西斯柯 (SYY) 2014 Q3 法說會逐字稿

Good morning and welcome to the Sysco third-quarter fiscal 2014 conference call. As a reminder, today's call is being recorded. We will begin today's call with opening remarks and introductions. I would now like to turn the call over to Ms. Shannon Mutschler. Please go ahead, ma'am.

Thanks, Anna. Good morning, everyone, and welcome to Sysco's third-quarter fiscal 2014 earnings call. Today you will hear prepared remarks from Bill DeLaney, our President and Chief Executive Officer, and Chris Kreidler, our Chief Financial Officer.

Before we begin, please note 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 within the meaning of the Private Securities Litigation Reform Act of 1995 and actual results could differ materially.

Additional information about factors 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, subsequent SEC filings and in the news release issued earlier this morning.

A copy of these materials can be found in the Investors section at Sysco.com or via 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 our presentation slides. The reconciliation of these non-GAAP measures to the applicable GAAP measures are included at the end of the presentation and can also be found in the Investors section of our website.

All comments about earnings per share refer to diluted earnings per share unless otherwise noted. In addition, all references to case volumes include total Broadline and SYGMA combined. 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, our previously stated expectations of hosting an Investor Day meeting this summer in Boston have changed. We have determined that it would be most effective to hold the meeting after the proposed merger with US Foods closes. Accordingly, we will update you once a firm date for the event has been chosen.

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

Thanks, Shannon. Hello, everyone, and thank you for joining us today. This morning Sysco reported third-quarter sales of $11.3 billion and net earnings of $181 million. Adjusted earnings per share, excluding certain items, was $0.38 for the quarter compared to $0.40 in the prior year.

Market conditions during the first two months of the quarter were dominated by the impact of unusually severe winter weather conditions throughout much of the United States. As a result we experienced very modest sales growth in January and February and delivery expenses were under significant pressure as well.

Conditions improved markedly in March as the adverse weather subsided which likely contributed to consumers going out more both to shop and eat. We benefited from this turn of events as evidenced by our nearly 6% sales growth in March, almost twice the top-line growth we experienced for the overall quarter.

In assessing our operating performance for the quarter and factoring in the challenging market conditions results were generally in line with our expectations. Sales growth, while modest at 3.2%, was aided by improved locally managed sales trends in March. Gross profit grew nearly at the rate of sales growth and at a higher rate than we experienced during the first half of the fiscal year. We also reduced our operating cost per case in our Broadline business.

We are encouraged by our improved gross profit trends during the quarter and attribute much of our progress in this area to more consistent margin management practices in our operating companies, strengthening local sales trends and the low level of inflation we experienced during much of the quarter.

Moving forward we are somewhat cautious regarding gross margin trends in the short term as we've begun to see a meaningful increase in product cost inflation in the high cost meat and dairy categories since the end of the quarter.

The consistently improved cost per case results we're experiencing in the Broadline business have been driven by the benefits realized from several cost reduction initiatives we have implemented over the past two years, especially in the SG&A area of the business. As some of these benefits begin to wrap on a year-over-year basis, we expect to realize increased benefits from more of our transformation initiatives on the operations side of the business.

Turning to our technology transformation initiatives -- this fiscal year between November and March, we implemented our new ERP platform at three operating companies and in April converted two additional locations for a total of 10 companies running on the new ERP technology. The successful conversion of five OpCos in six months reflects our consistent progress in strengthening and stabilizing our ERP platform.

In addition, we have worked to ensure smoother transitions for each successful conversion. For example, improved procedures and attention to data management helped to make the go live at Denver and New Orleans last month the most successful yet.

Regarding our initiatives to lower product costs, we expect to meet our stated financial objectives for this fiscal year and next as our category management efforts continue to gain momentum. By the end of this fiscal year the pilot, all of Wave 1 and the majority of Wave 2 categories will have launched into the market representing $5 billion to $7 billion in annual spend and roughly a third of the total addressable spend.

We continue to enhance the program's effectiveness by sharing best practices and improving communication both at the corporate merchandising and operating company level. We also continue to progress on our initiatives to lower operating costs.

During the quarter we advanced our routing optimization project, which is resulting in reduced routes and miles driven while improving on-time deliveries. Our fleet optimization initiative is underway and we have removed hundreds of older pieces of equipment from the system with more to come.

In addition, we have now completed an initiative to negotiate standard terms and specifications for fleet purchases. These changes, combined with similar actions for warehouse equipment completed earlier this year, will help us reduce costs and optimize our capital spend as we move forward.

Regarding our proposed merger with US Foods, the integration planning team is making good progress toward bringing our two companies together, as Chris will describe in a few minutes. This transaction represents a significant opportunity to enhance our ability to serve our customers, strengthen our supplier partnerships, further engage our employees and enhance profitability through meaningful synergies.

We are encouraged by our continuous improvement on multiple fronts throughout the Company and believe that this transformational change will help our customers be more successful, drive added efficiency in our business and enhance our financial results.

Personally engaging in a transformation of this magnitude is both challenging and rewarding for me as well as for all of our 49,000 associates. I very much appreciate their efforts and dedication as we move forward in this exciting and pivotal time in Sysco's history.

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

Thanks, Bill, and good morning, everyone. For the third quarter sales were $11.3 billion or an increase of 3.2% compared to the prior year, mainly due to increased case volume including the impact of acquisitions. Case volume increased 3% for the quarter and case volume, excluding acquisitions, increased 2.3%. Inflation remained quite modest during the quarter increasing sales by 0.9% and changes in foreign exchange rates decreased sales by 0.9%.

As Bill mentioned, January and February sales were negatively impacted by the unusually severe weather throughout most of the country. However, March saw a marked rebound with sales growth during the month of 5.5% which was more in line with the rate of growth in the first half of the year.

Gross profit in the third quarter increased 2.7%, nearly at the same rate of sales growth. Gross margin declined 9 basis points to 17.69%, which is the smallest decline we have seen in 15 quarters. After taking into account changes in customer mix, gross margin actually increased slightly compared to the prior year.

Similar to what we saw with sales trends during the quarter, gross profit was substantially stronger in March compared to January and February increasing 4.8% during the month as weather and locally managed sales trends improved.

However, as Bill mentioned, since the end of the quarter we have begun to see a meaningful increase in product cost inflation in the meat and dairy categories, which together total roughly 30% of our annual sales. We expect this pressure may contribute to added gross margin pressure in the near term. Operating expenses increased $57 million or 3.5% in the third quarter of fiscal 2014 compared to the prior year period.

The year-over-year increase in operating expenses was mainly due to increased case volume and new costs from acquired companies. Increased delivery and warehouse cost somewhat exacerbated by the unusually severe weather. Increased corporate expenses due mainly to timing, partially offset by lower sales organization costs and a decrease in retirement-related expense as a result of the restructuring work we completed last year.

Benefits generated from our transformation initiatives more than offset cost pressure in our delivery and warehouse areas resulting in a $0.03 decline in operating cost per case in our Broadline operations in the third quarter and a $0.07 decline for the first 39 weeks of the year with both periods excluding the impact of certain items.

We remain confident in meeting or exceeding our objective of a $0.05 decline for the full fiscal year as we experience continued year-over-year benefits from changes in our sales organization and the impact of lower retirement-related expenses.

The impact from the restructuring of our retirement plans is actually exceeding our expectations. We now expect that retirement-related expenses for fiscal 2014 will be lower by $65 million to $75 million excluding certain items. This is lower than our previous guidance of down $50 million to $60 million as expenses from our enhanced 401(k) benefits have been lower than anticipated.

As some of the benefits from our SG&A initiatives begin to wrap on a year-over-year basis we expect to realize increased benefits from more of our transformation initiatives on the operations side of the business.

Operating expenses including certain items increased $51 million or 3.3%. Certain items totaled $56 million during the quarter, an increase of $6 million over the same quarter last year. Certain items this quarter consisted primarily of two items. First, merger and integration planning expenses totaled $32 million and mainly related to professional fees. Second, we recorded a $20 million legal contingency of accrual related to a previously disclosed investigation in California, a portion of which is nondeductible for tax purposes.

Certain items in the prior year period totaled $50 million including a $41 million charge to withdraw from a multi employer pension fund. Business transformation expenses were lower in the third quarter compared to last year by $13 million and were lower by $45 million for the first 39 weeks of the year. About half of the variance year to date relates to a change we have made in how we allocate internal labor costs to the project.

In the past we allocated the cost of internal associates based upon the percentage of time they spent on the project. We are now allocating either all or none of an associate's cost to the project depending on whether they spent the majority of their time on the project. This has had the effect of shifting some expense from business transformation expense to general corporate expense.

The remainder of the year-to-date variance in business transformation expense is the result of capitalizing more of the work effort than originally estimated. As a result of the change in labor capitalization methodology and the increased amount of capitalization, we now expect total business transformation expenses for the year to be lower than our previous guidance, in the range of $275 million to $300 million, and general corporate expenses to be somewhat higher.

Operating income for the quarter was down 1.4% year over year. After adjusting for certain items, operating income increased 0.3%. Net earnings for the third quarter were $181 million, a decrease of $20 million or 10.2% compared to the prior year, diluted earnings per share was $0.31, an 8.8% decrease compared to the prior year.

Adjusting for certain items diluted earnings per share for the quarter was $0.38 which was down 5% compared to the prior year. We estimate that the impact of the usually severe weather in January and February reduced earnings per share by $0.01 to $0.015.

Total capital expenditures totaled $117 million for the third quarter of this year compared to $111 million last year. We continue to expect total capital spending to be in the range of $550 million to $600 million for fiscal 2014. 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 $273 million for the third quarter, increasing over the prior year period mainly due to improvements in working capital performance which offset weaker net earnings. For the first 39 weeks of the year free cash flow increased 22% to $484 million. As we begin to wrap our particularly strong cash flow performance in the fourth quarter of fiscal 2013, we expect the level of year-over-year increases in free cash flow to moderate.

Turning to the pending US Foods merger, we continue to make progress in our integration planning efforts and have engaged in an extensive process focused on three goals: day one readiness; value creation; and long-term organizational design. The teams are working well together and have made a lot of progress in a relatively short period of time.

Regarding the regulatory process, our dialogue with the FTC continues to be productive as we work to fulfill their second request for information about our business and industry. We continue to believe that this merger will benefit customers and help us become more efficient in an evolving and competitive marketplace. And also believe the FTC will agree that our customers have many choices in the fiercely competitive marketplace in which we operate today. As a result we continue to expect the merger to close in the third calendar quarter of this year.

In closing, while severe weather in the third quarter presented challenges to the business and our financial results, we were relatively pleased with our business performance as we exited the quarter. In addition, we are excited about our progress to transform our business and our integration planning efforts related to the US Foods merger.

While we continue to have much work ahead of us, we strongly believe that we are taking the right steps and making the right strategic investments to position our Company for success in the future. With that, operator, we will now take questions.

(Operator Instructions). John Heinbockel, Guggenheim Securities.

Hey, Bill, I was pretty encouraged by your gross margin management. So the question is, is there a different philosophy with regard to how you are spending those dollars, how you think about elasticity? And if so, what is driving that changing philosophy and how you -- practically what things you're doing differently?

I would say I don't think there is a different philosophy. I think where you saw some improved execution -- I mean we've been doing this a long time and we're always trying to strike the right balance between growth and taking profitable share for the medium- to long-term with obviously managing our margins appropriately.

So from that standpoint what I was trying to convey in my remarks is clearly we haven't been performing at the level we would like and we've spent a lot of time and done a lot of work with our operators, so to speak. And I think what you saw here is a small but meaningful step forward in terms of progress.

And I used the word consistency, that is probably our biggest opportunity in Sysco today. And I think the benefits you are seeing in this quarter were more consistent, focused on striking the right balance, like I said between growth, pricing and what is good for the customer. And just the basic day-to-day stuff, there is nothing really overly proprietary here.

When you have commodity prices, continuous attention to how fast they are moving and what direction they are moving in and being responsive in the right way. So I would say it is more improved execution of that philosophy and hopefully it is a sign of things to come.

Now is that in terms of getting let's say the improved execution? Is that more getting folks in the field to understand what you are trying to do and elasticity issues or is it more actually putting sort of guardrails on what they can do out in the field?

I would say our folks in the field understand. I think what it is is us bringing more focus to the issue with all that they have to deal with on a day-to-day basis. And in that process, yes, bringing lease parameters and over time a little more governance to that process.

So again, early days here, John. But we certainly are trying to get more consistency in terms of how we approach it. But our folks understand the issue, they are very good operators. It is more about bringing consistent focus to it.

All right and then lastly, with the inflation picking up, how do you think about this pick up in perishables inflation versus those we have seen in the last couple of years? We have had a couple of these cycles when you look at where the macro is, where you are with US Foods -- are you more or less inclined to pass that through quickly than you might have been in the past?

Well, I don't think the US Foods merger has anything to do with it. I would say what is interesting, what we're seeing right now, John -- and this has really just kind of manifested itself in the last four to six weeks -- is there is double-digit inflation in meat, seafood and dairy and the rest of the categories are roughly flat. You were actually down a little bit in grocery, down a little bit in poultry in terms of what we saw in April.

So what you are seeing here is, as you know, in particular meat, those are high-priced boxes. So it is challenging at times to pass that along as fast as you might like to with customers. Sometimes that is not even the right thing to do. Sometimes it is about sitting down with a customer, kind of reworking their menu in terms of if poultry is flat to down working more poultry into the menu.

So we are just trying to be a little cautious there, I mean the good news here is while, as you know, we don't want to see a lot of inflation over the medium- to long-term, it is not good for our customers, I mean that inflation is working its way into the top-line as well. So we are basically just calling out that on a gross margin as a percent to sales perspective, there is more pressure there right now than what we saw in the third quarter.

But I think we will manage it reasonably well. And as far as going forward, a lot of this has to do with supplies in the beef area and I think some of this will be with us for a while. It is really hard to predict what happens past three to six months out.

All right, thank you.

Andrew Wolf, BB&T Capital Markets.

On the March sales improvement, was some of that the inflation you're talking about or did the cases in the real business also get better?

In March, Andy, it was more -- it was not very much inflation. I think we probably saw some in the latter couple weeks of March, but I think March was really more of demand, people got out more and you saw it in the retail numbers I think that came out here recently. And so, it was just more -- we saw more volume and, as we alluded to, we also saw it more on the locally managed side than what we've seen in the last two or three quarters, which was encouraging as well.

Did you see that across the board so the independents -- I know in the past you said it is really hard to track their same-store sales? But just anecdotally or however you can, was the independent business also stronger?

Yes. When I talk about -- so the independents will make up a significant piece this locally managed -- and, yes, I would tell you we saw it across the board in March. It was very -- it was really a tale of two quarters. It was brutally hard out there I think for everybody the first couple months and then in March we saw a turnaround on the top-line in pretty much every segment, at least every restaurant segment.

Yes, and, Andy, I want to be careful and echo what Bill said a minute ago about this inflation. The reason we're calling it out is frankly it came upon us pretty quickly and we don't want it to be a surprise when we talk about it later on. But in the March quarter inflation was no different really than the rest of the quarter.

So it really wasn't yet in the March numbers. As Bill said, we started to feel it a little bit in the latter two weeks, but it was pretty much in line with the quarter. It came on -- it went from basically nothing to something in April and so that is why we are calling it out. And it's pretty narrow in terms of the categories but they're big dollar categories for us.

I don't want to get too much into April because that is something we typically do. I would just say to you we have had two solid months in a row on the top-line, they look a little different, April is a transition month. And so, I would say to you a couple things.

My sense is spring came a little earlier this year than last year, saw some of the clubs and that type of thing open up and that helped us. Easter was a little later and people were still I think looking to get out. So April, the weeks were not necessarily consistent but as a month -- we had another solid month on the top-line and in the business. And I would just say the mix was a little different between pricing and volume, that is all.

If I could follow up the same vein on sales trends and this improvement. When you look at the geographies that probably had less weather impact like California and Florida, let's say, where you have a lot of operations. Was there a better -- do you see the same thing or was it stronger the entire quarter? Could you just comment on the non-weather affected sales trends?

I would say the weather, to go back to that, was more east of the Mississippi. So that hit virtually all of our markets other than California and the West Coast. But it was particularly pronounced even though -- I always say, winter comes every year -- it was particularly pronounced in the Northeast and Mideast. But we were shut down in Atlanta for a couple of days; we didn't deliver, that kind of thing.

So I would say those first couple months the weather impacted the vast majority of our businesses. As you work into March and April here now I would say it is pretty much what we saw before. I think we're seeing very good strength in the Southwest, decent strength in the West, Northeast, the Mideast, still a little sluggish.

So these are matters of degree. But similar to what I called out I think in the last quarterly earnings release, we're seeing a little more strength certainly in the southwestern part of the country than we are in the north and northeastern part of the country.

Thank you.

Edward Kelly, Credit Suisse.

I wanted to just follow up on gross margin and gross profit because we try to look at gross profit dollars per case. And obviously this quarter you did better there in terms of year over year growth versus where you have been.

Now I know inflation going forward picks up. But do you think the business has reached the point where you've done a better job of managing it where gross profit per case should at least be stable to better going forward? Or when you talk about the pressure of inflation are you trying to say that year over year you could still be down a little bit there going forward?

Ed, we look at this thing a cross a lot of different ways. So I will let Chris jump in here in a minute as well. So I want to be careful about the gross profit periods because that is going to play out different in different categories.

What I would tell you is the way I look at it is I look at case growth; I look at the mix of case growth between locally managed, which is largely your street business versus your contract business. And then I look at gross profit dollar growth and then I look at cost per case -- operating cost per case.

And so, we can put that together, I don't want to shoot from the hip in terms of your question on this call. But I would tell obviously the first half of the year we had 1.2% gross profit dollar growth and that went to 2.7%. So I am encouraged with that, I think we can continue to improve from there, we will have to see how fast that develops. So I feel good about that part of it.

I think we will continue to manage the cost per case well. I think just to put this in some historical context, Chris and I were talking before the call. I have been around this business 25 years give or take and I would tell you if you go back and look at Sysco's history -- we didn't always share all of this -- to manage your operating cost per case to be up a nickel a year was usually a pretty good year in normal times.

Our medium- to longer-term model we are trying to find enough initiatives every year to keep that a flat cost per case and in this particular year, 2014, we targeted a nickel reduction, as Chris pointed out.

So I'm real pleased with how we are managing at the operating level in terms of cost. I'm encouraged -- two months does not a trend make here but I'm encouraged with what we are seeing on the gross profit dollar growth. And I don't know if Chris is going to answer your specific question, but I will let you put his tilt on it as well.

Yes, I probably won't get into any specifics, but I want to echo what Bill said. It is one of the metrics we look at but we look at a lot and the challenge on that particular one depends upon a lot of different variables, one of which we have been talking about here, which is inflation and inflation by certain categories.

So if we get a lot of inflation and it happens to be in high dollar categories -- categories that sometimes are fee per pound or fee per case, then that can play havoc with that particular number. So it is part of what we look at, but, as Bill says, we are driving the business for gross profit dollar growth. And that is why we were generally pleased with the way we exited the quarter with the amount of growth that we saw in March.

Yes, that makes sense. Okay, and then just last question for you. Category management, maybe -- could you provide just a bit more detail on sort of what you are seeing out there, what you are hearing from customers, where you are at? And I guess even more specifically, like how are sales doing in the category and how are gross profit dollars doing in the categories?

Sure. So we are a year into this now and, as I mentioned, we are deep into Wave 1 and 2. And we think by the end of the year we will have launched about 30% of what we call the [influencable] spend, which is about two-thirds of our spend, 60% to 70%.

We're getting better at executing it, so I would tell you there is certainly opportunity to improve, but we are certainly getting better in terms of working within our corporate merchandising team and with our OpCos in terms of how we communicate these category initiatives as they come out. There are a lot of categories out there being launched right now.

We're getting better in terms of working with our OpCos to work with their customers and their sales force on how to position the opportunities for the customer as well. Again plenty of opportunity to improve over the next 12 to 18 months as well.

So I think our execution is getting better both on the communication side as well as on the conversion side. We continue to see very good reductions in the cost of goods, certainly as much at times better than what we originally planned.

The sales line, while we had some challenges early on there in terms of some of the conversions, I think we are getting better as a Company in terms of positioning those conversions with customers. And in the subsequent waves the sales trends are somewhat better than what we saw in the pilot.

So I would say -- I would characterize that as gradual continuous improvement on the execution, still relatively early days here and it will be a big part of our progress for next fiscal year as well.

Great, thank you.

Karen Short, Deutsche Bank.

Just a couple questions on the MAs. I guess wondering if you could -- you made a comment in the press release, Bill, about improved weather and locally managed sales strengthened I guess. So I guess the first question is what do you mean by -- exactly buy it locally managed sales strengthened?

And then the second part of that question is, I guess there is definitely rumblings out there that people might be going after your MAs knowing that there is going to be disruption. So wondering in this kind of environment as you are leading into the close, how do you retain your best salespeople and how do you appease them that there won't be as much disruption as some people fear?

Yes. So let me take the first one, Karen. So locally managed was something I have kind of coined here over the last 18 months. We use it more internally, but I don't really like to speak externally differently than I do internally.

So it is an attempt, which is getting traction now within Sysco to have more clarity for operating in our market presidents so the certain segment of sales which we would call street sales, local contract, bid and other, basically where the customer and that decision maker, that relationship is driven at the local OpCo. We have just kind of bundled that a little bit more than just talking about street from an accountability standpoint and from an influencing standpoint.

So it is an internal terminology. We still look at street within that number so we look at both. I would tell you, and I think you would know this, over the last four to six quarters what we have seen is our corporate manager, largely our national and large regional business, has grown at a faster rate than our locally managed. And in fact the locally managed year growth is pretty modest and it was modest again in January and February.

So what I was referring to there is it did strengthen in March along with the other book of business as well and that is very encouraging and that is a key part of our growth and it is a key part of our profitability leverage as well. So it is a big part of our business and something we've put a lot of emphasis on.

And in fairness a lot of these initiatives we have been driving out both in terms of the sales organization, [cap man] that kind of thing, that directly impacts that sales force, our local sales management teams and ultimately the customer. And so, there is been a fair amount of distractions out there over the last year and I think we're starting to see that we are through a lot of that and beginning to manage it better.

As far as MA retention or MA numbers, we had situations in some of our companies last year where we -- as we had some of that distraction and disruption we allowed our MA workforce to fall well below what our target numbers were and we are coming back there. So we are not all the way back but we had targeted growth numbers for this year and we are beginning to approach those to get to the level we want to get to. We did eliminate several unprofitable territories about a year ago and we pretty have much worked our way through that process.

As far as the marketplace -- please take this the right way -- our people are always under high demand. Everybody comes after our salespeople. We do generally a pretty good job of retaining them. And I would say from the merger standpoint our folks right now are excited. And while there are some isolated situations there I wouldn't necessarily attribute them to the merger.

And that may be a challenge, I think, as we pull all this together, but right now I wouldn't tell you that it is -- it's not a big issue from the Sysco side. And it could be an issue as we put the companies together.

Okay, that is very helpful. And then just on Denver/New Orleans, you commented that they were the most successful conversions yet. Maybe can you just talk a little bit more about why and what you did? And then what are your plans, remind me, if you said it I missed it, but for conversions for the rest of the year?

Yes, well Denver and New Orleans, first of all they are both very large companies, very profitable companies, so that was a big step. I mentioned one example in my prepared remarks where, believe it or not, data management has been an issue for us, I mean that is the basic thing that you look at in all conversions. But one of the things that happens when there is that much change going on sometimes you don't have as consistent a focus as you need.

So we took that learning from the previous conversions and did much better and we'll continue to do better on that front. I would also tell you on the customer side we were more connected in particular with our larger regional and national customers in terms of how the conversion would impact them.

And so, as issues did arise we were much more connected as an organization between the technology group and the sales group and that was a big positive as well. So those will be two things that I would call out.

As far as going forward, we are having those discussions right now. We're going to need to overlay our view of the integration planning work currently that is going on with the merger and look at that. There is an opportunity to do probably a couple more companies and we haven't made a final decision on that. But I think there is a good chance we will probably do two more and then take a step back and look at where we are in the merger.

Great, thanks a lot.

Meredith Adler, Barclays.

My first question is you talked about MAs at your own Company. Can you talk about -- at all about what is happening at US Foods?

Meredith, this is Chris. We really can't. We are competitors in the market and while we are going through a tremendous amount of integration planning we really are trying to avoid talking about their performance, their sales, their own challenges, and issues (technical difficulty) [successes] out there. So that is something better directed directly to them.

Okay. I also have a question about -- you didn't talk about the Easter shift at all impacting March, it probably would have been negative. And March was very strong. Do you think it would have been stronger if it hadn't been for the Easter shift?

What was the first part of the question, Meredith? What would've been negative?

The Easter shift from March to April.

Yes. So your question is if Easter had been earlier would it have been better?

Yes.

No, I think a late Easter helped us. Interesting though, it didn't really help us that much -- well I can't say this. Our performance in Florida, which is where you would see most of the Easter benefit, wasn't that different, wasn't any better than the other regions until the week of Easter and then we definitely saw the fact that certainly there were still more people in Florida.

What you hear in Florida is regardless of the calendar people tend to stay -- a lot of people tend to stay until Easter. So it helped us that week. I think what really helped us a lot a lot in March, Meredith, was what hurt us in January and February, where people in a good number of parts of the country had been locked up in their homes and wanted to get out and did get out more. So I would say a late Easter helped us somewhat, but probably not as much as the other side of the weather discussion.

Okay, great. Thank you very much.

Ajay Jain, Cantor Fitzgerald.

First on business transformation, I know, Chris, you mentioned that you are capitalizing more of the project and shifting some of the allocation on expenses. I am just wondering if the merger developments have had any impact on how you are looking at business transformation.

Like do you have to tweak things in any way based on the business transformation process that is going on in parallel over at US Foods? So just wondering in terms of the capital allocation priorities if anything has changed.

Yes, it seems like there were several questions there, so tell me if I don't get to all of them. We are obviously taking into consideration the integration planning and what may occur post-merger. But in terms of how we report our business transformation today and how we are going about our business today really not that much impact.

So we are in planning phase for integration but we are not allowing it to impact what we're doing from a business transformation perspective going after the benefits of the way we look at the cost, etc.

What will impact it, and Bill alluded to it here a few minutes ago, is as we think about overlaying the merger into our Company and especially from the business technology standpoint, we have to rethink about rollout schedules, we have to rethink how we are going to put the companies together technologically. That will have an impact and we are playing through various scenarios on that right now.

Okay, that was helpful. And just in terms of the timing of the merger, it looks like you are still targeting closing by the end of September. And just wondering does that seem like a realistic timeframe based on how things are going with the FTC process and does that really provide enough time to get the necessary shareholder approval?

Well, yes, we don't need the shareholder approval on their side, they essentially have it whenever they need it. But we still believe it is a realistic timeframe. I think the way we would characterize our interactions with the FTC and the regulatory process it is pretty much as expected. We don't have any reason to believe that we will be significantly faster or slower than what we expected from the very beginning. So we still think Q3 is realistic.

Okay, and I just had one final question if I could. Can you just comment any further on inflation so far this quarter? I think, Bill, you talked about double-digit increases in certain categories, but just at an aggregate level how much is your cost of goods inflation right now compared to I guess it was around 1% from last quarter?

Yes, we wouldn't necessarily give you anything forward-looking. I know we have talked a little bit about April here just because there is a trend in March. We wanted to give you some color about what is going on with that trend. I think the way I'd characterize it is we went from almost nothing, which is that 1%, to something.

There are three very specific categories we have called out that are kind of double-digit inflationary categories. But as Bill said, the rest are really not an issue, they are either flat or even slightly down. So it averages out to certainly more than 1% but that is about all we will say. And it is only April, we have got a couple more months before we build out the quarter.

Great, thank you.

Mark Wiltamuth, Jefferies.

Is there any update for us on the net positives you expect from business transformation now that you have changed the accounting a little bit on how the costs are going to be done?

Yes, the way that we are allocating the cost really doesn't impact the benefit at all. We have been tracking this -- for those that have followed us, yourself included, Mark, of course -- the benefit side and the cost side. So on the benefit side we said $600 million of benefits we would achieve over three years, Bill said it in his prepared remarks, I have reiterated, we are still on track to achieve that.

We hit our numbers for the first year, at midyear we said we were still on track for this year and we've reiterated we still believe we're going to hit those numbers for the three years combined. So, on the benefit side, no change. What we are really talking about or what I refer to is on the cost side.

This is a long process and there is a lot going on and we are changing a lot. As we go through this much change we are having to take new looks at how we allocate costs, how we think about expenses, etc. So we have had some restatements we have talked about -- or not restatements but adjusting the way we look at things. And in this particular case we looked at the way we allocate our labor and we just said, it is more precise to do it the new way.

So I've got two choices, I either have to restate or give you a new look at the guidance using the new methodology, which is what we opted to do. Or we have to somehow go backward and tell you what it would have been in prior quarters -- prior years and frankly that would have taken a lot more effort.

So we are giving you a new set of guidance based upon the new methodology. Our variance this year from the old guidance, that $300 million to $350 million a year, is really about half-and-half capitalization of labor and methodology change on how we actually account for the labor. So that is the change.

Frankly, if we did it under the old methodology we would still be in the old guidance. So we are just changing the guidance so we can report it differently going forward. It does not impact the benefits.

Okay, thank you. And on the point of attrition there has been all this chatter in the marketplace on potential loss of some customers in reaction to the US Foods merger. Any color on what the customers are saying? What you have been hearing from your side? And is there any assurance that you are still retaining the customers on the US Foods side?

Well, again, we are not going to comment on the US Foods side. But I would tell you from our perspective we have had an opportunity at very senior levels of management to speak with virtually all of our top customers and at the local level our Presidents and VPs of sales have been out talking to many of their customers as well.

And I think as time has gone on people -- we've been able to explain the reasons for the merger and the opportunities and some of the challenges that will come with that in early days and the transition and that kind of thing. So I would characterize the visits with the customers from our perspective as very constructive, largely supportive and they have a lot of questions.

And as you can imagine, one of their key questions is, to what extent will this disrupt service, that type of thing, as we go through the transition? And obviously that is a big priority for us to minimize that type thing. So, so far I would say we have had very good visits with our customers.

Okay. And then on the US Foods side, are they on the same ERP system as you? And how do you feel like that will go on transitioning their system?

Yes, they are not on our old system which was a kind of customized proprietary system for Sysco. They had their own somewhat customized proprietary system. They are not on SAP either. So the way we have looked at this, and I think we have talked about this a little bit, is each company has a system, we are moving towards SAP as a unifying system.

We do believe, and we have said publicly, that we think it is the right system for the combined entities post merger. So we will have to build a bridge so that both systems can communicate and talk to each other in the near- and medium-term and then a new roadmap to eventually get it all to the new ERP platform over time.

Okay, thank you very much.

(Operator Instructions). John Ivankoe, JPMorgan.

Good morning, thanks, it is (inaudible) on for John. I guess the first question -- you touched on it a little bit, but with SAP in I think 10 facilities now, it would seem like you'd have a pretty decent sample size to compare to the baseline OpCos.

So I was just hoping maybe you could provide some more texture around where some of the most meaningful differentiation is coming versus the OpCos that don't have the systems? Is it on the profitability side, is it in case volume growth, are you just generally getting better customer feedback around execution? Just some color around that would be great.

Yes, I would say 10 companies, while we are pleased with that in the scheme of 70 is still early days. And our focus, as I pointed out in my comments, over the last six to 12 months, has been more about stabilizing the system and improving the performance. And we have seen that in those companies.

So on the sales side in terms of the speed of the system, that type of thing we have made a lot of very good strides there. Our service levels continue to improve and get toward the level of our other operating -- of our legacy companies, if you will.

We still have opportunities to manage the inventory more efficiently and effectively and we're working on some things there. So we are pleased with the progress that we are making, but I wouldn't want to get in a discussion today on it relative to the legacy companies because it is still early days.

Okay. And then just changing gears a little bit. We haven't talked about it a lot recently, but I guess where from your perspective -- obviously you have many things going on right now, but where Sysco Ventures might fit in terms of your priorities from a longer-term perspective.

Especially given the fact that with the scale that you have you probably have a treasure trove of information about what is working on restaurant customers' menus from both a sales and profitability standpoint. So it seems like it would be something that could be a pretty major differentiation for you versus maybe other competitors in the space.

We agree. We think Ventures is a key strategic opportunity for us. We are beginning to gain traction and we put together the platform with a Company called Leapset about a year ago. We have rolled out certain solutions in certain markets, we are seeing some progress there.

We still have a big opportunity here to get it more integrated into the business. We've made some progress there working with several solutions, there is more solutions to come.

So I would agree with you that with this merger it gives us an even stronger platform in terms of customers to leverage this capability and to build stronger, more effective relationships with a greater number of customers.

So it is a key part of our strategy and I think as we get deeper into the merger planning work we will be able to speak more specifically in terms of work structure and that type of thing in terms of how we are going to drive it out.

Okay, great. And just lastly, in terms of the CapEx I guess, Chris, directionally going forward. Obviously you have got the merger going on. But with some of the fleet optimization initiatives and maybe some of the business transformation initiatives being completed, is CapEx directionally likely to step down from that $500 million to $550 million net of asset sales or is it something that is kind of like a stable level of investment that is going to be ongoing?

It's a good question. Our goal has not been on a specific dollar amount but more around the 1 to 1.2 percentage of sales, which we are rapidly approaching. And so, when we get to that level and preferably the lower end of that level we will feel like we've got the right amount of base capital that should be able to grow every year as we grow the business through volume growth.

Now overlay that the merger and, yes, we have got to take a new look at that. We've got a lot of people looking through what that is going to mean in terms of what I will call one time capital to make the networks work well together. Post that we will have to reevaluate.

I have got a personal belief that we should be able to get long-term run rate capital down to the low end of our range if not even slightly below that range just based upon scale. But that remains to be proven out and it's several years off.

Very helpful, thank you.

Erin Lash, Morningstar.

I wanted to touch on some of the ad spend that you had been doing in you partnership with Robert Irvine over the past couple of years and how effective that has been or maybe hasn't been?

We think it has been very effective. We are in year two with Chef Irvine and, as we've talked about in the past, one of the reasons we partnered with him and Food Network is roughly 70% of our customers tune into that network on a regular basis and in particular watch his shows.

So he has been a great ambassador for Sysco both through the network as well as in personal appearances and working with our OpCos and doing some nice work as well in the community. So we are very pleased with that partnership and we have got some new ads that are going to be coming out this year. And I think you will continue to see it as a very significant positive for us from a marketing standpoint.

I will also say it is giving our marketing associates a lot to be excited about. We get that feedback constantly from our MAs. So that is positive as well for our system.

Thank you, that is very helpful. And then I just wanted to ask about the Sysco brand overall and I think you had been making some investments behind the Sysco brand and how to better tout that I think in front of customers. And I was wondering what kind of the mix is between the Sysco brand and private label and how those efforts are progressing?

Are you talking about the product brand or the corporate brand, Erin?

The product -- within the product sales.

Yes, I think what you are referring to is over the last year you have seen the numbers pick up a little bit in terms of the street or the local and that has been good. But I would also quickly say as we go through and do the category management work and our customer insights work we're trying to strike the right balance between what customers want and need and how our brand lines up with that as opposed to just trying to push our brand out there for the sake of pushing the brand.

So I'm actually very pleased with the work that has been done in the merchandising area over the last couple, three years in terms of going through and looking at all the specs in our various categories as we have -- even before the category management work started but in conjunction with that now as well as combining that with our customer insight work.

So, we don't have a particular number in mind there necessarily, we're just trying to strike the right balance with our customers. Where we really do have a value added product, we want to make sure that we are positioning it properly.

Thank you very much.

And it appears there are no further questions. At this time I would like to thank everyone for their participation. You may now disconnect.