Sysco Corporation Presents at 2013 Consumer Analyst Group of New York Conference, Feb-19-2013 04:15 PM

Feb.19.13 | About: SYSCO Corporation (SYY)

SYSCO Corporation (NYSE:SYY)

February 19, 2013 4:15 pm ET


William J. DeLaney - Chief Executive Officer, President, Director, Chairman of Employee Benefits Committee, Member of Finance Committee and Member of Executive Committee

Robert C. Kreidler - Chief Financial Officer and Executive Vice President

William W. Goetz - Senior Vice President of Marketing

Neil A. Russell - Vice President of Investor Relations


Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

If we could all find our seats. Good afternoon, and welcome. I'm Jonathan Feeney, conference cochair this year, and we're glad to once again have the senior management of Sysco with us. That's Bill DeLaney, President and Chief Executive Officer; Chris Kreidler, EVP and Chief Financial Officer; Bill Goetz, Senior Vice President of Marketing; and Neil Russell, Vice President, Investor Relations.

And before we begin, we'd like to thank all of you at Sysco, the senior management, all of Sysco, for a very special dinner and entertainment tonight. Thank you guys very much for stepping up. I appreciate that. And as a reminder to all of you, this is a seated dinner and show that starts promptly at 7 p.m. So please get there early, get a drink or 2 or 3. And whatever you do, be seated by 7 p.m. because that's when our dinner and show starts.

Sysco has a very proud heritage as premier partner to the food service industry. They bring both -- they bring their scale in both logistics and creativity to their customers, large and small, and always with a long-term focus on return on capital for shareholders.

Here to tell us more is Bill DeLaney, President and CEO. Bill?

William J. DeLaney

Thank you, Jon. Good afternoon, everybody. We appreciate the opportunity to be here again this year, and as Jon mentioned, we've got Chris and Bill up here for our presentation, and we are really looking forward to cosponsoring the dinner tonight. We've just recently entered into a relationship with the Food Network, and Chef Irvine will be with us tonight, and I think you'll enjoy that a great deal. So it would be good to get there on time, but I'm sure that won't be a problem for most of us.

As far as my presentation goes today, I'm going to spend a few minutes just updating you on the market and talk a little bit about how we're competing in that market and then spend most of the time giving update on our strategy and how we look to execute over the next several years in a market that, clearly, is much different than the one that most of us spent our formative years in.

Get through the disclaimers there. So the market itself, we're very fortunate. It's a $235 billion market. Our primary areas of conducting business are the United States, Canada and Ireland, and we're the clear leader in all those markets on the food service side of the ball. And we have roughly about 18% market share.

The market itself had very strong growth back in the '80s and '90s. It's leveled out some. Looking forward from our perspective, we get a lot of feedback, as you do, from a lot of industry experts. We look for 1%, 1.5% real growth in our marketplace, with some pricing on top of that. And certainly, our expectation is to grow faster than the market. And we've got a pretty good track record of doing that, and I'll touch on that here in a minute as well.

The other thing that we look to do is to expand the market, expand our opportunities, if you will, within the market. That's also something that we've been able to do over several years, really, and I'll take you through that in a little bit more detail as well. So we look for that space to continue to grow both in terms of core growth of the market and us also identifying other opportunities where we can bring our capabilities and leverage those in different spaces.

All right. Food service market, $235 billion. What is food service? Largely, the way we look at it, food service is any meal prepared and generally eaten away from home. So restaurants make up the bulk of that market, a little under 60%, but not all of it. So health care, travel and leisure, and in our world, travel and leisure would be hotel, motels, sports stadiums, that type of thing, education, secondary schools, colleges, a lot of different components of the marketplace itself. So roughly 60% of it is restaurant. The other part of it, there's a pretty good buffer, actually, to some of the ups and downs of the economy, and we have good share in all these markets. We're a little overweighted, I would say, on the restaurant side and on health care, but we have tremendous opportunity in every segment on this slide.

Just a couple of comments on current trends. I know you've had a lot of people in here already today, and the focus of the conference is around food, I believe, or largely around food over the next couple of days. What we're seeing on the restaurant side -- now this is the restaurant sales. So if you go back as we have here and just look to some quarterly data over about the last 2.5 years, you can see that the restaurants have been growing their business. But as we've been saying, really, since 2009, this economy or this so-called recovery, or at least our part of it, is still pretty choppy and uneven. And you can see it's moved up and down there. Most of the growth we've seen, and it's been consistent growth on the dollar side, has been with folks like us. When we're going out, they're spending a little bit more when we're there.

The traffic has been more volatile, some peaks and valleys. And about this time last year, we were entering into a peak unbeknownst to us, but we saw some good case growth on our side of the ledger as well. We're coming out of a strong holiday season and really favorable weather conditions up north. So that helped us quite a bit. It's a little softer out there right now. We talked about that on our earnings call a couple of weeks ago. And we're more of a trough right now, and I expect that to be a little soft here for the near term. But as with all things, I expect it to come back, and we expect to be very prepared to take advantage of the growth that should continue on the restaurant side. But obviously, the restaurant is key part of what we do.

As far as taking share, Sysco, for those of you who follow us pretty much know the story, the company was formed in 1969. It went public in 1970. By 1980, we had about $1 billion in sales, and at that point in time, you can see here about 2% market share. Year in and year out, pretty much -- but definitely, on average, over the last 30 years or so, since then, we've been able to take about 0.5 point a share a year, and we expect to continue to do that. And that's taken us up to about this 18% mark that I mentioned in my earlier remarks.

This is a new slide for us and frankly, one that caught me a little bit off guard. So if you just look at what we've done and what the industry has done since the turn of the century here, 2000, our space, U.S., Canada and now Ireland, has grown from about $190 billion market potential to a $235 billion market potential. And we've been able to basically take almost half of that growth. So just a little bit under half of that growth has come to Sysco's top line. And it's been challenging at times, certainly, but I think that's a pretty compelling illustration of what we're able to do in the marketplace and what we intend to do as we go forward.

So market share is one thing. The size of the market's another. How do we find ways to continue to expand the market in the space that we're in? And the reality is it's something that we've strategized over more -- probably the last 4 or 5 years, and we can articulate it better today. But the reality is since the late '90s, in 2000, we've been doing just that.

We were essentially a broadliner for the first 30 years, full set of products for our customers. We did create SYGMA, which is more of a quick-serve distribution option in the mid-'80s, but pretty much traditional food service company until the late '90s. And then what you're seeing on this slide is we went on an acquisition journey, where we enhanced our center of the play offerings by buying several meat companies. We didn't integrate them as well as we should have early on, but we're doing a really nice job of that right now. We enhanced our produce offering with a specialty produce company that we acquired in early 2000. We expanded into hotel amenities with Guest Supply. We've also expanded our geography.

We had a couple of companies in Canada through the late '90s, and then we did a major acquisition, the [indiscernible] food service division back in the early 2000s, and that really filled out the map floors in Canada. And then of late, we acquired European Imports last year, which was really a nice expansion of our offering on imported product, which we're integrating into our OpCos and also into our purchasing. And we're also starting up a venture company. I'll touch on that a little bit more.

So I think the point is what is today's adjacency becomes tomorrow's core, and we've done a nice job pretty consistently over the last 12 or 15 years in building that out, which gives us confidence for the future.

All right. Big market, like I said, pretty good track record of growing share, expanding the market. But in all honesty, as we've said to this group before and said consistently the last 4 or 5 years, we're in a very different market today than what we were in those first 20 or 30 years. And we've had to adjust to that, and I'm going to talk a fair amount about some of the initiatives we have going on in Sysco. Chris will fill in that in a little more detail, talk about our strategy. But the first thing we did about 3 years ago is we had to get clarity on just exactly what is our vision for this company and how do we want to articulate that both internally and externally, so everyone is coming from the same place. And we landed on this, to be our customers' most valued and trusted business partner. So we've always been very customer-focused, and I think if you went around Sysco and met our people in all lines of work, from selling, to the warehouse, to drivers, to corporate support, we would all tell you that we're very customer-focused. But I think at times, everybody has their own definition of what that meant, and we all had our own little prison that we went through.

So the way that we try to use this vision statement, the way I try to use it, is every major decision, every major strategic fork in the road we're looking at, what's the best thing to do for the customer? Now it's not always the best thing for that day or the next day. There's changes we're undertaking here that do create some disruption, and we have to work through those and we have to continue to improve our execution. But what this did do is change the axis a little bit in Sysco, and it's not just about the corporate office. It's not about the OpCo, not just about the MA. It's about all of us working together to enhance our offering for our customers and keep that as our major focus. So these few words here were actually quite hard to craft, but this is the foundation in terms of the vision of how we run the company.

We put together our 5-point strategy statement. We've taken that through before. We illustrated this a little bit different today. Just think partnership, productivity, products, expansion and people. On the partnership side, certainly, we need to partner more effectively and more often with our customers and with our prospective customers. We also need to partner much more effectively with our suppliers that carry out our initiatives and for that matter, any third party that we work with. And that's a big part of how we are driving out our strategic initiatives today and going forward.

Productivity, that's essentially increasing, enhancing our productivity in everything that we do, all parts of the business, a lot of opportunities go on the operations side, plenty of opportunity on the SG&A side.

Products and services. We've always been a company that's had a broad offering of products as we go through some of our new initiatives with our suppliers, certainly bringing more innovation to that product line and enhancing our services to create more differentiation in the eyes of our customer. Very, very important. I've touched a little bit already about opportunities that we've taken advantage of in the past and we hope to take advantage of in the future in terms of adjacent acquisitions, as well as geographic acquisitions. But we shouldn't forget the core, and Chris will take you through the core, but we have a lot of good, solid activity going on in our core space today.

And people. People are critical. That's not exactly an insight, but in the world that we're in today and the challenges that we all have, that hits you in the face every morning and every evening on the way home, and I would tell you we've got several of our leadership team here today. You'll see them at dinner. Mike Green is with us. I would invite everyone to sit at Mike Green's table tonight. He'll have a lot of good perspective for you on the business. But Mike oversees all of our operations, and he has 15 to 20 key leaders at the senior VP level, at the market level and then another 80 or so key operating company presidents, and they all have senior staff. And we're not perfect. We have plenty of opportunity, but that group that he has is second to none in our industry, and we're very proud of what they do.

Now we've been giving Mike a lot of help of late, probably more than he would like at times. And we surrounded him and all of us with a lot of other people that we brought into the company as well. So over the last 5 or 10 years, we really improved and enhanced our skill sets in the merchandising area, supply chain, technology and also, in the last 3 or 4 years, strengthened our senior team quite a bit. We brought in more leaders at the senior level in Sysco in the last 3 years than we've ever done. So strong long-term group of people that know the business and run it, complemented by a lot of strength coming in with folks that have the capabilities and the skill sets we need to take us through this transformation that we're going to talk about.

All right. So what's the focus here? I'm going to go through this pretty quick, but it's pretty succinct. What we need to do and what we are doing both on a day-to-day basis in terms of how we run the business and as we drive our strategic initiatives, sustainable profitable growth, enhancing our operating margin and do this in a way that we can leverage our cash flow even better than we have historically.

As far as sustainable profitable growth, that comes in all form. We need to drive the core business. We need to grow faster than the market, and we need to improve our customer retention. We're making good strides there. We need to continue to focus on bringing in new business. And even if our customers are experiencing softness, finding ways to differentiate ourselves in their eyes to penetrate their lines and grow organically. So organic growth, acquisition growth of all kinds, core and beyond the core.

Operating margin starts with differentiation, but on top of that, Chris will take you through this. As I mentioned, we have several key initiatives going on in the company today to lower our operating cost structure and to lower our product cost structure, working with our suppliers in a way that we can both grow the business, strengthen those relationships, lower our product cost, be more competitive for our customers and be more innovative at the same time.

Generating cash flow has always been a strength of Sysco's, but the reality is we can be even better and we need to be even better. Chris and his team have helped bring more focus to that. So we have opportunities to improve our working capital management. We've created more discipline within the company on capital allocation, and we do that for one reason, which is one of our biggest strengths is our cash flow and our balance sheet, which has a fair amount of debt capacity, and we need to continue to grow that to take advantage of the opportunities that, we think, lie ahead.

So, sustainable profitable growth, enhancing our operating margin, optimizing our cash flow, return on invested capital, leveraging our size and scale more effectively than we ever have. And I will tell this group, I probably said this last year, but I'll say it with even more enthusiasm this year, our biggest single opportunity in Sysco is to work more cohesively as one company, to take all of our strengths and all the capabilities that our 47,000 people have and all of our functional expertise and strike the right balance in terms of how we should present ourselves to our customers in terms of what's important to them, how they prioritize their needs. And that's a big part of the change that's going on inside the company today.

So one, Sysco driving value at the customer level in a way that rewards our shareholders but also maintains and reemphasizes some core values that, frankly, haven't changed. Again, we may articulate them a little differently today than we did 25 or 35 years ago, but these haven't changed: impeccable integrity, commitment to developing our people and recruiting great people, providing the right type of work environment for our folks to work in, sustainable business practices so that we'll all be around here to continue to grow the business for years to come and courageous leadership. We've had great leaders throughout Sysco's history, and they've opened doors for all of us here and created a lot of opportunity for us. But it does take a little bit of strength and intestinal fortitude to make some of the moves we're making right now given the success that the company's had over time, and these are the right moves to make.

Transforming the way we do business. I'm going to take a couple of minutes on this slide. This is a high-level view of just 4 or 5 key initiatives that are going on inside the company today. It starts with customer insights. Bill Goetz is joining us today. Bill came onboard a little over a year ago, and it's really the first customer-oriented marketing function we've had in the history of Sysco. And Bill is building a good team, working with a lot of great third parties. And we are in the process now of gaining much better understanding of what's important to our customers, what their insights are and scaling that internally, so we can drive out meaningful change and meaningful responses throughout the company at every level. And we're excited about that.

We need to expand and enhance our sales channels. Our marketing associates generate about half the revenue of our company, and that's our primary sales channel. I expect it to be our primary sales channel for a good while here in the future, but we also -- we need to support them through better tools and their managers with better tools. And so we're driving a very solid CRM platform for those folks to use, and I'm very optimistic about what that's going to do to help us provide a better offering more efficiently and more effectively to our customers. We're also looking at other channels, inside sales, online sales, those types of things.

Category management. I'll just give you the highlights today. We're close to rolling out a pilot of 4 categories, a significant amount of our spend. This is about optimizing our product assortment, leveraging our buying power and accelerating the sales growth both for us and for our suppliers. So it's a big, big change going on in the company, and significant resources are being invested. And we're very optimistic about the opportunity, but we're also quite aware that this will be something we need to execute very well at the MA level and at the customer level.

Sysco Ventures is a new entity, started up a couple of years ago. Brian Beach is heading that up for us. And essentially, we're looking to put together a platform where we can put together business solutions, largely technology-driven, to help us better partner with our customers, create traction with them, strengthen those relationships and grow the business profitably at the same time. And we're also going through, as all of you know or at least the ones who follow us, a massive technology change, a transformation journey, whatever you want to call it, at this point as well. That's the foundation for all this change. It needs to get done to support the ultimate development of all these initiatives. It does not need to get done for us to kick off these initiatives. And we've rolled out that -- the 5 companies at this point. We ran into some challenges, and we're working through those. I'm quite optimistic that over time, we'll drive that out the right way and we'll strike the right balance here in terms of the need for change, as well as our ability to execute it.

So those are 5 key things that are going on in this company right now that we'd be happy to take you through in more detail in the Q&A.

A couple of points just before I sit down. We -- as I said, I've been around Sysco about -- I'm sorry, my 25th year, actually, with the company. And we always have been very focused, as I mentioned earlier, on how important it is to provide good service for our customers. The difference is today, we're measuring that not just by our service levels, which are very, very high and frankly, expected by the customers today, but we're also beginning to measure our performance relative to what customers expect.

And we seek -- the key to driving out that service is to provide great opportunities for growth for our employees. So we believe if we do that, we'll continue to be able to reward our shareholders in the right way. The 40-year number there is certainly one we aspire to. That might be hard to catch, but that's still a live number here after 40 years. I'm very proud of the long-term track record of Sysco. The 3- and 5-year returns have been more medium-type returns. And I would tell you quite candidly that a good part of that return has been supported by the dividend. That's not by accident. We're going through a big inflection point, as I've noted, big transformation. And when you do that, sometimes, the earnings are going to be a little choppy, and the performance could be a little bit up and down. So we know the dividend's very important to our shareholders, and we've grown it nicely over the last several years, and today, that's a key part of our shareholder return.

I think in summary, as far as my prepared comments go, I will tell you these are incredibly exciting times at Sysco. Challenging, to be sure, but very exciting.

Now there's 3 points I'd like to leave you with for today. We operate in a $235 billion market, very fortunate to do so. We're the leader in that market, and there's a lot of opportunities to grow, both for the market itself, as well as for us to take share and expand our opportunities within that market. And we, as a management team, with the support of our board, are very aggressively and proactively enhancing our business model to fully realize these opportunities in a profitable manner in a world that's going to be very different over the next 5 to 10 years than what we've experienced over the last 40.

Again, I really appreciate the opportunity to be in front of all of you today. And with that, I'm going to pass it over here to Chris to continue the presentation. Thank you.

Robert C. Kreidler

Thanks, Bill. So back in spring of last year at our Investor Day, we set out a road map to 2015, fiscal 2015 for us. The concept of that road map was really simple. I'll get it up here. There we go. Grow the underlying business.

When I talk about the underlying business, that's taking out all the noise from our business transformation, ERP expenses, one-timers, things of that nature. So what's the underlying business generating on a day-to-day, quarter-to-quarter basis? Grow it organically, grow it through acquisitions and grow it with better customer insights, which Bill and his team are providing us, and with more attention to cost controls, which we've always been fairly good at at Sysco, but we just needed even more attention and focus on them. In addition, that road map called for us to successfully implement our business transformation. We're going to talk a bit more about where we are in that journey. And also somewhat new, more focus on free cash flow.

So as Bill said, Sysco's always been very good about generating cash flow, and at times, we've been very good about generating it all the way to the free cash flow line. But along the way, I think our focus has been directed on other things. We've certainly refocused our attention on free cash flow here of late. All of this it, when we do it right and do it the right way, of course, is going to generate significant shareholder returns similar to that 40-year chart that Bill just had up there.

So I got to start with the first half, and this is really the only kind of near-term information I'm going to talk about today because I want to stay a little bit more on the side of what are we doing and our plans and our strategies and our initiatives. But in the first half, you can see the numbers here. They continue to reflect, frankly, the challenges we've been facing over the last few quarters with both the macroeconomic environment, as well as some of the things going on in our industry.

So sales were up 5%, right in the middle of the long-term guidance range that we've given you guys, 4% to 6% kind of long term, 5% dead in the middle of that. It's a little more evenly split now between inflation and case growth. As early as a year ago, we had a lot more inflation built into those numbers, and of course, they were higher than the 5%.

Gross profit, however, was only up about 3.5%, and again, that's symbolic of what's going on with regards to things in our industry. So there's not a lot of traffic going into the Restaurant segment, which is roughly 70%, a little less than 70% of our business, not a lot of new case growth. And if you look into Technomics and others, less than 1%. So you've got very little in terms of new case growth, new case volume but a whole lot of competition competing for that volume. So that's led to pressure on the margins on our gross profit, and that's something we have to contend with, and we're getting better at doing that.

In the face of those trends, we continue to grow our underlying earnings. So we've set out, back again at Investor Day, a goal of 4% to 6% underlying earnings, and you can see in this graph, depending on where you start -- and there's a reason we started with '07. It was kind of the last of the precrash years, the last real year, if you will, before noise started getting in the way. We've been growing about 6%. True, what I just talked about. Lately, it's more like 4%. So we're at the bottom end of that underlying growth of earnings that we need to achieve to make our road map work, and so we've got to keep working on that.

But we continue to grow the earnings of the underlying business, not a growth rate that we're happy with long term, but for all the reasons Bill talked about and what I'm going to cover here, it's acceptable for now while we invest in the future. Case growth obviously continues to be fairly robust. So you see some 4s at the beginning of this chart, 4.5%, 5% case growth. It's a little less than that today, but it's still fairly robust case growth. And you see the gold part of these bars, that's the contribution from acquisitions. Acquisitions have always been a healthy part of our case growth. They'll continue to be, and that's a good thing because we're also starting to consolidate -- slowly but surely, consolidate the industry.

Now the last chart showed you -- this chart will show you even more. Our acquisition activity has picked up significantly here over the last couple of years both in terms of the value or the dollars, as well as in the number of transactions. I've got to point out, fiscal '13 is a big blip on here, and it's only half a year, obviously. We only have, I think, 7 months represented, this is year-to-date through January, 7 months represented in the fiscal '13 line or bar. And I believe that, that will be even higher before we're done.

In terms of dollars, we've given guidance in the past of 0.5% to 1% sales growth through acquisitions every year. I think we're gaining more and more confidence that we're going to be able to do at least 1% sales growth through acquisitions every year, and obviously, we're going to challenge ourselves to do better than that. But certainly, we've been able to achieve close to 1% or even better this year, significantly better than 1%.

In terms of numbers of deals, the people and the processes we've put in place over the last couple of years have allowed us to increase our deal activity 3x to 4x where it was just a few short years ago. Now frankly, I think we've got more room to run there as well. So we're making progress on generating more and more pipeline for transactions, which will help our case growth as we go through, again, the transformation and beyond.

We continue to focus on our existing markets, U.S., Canada, Ireland. We're also focusing on new markets. We continue to look at new markets, new segments and also new adjacencies. We have a very disciplined transaction process that we continue to improve upon. And valuations are, frankly, a little more reasonable than they were 2, 2.5 years ago.

So continuing on with the underlying business story, inflation has moderated. You guys have seen this happen. This is Sysco's food cost inflation that we talk about every quarter on our calls. You'll see it come down substantially from where it was 6 -- 4 to 6 quarters ago, basically back into our sweet spot, back into that 2% to 3% range that we kind of know as being the normal range for Sysco food costs. And then, as I said earlier, this allowed gross profit to rebound and improve but still not back to the levels that we needed to be back or back to -- or that we wanted to be back to longer term. But we're getting back to that 4% range. We need it to get north of 5% and closer even to 6%, and that's going to take more work.

Operating costs, we continue to manage down. It's an interesting chart. You see a little cyclicality here going -- which, frankly, is because of when the cases come in some of our seasonal business and how that interacts with some of our fixed costs, but you can see we continue to drive our operating costs down. Now we've had a couple of challenges here in the last couple of quarters, more on the delivery side than anywhere else. We'll continue to work through those, but we have always been good about lowering our operating costs, and we'll continue to do that.

So this is the same slide I showed a few minutes ago a little bit differently. So this is the line that basically is the 6% growth line. This is the line that since 2008, we've grown our underlying earnings, which represented here as adjusted EPS underlying, underlying earnings about 6%. But obviously, every quarter, we talk about a different set of numbers. We talk about these numbers down here by the orange line, and these are EPS after adjusting for certain items, so the one-timers, restructuring charges, et cetera. The space between those 2 is the investment we've been making in business transformation. It is a significant investment. We understand that. We've talked about that quite a bit, and there's significant returns on the other side of it, but this is the reason, obviously, we've not been able to achieve the reported numbers similar to what we've done in the past and what, frankly, we will be able to do in the future, when we get all this done.

So let's talk a little bit about where we are in business transformation. So a little bit of a review for those of you that have followed us. The business transformation, basically, has 3 major components here, starting on that left-hand side there of the graph, lower product costs. And our goal there is $250 million to $300 million over the 3-year period or by the end of fiscal '13, okay? And that's going to be an annual reduction by the end of fiscal '13. We said in the early years that'd be done more through sourcing, national sourcing, which we've done in the past, but we have more to do when we can improve what we call the compliance of our sourcing agreements, but then also start building in category management, something that's new and different for Sysco, something that takes a lot of ramp-up, frankly. We have begun the ramp-up process. Bill Day is here tonight. He and his teams have been bringing in the resources that we'll need to do category management over time. We have product categories that are out there, and we'll talk a little bit more about where we are here in a second. But we're making a lot of progress in category management. Got to go backwards. Won't let me go backwards. Got it. Thank you.

The middle box reduced cost structure by $300 million to $350 million. So this is not just operating costs, warehouse and transportation but also SG&A. So our sales cost, G&A both in the field, G&A at corporate as well. And then finally, that right-hand box, Bill already talked about it, is implementing that new technology platform, the ERP system.

So the orange box up there is a big call out. We've said it's going to cost us $300 million to $350 million a year as we go through the implementation process. It's a good range. We still feel like it's a good range, and that will be with us until we get through the implementation. But the benefits are significant as well.

So when you add up those 2 -- or those 2 areas, the first and the second one, you get about $550 million to $650 million of annualized benefits when we hit our run rate at the end of fiscal '15. There will be some additional benefits after '15. We're just not talking about those yet. But when you get the full ERP system implemented across all of our operating companies, there are additional benefits that you can derive from that, but that's past the fiscal '15 timeline that we've set to talk about here.

And here we've also showed the ramp up. So these aren't going to all come evenly. They're not going to all come early on. We said about 25% of these benefits will come in this year, this fiscal '13 that we're in today, 50% to 70% of them will come in next year and then we'll be at full run rate by the end of fiscal '14 -- sorry, fiscal '15.

So now let's put all this into a spreadsheet. Us finance guys love spreadsheets. And this is one I've actually shown before, so some of you have seen it. But if you start with that top line, and hopefully it's not too small, but I'll explain it, it's business transformation expenses and it's net of direct benefits from our shared service organization. Now those benefits aren't significant yet, but they will be significant over time, which is why we've set it up this way.

So you can see we ramped up from about $35 million to $100 million to a little less than $200 million of expenses last year. And that will go to that $300 million to $350 million range every year hereafter until we complete the implementation. The big step up is primarily because now that we've stopped designing and developing the machine and we've started to implement it, we're depreciating it. And so a substantial amount of that interest or that increase in expense is from the depreciation.

The line underneath that is business transformation benefit. So that 150, 360, 600 that are circled there, that's just from that prior page. That's 25% in the first year; 50% to 70%, I picked the midpoint, 60% of it in the second year; 100% run rate in the third year. Those are the benefits coming in.

So when you look at the next line, the net benefit line, that's the important one for us. So we've made significant benefits or significant expense -- or we generated significant expense getting to what should be in fiscal '14, what we call the crossover year, but the first year where the benefits should exceed the expenses. And then you look at '15, they start to become substantial benefits and thereafter they'll become even more substantial because once you finish implementing and rolling out the ERP system, your expenses drop off.

Capital down at the bottom. We spend a lot of capital developing the machine. We don't anticipate significant amounts of capital going forward. It's a $5 million to $20 million range. And then you also see the cash outlay down there, we laid out. It will help you get to depreciation. We expect that to step down a little bit, and we've seen it step down a little bit here, now that we've gone into the rollout.

So when we do everything I've talked about doing, so when we get continued growth from the underlying business, when we implement the ERP system, the business transformation initiatives successfully, we get EPS growth. The same slide that we showed back at our Investor Day about the bears [ph] reminding folks. We started fiscal '12 at $1.90. That's where we ended up fiscal '12. We'll have a bar there, green bar, first one from growth in the underlying business and then you get 3 bars from business transformation: reduce operating cost structure, lower our product costs and then we net the expenses again in the system. And the guidance we put out there is $2.50 to $2.75 a share fiscal '15.

Now this does not include restructuring charges, onetime charges. We've announced some of those here in the last few quarters. That's not included in here. I'm trying to get the run rates here.

So before I leave business transformation, let me give you a status report, an update, if you will, after 6 months. And this isn't going to have a whole lot of numbers in it, but conceptually you'll see a little bit, hopefully it'll be helpful. On our reduced cost structure, okay, a few things to walk you through on this slide. First, notice that as you might imagine, we plan benefits for '13, '14 and '15. This thing builds over time. I explained that a few minutes ago. And so you'll see in that bottom bucket there, our fiscal '13 benefit bucket, we're a little more than halfway through that bucket. We're a little more than halfway through the year. We're a little ahead of our schedule in terms of those reducing cost structures, and I've laid out there to the side some of the things we've accomplished.

So Bill has talked about some of these. We completed strategic sales initiatives including the rollout of our CRM system. We've got operations plans, action plans for every one of our operating companies out there. Now we're working those plans today. Maintenance module, which was the rollout of an SAP module ahead of schedule. That's done. That's being implemented or that's being used as we stand here today. Retirement plans have been completely restructured. That's done. They have the benefits this year, have the benefits every year hereafter. We restructured our IT department substantially including quite a bit of outsourcing. Painful process, it's been done. It'll help us as we go forward in terms of costs. We've started rolling out an HR module, which is again was originally part of the business transformation. Originally, it was supposed to roll out with the SAP system. We broke it off. It's rolling out independently now. Similarly with finance, we were originally going to centralize everything with the SAP program. We've already begun the centralization of finance.

So all of those things are leading to benefits that fit into the fiscal '13 bucket. We've got a lot of these initiatives and others that will continue to fill the buckets for '14 and '15.

Lower product cost. It's the same concept. You'll notice the spacing between '13, '14 and '15 is a little different. Why? Because I mentioned earlier, to get to category management, you got to ramp up. You got to ramp up the resources, the skill sets and then you got to do a whole lot of work to implement each of the categories that you want to rollout.

So we've started that process. We have a pilot, 4 pilots actually, that are underway. We're almost entirely through the process. And when you look at fiscal '13, it looks like we're a little behind. Frankly, we're not. It's just that there's a ramp in '13 just like there's a ramp from '13 to '14 and there's a ramp from '14 to '15. It just builds speed as we go.

So while we're making progress, I will say we're going to be very cautious with this one because this one affects our customers more directly than anything else that we're doing. So this is one we're going to do very, very carefully and we're going to do it the right way.

So let's now jump to capital allocation. This is really not changed at least since my time at Sysco. We allocate our capital between 2 halves of the equation, reinvesting in our business, both fleet and facilities, our business transformation initiative, which is very forward and future-looking just like major facilities are, acquisitions whenever we can find them and any other strategic initiatives that go on. So that's reinvesting in the engine of growth here. Then we also try to return value to the shareholders. Now our share repurchase program right now is just offsetting dilution until we generate substantially more cash, that's the right strategy. And then our dividend is very important. We peg the dividend payout of 40% to 50%. We know we're slightly over that now because our earnings have not kept up with the growth rate, but we fully expect to grow our way back into that payout range here over time.

We've recently, as Bill said and I've said, enhanced our focus on free cash flow. And a few components here. One is reduce our capital expenditures back in line with historic spending rates. I'll talk about that here in a second.

Institute better working capital management. So we've been pretty good at working capital management, but frankly, we can get a lot better at working capital management. We got a big team working on that today in all aspects of that. And I'm confident we're going to make some progress there.

Reduce our cost on business transformation. That's something that's already happened, and it's not that we're trying to be cheap on it, it's just that as we go through the process we're getting better and smarter about how we spend the money on our business transformation and the cash cost, so that have actually declined a little bit.

And then the IRS settlements. For those of you that have followed us, we paid out $960-some million to the IRS, payback of a deferred tax strategy. That's done. it was done at the end of the last fiscal year. Not having to pay that money out in the future creates substantially more cash, about $212 million additional cash a year.

So I said I'd talked about capital expenditures, and I'm going to remind some of you that have seen this slide before that this is what's going on with capital here recently. So that first line is the underlying business. We used to spend somewhere between $400 million, $425 million in capital on the underlying business, fleets, facilities, et cetera. Last year, that jumped substantially because we're building 3 large facilities all at the same time. We don't usually do that, but you can see what happened, it spiked up to about $635 million.

In addition, business transformation was calling for a lot of capital as we developed and designed the machine. So that went from a fairly small, modest spend of $50 million in '09, the first year of major expenditures, spiked close to $200 million, backed off to about $150 million, but the machine is done. So as I said earlier, we expect that to be $5 million to $20 million a year hereafter, not substantial.

So when you look at our total capital last year, almost $800 million. Our range right now, our guidance is $600 million to $650 million. Frankly, we're at the low end of that range as I stand here today. We'll take it from 600-ish down to 550 down to 500. Those are our goals. That will add to free cash flow. And the metrics that I'm using right now is down at the bottom. We used to spend a little over 1% of sales, not the best metric but it's the one we're using right now, but over 1% of sales. I want to get back to spending no more than about 1% of sales on capital.

The fun thing about this is when you put a limit around capital, when you put a governor on capital, you get the best projects rising to the top. So your projects actually get better returns. So this is going to have multiple side effects that are all positive.

So reducing our capital expenditures, increasing our working capital efficiency, continuing to grow the underlying business and generate cash flow, all that's going to grow free cash flow. So we'll then just hit the slide, there we go. So we doubled free cash flow over the last couple of years, and frankly, it's going to keep growing. And that's good news both for the investors but also for us as well.

Now I don't think I've shared this slide before, it's one we've used internally, but I wanted to introduce it. When we execute against our strategic initiatives, against business transformation, growing the underlying earnings, et cetera, there's tremendous cash that's thrown off, and that can lead to tremendous returns to the shareholders. This left-hand bar -- now this is a 5-year projection, okay? We took out a 5-year model, it's a 5-year projection. That left-hand bar is $11 billion of cash generation, okay? Now this is not free cash flow. This is cash generation. A little bit of cash on hand, the rest we just generate through the course of the business. We expect to spend roughly $4 billion of that nice round numbers, $4 billion on acquisitions. These are smallish acquisitions, the ones that we've talked about, not a big strategic deal and capital. We expect to spend about $4 billion on dividends and share repurchases, okay? It leaves about $3 billion, and the white and gray over there on the right-hand side is our debt capacity. Now that fluctuates depending on which rating agency you talk to at the time, but substantial abilities to raise capital for the right strategic acquisition or financial strategy, whatever makes sense to do. The bottom line, the tombstone if you will, is important. We've got $3 billion plus debt capacity to do anything we need to do strategically or to further enhance return to the investors. And that's the benefit of having this rock-solid balance sheet and the tremendous cash flow that we do generate.

Now I can't get away without emphasizing what we always tried to emphasize. We know that dividend is very important to our shareholders. We know the growth in that dividend is important to our shareholders, so it's very important to us. We've paid a dividend every quarter since our formation in 1970. And in November, we announced our 44th dividend increase. It's a phenomenal history, and that's why that starburst is there. We were added to the S&P dividend aristocrat fund for the track record. It's important to us that we maintain this, and thankfully we've got the cash flow to be able to do that.

So in closing, before I turn it over to the marketing guy, he's going to do a much better job than I in terms of livening you guys up, a few final thoughts. As Bill said, we participate in a very large market. We're growing that market in ways that we've been able to do uniquely over time where we're growing our share in that market 0.5 point a year steadily, some years hopefully even better than that. Our underlying business does continue to perform, which is good. It's not at the level that we wanted to be long term, but we know the headwinds that we're fighting right now and the massive amount of change we're putting the organization through to get to the place on the other side that's much better for our future.

That business transformation provides that platform for continued growth. It's going to require a significant amount of investment, much of which is behind us. It's going to require a tremendous amount of change, the organization. We're right in the middle of all that change. As Bill said, it's a very exciting time to be around Sysco, but no one day is like the one before it. But we're making progress on those initiatives already, and we're starting to feel that progress, and that's a good thing. Momentum is starting to build.

All of this is going to help us continue to generate substantial cash flow and free cash flow. With working capital efficiency and the things we're putting in place to focus more and more on that, reducing our capital expenditures, gives us even more cash to invest both in our organization as well as to reward our shareholders.

And with that, I'm going to turn it over to Bill Goetz, our Senior Vice President of Marketing.

William W. Goetz

Great. Thank you, Chris. As Bill mentioned in his opening remarks, he mentioned about our new relationship with the Food Network, and that's really what I'm here to talk about today.

We're excited about this opportunity to leverage our brand and grow our business through a relationship with the Food Network. We really feel like it's groundbreaking from the standpoint of our industry and what we're going to do with that program. So I'm going to cover that, it's only going to take probably 5 to 7 minutes. We've got a couple of commercials we want to show you that are currently running on the Food Network.

So if you look at this slide, we're very proud to be the first in our industry to launch national TV advertising in a supporting integrated marketing campaign. The assets that you see here are really strategically selected to drive brand awareness, first and foremost, brand preference and then also sales.

If you look at the program, it's really 3 tiers to this program. First of all, we have TV and digital advertising that you can see today on the Food Network and, also from a digital standpoint, go on to and you'll see a presence from Sysco. Secondly, we're going to be integrated into a show called Restaurant: Impossible. And if you haven't seen that show on the Food Network, it's all about transforming a restaurant. So that show is a struggling restaurant, and in 48 hours they turn that restaurant around where it can be successful moving forward.

What we like about that show is it really communicates what our sales associates, our marketing associates do everyday. We've got nearly 8,000 marketing associates that are out in the marketplace everyday helping our customers, and we think that show really translates what we're all about, and again that's making restaurants successful.

And then finally, and Bill mentioned this, we have an association now with Chef Robert Irvine, and he's the star of Restaurant: Impossible. And the great thing about this association with Chef Irvine is the fact he's a longtime Sysco customer. So he's been a Sysco customer for the last 17 years. He's used us even before this formal relationship. But we're great -- we're very fortunate to have him, have Chef Irvine on our team.

So why the Food Network? Why are we spending our dollars here? We did some research, right? If you look at this instinctively, you would say, Sysco, food distributor, into restaurants, so Food Network there's some synergies there, but we went into the marketplace and we did some research with our customers. And the bottom line is that we found that our customers watch the Food Network on a regular basis. So when you think about restaurant owners, food operators, they're watching that Food Network programming on a regular basis. Also they trust it, all right, they trust it for new ideas to keep up-to-date on trends. So we thought this was a great vehicle for us to be involved with.

If you look at these numbers, in my mind, they're extraordinary, honestly. I've done a lot of programs with NASCAR, the NFL, Fashion Week, and I've never seen numbers this high in my career. So we think we're in the right spot based on the research that we've done.

Our strategy is really based on delivering results and centered around 3 key objectives. First and foremost, we want to further differentiate the Sysco brand. We've got a great brand built over 40 years, but we think there's an opportunity with this association and the various activation that we're going to do with the Food Network to further differentiate that brand.

Additionally, as I mentioned, we're going to use activation, that's sweepstakes, promotion, other opportunities, to really leverage this to drive sales and to move cases. And we want to create a program that really instills pride in our 47,000 associates and, specifically, our nearly 8,000 sales associates that are out there every day talking to our customers about how we can help them build their business. So we're excited about the pride that this program is going to instill in our team.

So if you look at our TV spots, and we're going to show them here in just a second, our TV spots were created to target, first and foremost, our direct customers. So again, this is restaurant owners, food service operators. But secondly, this is the first time in the history of Sysco that we're going to formally introduce our brand and our company to the end consumer, the end consumer that dines and eats our food and probably is not aware that there's this great company that brings quality ingredients each and everyday. So we're excited about this program as it reaches out to that end consumer.

So I'm going to play these commercials for you. They're all 30-second spots. The first 2 are focused on our direct customers. There's 2 creative here, one is called inspiration, one is called partner, and they star our spokesperson, Chef Robert Irvine. And then the last one is really what we're calling our brand spot. And again, this is our introduction to the end consumer, a chance for us to communicate directly to that consumer that's enjoying our ingredients and our products everyday. So let's watch.


William W. Goetz

So that's the TV component, and again, please tune to the Food Network and you'll see Sysco. Now you should see all 3 of those ads.

Also, there's a major digital component to this effort, and it's in the form of 2 efforts. First, we created this micro site called Sysco Possible, and I encourage you all to go to Sysco Possible. On there, you're going to find an opportunity for our customers to sign up for promotions. There's actually a consumer sweepstakes that all of you can sign up for. There are special recipes, again, that you can use at home, and there's tips from Chef Irvine. So that's the first component of our digital strategy.

The second component is advertising on So you'll see Sysco if you go to, you'll see our ads, specifically our banner ads are targeted towards our direct customers. And there is a component, again, to introduce us to the end consumer.

And then finally, we're using this program to launch our Foodie Magazine. And I think Neil's -- we handed this out. I think you might have picked it up on the -- as you entered the room. But we're excited about this. We thought it was a great opportunity to introduce this publication. This is going to be utilized by our customers, utilized by our sales teams. Again, it has great menu ideas. It captures all the major trends that are happening in the food service industry right now. And of course, there's a lot of information about new Sysco products and services.

So that's this program. We think it's a great combination of television, digital and then promotions and sweepstakes. It'll build our brand, create preference in our brand and drive sales.

With that said, Bill mentioned this, but please join us tonight for our dinner. The cocktail reception starts at 6:30, and then we're going to have a fun evening for you at 7:00. Chef Irvine is going to be there. He has a live show that he does all across the country. You're going to see a version of that, and we're going to have great Sysco products, of course, to enjoy. But Chef Irvine will provide some entertainment.

So with that, I'll turn it back to Neil for the Q&A. Thank you very much.

Question-and-Answer Session

Neil A. Russell

We have a few minutes left for some questions. There are some microphones in the room. If you could wait until a microphone comes to you for the webcast, we'd appreciate it. But 5 minutes or so for questions if anybody has any. There's one here.

Unknown Analyst

Can you just talk to us a little bit about what you're seeing in terms of operator confidence? I mean, would you expect at this stage -- I mean, we hear from equipment suppliers to restaurants that growth is improving. I just wonder why it's not the case. I mean, you can see employment trends improving at restaurants, and I would expect that your business with the restaurants to be a little more robust.

William J. DeLaney

Yes, let me give it a shot. We have one data source that we look at that actually measures the performance of the operator, as well as their confidence to your point, and it goes up and down kind of like that chart I showed you in terms of traffic and that type of thing. I would -- my best sense right now is that the business is soft but the confidence is a little bit better than that. So I think people are hopeful, I'm hopeful. Yes, I think there's ebbs and flows in everything, it would be great if we get some of this fiscal activity in Washington a little bit better clarified. So I think their confidence is probably a little bit better than the actual performance right now.

Unknown Analyst

Do you still track the U.S. market in terms of meals at home and away from home?

William J. DeLaney

I'm sorry, Leah [ph], I didn't hear that.

Unknown Analyst

Meals away from home versus at home?

William J. DeLaney

You know what, we don't track it the way we used to all those years ago. So I actually -- I think it's -- what we do track is the percentage of that overall food pie that's retail versus our piece of space, and so that's gone from 48 to 52 back to, I think, 46, 47 right now. So retail has taken some share over the last 3 or 4 years. I would think it's still pretty close to 1 out of 2 meals though in this country.

Neil A. Russell

One over here.

Unknown Analyst

Do you -- just a quick comment, what do you see, from your point of view, the difference between private label and national brands in your part of the market? Do you see private label gaining ground?

William J. DeLaney

I think the key in all of that is just the ability, both for ourselves and for our customers, to differentiate themselves. So if the label is really a brand and it allows them to provide something that is different than the competition, then I think people are going to continue to invest in that. I know for us, we went through a period where we saw some erosion in our brand. Part of that was I don't think we were as focused and as coordinated on it as we probably should have been. Part of it was we lost some discipline with the brand for a period of time. So Bill and his team, John McIntyre is here with us today, bunch of our folks have done a nice job. I think tightening that up. And our brand is actually beginning to grow ever so slightly again, and then the real key is how we coordinate that with the category management approach as we go forward.

Neil A. Russell

Okay, John, I think they're all yours.

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

We have time for one more if there's one.

Unknown Analyst

Just a quick question on competition and to what extent your business has a moat. Maybe you could just talk through the moat your business has.

William J. DeLaney

The moat?

Unknown Analyst

Yes, in terms of the defensive qualities of your business and how hard it is for new entrants to gain a foothold in various markets, whether that be nationally or the various states?

William J. DeLaney

Yes, I think as you can see from the presentation, there's still quite a bit of separation, not just in size but in terms of our ability to grow relative to the competition. With that said, I think we could have also showed you in a slide that there's a couple of big other national or close to national players. I think they're growing. I think the better regionals are growing. So we continue to enhance our service levels. They continue to enhance theirs. This is why it's so important for us to get closer to the customer and understand what clearly is driving their business and what their priorities are. So I think there's a moat. I think we have to be cognizant of the fact that that moat maybe isn't as big as it was 10 or 15 years ago. And then there's other nontraditional folks that I'm sure continue to look at our space. So I would describe the competitive landscape as very competitive, not any more so than last year or 2 but still acutely competitive. But our scale, our people, our capabilities and I think the investments we're making in the business will continue to separate us.

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

Thank you very much. That's all the time we have. We'll have a breakout session next door as is customary. I want to take a moment to remind everybody dinner starts at 7. Please be seated and ready for our dinner and show, and thank the management team at Sysco for dinner and for a great presentation. Thank you.

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