西斯柯 (SYY) 2012 Q4 法說會逐字稿

Good day, everyone, and welcome to the Sysco fourth-quarter and fiscal-year 2012 conference call. As a reminder today's call is being recorded. We will begin today's call with opening remarks and introductions.

I would now like to turn the call over to Neil Russell, Vice President of Investor Relations.

Thank you, Danielle, and good morning, everyone. Thank you for joining us for Sysco fourth-quarter and fiscal-year 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 supplementing our comments with a slide presentation. You can download a copy of the presentation by going to the Investors section of Sysco.com.

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 referred to diluted earnings per share unless otherwise noted. In addition, all references to case volumes include total Broadline and SYGMA combined.

Lastly, I encourage you to download our new Investor Relations app from either the Apple iTunes Store or for Android at Google's Marketplace store. Just to search for Sysco IR App to have easy access on the go to all of our filings and important investor material.

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 and net earnings for the fiscal year of $42.4 billion and $1.1 billion, respectively. Earnings per share was $1.90. Excluding certain items, adjusted earnings per share for our underlying business was $2.13, representing a 4.4% increase year-over-year.

Sales grew 7.8% for the year as case volume growth of 3% and product cost inflation of 5.5% contributed to the highest annual sales level in our history. Earnings growth was not as strong, as pricing pressures resulted in only modest gross profit dollar gains. However, we did experience improved expense management in the fourth quarter and expect to continue that trend in the new fiscal year.

Cash flow from operations approximated $1.4 billion, a significant improvement over our performance in the prior year. On the capital investment front, we recently completed construction and began shipping from three new and more efficient distribution facilities, a 420,000 square foot facility outside of Boston; a second 420,000 square foot facility located between Austin and San Antonio; and a 240,000 square foot facility on Long Island. All three of these Operating Companies are located in large markets that provide tremendous growth opportunities for Sysco.

Looking forward, we remain totally committed to profitably growing our business in the $225 billion market that we serve today. While industry growth is expected to remain modest, we are highly focused on strengthening and expanding our customer relationships as well as reducing the cost structure of our underlying business.

To do so requires transformational change in all aspects of our business. Successfully deploying a new and enhanced technology platform is a foundational component of such change, and we continue to progress on that front.

Specifically, we recently converted our East Texas Operating Company to our new ERP system in late July, our third location to go live. We are pursuing a market-based approach for our rollout schedule, which we believe will enhance the conversion process in two key ways. First, we will more effectively leverage our market leadership team; and, second, the close geographic proximity of the Operating Companies will permit us to utilize all of our resources in a more flexible and efficient manner. As a result, our next five plant conversions will be facilities in Texas and Louisiana, all of which are expected to occur this fiscal year.

As conversions have occurred, we have become increasingly encouraged with the ramp-up in services provided and the quality of service at our Shared Business Services Center, or SBS, here in Texas. SBS is staffed and effectively supporting our three converted companies with multiple centralized functions including financial support, replenishment, national account pricing, and a customer support call center.

We have also begun to make progress on our key Business Transformation cost-reduction initiatives. These initiatives focused on improving productivity in our operations, selling, and administrative areas as well as lowering product costs. For example, each of our Broadline Operating Companies has already taken action in a variety of areas and begun to implement processes designed to enhance productivity in delivery and warehouse operations.

On the SG&A side, after careful and thoughtful analysis, we have elected to restructure our domestic nonunion retirement programs. Specifically, effective December 31, we will significantly enhance our 401(k) plan and freeze our non-union defined benefit pension plan. The enhanced 401(k) plan will provide benefits to our associates that are highly competitive in the marketplace, in a manner that results in meaningful cost savings to Sysco over time. Chris will discuss the financial savings in a moment.

On the product side, we are moving forward with developing our category management process, including preparing to pilot several food categories.

Returning value to our shareholders remains a top priority for Sysco. We recognize that our dividend represents a significant component of Sysco shareholder return, especially as we navigate through the transformational changes I noted earlier. Accordingly, we increased our dividend during this past year, the 42nd time since our founding in 1970. In total, we distribute $623 million in dividends to shareholders during fiscal 2012.

Looking back on 2012, it was clearly a year of transition for Sysco. While fiscal 2013 will undoubtedly provide its share of challenges, we are excited about the opportunities that lie ahead to profitably grow our core business and expand beyond the core over time.

In closing, I want to thank all of our associates for their efforts this past year in supporting our customers. Their contributions going forward are critical to fully realizing Sysco's vision to become our customers' most valued and trusted business partner.

Now I'll turn things over to Chris so he can provide additional details on our financial results for the fourth quarter and fiscal year.

Thanks, Bill, and good morning, everyone. For the fourth quarter, sales were $11 billion, or an increase of 5.9% compared to the prior year, driven equally by case volume growth of 3.4% and food cost inflation of 3.3%. Excluding acquisitions, case volume increased 3.3%.

In addition, acquisitions within the last 12 months increased sales by 0.6%, and changes in foreign exchange rates decreased sales by 0.5%. During fiscal 2012, we completed nine acquisitions representing nearly $270 million in annualized sales and met our goal of increasing sales by 0.5% to 1% through acquisitions. Nearly 20% of our new case growth came from acquisitions in fiscal 2012.

We have a number of additional acquisitions at various stages of completion in our pipeline and are targeting to increase sales in excess of 1% through acquisition in fiscal 2013.

Gross profit in the fourth quarter continued to be pressured by an intensely competitive market. Gross profit in the fourth quarter increased 2.9%, but gross margin decreased 54 basis points year-over-year to 18.2%. Fuel surcharges provided no benefit to year-over-year comparison as surcharges were comparable in both periods.

Gross margins have historically increased in the fourth quarter compared to the third quarter, and we broke that trend in the fourth quarter of 2011. We are encouraged that gross margin increased 39 basis points from the third quarter to the fourth quarter of this fiscal year, which is more in line with historic trends.

Operating expenses increased $103 million or 7.4% in the fourth quarter of fiscal 2012 compared to the prior-year period. This increase included $23 million of certain charges that were mainly related to the withdrawal of one of our Operating Companies from a multi-employer pension plan, or MEPP. Excluding these certain charges, operating expenses increased $80 million or 5.7%. Operating expenses were also impacted by a $38 million increase in gross Business Transformation expense and a $20 million increase in salaries and related costs.

Operating income decreased $45 million or 8.1% driven by a decrease in gross margin, partially offset with gains in case volume. Excluding the certain items I mentioned previously, operating income decreased 4%.

Net earnings for the fourth quarter were $309 million, a decrease of $27 million or 8% compared to prior year. Diluted EPS was $0.53, a 7% decline compared to the prior year. Excluding certain items, diluted EPS was $0.55.

As we have discussed on previous calls, we believe it is important to focus on the performance of our underlying business, which not only excludes certain items but also excludes Business Transformation expenses and the impact of COLI. As a reminder, COLI had a minimal positive impact on our results in fiscal 2012, ahead of significantly more positive impact in fiscal 2011. Adjusted operating expenses, which includes these items and better reflects our underlying business performance, increased 3.3%; and adjusted operating income increased 2.2%. Net earnings on this basis grew 3.7% to $367 million and EPS grew 3.3% to $0.62.

Turning to the year-over-year comparison, sales increased 7.8% or $3.1 million due mainly to inflation of 5.5% and case growth of 3%. Food cost inflation declined steadily throughout the year, from 7.3% in the first quarter to 3.3% in the fourth quarter.

Excluding acquisitions, case volume grew 2.5% for the year. In addition, sales from acquisitions increased sales by 0.7%, and changes in foreign exchange rates did not have a meaningful impact.

Gross profit increased 3.8% during the year, while gross margin decreased 69 basis points year-over-year to 18.1%. The decline in gross margin was due to high inflation combined with weak restaurant traffic, competitive pressures, segment mix, and a more aggressive go-to-market strategy.

Operating expenses increased $323 million or 5.9% in fiscal 2012 compared to fiscal 2011. Operating expenses for both years were impacted by certain items, primarily consisting of MEPP withdrawals.

In fiscal 2012, these certain items were approximately $13 million lower compared to the prior year. Excluding these certain items, operating expenses increased 6.2%.

Operating expenses also included a $147 million increase of salaries and related costs due to increases in delivery and sales compensation, increased volume and acquisitions, a $91 million increase in gross Business Transformation expenses, and a $40 million increase in fuel expense. These increases were partially offset by a $27 million decline in corporate-sponsored pension plan expense.

Cost per case in our Broadline companies was up $0.04 year-over-year. This was mainly due to increased delivery costs including a $0.02 increase related to an increase in fuel prices.

Operating income declined $41 million or 2.1% for the fiscal year. Excluding certain items, operating income declined to 2.7%.

Net earnings for fiscal 2012 decreased $30 million or 2.6% compared to the prior year. Fiscal 2012 EPS was $1.90, a decline of 3.1%. Excluding certain items, EPS was $1.93.

To summarize the performance of our underlying business, adjusted operating expenses increased 4.1%; adjusted operating income increased 3%; adjusted net earnings grew 4.7%; and adjusted EPS grew 4.4% to $2.13.

Turning to the impact of the Business Transformation project for a moment, in the fourth quarter of fiscal 2012, gross project expenses totaled $70 million, and we capitalized $23 million related to the project. In the prior-year quarter, gross project expenses totaled $33 million and we capitalized $49 million related to the project.

For fiscal 2012, expenses for Business Transformation were $193 million compared to $103 million in fiscal 2011, and total capitalized amounts were $146 million compared to $196 million in the prior year. As we discussed during our Investor Day we expect cash flows to improve significantly over the next several years due to our Business Transformation initiatives and improved working capital management.

Cash flow from operations for fiscal-year 2012 was $1.4 billion, an approximately $300 million or 29% increase compared to $1.1 billion in the prior-year period. This improvement was due mainly to improved working capital management and lower tax payments during the year.

Working capital has improved year-to-date due mainly to smaller increases in accounts receivable and inventories this year compared to the prior year. This is due to improvements in DSOs for receivables in inventory, partially offset by a decline in accounts payable DSOs.

Of note, we paid our final IRS tax settlement payment during the fourth quarter for a total of $212 million during this fiscal year and $952 million over the last three years. The completion of these settlement payments will have a significant positive impact on our cash flows in future periods.

Capital expenditures totaled $152 million for the fourth quarter and $785 million for the fiscal year. We had four new facility projects during the year, including the facilities Bill discussed earlier, which were completed during the year, as well as a new facility under construction in California that we expect to be complete late this fiscal year. This is compared to having only one such major project underway in the prior year.

In addition, capital expenditures related to our Business Transformation project increased by $50 million year-over-year.

Free cash flow increased 36% or $165 million to $620 million. During the quarter, we accessed the capital markets with very attractive rates, completing a bond offering of $750 million. The transaction was completed in two tranches -- $300 million in three-year securities at 65 basis points, the lowest rate ever achieved for a three-year deal at the time; and $450 million of 10-year notes at 2.6%. The effective rate for the entire issuance was around 2%, a continual reminder of the strength of our balance sheet and cash flows.

Before closing there are a few guidance metrics for fiscal 2013 that I would like to provide. First, based upon current market conditions and external forecasts, we expect fuel expense to be relatively flat year-over-year.

Second, regarding Business Transformation, as we shared with you at our Investor Day we expect gross Business Transformation expenses net of direct benefits related to SBS to be approximately $300 million to $350 million for the year including the amortization of project costs. As Bill mentioned we are now in the deployment phase of our new ERP system, and so this month we began to amortize the capitalized costs related to the development of this system over a roughly seven-year period.

The majority of work occurring going forward is expected to relate mostly to conversion and training, which is expensed for accounting purposes. As a result, you'll see a decline in the amount of capitalized spend on our Business Transformation project going forward. This year we expect to capitalize roughly $5 million to $20 million, which is $130 million to $140 million lower than our capital spend for fiscal 2012.

As we outlined at our Investor Day, we expect that we will achieve $550 million to $650 million in annualized benefits from Business Transformation by fiscal 2015, of which we expect to achieve roughly 25% in fiscal 2013. As Bill said earlier, we have begun to make progress on all of our key Business Transformation initiatives.

Third, total CapEx for fiscal-year 2013 is expected to be approximately $600 million to $650 million, which is substantially lower than the $785 million we spent in fiscal 2012.

Lastly, I want to address pension expense for fiscal 2013. As we were developing our 2013 financial plan, we learned that we were facing more than $100 million in additional pension expense for next year, primarily driven by continuous declines in interest rates. This substantial increase would have been in addition to the significant increases in two of the last three years.

We determined we needed to carefully review our retirement programs. As a result of our analysis, as Bill discussed earlier, we announced this morning that we made the decision to freeze our combined benefit pension plan effective December 31 and simultaneously enhance benefits to employees under our 401(k), or defined contribution, plan. The net impact of these changes will result in roughly $25 million in additional retirement expense in fiscal 2013. While still an increase, this represents a more than $80 million cost avoidance.

It's important to note that the net impact of these changes in our retirement plans will not be even across the quarters during the year. Retirement plan expense in the second half of the year will be higher than the first half. Because these changes become effective at the midpoint of fiscal 2013, we estimate that our retirement plan expenses will be lower in 2014.

In closing, while fiscal year 2012 was a year of transition, we continued to stay focused on our future. Fiscal 2013 will be another critical year for us as we work through the first round of ERP deployment and begin to realize benefits from several areas of our Business Transformation plan.

Sysco has been a leader in the industry for over 40 years. And while the change we are undergoing is difficult and requires a substantial investment, it is important to the future success of this Company. All of us here at Sysco are focused on transforming the Company and believe that this will enable us to further strengthen our financial results over time and enhance our industry leadership position.

With that, operator, we will now take questions.

(Operator Instructions) John Heinbockel, Guggenheim Securities.

Hey, guys. It's actually Steve Forbes on for John today. Just a couple quick questions.

The sequential improvement in gross margin this quarter, is that tied to getting more pricing through, or a conscious effort to pull back on some promotional spending?

I think, Steve, it is just some modest improvement on our part in terms of execution. As Chris pointed out in his comments, there is a seasonal flow that we tend to participate in as you go into the summer, and I think that helped as well.

So I think we are executing somewhat better. I don't think there is anything dramatically different in terms of the promotional spending.

Okay. Then when it comes to inflation and pricing for next year, how do you keep your marketing associates focused on gross profit dollar growth and/or case growth?

Well, the way our commission program works, the bulk of our marketing associates are paid on commission, and the biggest factor in that commission is gross profit dollars per delivery. So we continue to tweak that particular model as time goes on, to do just what you are suggesting here, which is keeping us focused on growth and quality growth. But the bottom line is, they are highly incentivized to service their customers well, but at the same time to strike the right balance between sales and gross profit dollars.

Okay. Then just lastly on case growth, did you see any change from June to July in case volume growth -- I guess after what some of the restaurant operators reported last week?

You know, we don't comment on inter-quarter type of developments. But yes, I would tell you that certainly we service pretty much the whole spectrum of the marketplace, and you can see that we saw somewhat of a slowdown in the fourth quarter. Pricing eased a little bit as well, which was good, I think.

But at the same time our top-line fell off some. And I think we are going to experience to some degree what you are seeing from some of the other people in the space.

All right. Thanks, guys.

Greg Badishkanian, Citi.

(technical difficulty) Concepcion in for Greg. Just wanted to ask another question related to the margin, gross margin. Sounds like there hasn't been much of a change in the promotional spending. What is your outlook on promotional spending in fiscal '13? Would you expect a year-over-year improvement in gross margin next year?

Okay. Maybe I should take a minute and let's talk about promotional spending, because that's two questions right off the bat. As far as I know, we don't really talk about promotional spending.

So bottom line is, we do promote. We have various marketing vehicles that we promote locally and to some extent here at corporate. That hasn't changed to any large extent over the last quarter or over the last year.

I think as we have talked about margin pressure over the last 12 to 18 months, we have attributed a lot of that to the challenges of passing along mid to high single digit rates of inflation in a marketplace that is still pretty fragile, and just kind of an uneven business recovery on top of that. So I think -- I don't think this really has much to do with promotional spending.

The bottom line is we are out there competing we feel very appropriately and very aggressively in a pretty challenging marketplace. We saw improvement as you saw and pointed out in the fourth quarter, and certainly as we talked about in May we expect to continue to improve those trends. But I don't believe that we've indicated in any way that we would expect to be over last year's gross profit.

I see. And on the promotional spending front again, that's from your end. What about from the competitive standpoint? Are you seeing any changes there relative to last quarter?

I'm start, could you repeat that question?

Yes, I'm just wondering if the competitive promotional environment has changed very much relative to last quarter.

You know, I don't think so. Again, I just attribute that to the competitive environment. And we see different things in different parts of the country. And, frankly, we see different behavior with different types of competitors.

As you know, we deal with very large regional, national-type competitors; and then there's a lot of niche players as well. So I would have to tell you that the environment remains very challenging from a competitive standpoint, and we expect it to continue that way. But I wouldn't say it has changed a whole lot.

Okay, great. Then the case volume growth in the quarter, it accelerated a relative to last quarter. Obviously I think you mentioned that you might see some more of the weak restaurant traffic impact your results. Can you talk about what some of the drivers were in the quarter in that accelerated improvement in case volumes?

Well, I think in this particular quarter, I don't know there is anything particularly different than any other quarter. We were highly focused, as we have talked about at length over the last several calls and in our public presentations, on the importance for Sysco as a leader in the industry to continue to take share and to do that profitably.

But we've got 8,000 marketing associates out there on the street. We have got a strong sales management team. We have great leadership throughout the country and in Canada.

And we work very hard at staying close to our customers -- all the basic things that we talk about every time we have an opportunity to speak publicly, from menu analysis to good quality business reviews to very focused time with our salespeople spending with their customers. Those are things that we feel we do better, by and large, than our competition, and as a result that allows us to grow the business.

So with that said, yes, it is still very competitive. And we still have some opportunity to work on our pricing and margin management.

Great. Thank you very much.

Ed Kelly, Credit Suisse.

Hi, good morning, guys. Can I just start on the volume side? The 3.3% case volume growth, can you talk about how that compares to like the true underlying trend?

What I am getting at is, easy comparison this quarter versus last year; did that play a role? Does weather and calendar play any role in this? Could you just give us a sense as to where you think the true business is running, underlying all that, today? Is it really that level?

Well, yes, it is at that level. We will take credit for it.

I think going to your point, as you go back and look at the latter part of last fiscal year, maybe even the first quarter this year, the volume trends were a little bit more modest. And, frankly, that led to us becoming more aggressive as we have talked about here in the last two or three quarters.

So, I would tell you that yes, we grew the cases 3%. Part of that was acquisitions, which we feel is a big part of our arsenal.

And I wouldn't over-weight comparisons when you're talking about the difference of 1% maybe from one year to the next, that type of thing. So we feel good with the volume, and we will take credit for it.

It sounds like -- and I don't want to put words in your mouth. But it sounds like so far in the current quarter things just generally speaking haven't been great, but maybe haven't gotten worse. Is that how I should read that?

You know, things are always great here at Sysco. But, no, look at the market. What I am trying to tell you here without getting into a disclosure area that I can't is that we are going to participate in what goes on in the market.

So I expect us to continue to grow cases. I expect us to take share. And to some extent as we have talked about in terms of our medium to longer term outlook, we are going to be impacted by the market itself. So to the extent that we see a slowdown as this quarter proceeds, I am sure we will feel that to some degree.

Okay. Then on gross profit dollar growth relative to case growth, this is another quarter where it was slightly less. And I know that not your long-term goal.

So could you maybe just walk through a little bit what was the driver there? And then how long do you think it takes to get us to the point where gross profit dollars maybe are doing a little bit better than volumes again?

Well, we need to get there. That's the bottom line and it's a very fair question.

So the way I look at it is we did better in the fourth quarter than we did in the third in terms of that particular relationship, but not good enough. So we need to continue, as I have mentioned on a question or two ago, to strike a better balance between the case growth and the gross profit dollars.

So I am encouraged that we saw some modest improvement, but there is a ways to go. And all I can tell you is that we are highly focused on it here as a management team and throughout the country, into our sales management and into our salesforce.

So it's a delicate balance, in terms of the economy and the marketplace and trying to be responsive to the needs of our customers. But we certainly see that as an issue and an opportunity for improvement.

Okay. Then on the MEPP side, maybe could you give us a little bit more color on the charge this quarter?

And then within your 10-K last year you disclosed about a couple hundred million dollar withdrawal liability. I am just curious as to how that is calculated. Is that your actuarial value of the underfunding? And could you also give us some sense as to what you think the fair value of the underfunding might be at this point?

That question just got worse and worse.

Time for Chris to answer a question here.

Started off, I was thinking -- oh, I can do this one. And then you just took it down the rabbit hole. Let me see if I can help.

The charge this quarter was related to Cleveland. So 220 employees at our Cleveland Operating Company withdrew from the Cleveland Bakers and Teamsters plan; and therefore we recorded a withdrawal liability of approximately $17 million.

We did have some liabilities earlier in the year that were basically true-ups of prior-year withdrawals. The way that works is you have to record the liability at the value that you know when the withdrawal is actually made; but then each quarter thereafter there are going to be true-ups until you actually are allowed to withdraw from that particular plan, which could be a year and a half later. So, I think that is the first part of your question.

The second part, we have generally recorded in our 10-K roughly $200 million of liability. I wouldn't call that an actuarial; that is basically our assessment of the materials that we get from those plan trustees about the status of their plans.

We don't manage those plans, we just get materials. And unfortunately, it takes a long time for us to get those materials. We are still stating that liability based upon materials that are as old as year-end 2009 to 2010, so they are just not given to us very timely.

In the 10-K that you will see in a couple weeks, we will update that number, which is -- just as we describe it, it is the total withdrawal or the potential liability if we withdrew from all of the plans, which is of course not something we would ever foresee doing.

But then under new guidelines we are required to put down a number that we believe is related to plans from which we would reasonably possibly either voluntarily withdraw or there would be a mass withdrawal. That number is about half that $200 million. It is about $100 million. Did that get close to answering your question?

Yes, I think, and I think when your K comes out we will probably want to do more work on that as well.

Okay.

Another question for you on the national account pricing. I don't -- I'm not sure if I heard this correctly. But it sounded to me like you had suggested that pricing would be moving to the SBS level. Is that right?

No, not the negotiation of pricing or the relationships. We handle our contract customers in various ways, but we have a significant group that works out of the corporate office that covers what we call corporate multiunit. And then we obviously have regional and local chains that we tend to handle those relationships locally through the Operating Companies.

What is going on at SBS is more just the facilitation of the processes themselves.

Okay. One last question for you here. Your CapEx guidance I think was a little bit higher today than at the analyst meeting. Then related to that, with the IRS payment being done, you should start generating some free cash flow again.

So the question is -- what do you guys plan on doing with that free cash flow? Thank you.

The CapEx actually is in line with what we talked at Investor Day. You are focused on the $600 million that I showed in Investor Day; the credit underneath that was a line for Business Transformation capitalization which was a range of $5 million to $20 million. So, depending on where you are in that range, we just put a range around CapEx, $600 million to $650 million.

Nothing has really changed in the assumptions that we are using for this year. We just put a range around it. So I think it is generally in line with what we talked about.

We do intend to generate additional free cash flow this year. We have not changed our posture with regards to how we view our cash.

We are reinvesting into the business. We are certainly making sure that we can have a substantial and growing dividend; and we are looking for additional acquisitions as much as possible.

If we start to generate significant additional free cash, we will take a look again at the shares. But right now, that is just not the case.

Okay. Thank you so much.

Andrew Wolf, BB&T Capital Markets.

Hi, good morning. Thank you. I wanted to ask -- did the lower rates of inflation, did that help with the gross margin management? I know you said -- it sounded like you were just getting a little more acumen with managing it. But I just wondered, in relation to lower inflation, did that help?

Do you think lower inflation had any effect on the case growth?

Andy, I'll start there. Sure, it helps. I mean as we talked over the last two or three quarters, there is a certain math to this whole inflation discussion. So when you go from 5.5 to 3.5, give or take that definitely helps. And it goes category by category and that type of thing.

So there is no doubt that that contributed to it, as well as I do think we executed, as I said, modestly better. And there is plenty of room for improvement there.

I think as far as case growth, I don't know that that happens quite as fast. I know there is this analytical way of looking at it.

The key for us I think as it relates to the inflation is over the medium to long term we have been very consistent on this and we truly believe it. Is that it is just better for our customers and our customers' customers if we can see a more moderate level of say 2 to 3 points of inflation over time. That is just a better environment for business, and whether it be our customers or ourselves.

So I think if it can stay there and be relatively consistent and not have too much volatility in the respective categories, I think that is more of a medium-term benefit for us.

Okay. On the case growth getting better, how do we look at that, or how do you look at that? Was any of that improvement or (technical difficulty) at the same customers, or was it really mainly new customers and really taking market share in that way?

It's a combination of three things. We continue to improve our customer retention. That has had a lot of focus here. We have talked about it somewhat publicly. So our customer retention numbers have improved over the last year or two, and that certainly helps.

We have seen penetration. That is obviously going to vary by customer and be somewhat dependent on how healthy their business is. But overall we have seen some case penetration.

And, yes, largely -- or not largely, but we tend to do a good job on new business as well. So it comes from the two that you mentioned, which is new business as well as penetration; but also again -- just in an environment like this we just need to stay closer and closer to our customers and just minimize lost accounts.

Okay. Are you willing to say if it is more of one than the other?

I would be willing to say if I knew. I mean actually it's hard to get precise information on that. But I honestly think it is a little bit of all three, Andy.

Fair enough. My last question is back to the pension freeze. I dropped off the call for a second. Could you just give the swing, what -- this year's swing for that? I think you gave the numbers (multiple speakers) or the numbers that get us to the math, either way.

Yes, and actually, I think we flashed a chart on the screen as we were going through. But --

Okay. So I will get that. I don't want to waste time.

The net-net is an increase of about $25 million for this year, and it would have gone up over $100 million save for the freeze. And then we expect it to be lower in '14.

I think there is a broader issue here, though, Andy. Obviously this is a very sensitive issue internally, and it is just being announced today literally throughout Sysco.

So we have been looking at this for a period of time. And the reality is, as growth has slowed industry-wide and even for Sysco, we have continued to see the liability of the pension plan grow meaningfully faster than the business is growing.

So the broader picture here is that we needed to address that in a prudent way, and we feel that we have. We feel as we communicate the new plan structure with the 401(k), I think our folks will find that it is a very competitive plan and provides a lot of opportunity to appropriately save for retirement.

Actually, you definitely were one of the last companies with a generous pension plan. I just wanted to ask one last thing about that then I'm going to drop off. From my understanding in these plans, they have different vesting, 20, 25 years and so on. And obviously that helps to keep senior management in place.

What is going to happen with those provisions? Are those also frozen? Or does the vesting continue just with no more increased contribution?

Which plans that you talking about, Andy?

Oh, so your plans are fully vested without relation to time and service?

No, the pension plan -- you do vest over time in the pension plan. What we are doing is we are freezing the pension plan. Whatever benefits you have today you retain. All of your new benefits will come from a 401(k) defined contribution plan going forward.

So upon retirement what you will have is the vested benefits in your pension plan from the date at which we froze it, plus your defined contribution benefits that grew from that point going forward.

Yes, so if somebody is a year away from the hurdle for vesting, next year it will vest, it will just be on today's amount?

That's correct. And just a point of interest, our plans -- and I don't have the specifics. But our vesting tends to be pretty much 100% within five or seven years, something like that.

So you vest relatively quickly here. So most of our people are vested and then it will work like you say. What we will be doing over the next few weeks is communicating the components of the 401(k) plan and so on and so forth.

Okay. That's all I needed. I just wanted to get that flavor. Thank you.

Michael Kelter, Goldman Sachs.

I recall you guys saying in the past that 1% to 2% inflation is a sweet spot for you, and it appears like we are heading there. I guess my question is, why won't the gross margins be up in 2013 if that happens, if we hit your sweet spot?

Or are gross margins going to keep going down regardless of the level of inflation, because of the broader industry conditions?

Well, obviously, Michael, we don't have the answers to those questions. Those are great questions. I would tell you we have had now one quarter of 3% inflation, and it looks like this quarter is starting out in a similar way. So I think we will see some moderate inflation for a period of time.

We are not clear on how long that will stabilize, given what is going on with the droughts and various things around the world. So I think we need to wait and see to some extent how this thing plays out here over the next six, nine, 12 months.

What I said and what I do believe is I think the lower inflation will take some pressure off of our customers, and that will take some pressure off of us. So that should support some of the initiatives we have to strike the right balance between growth and margins.

But the other thing I am saying is what I have also said pretty consistently -- is this is different than two years ago or four years ago or five years ago. Until this economy shows more consistent improvement, until our customers participate in that, there is going to continue to be a lot of pricing pressure out there.

So I am not saying that we can't improve our margins over time. I am just saying we need to take it one step at a time; and right now our goals are -- is to reverse the trends that we saw this past year.

And the spike in grain that you alluded to, what kind of a lag before something like that will hit your P&L? And when it does, whether it is a quarter from now or two quarters from now, whatever, the right answer is there -- should we expect that the pace of gross margin declines, to accelerate again as we get into the heart of 2013?

I don't know. I wish I did know and I wish I could give you more specific answers there. But typically what happens is it takes a while for it to work itself through the food chain, into the meal for the cattle and the poultry and all that. So it works its way through the feedstock and into our cost of center of the plate type items.

And I would expect that that will take three to six months at least for us to see that play out. And we will just have to see how the business climate is in general.

So we are not hiding behind that. We would love to see a nice, stable inflation environment. But I am just pointing out that we could see some pressure on pricing here later in the year, that's all.

Then kind of switching gears, another thing. You had mentioned that, in 2013, that acquisitions would drive over 1% to sales. That actually hasn't happened in seven years. So I thought that was interesting.

I was wondering curious if there was one specific acquisition of size that is in the pipeline that you are thinking about, or is if it is reflective of a bunch of smaller deals. And if it's one of size, is it in the US or international? Is it a traditional competitor or somehow tangential? Just a better idea as to where you guys are going on the acquisition side would be great.

Yes, what we continue to talk about on the acquisition side is a stream, as many as possible, of the smaller transactions that are -- in combination become meaningful to us. So that is why we said we did nine transactions for $270 million.

Actually I think last year we were above 1%. I would have to go back and check my numbers; but I thought we were just above 1%.

But our goal has been 0.5 to 1 point. What we are really pointing out is we are starting to accelerate that and we are starting to increase our pipeline. Our goal this year is north of 1% through a combination of these smaller-ish transactions.

I don't want to characterize them as being small, meaning meaningless. They are not at all. Every one of them is important to us.

But they are smaller than the $500 million or $600 million regional size transactions that we would love to get but are just frankly, very, very difficult to get. And they don't come along very often.

Then lastly, on these changes to the retirement plans. Just simplistically, is your pension expense no longer going to move with interest rates as we look forward? If -- just so I understand; when you say a freeze, is that -- are interest rates no longer relevant for you?

No, they are very relevant to us. We still have $1-billion-plus pension plan that is out there that has to be revalued every year.

What the freeze does is it stops growing in terms of the assets and the liabilities. So that the growth of it will now cease. And the next step in managing our retirement plan is to start to go after the volatility of those assets. And we do have some more work going on in that area as well.

But as Bill said, this is something we have been looking at for a while. Pension expense has been going up significantly over the last few years. It was growing at a rate that was just frankly not sustainable.

So we needed to come up with a different set of plans that would be beneficial to our employees and help with retention of our employees and help them plan for their retirements, while at the same time not causing our expenses to grow at a rate that frankly our earnings could not sustain.

We have looked at a number of things. Step one is we have got to freeze what is there. Now we have got to go about looking at how do we reduce the volatility of the liabilities that still exist on the balance sheet.

Are you guys still then at this point looking at what your assumptions are for your existing exposure?

Yes.

How conservative do you feel like those assumptions are at this point, given how long interest rates have stayed low and returns have stayed low?

Well, there are two separate components to figuring out the pension expense. Obviously the first one is discount rate, which we unfortunately have nothing to do with. Interest rates drive down the discount rate; it declined even more this year from a rate that I didn't think it could even decline from last year. So that cost us a tremendous amount of valuation and that was driving our interest -- or driving our pension expense to be significantly higher for '13.

The second component is the discount rate that -- or sorry, the return that you assume on the portfolio. We evaluate that every year. You look at 70 years' worth of history on a portfolio of assets that you invest in. Obviously the last 10 years are not good compared to that 70-year history.

So we are constantly evaluating. Are we too aggressive? Are we too conservative? It's something we evaluate every year.

All right. Thank you very much.

Mark Wiltamuth, Morgan Stanley.

Thank you for taking my question. If you look at the gross margin rate, I am just curious how your new business wins look versus the existing book on the gross profit rate.

Great question, Mark. That's another one of those ones that's -- when you have as much new business as we have, I mean, we're talking about double-digit new business -- it is hard to critique that. But I would say it is a mixture.

Generally the new business as it comes these days comes a little bit harder and a little bit more competitively. So I don't have a lot of data on that in terms of the entire Company, but more than likely it probably comes in a little bit less than the average would be my best judgment on that.

Okay. As we look at the Business Transformation savings as they come in, what kind of timing should we expect on that? Is it something that builds throughout the year, or do you expect any quarters bigger than others?

We have not given any quarterly breakout of that, but I think it would be fairly safe to assume it will build over time. Just as it's going to build over the three-year period, it is going to build during each of those three years.

Okay. On the inflation, what is your protein team saying? It seems like there is a pretty good chance you're going to be looking at much higher inflation next year. I am curious what your thoughts are there.

Well, we are seeing higher prices now in beef and poultry. We are seeing deflation actually in dairy and produce right now; and then everything else is kind of around the average.

So they are pretty much saying what we are reading and what I tried to say earlier, which is that we should expect to see some pressure as the year goes along.

Okay. Okay, thank you very much.

Ajay Jain, Cantor Fitzgerald.

Yes, I just wanted to get some more color on your outlook, your near-term outlook for ERP in fiscal '13. So could you maybe talk about how much your guidance is interrelated as far as expenses and the projected cost savings?

It looks like $150 million is still what you are roughly expecting on the cost-savings side. But if at some point over the next year it looks like you are not getting the benefits at the rate that you currently looking for, would you still plan on absorbing as much as $350 million on ERP costs? How much variability could there potentially be on the expense side? Thanks.

Yes, Ajay, those two things really aren't tied. So as we tried to do during the Investor Day, we tried to explain that the expenses are primarily due to the technological implementation of our new ERP system. So the million to $300 million to $350 million net of direct benefits from SBS, that is the expense that we plan to incur as we now implement and rollout the ERP system. We gave guidance of five to 20 companies during the course of the year, and Bill gave you a little more color about where the next five of those were going to be.

So that is Part A. Part B is we also have these Business Transformation initiatives, cost-saving initiatives, that do not rely upon that technology to go forward. So we are going down the road on a variety of those that we outlined in great detail, and that is where we expect to receive 25% of our overall benefit in the first year.

Okay. That's helpful. I just had one follow up-question. Maybe it's just a variation of some of the questions that have been asked on inflation. So just wondering internally how concerned are you guys based on the current weather and drought conditions? A lot of that recent volume improvement, case volume improvement begins to slip away very quickly if inflation starts to get out of control.

I don't think we are overly concerned, or at least any more concerned than the last two or three years, Ajay. It's part of what you deal with in this business.

When you put it in the context of some of the other challenges that we have out there in terms of the marketplace and our customers' ability to grow and that kind of thing, I think it's certainly -- we take it seriously, but it also comes into the bucket that we don't really have much of an ability to influence it.

So I wouldn't -- I would be probably more concerned about the economy and whether we can see a little bit more stability and a little more consistent improvement there. Because then that creates a mindset in the consumer wanting to go out to eat more, and that is always the key I think for our business -- is that people want to go out to eat and they are not totally focused on what it's going to cost or how many times they go out and all that kind of thing.

I mean right now, our information is a little dated, but we are still seeing increases in traffic and check size. It varies between concept and that kind of thing. But we just need to see improved -- consistently improving psyche of the consumer, and I think we can weather the rest of it.

So, can you comment as far as quarter to date? Have volume trends deteriorated at all sequentially?

I really can't. As I mentioned earlier, we just don't do that.

But again, you know us real well. And we play in the entire space in this market. So to the extent that you are seeing softness out there, we would certainly expect to participate in some of that as the quarter goes along.

Finally, can you confirm if there were any quantifiable ERP benefits in the fourth quarter?

We really didn't look at it that way, to be honest with you. I am sure there were, modest. But essentially what we have said is -- what Chris just took you through is we have laid this thing out in terms of our roadmap, and we are looking to knock down about 25% of that in cost savings here this year.

And it's going to come from operations. It's going to come from SG&A. And it's probably going to come a little bit more toward the end of the year than the beginning of the year.

Great. Thank you very much.

John Ivankoe, JPMorgan.

At this point -- and I think it's fairly short. You made a comment -- I think it was Chris that did; I don't remember -- talking about expanding Sysco beyond the core over time? I guess, is that a 2013 event? Is that the type of technology initiatives that may come from Sysco Ventures or are there other things that we should be thinking about on near-term significance, just to put some parameters around that?

Hey, John. It's Bill. I think that was actually in my prepared comments, so --

I apologize.

No, that's all right. Chris can take a break here. No, it's no different than what we have talked about before. I think again in terms of our communications and messaging, we want to make sure that all of our constituents understand that we are primarily focused on the core right now. We have got a lot going on; a lot of opportunity out there.

But yes, we continue to look for ways to grow in an adjacent manner. And over time we still would like to grow international. But I didn't put a timeline on that as much as I said -- over time, I think, is actually the words that I used. So it is more of a strategic objective here over the medium term.

Okay. You said -- so outside the core is international as opposed to something within the US?

Well, it could be -- we could look at adjacencies. Sysco Ventures, as you mentioned, kind of bridges both. As you start talking to folks who have opportunities for us to partner with in terms of business solutions that are more technology-driven, those types of things.

But the attraction there obviously is to create a stronger relationship with our customer base and more traction to help them grow and to solidify our position with our customers over time. So, no; it would be both adjacencies as well as international.

Okay. Understood. Thank you.

Meredith Adler, Barclays.

Thanks very much for taking my question. I first want to just talk about the money, the 25% of savings that you are expecting to get this year. That isn't really part of the Business Transformation process, right? Those are a whole set of separate initiatives that you started working on last year -- or this year, I should say; this year. Is that right, '12?

No, we view all of the initiatives that we have undertaken as part of the transformation of our business from what was the old business model, if you will, to what needs to be the new business model in order to compete going forward. Many of them originally were described as being enabled by this new ERP system. And as we got further and further into the ERP system design and implementation, we realized we did not need to wait on the ERP system in order to attack some of these other Business Transformation initiatives.

So now we are talking about them as separate streams of work, but it's all under the moniker of Business Transformation because, frankly, most of this is different than what we have done before.

So they are not actually benefits from the ERP system; they are just other ways to save money.

Yes, that's fair. I mean again, Business Transformation is not ERP. ERP is the technology change that we set out to put in place several years ago.

And again, with the original plan, if we step back -- before my time, but I certainly understand it now. The original plan was, if we are going to through all the work to develop, design a new ERP system that changes all of our processes, everything about how we go to market, let's go do this Operating Company by Operating Company and change the business model one at a time. So everything was really on one rollout schedule.

As we got further into it, we realized it doesn't need to be done that way. Especially as the ERP implementation slowed down we realized we need to go faster on the rest of it. So we have just disconnected them.

Meredith, if I could just jump in there, I want to -- this is a key point, and I think it is key to anybody who would be listening to this call, inside or outside Sysco. If you go back to our May presentation up there with all of you, we took a fair amount of time to reframe this deal and to, if you will, rebrand it to some extent from a standpoint of what Chris just took you through.

So Business Transformation is essentially us coming to grips with what we need to do, the changes we need to make in terms of our processes, how we go to market, to continue to enhance our leadership position in this industry going forward for the next five or 10 years. Now, three and four years ago, when we had more of a design than anything else, we bundled it all together in terms of one.

So where we sit today we are talking to you about deploying the technology platform effectively throughout Sysco. So that is one big bucket.

Then we are talking about taking a look holistically at all of our practices in terms of how we run the business, selling, general, administrative, all the different things that we do, how we organize the Company, and revisiting those. Some of which, as Chris said, would have been part of the original business case for 2012; a few of which weren't; many of which do not require a new technology platform to get those going. Because a lot of it has to do with a more consistent go-to-market implementation of our business practices.

Then third is sitting down and partnering with our suppliers, our product suppliers, and finding more efficient and more effective ways of sharing cost savings on product and at the same time doing it in a way where we can grow the business.

So this is a key point, that the Business Transformation going forward for Sysco encompasses all three of those buckets, if you will, and not just the technology platform. Now, we can't get to the finish line without the technology platform, so that remains very foundational, as I said in my comments. But it is just one piece of it.

Okay. I guess where I was confused is I thought some of these new cost-saving initiatives truly were new and had not originally been envisioned when you laid this out. But you are saying it is just an acceleration of how you implement those things?

I am saying there is a lot of that; and then I'm also saying -- look, we're running a business here, right? So we are somewhat behind on the deployment schedule. We have got some cost overruns. So we are running a business, and we have taken stock over the last six to nine months of other things that we can do in the Company to offset the cost overruns. So it's a combination, but largely it is an acceleration of the original business case.

Great. Thank you. That's very fair. I have one other question. This wasn't a great year for the Company as a whole, and I don't know how that compared to your internal plan.

But I was wondering what happened with bonuses for the Company this year. Were they up or down versus last year? How did that play out over the quarters?

Well, we haven't actually talked about bonuses internally, but I can describe our bonus objectives to you. From a corporate perspective, we basically had three bonus objectives.

One was sales, which we have actually achieved our plan and actually somewhat exceeded our plan in terms of sales. We had one that was operating profit; and that of course was, I will use your words, was not good in terms of the year. And then one was return on invested capital; and that one kind of went the same way as operating profit. If you don't get your earnings, it is very hard to achieve your ROIC objectives as well.

So while we haven't -- I don't think we have fully rolled on what the bonus outcome is for the employees, that is a general sense of where we were. Compared to last year, from a corporate perspective, I would say we will definitely be lower than last year, where we had a slightly different bonus plan.

Now the Operating Companies have their own bonus plans. Typically they are tied partially to the corporate at their leadership team; but then also predominantly to their own performances. So those are going to vary depending upon the performance of the Operating Company.

Have you -- the fourth-quarter numbers, do those reflect any assumption about bonus for the year? Or is that something that gets actually recorded in fiscal '13?

We had already adjusted and accrued appropriately for where we thought the payouts would be.

Okay, great.

So I think, Meredith, I will pile on here a little bit. We -- you are going to see different results on bonuses. Well, you won't see them; but obviously we have some Operating Companies that performed well above plan and in plan, and those folks will make some bonuses; and some who didn't.

To Chris's point overall, we didn't achieve our earnings goals for the year, so we will not hit our target bonus. But we will pay bonuses this year.

I don't know what it is compared to last year, to be straight with you. But as Chris also pointed out, we moved to more of a plan-based bonus structure this year. And I think in the end, I think you are going to find it to be very appropriate.

Okay, great. Thank you very much.

With no further questions we would like to thank you all for your participation. You may now disconnect.

Thank you.