西斯柯 (SYY) 2013 Q1 法說會逐字稿

Good morning and welcome to Sysco's first-quarter fiscal 2013 conference call. As a reminder, today's call is being recorded. We will begin today's call with opening remarks and introductions.

I would like to turn the call over to Mr. Neil Russell, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Operator, and good morning, everyone. Thank you for joining us for Sysco's first-quarter 2013 conference call. On today's call, you will hear from Bill DeLaney, out 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 managements' 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 June 30, 2012, and in the Company's press release issued earlier this morning.

Non-GAAP financial measures are included in our comments today, and in the presentation slides. A 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, including total Broadline and SYGMA combined.

At this time, I'd 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 record sales of $11.1 billion for the first quarter, and net earnings of $287 million. Earnings per share was $0.49, and adjusted earnings per share, representing our underlying business performance, was $0.58 or a 3.6% increase year over year.

Sales grew 4.7% for the quarter, driven mainly by case volume growth of 2.9%, which contributed to the highest quarterly sales level in our history. While we believe restaurant spending trends may have softened somewhat as the quarter progressed, we are pleased with our overall volume growth during the quarter.

Acquisitions contributed 0.5% to sales growth during the first quarter. And we have completed or announced, thus far this fiscal year, the acquisition of companies with annual revenues totaling approximately $560 million, several of which expand our presence in geographic markets that we currently serve outside the United States. The acquisition environment is currently favorable, and we have a number of potential opportunities in the pipeline.

Product cost inflation moderated to 2.2% for the quarter, which is beneficial for both Sysco and our customers. While our growth in adjusted operating income was modest, we are encouraged by our expense management performance in most areas of the business. Specifically we experienced lower cost per case (technical difficulty) business as we move forward.

Turning to our Business Transformation efforts, we continue to make progress in deploying our new and enhanced technology platform. Just prior to last quarter's call, we converted our East Texas operating company to our new ERP system, our third location to go live. That conversion went very well, and we moved forward with our planned conversions at our operating companies in North Texas and West Texas last week.

The early results in both locations are generally favorable. And we will continue to assess the performance of these two companies closely over the next several weeks. These two deployments represent a critical step in our technology implementation timeline for two reasons -- one, it is the first instance of multiple operating companies converting simultaneously; and, two, the North Texas location is one of our largest operating companies, and services a significant number of our corporate multi-unit customers.

We are pursuing a market-based approach for our rollout schedule. As a result, we expect to move forward with our next planned conversions in Texas and Louisiana in the coming quarters. As we prepare for these conversions, we are also evaluating the possibility of potentially accelerating our pace of deployment in fiscal 2014 and beyond.

I would like to take this opportunity to thank the many associates that are engaged in this project, including those at the operating companies who have or are preparing to convert to the new technology platform, as well as those at SBS, IT and across the Company. The very real progress we are making in transforming our business would not be possible without their hard work and dedication to the success of this project.

I also want to acknowledge a new member of the team. We welcomed Wayne Shurts in October as Executive Vice President and Chief Technology Officer. Wayne brings extensive experience in both the food business as well as the deployment of large technology projects. His capabilities complement our team as we work to increasingly leverage the opportunities technology can bring to our business.

Beyond the technology deployment portion of our Business Transformation journey, we are rapidly rolling out several other key initiatives. For example, we are building the foundation for enhanced customer insights through direct feedback from our customers, prospects and associates. We have also recently rolled out our first-ever customer relationship management, or CRM, platform; which will permit our sales managers and marketing associates to service their customers more effectively, operate more efficiently, and accelerate our sales growth over time.

In addition, we are exploring multiple ways to reduce our operating cost structure, and have recently identified significant potential savings in our IT support function.

Regarding Hurricane Sandy, while it is difficult for us to accurately estimate the full impact to our customers, I do want to provide you with some relevant updates. First, our employees are safe. Second, we know that many of our customers were impacted more severely than us, and we are doing everything we can to help them. Third, there was no substantial damage to any of our facilities. While we did have some intermittent power outages, our backup generators operated effectively; and, as such, our inventory is secure. Fourth, due to on-site fueling capabilities, we have adequate fuel supplies to make deliveries. And, finally, obviously there were initially some road closures and power outages that limited some deliveries. However, our operations have recovered relatively well, and we are ready to serve our customers as they are able to get back to business as usual.

In closing, it seems appropriate and timely to remind all of us that Sysco is in the midst of a great deal of change. Not only is this change necessary at this point in our 40-plus year history as a public company, but it will result in a much stronger Sysco for years to come. We will build upon our industry leadership position by becoming a much leaner, more agile, and easier company for our customers and suppliers to do business with.

We are most fortunate to have 47,000 highly committed and capable associates to lead us through this exciting period in Sysco's history.

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

Thanks, Bill, and good morning, everyone. For the first quarter, sales were $11.1 billion, or an increase of 4.7% compared to the prior year, driven by case volume growth of 2.9% and food cost inflation of 2.2%.

And in addition, acquisitions within the last 12 months increased sales by 0.5%, and changes in foreign exchange rates decreased sales by 0.3%. Gross profit in the first quarter increased 2.9%. While gross margin in the first quarter declined 33 basis points to 18.1%, it's important to note that this performance significantly improved as the quarter progressed.

Operating expenses increased $87 million, or 6%, in the first quarter of fiscal 2013 compared to the prior-year period; driven mainly by a $41 million increase in Business Transformation expenses and the $30 million increase in salaries and related costs. As a result, operating income decreased $31 million or 6%.

Net earnings for the first quarter were $287 million, a decrease of $16 million, or 5.3% compared to the prior year. Diluted EPS was $0.49, a 3.9% decrease compared to the prior year. As we've discussed on previous calls, we believe it's important to focus on the performance of our underlying business, which not only excludes $6 million in certain items such as severance, but also excludes Business Transformation expenses.

To summarize the performance of our underlying business, adjusted operating expenses increased 3.2%. Adjusted operating income increased 2%. Adjusted net earnings grew 3.2%. And adjusted EPS grew 3.6%, to $0.58 per share.

As Bill mentioned, the acquisition environment is currently quite favorable, and we have been very active in this area. To date in fiscal 2013, we have completed or announced six acquisitions, with annual revenues totaling approximately $560 million, including two transactions which occurred subsequent to the end of the first quarter.

As a result, we expect to exceed our goal of adding 0.5% to 1% in sales from acquisitions this fiscal year. And we still have a number of additional potential transactions in the pipeline that we are working to complete over the next few quarters.

Building on our successful 2009 acquisition of Pallas Foods, we recently added two new distributors to our family of companies in Ireland. We acquired Crossgar Foodservice, a Broadline distributor, during the quarter; and in early October, completed the acquisition of the food service distribution division of Keelings, a specialty produce company.

Both of these companies have great people, and we are excited to add them to our Sysco family. We believe that building a market leadership presence in Ireland, similar to our efforts in the US and Canada, provides us strategic advantages and offers our existing and potential customers a broader choice of products and services.

In addition to Ireland, we continue to expand in Canada. Over the last year, we have been strategically building our presence in the province of Quebec. This is a well-populated area of Canada, home to roughly 8 million people, and we believe we have significant opportunities to increase our market share here. As a result, we have completed several acquisitions in Montreal, including a company specializing in Italian imports; a meat processor and distributor; and a seafood company.

In addition, in late October we announced our agreement to acquire Distagro, the food service division of a Montreal-based grocery retailer. This is our largest acquisition so far this year, and is designed to complement our growing presence in this highly competitive market. The Distagro transaction is subject to Canadian regulatory approval, and we expect to complete the acquisition by the end of the calendar year.

Turning to the impact of the Business Transformation Project for a moment; in the first quarter, project expenses totaled $78 million, and we capitalized $3 million related to the project. In the prior-year quarter, project expenses totaled $37 million, and we capitalized $45 million related to the project. As Bill mentioned, considering the successful implementation of our third operating company, and dependent upon how the next few weeks ago for North Texas and West Texas, we have begun to explore what is necessary to potentially accelerate the deployment schedule beginning next year.

We continue to make progress on our other key Business Transformation initiatives as well. In the first quarter, we announced our decision to outsource a portion of our IT resources to a third party. The changes in the organization will result in significant financial benefit over time, and is included in the total Business Transformation benefits that we expect to achieve.

Due to our progress on this and other initiatives, we believe we are on track with the Business Transformation financial objectives we provided at Investor Day last year.

Turning to our cash flow performance, cash flow from operations for the first quarter was $213 million, a decline of $42 million, driven mainly by increased tax payments and lower earnings, partially offset by increased depreciation and amortization. The IRS settlement payments we paid last year will begin to impact the year-over-year operating cash flow comparison, beginning in the second quarter. As a reminder, during fiscal 2012, we paid a total of $212 million in settlement payments, none of which was paid in the first quarter; $106 million that was paid in the second quarter; and $53 million that was paid in each of the last two quarters.

Capital expenditures totaled $156 million for the first quarter this year, compared to $227 million last year. The $71 million decline in capital spending is driven in part by a reduction in Business Transformation capital spend, and in part by a reduction in the number of major facility projects this year compared to last.

As a result of the reduction in capital spending, free cash flow doubled year over year, to $58 million. We expect the effect of lower capital spending this year, combined with the completion of the IRS payments last year, will result in an improvement in free cash flow in fiscal 2013 compared to fiscal 2012.

Before we close, I wanted to update you on our fuel guidance for the year. Our process each quarter is to project the impact of fuel prices using, among other inputs, forward fuel prices. While we are hearing continued discussion in the market about a potential decline in fuel prices, there has been little impact yet in the forward prices. As a result, our current and projected rates for fuel have increased since our last forecast, which results in an estimated increase in fuel expense for the year of $10 million to $20 million.

In closing, while fiscal year 2013 is a critical year for us as we begin -- as we work toward significant milestones in our ERP deployments and begin to realize benefits from several areas of our Business Transformation plan, we are beginning to see a consistent uptick in the momentum underlying our efforts. This is evident in the increased confidence throughout the organization, in particular as it relates to the deployment of our new technology platform.

I believe this favorably positions us to take advantage of opportunities to grow our market share and expand upon our leadership position in the industry.

With that, Operator, we'll take questions.

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

Hi, good morning. This is actually Ryan Gilligan on for Karen. We wanted to ask you about the inventory opportunity, in terms of reducing SKU counts in your categories, and the progress you've made so far. Specifically in the categories that you have approach already, what has been the response from customers? And what has been the impact on cost of goods?

This is Bill. Good morning, Ryan. I would say on the SKU opportunities, we have a two-pronged approach right now. We, from an operational standpoint, have a lot of activity going on in our operating companies. We are basically is -- what I would characterize as good old-fashioned inventory management, where we see opportunities to reduce SKUs that are not critical to customers and which are slow-moving. We do have -- brought a lot of focus to that particular initiative.

So we have actually made good progress on that side of things. And, generally, that's being handled well with customers. Any time you have a situation where you are reducing a SKU that -- or taking away a SKU that sells, often there will be some type of discussion with the salesperson or the customer. But we are working through those, and I feel pretty good about that.

As part of our lower-costing products initiative, we've talked about exploring category management. And that will bring a much more integrated and smoother approach to how do we optimize our assortment throughout the enterprise, and manage SKUs more effectively at the same time. That work has not yet begun in terms of being live, but we're doing a lot of development work on that front as well.

Great, thanks. Can you talk about that cadence of sales trends throughout the quarter and into the second?

I would characterize sales trends pretty much the way I said in my prepared comments. We certainly read a lot from you folks in terms of softening in the restaurant industry, and we think we have seen some of that as the quarter has gone along. And that's continued here somewhat in the early part of the second quarter.

The good news for us -- and this is something we always try to remind everybody -- restaurants are obviously a big part of that $225 billion market. But we have a lot of other business beyond the restaurant business; with colleges, universities, healthcare, hotels; basically any establishment where food is prepared and eaten away from home. So we have made some good strides with some of those customers. And that's serving us well right now.

Great, thank you. And, sorry, last question. To go back to the opportunity with reducing cost of goods, the estimate that you outlined at the Analyst Day, could that possibly be conservative? Or how are you guys thinking about that right now?

It's not conservative until we beat it. So I think, at this point, that's our best guidance for you.

Great, thank you.

John Heinbockel, Guggenheim Securities.

So, Bill, a couple of things. One of the reasons gross margin had declined over the last year, year and a half, had been some proactive price investments you guys had made. Where do you stand on that? Assuming that that is moderating, is there any possibility here that gross margin turns positive sometime in 2013?

I certainly hope so, John. We are pleased that the trends have improved. But, obviously, they are still below last year. And I think in this type of market, where the inflation has moderated, as we called out, we would expect to continue to see improvement in those trends. So we're highly focused on that, is about all I can tell you.

We've done a lot of work internally, John, outside of the big initiatives, in terms of providing what we call more market-relevant costing to our operating companies through our purchasing organization here. And I think as we continue to provide better and more market-oriented, market-relevant transfer costing, that gives the OpCos a better cost base to price off of.

So there is a lot of different things going on there. I'm going to answer it similar to the earlier question. We need to continue to improve, continue to improve in that area. And, as we get closer to the year-over-year being flat, then I'll be more optimistic about improving year-over-year.

And you also talked about the acquisition environment being very favorable. I guess it's a combination of these two things. But in terms of quality of companies available versus the price that you're having to pay, is one of those two much more favorable than the other?

That's an interesting question. I'll start, and let acquisition guy here probably clean it up here a little bit. I would say there's a couple things going on right now. I think the environment is good. There's a little bit, I think, of the year-end phenomenon going on with the concerns about tax code and that kind of thing. So I think that has helped, at least in this country.

But I would also tell you that this interest rate phenomenon, I think, works both ways. So for us, it helps the deals look more attractive, obviously, since our borrowing costs would be a lot less. But the sellers know that as well. So I think for good value, in terms of quality companies, you're going to pay an appropriate multiple today. And we're willing to do that, because we can see the benefits financially and otherwise.

Hopefully, that's a response. I think it's a better environment, but we're not stealing any companies right now. We're trying to buy good companies and pay reasonable value.

I don't really have anything to add. Bill kind of couched it. The only thing I'll amplify is we have seen substantial increase in inbound phone calls because of the potential for tax rate increases in the beginning of next year. So you have got a little bit of that to rush to get it done phenomenon, but we're fortunate. We're seeing a lot of good companies that haven't been interested in talking before coming forward and wanting to have discussions. And some of those will result in transactions soon, and some may result in transactions later. But we're happy to talk to everybody.

All right. And then, last on ERP. Chris, you said none of the financial objectives have changed. I assume the costs and benefits you had outlined for 2013, that none of those have changed?

That is correct.

Okay. And then, accelerating it in 2014, how many OpCos do you think you have done by the end of fiscal 2013? And then, what's the capacity -- if you look at it per-week, per-month, however you want to look at it -- the capacity of the organization has to do those? And if you do accelerate it, what do you do to enable you to accelerate it?

Well, John, first, our guidance for the year was 5 to 15 companies. And we are certainly comfortable with that guidance. If I were going to shade it -- on the pace that we're at, as long as things continue to go well, I think we'll be towards the higher end of that guidance. But we're very comfortable with that.

As Bill said, and I repeated, we are looking at now what it would take to accelerate that based upon starting to feel better about our deployment capabilities. I think it's premature to give any more guidance as to how fast we could go, or how many we could do at a time, until we finish that work.

Okay, thanks.

Edward Kelly, Credit Suisse.

Hi, good morning, guys. Could we maybe go back to ERP? And I was hoping you could maybe give us a little bit more color around the decision that you are potentially making, I guess, to accelerate the rollout. What are you seeing today in the most recent rollouts, versus what you've seen over the first couple, that gives you a little bit more confidence?

And then the second part of the question is, if you did accelerate it -- and I know, obviously, there is a lot of variability around the details -- but what would that mean to the 2015 guidance that you gave at the Analyst Day?

I'll tell you what, I'm going to try to do a better job than Chris. And then I'll let him go back and do this all over again. I think the biggest thing that we are seeing is confidence, to be somewhat qualitative with you. I think our people are -- we've done a few of these now. We've done five now. And each time we do it, both the teams on the deployment side as well as the local operating teams, the SBS teams, everyone -- it's familiar. And it's things we've -- we get better each time. So I think confidence coming from improved performance, in terms of the deployment aspect of it.

In terms of what we need to see, we need to ramp up some resources to be prepared to move at a more accelerated rate. And we need to see really good transition into the operationalizing of the ERP platform as well. So those are all things, as I said, and that Chris has alluded to, that we are assessing here over the next several weeks following these last two deployments.

Yes, I want to go back. At Investor Day, we actually talked about the potential to accelerate, once we proved a few things and built up our own confidence. We just said we'd be looking for that opportunity. I think all we're really pointing out right now is, we are now starting to look more seriously at the opportunity to accelerate, based upon some early confidence.

The impact of that -- I obviously can't quote you numbers. But, conceptually, the impact of that is we will accelerate expense, obviously, inside the range that we had previously disclosed. And that would also, ultimately, accelerate some of the benefits that were post-2015.

So if you recall, when we talked about the benefits from Business Transformation, we said there would be additional benefits beyond the three-year guidance that we were putting up on the slide and on the screen during Investor Day. So this would allow some of that to come into that three-year period. But we would also accelerate the expense to get it done.

Okay. That makes sense. And then you did mention the $10 million to $20 million increase in the fuel charges. Is that a gross or net basis? Because you do have surcharges, I think, down a lot of (multiple speakers).

Yes, that's the fuel expense, not the surcharge. I don't really anticipate the surcharge increasing very dramatically, so that's the fuel expense. But, ultimately, if the surcharge isn't going to grow, it's going to end up being a net expense as well.

Okay. Great, thank you. My other question is on inventory. Inventory was up about 11% this quarter. Inflation is lower. You're doing some SKU rationalization, although I don't know how much of that is in the numbers. Could you maybe help us understand why inventory is up that much?

Yes. First, we are moving more cases -- or still a significant amount of new cases. We were up 2.9%. Secondly, the acquisitions that we bring online also bring on additional inventory as well. We still have a little bit of inflation in there; it's not nearly as much as before. So, every quarter we will -- actually, every month -- we will analyze how much of our increased inventory was due to sales versus DSOs. And I will tell you, we are still not hitting on all cylinders on the DSOs. We have opportunities for improvement there. But most of our inventory increase was driven by sales growth.

Okay. And then my last question for you is a little bit more bigger-picture, related to CapEx. Your CapEx guidance for this year is certainly down, relative to last year because there's less spending, I guess, on Business Transformation. But if you look back over time, you have had years where you were $400 million to $500 million in CapEx. You are still, I think, in the range of, if I remember, $600 million, $650 million.

Could you help us understand what the difference is, even where you are now versus what that used to be? And is there an opportunity to get CapEx lower in the not-too-distant future?

It's a topic we've spent quite a bit of time talking about around here. I think the answer is yes, we can bring CapEx down lower. We have taken the first step of that, which is to look, historically, at some metrics for capital versus sales, for example. We talked about that at Investor Day, and what's the right percentage. And I think we outlined 1% to 1.2% of sales. It's not perfect, but it's a good guideline.

Step one is to get us back comfortably into that range. And then we'll see where we can go from there. The answer to the first part of your question is, we are a bigger Company than we were four or five years ago. We've got more facilities. We had to -- during the crisis we didn't spend a lot of capital. So we did some make-up spending afterwards; because, frankly, we had built up some pent-up demand and we needed additional space. So there was some catch-up there.

Now we've got those facilities to maintain. We've got additional fleet from all of the case growth that we have realized over the last four or five years. So we're going to spend more capital to maintain that fixed asset base. But all of us believe that we've got more opportunities for efficiency.

The only thing I would add is, Chris has done really good job over the last few months helping us make cash flow and asset optimization -- asset management optimization one of our key areas of strategic focus.

We had three big facilities that came on board this past year. We have one big facility that is going to come on board in the current year in Southern California. Fleet replacement -- those trucks and power units cost more today, significantly more, than they did two and three and, even, certainly, five years ago.

So there is a fair amount of inflation on the construction side and on the fleet side, if you go back and compare what we're doing today versus just a few years ago.

Okay. Just one quick follow-up, then I'm done here. The cost savings that you guided to for the year, I think was in this $150 million range. How much of that did you get in this quarter?

Your guidance is approximately correct. We said total run rate benefit at the end of three years -- $550 million to $650 million. And we realized about 25% of that in the first year. So your math certainly holds up.

We believe we're on track for that. We're not really going to give quarterly guidance as to what we received. We certainly have internal forecasts, by category, of initiative and we're tracking those very carefully. We are ahead in some areas; we're behind in some areas; we're on track in other areas. But all-in, we're feeling pretty good about the number for this year, and that's why we have not changed our forecast for that.

Okay. Thank you.

Greg Badishkanian, Citi.

Hi, good morning. This is Alvin Concepcion in for Greg. I just wanted to ask a little bit more about the slowdown in the restaurant industry trends throughout the quarter and early part of the second quarter. Is there a major difference you are seeing out there between casual dining chain customers and independents?

And also, is there any color that you're hearing from your customers on the sales environment? Are they increasingly more concerned, and are they making some adjustments to pricing as a result?

Let me take the first one. If I forget the second one, let's come back to it. I tell you what -- can you just give me the first one again? I want to make sure I answer it right.

Sure. Are you seeing any major differences out there between casual dining chain customers and the independents?

First of all, I guess the way we look at it, there's a lot of independents that are casual dining restaurants. So, relative to chains, I'd say -- actually, the data we're seeing right now is that there has been some growth with independents -- modest. It's comparable to the chain growth right now, after a couple of years of -- where independents have been flat to down, and chains have been flat to up. So from that standpoint, that might be a promising sign.

We are seeing the same data you all see. Sometimes we are reading your data. I think, overall, there is still very, very modest growth there. But the trends have softened. And it's not what it was a few months ago. Most of the growth seems to be on the quick-serve side and the casual is holding their own.

Upscale is up a little bit, but I still think that might be off of a relatively easy comparison. The only other color is, I think, traffic has softened some. But the price of the check, so to speak, continues to grow modestly. We still think there is some very modest growth there, it's just not at the rate of what we saw here just a few months ago.

And, again, we're splitting hairs here. It's not like it was robust growth a few months ago. I just want to reiterate our point -- we feel like we're doing a good job being responsive and proactive in those areas. We cover all segments of the restaurant industry. But, again, we also have a strong presence in the non-restaurant side of that food service industry, and we're doing a really nice job there as well.

That's great color. Thank you. And I apologize if I missed this, but in regards to the sequential improvement in the gross margin, I'm assuming moderating inflation was a contributor to that. Did you also see improvements in the competitive pressures in the quarter relative to last quarter?

Clearly, the moderating of inflation was a big part of that. We saw a little bit of that in the fourth quarter. I think inflation came down into the 3s; and then, this quarter, in the 2s. So there's -- as I've explained before, I don't want to sound too esoteric or to passive here -- there's a certain amount of math in the relationship between the inflation and gross margin. So, yes, we've benefited from that. But our margins were still down 0.3 points.

And so a little bit of that, we think, was customer mix. Our contract customers are going a little faster than our street customers right now. We did see our brand grow, which is encouraging. That's a good thing on margins. So, yes, the competitive pricing environment remains very acute. But at this point, this is really on us, to find ways to continue to strike the right balance between growing our business with our customers and still driving out the right type of gross profit dollar growth.

And did you see any changes in the environment into October?

Yes, I would say it softened further in October.

Just competitive pressures I'm talking about.

Yes, that's almost impossible to gauge on a monthly basis.

Okay. Thank you very much.

Mark Wiltamuth, Morgan Stanley.

Bill, if you could give us what your buyers are saying about inflation right now -- and how are you feeling about the center-of-the-plate proteins in particular, given the drought we had this year?

I think it's mixed. I believe we saw a fair amount of inflation in poultry his quarter. And meat's a big category for us, Mark. So I think that was 5% or 6%. It's hard to get a great handle on where that goes from here. But I would expect it to stay up; seafood, not as much.

Dairy, on the other hand -- we saw meaningful deflation there. And dairy -- and a little bit in produce as well, deflation. Actually, dairy and produce are probably two of your most volatile categories, and so they will go back and forth.

Right now, I would say it hasn't changed a lot from what we're showing here for the quarter. And I wouldn't expect it to change dramatically in the next few weeks, or month or two. But also, we're watching it really close; because, obviously, there's other fundamentals out there, in terms of the drought that we experienced throughout the summer and what that may mean in the second half of the year, in terms of both products and livestock and all that type of thing.

Bottom line is, it's in a good place for us and our customers right now. I do think there are some pressures building that, over the second part of the year, we could see it pick up again.

Just a follow-up a little bit on your last comments there on the gross margins getting a little better here as the quarter progressed -- is that because your efforts to manage inflation were a little better, or that you backed off of some of your planned discounting? Where do you think the improvement came from?

I think we managed it somewhat better, but we're still not managing it as well as we need to. I'm just being straight with you there. But I also think, like I said, just the math of inflation -- when your costs are only going up 2%, it's not as difficult to manage the pricing off of that than when they're going up 7% or 8% in some categories.

Okay. Thank you very much.

John Ivankoe, JPMorgan.

Hi. Just a couple of quick ones, I think. You mentioned, Bill, in your prepared remarks, something that Sysco was doing that was driving up the cost of delivery in the quarter. Maybe -- I don't know if it was a mistake that you made, or maybe there are some initiatives. What were those? And are those now solved for the current quarter?

Let me balance this a little bit, John. What I said is, I felt we did a really good job on the SG&A side. And, unfortunately, we lowered our cost per case there, which is a key metric for us. To just have flat cost per case in this business is pretty hard to do, so we were pleased with what we did there.

We gave a lot of it back on the delivery side. Some of that was fuel. Some of it was some labor shortages in markets that are particularly robust right now, where some of the oil is being drilled in energy and that type of thing. I'm sure we saw the benefit of that on the sales and gross profit line.

There are just some things that we didn't execute as well as we could have in several markets. And I'll leave that in-house, if you are okay with that. But we are running a business here. And I wish, on a given day or a given quarter, we could execute with perfection. And we did a lot of things well here. I would say, to characterize this quarter, I would've liked to see us perform a little better on the gross profit line, and manage our delivery expenses a little more consistently across the Company. And we're working on both of those.

Okay, understood. And then, secondly, obviously you're outperforming the broad food service distribution industry, as would be evidenced by restaurant sales that -- especially in casual dining, is actually seeing shrinking traffic. What is your sense that -- where is your share coming from at this point? Is it coming from some of the larger competitors? Or is it the very fragmented industry that you see out there, that may finally see some forced consolidation as traffic remains weak and fuel costs go up for operators that already have extremely low margins?

Great question; hard to answer, since we don't see the other guy's numbers. My best judgment is that more of it is coming from the smaller, more fragmented part of the competitive landscape, and that the larger players are probably holding their own, or maybe picking up a little share.

And, obviously, we've been talking a lot about acquisitions, but are you beginning to see, at the local level, some consolidation of the smaller operators? Is there some supply that is quietly coming out that we wouldn't necessarily see here?

Yes, I think we are. And that's what we alluded to in comments on the acquisition environment being somewhat better. The challenge for you guys is -- there's thousands of them. So it's hard for you to see it in terms of how our numbers roll up, or the industry numbers. The acquisition pipeline we're talking about is more in that middle to lower end of the competitive food chain, so to speak.

Okay, thank you.

Ajay Jain, Cantor Fitzgerald.

Yes, good morning. My main questions were already asked earlier. But I wanted to get some clarification on whether the severance costs this latest quarter are related to the cost reduction activities that were already contemplated for the year? So, to the extent that your anticipated cost savings are at least somewhat headcount-driven, I'm just wondering if the severance represents some upfront investment in terms of the cost reduction goals? Or if it's totally outside the scope of the planned cost reduction activities that you talked about at your Analyst Day.

Hi, AJ, this is Chris, and you nailed it. It is related to the initiatives; primarily related to the IT initiative that I talked about. So there was a fairly large chunk of it this quarter. We'll probably have some more of it in Q2. But it's an upfront investment to get to the run rate savings.

Great, thank you.

Andrew Wolf, BB&T Capital Markets.

Thank you. Good morning. Looking at the segment numbers, the sales, could you talk about SYGMA -- why it slowed? Was that what's going on with those customers, or did you anniversary some business?

We anniversaried some business. I've never used that term before, but I like that one, Andy. We've had pretty good growth in this segment last couple of years. And the key there, generally, is picking up a new customer and, obviously, not losing any big ones. We haven't picked up a large new customer here over the last year. And we've lost a little business. Some of it we wanted to lose; and some of it, not so much. Bottom line is, SYGMA is going to be a little more volatile compared to the Broadline in terms of ups and downs.

Okay. We don't see the inflation number by segment. But when I look at SYGMA going down -- and much more than sequentially, in terms of sales growth and Broadline -- can you tell if Broadline case movement was actually -- I'm sure it was better than the combined number, but was it a lot better? Was it flattish, sequentially, or -- versus down, the way it was for the combined two segments?

I want to be careful here, Andy, because a lot of our people listen to these calls, and we're working hard at this one Sysco mentality here. But when you look at our numbers, as the Broadline goes is how the Company does. There is never going to be much of a difference between the Broadline numbers and the overall numbers, and there wasn't in this case either.

Fair enough. Okay. And my last question is on Business Transformation. Simply put, what are the things you're seeing that have the executive -- are you folks contemplating accelerating it? What's working?

Well, we had a similar question earlier. I'll give you my best shot at that, and let Chris jump in here.

Maybe I can help.

Chris is going to help me this time. No, seriously, we've obviously had some bumps along the way here. But we've done five of these now. We've continued to bring in folks to strengthen our team at all levels. And we're getting better at all parts of it -- the prep work, the programming, the change management work, the training -- and as a result, each rollout -- these conversion weekends have been a little bit better.

East Texas went very well. We've had good results, business wise, since then. And so, as you see that, people gain confidence; we gain confidence. So that's the first step, is to make sure that you can handle the conversion right, get the deployment right, and began to hand it off to the business in a way that they can run with it.

But you can't wait until you are a year into it to have these thoughts. Where we're at right now is evaluating the opportunity to accelerate, as we get more comfortable that we are executing at a level that's appropriate, and that we can mobilize the resources that it's going to take to do that. Chris?

Yes, I think about this in two different components. There's the confidence level in being able to roll it out, so the actual implementation. And then there's, how does it work after the fact? And while those are tied together in our minds, they are kind of distinct parts of the equation.

We're definitely focused in this particular answer to this question on the first part of this -- which is, are we gaining more confidence in being able to roll it out? I spent the weekend in North Texas during their rollout last weekend. And when you're actually sitting the large number of people roll this thing out and implement it, and it goes incredibly smooth -- and, yes, there are issues that come up right and left. But the team has gotten so adept at handling the issues and, frankly, they are smaller issues than we were seeing in the other ones -- that just gives you more confidence that we know how to roll this thing out.

And at the same time we, were doing it in another operating company at the same time; first time we've tried that. That gives you more confidence that we're going to be able to roll this thing out a little bit faster. Now, we still have to get through a couple other hurdles to make sure that we're going to be ready to do that. And that's the work that we're doing beginning now. But I'd say that's more color on the whole confidence notion. And that's what's causing us to, at least look at what it would take to go faster.

Okay. And on the second -- that is sort of where I was -- that answer was very clarifying. So, the second way you look at it, the benefits. Is there any -- is there enough data for you internally to also feel a bit more confident about that? Or is it really more about the first part, the execution of the roll out?

Well, if you remember some of our previous conversations around the benefits, we were only looking at the hard dollar benefits, which primarily are driven by reduction in staff and headcount out in the field as we roll these things out. So, as we go back we and look at what was our pre-rollout headcount? What did we anticipate getting to after the rollout by a certain amount of time?

We're getting close to our targets there. And the first three being pilots, and the second two -- or the first two being pilots, and then East Texas and the second two just having gone -- it's a little early to get a complete read on that. But we are getting the headcount reduction benefits that we had anticipated getting in almost all areas.

And the exceptions, frankly, are areas where, as we went through the process, we decided that we might have been a little aggressive in our initial estimations. And we've pushed back a little bit since that time. So, it's too early to read everything. We're not going to quote a bunch of numbers. But we're feeling pretty good about at least the hard-dollar savings that we talked about publicly.

Yes, Andy, I want to just take a moment here to remind everyone that a lot of what we talked about in May, and what we have shared since then, is because we have had some delays here. We are finding other ways to accelerate these benefits. We're not waiting to deploy this thing in 70 US companies and then Canada to get the benefits as we originally designed them in the business case.

When we talk about improvement in SG&A, and when you look at that roadmap to 2015 that we put out there in SG&A and operations, some of those benefits were part of the original case. And we're going to drive those out now; muscle through them where we need to. And then, to Chris's point, there will certainly be some additional benefits as we deploy and are able to become more efficient, post-deployment. There's two paths right now -- one is the deployment path, and the other is muscling through these cost savings, even without the system.

Okay, thank you.

(Operator Instructions). Meredith Adler, Barclays.

Thanks for taking my question. I wanted to talk a little bit -- go back to the subject of inflation -- and maybe just talk a little bit about what you're working on. I think you talked about some systems that would help pass along in the [price] better, and I'm sure that relates to inflation. So, maybe talk about where you feel like you haven't done as good a job and how you see that improving. And how quickly can it improve?

Well, okay. I'm not sure what we talked about, in terms of pricing and inflation. But what I would try to share with you, Meredith, is, as we've said very consistently for as long as I can remember, if we could keep inflation in this 2% to 3% zone that we've had the last couple of quarters, and if it was relatively comparable across all categories, that's just a much better environment for our customers; and, therefore, it's a much better environment for us.

People can handle modest increases. Maybe not as easily as they could 3 to 5 years ago, before some of the challenges and the economy and the marketplace, but certainly better than they can a 5%, 6%, 7% increase. We have pretty good systems today. I want to be really clear, we have good systems today on how to manage inflation. And from that standpoint, I think we do a decent job with it.

I think the art to this thing right now is to, again, strike the right balance as we manage the business -- at that district level, at the OpCo level, and then even in here, on how we interact with large customers and suppliers. How do we strike the right balance between profitable growth and pricing?

Along the way, we have, certainly, explored some different systems and scientific pricing modules. And we continue to assess those. And I think we will get better in that arena over time. And we certainly can see, analytically, that there's probably an opportunity to have less variability in our pricing. And we'll continue to work on those opportunities.

But I would say to you, for now, it is kind of good old-fashioned management on our part, and attention to detail, and striking the proper balance between growth and profitability.

So I guess when you have said -- you did say it on this call, about could've done a better job, in terms -- you're talking about finding a good balance between profitable growth and pricing, when you say, could've done a better job?

Yes, I'm just saying we, as a management team, throughout Sysco, I think could've done a better job. We did better than we did last quarter. And we certainly did better than we did a year ago, from a trend standpoint. But what I'm really trying to say is, we see opportunity out there where we could perform even better. And that's what we're working on internally.

Great. Most of my other questions have been asked. Thank you very much.

Erin Lash, Morningstar.

Thank you for taking my question. You commented that the acquisition environment was very favorable. I was wondering if you could touch on whether there were any differences that you are seeing between the acquisition environment in the US versus internationally.

Well, to the extent that -- in the US, we mentioned the kind of tax rush, if you will, to get some of these transactions done by the end of the year. That does not necessarily apply to for foreign acquisitions unless that their ownership may be US-based. So we're not seeing, I'll say, quite as many.

The markets are -- just talking about Ireland -- there aren't as many players in Ireland. We tend to know who they are. And I think these were very targeted, strategic transactions for us, to broaden our appeal to the customer base there and also broaden our network.

So, we kind of picked what we wanted there, I guess we could say, and done it strategically. Canada, we spoke a lot about, or at least I talked about our strategic desires in and around Quebec, Montreal. And so, again, I think the team is very thoughtful up there about which acquisitions we wanted to go after.

But in terms of the pipeline, we've got stuff coming to us, I'd say, in all three markets. And we look at it; we evaluate it; we first decide whether it makes strategic sense. Then we start looking at whether the valuations are going to make sense to both us and the sellers, and see if we can get a deal done.

Thank you, that's very helpful. And then, finally, I was wondering if you could provide just a little bit more detail. You alluded to the execution issues that you are facing. I was wondering if those were in markets where you've already rolled out Business Transformation, or in markets that haven't been touched by those efforts yet.

Erin, it's Bill. No, they were just -- I'm just trying to give you all some color. When you look over our business, and you're talking about roughly 70 operating companies in the US and other another 10 or 12 large companies in Canada, plus Ireland.

The beauty of this business is there is always things that we are doing well and we can do even better. And then there is always going to be situations where we are not doing and performing quite as well as we would like.

The point is, is I can tell you, from where I sit and where our management team sits, that there are several markets where we probably could have managed the operations side of the business a little bit better, and we will. We're very focused on that.

So, I share that with you basically to be candid, but also to illustrate the nature of the business, that it's one of continuous improvement. With that said, we did a nice job on the SG&A side. So, from the standpoint of looking at it overall, that's why you saw, in my prepared comments, from an overall expense management standpoint, the expenses in the core business grew about 3%. That's pretty good. We think we can do as well as that or better going forward.

Thank you. That's helpful.

And this concludes today's question-and-answer session. I'll turn it back to the management team for any final comments.

Thank you, everyone, for joining us. Have a good day.

And this concludes today's presentation. Thanks for joining, and have a nice day.