a little bit on this them. I have heard that maybe some of the very largest of your competitors are not feeling quite as much pressure as you are. Do you have any sense that that's true and do you have any sense about your positioning that might make things a bit more competitive for you right now?

Meredith, what was the second part of the question?

If it is true, what is it about your business, the way you are positioned, that may make you have to be more competitive right now?

I don't know that it is true. It's hard for me to comment on what we may have heard from other sources, given that they are all private sources. So I can't really comment on how they are doing.

I can tell you that this market, if it's growing at all, it is growing very little. And we just put up 2.8% to 3.6% growth, depending on how you look at acquisitions. So like I said, this quarter, we are not pleased with the bottom line, but we feel we are doing what's right for Sysco and our customers and our shareholders, and we are in this thing for the long-term. So we've got a lot of different competitors out there with different time horizons, and I really don't know what they are feeling or seeing.

Okay. And on some of the smaller competitors, we thought they would get hurt during '09 because business was really weak. But we had deflation, so they probably benefited on the working capital side. Do you think they are under more pressure now because working capital is going up significantly, and are they having trouble getting financing?

Meredith, this is Chris. I will try to take that one. Again, it is hard to make generalizations across the pool of some multiple thousands of smaller competitors. But as sales go back up -- reinflate, as we like to say -- if they want to participate in that growth, if they want to sell more boxes, they are going to have to find the financing for the working capital somewhere. I don't know if they have access to the capital or not, to be honest with you. They may not be participating in the growth.

One thing you kind of have to look at, if Technomics is saying that the market grew last year I think basically 0.1% or flat, and we know we grew our cases and you're at least implying that others may have grown their cases, some of the big guys, it kind of leads you to believe that somebody out there is shrinking; we just don't have visibility as to who it might be.

Okay. And I guess I'm just trying to understand better. It is an extremely competitive environment, and do you have a sense where that competition particularly might be coming from? Or is it very competitive in every market from lots of different competitors?

I think it is a continuation of the theme that Bill and I have talked about here for several quarters. You've got very, very high inflation coupled with stagnant growth. And when you get those two things together, it is just highly competitive. Everybody is used to growing, wants to continue to grow, and they've got to fight out there on the street to find that growth when it is not coming organically.

And to compound that, Meredith -- I know you know this -- your customers are dealing with the same issues as are your suppliers. So that is what we mean when we talk about pricing being acute and all that type of thing. It is acute at every level of the chain here.

Okay. And how long do you think it really takes to kind of get expenses and productivity in line with the gross profit dollar growth?

Like I alluded to, I think you'll see us improve there. I think it will be gradual. This quarter -- a little cautious on this quarter just from the standpoint we had a pretty good bounceback quarter last year in the third quarter, and it's just hard to predict, like I was saying earlier, because March drives us so much. But I think as the rest of the year plays out, you will see improvement there.

Great. Thank you very much.

Karen Short, BMO Capital.

Thanks for taking my question. I guess it sounds like maybe you were a little surprised by what it cost you to drive the improved volume or case volume growth. So I guess I'm wondering, would you say you reacted more to an acute pricing environment in the quarter or did you lead the more competitive environment?

We probably have reacted in some particular instances, Karen. As I mentioned earlier, I think internally we just got a little bit more connected and coordinated on the fact that -- I don't know if you would call it leading, but we are just -- we're not going to sit back in a flat environment and just hope that we get some case growth. You are going to have margin pressure whether we grow it zero or whether we grow it two or three. And the part that we know for sure in our model is that when we grow cases and there is a good balance of that growth between the street and contract, over time, we will be able to make money on that. Maybe not as much on the delta as what we've seen in the past, but it is certainly better for us than accepting flattish type growth.

So I wouldn't say we were surprised. Frustrated might be a little better word, in terms of that we weren't able to take more of it to the bottom line. But we are being very, I think, appropriately aggressive out there. And obviously, over time, the investment we are making needs to turn into some positive operating margin enhancement. And I think it will; I just think it is going to take a little longer than maybe what we've seen in the past.

Okay, that's helpful. Thanks. And then any color on how much the timing of the holidays this year maybe helped your top line? I realize you probably give it back in the next quarter, but --

I don't think I can quantify that. But certainly the calendar played to our favor this time. And I think it was more that than anything. Basically what we saw in terms of the retail, we think we saw in our business December was a better month for us -- meaningfully better than what we saw certainly in October and the first part of November. So I don't know about the numbers, but I can tell you it was much stronger the last five or six weeks.

Okay. And then just kind of looking forward, I don't know if you have any update on what you think the inflationary environment is going to be looking like. Obviously, there was a slight improvement this quarter.

Yes, it is really hard to predict; a lot of different views on that. I don't see any views out there that say it's going to subside significantly the next three to six months. So it could come -- hopefully, it will come back a little bit. But you've seen it go from what -- 4 to 5 to 7 back to 6. So a lot of commodity pressure, a lot of pressure in the meat area. I'll let Chris speak to some of the other categories in terms of what it means to our business. But we are not really looking for a whole lot of relief here over the next couple quarters.

No, that's right. I keep saying we may have a crystal ball but we don't know how to read it. It eased off -- I would like to say it was easing off throughout the quarter. That would not be factually correct, though; it didn't ease off throughout the quarter. So it's hard to say where it's going to go.

And then I think one of the things we've talked about in the past, not so much here recently, is it used to be just a few categories; now it is pretty broad-based. It continues to be fairly broad-based. Bill mentioned meat. That has been a category that has been under inflationary pressure for a while. And if you just look at supply and demand, it looks like it is going to continue to be under pressure for a while.

Other categories may have the opportunity to ease off faster, should we get some help in the commodities market. We will just have to look at that. My best guess is we'll get back to a place where we have some categories that are highly inflationary and others that are more normal. So the overall rate may be high, but it will only be across certain categories. That would certainly be better than the situation we are in today. But again, that s crystal ball type stuff and I can't tell you how long it takes to get there or even if we are going to get there.

Okay, great. And then just last question any initial comments on how the second opco is doing on the new system?

Yes, I thought we made some comments on that, but I will try again here, Karen. Look, we just went live there last weekend, so we are in the early part of week two, and it went well. It went well from an operational standpoint and some of those things I alluded to in my comments, in terms of where we had some struggles. Certainly on the order entry and on the reports, we are off to a much better start there.

And like I said, we saw those improvements already in Arkansas back in November. Now, as you can appreciate, in the cycle of our business, it takes two, three, four weeks to go through an inventory turn and all that type of thing to get a full handle on how some of the demand planning and the ordering and reordering systems and all that are working. So we will be watching that real close here over the next two to four weeks.

Okay, great. Thanks. That's helpful.

Ajay Jain, Cantor Fitzgerald.

I am trying to reconcile the sequential improvement in volumes with your gross margin performance. So just based on the magnitude of the volume growth in the quarter, can you comment on whether there was any greater emphasis on price investments that might explain some of the variability in the top line and in your gross margin performance?

It's a great question, and I understand it from your perspective. It's just not exactly how we run the business here or how we think about it.

What I'm trying to articulate to you is we had our presidents in for our regular fall council here in the middle of November, and we talked a lot about the business. And I think coming out of that meeting, we probably did take a little bit more of a cohesive approach to being more aggressive in terms of protecting our business support and the customer base and going after new business opportunities.

So it wasn't like, okay, we're going to invest X in price to get to that. But we saw some pressure on margins as we did that. But to be honest with you, I can't tell you that the margin pressure really exacerbated that much the second half of the quarter. So I think my point is the pricing pressure is there. We're going to go out and get cases while it is there and learn how to manage it as best we can. And at the same time, there is a learning here that has been with us for some time, and certainly our strategy, which I feel very good about, is addressing it, which is in the world that we are in and that we are going to be in for the foreseeable future, we need to continue to work on our cost structure. And it goes well beyond cutting and slashing. It is just a fundamental, a more cohesive approach to productivity opportunities in all parts of the business, operations, selling and admin.

And you see us over the medium term beginning to address some of that with the Business Transformation work. In the shorter term, when you have 70 broadline operating companies and 8000 salespeople on the street and 47,000 employees, there is always opportunities to improve productivity in a business. And those are the things that we are working on today.

And clearly, there is opportunities for us to assess where we are in our pricing and tweak that as well.

Okay. And I think you confirmed, just based on the general operating environment and the readthrough for your case volume trends, it looked like you did see some pickup in December, and you are seeing some similar improvement in volume trends in the current quarter. It doesn't sound like things have tapered off -- correct me if I'm wrong -- things have tapered off over the last month or so. But can we infer from that that your volumes or case volumes are still in the 2% to 3% range through the first four weeks of the quarter?

I think what I said was that the trends that we saw the latter part of last quarter are continuing. I just want to be a little cautious here, is that you've followed us for a long time. January, even February, are not that relevant in terms of this quarter. The month of March is kind of the month where you have -- you still have the seasonal business in the South, but people start getting out again in the North.

So yes, so far we've see continuation in the trends, but March is going to drive this quarter. And as I mentioned in my prepared comments, I think the real key for us in the second half of the year is improving in the areas that I have been questioned on, that we've addressed this morning. But we need to see a continuation of those trends. And if we do, I think we are well positioned.

If I could, I also wanted to ask a question about the facility in Indiana. I know the timing has gotten pushed out a few different times over the last few years, and each time it seems like the main reason cited for the delay is just a lack of industry growth.

So I just wanted to confirm if the business decision to build out the third RDC is purely a timing issue from your standpoint, or is there any kind of a scenario where you might feel the capital investment just simply isn't warranted?

Ajay, as you might imagine, those are all coupled together. When we build facilities we expect to get a return, and when we first looked at that facility just like the other two, a lot of the return came from what we call the avoidance of capital, which is as cases grow we won't have to build out facilities around that new facility because that facility will take up much of the volume. So it helped with the return.

So when you get to a low case environment, you're not seeing the same return on the facility. So we said, you know what, we need to push this thing off a little while and keep looking at it. We continue to look at it. Case growth here is certainly helping the case for that facility, but it is also causing us to be a lot smarter about what other benefits can we derive from that facility; how can we work with suppliers better in terms of inbound transportation, etc., to get more return out of that facility if we don't think we are going to get the return the same way as we did in number one and number two.

So it's really all of the above. It is certainly not something we have taken off the table. We just continue to evaluate it, and we said we would look at it again in the spring and that is our plan.

And one final question if I could. Just based on your update for the ERP guidance of, I think the new range is $230 million to $250 million. How much of that is, if you can comment, Chris, is depreciation?

I can't really comment specifically on the depreciation number. What we have said is that if everything continues to go well with Oklahoma as we read the assessment, if we are prepared to roll out the first multiple wave, we would expect our depreciation to start somewhere in the latter part of the third quarter. And that is factored into the updated expense guidance that we've given you. We've not broken out how much it is at this point.

Okay. Thank you very much.

Ed Kelly, Credit Suisse.

I'm just trying to get a sense for what real underlying market growth is doing here and what the cadence is for Q2 versus Q1. If you have not been call it a bit more aggressive in terms of growing volume, would your case volume growth have been similar to Q1, would it have been slightly better? How should we be thinking about that?

It's another one of those really good questions. It's hard to tell. I think what you should be thinking is for the calendar year the early estimate is that the market was flat. I think we said up 0.1. I think at the same time it was probably better than that in the December quarter for the reasons that we alluded to, and certainly what you've seen in other businesses.

So I think you probably would have seen better growth in the second quarter -- our second quarter than the first, even if we hadn't maybe gotten a little bit more aggressive in terms of our approach and mindset. But I don't think you would have seen what we put up. So that is the best I can conjecture on that, Ed.

Okay, and I'm trying to see if I'm reading you guys correctly here. But you are sounding a little frustrated about the flowthrough on the bottom line of the volume growth. But it doesn't sound to me like you really plan on changing how you go after volumes. So if you go to improve that flowthrough, is it really all about the operating expense line and how you get that done?

Look, I used the word frustrated. Maybe -- I don't know -- depending on the data, it could be a little strong. It may not be.

The bigger point here, I think from our standpoint, is when you look at our business model, it is predicated on growth, whether you are talking about buildings RDCs or you're talking about growing the earnings and that type of thing. And we know when we grow boxes, that over some period of time, generally we can leverage that into earnings growth. And that is what the goal is.

So we acknowledge here that the number on the bottom line didn't come in where we expected it to for the quarter, so that is disappointing on one level. But I'm not disappointed in the sales. We feel good about how we are going after the business. I feel very good about our people and the effort that we are seeing there. I feel very good about the cash flow of the Company. We are putting this IRS thing -- bad for this year -- that's behind us. And I think you will see our working capital management improve somewhat over time. And I feel good about the strategy.

So overall, I feel good. The frustration is -- look, we are competitive people. We know that we have shareholders that are looking for certain numbers, and we just came in a little bit short of what we expected to come in at. But I am not frustrated in terms of the business or the people.

Okay. And then related to the Business Transformation costs, I know you are obviously not prepared to give numbers beyond what you've given this year. But do you think that the peak year in spending on Business Transformation costs will be fiscal '13 or will it be the current year?

When we had originally put up numbers for -- I'm going to try to answer your question not by looking forward, but by reminding you of what we said before. When we first put up numbers, we showed the peak year being, I think, either fiscal '12 or fiscal '13. Since then, we've talked about the delay that we have experienced. So I think you can make a reasonable assumption that the peak year got pushed out.

So my best guess -- and I don't have numbers to share with you yet, but we do believe we will have quite a bit to talk about in May -- my best guess is peak year is going to be fiscal '13.

Okay. Last question for you, can you help us with how much you've capitalized to date? And then as you think about that line item beginning to amortize, what time period should we be doing that, on average?

We are going to issue our Q tomorrow, and I think you will be able to -- with that number and the previous numbers, you will be able to come up with the total capitalized number. I don't have it in front of me or off the top of my head, Ed. But you will be able to see what it is.

And then in terms of the timeframe, some of the stuff that we are capitalizing is a 7-year, some is a 5, some is a 3. Ball-parking it, not knowing the number off the top of my head, you could probably take an average around five years, and you will be -- plus or minus a year, you are going to be accurate.

Okay. Great. Thank you.

Andrew Wolf, BB&T Capital Markets.

Bill, I know it is -- I don't blame you for being a little cautious on sales, but given the macro backdrop got a little better and your -- sort of your internal numbers got a little better in sync, and I know you are going out and getting share, too. But you also characterized I guess your outlook is you still think the market is going to be choppy.

What would make you turn to a little more -- saying something like cautiously optimistic? Would it be a good March for Sysco and the market? Or are you just -- that is your outlook, you just think it is going to be choppy? And if that's the case, could you explain why?

I let Chris use the word choppy this time. I didn't say choppy. So I'm trying to be optimistic here, Andy. Yes, I think a couple good quarters in a row would be all I'd need, to be honest with you. And so I think -- we had a nice finish to the last quarter. How much of that was driven by holidays is to be determined.

I just think if you take a step back and just look at the economy in general and the mindset of the consumer, every piece of data that you are seeing right now on the consumer side is increasingly positive. So if that can continue and if that translates into people going out to eat a little bit more, as I said in my prepared remarks, then that is a good thing.

So it is just -- it would be nice to see a trend over two or three quarters where you see that. And then I think that -- then that would really validate the approach that we've taken, which is to get more aggressive in the marketplace and to be well-positioned when the volume picks up, and then we can leverage a lot of our scale at that point in time.

So I feel like we are doing the right things. It would be nice if we saw the results a little faster, but we haven't. I think we will see them gradually. And I think cautiously optimistic is where we are at, but all that really means is we need to see a couple, maybe three good quarters together. And it really comes down to what is between the ears of the consumer, and are they to a point now where they are going to start going out to eat a little bit more.

We are seeing a little bit of that, more at the quick service side. But what we've consistently seen over the last few months is that the tickets -- the size of the purchases when people go out to eat, that is increasing. So we are seeing signs, and we just need to see them, I think, for a little bit longer.

Andy, I'll jump in and I'm the one that used the word choppy. The economist in me just continues to remind myself that we are comparing these latest quarters to a historically bad point in time. And by any measure, the macroeconomics still say that this economy is very fragile.

So while we are -- Bill's words, I'll echo -- while we are feeling a little bit better, you do have to sometimes pull back and remind ourselves that this economy overall is still very fragile. If we get some rhythm to it, the consumer confidence picks up, the job state is certainly helping here, that stuff starts to build momentum, you will hear us starting to be a lot more confident about it. But we are not very far from the trough that we were in.

The one thing -- I know you know this, Andy, but the one thing we have to remind ourselves -- we have been in this period here for an extended time now -- is going out to eat is still a relatively low-cost form of entertainment. And I've been saying that off and on for 25 years here at Sysco. And we certainly have had to deal with a new environment the last three years. But once that mindset turns, we think that will be helpful to our business. We just haven't really seen it turn in the business as much as we would like to see yet.

Great. Thanks. That helped me. A couple housekeeping questions. Did you have a similar bonus increase accrual in Q1 that you called out this quarter?

It is a little bit of a mismatch. Last year, in the second quarter, based upon our full-year forecast and the bonus plan and targets we had in place at that time, we reversed the bonuses basically back to zero. That is just what the forecast was telling us -- we were not going to hit the grid.

We had a good third quarter, as Bill alluded to earlier, though, and that put us back into contention. This year is a slightly different bonus plan; there are different targets and objectives, because you change those year-by-year depending on your plan. And we did not reverse -- we did not take our bonus accrual down as low as last year; hence, you have a lapping effect of $18 million.

And lastly, actually do have a follow-up on gross margin, which I thought was exhausted. And you might have mentioned this, but was there a mix aspect to it, too? Are you growing chain type -- or non-street type of business that might be lower margin at a greater rate, and is that just part of what is going on with the gross margin, or was it mostly on the price side?

We have done the same analysis on gross margin that we've done every quarter to try to ferret out is it mix, is it this, is it that. And really, nothing. The thing that stands out most is the category we've been calling inflation, which is just in the high inflationary product categories, that is where we are seeing the most margin. That accounts for the vast majority of the 75 basis points.

I think -- the only other thing I would add to that is you read our material and as we speak here today, we are talking a lot more in terms of deltas on dollars. Piece growth, sales dollars, in particular gross profit dollars, expense dollars, that type of thing. Because look at -- we have concerns about the margin, as you can expect. But the percentages are not as relevant. When you've been through an extended period here now several quarters of inflation, whether you're looking at expense percentages or gross profit percentages, I don't know that is as meaningful a way of looking at it as it might have been historically. But clearly what is meaningful is the dollars we are taking to the bottom line.

So that is how we are evolving here in terms of how we look at the business internally, which is our gross profit dollar growth versus our expense growth.

Thank you.

(inaudible), JPMorgan.

I'm on for John Ivankoe. Just a quick housekeeping one first. Did you quantify how much the weather and the calendar shifts were to the sales growth for the quarter?

No, we did not.

Could you, or is that --?

I don't think it was a big deal.

Yes, I wasn't trying to be short with you. We didn't quantify them because, frankly, they weren't a big deal. They weren't enough to call out.

We had some bad weather last year, I think, in the North, but I don't really count that, because bad weather in the North in December is not a big deal.

Yes, it is kind of something you expect year after year, and you never know what day it is going to hit.

I think the one thing that did help, but we didn't quantify it, was the way the calendar fell, with Christmas and New Year's being on a Sunday. That did, I think, allow people to get out more.

But I think we benefited more and our industry benefited more from just what you saw in retail and everything else, which is just business seemed to pick up throughout the holiday season. But even with that, I feel like we were able to grow our business better than others.

Okay. And then just in terms of longer term, you've talked to maybe half a point or a point of sales growth coming from acquisitions. Could you just talk a little bit about how you guys see the acquisition pipeline going forward, if you still have kind of confidence in your ability to roll in maybe some smaller companies?

That continues to be our goal and our plan, half a point to a point. We've got a very robust pipeline. We are trying, as we've said in prior calls, to go back to kind of the way we used to do things in the past, which is just build relationships with the families that are out there. And when it comes time for them to exit the business, for whatever reason, we are a phone call away, and hopefully we can put together a transaction. So we have a pipeline of folks that are thinking about exiting the business, either now or sometime in the near future, and we try to turn that pipeline into actual transactions. We've done a number of deals the year. They're usually pretty small. We don't announce every one of them because of their size. But in aggregate, we hope they add up to 0.5& to 1% every year.

Okay, great. Thank you.

That concludes today's Sysco Corporation conference call. Thank you all for your participation.