西斯柯 (SYY) 2014 Q1 法說會逐字稿

Good morning, everyone, and welcome to Sysco's first-quarter fiscal 2014 conference call. As a reminder, today's call is being recorded. For opening remarks and introductions I will turn the call over to Mr. Neil Russell, Vice President of Investor Relations. Please go ahead, sir.

Good morning, everyone, and welcome to Sysco's first-quarter fiscal 2014 earnings call. Today you will hear remarks 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 29, 2013, 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 be 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 that we have sufficient time to answer 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.

Thanks, Neil, and hello, everyone. Thank you for joining us today.

This morning Sysco reported record first-quarter sales of $11.7 billion, net earnings of $286 million, and EPS of $0.48. Adjusting for certain items, such as severance and facility consolidations, adjusted EPS was $0.49, which was flat compared to the prior year.

Market conditions remain very challenging for our customers throughout the quarter as consumers continue to spend their disposable income in an increasingly disciplined manner and to some degree shift their spending to more durable goods. While these trends are not favorable to the food service industry, we are hopeful that they will begin to abate as we approach the new calendar year and beyond.

Notwithstanding the challenging market conditions, we grew our sales for the quarter by nearly 6% over the prior year with approximately two-thirds of that growth coming in the form of case volume growth. Earnings were generally in line with our expectations as strong expense management helped to offset the impact of sluggish gross profit dollar gains. We continue to drive solid growth with our large national and regional customer base, while sales growth with our locally-managed customers remained soft.

We also made good progress on several of our enterprisewide business transformation cost reduction initiatives, which contributed to a significant reduction in cost per case in our Broadline operations compared to last year's first quarter.

Turning to our technology transformation, during the quarter we installed a major scheduled update to the system which favorably impacted all five of our SAP-enabled operating companies. Following the implementation of these performance and functional enhancements, we generally have experienced improved performance and stability in the technology.

Encouraged by this progress, we remain scheduled to resume our deployment rollout next week at our Boise, Idaho operating company. Assuming the results in Boise are favorable and that we continue to make consistent strides in improving the overall technology platform, our plan is to carry out additional conversions beginning early in the new calendar year.

We are also pleased with the progress we have made to date on our category management initiative. We are moving forward with the process, building our capabilities, and focusing on driving a new assortment based upon consumer and customer insights. The four pilot categories representing approximately $1 billion in total annual spend went live this past summer and we have begun to launch additional categories in wave one, which will encompass approximately $4 billion in aggregate annual spend once it is fully rolled out.

While results vary somewhat amongst the categories and between our operating companies, both customer conversion rates and product cost savings opportunities have generally been in line with our expectations. As expected, we have encountered some challenges in marketing the enhanced value of the new product assortment to certain customers. As a result, we are taking steps to improve our conversion processes so as to provide our customers with a more rewarding experience as we work through the assortment changes together.

Specifically, we are enhancing our product and supplier selection process on the front end by working with our vendor partners and sharing best practices from our most successful operating companies and adjusting the rollout calendar where execution risk warrants. We remain confident in both the benefits that category management will provide our customers and the savings we will realize over the next few years. Accordingly, wave two is in the early stages of implementation and is expected to launch during the second half of our fiscal year.

In closing, while the market environment is still very challenging for many of our customers, especially those who operate in the casual dining restaurant segment, we remain focused on the following -- creating greater value for our customers, delivering our annual business plan, and driving transformational change within our company. In so doing we expect to provide improved financial results in fiscal 2014 and we expect that year-over-year improvement will gradually build and be more pronounced in the second half of the current fiscal year.

Reflecting on the amount of necessary change we are driving in the midst of a difficult market environment, we are most appreciative of the support and partnership we received from approximately 425,000 customers and our more than 10,000 suppliers, as well as the tremendous commitment and contributions our 48,000 associates provide each and every day.

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

Thanks, Bill, and good morning, everyone. For the first quarter sales were $11.7 billion for an increase of 5.7% compared to the prior year, mainly due to acquisitions which increased sales by 2.3% and food cost inflation which was 2.1%. Case volume increased 4.1% for the quarter and case volume, excluding acquisitions, increased 1.8%. Changes in foreign exchange rates decreased sales by 0.5%.

Gross profit in the first quarter increased 1.8% and gross margin declined 68 basis points to 17.63%, due mainly to continued weakness in locally-managed sales, a difficult business environment, and competitive pressure. In addition, sales to large regional and national customers are growing faster than local business and this mix shift drove about 15% to 20% of the gross margin decline during the quarter.

Operating expenses increased $36 million, or 2.3%, in the first quarter of fiscal 2014 compared to the prior-year period. Excluding the impact of operating expenses from acquired companies, adjusted operating expenses were flat compared to the prior year. This was achieved as a result of benefits from our business transformation initiatives as well as lower business transformation expenses.

Business transformation expenses were lower in the first quarter by $11 million due mainly to lower spending on third-party contractor expenses. As deployment begins to ramp back up in the second quarter and throughout the remainder of the fiscal year, expenses are expected to be similar to the prior year. As a result, we continue to expect total business transformation expenses for the year to be in the $300 million to $350 million range.

Similar to last year, we continue to see business transformation benefits driving down operating expenses. As a result, payroll in our sales and IT departments are once again lower than the prior year, down more than $20 million combined, as are retirement-related expenses.

I would like to provide some additional insight on our projected retirement-related expense trends for the remainder of the year. We recorded a net $9 million decline in retirement-related expense for the quarter. This was the result of a $32 million decline in pension expense partially offset by a $23 million increase in 401(k) expense.

As a reminder, retirement-related expenses in the first quarter and for the remainder of the fiscal year are being impacted by the timing of changes in our retirement plan benefits implemented midyear last year, as well as by the timing of certain related restructuring items that were recognized last year. We have provided a chart in our slide presentation showing our projections of the year-over-year impact of each of these items. As you will see, we continue to expect adjusted retirement-related expense for the year to be lower by $50 million to $60 million with the majority of that decline occurring in the second half of the year.

As a result of the benefits generated from our transformation initiatives, cost per case performance in our Broadline operations was significantly better than last year for the first quarter, declining $0.09 per case compared to the prior year. We don't anticipate maintaining this rate of improvement as we lap the point at which we began some of these initiatives last year, but we remain confident in meeting our objective of a $0.05 decline for the full fiscal year.

So in spite of relatively weak gross profit growth, the progress we continue to make towards our cost reduction initiatives resulted in operating income being essentially flat year over year. Net earnings for the first quarter were $286 million, a decrease of $1 million, or 0.4%, compared to the prior year.

Diluted EPS was $0.48, a $0.02 decrease compared to the prior year. Adjusting for certain items, which mainly related to restructuring items, diluted EPS for the quarter was $0.49.

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 3.5%, adjusted operating (technical difficulty) decreased 2.7%, and adjusted net earnings declined 3.1%, and adjusted EPS declined 3.4% to $0.56.

Turning to the impact of the business transformation project for a moment. In the first quarter project expenses totaled $67 million and we capitalized $4 million related to the project. In the prior-year quarter project expenses totaled $78 million and we capitalized $8 million related to the project.

Free cash flow was $44 million for the first quarter, slightly lower than the prior year, mainly due to working capital performance. The first half of the year and the first quarter in particular are our weakest cash flow quarters and a year-over-year decline is not surprising. Capital expenditures totaled $136 million for the first quarter of this year compared to $156 million last year.

In closing, while the challenging business environment and the food service industry continues to impact our customers and our business, we are focused on those areas of our business that we can control and are encouraged by our progress in growing our business, controlling expenses, and achieving our business transformation goals.

With that, operator, we will now take questions.

(Operator Instructions) Karen Short, Deutsche Bank.

Thanks for taking my question. Just looking at case volume in general, it sounds like case volume in street accounts is very limited or low or potentially even negative. So I guess maybe can you talk a little bit about what you think that is a function of?

Is it maybe a function of headcount reduction [in MAs], or just base level attrition at the street level with your customers, or maybe some response to your waves of FTE reductions? Any color there?

Karen, I think you answered most of your question right there, but, yes, I will take a shot at it. I think, clearly, this macro environment continues to be difficult for our customers. We mentioned the casual dining segment so that is a big part of our street business, more so than maybe on the big contract side. So I think there is a macro aspect to that.

Certainly we are driving a lot of changes we have referenced here for several quarters, and anytime you drive change you do have to drive it through your sales organization. And our folks have had to deal with a lot of that over the last 12 to 15 months. Now we are getting the benefit of it on the cost side, but it has somewhat probably hurt us a little bit on the top line. It is hard for me to tell.

And really the SKU thing you can get different pieces of feedback on that. I don't think it is as much the SKU issue as it is just the amount of change and to some extent, as we have eliminated some territories, customers are dealing with different MAs and that type of thing.

So I think there is a little bit on the macro, somewhat on the inside, internal if you will, I would say largely to be expected. We just need to work through it as fast and as well as we can.

And I would just tell you the competitive environment, in particular on the street business, remains very acute. We need to fight to keep the cases that we have and to grow those cases.

So there is a never-ending balance here across the different markets and the different operating companies and that trade-off between retaining and growing business and pricing. We continue to try to do that as well as we can. Obviously, it is a challenge right now.

Okay, thanks. That is helpful. Just a question on categories in terms of wave one and two.

How many categories is it going to address? I know you gave dollar amounts, but how many categories and if you could give any color on what categories.

Yes, I don't think we have a finite number of categories. We continue to look, for example, at the rollout calendar. It was pretty aggressive on the front end. We have made some modest adjustments, so that could ultimately end up with maybe a couple more waves, if you will, than what we initially intended.

But I think to put it in perspective, we buy a little over $30 billion worth of product and the pilot we said was about $1 billion and wave one was $4 billion. But wave two would be less than that, so I think we are getting to where it is a significant piece. By the end of the year it will be a significant piece of our overall purchasing.

Okay, thanks. That is helpful.

Mark Wiltamuth, Jefferies.

Good morning. Wanted to dig in a little bit more on the gross margin decline of 68 basis points. You talked a little bit about mix, but maybe you could give us some other factors that played into that decline, because we have now had a couple quarters in the mid-60s or 60 or higher on basis point decline.

Mark, so mix is a part of it. I think Chris mentioned it is about 25% of that reduction. The rest of it is pretty much what I was discussing there with Karen.

We have got a very competitive environment out there and we do a lot of business. It's a volume-driven business; we are the leader by far. And the most profitable business we have is the business that we are already transacting. So we are fighting very hard to hold on to those cases and we are doing a reasonable job of that, as I said, in a challenging environment.

With that said there is things that we can do and execute better. There is some variability as we have called out over the last two or three calls between operating companies and how well we are executing, and we are trying to provide the right level of support to get more consistency in our performance there. So there is opportunity for us in the short to medium term to manage the margin better and still grow the business and take care of our customers. And that is what we intend to do.

What do you mean by locally-managed business was under more pressure on margin? Does that mean more street account margin pressure than the rest of the business?

Yes, so let me address the terminology. Over the years, and it is still relevant -- we have talked about contract and street, but as we evolve here and as our organization structure evolves we are trying to be a little more clear on where the larger amount of the accountability goes in terms of growth.

And so our operating companies pretty much control 60% to 70% of their revenue stream on average. The bulk of that is street business, but there is also contract business locally. So when I speak of locally-managed business it is what is largely manage at the operating company level, the majority being street, but there is some good percentage of local contract as well.

The rest of it we refer to it as corporate managed, and that is our big national and large regional multiunit customers.

It sounds like that segment is where you have been getting more of your wins lately, the corporate managed business; is that right?

Yes, I mean there is pressure in that segment as well, but we have done a nice job leveraging our scale there and those customers see that as a big competitive advantage for them. So we have had some good success there actually over the last two, two-and-a-half years.

And the locally managed pressure, is that just reaction to the difficult operating environment or is it kind of planned attacks to gain share in some places?

I think it is a combination of all of that. I don't think there is a lot of growth right now on the street. We will update the data here as we get into the calendar year and so I think that results in more of the same that we have seen the last two, three years. When there is not a lot of growth that creates a lot of acute pressure on the street and that type of business, and there is a lot more people trying to do what we are trying to do, which is hold their business and grow it.

Okay, thank you.

John Heinbockel, Guggenheim.

So a couple of things. Bill, you said in the five SAP-enabled companies performance has significantly improved. So with respect to that, what has improved? And then is it just operating performance or actually is there a financial performance at those five companies that is meaningfully improved?

John, when I speak to the favorable results that we are seeing there and the improvement we are seeing it is more about the platform itself. We see more stability with it. We are utilizing the hardware better. Some of the issues we have had with replenishment and service levels those have begun to improve as well.

It is not as consistent in terms of the trend lines as we would like to see, but it is definitely better than where we were. So it is more on the operating side than on the hardware utilization itself, and it is encouraging.

Should that directly translate to financial performance, or is there a fair bit of a lag between when that would happen?

There is still more of a lag than what we would like to see, which is why we took this pause here to go in and basically dedicate all of our resources to enhancing the underlying system itself. So, yes, it should do it. It obviously needs to and we just need that dip to be more shallow and last not as long.

We are not there yet, but we are feeling more confident in terms of the strides we have made. And that is why you hear us talking about beginning deployments again with our company in Idaho this month. Then, hopefully, more than that as we get into the new year.

Let me ask on gross margin; so if you take mix out, maybe you are down 50 bps, give or take. How do you guys analytically look at the ROIC of that and the elasticity of that?

I guess if you had spent less than the 50 bps would case volume be significantly worse? It's a balance, but how do you analytically think about the balance whether you're getting a decent return for the 50?

I think, John, you have been very consistent on that question and actually I'm getting a little more perspective on the elasticity as we go through this over the last year, year-and-a-half. But I would say certainly we are conscious of ROIC, but we tend to look at that more at the operating unit level and obviously the enterprise level.

We look at the profitability of the accounts. We look at growth. Ours is a business that is driven on growth. We invest in the business; we utilize our scale. We see that as a very big, competitive advantage, both on the operations side and on the sales and marketing side, both without big contract customers and locally.

So our fundamental belief is that we need to grow this business. Now we need to grow it profitably, but our customers are all profitable. It's a matter of are they as profitable as they were a year ago, and we look at that.

I would tell you a year, a year-and-a-half into trying to get better answers to your question on elasticity I would say it's -- I don't think I can tell you that we would have had more GP dollars if we had had higher margins let's say. As you look at it by market or opco it is a function of our leadership and our execution. It is a function of the support we are able to give them here from corporate with all the initiative work that we are doing.

And it is a little bit of a function geographically on how healthy those markets are. For example, the Southwest and Texas we are able to grow the business here a little better. I think the underlying markets are somewhat better. Middle part of the country more difficult.

Lastly, the acquisition pipeline. Do you think, based on what you see today, that you will be -- again, we are going to lap some of the acquisitions you did last year. But if you sort of think about what you might bring online new over the next nine to 12 months do you think that will likely be in the 1% to 2% range contribution to sales, or do you think it is less than that?

John, this is Chris with a bit of a weak voice today, I apologize. What we said is we plan to grow at least 1% every year. We have got a lot of carryover from the deals we did last year, the annualization of what we last year which is going to give us 1% just on carryover.

So if we do our normal 1%, of which we will get about 0.5 point benefit this year, plus the point carryover, we will be in that 1.5% range. That is kind of our target for this year and then going forward we still plan to do at least 1% a year. We have still got a very robust pipeline. The first quarter always seems to be a little bit weak, but we are pretty pleased with the progress we continue to make on the acquisition front.

Okay, thanks.

Edward Kelly, Credit Suisse.

Thanks, good morning, guys. Bill, not to beat a dead horse here, but I want to start with a follow-up on gross profit. And let's think about gross profit per case, I guess.

How much of the pressure that you are seeing right now is from new business pricing or is it renewals of existing contracts?

Ed, are you just asking about the contract business or are you asking about all?

No, your whole business. How much of it is pressure on existing customers versus going out and trying to win new customers?

I would say it is more on the existing customers. They are all looking to find ways to save money and run their businesses better. As we have alluded to here and spoken to, the environment for many of our customers, especially on the restaurant and casual dining side, remains very challenging. So we are always in conversations, whether it is street business or larger chain business, trying to find ways to share savings and to provide them more value.

So given the math it's definitely more on the existing business. We could be doing better on the new business, I will tell that, so I think that is a left-handed way kind of a testimony to the fact that we are not just chasing business to get a top line. I would like to see our new business numbers be a little bit higher right now and I expect that they will pick up here as things start to stabilize with the sales force, but I would have to say it is mostly on the existing business.

Okay. Then just on gross profit per case generally, obviously it is a little weak right now. It sounds like you expect it to get better as the year progresses. So, first, I guess is that true?

And do you think you can get back to the point at some time this year where you have flattish to maybe modestly positive gross profit dollars per case?

We tend to speak about gross profit more in terms of percentages, so I'm going to leave it there. I will say this; we need to improve. I think that is clear.

If you look at the quarter, the way I would characterize the quarter is the top-line number was good. We would have liked to have seen a better number on the locally-managed street business than what we saw, and that drives some of the margin as well. So we need to do better there. I don't that we can get all the way back to flat by the end of the year, but certainly we can -- I feel like we can make some improvements and we need to.

The good news here is that the cost per case, we are seeing the benefits of a lot of the initiatives we have undertaken here over the last 12 to 15 months and there is more to come there. They do go together at some point, especially on your big contract business. As that business grows somewhat faster than your street, you need to see lower cost per case than your expenses, because that is part of the economics on how you go after that business.

So our target is to obviously improve the gross margin performance. I am probably not prepared today to tell you we are going to get back to flat.

All right. Then just last question for you; category management. Can you just maybe provide a little bit of color on what your clients actually are saying at this point -- specific pushback, how you are adjusting to that?

And then as you think about what you have rolled out so far, what has been the sales and the gross profit dollar impact so far on those categories?

I would say generally two things. One is the customers have been incredibly supportive. They are looking at this with an open mind. Our salesforce is -- they have got a lot coming at them. They have done a nice job in our sales management.

We have done, I think, a very good job bulking up and strengthening our merchandising team throughout the Company, but especially here at corporate. We put a lot of planning, a lot of thought into this. So we have learned a lot over the last three years from big initiatives that there is things we need to do in terms of bringing folks in and better preparation, better communication.

With all that said we can still communicate better between here and our operating companies. There is probably some process improvements in terms of how we manage the conversions at the operating company level that we need to get better consistency on amongst the different companies. And that is an opportunity, obviously, for us to work better with them.

The suppliers give us good feedback, as we get into some of the individual categories, on which ones would be more complicated than others. That type of thing. So right now I would just say to you that from a process standpoint we are about where we thought we would be.

We are doing fine on the conversions, but the reality is it somewhat depends on the category and it depends on the customer. It depends how good a job we did in terms of comping the specs on the individual items. And so it is a one-on-one conversation with each and every customer.

We are just trying to strike the right balance between moving forward and doing the right thing for the customer, but also the right thing for our economics. At times we probably have moved a little too fast there and we just need to be a little bit more patient at times and give our people a little more support to do that.

But all-in-all I am pleased with where we are at. It is a big initiative, and as I said in the prepared remarks, we still feel very good about going forward.

Okay, thank you.

Michael Kelter, Goldman Sachs.

Good morning, this is Ivan Holman sitting in for Michael. I was hoping to dig into the guidance a little bit.

You mentioned that you expected trends to improve and profitability to build as 2014 continues. And since there are a lot of moving pieces, I was wondering is that predicated on an improvement in a macro? And excluding an improvement in the macro, do you still think that you can continue to build there through the initiatives that you are rolling out?

Yes, it is predicated on some improvement in the macro. If you recall, if you look at our year last year on a relative basis, the first half of the year was much stronger than the second half of the year. So there is some presumption there that the macro will gradually improve, but we're not waiting on that. So it's hard for me to gauge how much improvement we will make with our without the macro.

We certainly expect to grow the business. If the macro improves we will grow it a little bit more. We expect that we will continue to make strides on margin and cost management.

I think the components of the improvement on cost control will change over the course of the year, and Chris can take you through that a little bit. But the bottom line here is we expect to improve and certainly an improving macro would give us more confidence.

Great, thank you. Just a quick follow-up. With regards to acquisitions, can you just help us understand from a process perspective -- given the erosion in gross margins from the mix shift towards the locally-managed business, can you help us understand when you are looking at acquisitions if there are any constraints around that in terms of decisions to grow the top line but perhaps at the expense of gross margin, and how you view the evolution of the business as you look at acquisitions on a go-forward basis? Thank you very much.

Let me say this, the way we look at acquisitions is we are looking for opportunities to bring businesses in as a company that will help up grow. That may be geographic; it may be a product category. It may not be necessarily a top-line opportunity; it could be a consolidation play. So it just depends on the specific opportunity we are looking at.

If you look at our acquisitions over the last year-and-a-half or two years, we have done all of that. We bought a company up in western Minnesota, which, believe it or not, gave us some green space up there. Even though we are in Minnesota, we are in North Dakota we have got some specialty product companies, European Imports comes to mind, and we have entered into some new geographies -- in Quebec, in the Bahamas, and Ireland.

So we look at everything there and certainly it's -- as you look forward it is certainly a meaningful part of how we expect to grow the top line, but in the end it needs to be profitable as well. Chris, you want to add anything to that?

Yes, I am not sure we fully understood the premise of your question, but I think Bill's explanation is good. We do all sorts of different types of acquisitions. Generally, the margins that we see in the Company before we acquire it are lower than our own margins, and so it might be a bit dilutive when we first merge it in with our existing business. But then that yields the opportunities that we have with these acquisitions to put them into our buying programs to enhance their performance, especially if it is a fold-in, and get cost savings out of it.

So we might see a bit of a dilution initially, but then we see the synergies, if you will, as we operate it for a period of time and bring it into the fold. So we believe, especially these smaller acquisitions that we have been doing -- they are not all tiny. But small and medium-size acquisitions are very beneficial to us, both in growing the top line but also in continuing to enhance our profitability over time.

Great. Thank you very much.

Meredith Adler, Barclays.

Thanks for taking my question. I would like to kind of connect two things you have been talking about and we will see if there is a connection. You were talking about category management and maybe you got some pushback from some customers.

Do think there is any relationship with pricing? You did say pricing to existing customers had come down. Is there any relationship between that and your category management efforts, or is it separate?

Meredith, I think what I acknowledged is that we can do better on gross margins and we are working hard on that. I would say, on [cat man] in particular, the type of conversations we are having with customers would be generally expected. When you are sitting there talking to them about in certain instances changing out an item, I wouldn't call it so much pushback as it is just people want to know why it is good for them and that type of thing.

I would say overall in terms of the profitability on the [cat man] it has been as good or better than we expect. So that really hasn't been the issue there; it is just we need to do it in the right way to sustain the growth that comes from that. The way we are approaching category management is clearly we need to realize the growth savings and invest in that in the right way and create the net savings we have spoken about.

But our whole goal here is to do this in a way -- and we are doing it in a very well thought out way -- to sustain growth over the next two or three years as well and hopefully accelerate growth. So it is more of a growth issue than it is a profitability issue I would say.

Okay. Then I have a question about marketing associates. I think you mentioned that there have been some declines.

Could you just spell out -- I know you had done some layoffs or allowed attrition to happen. Have you also had some defections? And would you say that whatever impact that has on sales is behind you or will there be some future spillover effect?

Yes, if you go back -- let's go back 15 months. And so as we started rolling out a lot of these initiatives on the sales side we had several key initiatives. We implemented CRM tool across the company. We looked at creating more consistent pay plan across the Company; different variables with more consistency in terms of how the commission grid works.

We flattened the sales organization. Where it made sense, we tried to take layers out or at least make sure that our best and most talented sales associates and sales management are as close to the customer as possible. And we looked at nonprofitable territory. So yes, we are down in terms of territories year-over-year.

That rate of decline has plateaued out to some extent and I would say this; part of it was very conscious, part of it we have lost a handful or two of people in management, probably that we wouldn't have wanted to have lost. And I am sure we have lost some MAs that we wouldn't have wanted to lose. And when we didn't execute well in a few companies, we lost more people than I would have liked to have seen us do.

But all in all, for something of that magnitude, I think we have executed reasonably well. And to your last question, yes, things have begun to stabilize. The change that Sysco is going through today, becoming much more customer centric and we are having to accept the fact that change is perpetual. So it is not like the sales force isn't going to have change going forward. It is not like customers are not going to see some change.

The degree of change I think has stabilized, and I think we will see some improvement there as people get more confident in the new organization structure and what their roles are and that type of thing. So absolutely in a better place from that standpoint than we were a year ago.

I would just like to throw in one more question. This quarter you did buy back stock, and it looked like you were a net borrower to buy that stock. I was just wondering, I kind of went back and looked and it seems like the share count went down a bit more than it has recently. Is there anything in that; is that a part of a plan or just worked out that way?

Meredith, this is Chris. It is no change in our strategy, just to be candid and upfront about it. We typically, periodically every quarter we look at what is the expected dilution from options, issuance options, exercises, etc. We try to look as far ahead as possible, and then we try to put in place a plan to offset that with stock repurchases.

We got a bit ahead in the first quarter due to pricing and due to some modeling that we did, and so that is what you see is a pretty strong first quarter. Depending on where the stock goes and what happens with option exercises will determine whether we continue to buy at a similar clip or a much less clip, but it is not a change in strategy.

Okay, great. Thank you very much.

Andrew Wolf, BB&T Capital Markets.

Thank you, good morning. Chris, you mentioned -- I just want to make sure you said the cost per case was $0.09 lower this quarter, but you expect $0.05 for the year.

That's correct.

And could you just kind of give me more information about that? It seems like a really strong number this quarter. Is that all having to do with hiring in the warehouse or in other parts of the Company?

As we have talked about over the last couple of quarters, I think we are starting to give a little more insight into the amounts and the magnitudes. It is really a continuation of the initiatives that we began last year, so we saw significant decline in our sales cost per case offset by some increases on the warehouse and driver side.

And so what we are really saying is as -- well, first, we put out guidance for the year that we expect to be down $0.05 a case. The first quarter we are down pretty heavily, but we are going to wrap that as we get into the latter half of the year because we started some of those initiatives in the latter half of last year. So as we wrap it we won't see as much of a decline.

We are very confident we will see our $0.05 a case for the year and I hope we will do better than that. Then we have got to continue with additional initiatives to continue to drive down that cost per case as much as we can. First, offset any increases that are somewhat natural year to year and, secondly, hopefully actually drive down the absolute number.

And is any of the overhead cost reduction part of that, like the lower pension expense, or is it all sort of variable cost?

It is, Andy, and the reason I don't call it out is it is multiple line items. When we talk about the retirement-related expenses on a cost per case basis they hit the sales line; they hit the operations line. They hit multiple lines because it is a labor expense, but, yes, that is part of the decline in multiple areas.

Just wanted to understand it, because the variance was -- it's big numbers. Second, on the table in the release that has the MA sales as a percent of Broadline, the year-ago figure is almost 90 bps or so lower than was in the press release a year ago. Is that a number that gets routinely adjusted, or is that in any way related to the re-class?

Andy, to be honest, I didn't look at it. I don't think it would be related to a re-class. We will take a look at that and come back to you with an answer. I don't know the answer of the top of my head.

I appreciate it. The reason I asked that is if it is adjusted they way -- if I were to carry through the same 90 bps change, it would actually look like your MA serve business as a mix -- on a mix basis actually kind of improved from the fourth quarter. But that doesn't sound like what you all are saying.

That should not be the implication you get from that, so let us check.

All right, that was it for me. Thank you.

(Operator Instructions) John Ivankoe, JPMorgan.

Great, thank you. It seems like with the gross margin decline that it almost feels like there is a war of attrition that is out there in the overall marketplace with everyone having to take gross margin down because the next person is and what have you.

So I mean could you kind of comment, if that is something that is happening, who you might be losing share to on the street account basis? I know it is a very hard question to answer, but how long, if you continue, how long can your competition continue to invest in price if they don't have the cash flow and the balance sheet and the margins that you have to start with?

Well, those are great questions, John. I will take a shot at it.

I would say -- I don't know if it is a war of attrition. It is just a very acute, competitive environment. I know I'm repeating myself at this point; I don't believe there actually is a lot of overall growth on the street right now.

If you are Sysco -- first of all, let me be clear, we need to do better at managing margin. We have got some things we are working on and continue to work on in the short term. And over the medium term there will be some other opportunities I think for us to mitigate some of this pressure.

But from our standpoint it does come back to scale, it does come back to looking at that in the context of expense improvements as well. We are just not going to give up cases unless we are doing something really ridiculous and in that case we will transition the business. It is not an environment where you want to give up cases.

As far as what the other guys are doing, we have acknowledged over the last couple of years that the nature of the competition continues to evolve, so we continue to have a lot of traditional competitors, large, medium, and small. I think the nature of this business is, if you are not looking to grow and expand, you can generate cash and stay in business for a while.

I think there is a fair amount of people leaving and you see that, I think, in our acquisition pipeline picking up somewhat. At the same time the barriers to entry are relatively low, so there continues to be a lot of small players out there. And then we have the nontraditional folks that I think are doing well in this type of environment -- the cash and carry and the club stores and that type of thing.

Those are all part of the environment that we are in right now. On a day-to-day basis what we are marketing is our ability to sit and work with customers and help them plan their menus better, help work with their waitstaff, manage their costs better, as they get larger in scale manage their freight better. Anything we can do to help them run their business more effectively.

So at any given point in time that is going to resonate at different levels with different customers. We think we have a clear advantage there and we certainly think that our approach strategically is the right approach. I think we are a very customer-centric model. We are very much about working closely with our customers, our suppliers, gaining better insights, operational excellence, acquisitions to grow the top line, developing our people.

But at the same time we have room for improvement and that is, I think, all I am acknowledging as well. We do need to continue to find ways to strike a better balance between growth and margin, and we will.

A little bit separately, if I may, we don't talk a lot about SYGMA on these conference calls. Is there some really big opportunity that is out there on the chain account side that maybe we haven't seen you convert in the last couple of years?

We had a pretty good run with SYGMA for about two years. We did pick up some business over the last few months and I think you saw that on the top line this quarter. When you do pick up business it can create some expense issues in transition, so we had some earnings pressure there as well.

So we have got a nice stable of customers in SYGMA and we are working very hard to continue to do good by them and to solidify those relationships and grow within those relationships. But certainly we have some key prospects out there as well. SYGMA, it is a $6 billion business. We make about 1%, but it represents a big part of the opportunity in our market and it is just important that we balance the growth there.

Okay. The final question for me, it is a quick one. What is kind of the inflation/deflation outlook as you see it maybe over the next six to 12 months?

I would say again it varies by category. Certainly your commodities are going to be up and down and that type of thing, but right now the best information we have is probably more of the same.

It's hung in there in the relatively low 2s. As I sit here this morning I don't really have anything to tell you that would cause that to go up appreciably over the next six to nine months.

The only thing that we get, which I'm sure you guys get the same reports, is there are certain categories -- beef, for example -- where you continue to see some inflation. But Bill is right, overall food prices just don't seem to be going up and the forecast is not for them to go up.

And that was actually kind of a point of the question is whether the rate of inflation could actually drop to the point where there would be almost no inflation in the model.

We are not reading that in any of the expert reports. We see that it might be a tad lower than last year on a whole, but we are not seeing anybody writing about deflation.

Okay, thank you.

Ladies and gentlemen, we thank you for your participation. This does conclude today's conference call. Have a great rest of your day.