西斯柯 (SYY) 2013 Q2 法說會逐字稿

Good morning and welcome to Sysco's second 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 Neil Russell, Vice President of Investor Relations. Please go ahead.

Thank you, operator, and good morning everyone. Thank you for joining us for Sysco's second quarter 2013 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 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, a copy of which is contained in the investor section of our website.

Non-GAAP financial measures are included in our comments today and in the presentation slides. The re-conciliation of these non-GAAP measures to be applicable GAAP measures are included at the end of the presentation which can also be found in the investor section of the 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.

Lastly, we look forward to seeing everyone at the Cagney conference on February 19 where we will offer a business update presentation as well as a dinner featuring Chef Robert Irvine. At this time I would like to turn the call over to our President and Chief Executive Officer Bill DeLaney.

Thank you, Neil. Good morning everyone. This morning Sysco reported sales of $10.8 billion for the second quarter and net earnings of $221 million. Earnings per share was $0.38 and adjusted EPS representing our underlying business performance was $0.49 or a 4.3% increase year-over-year.

During the quarter solid case volume growth contributed to the highest second-quarter sales level in our history. This growth was driven by both acquisition and organic growth as we were particularly successful in growing with our large regional and national customers.

Adjusted operating income grew nearly 5% for the quarter. Gross margin trends improved for the third consecutive quarter, but were lower than the prior year due in part to a change in customer mix I just noted.

We were especially pleased with our expense control performance in the selling and administrative areas of our business, as we benefited from successful implementation of several strategic initiatives. However, managing our expenses on the operating side of the business was challenging as fuel and payroll cost grew at a faster rate than our productivity improvements.

To date in fiscal year 2013 we have completed 10 acquisitions representing approximately $775 million in annualized revenue and expanding our presence in the United States, Canada and Ireland. The acquisition environment remains favorable and we continue to have a number of additional opportunities in the pipeline.

Our core market potential approximates $235 billion and grew by about 1% in real terms in calendar year 2012. Based on preliminary industry data, we believe we grew our market share this past year at a rate consistent with our strong historical performance. However, consumer sentiment and restaurant traffic trends have softened of late due to ongoing economic pressures, reinforcing the need for Sysco to aggressively transform our business so that we remain well-positioned to provide greater value to our customers and reduce our overall cost structure.

Two critical components to deepening our customer relationships are more effectively marketing the Sysco brand and gaining greater insight into what our customers value and how we can most effectively address those needs. We are making good progress in both of these areas under the leadership of Bill Goetz, Senior Vice President of marketing, who joined Sysco about a year ago.

One development that we are very excited about is our recently announced marketing relationship with the Food Network, its highly rated show Restaurant Impossible, and its chef, Robert Irvine. This is a first for Sysco, and we believe it will enhance our brand to strengthen our relationships with existing customers and extend our reach to new customers.

This multi-platform relationship will include TV commercials, in-show product integration, digital integration and personal appearances by Chef Irvine.

Turning to the technology deployment portion of our multiyear business transformation efforts, we are making progress at our operating companies in North Texas and West Texas, where we deployed our new ERP system in November. Particularly encouraging has been the improved functionality of the order entry system compared to earlier rollouts. In addition, our shared business service center, SBS, continues to ramp up to support a broader array of administrative functions in a centralized manner.

We have encountered some challenges, however, in the recent rollouts and are in the process of the proceeding to make additional changes to further enhance the functionality of the system. We are confident that we will be able to resolve these matters as we move forward and we will refine our deployment rollout schedule accordingly. At the same time we continue to move forward with other aspects of transforming our business.

In closing, I would like to thank all of our customers for their support as we move through our business transformation journey. I would also like to recognize all of our associates for their ongoing dedication and commitment to Sysco's success, especially those that put forth tremendous effort to service our customers in the midst of Hurricane Sandy and its aftermath.

The transformational change that we are currently navigating throughout Sysco is both extraordinary and foundational to our profitable growth in the years to come.

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

Thanks, Bill, and good morning everyone. For the second quarter sales were $10.8 billion or an increase of 5.4% compared to the prior year, driven by case volume growth of 2.8% and food cost inflation of 2.5%. In addition, acquisitions within the last 12 months increased sales by 1.1%.

Changes in foreign exchange rates increased sales by 0.3%.

Gross profit in the second quarter increased 3.9%. Gross margin in the second quarter declined 26 basis points. Roughly half of this decline was caused by a slight shift in customer mix as a result of growth in large regional and national customers. The remainder of the decline can be attributed to continued competitive pressure and a difficult sales environment that softened further during the quarter.

Operating expenses increased $116 million or 8.2% in the second quarter of fiscal 2013 compared to the prior-year period, driven mainly by a $45 million increase in business transformation expenses and a $17 million increase in salaries and related costs.

In addition, during the second quarter we recognize $22 million in charges from certain items related mainly to severance from the restructuring of our IT function, which we discussed last quarter, and the restructuring of our executive retirement plan, which we discussed in the 8-K we filed on January 16.

As a result of all of these items, operating income decreased $44 million or 10.4%. Net earnings for the second quarter were $221 million, a decrease of $29 million or 11.5% compared to the prior year. Diluted EPS was $0.38, an 11.6% decrease compared to the prior year.

As you know Hurricane Sandy had a devastating impact on a large part of the country during the second quarter. We have been deeply saddened by the tremendous personal and professional toll it has taken on our customers and the communities we serve. Our operations and crisis management team did a tremendous job protecting our assets before the storm and in helping our customers recover afterwards.

In addition, as in many natural disaster events, Sysco played a key role in ensuring first responders could serve the community.

While we avoided substantial asset losses we estimate that the storm and its aftermath cost is about $0.01 a share during the quarter.

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 the $22 million in certain items I just mentioned, but also excludes business transformation expenses. To summarize the performance of our underlying business, as we go through our business transformation, adjusted operating expenses increased 3.7%, slightly lower than the growth in gross profit dollars. Adjusted operating income increased 4.6%, adjusted net earnings grew 4.7%, and adjusted EPS grew 4.3% to $0.49 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 10 acquisitions with annualized revenues totaling approximate $775 million. As a result, we have already exceeded our goal of adding 0.50% 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 several quarters.

Turning to the impact of the business transformation project for a moment. In the second quarter project expenses totaled $81 million and we capitalized $3 million related to the project. In the prior year quarter, project expenses totaled $36 million and we capitalized $33 million related to the project.

We continue to make progress on our other key business transformation initiatives. With regard to our initiatives to reduce operating costs, we have completed the implementation of the SAP maintenance module throughout our US Broadline companies and we have also created specific action plans for every OpCo to implement best practices in warehousing and delivery.

On our initiatives to reduce our SG&A costs we have completed the rollout of our sales productivity initiatives, including the deployment of our new CRM tools throughout our US Broadline operating companies. We have implemented substantial changes in our IT function, outsourcing our managed services work.

We have begun to implement the SAP human resources module throughout our operating companies. We restructured the retirement benefit plans and for associates and executives. And we have begun the process of centralizing some of our field finance work to our shared services center.

And, finally, with regard to our initiatives to reduce our product costs we have progressed our four pilot categories throughout the category management process to the point where we are now awarding new contracts to suppliers. Even though there is a lot of hard work left ahead of us, we are pleased with their overall progress to date on our key transformation initiatives.

Turning to our cash flow performance, at our Investor Day last year we discussed our plans reduce capital expenditures in both our underlying business as well as for the business transformation project. We have made good progress on that objective with CapEx declining $172 million in the first half of this year compared to last year. We have seen a decline in capital spending related to the business transformation project, mainly driven by the fact that we began implementation of the new technology earlier this year.

In the underlying business, we have seen lower capital spending because of a reduction in the number of major facilities projects this year compared to last, and a more disciplined capital allocation and approval process.

As a result of the reduction in capital spending, free cash flow increased 20% year-over-year to $125 million. We expect the effect of continued lower capital spending this year, combined with the completion of the IRS payment last year, will result in an improvement in free cash flow in fiscal 2013 compared to fiscal 2012.

The other component of the free cash flow equation, cash flow from operations, declined year-over-year in the first half by $152 million or 28%. Increased inventory levels drove about half of this decline. We also had an increase in certain current-period tax payments mainly due to timing.

Before I close I want to remind you of guidance we have provided previously on a few significant items that will impact the second half of the fiscal year, two of which we discussed in more detail in our 8-K filed in January.

We believe our transformation initiatives will provide meaningful long-term benefits to Sysco. However, as we discussed our Investor Day, some of the initiatives will result in one-time charges. I discussed a few minutes ago a $12 million charge we incurred in the second quarter related to the restructuring of our executive retirement plans.

The total charges are estimated to be $24 million and we expect to incur the remaining $12 million in charges related to this action in the second half of the year. This restructuring more closely aligns the executive retirement plan with the employee retirement plan, and we believe over the long-term will reduce the volatility of retirement-related expenses as well as the total cost of retirement-related expenses.

On our fiscal 2012 year-end call last August, we discussed the more than $100 million potential increase in pension expense we were facing as we were developing our fiscal 2013 plan. In response to this potential significant increase in expense, we restructured our employee retirement plans to freeze our defined benefit pension plan and subsequently enhance our defined contribution or 401(k) plan.

As I mentioned a few moments ago, during the second quarter we recently completed the restructuring of our retirement plans by also restructuring our executive retirement plans. The net effect of all these changes is that we now expect pension expense to be lower in fiscal 2013 by $21 million, with $15 million of this decrease occurring in the second half of fiscal 2013. The additional expense in fiscal 2013 related to the increase in 401(k) and other retirement plan changes will be in the range of $55 million to $65 million, all of which will impact the second half of this fiscal year.

These two components together will result in a net increase in retirement-related expenses for the full year of between $35 million and $45 million. This includes amount that we categorize as certain items.

Finally, in the third quarter we expect to incur a $40 million charge related to the withdrawal from an underfunded multi-employer pension plan. This withdrawal will help us mitigate our exposure to multi-employer pension plans and underfunded status.

In closing, fiscal year 2013 is a critical year for us as we work toward significant milestones in our business transformation plan and begin to realize benefits from several areas of our Company. The work we are doing will favorably position us to take advantage of opportunities to continue to grow our market share and expand upon our leadership position in the industry.

With that, operator, we will now take questions.

(Operator Instructions). John Heinbockel, Guggenheim Securities.

Couple of things. Is there any update on either the rollout schedule, where you expect to be by fiscal year-end in terms of OpCos, or the benefit -- because I think you had said 25% of the ultimate benefit would be seen this year. Is there any update on either one of those?

No, I don't have an update for you this morning. What we are telling you, I think, in our prepared comments is we are in somewhat of a delay here from what we originally anticipated in terms of rollouts, and we're going to take the next few weeks to continue to assess the things we need to improve in terms of the functionality of the system. And I think over the next month or two we should have an update on the rollout timeline.

As far as the 25% of the benefits, want to just keep reminding everybody, and I will let Chris speak to this, because he is the one that is really managing this very well. That is off of an overall targeted savings of $600 million, give or take, over a three-year period, which incorporates not just the technology side of it, but some big initiatives we have going on, which Chris referenced in detail here today on the SG&A side of the business as well as the product cost side of the business.

So I think we are in a pretty good place there. And I will let Chris provide some color for you.

Yes, John. With regards to both parts of your question, on the rollout plan, I won't add any color to what Bill said other than the guidance that we have out there right now is 5 to 15 operating companies being converted this year. I think it is fair to say we are going to be at the lower end of that range, but as Bill said, we are working through whatever revisions we might need to make our plans right now. But that is the current guidance.

On the savings, again, as Bill said, it is across all of our business transformation initiatives. I can kind of walk you through where we made progress and many of the others and, frankly, we feel pretty good about where we are on our overall cost saving initiatives for this year as well as going forward.

So just as a follow-up on, I guess, ERP, two things; the functionality challenges are coming primarily where? And then as you have rolled out the CRM component, have you seen yet much of a benefit to have the salespeople -- are doing their day-to-day job, whether it is calling on more customers or anything like that? Or is that too early yet?

I think we are beginning to see benefits, John, on the CRM, but it is pretty early. It is a huge rollout for us and multiple companies. But for us to be able to successfully implement some of the other initiatives in the SG&A side that we've undertaken, we are going to need to see effective implementations of CRM.

So I think we are in a good place there, but that is like a lot of things. It probably takes you a good year to get it out and get people to use the system and to trust it, and then to hold each other accountable for results. So I would say it is still early, but we are very encouraged and very pleased with the system itself that we are using.

As far as the functionality, let me do this. I went back and looked at some things we've said to you all on recent calls, and I would like to put in context. I think the first point I want to leave with you is we are very confident in the direction we are going in here. We are very confident that we are going to be able to resolve some of the challenges that we have right now. We're just not as confident in terms of the specifics of the near-term timeline.

With that said, what we have talked about in the past is concerns, issues with speed, performance; in particular, with the order entry system. We had some issues with reports early on. And we spoke a little bit in the past about inventory management service levels, those types of things.

I would say to you, where we are today with these recent rollouts, we are pleased with the progress we made on the order entry and the speed and the performance of that system. So we have done well there.

We are very pleased with -- as I said earlier, with the ramp up of SBS, and that group beginning to take on a broader array of support services, even without the technology being as far along as it will be at some point. So we are not waiting on the technology to begin to centralize the things that we believe can be centralized effectively.

Our challenge is today -- we have had some hardware blimps, to be honest with you. Around Thanksgiving time we ran into some issues there, and took us a while to resolve that. We have had an event or two here of late as well. So we have still got some things to work through on the hardware side; highly confident that we will be able to do that.

And then on the -- what I will call -- again, the inventory management service level issues, we are still not clicking there at the level that we need to be. We came out of the chute pretty well after the deployments themselves, but the service levels aren't where they need to be. We have run into some issues with connectivity and our system to our large customers' systems, and those are things that we are working through today.

Now I will remind you that this deployment we did back in early November was very important for a couple reasons. One it was the first time we deployed two companies. But second, North Texas, or essentially Dallas, is by far and away the largest OpCo we put on the system, and it is one of our largest OpCos overall.

So these challenges we will run into right now, while somewhat frustrating at times, not unexpected and we are working through them with our customers and with our people. And, again, really appreciate the patience of the customers and very, very appreciative of the efforts of people are putting forth.

And then just one last thing. It looks like the level of price investments have moderated from where they were nine months ago, a year ago. Is that likely to continue? Or does that go the other way given the macro and maybe a resurgence in inflation? Do you think the pace of price investments gets more intense on your end the next -- the remainder of this year? Or do you think we continue to moderate?

Those are your words. I don't think I would use those words exactly. I will say about a year and a half, two years ago we did talk a lot about strategic pricing initiatives and there were some things we are doing there in a category or two that we pretty much cycled through. And we are pleased with what we have seen there in terms of growth.

I think the relative improvement you are seeing on the margin trends is a combination of two things. We are working very hard at it, trying to strike the right balance in terms of growth and being responsive to our customers. And, secondly, it's because the inflation has subsided that takes a little pressure off the percentage change issue there.

So we are continuing to try to grow the business aggressively, but be smart about it, and we need to continue to improve on the margin side.

Okay, thanks.

Edward Kelly, Credit Suisse.

So if we could go back to just a quick follow-up on the ERP implementation. Is there any impact on the cost that you expected to incur this year -- that [$300 million, $350 million], as well as on capital, because I know you talked about some hardware issues?

I will take the second one first. At this point we will don't really anticipate an increase in the cost of capital. And if it is, frankly, it is going to be minor. Hardware really doesn't cost that much in the grand scheme of our project like this. The capitalization of labor, which typically occurs when you're developing the system, not when you are implementing it. So I don't anticipate a significant increase in the capitalization.

In terms of the overall costs, to the extent that there is a delay here, just like what we talked about the last time when we talked about the more significant delay, it is not really in the current year. It just adds additional time down the road. So while there may be some additional costs, I don't currently anticipate those being significant. But anytime you have a delay, of course, you're adding more time to the end of the deployment cycle and you'll pickup additional cost for a longer period of time.

Okay, and then I am just trying to frame the net cost of business transformation as well as the cost savings that you talked about this year. And I guess the way we think about it, if there is [$300 million to $350 million] in business transformation, and let's call it roughly $150 million in cost saves, you are sort of at this $175 million level net for the full year, which is lower year-over-year than last year, right, because you just had gross costs and no savings. Are we thinking about that, the correct way? So (multiple speakers).

Generally correct. We gave you a lot of guidance under investor day, which I would encourage you to pull back up. There are a couple of charts there that are pretty good that frankly, if you listen to our calls, we try to talk in the same language as those charts every time, so you can keep up. But that is how we outlined it.

We said gross business transformation cost. We netted against that some benefits from our shared services center to get to a net business transformation cost. And then we also broke it down into cash costs. And cash is where we expected to pick up some benefit this year as we slowed down the implementation and started depreciation -- or sorry, slowed down development and started depreciation.

Now on the cost savings side, I know in the first quarter you are reluctant to give any color on really where you stood. I don't know if you could help us understand how much you have achieved to date in the first half or how much of that is back half weighted, just as we think about the model here.

We are pretty -- we are going to be very cautious about giving quarter by quarter guidance, because there is going to be a lot of timing elements to this, to be real candid with you. But, look, I'm not going to dodge the fact that this whole thing was a buildup from one quarter to the next all the way through three years.

So we told you 25% in the first year, 50%-ish -- a range around 50%-ish in the second year and all of it by the third. So you can see the ramp up. Throughout the year it is a ramp up as well. So of the 25%, yes, more than half of it is going to be the latter half of the year.

Okay, great. And then, Bill, could you maybe talk about just general consumer and industry trends? So maybe start with volume growth. What was the cadence of that volume growth throughout the quarter?

And then it sounds like things have weakened up so far in the current quarter from a volume standpoint. I don't want to put words in your mouth, so if you could just help us understand what you are referring to there.

Yes, sure. I would say to you that the volume trends have softened, I think, as we went through the second quarter, in particular on the street. We are doing a really nice job with the large regional national chains. Kent Humphries and his group have brought in some great accounts there. We have been able to grow with some big existing customers. So that has been a real positive for us.

I would say on the street we have seen some softness. And then when Hurricane Sandy came, that just exacerbated it. And things picked up after that, but not to the level that we were at before. I'm not really putting that on the hurricane, though. I just think as you read all the things that come out in terms of economic confidence, and you look at some of the things coming out of our industry in terms of the operators, and just looking at a lot of the things that you guys publish in terms of restaurant trends, I think you can say that things have softened out there. And we are dealing with it.

And bottom line is we are continuing to find ways to stay closer to our customers, work even harder on retaining the business that we do have and going after new prospects that are good fits for Sysco. So I think it is going to be soft here for a while, from everything I read. And that just means that we need to work a little bit harder and continue to, as I mentioned in my comments, continue to aggressively go forward on some of the transformation issues and continue to develop that acquisition pipeline.

And I just want to ask you one last question on gross profit dollar growth. Your gross profit dollar growth exceeded your case growth this quarter for the first time in a while, which is probably an encouraging sign. Could you maybe talk about what the drivers of that were? And it might be some mix. SYGMA didn't grow much. And then how sustainable that is (technical difficulty) in the back half?

To be candid that is not exactly a high bar, but we need to at least get to that, and we -- fortunately we did. So it is encouraging. And, yes, I would attribute that to some modest improvement on our part in terms of managing growth and profitability, and we need to continue to improve there, to be totally candid. So it is encouraging, but a lot of room to go.

Can you keep that up in the back half, though, do you think?

We are planning to.

Okay, thank you.

Michael Kelter, Goldman Sachs.

Just, first off, a quick one on the recent delays on the ERP rollouts. Do you expect the delay to be measured in months or quarters?

Right now I am dealing with weeks, Michael. So basically we are, as I said, we are taking a look at some of the challenges we have, and we have got some very capable people internally and externally working with us on that. We are staying close to our customers, so I think over the next several weeks we will have a better update for you on that.

Okay, and then on the business trends commentary that you've given, anything you can help us with on the trends you're seeing over, let's say, the last four or five weeks in the current quarter. Are they stable or is there any evidence of an impact from the recent payroll tax increase?

First of all, January is hard for me to make any great commentary on. Just there is a lot of volatility from one year to the next on weather and that kind of thing. I don't talk a lot about weather, but keep in mind this quarter for us, March is disproportionately large because of the seasonal changes. We are -- you will continue to hopefully have good business where people go on vacation as well as people up north getting out a little bit more.

So it is really hard to draw any conclusions, but January was soft. I will acknowledge that. I don't know that I contribute any of that to the payroll tax.

What I would attribute to is confidence, just what the country is going through on the economic side, and I guess the payroll tax would be a piece of that. And just everybody is, I think, continuing to be pretty careful with their dollars as they start the year. But I think our operators just saw some numbers this morning and these go up and down. And the outlook from our customer base is a little bit better, even though we are not seeing it in the numbers yet.

We said this two or three years ago and I think, unfortunately, we were right. This recovery is slow and it is uneven. And going back to your earlier question, it seems to almost be quarter by quarter at times. So, hard to predict, but I think comparisons will be a little tough this quarter.

Again, I am going to say one more thing on weather, and I have seen it in some of your guys' reports. We did have a very mild winter last year and that did help us, in particular in the northern states. So a little cautious here early in the quarter and certainly hopeful that things will pick up as we get into March.

And then on the SYGMA business, I know it is not the biggest chunk of your business, but it was up less than 1% in the quarter despite the 2.5% pricing, which implies that division at least temporarily is actually in decline on a real basis. Is there anything we should be aware of in terms of lost customers or anything like that? Or is it just some temporary time shift of some sort of orders, anything like that?

It is more the latter. SYGMA is going to have a little more volatility on the top line because when you bring in a new account or you pick up significant more business within an existing account, that will jump your numbers for a period of time. But we have essentially wrapped some of the new business pickup there.

And there has been some wins within existing customers and some modest losses, that type of thing. But basically it is a function of we have wrapped some of the new business from a year ago. And what you're seeing there is a pretty good reflection of the overall growth of the customer mix.

All right, thank you very much.

Mark Wiltamuth, Morgan Stanley.

Can you give us a little tone on what was going on with inflation during the call -- during the quarter -- and also your prospective outlook for inflation here for the rest of the year?

The way we measure it, Mark, I think we have said we have about 2.5 points of inflation in our costs. It is pretty stable within most of the categories.

Meat was up. I think poultry was up quite a bit. We had some deflation in seafood, and the rest of the categories were not overly significant, other than some were certainly larger categories than others, so pretty stable from that standpoint.

I would expect certainly to see a modest increase over the second half of the year, but I don't know that we have seen enough yet to be projecting more than that. Just have to watch it closely, but I guess my best judgment is a modest increase.

Okay, thank you.

Karen Short, BMO Capital.

A couple questions just on the OpCos where you have rolled out -- you have already rolled out to. Can you maybe talk to what is happening with volumes and in general the retention with the customers, or anything you can point to that is encouraging?

You are talking about the last two rollouts?

Yes.

I think it's a little early for that, but as I said early on, we did a great job. We had a record sales week, and one of the companies had a rollout, and our leadership teams and our salespeople and our support people here on the 212 team and SBS have done a great job supporting our salespeople and our customers.

As you would expect, as you do run into some of these issues, that will strain some relationships. And we've had some good discussions with customers that are experiencing some of the same challenges we are.

So they have been very supportive to date, and we are working very hard to get the service levels to the level that we have had historically and that they would expect. So I would say, so far, good partnership with the customers, but as we have noted, there are some challenges out there.

Okay, and then in terms of the categories where you have looked at rationalizing SKUs, what about the impact on customers in those categories or on volumes overall in those categories, any color there?

I don't think that has had a big impact on customers. It has had an impact internally, but most of the SKUs that we rationalized were, as you would expect, pretty low velocity type SKUs. So any time you reduce SKUs it creates some angst and tension in the organization, but Mike Green and his team have done a great job there, and we are down about 10% on our SKUs.

So I think the real test there will be as we go further on the category management work, I think Chris mentioned that we are in pilot stage right now. Part of that whole package is to put together a more optimal assortment that is broader, but less redundant. And that will create some SKU pressure as well, but in the right way. And so our challenge there will be to work through that with our sales force and our customers from a value-added perspective.

So, all in all, I think we have done a good job there and there hasn't been a lot of pushback.

Okay, and then just last question looking at your cash flow, on the acquisition side of it. The multiple, if that dollar amount is actually your total payment for the acquisitions that you made, it seems like a pretty attractive multiple of sales. Are there any deferred payments or anything that will be part of the acquisition price? Or is that the actual multiple that you paid for those acquisitions?

Typically when we do acquisitions we will have an earnout agreement which will last two or three years, which generally just says that the former management team owners will stay around and help integrate the Company and retain as many customers as we possibly can. And for that, if they are able to accomplish that, there is a portion of the purchase price that gets paid out over time.

It is not a huge number, so what you're looking at in terms of multiples is fairly reflective of what we are actually paying for these things. We don't typically look at it on a multiple of sales. I know sometimes people do that.

There are a lot of different types of businesses that we look at, that have a lot of different operating margins. So that sometimes will cost cause a pretty broad range, if you look at it on a percentage of sales basis.

Great. Unfortunately, that is all I can look at. But --.

I understand.

Okay, that is all I had. Thanks.

Meredith Adler, Barclays.

I wanted to talk a little bit about what you're doing in terms of retirement expenses. You talked about a pretty big increase in 401(k) expense. Is that because it is a new program, is that an initial expense? Or will there be continuing -- will that expense continue? Or will there be incremental higher expenses in coming years?

First, I have got to back up and I always have to start with where we would have been this year. We would have been $107 million more in terms of retirement plan expenses, which was obviously not something that we were looking forward to and our shareholders wouldn't have enjoyed either. For that and many other reasons, we looked at restructuring our pension plan. That was something we were always looking at as part of business transformation.

So we think of it in terms of that was the bogey. We had to do better than that. Now on a year-over-year basis it is going to be higher.

So the direct answer to your question is yes. Within the charges that I read out earlier, there are some -- what we call a certain items, which are one-time charges that will affect us this year. We talked about $24 million in terms of that, that will hit us this year, and then we will get more to a run rate.

We are going to give you more color as to what that run rate is, if not next quarter, certainly in our fourth-quarter reports that you can model it for next year. We are trying to just give you the visibility for this year.

The reason why we also have to put ranges around it is 401(k) expenses depend upon participation, of course, and that is somewhat hard to predict, especially with employees' paychecks going down because of tax changes. So we have got a fairly wide range in those numbers, because we are not sure what the 401(k) benefits are going to look like.

Okay, I think it is great that you froze the defined benefits. It needed to be done, I'm afraid. I was wondering if you (multiple speakers) -- sorry, go ahead.

No, that's okay. Go ahead.

I was just wondering if you could talk about the 10 acquisitions you did, and whether there is any commonality or anything in particular you are looking for. Are these filling in geographic wholes or line of business? Or just great opportunities?

It varies depending on the acquisitions. So I am going to say they are across the board. I will give you a little color.

In Ireland, while we have a very strong business over there and it covers much of the country, we were able to find two other companies that, together with ours, now cover all of white space on the map. We can reach all the way up into Northern Ireland without doing long-haul, et cetera. So that gives us, we believe, coverage over most of the country.

Not to say we won't look for additional transactions there, but those were great transactions for filling out the map.

Canada, we still have a little bit of white space left. And predominantly in some of the larger cities -- Quebec, Ontario area -- there we were under penetrated, and so that give us the opportunity to increase our penetration and market share in an area where we thought we had plenty of opportunity.

Here in the US, most of what we are doing now are fill-ins. And they're companies and families that we find that we believe have built a great business and a great name, and we like the way they operate. And we enfold them into our companies.

Great, thank you. And then maybe just my final question would be, obviously, inflation is pretty modest right now. I think there was a time when inflation was a lot higher than when it was just challenging to pass it all along to your customer. Is there any reason to believe that is still an issue? 2.5% is on top of big numbers last year. Or would you say you're not having any issues passing it along?

It is Bill. I would say this is as good as it gets. All right? We are in that 2% to 3% zone. That is what we have historically always signaled is best for our customers, and for us. I'm not going to tell you it is easy to pass along, but I think we are doing a little better job of it.

It really comes down to the pressure that the foodservice operator is feeling and their outlook. So I think we are doing a decent job right now. If inflation were to pick up materially, that would put pressure on our customers, which ultimately puts pressure on us. So we would love for it to stay right around here and maybe tick up a little bit.

The thing we have to keep reminding ourselves of, and helping you all with, is at the other end of this equation, we still have the problem of consumer demand -- the ultimate restaurant patron. They're just not as -- they are not out there as much as they used to be out there. And that is the part that has never really recovered from the Great Recession, if you will.

So as long as we have kind of a weak consumer demand and restaurateurs are trying to get as many customers into the restaurant as possible, you're going to have this competitive pressure in the industry. So it's inflation, yes, but it is also just weak demand on the other side.

Right. And then I just had one final question about the things you're doing in your Shared Services facility. It sounds like you have moved a lot of new activities to that facility. Is there anything that you are doing there that perhaps you hadn't originally contemplated and you have now seen an opportunity to use that facility more effectively?

I don't know there is anything we hadn't contemplated. There are some things that we are accelerating, because we are not to the point where we thought we would have been originally on the technology side. So Chris mentioned several of them -- HR, finance, we are doing some things in marketing out there. I will let Chris add to that. But it is more about an acceleration, I think.

Absolutely right. As we have said and tried to explain a number of times, rather than wait to give the full technology rolled out one OpCo at a time or six OpCos at a time or whatever the original plan was, and then bring all of those companies into SBS, we have been doing it frankly function by function.

And we talked about maintenance. That one is done. We are starting to prepare ourselves to receive benefit from that. HR is now being rolled out. Finance is underway already. We are just bringing them in function by function, everywhere that we do not need to rely upon the big system going into place.

And, indeed, I think I mentioned in several of these we are using the SAP modules. We are just turning them on without the overall system being in place. They work just fine coupled in with our existing systems. So it is really about accelerating everywhere we can so that we can get the benefits that we originally described.

Thank you very much.

Ajay Jain, Cantor Fitzgerald.

Actually, most of my questions were already asked. But I just had a question on the payroll increase in Q2, and maybe a lot of this was already covered in the prepared comment from Chris.

So I think, Chris, you mentioned that there was going to be an additional $12 million of payroll increase in the back half of the year. But I am trying to understand the net payroll impact, like what has been the cumulative effect on payroll net of the severance charges year-to-date. And can you give it any similar commentary on the outlook for the back half of the year?

I believe we talked about payroll being up $17 million, if I recall correctly, quarter-over-quarter. I am seeing if I have got any detail on that that I can talk about. Yes, $17 million up for the quarter.

I don't believe, actually, that number has any of the one-time charges in it. So what you have got going on in there is, we have talked about cost being up on the labor side in our delivery area and cost being down on the SG&A side of the equation. You have got those two things playing together. And the rest, frankly, are normal increases in payroll expenses as we move forward.

Okay, yes. I was just trying to understand the net impact of payroll expense of year-to-date and what is your outlook for the balance of the year. But maybe I can follow up off-line.

Yes, look, we can talk about that. I think Bill said in previous comments that we haven't been all that pleased with some of the increases on the delivery side of the equation. We had some over time issues, some shortage of driver issues, things of that nature. Those costs have been higher than we anticipated.

On the other hand, some of our initiatives are kicking in on the SG&A side and specifically the sales side, and those costs are lower. So you get a bit of an offset there. So you're going to have, hopefully, the latter continuing -- the initiatives continue and they hold, and we actually start to gain some benefit or frankly just get some control over the delivery side of the equation.

So, in terms of what we would like the outlook to be, that is it. This is where we just have to operate really well.

Okay, and just as a follow-up, my understanding was that a lot of the cost savings to offset ERP spending, those -- whatever was targeted, I think $150 million for this year -- that was supposed to be heavily headcount-related. So if that -- if my assumption is correct would it be reasonable to infer the payroll expense goes down in the back half, if you look at the year-over-year comparisons?

Yes, let me take that in two parts. Is it reasonable to expect that there will expense will go down? It will certainly -- it should not go up as much. Let me put it to you that way, without giving you specific numbers.

I want to be careful though. I don't believe we ever said that the vast majority of the $150 million was going to be headcount-related. You may be confusing that with statements. We have always said that most of the hard dollar benefits from business transformation or the ERP systems would be headcount-related, which is a different concept.

That $150 million fell into various buckets we have described, including product cost reductions, SG&A reductions and lower operating cost reductions. So it is across the board. There is a lot of payroll in it. I am not trying to dodge that. And so we would expect it, like I say, to at least not continued to increase and hopefully go down a bit, but there are other cost savings in there as well.

I think the only thing I would add is payroll doesn't have to go down for us to leverage our productivity improvement. And so I would say -- I would echo what Chris said. We are not quite where we wanted to be at this point. There is different things going on in different parts of the business, but we have a very aggressive plan for expenses this year.

So -- and I am sure you have -- when you look at the expense growth, it is not bad. If you go back and look at it historically, it is just we had a very aggressive goal given some of the impact of the initiatives. So I don't know that it has to go down. I think it needs -- the delta -- the increase of the delta needs to continue to come off, and that is what we are managing, very much focused on cost per case.

Great, thank you very much.

John Ivankoe, JPMorgan.

Chris, I heard some of your prepared remarks regarding CapEx controls in general and system increase discipline in general about how the money is being spent. Have you been able to update fiscal 2014, fiscal 2015 CapEx guidance? Is it still the intention that those numbers continue to come down as ERP gets finished up?

We typically update our five-year capital plan as we go into the end of the year. So we haven't updated future-looking years. I will say this, and alleviate maybe one of your concerns. We are not pushing off CapEx this year into next year, so that we could gain some benefit this year.

I know sometimes you can play with the numbers that way, but we honestly don't feel like we are pushing off just to be making the numbers look better. We are just getting a little bit -- as I said, a little smarter about where we spend our money.

Yes, I think if you look at last year and this year and pull out the technology and divide it by 2, I think that is a more representative view.

Yes, so we are down $170 million-some on the capital line. In fact, if you double it, we are going to be well under our guidance. I don't anticipate being well under our guidance, but we are certainly running the lower end of our guidance right now in terms of our forecast for the year. I just don't have a good view of 2014 right now.

Okay, and then secondly, regarding acquisitions, it seems like your acquisitions are being made almost independent of what is going on, on the ERP side, especially with some of the modest delays that are happening. Is that the case? Or are you just -- are you conscious of the size and the amount of acquisitions that you can make until your legacy system can be running exactly the way that you want it to be?

So we have talked about $775 million annualized sales across 10 transactions. So just do an average of $75 million sales per transaction. They are not extremely large deals that we would worry about disrupting us.

Now that being said, I don't think we would be doing a deal in the middle of Dallas right now and trying to integrate it in Dallas. There is no reason to complicate our lives where we don't need to. So it is a little of both.

There are smaller transactions in general, which we feel comfortable taking on regardless of where we are with ERP. At the same time I think we are pretty thoughtful about where we are going to be trying to integrate deals with our ERP rollout schedule.

Okay, thank you.

Andrew Wolf, BB&T Capital Markets.

Chris, I want to just ask you about Hurricane Sandy, the $0.01 impact you called out. Is that all from foregone sales or was there some inventory involved?

It is a little bit of everything. So we had a little bit of asset loss. We moved as much of our equipment out of the area as we possibly could, and literally ran out of storage area for some, so we had a little bit of asset loss. Some inventory damaged the facilities and then sales loss.

In general what happens is you lose the sales, but you don't necessarily lose the expenses. So you are effectively losing the gross profit on all of that for a period time. We measured it as best we can. These are more art than science for the quarter.

Some of this impact will last for a while and we are probably going to feel some of the impact when the summer months roll around. And some of the businesses that generally will open and thrive during the summer aren't there anymore. But we are starting to see some recovery in the area.

I will tell you, if you looked at our sales that week, I don't think I need to tell anybody on this call the impact of that hurricane, but from the Mid-Atlantic right up into Maine, and even into the Mideast a little bit, it was dramatic, and in particular in metropolitan New York, New Jersey. So that week was -- obviously, it was devastating to people, and our people and customers, but financially it was a very significant event for that week.

Sure, no; just as we are trying to carve out the potential sales impact, I thought it was helpful. Appreciate that.

Moving on to M&A, were you helped by the change in the tax code or do you think the M&A environment still remains equally favorable as it was in the quarter?

We had a very busy December. The teams put in a lot of hours trying to close transactions that needed to be closed by the end of the tax year. So, yes, that was the case.

At the same time, though, I don't think that -- we'll just say the pipeline has continued to be rather robust. It is just the number of the deals were desperate to close prior to the end of the tax year.

Okay. And is this environment wearing on potential sellers in terms of valuation expectations, from what you are seeing? Is that -- if you take out the tax part of it, what you think of that?

I would say -- I would characterize where we are currently has more normal, which means you have got sellers that are at least somewhat reasonable. Now, look, in any normal environment, you got some sellers that are being irrational with their expectations and some, frankly, that aren't asking enough for their businesses. So you have got a range.

But the range is more what I would call traditional and normal than it was, say, 24 months ago. That is what we have been seeing. And that helps us in terms of getting to a yes with -- on a deal that both sides win at.

I think the biggest thing, though, year in and year out, is still going to be the mindset of that owner or that family or whoever the decision-maker is, in terms of how they see their business over the medium term -- three, five years and are they prepared to invest in that business, for the other part of the environment which is remains pretty tough market out there.

So, as we have said, I think we are still confident that we will see some activity here going forward.

And if I could, just a follow-up; I know you have been asked about the SAP a lot, but I just want to check my understanding. Is it -- the hardware issue you are now having, is that tied directly to the service level issues, or is the service level also -- go back to the code, to the software side of things?

The service level is a result. And what I was trying to say is we have had some hardware issues. And, again, we are confident. We are working through them, in that we are confident we will resolve those, but that will create slowdowns in the system. That will create late trucks, and that type of thing. So we have had some of that.

But on top of that, we continue to have challenges as relates to the functionality of the inventory management system. And that is a separate issue that needs to be addressed separately. But they both result in service level variances from our typical levels.

The biggest issue with hardware, as you might imagine, is just stability. If you have got hardware issues, you have got an unstable system. And that is the part that you've got to resolve before you can gain confidence in the system. And then, as Bill said, everything else drives from that.

I need to be careful here. Let me be clear. We're shipping groceries. The service levels are not at the level that they historically have been at, which is a very, very high level. All right? So the levels are not quite up to our norm.

The challenges that we have had -- in particular hardware is -- we might have a day or two where we have issues with slowness of the system, and we have a hard time getting trucks out on time. And that creates its kind of issue.

The other issue is more of a, if you will, a steady-state issue that we are working on as well. So we are delivering groceries. It is functioning. We just have very high standards and so do our customers, and that is what we need to continue to perfect here.

And the other thing, just to take your temperature in this, if I can say it that way, let's say nine months ago when you had -- well, it's not as similar, but you also had a delay and some challenges. How do you rank this compared to that in terms of your confidence of resolution and getting back on track in a reasonable period of time? (multiple speakers). Back then it sounded like -- to me it sounded more serious. I'm just trying to take your temperature on that.

I am actually much more confident than I was nine months ago, in terms of getting back on track and in terms of taking this system to the level it needs to be, to scale it and to provide not just the service to our customers, but the efficiencies that we need and some of the ease of doing business that our salespeople need.

What I am not as confident on in the short term is the timeline. But those are two different questions. So I feel better today.

We have got -- I am very proud of our people. Not only are they working hard, we are making progress. We have brought in some good people internally and externally to help us. And each day and each week, even good weeks or challenging weeks, you learn more about it.

So I feel very good about where we are heading. I wish I could give you a little more definitive update on the timeline, but I certainly hope we can here over the next several weeks.

Just lastly, on sales again, because I understand the weather -- are you trying to say for January potatoes, it is too light a month to really say there is a change in trend based on -- to say that the payroll rate -- the payroll tax going up? Or -- is that what you're trying to? Say or do you, in fact, say maybe things have softened? I'm just trying to get some clarification.

I think I am trying to say two things. I will keep working at it. One, is the business has slowed, especially on the street, over the last couple of three months. And that includes January. Two, whether we have a great January or a poor January, it is not as material to the quarter as what you see the second half of the quarter, in particular in March.

That is pretty straightforward. Appreciate it. Thank you.

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