西斯柯 (SYY) 2013 Q3 法說會逐字稿

Good morning, and welcome to Sysco's third-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 now like to turn the call over to Mr. Neil Russell, Vice President of Investor Relations. Please go ahead, sir.

Good morning and thank you for joining us. Today 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 during this presentation that state the Company's or management's intentions, beliefs, expectations or predictions of the future are forward-looking statements and actual results could differ in a material manner. Additional information that could cause results to differ from those in the forward-looking statements is contained in the Company's SEC filings. This includes, but is not limited to, risk factors contained in our annual report on Form 10-K for the year ended June 30, 2012 and in the press release issued earlier this morning, which is posted in the Investors section at Sysco.com.

Non-GAAP financial measures are included in our comments today and in the presentation slides. The reconciliation of these non-GAAP measures to the applicable GAAP measures are included at the end of the presentation, which can also be found in the Investors section of our website. All comments about earnings per share refer to diluted earnings per share unless otherwise noted. In addition, all references to case volume growth include total Broadline and SYGMA combined.

At this time, I would like to turn the call over to our President and Chief Executive Officer, Bill DeLaney.

Thank you, Neil, and good morning, everyone. This morning, Sysco reported sales of $10.9 billion for the third quarter and net earnings of $201 million. Earnings per share was $0.34 and adjusted EPS, representing our underlying business performance, was $0.49 a share, a 2% decrease from the prior year.

As reflected in these results, the third quarter proved to be very difficult operationally for many of our customers, and as a result, for the vast majority of our operating companies. A number of factors impacted consumers' willingness to spend on food away from home, including higher tax rates, tax refund delays, stubbornly high unemployment, high gas prices and, in some parts of the geographies we service, unfavorable weather conditions.

Consumers appear to have become increasingly judicious with their disposable income, and it is clear from the decline in restaurant traffic in January and February that going out to eat has not been a high priority of late.

While an extended winter has continued to challenge us in certain markets through April, we view most of these trends as cyclical in nature and expect overall market conditions to gradually improve as we move into the remainder of the calendar year.

In assessing our financial performance for the quarter, let me be clear on one very important point. Although external headwinds created significant pressure on our operations, we did not execute our business plan across the organization as consistently as we should have. We must minimize the unevenness of our operating performance within Sysco, and we will.

Sales grew 4% for the quarter. While that growth was primarily driven by the impact of acquisitions and pricing, we did experience solid growth with several of our large regional and national customers, especially on the institutional side of the business, by leveraging our broad supply chain capabilities and geographic coverage. However, many of our restaurant customers struggled to grow during the quarter for reasons I mentioned earlier.

Specifically, sales dollar growth with our street customers, who are largely independent restaurant operators, was soft for the quarter. This group of customers comprises a significant portion of our overall volume and an even greater percentage of our profitability because of the high level of value-added services we typically provide them. Thus, even though we did a fairly good job of managing gross margins at the customer segment level, the impact of customer mix changes contributed to our growing gross profit dollars by only 2% over the prior year.

Notwithstanding what we believe to be cyclical industry headwinds, we remain confident in our ability to profitably grow our market share over the long term. The key to our future success will be driving out strategic initiatives in conjunction with Sysco's overall business transformation efforts.

Turning to our multiyear business transformation initiatives, to date, we have completed the rollout of the full SAP system to five operating companies. All five locations are running their business reasonably well, and we have seen improved system performance in recent weeks. As we have further evaluated system performance following our two deployments in Dallas and West Texas, we focused our thinking on two potential paths forward. We could either, one, proceed with our previously communicated rollout schedule and continue to work on enhancements at the same time; or two, continue to accelerate specific functional initiatives, such as human resources and general ledger accounting, while allowing the team to focus all of their time and effort on implementing enhancements to the broader SAP platform.

We believe the latter option is the better approach for the following reasons. One, it allows us to continue to make substantial transformation progress while making future deployments easier and less complicated; and two, it also allows us to more effectively balance benefits, costs, risk and speed.

It is important to note that the vast majority of the system functionality is performing as designed. However, as we have previously communicated, we do have issues that need to be addressed, such as pricing complexity and the inventory management functionality, before moving forward with a revised rollout schedule. We have isolated and understand the causes of these issues and are executing against a solid plan to remedy them.

In the meantime, we are continuing our efforts to standardize, centralize and technology-enable many of our business processes. As we announced previously, we recently completed the rollout to all US Broadline operating companies of both our CRM and SAP maintenance modules.

Other similar efforts have been progressing rapidly. We have completed the rollout of the HR SAP module to 26 locations, with four going live every two weeks, and expect to complete the transition of our general ledger accounting functions to SBS in 42 locations by fiscal year-end.

We expect to complete the rollout of both of these initiatives to all US Broadline locations by the end of the calendar year.

We've also begun setting up master data files across the enterprise and are bringing locations onto this module in anticipation of the broader SAP rollout. This prepares us for a more rapid deployment in the future. To that end, we have restarted our operating company deployment preparation process and anticipate the enterprisewide rollout to pick back up again around the end of the calendar year, and we will provide updates accordingly.

Importantly, I should note that the revision of the rollout schedule will not impact the timing of the approximately $600 million in annual benefits from operating product costs targeted for fiscal 2015. Those benefits do not rely on the ERP system. We believe we are generally on track to achieve those savings within the timeline we previously communicated.

Leading our technology transformation effort is Wayne Shurts, who joined us this past October as Executive Vice President and Chief Technology Officer. He has extensive experience in leading IT organizations, including large SAP deployments, and I'm confident in his ability to lead us through this period of vital change. Wayne recently began to move forward on a major reorganization which is designed to streamline and more effectively integrate our IT department and technology deployment teams. In so doing, he has and will continue to recruit individuals that are highly experienced in SAP and large systems implementations.

We also continue to make solid progress on several of our other strategic initiatives. We recently completed the acquisition of Bahamas Food Service, which adds another attractive geographic market to our portfolio and provides a solid foundation for future growth. We are excited about welcoming Ben Frisch and his team to the Sysco family, and Chris will provide additional details on all of our acquisition activities in a few minutes.

Our customer insight work continues to identify opportunities to provide enhanced value to our customers and more effectively establish Sysco's corporate brand. We continue to roll out and train our sales management and marketing associates on our new CRM tool so as to create a more efficient and effective sales process in this critical channel. We have added to and strengthened our merchandising team at all levels of management, in preparation for rolling out our category management process to our customers in the coming weeks.

Four categories comprise the pilot wave and represent nearly $1 billion in annual spend.

A key step in building out our capabilities in this all-important area of our business was the hiring of Tom Bene as Executive Vice President and Chief Merchandising Officer. Tom joined us in mid-April and will oversee our merchandise and supply-chain activities, as well as work closely with our sales, marketing and operations teams.

As I conclude my prepared remarks, I would like to leave you with a few thoughts. Sysco is the clear leader in the $235 billion food-service marketplace. While our industry has recently experienced some pronounced short-term pressures and has not consistently participated in the modest economic recovery to date, we expect this industry to achieve 1% to 2% annualized real growth over the long term.

We have consistently grown our market share since our inception more than 40 years ago, and we are committed to continuing to do so in a profitable manner.

Our industry has and will continue to experience significant change. We have proactively developed a solid strategy to expand our leadership position over the long term by renewing our focus on enhancing our customers' experience with Sysco so as to create ongoing profitable growth and strong free cash flow for our shareholders.

We are driving now a transformational change throughout Sysco. We must do so in order to realize our full potential as an enterprise. But such change is difficult and may result in uneven performance on our part in the short term.

Through the exceptional talents and dedicated efforts of our 47,000 associates, we remain highly committed to and focused on providing outstanding value to our customers and shareholders as we move forward.

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

Thanks, Bill, and good morning, everyone. For the third quarter, sales were $10.9 billion, for an increase of 4.0% compared to the prior year, driven by case volume growth of 1.7% and food cost inflation of 2.4%. Acquisitions within the last 12 months increased sales by 1.8%. Changes in foreign exchange rates decreased sales by 0.1%.

Gross profit in the third quarter increased 2.1%. Gross margin in the third quarter declined 34 basis points, and roughly half of this decline was due to the shift in customer mix as a result of faster growth in large regional and national customers. The remainder of the decline in gross margin was driven by the difficult sales environment during the quarter and continued competitive pressure.

While we experienced good case growth in our large national and regional customers, our street case volume was particularly softer in the quarter. Overall, our case growth, excluding acquisitions, declined 0.2%.

Operating expenses increased $140 million or 9.8% in the third quarter of fiscal 2013 compared to the prior-year period. Operating expenses for the quarter include $50 million in certain items, including a $41 million charge to withdraw from an underfunded multi-employer pension plan and $9 million in restructuring items, mainly related to the freeze of our executive retirement plans. We provided guidance on both of these charges in an 8-K filed in January, as well as during our last earnings call. Compared to the prior-year period, certain items drove $46 million of the increase in operating expenses.

Increased business transformation costs accounted for an additional $34 million of the operating expense increase. Lastly, salaries and related costs increased operating expenses by $22 million, due mainly to increased 401(k) expense, acquisitions and higher delivery costs, partially offset by transformation benefits related to sales organization changes and our IT restructuring. As a result of all these items, operating income decreased $102 million, or 23%.

Net earnings for the third quarter were $201 million, a decrease of $58 million, or 22%, compared to the prior year. Diluted EPS was $0.34 per share, a 23% decrease compared to the prior year. Adjusting for certain items, such as the changes related to the MEPP withdrawal and restructuring and retirement plans, diluted EPS was $0.40 per share for 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 $50 million in certain items, 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 4.4%. Adjusted operating income decreased 4.4%. Adjusted net earnings declined 1.4%. And adjusted EPS declined 2% to $0.49 per share.

We continue to be very active in the acquisition arena and have surpassed our stated goal of increasing sales from acquisitions by 0.5% to 1.0%. As Bill mentioned, in April, we completed the acquisition of Bahamas Food Service, a Broadline distributor based in the Bahamas. BFS has annualized sales of approximately $200 million. This acquisition further expands Sysco's international footprint and provides an even greater breadth and depth of products and services for our BFS customers.

BFS is the leader in the Bahamian market, which has meaningful growth potential. We also believe that there are some synergies to be achieved between BFS and IFG, our international division that ships products throughout the Caribbean.

Including this acquisition, to date in fiscal 2013, we have completed 11 transactions that, in the aggregate, approach nearly $1 billion in annualized sales.

Turning to the impact of the Business Transformation Project for a moment, in the third quarter, project expenses totaled $83 million and we capitalized $4 million related to the project. In the prior-year quarter, project expenses totaled $49 million and we capitalized $44 million related to the project. As Bill mentioned, although we continue to accelerate specific functional initiatives, we are going to implement enhancements to the broader SAP platform before continuing our enterprisewide rollout schedule. As a result, we will not convert any additional operating companies this fiscal year.

Our rollout schedule in fiscal 2014 will be determined once we are able to assess the success and timing of the additional changes and enhancements we are making to this system.

Our prior guidance for the run rate of project costs was $300 million to $350 million annually, and we still expect to be in that range for fiscal 2013. We will be reassessing the ongoing costs over the next several months as we make these additional changes and enhancements.

I want to reiterate that the changes to the timing of the deployment of the broader ERP platform have no impact on the approximately $600 million of annual benefits targeted for fiscal 2015. And as Bill mentioned, we believe we are generally on track to achieve these benefits.

Examples of our progress so far include expenses related to our retirement plans are significantly lower than they would have been had we not frozen all of our old plans, and we expect them to decline further next year. After restructuring our sales organization, expenses are significantly lower than the prior year. After restructuring our IT department, expenses are lower year-over-year.

We are also making progress on our category management initiative, as we begin to roll out the pilot categories to our customers. And the ongoing work of additional waves continues at a good pace. In addition, we are enhancing compliance across the organization with existing sourcing programs.

Finally, we are making progress on some of the operations initiatives, including implementing our maintenance module and realigning our incentive plans for our driver and warehouse personnel. Unfortunately, this progress has been masked by the current difficult business environment and general operating performance of the underlying business that did not meet our expectations.

Turning to our cash flow performance, at our Investor Day and recently again at CAGNY this year, we discussed our plans to gradually reduce capital expenditures back to historic rates. We've made good progress on this objective, with capital expenditures declining $260 million in the first 39 weeks of this year compared to last year. We've seen a decline in capital spending related to the Business Transformation Project, mainly driven by the fact we began implementation of the new technology earlier this year.

In the underlying business, we've 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 40% year over year to $386 million. We expect the impact of continued lower capital spending this year will contribute to an improvement in free cash flow in fiscal 2013 compared to fiscal 2012.

Cash flow from operations was flat year-over-year for the quarter and decreased $149 million for the first 39 weeks, primarily driven by the decline in net income.

Turning to a couple of guidance items for a moment, we now believe our capital expenditures for the year will be $550 million to $575 million. This is lower than our previous guidance of $600 million to $650 million, partially due to the timing of certain construction projects which will increase fiscal 2014 as compared to prior guidance.

We continue to expect fuel expense for the year to increase in a range of $10 million to $20 million. Right now, it looks likely that we will come in at the high end of that range, although fuel prices have been recently trending down.

In closing, the current economic recovery continues to be modest and marked by inconsistent consumer trends and unforeseen headwinds. The food service industry environment and our financial results reflect these challenges. However, we are working to improve on those elements of our business that we can control, including enhancing our product and service offering, managing our costs, increasing our free cash flow, achieving our targeted business transformation benefits and addressing the requirement of our technology transformation in a prudent manner. We also continue to ramp up our acquisition pipeline.

The work we are doing will position us to take advantage of market trends as the health of the consumer recovers, enhance our ability to grow our market share over the long term and expand upon our leadership position in the industry.

With that, operator, we will now take questions.

(Operator Instructions) Karen Short, BMO Capital Markets.

Good morning. This is actually Ryan Gilligan on for Karen. Can you guys talk about the competitive environment maybe by customer type? Is the weakness with independent customers due entirely to the environment, or are you losing some share there?

Good morning, Ryan. That's -- I would say the competitive environment overall is about the same as it has been the last two or three years. It certainly feels a little more acute right now just because of, I think, the pressure on a lot of our customers, but I don't know that it is any worse.

It is hard for me to really measure that. I would say to you I think the competitive environment may be a little more acute or a little tougher with the smaller restaurant operators, that type of thing, where they are particularly under pressure. But that is more conjecture on my part than anything else. We don't have great data on that.

Okay. And switching to the category management initiative, can you guys talk about how your customers and marketing associates are reacting to it, at least in the pilot categories?

Yes, we've spent several weeks and now months working internally with our merchandising folks here and our operating companies. We've had meetings at all levels, including the presidents and VPs of sales and merchandising. We've run this out through our sales meetings. And that's still going on, so we haven't launched yet; but we would hope to launch these categories here over the next few weeks, as we said.

It is being very well-received. Obviously, people are very interested to see where the pricing is going to come in and that type of thing. But we've done a nice job, I think, in communicating it internally. We are working well with our suppliers.

And again, this is a different approach than what we've taken in the past with sourcing, whereas we are focusing on the assortment being broader and less redundant. We are looking to partner with our suppliers and customers to grow the business and take costs out at the same time.

So we are optimistic. The one caution I guess would be this is something that we've never done before, and really no one in this industry has done the way we are approaching it. So we expect that there will be some challenges as we go forward, but at this point, our people are very excited about it.

Great, thanks.

John Heinbockel, Guggenheim Securities.

So a couple of things. First, Bill, do you think when you look at the macro environment, what, if anything, can you guys do to stimulate demand with your customers and be comfortable that the price elasticity -- if that is what drives it -- is acceptable?

I think, John, what we have to do is focus on the microenvironment. So the macro, we've talked for a while now -- you are very familiar with us and this industry. What I've tried to lay out in my prepared comments is we still think this industry is going to grow at modest levels 1%, 1.5%, 2% maybe. But there is going to be some peaks and valleys, and we are in a little bit of a trough right now, especially on the restaurant side. Last year we saw more growth; first half of this year, we saw more growth.

So I think the key is these strategic initiatives that we've been discussing. And this is where we are going places where we haven't been before. So it starts with the customer, John. We have excellent service levels out there in terms of how our MAs provide support to their customers, our on-time deliveries. We are in stock, all that type of thing. We perform at a very high level.

Now, from the customer's perspective, probably the other guys have gotten better over time, so that gap isn't as big. But in reality, we are compared to how we did last week. So we need to continue to do well operationally from a basic service standpoint, but we need to also differentiate ourselves more and more.

So it starts with better understanding what is important to the customer, and we've got some good work going on there with Bill Goetz and his marketing team. I think that will take us to some segment work, where, when you look at that 1% to 2% growth, probably most of that is going to come in ethnic segments, and we are going to have to continue to strengthen our ability to focus in on those groups, focus in on certain geographies, where we have a lot more upside from a market share standpoint, that type of thing. We believe category management over the long term will be very good for our customers and for Sysco. And again, we're approaching that in a very balanced way, both from a growth and from a cost savings standpoint.

And Sysco Ventures, while it is still very much in its development stage, we are hoping to have a platform in place there soon where we can augment our product offerings with several services and technology-based business solutions that should create greater traction with our customers as well.

So again, when I talk about we've got a proactive strategy for a new world, a new environment, those are three or four of the things that I'm trying to focus on.

What do you think you get most out of category management? Is that more a benefit in terms of purchasing? Is it more getting the assortment right geographically? What do you think of the one or two big wins there?

I think in the short term, there is certainly savings on the gross product cost-saving side. But I think over the medium-term, it will help us work with our customers and focus more on creating an assortment that is more relevant to their marketplace and will allow them to grow their business more effectively, rather than have a lot of redundant SKUs, not just in our warehouses, but, to some extent, in their pantry as well. So I think it starts certainly with the cost savings, but it will only be successful -- fully successful if we are able to grow our business and support our customers' growth at the same time.

Then lastly, the $500 million you talked about, that is a gross benefit, correct?

I'm not sure -- what $500 million are you talking about?

What I'm thinking about -- as you push out the implementation of ERP, you would think that pushes out the cost of the program, or no?

The actual implantation cost, yes, of course.

Sure. What we are focused on it right now -- I'll let Chris jump in here -- but I mean, what we are focused on right now, John, is getting a really good handle on what is the most effective way to go forward here over the next two to three years in terms of deployment. And we will be assessing the annual costs as we do that. So we've got to look at pace and we've got to look at annual costs at the same time.

John, was your question about the approximately $600 million of annualized benefits we've referred to?

Yes.

Yes, so first and foremost, both Bill and I said that those are not impacted by the timing of our ERP rollout.

Secondly, we actually don't characterize those as gross costs. To the extent that we have costs associated with the implementation, we are actually -- we have to cover those. So we expect that $600 million to be net.

Over and above implementation costs?

That is correct, yes.

John, I'm not trying to confuse this, but --

Hang on, John. I'm going to cut Bill off. They are separate categories. $300 million to $350 million is an actual operating or implementation expense -- operating expense around ERP. We are going to have that and we will continue to give you annual guidance on that.

The $600 million is a gross benefit, yes. We don't net the two together; if you want to do that, feel free to do that. The benefit that we look at is that $600 million, which we would hope to be even more than that as we get further out -- we have only given three years of guidance -- that will be with us for ever and ever. The implementation costs will eventually go away.

John Heinbockel Thank you.

That's what I was going to say, but Chris said it better. Thanks.

Andrew Wolf, BB&T Capital Markets.

Good morning. Follow-up on the $600 million savings. I'm looking at the Investor Day presentation, where a little over half was SG&A and the rest from COGS. Is that still roughly how you are thinking of it?

Second, Chris, you mentioned restructuring, sales, the retirement plans, other things. Could you give us sort of the run rate of what you have achieved in dollars? And I guess build a bridge using the cost of goods sold and category management to get to the $600 million.

I probably won't go so far as to build a bridge for you, but let me start with the top of your question and work my way to the bottom.

So we did say $550 million to $650 million. We're just saying approximately $600 million midpoint. We said about 25% of that would be in the first year, so roughly call the midpoint $150 million-ish worth of benefits for the first year. We do believe we are on track in the first year.

We laid out kind of how we were going to get there, and you obviously have looked at the slide in terms of there will be a component that is SG&A; there will be a component that is lower cost of goods.

We've kind of said in different calls, we are getting to our number; we're not getting there exactly the way we thought we would get there. So some of the front-end stuff, restructuring and pension plans, et cetera, very painful, very difficult stuff to do, but you can do it rather quickly. So we got to that fairly fast.

The SG&A component, and specifically the S part of that, the sales component, that is work that has been done. And frankly, we thought it would take longer to get to that and it happened a little sooner than we thought.

And then some of the what I'll call operating expense reductions and initiatives out in the field, given the environment, those are coming along slower than we thought. They are a little harder.

We haven't tried to give you a bridge on the retirement planning stuff; that is a little bit difficult. We did, I think, telegraph what the overall savings are this year compared to what they would have been, which I believe is about $85 million better than what they would have been with the discount rate and the other factors that go into that calculation.

On a year-over-year basis, they are $15 million to $20 million worse than last year. So we've given you that. And then the only other thing I think we've tried to telegraph to you without numbers is the expenses will be, frankly, higher in the second half of the year than in the first half of the year on that increase. So $15 million to $20 million year-over-year higher, but you actually get a little of benefit in the first part of the year and detriment in the last part of the year, just because of the way the accounting works. Next year, we expect those costs will go down further as the run rate kicks in.

Okay. And just on the bridge idea, I can appreciate you not wanting to update that or spend the whole call on that. But is it fair to say the cost of goods sold component is the majority or the largest part of what is to come?

I would say -- actually no. The way we worked out the $600 million, it almost equally balanced between the lower cost of goods and then lower operating costs. The timing of those is different. The category management initiatives are back-end-loaded because there is a much longer ramp-up period. There is a testing period, there is a pilot period, and then you start delivering wave after wave. So we've talked a lot about the four pilot categories. We're now to the point where they actually get rolled out, and then you have waves that come after them. So year one is pretty light in terms of lower cost of goods.

A lot of what we are getting in year one, we said would be from additional sourcing initiatives, specifically better compliance around sourcing. We are seeing that. Category management has ramped up really well, and now we've got to see benefits from category management in year two and even more in year three. So the timing is not equal, but the overall benefit from each of those two major components is about equal in the $600 million figure.

Andy, I think the only thing I would add to that is on the SG&A, Chris is on point. We are off to a fast start there. I think you'll see more of that in year two on the admin side as some of the pension benefits kick in again next year. So we are doing a little better there than we planned on the SG&A side, not quite as well on the operating cost savings. That has turned out to be a little more complex than what we thought. But we have turned the corner there and we are expecting to see good improvements there. We managed our expenses actually pretty well in the third quarter, given the environment at the operating company level, and I think we will see good results there over the balance of this year and next year.

(technical difficulty)

And then on the COGS, Chris nailed that as well. The first year, what was implied in those savings was pretty modest, more about sourcing. So year two becomes the first big year on the category management. Look, we haven't even launched it yet, so we'll talk more about it as we get into it and see what is working and what some of the challenges are.

A little color on that. It is a massive undertaking. We've strengthened the team quite a bit, as I mentioned in my prepared remarks, and we feel good about the savings. It may take a little longer to roll this out than what we originally thought, but we also expect the benefits to continue beyond the third year as well.

So we're excited about that, but again, we've got a lot of work to do here over the next few months.

Lastly, on the same subject, how do you think about sharing the savings with customers to drive market share or just help their business so they can increase their same-store sales through lower menu prices? It's sort of being presented -- at least the way I'm hearing it -- is it is sort of all slated to go to shareholders and earnings power directly. But could it go more directly through supporting your customers?

You must be talking to our competitors, I guess. That is not the way we are presenting it. What we've tried to do here over the last couple years, Andy, with our sourcing work and as we've further developed our supply chain work and some of our internal transfer pricing, the whole key here is for us to continue to get better at providing our operating companies with what we call market-relevant pricing. And that is an easier figure to quantify and determine in some categories than it is in others.

So what we will do is we will lock in some pretty meaningful growth savings, and as appropriate, we would expect to pass along some of those savings to our customers, to make sure that our salespeople are properly positioned on the street with good, solid pricing. And I think you will probably see us early days invest some money in promotions, too, just to help grease the skids here. Because this is change, and we think it's good change, but any change is difficult these days. So I think you will see us invest in price to some extent, to the extent that we think that is appropriate, and also some promotion activity.

Andy, as we calculated the potential benefits from category management, we made the assumption we would have to -- need to -- want to pass through some of the cost savings down to the customer level, as Bill said, some just to get to market-relevant pricing and some just more temporary promotional type spending. So those numbers are built into our estimates. We've already learned in the pilot categories in some places we were a little conservative. In some places, we were too aggressive. We expect we will get that in every wave. But we've made an estimate and it's in those numbers already.

So you are saying the $250 million to $300 million is net of what we are talking about?

It is net of our estimate of what we believe we will need to pass down to make this work all the way through to the customer level. That's correct. Now again, as Bill said, we are at the point where we are going to the customer, so we are about to see how good our estimates are.

Last quick question. Has volume picked up any in March and in April?

I'd say the trends are a little bit better, but the problem is February was just ugly. And so we just saw significant falloff, as you've seen in some of the restaurant publications, in February. So I would say it has still been somewhat soft here in March and April, but the trends are better than what we saw in February.

Thank you.

Edward Kelly, Credit Suisse.

Good morning, guys. Bill, you talked about volume getting better throughout the year. Is that just based on what you said about sort of March/April, or are you expecting volume to get better incrementally on top of that?

I think what I'm trying to say, Ed, is we got hit with a lot of things, our customers got hit with a lot of things in this past quarter, and I think some of that will cycle out.

I mean, if you guys go back and listen, I probably have done 25 calls since I've been back here six years. I hate talking about weather, and I don't think you'd find that I've talked about it hardly at all. But we have had weather issues going back to last year, where it was a very favorable winter. This year, some strange weather in some different places. And even in April, we've seen an extended winter and all that type of thing.

So I think some of that will run its course and that that should help us a little bit. I'm not going to say it is dramatic, but it is a piece of it. I think some of the things I touched on -- however you want to quantify the impact of the FICA taxes and that type of thing, I think that did impact the consumer.

So the key thing for us is the mindset of the consumer. That is what will drive them back into our customers in a bigger way and a more regular way than what we've seen. And I'm not really talking about Friday night and Saturday night; I'm talking about the family specials on Wednesday and business trade maybe a little bit more during the week. So I just think some of these things we've run into are somewhat more short-term or cyclical in nature, and I would expect them to ease over the balance of the calendar year.

I wanted to clarify a couple things on the cost savings program and ERP. Are you -- I think -- are you telling us you are still expecting 50% to 70% on the cost savings in 2014 -- is that right?

We've not changed our guidance over the three-year period. Obviously, we are building our plans right now for fiscal 2014, so we're going to be taking a much closer look at where we think we'll be. But our three-year guidance to $600 million over the three years, we are good with that.

The pace and sequence of that, as Bill and I both said, we are ahead in some areas, behind in others. So we've got to take a look at 2014 specifically. We typically provide you guidance -- to the extent we provide guidance, we provide it in our fourth-quarter call. So you can expect some more information from us then if we are going to change anything. But right now, I can say we are making good progress in a lot of areas. As I said in my prepared comments, it is being masked by a lot of other stuff that is going on, unfortunately.

And to that as well, the costs associated with the program, it sounds like possibly could be higher in 2014 than the $300 million to $350 million. Is that a fair way to think about it?

I'm not sure what we might have said that led you to that conclusion. Obviously, we've got to take a look at that as we make the changes and enhancements that Bill and I both referred to in the system and start to relaunch. If anything, I'm kind of looking at those costs like this. We took a lot of pain to get to the place we're at now, which is -- we're at a run rate of somewhere in the $300 million to $350 million range annually. So that is now built into our expenses, as painful as it was to get here.

We're going to be very, very cautious about allowing that number to go any higher, and we're going to work very, very diligently to try to figure out a way to actually implement this thing at a lower annual run rate. That has work that we are doing right now; Wayne and his team are working very hard to figure out ways to do it less expensively. Not sure we're going to accomplish it, but that's our goal.

When you gave 2015 guidance, a lot has transpired between now and then. Should we as investors assume that 2015 guidance is good until you were to actively address it?

That is kind of the normal -- the normal rule is unless we change the guidance, we still believe in it. Look, we are not trying to sugarcoat anything. It has been tough here. When you give three years of guidance and your first year comes out of the box weak, it makes it hard to still see a path to your third year. But we are one year into it.

So we are going to be re-looking at all of that and see whether we still have a path to achieve it. Again, I've talked about the underlying business has to continue to perform. We've got to hit on all cylinders on the initiatives and the benefits we are going to achieve there to get to that guidance. We feel pretty good about the initiatives. The underlying business, unfortunately, with the headwinds, we are struggling with a little bit. So we've got to hit on all cylinders to be able to get certainly to the top end of that guidance. Whether we are in the middle or at the low end of that guidance still is something we will work through as we update our planning.

One last question for you, on balance sheet, cash flows. Your working capital to -- I guess if you look sort of year to date has been a little bit of a headwind. I was hoping you could just talk specifically about working capital management, especially sort of inventory up about 8% year-over-year. And I think receivables are up 10%, something like that. So just what your thoughts are there.

The story has really not changed since my comments last quarter. We continue to make progress on accounts payable, and we actually made maybe another $100 million of ground on accounts payable in this last quarter on a year-over-year basis. But we lost about $200 million combined between inventory and accounts receivable.

Part of that is we are continuing to grow with our large regional and national customers, and they typically have longer receivable cycles. So that is -- I'll call that a mix issue, but it is certainly something that is affecting the number.

We had some pre-established contractual changes that allowed for days to go out a little further on a couple of customers. So that is in there, as well.

Inventory is a tricky issue, because while we realize it is going the wrong direction, or certainly it is going the way we would rather it not for working capital purposes, you can't just try to shut it down too quickly, because it does affect service levels. So we are being very prudent and careful in how we look at moderating or slowing down the growth in inventory, and we are putting in place or at least working on plans that we can put in place to start to bring that back down.

It is going to be slower progress than I had hoped it would be, so we're doing what we can, which is on accounts payable. We are trying to be sure we manage accounts receivable and not let it extend further. And then inventory is something that's going to take a little longer to bring back into control.

Okay. Thank you.

Meredith Adler, Barclays.

Thanks for taking my question. I would like to start just with what you said at the very beginning about the change in how you are going to roll out the ERP system. It might be helpful if you could divide out the functions or the tasks that it will do and tell us what is delayed, which I'm assuming is the warehouse management part of it, and what parts of it are still being rolled out, which I think is HR and general ledger. Am I understanding that right?

Let me start here, Meredith, and I'll let Chris help me out. Let's go back to the beginning. Warehouse and delivery are not part of the ERP rollout. We have excellent systems, and from day one, we never included those in the deployment. So those systems are best-in-breed and operating fine. Obviously, they need to be interfaced with SAP, and we're -- so there is no issue there.

The hub of the system, the operating system itself, is more on the sales, inventory replenishment, purchasing side of the business, as well as, over time, the financial reporting. All right?

So what we are saying -- I am going to go to the end first and come back -- so what we are saying is we are making good progress with some things we can do without fully rolling out the entire integrated SAP system -- with the general ledger system moving into SBS, with what we call our human resource module, with our maintenance module that we are using in our shops. And separately from that, with our CRM module, which we've integrated from salesforce.com. So those things are moving along well, and we expect -- a couple of them are fully deployed already, as we mentioned, in the US; and the other two will be fully deployed, we expect, by the end of the calendar year.

Where the delay is or where we are doing more work is on the sales, purchasing, inventory replenishment side, pricing side of the business. Again, I would say to you the vast majority of the system is highly functional; it is just not -- there's pieces of it that are not as functional as it needs to be for us to run this business at the level that we run it at. And we've made the decision to step back and allow our deployment teams to focus 100% of their time on addressing those issues across the board on the SAP platform, while the other teams can continue to drive out these other modules.

And we just felt that is a more prudent way to go, to get better depth and better focus in terms of what the issues are and remedy these things somewhat more cohesively, rather than try to continue -- we could have rolled out a few more companies, but to continue to do that and work on these other issues with the system just dilutes people's attention and creates resource needs, and we felt that was not the way to go at this stage of the game.

The category management effort, you don't need to have the SAP system in terms of pricing, inventory management, inventory replenishment, purchasing, you don't need that to do category management?

At some point, it would facilitate it a great deal, but we do not need it to roll out category management.

We have systems that we've operated with for much longer than I've been here, for at least a decade, that can certainly handle everything that we are trying to accomplish in category management. It will be easier, more efficient and faster when we have the new system in place.

At some point -- the reason we are going forward here, at some point, we do need an end-to-end system to run this business and have visibility to what is going into a very complex business. But to begin to roll it out, we do not need it.

Okay. And then I have a question -- sort of follow to Ed's question about working capital. You had a very big sale of treasury stock in the latest quarter, bigger -- even if you look at the purchase of treasury stock, it was substantially higher. Could you just talk about what prompted you to do that? And it does seem to me that it helped fund the dividend. Is that an alternative to borrowing?

It is not something we did; it was the exercise of options. And so the stock got to a high, a place it hadn't been in a while. We have a lot of employees that have been sitting on options, a number of which were expiring this year. And so we saw quite a bit of option exercised during the quarter to the tune of I want to say about $500 million. Or actually, I think that is the year-to-date number, about $500 million, a lot of which came in the third quarter.

So it is not something we did to finance anything; it is something frankly the employees have the right to do whenever they want to exercise it, as long as they follow the guidelines.

But the second part of my question is, if you hadn't gotten that option exercising, how would you -- would you have an issue funding the dividend?

No.

We have no issue funding the dividend. We have a very strong credit rating. We have a tremendous amount of debt capacity. We would have fewer shares outstanding.

And Meredith, I know you understand our cash flow statements very, very well. We start with just the amount of cash we produce from the business, and then frankly, everything after that becomes a discretionary item, and you just determine your priorities. The dividend is a priority for us. So a lot of what we're doing in terms of becoming more efficient with our capital expenditure is to drive more cash to the bottom line in terms of the free cash flow. That is just more cash available to do whatever we think the shareholders would like us to do, one of which we know is the dividend. So we have plenty of available cash from operations, as well as borrowing capacity.

No doubt about the borrowing capacity. And then I have a question about Mother's Day. I know you've been kind enough to update us on April. Mother's Day, I believe, is one of the very biggest holidays that impact the restaurant industry. Can you -- and we are less than a week away. I'm a mother. I can say that. Any comment on how that is shaping up, or do you think it's a continuation of the weakness that we've seen so far?

First of all, Happy Mother's Day. Today is day one of Mother's Day week for us, Meredith, so a little early to tell. Neil won't let me give you daily guidance on sales. So typically, the way these shape up is we generally have this week, and there is a week right around when the schools go back in session, maybe the week before Labor Day, which typically are our two biggest weeks of the year. So we would expect to have a big week.

But the reality is the toughest comparisons are the big weeks against big weeks. So I'm not sure to what extent there will be an increase or how big of an increase. But the one thing you can pretty much count on is almost everybody goes out for some type of meal on Mother's Day weekend, and we would certainly expect to benefit from that.

Okay, great. Thank you.

Ajay Jain, Cantor Fitzgerald.

Good morning. I wanted to just get your feedback on the softness that is specifically in your street account business, that, Bill, I think you talked about in your prepared comments. I guess as it relates to the street accounts, that has both sales and margin implications. So is there anything specific you can point to in terms of the underlying volume trends, in terms of what was behind the decline sequentially in Q3?

Can you also comment on whether you are seeing any pickup in the sales environment in the current quarter? I guess that is another variation of some of the questions that were asked earlier, but I just am asking in the context of your higher-margin, independent restaurant operators. Thanks.

What I can do is try to give you a little color here, and if I'm not nailing it, just follow up. But I think the biggest thing we are trying to bring out -- so if you look at the quarter, I think it is largely a sales story. We manage margins reasonably well at the segment level. We actually did a decent job managing our cost per case in the opcos. It is hard to see with all the back-and-forth in some of the expense numbers, but I will share that with you.

But the restaurant segment in particular, we saw across-the-board a lot of pressure on most of our restaurant customers, whether they were independent or whether they were contract customers. The difference is that restaurants make up a larger piece, a very large piece, of our quote, unquote street business.

So I think the big story here is it was a tough quarter for restaurants. That is a big piece of our street business. And our street business has a disproportionately higher profitability, in particular on the gross margin line. So -- because of the value-added services that we provide.

So if you just do the math, if you look at the first half of the year, our gross profit dollars were up about 3.5%; I think it was 3.4%. And they were up about 2%, 2.1% this quarter. So I'm not laying all of that on the street side, but I think it is a big piece of it. And so when your street business doesn't grow at the same rate, and in fact has very modest growth, that puts pressure on your gross profit dollars, and that is what we saw on both of those lines, both the top line and the gross profit line.

As far as trends, I think I addressed that earlier. Technically, I can tell you the trends are better, but that is more a function of February was just very difficult. It is still somewhat soft on our business right now. I still think some of that is cyclical. And to Meredith's question, I think May and June will be a much better barometer on our business.

Okay, and just shifting gears, on ERP, I think when you gave your preliminary outlook for fiscal 2013, I think it was clear that a lot of the anticipated cost savings were not necessarily related to business transformation. And I think you confirmed that today from a longer-term perspective through fiscal 2015.

But with three quarters in now, can you just quantify how much of the intended cost savings you have been able to achieve? And I know you are also confirming that you are on track for $600 million of cost savings by fiscal 2015, but can you give some frame of reference for, again, on where you are year-to-date, and if $150 million of cost benefits are -- if that is still the right number for this year?

As I think I said earlier, we are on track for the 25% of the $600-ish million in year one. We are on track to achieve that for year one. We are not going to get into the quarter-by-quarter assessment of where we are. And frankly, that is always going to be something hard and difficult to pull out of our numbers. But we feel pretty good about where we are for this year, and as we've said, we feel good about the three-year run rate as well. That is pretty much the extent that we are going to go.

I think Chris said this earlier. When you look at the three big pieces of what we've laid out there on the road map, there is assumption of an underlying growth rate of the business. We talked about 4% to 6%. So if you would use the midpoint of 5%. Then there is the $600 million, which as we've discussed now at length, half of that, give or take, is operating costs, half of it is cost of goods. And then there's the investment we are making annually in the deployment of the technology platform.

So I think we are generally on track on those last two. We are not as far along as we would like to be on the deployments, but in terms of expense and benefits, we are generally on track. Clearly for this year, we are not seeing the 5% growth in the business that is in that road map. So we either need to make it up in benefits, which we are not putting that on the table today, and -- or hopefully, we will get a better market environment here and better execution on our part over the next couple years.

Okay. Just one final question. I know you don't want to get into quarterly projections, but on the project expense, as you indicated, that $300 million to $350 million is still the right range for this year. But that still leaves a lot of variability for Q4. So is there any way you can give some more specificity on the expenses for Q4?

Not on Q4. I'll tell you for the year, based on my current forecast -- so I've got three years -- or three quarters of actual and forecasts for one quarter. I mean, we are in the top part of that range, but we are -- right now, we are not really at risk of going over that range.

Great. Thank you very much.

John Ivankoe, JPMorgan.

Good morning. Thanks. It is Amod Gautam filling in for John. The first question was on the ERP and business transformation in terms of how it is affecting whether or not you are getting a better view on individual account profitability. In other words, could your number of accounts and/or market share potentially drop, but with more efficient pricing and logistics allow increased profitability?

I don't think we are far enough along to really give you a great answer to that question. I think what we will have and certainly one of the benefits of an end-to-end system is that we are going to have a better view on what we call -- or what some people call activity-based costing. So I think we will have a better view of profitability.

And I'm sure -- you know, we've done a lot of customer stratification here over the last five or six years, so I'm sure that we will have some earnings there. I think generally we have a pretty good handle on how we make money. And so I don't know that there would be significant falloff there in terms of customers. There might be an opportunity to sit down and have a more balanced discussion on our costs versus their costs and how we make the whole thing work together. That is typically how we try to work.

I think the key for us really is as we get better visibility to our costs and what our customers' needs are to continue down that differentiation path and explore different channels that may be more cost-effective for our customers. We are, as you know, a very traditional Broadline distributor, and there may be opportunities, whether it is inside sales or other vehicles, for people to purchase food in ways that we typically don't provide today, and perhaps there would be an opportunity for us to get into those adjacencies. And that is certainly one of the things that we've talked about in terms of how we can grow the potential for the business over time.

Okay, and then in terms of the acquisitional environment, I know you have talked -- both of you have commented for some time that it has been somewhat unfavorable acquisition environment, and that is driving growth above the long-term 50 to 100 basis points that you've talked to. Is that something we should continue to expect, or are changes to the ERP rollout and potentially some pushout of some CapEx, is that going to affect your acquisitional strategy in any way?

It should not affect it. The types of deals that we discuss and that we've been talking a lot about this year are kind of our pipeline deals. They are small enough to where they can be fairly easily integrated into the system. We are not really concerned about an ERP rollout with those types of transactions.

And as far as CapEx, we actually -- when we talk about CapEx, that is kind of a separate line item; it does not include acquisitions themselves. So we still intend to -- I'm sure next year, we will probably be giving guidance that at least 1% is our goal and our target as we go forward. We'll update you to make sure that -- what our guidance is going to be. But I think we've built a robust enough pipeline to feel good about maintaining that kind of 1% plus range for the foreseeable future.

Okay. Great. Thank you.

Erin Lash, MorningStar.

Thank you for taking my question. Most of my questions have been answered asked and answered, but I was wondering if you could talk about the marketing relationship that you've had with Chef Robert Irvine and The Food Network in general, and maybe any additional thoughts as to the traction that you are seeing from those efforts or any additional opportunities you see from leveraging that relationship.

So we've just completed our first season with The Food Network and with Chef Irvine. As those of you came to CAGNY, he is a very compelling speaker and very enthusiastic supporter of Sysco.

We've had very good response. The goal here going in was to create greater brand identity in terms of the corporate brand. Our research told us that 70% -- a little over 70% of our customers actually watch the Food Network in search of ideas to help them run their business better. He has this show, Restaurant Impossible, that goes out and, frankly, does what we try to do in a different way, which is to help our customers be more successful in their business.

So that whole partnership is off to a very good start. It has created some good will, I guess, for lack of a better term, with our sales force, and at a time when we are throwing a lot of change at our sales force. We've talked a lot about the market this morning, so it has been difficult out there on the street. So very well-received there.

He has done some in-person functions in different locales that we are located in, and it has just created tremendous enthusiasm and tremendous goodwill, and we do believe that it is resonating with our customer base. So it is still early, but we are very excited about the relationship and hope to continue and grow it.

Thank you very much.

With that, it appears there are no further questions. I'd like to conclude the conference today and thank you, everyone, for your participation.