西斯柯 (SYY) 2013 Q4 法說會逐字稿

Good morning and welcome to Sysco's fourth 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, sir.

Thank you, operator, and good morning, everyone. Welcome to Sysco's fourth quarter and fiscal 2013 earnings call. Today, you will hear prepared remarks from Bill DeLaney, our President and Chief Executive Officer, and Chris Kreidler, our Chief Financial Officer.

Before we begin, please note the 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 news release issued earlier this morning, which is posted in the Investors section at Sysco.com and can be found on the Sysco IR app, which can be downloaded from the iTunes App Store and Google Play.

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 volumes include total Broadline and SYGMA combined.

Lastly, so that we ensure we have sufficient time to answer all questions, we would like to ask each participant to limit their time today to one question and one follow-up.

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, and thank you for joining us today. Sysco's financial results announced this morning reflect a year that has both produced several significant successes and provided us with many challenges. While we have seen a slow and steady economic recovery, it is clear that the food service industry as a whole has not fully participated in that recovery.

At the same time, we are driving a much-needed transformational change throughout Sysco. This change is broad in scope, will permit us to enhance the products and services we provide our customers and will allow us to build upon our industry-leading position for years to come. Successfully implementing change of this large scale requires strong leadership, substantial effort by our associates and, more often than we would like, patience from our various stakeholders.

Starting with the market, it is clear that certain elements of the overall economy appear to be recovering. Consumer confidence is near its highest level since 2008, housing sales and prices have consistently improved this year and unemployment levels are declining. However, a deeper look at the data reveals that consumer confidence remains well off its historic highs, unemployment levels do not fully reflect the number of individuals who would like to work but have given up, and personal income is stagnant.

As a result, we believe many consumers have become much more disciplined in their spending habits and this has directly impacted our business, particularly our street business with independent food service operators. Today's consumer is more actively allocating their disposable income and eating out has been de-prioritized from some consumers' personal budgets. We believe this trend is more cyclical than structural in nature, but acknowledge that greater consumer confidence will be required to reverse it.

Reflecting these factors, this morning Sysco reported that sales for the fourth quarter increased 5% to $11.6 billion and net earnings were $283 million. EPS declined 11% to $0.47, in part due to increase cost from business transformation and restructuring items. Excluding these costs, adjusted EPS, representing our underlying business, was $0.59, declining 6% compared to the prior year.

Sales for the fiscal year were $44 billion, a record for Sysco, and net earnings were nearly $1 billion. EPS declined 12% to $1.67, which was mainly due to increased costs from business transformation, multiemployer pension plan withdrawals and restructuring. Adjusting for these costs, adjusted EPS, representing our underlying business, was $0.01 lower compared to the prior year at $2.14.

Cash flow from operations grew by 8% and free cash flow increased significantly to $1 billion.

Our sales growth for the year was driven by case volume growth of 3% and product cost inflation of 2%. Earnings growth did not meet our expectations as pricing pressures and lighter street sales growth resulted in only modest gross profit dollar gains. Helping to mitigate these pressures, we did achieve our overall targeted business transformation benefits for the year with reduced selling and administrative costs providing the most benefit.

We expect to achieve our overall targeted benefits in the new fiscal year as well.

As we close this fiscal year, it is an appropriate time to reflect on our successes as well as those areas where we need to improve. We should start with the fact that our industry is being impacted by many developing trends and realities. Growth in food service is projected to remain modest, about 1% to 2% real growth per annum. And our customers are increasingly value-focused. As a result, we expect pricing pressures will likely continue, and in addition, nontraditional competitors have become more of a factor. And lastly, consumer spending trends in our space are gradually shifting more to fresh, natural, and sustainably produced products.

We continue to focus on ways to respond to and capitalize on those trends, in our own business as well as in partnership with our customers and suppliers.

One of our most significant challenges continues to be gross margin compression. Several of the trends I noted are contributing to this challenge. In addition, our shifting customer mix in recent quarters has adversely impacted gross margin as our more value-added local and street customer business has not kept pace with our larger but lower-margin multiunit customer business.

This area has management's full attention and we expect to improve our gross margin trends as fiscal 2014 progresses by effectively implementing our category management initiative and gradually improving our street growth performance.

Another significant challenge during the year was the unanticipated delay in deploying our SAP technology platform. However, we are now making progress in developing required system enhancements. This work primarily focuses on simplifying certain processes to improve response times and to reduce system loads, which will lead to improved system stability and will also lead to improved ability to scale the system as we go forward.

We expect to restart conversions of the broad SAP rollout around the end of this calendar year at our Boise, Idaho Company. And as our system enhancements in our five SAP operating companies take hold and upon successful deployment in Boise, we would anticipate deploying additional operating company locations beginning early in calendar 2014.

Notwithstanding all these challenges, I am encouraged by several of the key successes we experienced during the past year. We grew sales at our corporate managed customers by 6% for the year, with the Broadline portion of this business up 9%. We completed acquisitions during the year of 14 companies, representing annualized sales of over $1 billion. These deals contributed significantly to our sales growth during the year and enhanced our international market presence and product capabilities.

We exceeded our targeted business transformation benefits for the year. The majority of the benefits achieved were driven by changes in our retirement programs and sales and IT organizational changes.

We are making significant progress in our category management initiative. Our pilot waves include four categories -- French fries, dressings, shrimp and tissues, towels and napkins. Three of the four categories were launched in the market in June, with the fourth, shrimp, planned to launch in the fall. Customer acceptance of the new assortments in the pilots has been encouraging. Conversion rates are running ahead of where we expected to be at this point in the process and our customers and MAs appreciate the increased variety and value offered by our new optimized assortment.

Our supplier partners are highly engaged in all phases of the process and also appreciate our approach to this initiative, in particular, our focus on building strategic partnerships which we believe deliver benefits for all parties. We and our suppliers are sharing customer insights to enhance product innovation and improve our response to customer trends. And our ability to commit volumes to our supplier partners allows them to more efficiently service the business.

As is true in all pilots, we have learned along the way and we appreciate our customers' and suppliers' engagement as we move through the process. We have a very aggressive implementation plan and will continually improve our processes as we move forward with each successive wave.

Cost per case in our Broadline business declined year-over-year, demonstrating our continuing efforts to reduce our operating cost structure. We reduced our cost in particular in our selling and administrative areas. Specifically, we aggressively drove cost-reduction initiatives in selling by implementing a Customer Relationship Management platform, or CRM, flattening our sales management organization structure, modifying compensation plans for our marketing associates, or MAs, to incentivize growth and reducing the number of unprofitable sales territories.

Some of our operating companies executed these initiatives better than others, and while we realized significant cost savings, we no doubt experienced some sales loss in certain markets as well. We believe the impact of all of these changes has now been largely absorbed and that our local sales organizations are well-positioned to accelerate growth as fiscal 2014 progresses.

We generated free cash flow during the year of $1 billion, exceeding our expectations. This was a direct result of improvements in working capital trends, as well as renewed focus on better prioritization of our capital [expense] opportunities. We will continue our work to improve our working capital metrics, as we believe there is ample opportunity to do so.

We have also made significant progress on many other individual elements of our business transformation initiatives. Specifically this year, we completed the rollout of our CRM module to all US and Canadian Broadline operating companies. We completed the rollout of the SAP maintenance module to all US Broadline locations.

We expect to complete the rollout of the SAP human resource module to all US Broadline locations by the end of the third quarter of fiscal 2014, and we expect to complete the centralization of our general ledger accounting functions for all US Broadline locations by the end of the calendar year. And we have begun implementing enhancements to our routing technology and processes to further improve delivery efficiencies and expect this initiative to be completed in fiscal 2015. Pilot locations that have completed the enhancements have experienced reductions in mileage of approximately 5%.

We increased our dividend during this past year, the 44th time since we went public in 1970. In total, we distributed nearly $650 million in dividends to our shareholders during fiscal 2013. We recognize that our dividend represents a significant component of Sysco's shareholder return, especially as we navigate through our transformational changes.

Lastly, we have strengthened our management team this year in several strategic areas throughout the Company. In addition to other key additions I have mentioned in previous calls, we recently welcomed Scott Charlton to lead our Distribution Services team and fill the vacancy left by the retirement of Fred Lankford. Scott bring significant supply chain experience from the retail grocery industry, which will greatly benefit our Company over time.

As we look forward, we will be managing our business by aligning it around several core metrics -- case growth and mix, gross profit dollar growth and cost per case. While we expect a modest level of continued gross margin compression in the year ahead, we also expect to grow both our corporate and locally-managed customer business and to once again reduce our overall cost per case.

Considering these improvements and additional benefits from our business transformation initiatives, we would expect our earnings performance trends in fiscal 2014 to gradually improve.

In closing, I would like to leave you with a few thoughts. With the support of our customers and suppliers, and through the talents and efforts of generations of committed associates, Sysco has grown into a Company that last year produced $44 billion in sales, as well as approximately $1 billion in both net earnings and free cash flow. We are proud to be the leader in the $235 billion food service industry that we participate in and take our leadership role very seriously.

We recognized a few years ago that our industry's growth rate would begin to plateau, that the industry would undergo significant changes over time and that we would need to change our business model if we were going to continue to expand our leadership position. We are currently in the midst of a multiyear business transformation that has touched nearly every part of our business -- sales, marketing, merchandising, operations, technology, finance, and business development -- in order to continue the success we have enjoyed historically.

We are making good progress on this journey, but that progress has not been as consistent as we would like and there have been setbacks along the way. Driving change at this scope of magnitude is challenging.

While a great deal of work lies ahead, I believe our strategy is sound, our execution will improve and that we are extremely well-positioned to solidify our foundation for delivering best-in-class customer service and profitable growth in the years to come. I want to thank all of our associates for their efforts this past year in supporting our customers. Their contributions are critical to fully realizing Sysco's vision to become our customers' most valued and trusted business partner.

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

Thanks, Bill, and good morning, everyone. For the fourth quarter, sales were $11.6 billion, or an increase of 5% compared to the prior year, mainly due to acquisitions, which increased sales by 2.1%, and food cost inflation, which was 2%. Case volume increased 3% for the quarter, and case volume excluding acquisitions increased 0.8%. Changes in foreign exchange rates decreased sales by 0.1%.

Gross profit in the fourth quarter increased 1.2% and gross margin declined 66 basis points. Roughly 1/4 of the gross margin decline was due to the shift in customer mix as a result of faster growth in sales to large regional and national customers. The remainder of the decline was driven by the difficult sales environment during the quarter and continued competitive pressure.

Operating expenses increased $80 million, or 5.4%, in the fourth quarter of fiscal 2013 compared to the prior-year period. This increase was driven by an $18 million increase in retirement-related expense, mainly due to higher 401(k) expenses, and an $18 million increase in business transformation expenses.

As a result of all of these factors, operating income decreased $56 million, or 10.8%.

Net earnings for the fourth quarter were $283 million, a decrease of $26 million, or 8.5%, compared to the prior year. Diluted EPS was $0.47, an 11.3% decrease compared to the prior year. Adjusting for certain items, diluted EPS was $0.50 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 excludes certain items, as well as business transformation expenses. To summarize the performance of our underlying business, adjusted operating expenses increased 4.9%, with the increase in retirement-related expense accounting for roughly 1 percentage point of the increase. Adjusted operating income decreased 7.3%. Adjusted net earnings declined 4.2%. And adjusted EPS declined 6.3% to $0.59.

Turning to the year-over-year comparison, sales increased 4.8%, or $2 billion, due mainly to inflation of 2.2% and acquisitions of 1.5%. Case volume increased 2.6%, and excluding acquisitions, case volume grew 1.3% for the year. Changes in foreign-exchange rates did not have a meaningful impact.

Gross profit increased 2.5% during the year, while gross margin decreased 39 basis points year over year to 17.7%. Approximately 1/3 of the decline was due to the shift in customer mix mentioned earlier. The remainder of decline in gross margin was due to weak restaurant traffic and competitive pressures.

Operating expenses increased $423 million, or 7.3%, in fiscal 2013 compared to fiscal 2012. The increase in operating expenses was driven by several factors. First, business transformation expenses increased $137 million. Second, certain items increased $58 million, mainly due to MEPP withdrawals and restructuring items. Third, payroll costs, excluding retirement-related expenses, increased $48 million, driven by acquisitions, increased volume and higher delivery costs, partially offset by lower IT and sales costs as a result of our business transformation initiatives.

Fourth, depreciation and amortization expense, excluding business transformation expenses, increased $36 million, due mainly to facilities and fleets put into service, as well as amortization on acquired intangible assets.

Fifth, fuel expense increased $19 million. And lastly, retirement plan expenses increased $10 million due to higher 401(k) expense, partially offset by lower pension expense following changes in the retirement programs that became effective this year.

With regards to the last point on retirement-related expenses, it is important to recall that we had previously estimated that the pension expense would have been more than $100 million higher this year. However, due to our retirement plan restructuring, actual pension expense was more than $30 million lower year-over-year. While expenses from our enhanced 401(k) plan offset this benefit somewhat, overall retirement-related expenses, which include both pension and 401(k), increased only $10 million this year.

Our operational focus on expense management resulted in good cost-per-case performance for the year. After adjusting for certain items, cost per case in our Broadline organizations declined year over year by more than $0.03, which is very difficult to do.

Operating income declined $232 million, or 12%, for the fiscal year. Excluding certain items, operating income declined 9%.

Net earnings for fiscal 2013 decreased $129 million, or 11.5% compared to the prior year. Fiscal 2013 EPS was $1.67, a decline of 12%. Excluding certain items, EPS was $1.78.

To summarize the performance of our underlying business, adjusted operating expenses increased 4.1%. Adjusted operating income decreased 1.7%. Adjusted net earnings grew 0.1%. And adjusted EPS declined 0.5% to $2.14.

Fiscal year 2013 has been a very active year for us in the acquisition arena, and as a result,. we surpassed our stated goal of increasing sales from acquisitions by one half of 1%. We completed 14 acquisitions during the year that, in the aggregate, totaled more than $1 billion in annualized sales. These acquisitions will enable us to better serve our customers, further expand our product offerings and service footprint and profitably grow our business. These transactions expanded our footprint in both current and new geographies, with six acquisitions in the US, five in Canada, two in Ireland and one in the Bahamas.

They also spanned a number of different service capabilities, with six Broadline companies being acquired, five seafood specialty companies, two produce specialty companies and one systems distributor.

Turning to the impact of the business transformation project for a moment, for the fiscal year, project expenses totaled $331 million, including $77 million in depreciation and amortization expense. We capitalized $20 million related to the project. The cash outlay on the project was $274 million, or $48 million lower than prior year. All three of these metrics -- expense, capital and cash -- were in line with the guidance we gave for the year.

As Bill mentioned, although we continue to accelerate specific functional initiatives to advance our business transformation efforts, we plan to implement enhancements to the broader SAP platform before continuing our enterprisewide rollout schedule. We expect our next conversion to occur around the end of the calendar year. Our rollout schedule beyond that time will be determined once we are able to assess the success of the additional changes and enhancements we are making to the system.

The transformation benefits achieved this year include significantly lower pension expenses, which we expect to decline even further in fiscal 2014, [and] restructuring our sales and IT organization, SG&A expenses are significantly lower than the prior year. We also enhanced compliance across the organization with existing sourcing programs. In addition, as Bill mentioned, we made substantial progress on our category management initiative and expect to see specific benefits from these efforts in fiscal 2014.

Finally, we made progress on some of our operations initiatives, including completing implementation of the SAP maintenance module, beginning the realignment of incentive plans for our driver and warehouse personnel and beginning the implementation of enhanced routing processes to reduce miles traveled.

As you will recall, we had stated that we would achieve approximately 25% of the total targeted benefits of $550 million to $650 million in the first year, fiscal 2013. We actually exceeded our targeted business transformation benefits for the year. 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.

As a result, we no longer expect to achieve our previous EPS guidance of $2.50 to $2.75 by fiscal 2015.

Turning to our cash flow performance, total capital expenditures were $512 million for fiscal 2013, in line with our guidance. We made good progress on our objective to better prioritize our capital expenditures this year, enabling us to reduce our spending by $273 million 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 and stopped capitalizing much of the expense.

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. In addition, a few construction projects moved from fiscal 2013 to fiscal 2014.

As a result of the reduction in capital spending and increase in operating cash flow, free cash flow increased more than 60% year-over-year to $1 billion. Cash flow from operations was $1.5 billion for fiscal 2013 compared to $1.4 billion in the prior year.

Now turning to fiscal 2014 guidance for a moment. Regarding our acquisition activity, we expect acquisitions to add at least 1% to our sales growth each year going forward. Due to the amount and timing of acquisitions during fiscal 2013, we will exceed this goal during fiscal 2014. We expect just the carryover effect of deals done during fiscal 2013 to add approximately 1% to fiscal 2014's sales growth. And of course we also expect to complete new transactions in fiscal 2014 which will add additional sales growth during the year.

We believe retirement-related expenses will decrease $75 million to $85 million overall in fiscal 2014 versus fiscal 2013 and $50 million to $60 million net of certain items which we recognized in fiscal 2013. As a reminder, the change in retirement-related expense includes the impact of our defined-benefit pension plan and our defined contribution or 401(k) plan.

As you will see in the chart provided in our slide presentation, the majority of the reduction in the adjusted portion of these expenses or the portion of the expenses excluding certain items will occur in the second half of fiscal 2014.

We expect fuel expense for the year to increase in the range of $10 million to $20 million. We currently have about two-thirds of our anticipated fuel needs locked in at prices lower than fiscal 2013.

We also expect to continue our trend of strong expense management in fiscal 2014, with cost per case in our Broadline companies expected to decline by $0.05, aided by the reduction in retirement-related expense.

We expect our capital expenditures in fiscal 2014 will be $550 million to $600 million, including business transformation CapEx. This is somewhat higher than our actual spend this year and the guidance we provided earlier this year because a few projects were re-prioritized and shifted from fiscal 2013 to fiscal 2014. We currently expect business transformation expenses in fiscal 2014 to be in the range of $300 million to $350 million, capital spend to be in a range of $5 million to $20 million and cash outlay to be in a range of $225 million to $275 million. All three of these ranges are consistent with our prior long-term business transformation guidance.

Lastly, we continue to expect the approximately $550 million to $650 million in annual business transformation benefits to be achieved in fiscal 2015. As mentioned earlier, we exceeded our goal of realizing approximately 25% of the total benefit during fiscal 2013. This increases our confidence in achieving our long-term guidance, which is to deliver a cumulative benefit of approximately 50% to 70% of the total targeted benefits in fiscal 2014 and 100% of those benefits in fiscal 2015.

In closing, while we have seen recent positive developments in the overall economy, the recovery continues to be modest. We believe that as a result, consumers have not yet fully recovered from the economic downturn. The food service industry is continuing to feel these effects, seen in generally low growth and strained traffic patterns. While our financial results reflect these challenges, we are working to improve on those elements of our business that we can control, including enhancing our product and service offering, improving our execution on the gross margin line, managing our costs, increasing our free cash flow, achieving our targeted business transformation benefits and addressing the requirements of our technology transformation in a prudent manner.

The work we are doing will position us to take advantage of market trends, enhance our ability to grow our market share over the long-term and expand our leadership position in the industry. With that, operator, we will now take questions.

(Operator Instructions). Edward Kelly, Credit Suisse.

Hi. Good morning, guys.

Good morning.

A couple of things for you. I was just hoping maybe we could start with the guidance, and the 2015 guidance not being valid. You know, you haven't really changed much from a business transformation standpoint, from a cost-saving standpoint. So it sounds like it is, I guess, more sort of industry-related.

When you gave the guidance, things weren't great, right? So I am just trying to figure out what the moving pieces are on the difference today, and maybe you could just sort of help us frame that.

Thanks, Ed. I will start. I will let Chris kind of get into it in a little more specific way.

Obviously, we have given that a lot of thought as well. So if you go back to the way we presented it, we had three buckets. We said A plus B equals C, and with A being a view of what we thought we could continue to grow the underlying business at steady-state. And the implied guidance there was 4% or 5% growth.

And then we had the $550 million to $650 million in cost savings, both on the operations side as well as product, with the goal being to get back to what Sysco had historically, has been as a Company that has been able to produce consistent earnings growth.

I would say this to you. Obviously, the market has been difficult, but we have had some execution challenges, as we have acknowledged here today. I think the biggest thing I would say to you is the market and just the environment itself, I think, has just proven to be a lot tougher than what we thought it was going to be. We had baked in, like I said, 4% to 5% expectation that we would be able to continue to grow the business ex the transformational cost savings, and that is not the case.

So sure, there has been a lot of distractions and a lot of change going on, but, on the one hand, it is disappointing to pull the guidance back. On the other hand, I think it reinforces the direction we are going in, which is we have to change this business model. Because if we hadn't gone down this road with business transformation in the broader sense, we probably would be looking at flat to very modest single-digit earnings growth.

So I don't want to put it all on the consumer or the economy, but clearly this market is tougher than what we anticipated at the time we put the guidance out. I will let Chris gave you his insights.

Yes, the only thing I will add is unfortunately, just math, which is, as Bill said, A plus B has to equal -- or should equal to C. We didn't expect A to be stagnant or go backwards. And so when you lose a year on three-year guidance, it just means your growth rates have to be that much higher. And when I just do the math, with everything we have got going on, we expect to do good things, we expect there to be improvement. But I don't expect to see enough improvement to overcome that first year. So as I said, we don't expect to achieve it in fiscal 2015.

Okay. And when you say sort of lose year, is that kind of how we should think about setting our expectations? I know you are not giving a number. But is it more or less kind of like a year delayed, is that how to think about it?

Ed, I am going to go with the comment you made. We are not giving a number at this point. Look, we have been at it, doing long-term projections. There is still a tremendous amount of uncertainty in what is going on out there right now. So we are not prepared at this moment to put a new set of guidance on the table.

What we said a number of years ago I think is still true today. We are trying to set this Company up for long-term, sustainable growth of a certain level. We have never really said what that level is, because we have got to get at least some way through this business transformation and know what we are capable of achieving. But the whole goal is to set us up for long-term, sustainable growth, not to hit a particular number, but to be able to grow a certain percentage or a certain amount every single year, regardless of what goes on in the market and what we are doing.

And that is where we are trying to get to. So we will -- we are reassessing what we can achieve and by when and we will certainly come out and talk about that, probably at the next Investor Day.

Ed, I would echo that. The only thing I would add to it is we have talked about 2013 being a year of transition. And as I think about it, I think you need to look at 2014 as the year that we begin to turn this thing. All right? So while we are not giving you specific guidance, I think we are signaling to you that we expect to see better trends on the top line and the bottom line. We have got our challenges certainly on the gross margin line. We have got a lot of good things going on, we think, in expense initiatives.

So we feel good about the direction. We think we will begin to turn it here this year. But to Chris's point, we need a little more time, deeper into the year, to see how we start the year out, get further along on the technology deployment and the CatMan work, and we hope to come back with you with a little better perspective here later in the year.

And if I could have just one follow-up on that, Bill. You know, thinking about gross profit per case, which I know is a metric you guys care a lot about, I mean, the best way we have to look at this -- right -- is to just look at volume growth versus gross profit dollar growth. And this quarter, we haven't seen it at this level really since we saw deflation.

So I was hoping you could just maybe talk about -- you mentioned competitive pressure in the marketplace. Talk a little bit more about that, what is going on from a pricing standpoint on your end of the new business that you are bringing in, and just how you get this to improve next year. Thank you.

Sure. So if it is okay, I am going to really combine the last two quarters, I think. So if you look at the third and fourth quarter, they were more similar than they were different. Things kind of bottomed out in February, I think, in terms of the market, from our perspective in the third quarter. Began to trend up a little bit in terms of March and April and we saw a fair amount of softness in June in terms of restaurant numbers and that kind of thing.

So again, we are talking about a very choppy market here. But the reality is we only grew our gross profit dollars 2%. So while gross profit per case is an important metric, I would say to you what I look at the most is volume and the mix of that volume, locally-managed and within that street, and then corporate managed. And then look at gross profit dollar growth. And the reality is the first half of year, we grew it over 3%; in the second half of the year, only 2% or maybe even a tad less. And then cost per case.

So all those go together, but those are three high-level metrics I would continue to look at. And as you saw, we gave you a little more color on some of those this particular earnings release.

I would say as we start out the new year, there is tremendous emphasis within the Company on that top line. I mean, you can grow your gross profit dollars in a lot of ways. So right now, we are very focused on the top line, we are focused on reenergizing our local and street sales growth, while still maintaining very strong corporate managed -- some of those -- high-volume chain business.

So we need to keep the top line going in order to leverage the business. We need to drive out category management very effectively. We are off to a good start and it is early. We have got some other things that we are working on that we think over time -- not so much this year, but in subsequent years -- can help us mitigate some of the margin pressure. And we need to continue to look at the cost structure of the Company.

So again, I think you will see gradual improvement this year. And to Chris's point and my point, I think we will create the foundation for that to become more consistent in the years to come.

Thank you.

John Heinbockel, Guggenheim.

Bill, a couple of things with regard to pricing. So it looks like things got a bit worse this quarter. Was that -- do you find your investments -- are they more proactive or reactive?

And then maybe talk a little bit about analytics and ROI, because I always hit you guys on price elasticity. It did not look like a good ROI this quarter. How can you manage that better and maybe not make some price investments that are not productive? So that is kind of a big question.

So, John, when you say ROI, you are talking about the ROI as it relates to pricing -- is that what you are getting at?

Yes, so when I think about you gave up 66 bps and what you got back for it, it doesn't look like you got back what you would like for it.

No, we didn't. I mean, that is very fair. We didn't. And again, I would just repeat what I said a moment ago, that that has not escaped us. And we thought we were beginning to make some progress, but as the quarter unfolded and June in particular, we fell back there.

So the way we are structured today, John, there is two ways to go at it. One is to continue to standardize and centralize more and more of what we are doing in terms of how we source the product, how we work through category management and how we create transfer pricing within the Company to give our operating companies and our salespeople as true a cost as we can and as competitive a cost as we can to price off of over time. Driving out these initial waves in category management will help us a great deal.

And as I just alluded to, there are some other things we just need to do over time, very early days, very early exploratory work, where we need to bring more consistency to how we price -- not take pricing -- so think about it this way. A little under half of our revenue stream is priced by our marketing associates, so they have a fair amount of latitude there. And we want that, because they are dealing with different customers at different points in time with different priorities. So we don't want to overly limit their latitude.

At the same time, if you could see what we see, which I am not going to let you see totally, there is a fair amount of volatility in that pricing that doesn't need to be there. And so I think, not so much this year, but over the next two to three years, we have an opportunity to standardize that with some things like scientific pricing -- I will use that term for today. But there is other things as well.

And so the idea would be to take some of the volatility out of the pricing, have more consistency, but still position that marketing associate to adapt to the needs of the customer locally. We don't want to move away from that because that is our bread-and-butter and that really is part of how we think we differentiate ourselves.

But no doubt about it -- tough quarter, tough couple of quarters, and we are just going to have to dig ourselves out of it. And as I mentioned in my script, I think that gradually you will see the trends improve. And look, the bottom line here is, John, is we need to do all of that and continue to grow the top line and take cost out of the business.

Do you think the MA pricing volatility, is that more them being reactionary or proactive? And how good a visibility do you think they have into their competitors' pricing?

I don't know that much about the latter certainly. Most of the accounts they call on are probably -- there is probably two or three other competitors. So certainly -- they certainly have some sense of it, depending on the items. Obviously, the more competitive items -- I don't know that it is proactive or reactive. What I am getting at is not so much the volatility with a given MA, although there is some of that. What I am talking about is the volatility -- or the variability maybe is a better word -- between MAs, between opcos, on similar items. And that just comes from having 7000 different people pricing.

So we need to strike a better balance between that variability, but still being responsive to the needs of the individual customer. And we will, but it is going to take some time.

And then lastly, on category management, do you think -- is one of the thrusts here going to be fewer SKUs, you buying -- giving more volume to certain vendors, thus your costs going down and your ability to take pricing down along with that -- is that a key thrust to you or is that secondary?

I wouldn't say it is secondary. I would say it is in tandem with a broader goal. There is different ways to go at this, and different people call category management -- or define category management in different ways. We have taken a more deliberate, what we think very thorough approach, which starts with gaining insights from our customers, from our suppliers in terms of what the needs are in the market, what the trends are in the market, and using that as an opportunity to not just eliminate SKUs, but to create new SKUs as well.

So certainly there will be a SKU reduction aspect to it, but that should be more of a benefit as opposed to a targeted goal, as we position our inventory to be more in sync with what the marketplace demands.

And then as you go through that, that should allow us to grow more effectively with our customers, bring more innovation to the work itself, address some of these trends more effectively that I mentioned in my prepared remarks. And certainly along the way, when you are able to identify those supplier partners who want to make the commitment to go down that road with you, you are able to identify shared savings that are good for both us, the supplier and the customer.

So it is all of the above, John. To do this just to save money for year or two is not enough. We need to do it -- don't get me wrong; it is part of our cost-savings initiative -- but we need to do it in a way that we can grow the business over time as well.

All right. Thank you.

Meredith Adler, Barclays.

Thanks very much. I would like to chat about cash flow. You did increase your free cash flow this year, but you also increased your spending on acquisitions, which was clearly a driver of revenues. So I am just wondering about -- one of the benefits in the fourth quarter was working capital. How long do you think that lasts? Kind of what were the drivers of the better working capital? And is that a concern at all that if you take out of free cash flow the dividend and the acquisition costs, you really were almost flat -- you were actually slightly negative, I think. So first, working capital and then the overall thoughts about cash flow.

Yes, I will start in your order. So on working capital, we did see some improvement in the fourth quarter. On a full-year basis, just looking at it year-over-year, it was actually pretty close to flat for the same type of discussion we have had before. Our trends prior to the end of the year were going in the wrong direction. Said another way, accounts receivable and inventory were going in the wrong direction and we were making up for some but not all of that with accounts payable efforts.

By the time we got to the end of the fourth quarter, we had balanced it out, and I believe working capital was a positive of only about $10 million at the end of the year. So working capital wasn't a significant driver on a year-over-year basis. And Meredith, I don't spend a tremendous amount of time looking at the quarters because there is seasonality in those numbers for working capital from one quarter to the next. But year-over-year, it was basically flat.

The second part of your question -- do I have concerns about free cash flow being able to support dividend and acquisitions. I look at it differently. Acquisitions, we are actually adding EBITDA. As we bring those acquisitions in and we integrate them with the Company or leave them as standalones, whatever they are, they generate additional cash flow, which supports additional debt, if we want to maintain the same debt-to-equity and debt ratios, if you will.

Said another way, unless we are planning to continually reduce debt over time, we actually have the ability to leverage against acquisitions. So I look at acquisitions as being something we can buy with cash, we can borrow money -- that is more of a financing discussion. That is why free cash flow doesn't take a deduction for acquisitions, because you are actually buying new cash flows into the future.

That's fair. Maybe you could just talk a little bit then about buybacks. It doesn't look like you did much this year, and you do -- not only are you buying additional EBITDA, but you are not a very leveraged Company. Is there any thought about leveraging up a bit to buy back stock?

We have and will continue to look at our capital structure to make sure that it is appropriate for where we are in our strategies, et cetera. As I said and Bill has said, as we've talked on these calls and at conferences, we expect to generate additional free cash flow. You have seen it this year. We will see it as we continue into the future. And we are constantly evaluating how we are going to put that new cash flow to work.

Our goal would be to find strategic opportunities for that cash to put it to work for future growth. Barring that, we have got to look at other options.

Okay. And I just have one sort of housekeeping question. You had an unusually large amount of other income, I believe, this quarter. Was there anything in there that was unusual or should we expect a higher run rate of other income going forward?

The only thing in there that was different, if you will, is we had an equity investment in a small company, HotSchedules, which we divested and there was a gain on that sale of I want to say $6 million, $6.5 million. Other than that, it wasn't significantly different than the run rate.

Great. Thank you very much.

Andrew Wolf, BB&T.

Good morning. I think, Bill, you mentioned that the conversion rate in the category management area was ahead of what you expected. What is driving that? Could you talk a little about that? Is it a price offer or is it sort of take it or leave it, because you are taking out SKUs? Could you just give a little color on that?

Yes, it is not take it or leave it and, again, the SKU thing is important but the SKU reduction is more of a byproduct of the overall process, which again is to find ways to grow better share savings with our suppliers and our customers. We have had some big initiatives over the years. So I think we are getting a little bit better at being more realistic early days than what our expectation should be.

So we didn't assume 100% conversion here. So what we are saying to you is early days. We are pleased with the response we are seeing with our sales force and with customers. And no, it is not take it or leave it because customers always have options.

So I think all I am saying there to you is that we are pleased, and I think it is really attributed to there is a year of work that went into this in terms of preparation, work with the suppliers, work with the customers, and in particular with our sales force and operating company.

So we are moving fast, as I said, and there is a lot to get done, but I think our team at SMS has done a great job preparing our people to drive this out, and that has showed up in the results so far.

I didn't mean to sound so much that way, because to me the conversion being above plan is actually a positive. Is it fair to say there is a lot of, I wouldn't call them quite dead SKUs, but very low productivity SKUs certainly for Sysco; and that some of the challenge is to maybe tell the customer why that might be also a low productivity SKU for the customer?

That is absolutely right. That is exactly what the deal is, Andy, and so that is kind of the opportunity that we have with each customer, whether they are street or say a big contract customer, is to sit there and go through their assortment, look at their movement, look at ours, look at these trends and these insights that we have been talking about, and then jointly make good business decisions on how they should move forward with their assortment.

And as you do that, you do it in a fairly methodical or scientific way, you identify a lot of slow-moving SKUs. You also identify believe it or not SKUs that we don't have or that the customer doesn't stock that they should be stocking, in terms of where the market place is. So it is a double-edged opportunity, so to speak.

Andrew Wolf- And just one follow-up -- I think it is more for Chris -- because, Chris, I think I heard you say there is going to be -- your plan is to have 50% to 70% of the cumulative savings you identified --

Yes.

The midrange. That seems like a pretty large variance. And what kind of unknowns are around that variance? Is it more on the execution side at Sysco or with SAP or is it more what the dynamics of the marketplace and maybe pricing and things like that.

Well, I will start with the second -- I don't know -- the first point you made. It is not SAP, because again, these initiatives do not rely upon the additional rollouts of the ERP system. We have tried to make that pretty clear.

Yes, there are some uncertainties. So first and foremost, we are expecting a lot out of our category management initiatives. So as you will recall, we have benefit in all three years from lower product costs. The first year was mainly higher compliance of sourcing. But during the first year, which we just completed, we had to ramp up all of the work that was necessary to start delivering real dollars on category management. Now, we are right into the middle of that. So we are expecting a lot out of category management.

We have a lot of assumptions in the models that support and justify what we think we are going to achieve. Now we were out executing against those. So as Bill said, early weeks look good, but we got a long way to go on that one.

We have additional operating initiatives, additional benefits that we expect to derive throughout the operational part of the organization. That is a lot of execution work, and so those are going to be the main headwinds, if you will. It's just a lot of execution work throughout the organization to get these things done and accomplished.

The first year, I don't want to say it was easy. Nothing we did the first year was easy, especially when you are starting to play around with retirement costs and things of that nature. But there were things that were vastly within our control and we could execute on them fairly quickly.

Now it is the harder stuff. It is into the trenches and doing all the down and dirty work to get the rest of the stuff done. So that is why we still have a fairly big range on that.

I will say we gained a lot of confidence in the fact that we exceeded the first-year goals. So that certainly sets us up going in with some surplus, so we feel better about hitting that range.

Very helpful. And I just want to double check my takeaway on that. I didn't hear -- you didn't talk about pricing; it was all sort of internal and execution.

So it is not like Sysco could execute fairly flawlessly, head towards the higher end of that range, and yet the market got even more competitive or stayed as competitive as it is, and some of that, let's say, in category management in particular -- or all of it -- the whole bucket, I should say, could go into the marketplace.

I am just thinking in terms of how you are thinking about things. I know obviously anything could happen, but just how you are thinking of that variance.

Ed, look I am going to go back to our A plus B equals C. I mean, the way we account for the initiatives is you kind of have to have a starting point and you have got to challenge the teams to realize their product cost savings or their operating cost savings versus that starting point, where we thought things were going to go based upon kind of trends, et cetera. And that is how we measure them.

If something goes on in the underlying business, if something goes on in the marketplace, that is definitely going to impact A. And so the overall numbers, the C part of that equation, are definitely going to be impacted as well. But the way we measure the benefits have to be off of a base case, if you will; otherwise it is a constant moving target and I have no way to talk about those -- our success in that area or our progress in that area.

So again, I am not avoiding your question at all, but B has to be measured off of a base case. The impacts you are talking about -- pricing competitiveness in the market, et cetera -- are definitely going to impact A.

Yes, I think Andy, I would just add -- and I don't want to get this thing too complicated -- they are really two different things, as Chris points out. So we are out there -- it is not just that we track it separately; we are creating the opportunity to grow and to create these product cost savings separately. We ultimately distribute those savings, the ones that -- so we share some of those with the suppliers and customers and then we keep some.

So the shared savings that we keep go out to our operating companies, but they also have a profit plan for the year as well. So they are not just going to unilaterally -- I know you are not suggesting that, but I just want to be clear -- they are not just going to let that stuff leak in, other than, to your and Chris's point, you know, competitive conditions are going to be what they are going to be.

So there is the pressure of the marketplace, which we need to continue to address in multiple ways, including enhancing our differentiation and everything else we have talked about here this morning, and then there is the savings themselves.

So the way a would look at it is I would look at these initiatives as being significant. I think that they can go on beyond the 2015. I think there is a big opportunity for Sysco, and they certainly should mitigate the pressure that we see in the marketplace.

Thank you.

John Ivankoe, JPMorgan.

Hi, thank you. I think they are related questions, and maybe, Bill, you touched on them in your prepared remarks. Firstly, could you -- you mentioned nontraditional is more of a factor than it has been. I mean, I don't know if that is being referred to like a warehouse club or an Amazon or something like that. So just kind of flesh out that statement that you made and what Sysco can do to respond to that. And then I will have a follow-up as well.

Sure, John. I think what I was doing in that part of the prepared remarks was just trying to set an overall trend line over the last few years. So certainly, we see group purchasing organizations have a bigger role over time. We work with a lot of them on contract business. To some extent, they are more involved with some of the larger street businesses today, which requires us to have a much more competitive bundle of goods and services.

Certainly the club stores and the cash-and-carry have made an impact, in particular in this type of economy over the last three or four years.

Amazon or Amazon-like business, we are certainly appropriately respectful of that channel and attempting to find ways that we might be able to participate in it. So that has not been that big of an impact to date, but it is all around us, we see it, we recognize it and we are watching it very closely. And as I said, trying to identify areas where we may be able to participate.

Certainly one of the challenges of that channel is how do you do it profitably. And with our model, that is clearly very important. So those are three examples that I would be talking about.

So it all comes back to us continuing to enhance our business model, perhaps over time finding the right type of acquisition opportunity to supplement our current capabilities.

And are most of your contract businesses that have franchise organizations on co-ops to date, or is that something that you see as a risk of increasing in overall volumes?

No, a lot of the big contract -- not a lot -- but a few of the big contract folks we work with have their own group purchasing organizations. And we will partner with some of them on the large contracts. You see a lot of that in healthcare.

What I am talking about is when it goes beyond that into some of your larger, independent type of business operators. So that is a trend that has been gradually moving over the last few years, and we combat it, but the best way to combat it, as I mentioned, is to continue to work on a very complete bundle of goods, services, pricing, all the things we are talking about.

It is really -- it is somewhat disruptive, but it is just another form of competition that is different than what we would have seen, say, eight or 10 years ago. But in the end, you end up at the same place, which is this trade-off of value and price and that type of thing.

Thank you. And I will try to ask this question delicately. Sometimes recently in the marketplace, you hear of like a certain marketing associate or group of marketing associates didn't like some of the changes at Sysco and they maybe went to one of your competitors or did something else and took some of the customers with them.

So I mean, the question is, with the changes, how stable has your marketing associate organization been? Is it more stable now than it was, for example, six months ago? And I am happy if you want to publicly correct me. I mean, to what extent has this really been kind of an issue that has been happening within the organization?

Yes, so let me give you some context. I think in a normal year, we would have about 15% turnover in marketing associates, and that is considered good and that is what you want. I somewhat delicately in my prepared remarks talked about reducing unprofitable territories. So we are down significantly more marketing associates right now year-over-year, and that has been a trend over the last 12 months. We haven't talked a lot about it publicly, because it has been gradual, and from a competitive standpoint it doesn't really make a lot of sense to talk about that stuff publicly.

But what I am -- I would acknowledge what you said. Certainly, when you lose people -- any associates, but particularly salespeople, sales managers -- and if they were to go to the competition, that does create some challenges for whatever -- three, six, nine months. Not all of them go to the competition. Some of them leave the industry as well.

So yes, what we were trying to signal there -- and I appreciate the question -- is that we initiated that change in an effort to optimize our sales force and to improve productivity. And there is a downside to that on the top line, and that is lingering here a little bit. But I think to answer your question, what I also said is we are through most of that right now. Certain operating companies dealt with it better than others, and so I think as 2014 unfolds, the sales force, sales management structure, all that is beginning to stabilize and we are in a much better place than where we were six or nine months ago to go forward.

Thank you.

Yes, sir.

Ajay Jain, Cantor Fitzgerald.

Bill, I think you indicated in the past that with all of the industry headwinds and even some of the more Company-specific challenges that you are dealing with that all of those issues further justify the investment in business transformation.

So I just want to ask maybe a variation to maybe Andy's question earlier about your confidence level on getting the projected cost savings in fiscal 2014 that are supposed to offset the continued spending. I mean, clearly pension and retirement-related expenses should be a tailwind for you. But I think the guidance you provided calls for about $200 million of incremental cost savings. So it sounds like in response to Andy's question that you are fairly confident about the cost reduction goal. But can you maybe discuss the different components of the incremental cost saves and how much of that you expect to get from procurement benefits specifically? Thanks.

I might let Chris take or dodge the second part of that. But just in general, I would agree with your initial caveat in terms of the assessment. I would say this to you. If you look at it, we called this out pretty much in our remarks the last couple of calls.

We have made very good strides on the SG&A side, for all the reasons you just cited. So pension, some of the things we have done in IT. And there has been some pain along the way with that. Our folks have done a good job rolling that out, but we have had some challenges, and our customers at times had to experience some of the downsides when you move quickly in some of those areas.

Where we didn't do a particularly good job on the expense side this year was on the operations side. Right from the get-go, transportation got away from us, and we actually backed up there in our cost per case in operations. I think that came out on one of the slides that Neil and Shannon presented here this morning.

So I think as the year goes along, the SG&A cost savings will begin to plateau out. I think you'll still see some in the early part of the year and they will begin to plateau. I think you will see -- with one exception, which is the pension that Chris talked about. So if you just look at basic SG&A ex-pension, you will see some in the early part of the year. I think that will plateau out a little bit cost per piece. I think you will see operating cost per piece begin to improve. In fact, I think it already has begun to improve from a trend standpoint, but we are still up versus a year ago. So I think that will improve as the year goes along.

And then yes, we are looking for significantly more on the product cost savings through the category management as the year goes along as well, particularly in the -- I would say the second two thirds of the year.

Okay. And I think you guys indicated that you came in ahead of your expectations for fiscal 2013 on the cost savings. Would it be possible to just confirm the actual number?

No, we are probably not going to give out the number. Let me try to handle it this way. I am not going to completely dodge your question, Ajay, but there is a slide in the presentation -- I don't know if you have actually seen it yet -- I encourage you to pull it up afterward -- it is already posted; it is slide 14. But it is an update to what we showed you at CAGNY.

And what you will see on there is we kind of put buckets for 2013, 2014 and 2015 on the savings we expected from each. And the 2013 bucket is full, and you actually see that we started filling in the 2014 bucket a little ways. And that represents kind of the overage. So if you want to take out your slide rule, maybe you can interpolate -- I am not encouraging you to do that.

But we did deliver more than we expected in 2013 and that is what we are trying to represent there. And that is why we have confidence that we will get to our range -- the midpoint, high end, wherever -- we will get within the range of our goals for 2014 as well.

We never have broken down exactly how much the benefit is going to come in each of the areas each of the years. What we did say early on is that the $600 million, half of it roughly would be in lowering cost of goods and the other half would be in lowering cost of operations. We have also said that we got ahead in our SG&A initiatives, our operating cost initiatives were slower to come. We were roughly on track with category management; frankly, fell behind a little bit at the end of 2013, mainly because the way I track those is I assume that the benefits are going to cover the direct cost of doing that. And we had some additional consulting costs that frankly we didn't cover. So we don't believe that we actually hit all of that number in 2013, which was primarily sourcing, as I said a few minutes ago, not category management.

So we have tasked them to make up some ground in 2014, and they understand that. So as Bill said, the big things for 2014 -- category management is going to deliver a lot and we are counting on that. But we also have a lot of operating initiatives that we are counting on, similar to deliver benefit.

So we talked -- or at least I talked in my opening remarks about a $0.05 cost per case reduction, which is our expectation for the year. And that is inclusive of initiatives and everything else. That is hard to do, and the way you accomplish that is first offsetting the natural cost increases that come every year, so we have got to cover those. And then also, find ways to drive that cost down.

So retirement restructuring helps us do that. And then some of the stuff that we still have left to do this year in terms of the routing efficiency and warehouse, things of that nature, that has got to continue to drive those costs down.

So I know that is not a lot of specifics for you, Ajay, but I want to keep it in context of the guidance that we have provided you in the past.

Okay. That was actually very helpful. I just had one final question around issues related to customer mix. I think you had mentioned that one aspect of the mix issue is your sort of end-market exposure to independents. But in terms of what is mostly behind the gross margin performance, it sounded like, Chris, based on your prepared comments, roughly one fourth of that decline was purely mix-related, and then the rest was impacted by underlying demand from your street account customers and based on market conditions.

So I just wanted to ask -- how much of the gross margin weakness do you think is market-share driven, loss of share to other Broadline distributors? And to the extent that you are dealing with competitive headwinds to other food service distributors, I also wanted to ask if you expect any relief on competitive pressures heading into fiscal 2014?

Ajay, you hit a nerve there. So I am going to start and then let Chris dive in.

Look, I don't think we are losing any market share to other Broadline competitors. Okay? We don't really know where the industry is at right now, but there is no reason to believe that this industry is growing the first six months of the year.

So there may be some other people, some of the nontraditional ones, that are taking share from the Broadliners as a group. But on an overall basis, I would say to you we believe we are continuing to take share.

I would acknowledge on the local and independent operators side there is some markets where we are getting beat a little bit right now. But overall, I don't think we are getting beat. And I just want to kind of get that out there before Chris cleans this up.

I don't know that I am going to touch that one now. Look, Ajay, good question. There are a lot of ways that we can cut up, chop up gross margin changes year-over-year, and some that make sense and some frankly that I don't believe do makes sense. All we are really trying to pull out now, because we are not trying to put a bunch of excuses out there, is mix. Because we continue to say mix is somewhat -- frankly, it is not one we are going to apologize for, because as long we continue to grow our business in all quadrants, we have the potential for mix reduction.

It is not that we are disappointed that we are growing in our corporate managed sales; it is that we are not going fast enough in our locally-managed sales. So we are not really apologizing for the mix; we are just kind of cutting it out so that you all know what the impact is.

I mean similarly, the acquisitions that we have done, the vast majority of them were done right around the calendar year-end. Those things typically come in at lower margins, and it takes a while for us to get them to our margins. So that is part of the impact. I am not calling it out, because I am not asking to present it as an excuse. I don't have the analytics around it. But there are things like that that impact that margin in addition to a dozen other things we could talk about, in addition to competitive pressure, et cetera, et cetera.

All we are really saying is what we were trying to -- I don't know eight quarters ago -- delineate all the different things that are impacting gross margin. Frankly, they are all in the same set of competitive pressures that we have got to continue to fight and overcome, and we are just going to call out the ones -- the one that we talked about, which is mix, which is kind of very real and that we should be able to give you more insight in as we go forward.

Great. Thank you very much.

Karen Short, Deutsche Bank.

Hi there. Just a couple questions. In terms of your comments on fiscal 2014, I think the wording was fiscal 2014 is kind of a year where things start to turn around. Is that assuming no change in the economic environment or a slight improvement? If you could just give a little bit of color there.

Well, we would hope for slight improvement. That always helps. But no, that would assume pretty much the same environment, Karen. Maybe a little bit of improvement. But what it is really geared at is we feel we have locked in some of these cost savings that Chris referenced. We recognize that we need to continue to work on the gross margin.

But we just think we are better-positioned going forward today than we have been in some time. I think the cash flow performance from last year could serve as a leading indicator of the type of progress hopefully we can make. We will see.

But bottom line is -- I know it is hard to see sometimes, when you are looking at the numbers being reported. But in this type of business, you feel things getting better before you see it, and then you see it and then it shows up in the numbers. And what we have tried to signal today's comments and Q&A is we think we can grow the top line. We have got a lot of good things going on in acquisitions. We think we are on top of our cost structure. We will continue to make strides there.

And we need to manage the margin better, and we have got good initiatives going on there to do that.

Okay. And then ,y next question is, given that you are kind of starting to get, I guess, out of the woods in terms of this SAP implementation, wondering what your appetite might be for a larger acquisition. I mean, you have obviously demonstrated this appetite for smaller ones. But as you can kind of shift gears and maybe focus your attention on something else, do you have an appetite for a larger acquisition, if it were available?

We have an appetite for larger acquisitions, the right kind of acquisitions. I would break it down into two different types. I mean, if there was an opportunity to do something say it was more adjacent or maybe different geographic markets of size, those would probably be easier for us to absorb at this point in time, if it was in our core space. I would like to see us get further down the road on both the technology deployment and the category management. But assuming that those initiatives go well here over the next six to nine months, I think we would be in a better position operationally to absorb something like that.

Okay, thanks for taking my questions.

Sure.

Mark Wiltamuth, Jefferies.

Hi, thank you. Question -- you had mentioned in the transcript there that you have seen more attention from customers asking for fresh and natural products. And how do you really address that, since you seem to be more focused on packaged and canned and products of that nature? And are you losing any share to some of the more specialty purveyors on perishables?

Hey, Mark, it's Bill. Look, this is a trend that we have seen coming for quite a while. We are doing -- just as an aside, we are doing a lot of really nice things in our sustainability work, which I will let you review that report that is out there online.

But in terms of the business itself, I would just remind everybody, we are a full Broadline distributor and we have several specialty companies -- meat, produce, imports, et cetera, et cetera. So there is really very little product out there that we can't distribute. We work very closely both with local suppliers and farmers, as we do with regional and national suppliers.

So the challenge there really in all honesty is to identify where the demand is and the volume and create enough volume to justify bringing the SKU in and the cost of distributing those SKUs. So it just comes down to essentially locking in on the right opportunity for the right customer, and there is no reason why we can't participate there.

I will acknowledge that that is an area that we maybe historically have not been as strong at, but I think you will see us continue to grow there, both through our core business, as we said, and potentially through more acquisitions as we have made in the past.

Is the challenge there that it is really a diffuse set of expectations from the customers, that you can't really hone in on a set of SKUs the works across the board?

It's multiple challenges. One is that. And I think -- but I think to me, frankly, the bigger challenge is just breaking down what do the words mean. So fresh is one thing, natural is another, local is a third. And so is local better, is it fresh, that kind of thing.

So essentially, it just comes down to really understanding the needs of the customer, why they are looking for that product and making sure we are all clear on what the advantages are. So some of these words tend to get co-mingled, but they are all very different in terms of what they mean.

So we are just trying to create as much clarity as we can with the customer, and then we can work with all types of suppliers, as I have mentioned, to be responsive there.

And on the SAP issue, what is really tied to that in terms of the cost savings? Is it accounting duplication that you will be getting rid of, or what things are gated there? Because you are hitting your marks and exceeding them on the cost savings to date, but there must be some things tied to the SAP that you are aiming at for the next couple of years for cost saves.

Yes. Once we get the full SAP platform rolled out, there will be some additional savings. Now, some of it, at least some of the savings that we originally identified, we have accelerated. The maintenance module is already out and installed, so we are accelerating that. The HR module will come out. We will accelerate that.

What is left is going to be a few areas. One, yes, financial will be one of them. There will be some additional labor savings out in the field as we consolidate more work into our shared services center. And a few other functions; there will be some ancillary savings from having that fully rolled out and being able to fully ramp up our shared services center and get the labor arbitrage that usually comes with doing that.

Okay, thank you.

And this does conclude today's conference. We appreciate your participation.