西斯柯 (SYY) 2014 Q2 法說會逐字稿

Good morning and welcome to the Sysco second-quarter fiscal 2014 conference call. (Operator Instructions). 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, Lexi, and good morning, everyone. Thank you for joining us for Sysco's second-quarter fiscal 2014 earnings call. Today you will hear from Bill DeLaney, our President and Chief Executive Officer, and Chris Kreidler, our Chief Financial Officer.

Before we begin, please note that statements made during this presentation that state the Company's or management's intentions, beliefs, expectations or predictions of the future are forward-looking statements and actual results could differ in a material manner. Additional information that could cause results to differ from those in the forward-looking statements is contained in the Company's SEC filings. This includes but is not limited to risk factors contained in our annual report on Form 10-K for the year ended June 29, 2013, and in the news release issued earlier this morning, which is posted in the investor section at Sysco.com and can also 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 investor 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.

To ensure that 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.

Lastly, we expect to host an investor day meeting this summer in Boston. Additional information will be provided in the coming weeks.

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

Thanks, Neil. Hello, everyone, and thank you for joining us today. This morning Sysco reported second-quarter sales of $11.2 billion and net earnings of $211 million. Adjusted EPS excluding certain items was $0.40 for the quarter which was flat compared to the prior year.

Market conditions continue to be challenging for many of our customers and competitive pressure remains acute. These conditions were amplified in December by a shortened holiday shopping season and severe weather in several areas of the country. The casual dining restaurant segment was especially impacted experiencing flat year-over-year sales during the quarter as high average check amounts could only offset the impact of declining traffic.

Notwithstanding the ongoing challenging market conditions, we grew our sales 4% over the prior year in the second quarter through both case volume growth and acquisitions. We continued to drive solid growth with our large national and regional customers while our business with locally managed customers remained soft.

We are seeing reasonably strong growth with locally managed customers in our Southwest market while underlying market conditions are particularly difficult in our Northeast and Mideast markets. Operating income fell short of our expectations for the quarter. Expense management was strong once again this quarter as evidenced by cost per case in our Broadline business being significantly lower than the prior year but sluggish sales growth with our locally managed customers and ongoing gross margin pressure more than offset those gains.

We have implemented several short-term action steps and longer-term strategic initiatives to both accelerate our locally managed sales growth and mitigate the ongoing gross margin pressures that we have experienced in recent quarters. These actions are gaining traction within our Company and we are targeting gradual improvement in these areas for the balance of calendar year 2014 and beyond.

At the same time, we anticipate our expense management performance will remain solid as we make additional progress on productivity improvements and operations over the next several months while the year-over-year benefits of our SG&A cost reduction initiatives begin to plateau.

In summary, calendar year 2013 was one of the most difficult years in recent history for our industry and we struggled to leverage our sales growth. While weather conditions have been quite severe thus far this quarter, we believe that market conditions will improve modestly in calendar year 2014 and that Sysco's operating performance results will show steady improvement as well.

Turning to our technology transformation, as we discussed last quarter, our teams have invested significant effort to prepare needed updates to the SAP software to improve both stability and scalability. Last October, we implemented performance enhancements that meaningfully improved system capacity utilization as well as functional enhancements that improved order management and other processes. Encouraged by the success of these changes, we resumed our deployment rollout at our Boise, Idaho, operating company back in November.

System performance in Boise was favorable upon go live and in the weeks since and importantly, the recently implemented system enhancements have successfully addressed challenges that had previously impacted our large regional and national contract customers. This success provided us the confidence to convert two additional locations, Phoenix and Las Vegas, at the end of January.

These deployments are an important test of both the stability of our SAP solution and our ability to successfully deploy multiple larger size opcos simultaneously.

While we are pleased with our progress over the last year, we are working hard to further optimize our SAP solution in the days ahead. In February, additional updates are scheduled to be implemented that are intended to further improve system stability and scalability. These changes include simplification of the dynamic pricing and purchase order processes.

While we continue to monitor progress in the eight facilities now live on the SAP platform as well as performance following the enhancements scheduled to take place later this month -- excuse me, let me say that again.

While we continue to monitor progress on the eight facilities now live on the SAP platform as well as performance following the enhancements scheduled to take place later this month, depending upon success of these next important steps, we would expect to launch two additional facilities by the end of the fiscal year.

We also continue to move forward with our category management initiative. The majority of wave one categories have now been launched and we expect the wave two categories to launch during the second half of fiscal 2014. We are applying learnings to the process as we move forward and have seen some improvement in execution and performance recently. We will continue to monitor performance in these categories and remain confident in both the benefits that category management will provide our customers and the savings we will realize over the next few years.

We also have multiple initiatives underway targeted at lowering operating costs. While we have previously discussed extensively the SG&A cost reduction initiatives, we also have several efforts underway to reduce cost and improve productivity in our warehouse and delivery operations.

Broadening optimization initiatives are underway in several of our largest operating companies. We expect to implement in the coming weeks a new warehouse scorecard to drive enhanced performance and accountability and are developing a similar scorecard for delivery operations. A consolidated parts procurement program has been implemented across the entire United States.

We have negotiated a universal contract to procure forklift equipment resulting in significant savings on this category of equipment and we also have undertaken an initiative to right size our fleet. To date we have identified 700 pieces of equipment to eliminate and expect when complete, a total elimination of 1500 pieces of equipment. This will reduce our maintenance costs, title and registration expenses, ongoing capital requirements and optimize our overall fleet age.

Turning briefly to an update on the proposed merger with US Foods, last month we announced several key decisions regarding the integration planning and leadership structure. We have formed a steering committee which I will chair and it is comprised of a joint team of senior executives from both Sysco and US Foods.

The role of the steering committee will be to oversee the integration planning work and approve key decisions. Chris Kreidler has been appointed to lead the integration planning work. Because of his strong business and financial capabilities, Chris is well suited to provide the leadership, valuable skills and perspective that will be required to successfully bring both companies together. In addition to his integration planning and leadership responsibilities, Chris will continue in his current role as Chief Financial Officer.

The integration planning process will consist of four major tracks of work. Greg Bertrand, Senior Vice President of Food Service Operations, has been appointed to lead the sales, merchandising and operations integration planning tracks. And David Schreibman, US Foods Executive Vice President of Strategy, will lead the corporate functions integration planning track.

We are moving forward quickly along the path of planning for eventual integration and Chris will provide more details on our progress in a few moments.

In closing, these are both exciting and challenging times at Sysco. We are beginning to see many of our transformational changes take hold and we now look forward to the US Foods merger as the next step in our transformation, enhancing our ability to serve our customers, strengthen supplier partnerships and further engage our employees.

Sysco is unique in its ability to make these types of significant investments which we believe will create a compelling opportunity over time for all stakeholders. We are focused on driving out this change in a manner that contributes to the success of our customers and suppliers and we appreciate the dedication of our Sysco employees.

Now I will turn things over to Chris so he can provide additional details on our financial results for the second quarter as well as the merger and integration planning work.

Thanks, Bill, and good morning, everyone. For the second quarter, sales were $11.2 billion or an increase of 4.1% compared to the prior year mainly due to case volume growth, about half of which came from acquisitions. Case volume increased 4.3% for the quarter and case volume excluding acquisitions increased 2.7%. Inflation increased sales 0.8% and changes in foreign exchange rates decreased sales by 0.6%.

Gross margin in the second quarter increased 0.7% and gross margin declined 60 basis points to 17.48% due mainly to continued weakness in the locally managed sales, the difficult business environment and competitive pressures. In addition, sales to large regional and national customers are growing faster than local business and this mix shift drove about one-quarter of the gross margin decline during the quarter.

Operating expenses increased $44 million or 2.8% in the second quarter of fiscal 2014 compared to the prior year period. Approximately $30 million of this year-over-year variance was driven by operating expense from acquired companies. In addition, certain items totaled $33 million during the quarter, an increase of $12 million over the same quarter last year.

Certain items this quarter included a $24 million increase in the estimate for Sysco's self-insurance reserve, $4 million in merger-related costs, and $5 million in other restructuring costs. If we exclude certain items and the impact of acquisitions, operating expenses were flat year-over-year.

Business transformation expenses were lower in the second quarter compared to last year by $18 million and were lower by $29 million for the first half of the year. However, expenses in the second half of the fiscal year 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 line with our guidance of $300 million to $350 million albeit at the lower end of that range.

Similar to last year, we continue to see business transformation benefits driving down operating expenses mainly in the areas of sales, IT and retirement-related expenses and we expect benefits from category management and operation initiatives to build as we move forward.

As a result of the benefits generated from our transformation initiatives, cost per case performance in our Broadline operation was significantly better than last year's second quarter declining $0.11 compared to the prior year. For the first half of the year, cost per case declined $0.10 compared to the prior year.

As we discussed last quarter, 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 or exceeding our objective of a $0.05 decline for the full fiscal year.

In spite of the continued progress on our business transformation initiatives, continued weakness in the underlying business resulted in a decline in operating income of 8.1% year-over-year.

Net earnings for the second quarter were $211 million, a decrease of $11 million or 4.8% compared to the prior year. Diluted EPS was $0.36, a 5.3% decrease compared to the prior year. Adjusting for certain items which mainly related to an increase in estimated self-insurance reserves, diluted EPS for the quarter was $0.40 which was flat compared to the prior year.

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 3.4%; adjusted operating income decreased 7.6%; adjusted net earnings declined 4.4%; and adjusted EPS declined 4.1% to $0.47.

One housekeeping item to mention. Beginning in the first quarter of fiscal 2014, Sysco changed its classification of certain intercompany purchases related to our FreshPoint and meat companies from the previous classification used in fiscal 2013. This change impacted gross profit and operating expense but had no impact on operating income or net earnings. In our press release this morning you will find a table showing the impact of these reclassifications to prior-year results for fiscal 2013 and fiscal 2012.

Turning to the impact of the business transformation project for a moment, in the second quarter project expenses totaled $63 million and we capitalized $10 million related to the project. We expect to maintain this level of capital spending in the third and fourth quarters due to ongoing work to enhance the stability and scalability of the system. As a result, we expect total capital spending related to business transformation to be $30 million to $40 million for fiscal year 2014. This is an update to our previous guidance.

Total capital expenditures were $135 million for the second quarter this year compared to $106 million last year. We continue to expect total capital spending to be in the range of $550 million to $600 million for the fiscal 2014 year. However, after including anticipated proceeds from asset sales, net capital spending will be in the range of $500 million to $550 million.

Free cash flow was $167 million for the quarter, increasing substantially over the prior year period mainly due to improvements in working capital performance. For the first half of the year, free cash flow increased 64% to $211 million.

Now I would like to turn for a few minutes to a discussion of our proposed merger with US Foods. In December, we announced our plan to merge with US Foods in a cash and stock deal valued at $8.2 billion. This is an extremely important and exciting combination that we anticipate will generate at least $600 million in synergies over three to four years.

As Bill mentioned, last month we announced that a steering committee had been formed comprised of a joint team of senior executives from both Sysco and US Foods and the integration planning leadership had been determined. Our integration planning team is comprised of leaders from both Sysco and US Foods. We are focused on planning how we will operate as one company and better serve our customers.

Our integration planning efforts have three primary goals: day one readiness, value creation and long-term organizational design. We are off to a good start and we look forward to working with our US Foods colleagues on the merger integration planning as we determine how to bring together the best of both of these two great companies.

As we have discussed, we expect a thorough regulatory review to take place over the next six to nine months and we recently learned that the FTC will be the agency leading the regulatory review for the government.

As part of the merger consideration, Sysco will assume or refinance all of US Foods' net debt of approximately $4.7 billion. We have begun to take the steps necessary to secure financing to do that as well as hedge the interest rate risk between now and closing. In December, we secured fully committed bridge financing which will be available upon closing to fund the acquisition and refinance US Foods' debt. Shortly thereafter, US Foods obtained consent from holders of their 8.5% notes to waive a provision that would have in effect required Sysco to purchase the notes upon a change of control. This consent allowed us to reduce the bridge facility to $3.4 billion thereby reducing our financing costs.

At the end of January, we amended our revolving credit facility to increase the amount available to us by $500 million to $1.5 billion and last week we entered into agreements to hedge the interest rate risk on $2 billion of the permanent financing.

In closing, while the challenging business environment in the food service industry continues to impact our customers and our financial results, we remain encouraged by the progress of our efforts to transform the way we do business. We strongly believe that the investments we are making in our business are vital to our future success and position us to extraordinarily -- position us extraordinarily well for the future. The proposed merger steps up the momentum for change and provides many additional exciting opportunities for Sysco and the industry.

With that, operator, we will now take questions.

(Operator Instructions). John Heinbockel, Guggenheim Securities.

Bill, a couple of things. One thing I may have missed or may not have heard, you talked about some of the actions you are taking on the cost side but you also mentioned actions taken to drive street sales or street cases. What specifically are you doing there?

John, good morning. As I said, we are doing several things. I think what I said is we have a lot going on both on the cost side as you point out as well as addressing what our biggest challenge is right now is driving sales on the locally managed business as well as addressing margin. And those two as you well know are very interrelated.

In the short term, we revised our comp plan for MAs about a year ago and that is pretty well fully implemented now in the states and in process in Canada. There is an element of that today that we didn't have before, it is not overly significant but it is meaningful which is predicated upon growing cases. We just finished up another new account promotion so we see opportunities to kind of get back into more regular coordination of new business promotions, penetration promotions both with our local marketing people as well as from a national perspective.

We have got as you can appreciate a lot of pretty comprehensive margin management training going on in the Company at various levels both locally as well as coming out of our corporate offices in terms of how do we optimize this whole challenge of quality growth with managing margin. Those are initiatives that kicked off in a bigger way here in the fall.

So those would be three that I would mention in the short-term that we think will pay dividends for us here. To some extent they are already helping but I think will pay bigger dividends over the second half of the fiscal year.

Beyond that, John, I think the others are more along these lines of the strategic initiatives we have been talking to you about which is we are doing a lot more work in marketing in terms of gaining objective customer insights. Our CRM tool is further along in terms of implementation. We really do believe CatMan is going to help us a lot once that matures both on the sales side as well as on the margin side and it should be a win win for us and our suppliers and our customers.

And we've got some other things going that are more pilot stages with revenue management, inside sales platform, that type of thing. And beyond that, Sysco Ventures is still something out there we continue to grow and we believe long-term will give us opportunities to create traction with our customers. So many of these are more medium-term but as I said, we have heightened up the intensity on some of those short-term initiatives.

So just as a follow-up to that, you said 25% of the margin pressure was mix. So this is probably hard to tell precisely but if you look at the other 75%, how much of that do you think is proactive, you are doing something, versus reactive, where you are responding to somebody else?

Then the part that is proactive again, how do you get your arms around these are productive efforts when you look at gross profit dollar performance?

Let me take a shot and if I'm not getting it, John, just clarify the question a little bit more.

So I would say over the last year, year and a half, we have attributed a third to a quarter of the margin erosion to mix because the larger customers are going faster. The rest of it, it is difficult to quantify. Obviously the way our business model works we can't just look at the gross margin, we have to look at our expenses as well so we are definitely going to fight very hard for the cases we have today as well as continue to find ways to grow with our existing customers and our new prospects as well.

I think where we are at right now in this process as I look at even early numbers this quarter is we are beginning to get smarter I think and a little bit more cohesive at the local level on making the right trade-offs between volume and margin management. But the reality in this business for us is we need to grow the local business, we need to grow the street business and that will contribute significantly to our gross profit dollar growth.

We just got to be smart and balanced in how we do it and so I think we are making strides there. You didn't really see it here in the second quarter. I think you will see some improvement here in the second half of the year as far as the margin management goes.

And just lastly then, do you think the industry as a whole is behaving rationally in terms of balancing margin and case volume?

That is one of those great questions that I don't know if I can answer as well as any of us would like. I think as I said, the competitive environment is very acute as we have talked about a lot in the past in presentations and on calls like this there is some growth we believe. We believe the market grew somewhat in 2013. We will fine tune those numbers and hopefully talk more about it at CAGNY. We don't think there was a lot of growth. We were able to take some share but we invested in that to some extent. I think that is rational from our perspective because in the end I think for our medium- and long-term success, it is important to continue to grow.

There certainly are pockets of activity out there where there is some behavior that probably isn't the smartest as it could be but overall given the environment I think it is reasonably rational right now. It is just very competitive.

Thanks.

Karen Short, Deutsche Bank.

Just turning to cost per case expectations for the full-year, I guess your full-year expectations kind of reflect flat cost per case in the second half. So I know you have discussed this in the past but I guess I am wondering with a successful wave one behind you, wave two about to begin and three more opco conversions by year-end, why wouldn't you continue to see improvements in cost per case for the back half?

Karen, I think we will continue to see improvements in cost per case in the back half. What we were really commenting to is the fact that we are going to be lapping some significant work that was begun last year so the quarter-over-quarter performance is not going to feel as good as the first half of the year. We do think we will be down at least $0.05. I think I admitted this time it will probably exceed $0.05 a case as we look at the full-year. We are just not necessarily giving a higher exact number to that right now.

I think, Karen, I would just add, when we talk about cost per case, we are talking about operating costs so we definitely are seeing reduction in cost per case for the CatMan work and we expect that to continue.

Okay. Any color on wave one in terms of how your customers are reacting to the initiative and any color you could give on what the benefit to gross profit or COGS would have been as a result?

I think it is still reasonably early in the wave one cycle but I would tell you I think our execution -- I think we alluded to this in our comments -- I think we are improving our execution there in terms of how we do the conversions, the cadence of the conversions and addressing these opportunities in the most productive way possible with our customers.

So I think where we've had some challenges with the pilot categories on volume at times, we are starting to see some improvement on wave one. We continue to see like I said significant improvement on our cost of goods which was driving most of the economics on this initiative.

Okay and then just last question, obviously inflation came down this quarter which is pretty widely expected. But any comments on your outlook for the third quarter and beyond? There is a lot of noise with the drought in California and protein inflation and things like that?

Yes, I was actually a little surprised with how much it came down. We had about 1 point of inflation which is kind of low so I would say sitting here today depending -- I'm not going to project the impact of weather and that kind of thing, that is difficult to do but I would expect it to remain pretty modest somewhere in that 1% to 2% range. But we will have to see.

Most of the external stuff that we read, Karen, is probably the same as you read. Expect it to kind of go back to a more normal range and whether it is Bill's 1 to 2 or I guess what the others say out there, 2 to 3, but we would expect it to be a little higher than where it is today. It is a hard thing to predict as you know. Last year or maybe 18 months ago remember we had a drought and everybody was expecting food cost inflation to go through the roof again and we never saw that materialize.

Right, okay. Thanks. That is helpful.

Mark Wiltamuth, Jefferies.

Good morning. On your comment that the sales slowed throughout the end of the quarter, how much of that was really the calendar and the weather? Did you see any snapback as you got into January results?

I think the calendar was certainly part of it, Mark, and we did have some weather those last couple of weeks in December. I think that impacted us in certain parts of the country. So I would say it -- is hard to put a number to it but I would say part of the slowdown was that. We had pretty good growth in the second quarter last year so when you look at comps -- and we are talking about deltas of 2% to 3% case growth here so if it goes off a point, that is 50% of the delta.

So I would say it is a little bit -- the comps are a little more tough but we definitely saw a fall off in December and certainly from what we see and what we read, I think you would have to attribute a fair amount of that to the weather. We knew the calendar but we still saw a little more than what we expected to see.

I hate talking about weather especially in winter and we just had our market presidents in here a couple of weeks ago and really didn't want to hear a lot about weather but I will tell you weather has been pretty brutal here the first part of -- first four or five weeks so we have had four of the five weeks I think have been very difficult, last week in particular. You all see the weather reports, we had issues throughout the Southeast. We didn't ship in New Orleans. You saw the reports in Atlanta.

So, yes, the good news is it's January and early February so March is a key part of this quarter and we still have an opportunity to make some of that back but I would say weather has impacted us quite a bit so far in January or early February.

And on the gross margin weakness, did you have any pressure on the meat categories? I know red meat was a pressure for at least one of your smaller competitors out there.

I can't tell you it was any more pronounced in that area than any place else. Obviously those are high dollar boxes so you tend to get somewhat competitive depending on the size of the customer but I wouldn't attribute any particular piece of it to the meat category.

And for Chris, is there any way you can give us a rough idea of what kind of interest rate we should be looking at for the big refinancing for the US Foods deal?

No, I wish I knew myself. Our strategy as I talked a little bit about is to hedge interest rates but in this environment, we have chosen to basically hedge about half which means that if they continue to languish or indeed decline, we won't give away all the benefit. If they go up, we are partially hedged so that is kind of where we are hanging out right now.

We will continue to evaluate the markets as well as the yield curve going forward and look for an opportune time to lock in and obviously we've got to get much further along in the deal process and the regulatory approval process as well. But right now I can't give you much more guidance.

Okay, thank you.

Andrew Wolf, BB&T Capital Markets.

Good morning. Bill, you sounded kind of optimistic about this year, market conditions, restaurants getting maybe back to positive traffic. I just wanted to ask you to explain a little about what you are thinking there generally, why you might think that?

And then, secondly, as part of the same question. Have you seen -- you just talked about Atlanta and what is going on there but between the fourth quarter and the recent snow events and cold weather in the East, have you seen a bigger variance in performance between places that have normal weather out West let's say versus the East that you could share with us that might give us a sense if that is the case?

Yes, Andy, I will. So let me start with the second one. I tried to give you a little color of that in my prepared comments and so right now, yes, I am looking very hard at the West because we haven't seen that kind of weather out there. So we are seeing -- I think I called out the Southwest and to be fair, I would say the Southwest if you go back the last two or three years has been probably the strongest part of the market. If you look at some of the more industrywide survey work that is done on consumers, the Southwest shows up quite strong.

And I would say right now we are trending -- it is hard to do this, Andy, because I have to adjust for that variability you were alluding to in terms of our individual performances. But I would say if I just look at the West right now, things are a little bit better there which gives me the confidence that some of this actually clearly is being driven by weather in terms of early days here in this quarter.

So with that said, the other thing I called out was we see now for several quarters that the Northeast and what we call our Mideast markets have seen more pronounced sluggishness and it is not to say we don't have opportunities to execute better in those markets but at the same time when I look at them across that entire geography, that seems to be a tougher part of the country in terms of growth right now.

As far as why I am optimistic, I would say it is interesting when you read all these reports that some of you publish and that we all read, the state of mind of the consumer is reasonably good right now. The state of mind of our customers is reasonably good when you look at forward-looking feelings about the future. So any time people are optimistic, that gives you reason to be optimistic and that is part of it.

I think there's some technical issues that are somewhat clouded by the weather right now with some of the tax hits that the consumer took early last year that I am hopeful that those will turn into positives here as we get toward spring and into summer.

So I think the mindset is better and it is fragile. I'm not going to kid you on that and when you look at the economic data, it is good at a certain level macro and not so good in our piece of the industry. But I'm basically going off of some of the sentiment surveys that we see in terms of the consumer, some technical things that we see in terms of what happened last year, early part of the calendar year.

And I would say even though we are somewhat challenged here in terms of our performance for the quarter, haven't had a chance to talk to a lot of our people, I think we really believe that we are gaining traction on our initiatives and that we will see some steady improvement here as we get deeper into the calendar year.

(Technical difficulty) It is interesting. Last question, but it is follow-on to what you just answered. Do you have a sense of the same-store sales for your independents and is that something also you have by geography and could also shed light on the context of regional variance?

I don't have a great sense of that. We obviously have our sales data where we can look at that -- various levels of detail in terms of what we call penetration. That doesn't tell you what the account's same-store sales are. I would tell you it varies. So whether you are talking big chains or whether you are talking about more street oriented type of operators, the stronger operators I think are holding up reasonably well in this kind of market and people that are more on the margin are struggling more.

So we see a fair amount of variability across customers as it relates to penetration. My best judgment, I don't have any data on this, Andy, is that it is reasonably flat right now out there in terms of restaurant sales overall -- same-store sales. Some chains are doing better than others obviously.

Got it. Thank you.

Ajay Jain, Cantor Fitzgerald.

Good morning. I had a variation of some of the previous questions but it is more specific to the outlook for the current quarter. I think with at least some of the casual dining needs, it looks like traffic was down significantly in December. I think it even turned negative in a few cases. So my guess is that trend probably continued into January because of some of the cabin fever or weather-related issues that you talked about.

And then it looks like you are also getting the benefit of some inflation and you talked about inflation a little earlier but I think some of the government data suggests some deflation over the last three or four months. So from your prepared comments it sounds like you are more optimistic about the sales trends for calendar 2014 but do you foresee potential for incremental volume weakness in the current quarter from the combination of even potentially deflationary pressure and also sort of the continuation of some of the weather-related impact? Thanks.

Good morning, Ajay. I would -- I think where I am at on that thing, what I tried to get across in my comments is I'm pretty cautious on this quarter right now on the topline just given what we have been dealing with here the first four or five weeks. As I said though, March drives this particular quarter so if we catch a break with the weather and maybe we have seen the worst of it, in terms of parts of the country where you don't expect to see this kind of weather, that is really the issue.

So the way weather affects us is when you have these freezes and snowstorms in the Southeast and the Southwest, that is a problem. When they carry into April, that is a problem. When they start early in November, that is a problem. Winter is going to be winter in the Northeast and the Midwest and we understand that. So I am somewhat cautious because of the weather and how we've started out this quarter but there is still a lot of good weeks ahead of us in terms of volume as we get toward the latter part of February and March.

I am more optimistic on the year just for reasons I espoused earlier that I think the consumer is in a better place and I think with a break here or there that that is going to be good for our customers and we are very well positioned to leverage that in terms of our business.

Deflation, we are not really seeing deflation. We are seeing categories that are maybe down a little bit, up a little bit. We've got some inflation in meat and seafood I think going right now. So deflation would not be good for us. Again, what is more ideal for us would be to have that inflation number get back around two, maybe even a little bit higher. That gives us a little more room to maneuver in terms of our expense management and at the same time work with our customers in a way that they can handle the cost increases.

So deflation would not be good but I don't necessarily think we are looking at deflation, I think we are looking at, as we said earlier, moderate inflation continuing.

Great. Thank you.

Meredith Adler, Barclays. Due to the silence on this line, we will take our next question from John Ivankoe, JPMorgan.

Thank you. The question is how your customers might be responding to the merger or I guess news of the merger. Is it a situation -- I guess FTC excluded that 1 plus 1 equal could equal 2 or do you sense some nervousness within your customer base on the consolidation of power? And if that is the case, what will you do maybe differently in six to nine months to retain some business that some of your competition might otherwise be trying to get?

Good morning, John. I would say this, from the day one of the announcement through today and going forward to close and then beyond close, certainly one of our big goals here is to have a very active effective communication program with all of our stakeholders, so our customers, our suppliers, our associates, our shareholders, the government, media, all of that type of thing. So we are early days of dealing with that.

We are in constant contact with our customers. We have equipped our opco presidents and their sales leadership with pieces to communicate with the local chefs associations, restaurants associations. So I would characterize it early days as we have got good ongoing discussions with our customers. Certainly there are some that have some concerns. We work through those. I would say many are excited to understand what the benefits are and how long we will take to close and when will all that happen. But I would say largely customers are pretty open-minded and they are looking for those benefits.

So whether it is going to enhance their business from how they might order product with us or a wider assortment of innovative products, the fact that we will be able to take cost out of the system over time and how that translates to their opportunities to work with Sysco, those are all things that we were talking with our customers about. We clearly see this as a very good thing for our customers. Frankly I see it as a very good thing for the industry over time and certainly we see it as a good thing for Sysco.

So I think generally it is very open-minded and constructive. Obviously there are some people out there that don't like this, they tend to be more on the competitive side of the ball and they are having those types of conversations and we are addressing that as appropriate.

Thank you.

Meredith Adler, Barclays.

Thanks for taking my question. First, I would just like to talk a little bit about -- your comments about category management -- you are done with -- finished wave one which I think you made some comments about what the impact was. You think it is recovering. Could you just be more specific about what happened to revenues or customer reaction to category management?

Yes, I will take a shot at that, Meredith. Essentially the whole idea of category management is to optimize the assortment of products we carry in an effort to help our customers optimize and enhance the products that are available to them as well. Along the lines, we certainly see opportunities here to enhance our relationships with our suppliers, improve product development, innovation and reduce our SKUs where that makes sense and to take cost out of the system as it relates to our cost of goods.

The challenge as you would expect as you go into something like this is the conversion process. So I would say to you in the pilot wave or the pilot categories, there was four of them, we did a very good job working with our suppliers, we did a very good job identifying opportunities for cost savings and we are realizing those. Where we are learning as we go is to strike the right balance in terms of the cadence on the conversions with our customers and to make sure we are equipping our operating company, sales management and the MAs with the tools that they need to have the conversations about conversions with the customers in the right way.

So where we are making progress at this point I think is on the conversion side and we expect to continue to make progress as we get deeper into wave one and wave two.

So when you say you are learning more about how to do the conversion, does that mean that there was unhappiness initially?

Meredith, any time you sit down with a human being and tell them that you are there and you've got an idea and you are going to ask them to change what they are doing, there is some challenges to that. So I would say yes, as we got into it even though we had done I think a tremendous job in terms of developing the communication pieces, training our people, there is always the dynamic that you deal with across the table from a customer. So we ran into some challenges there. We still have them.

But I would say to you this in the most straightforward way as I can, it is really more about just making sure that to the extent the conversion is relevant to that customer, many of them aren't -- we are not converting every item for every customer -- but to make sure that we are having good constructive dialogue in terms of why it is a good thing for customers. And as you play that out over 7000 territories with tens of thousands of customers and this is something that you've done for the first time, certainly there is challenges. But I would tell you again that I am seeing improvement on that performance here as we get into wave one and I expect it to continue to improve.

Okay, thank you. And then another just sort of quick question to confirm something that Chris said about the cost per case, I think you said down 5% and I wasn't sure if you were saying down 5% for second half for down 5% for the full year?

Yes, Meredith, I actually said down $0.05 per case. We will be down at least $0.05 per case for the full year.

And do you include the pension change as part of the cost of case?

Yes, that is an all-in cost per case.

Edward Kelly, Credit Suisse.

I just have a -- I guess a lot of my questions are around modeling and how we think about the back half of this year. But the first one is on mix and I guess the impact of negative mix on sales which seems this quarter to be higher -- and I only say that because we try to figure out what your volume growth is based on the data points you give. We would come up with a lower number by about 70 basis points and we are not typically that high. So has the negative impact of mix accelerated and then would you expect it to stay at this level or could it even be higher?

I'm going to start and then let Chris jump in. I can't speak to the modeling part of it. I would say it is not accelerating. What I would say is as we said in our prepared comments, we are still seeing good growth with the larger customers, regional and national customers. We are just not seeing enough growth yet on the local side but I wouldn't say that it has accelerating at all.

I'm not sure I can add a lot. Your question was negative mix on sales, correct?

Correct. You know, Chris, it is just that if I think about your dollar sales and I adjust for acquisitions and I adjust for inflation, I'm going to come up with a 2% volume growth number, right? You get 2.7%.

Right.

So that 70 basis points is bigger than what it has been historically and I'm trying to figure out if that is a number I should be using going forward?

We've had this conversation before that I understand that is how folks come up with what I guess they call real growth and that is just not a number that we have ever put much credence in which is why we started giving you actual case volumes. So that number is going to move around for a variety of different reasons and we frankly just don't track it.

I would say the bigger issue in this quarter other than some of the sluggishness in December that we've already talked, about if you compare the first quarter to the second quarter, your inflation number went from 2 to 1 and that is probably the bigger impact.

You've got inflation and actually your Forex was a little higher as well. When you put both those in there, then your sales number is not significantly off where we were.

And then the other question relates to a sequential change in the business is this notion of looking at your volume growth relative to your gross profit dollar growth and that spread seems to have widened a bit which I guess could be competition, market or whatever. But I guess, how do you think about that? I know you typically don't want -- you would like to grow gross profits closer to volume. So going forward, should I be using this type of spread? Do you think it can improve?

As I said, we came up somewhat sort of our internal goals here for the quarter and that was on the gross profit dollar line. But I would say the spread was about the same as what it was in the first half. We had a topline miss and continue to have gross profit pressure -- margin pressure on all categories of customers actually. So from what I am looking at, Ed, the spread is about the same as the first quarter.

Ed, obviously you've got to do your own modeling. Our plans certainly don't call for or allow for a 0.7% gross margin growth number. We are clearly higher than that, we clearly have higher expectations for that. And as Bill explained, that is where we've got a tremendous amount of focus and we talked about it for a number of quarters here so that is not in our short- or long-term projections.

All right. Chris, you are going to lap some -- an acceleration in the acquisition benefit in the back half here?

Yes.

I guess would -- you would expect that benefit to slow then I guess, is that right?

It will. We have kind of expressed what we think the full-year benefit will be. We said just the carryover deals themselves would boost us by at least 1% in terms of sales and then new transactions every year are targeted at least 1% so you get about 0.5 point impact for the year. So add those up and generally our expectation is about 1.5 points.

So we still have a significant pipeline of transactions. We've got this major one that we have to work our way through of course and so US acquisitions may slow a bit but we still have focus in Canada and focus in other geographies.

And then just one last question for you on SAP. Now that it sort of looks like you got through Boise, when is the next big opco going to get done? Is that within the next group and are you comfortable now that some of the changes you made get you over the hurdle to getting a big opco done just as well now?

As I mentioned, we just did Phoenix and Vegas last weekend actually so we are in week two there now, Ed. So we are early days but we are feeling good about that. I think I also mentioned if things stay on course both with the next round of enhancements as well as what we see in these last three companies, we expect to do a couple more in the latter part of this fiscal year. They would both be very large companies.

Okay, great. Thank you.

Greg Hessler, Bank of America.

Thanks for taking the question. Apologize if I missed this earlier. I think you may have addressed it and I was cutting out a little bit. But in terms of the refinancing that you guys intend to do, should we just expect that to be closer to the time of the closing of the transaction? I think you have said you expect it to take -- or at least the FTC review to take 9 to 12 months. I'm just trying to think of this from a timing perspective.

Yes, it will certainly be closer to the time of the transaction. Whether we take advantage of market conditions and confidence levels prior to that, it will depend upon a number of factors in terms of when we will actually pull the trigger to do some of this refinancing.

Okay. Then in terms of the overall size, you've got a pretty big chunk of legacy US Foods debt here to refinance but then at Sysco, you also have some shorter term borrowings. You've got a 2014 and a 2015 maturity coming up. Should we expect that you do that all at once or could you be coming to market multiple times here over the next couple of years?

Yes, obviously our goal would not to be -- to come to market a whole bunch of different times. It tends to cause a little inefficiency in terms of pricing as well as disruption. At the same time, if we've got something that comes due and we see an opportunity to refinance a chunk of it both our side as well as pre-refinancing the US Foods merger consideration, we may look for an opportunity to do that.

Okay. Thank you very much.

Thank you.

This concludes today's question-and-answer session and today's Sysco second-quarter fiscal 2014 conference call. We thank you for your participation and have a good day.