Sysco's CEO Discusses F2Q 2014 Results - Earnings Call Transcript

Feb. 3.14 | About: SYSCO Corporation (SYY)

Sysco Corporation (NYSE:SYY)

F2Q 2014 Earnings Conference Call

February 3, 2014 10:00 ET

Executives

Neil Russell - Vice President, Investor Relations

Bill DeLaney III - President, Chief Executive Officer

Chris Kreidler - Chief Financial Officer, Executive Vice President

Analysts

John Heinbockel - Guggenheim Securities

Karen Short - Deutsche Bank

Mark Wiltamuth - Jefferies

Andrew Wolf - BB&T Capital Markets

Ajay Jain - Cantor Fitzgerald

John Ivankoe - JPMorgan

Meredith Adler - Barclays

Edward Kelly - Credit Suisse

Greg Hassler - Bank of America

Operator

Good morning, and welcome to the Sysco's Second 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'd like to turn the call over to Neil Russell, Vice President of Investor Relations. Please go ahead, sir.

Neil Russell

Thank you Alexia, and good morning, everyone. Thank you for joining us for Sysco's second quarter fiscal 2014 earnings call. Today you will hear from Bill DeLaney, our President and Chief Executive Officer; and Chris Kreidler, our Chief Financial Officer.

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

Non-GAAP financial measures are included in our comments today and in the presentation slides. The reconciliation of these non-GAAP measures to the applicable GAAP measures are included at the end of the presentation, which can also be found in the 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, we expect to host an Investor Day meeting this summer in Boston, additional information will be provided in the coming weeks.

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

Bill DeLaney III

Thanks Neil. Hello, everyone and thank you for joining us today.

This morning Sysco reported second quarter sales of $11.2 billion, the net earnings of $211 million. Adjusted EPS excluding certain items was $0.40 for the quarter, which was flat compared to the prior year.

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

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

We are seeing reasonably strong growth with locally managed customers in our Southwest market, while underlying market conditions are particularly difficult in our Northeast and Mid-East markets. Operating income fell short of our expectations for the quarter.

Expense management was strong once again this quarter is evidenced by cost per case in our Broadline business being significantly lower than the prior year, but sluggish sales growth with our locally managed customers and ongoing gross margin pressure more than offset those gains.

We have implemented several short-term actions steps and longer term strategic initiatives to both accelerate our locally managed sales growth and mitigate the ongoing gross margin pressures that we have experienced in recent quarters. These actions are gaining traction within our company and we are targeting gradual improvement in these areas through the balance of calendar year 2014 and beyond. At the same time, we anticipate our expense management performance will remain solid as we make additional progress in our productivity improvements and operations over the next several months. While the year-over-year over benefits of our SG&A cost reduction initiatives begin to plateau.

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

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

System performance in Boise was favorable upon Goliath and in a weak sense. And importantly, the recently implemented system enhancements have successfully addressed challenges that have previously impacted our large regional and national contract customers. This success provided us the confidence to convert two additional locations Phoenix and Las Vegas at the end of January. These deployments are an important test to both the stability of our SAP solution and our ability to successfully deploy multiple larger size OPCOs simultaneously. But, we are pleased with our progress over the last year, we are working hard to further optimize our SAP solution in the days ahead.

In February, additional updates are scheduled to be implemented that are intended to further improve system stability and scalability. These changes include simplification of the dynamic pricing and purchase order processes. While we continue to monitor progress in the eight facilities now live on the SAP platform as well as performance following the enhancement schedule to take place later this month.

Excuse me, let me say it again. While we continue to monitor progress in the eight facilities now live in the SAP platform as well as performance following the enhancement schedule to take place later this month depending upon success of these next important steps, we would expect to launch two additional facilities by the end of the fiscal year.

We also continue to move forward with our category management initiative. The majority of wave 1 categories have now been launched and we expect the wave 2 categories to launch during the second half of fiscal 2014.

We are applying learnings to the process as we move forward and have seen some improvement in execution and performance recently. We will continue to monitor performance in these categories and remain confident in both the benefits that category management provide our customers and the savings we will revise over the next few years.

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

Broadening optimization initiatives are underway in several of our largest operating companies. We expect to implement in the coming weeks a new warehouse scorecard to drive enhanced performance and accountability and are developing a similar scorecard for delivery operations.

Our consolidated parts procurement program has been implemented across the entire United States. We have negotiated a universal contract to procure forklift equipment resulting in significant savings on this category equipment. And we also have undertaken an initiative to right-size our fleet. To-date we have identified 700 pieces of equipment to eliminate and expecting to complete a total elimination of 1500 pieces of equipment. This will reduce our maintenance cost, title on registration expenses, ongoing capital requirements and optimize our overall fleet age.

Turning briefly to an update on the proposed merger with the U.S. Foods, last month we announced several key decisions regarding the integration planning leadership structure. We have formed a steering committee, which I will chair and is comprised of a joint team, the senior executives for both Sysco and U.S. Foods. The role of the steering committee will be to oversee the integration planning work and approve key decisions.

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

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

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

In closing, these are both exciting and challenging times for Sysco. We are beginning to see many of our transformational changes take hold and we now look forward to the U.S. Foods merger as the next step in our transformation. Enhancing our ability to serve our customers, strength and supply our partnerships and further engage our employees.

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

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

Chris Kreidler

Thanks Bill, and good morning, everyone.

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

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

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

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

Business transformation expenses were lower in the second quarter compared to last year by $18 million and are lowered by $29 million for the first half of the year. However, expenses in the second half of the fiscal year are expected to be similar to the prior year, as a result we continue to expect total business transformation expenses for the year to be inline with our guidance of $300 million to $350 million, albeit at the lower end of that range. Similar to last year, we continued to see business transformation benefits driving down our operating expenses, mainly in the areas of sales, IT and retirement related expenses. And we expect benefits from category management and operation initiatives to build as we move forward.

As a result of the benefits generated from our transformation initiatives cost per case performance in our Broadline operation was significantly better than last year's second quarter declining $0.11 compared to the prior year. For the first half of the year cost per case declined $0.10 compared to the prior year. As we discussed last quarter, we don't anticipate maintaining this rate of improvement as we lapped the point at which we began some of these initiatives last year but we remain confident in meeting or exceeding our objective of $0.05 decline for the full fiscal year.

In spite of the continued progress on our business transformation initiatives, continued weakness in the underlying business resulted in a decline in operating income of 8.1% year-over-year. Net earnings for the second quarter were $211 million, a decrease of $11 million or 4.8% compared to the prior year. Diluted EPS was $0.36 a 5.3% decrease compared to the prior year. Adjusting for certain items which mainly related to an increase in estimated self insurance reserves diluted EPS for the quarter was $0.40 which was flat compared to the prior year.

As we have discussed on previous calls we believe it is important to focus on the performance of our underlying business which excludes certain items as well as business transformation expenses.

To summarize the performance of our underlying business, adjusted operating expenses increased 3.4%, adjusted operating income decreased 7.6%, adjusted net earnings declined 4.4% and adjusted EPS declined 4.1% to $0.47.

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

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

Total capital expenditures were $135 million for the second quarter this year compared to $106 million last year. We continue to expect total capital spending to be in the range of $550 million to $600 million for the fiscal 2014 year. However, after including anticipated proceed from asset sales, net capital spending will be in the range of $500 million to $550 million. Free cash flow was $167 million for the quarter increasing substantially over the prior year period mainly due to improvements in working capital performance. For the first half of the year free cash flow increased 64% to $211 million.

Now I'd like to turn for a few minutes to a discussion of our proposed merger with U.S. Foods. In December, we announced our plan to merge with U.S. Foods in a cash and stock deal valued at $8.2 billion. This is an extremely important and exciting combination that we anticipate will generate at least $600 million in synergies over three to four years. As Bill motioned last month we announced the steering committee has been formed comprised of a joint team of senior executives from both Sysco and U.S. Foods and the integration planning leadership had been determined.

Our integration planning team is comprised of leaders from both Sysco and U.S. Foods. We are focused on planning how we will operate as one company and better serve our customers. Our integration planning efforts has three primary goals day one readiness, value creation and long-term organizational design. We're off to a good start and we look forward to working with our U.S. Foods' colleagues on the merger integration planning as we determine how to bring together the best of both these two great companies.

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

As part of the merger consideration Sysco will assume or refinance all of U.S. Foods net debt of approximately $4.7 billion. We have begun to take the steps necessary to secure financing to do that as well as hedge the interest rate risk between now and closing. In December, we secured fully committed bridge financing which will be available upon closing to fund the acquisition and refinance U.S. Food's debt. Shortly thereafter, U.S. Foods obtained consent from holders of their 8.5% notes to waive a provision that would have an effect require Sysco to purchase the notes upon a change of control.

This consent allowed us to reduce the bridge facility to $3.4 billion thereby reducing our financing cost. At the end of January, we amended our revolving credit facility to increase the amounts available to us by $500 million to $1.5 billion and last week we entered into agreements to hedge the interest rate risk on $2 billion of the permanent financing.

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

With that operator, we'll now take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we'll take John Heinbockel with Guggenheim Securities.

John Heinbockel - Guggenheim Securities

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

Bill DeLaney III

Yes. John, good morning. Well, as I said we're doing several things. I think what I said was we got a lot going on both on the cost side as you point out as well as addressing what our biggest challenge is right now driving sales on the locally managed business as well as addressing margin and those two as you well know are very unrelated.

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

We got as you can appreciate a lot of pretty comprehensive margin management training going on in the company at various level both locally as well as coming out of our corporate offices in terms of how do we optimize this whole challenge of quality growth with managing margin. Those are initiatives that kicked off in a bigger way here in the fall. So those will be three that I mentioned the short-term that we think we'll pay dividends for us here to some extent, they're already helping, but I think we'll pay bigger dividends for the second half of the fiscal year.

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

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

John Heinbockel - Guggenheim Securities

So this is a follow up to that, you said 25% of the margin pressure was mix. So if you look at the others and this is probably hard to tell precisely but if you look at the other 75%, how much of that do you think is proactive, you're doing something versus reactive when you're responding to somebody else? And then the parts that proactive again how do you get your arms around that these are productive efforts right when you look at gross profit dollar performance?

Bill DeLaney III

Yes. Let me take a shot and if I'm not giving to John, just clear about your question a little bit more so. Look so I'd say over the last year, year and a half we've attributed a third to a quarter of the margin erosion to mix because of the larger customers are growing faster. The rest of it, it is difficult to quantify. Obviously, the way our business model works we can't just look at gross margin we have to look at our expenses as well. So we are definitely going to fight very hard for the cases we have today as well as continue to find ways to grow with our existing customers in our new prospects as well.

So I think where we're at right now in this process is I look at even early numbers this quarter is we're beginning to get smarter I think and a little bit more cohesive at the local level and making the right trade offs between volume and margin management. But the reality in this business for us is we need to grow the local business we need to grow the street business and that will contribute significantly to our gross profit dollar growth. We just got to be smart and balanced in how we do it. And so I think we're making strides there, you didn't really see here in the second quarter I think you will see some improvement here in the second half of the year as far as the margin management goes.

John Heinbockel - Guggenheim Securities

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

Bill DeLaney III

That's one of those great questions I don't know if I can answer as well as anyone of us would like. I think as I said the competitive environment is very acute as we've talked about a lot in the past in presentations and calls like this. There is some growth we believe -- we believe the market grew somewhat in 2013 we'll fine tune those numbers and hopefully talk more about it. At CAGNY, we don't think there was a lot of growth and we were able to take some share but we invested in that to some extent. I think that's rational from our perspective because in the end I think for our medium and long-term success it's important to continue to grow. There certainly are pockets of activity out there where there is some behavior that probably isn't the smartest as it could be. But overall, given the environment I think it's reasonably rational right now. It's just very competitive.

John Heinbockel - Guggenheim Securities

Thanks.

Operator

We'll take our next question from Karen Short with Deutsche Bank.

Karen Short - Deutsche Bank

Hi. Just turning to cost per case expectations for the full year, I guess your full year expectations kind of reflect flat cost per case in the second half. So I know you've discussed this in the past, but I guess I am wondering with a successful kind of wave 1 behind you, wave 2 about to begin and three more OPCO conversions by year-end. Why wouldn't you continue to see improvements in cost per case for the back half?

Chris Kreidler

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

Bill DeLaney III

I think Karen, let me just add. When we talk about cost per case, we're talking about operating cost. So we definitely are seeing reduction in cost per case for the CatMan work and we expect that to continue.

Karen Short - Deutsche Bank

Okay. And any color on wave 1 in terms of how your customers are reacting to the initiative? And any color you could give on what they benefit to gross profit or COGS could have been as a result?

Bill DeLaney III

I think it's still reasonably early in the wave 1 cycle, but I would tell you I think our execution, I think, we alluded to this in our comments. I think we are improving our execution there in terms of how we do the conversions, the cadence of the conversions and addressing these opportunities in the most productive way possible with our customers. So I think we've had some challenges with the pilot categories on volume at times. We're starting to see some improvement on wave 1. We continue to see, like I said, significant improvement on our cost of goods which was driving most of the economics on this initiative.

Karen Short - Deutsche Bank

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

Bill DeLaney III

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

Chris Kreidler

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

Karen Short - Deutsche Bank

Right. Okay. Thanks that's helpful.

Operator

And we'll take our next question from Mark Wiltamuth of Jefferies.

Mark Wiltamuth - Jefferies

Hi, good morning. On your comment that the sales slowed throughout the end of the quarter, how much of that was really the calendar and the weather? And did you see any snap back as you got into January results?

Bill DeLaney III

I think the calendar was certainly part of it Mark, and we did have some weather, it was last couple of weeks in December. I think that impacted us in certain parts of the country. So I would say it's hard to put a number to it but I would say part of the slowdown was that – we had pretty good growth in the second quarter last year. So when you look at comps – and we are talking about deltas of 2% or 3% case growth here. So if it goes off a point that's 50% of the delta. So I'd say it's a little bit of – comps are little more soft but we definitely saw a fall-off in December and certainly from what we see and what we read. I think you'd have to attribute a fair amount of that to the weather.

We knew the calendar but we still saw a little more than what we expected to see. I hate talking about weather especially in winter. We just had our market presence in here couple of weeks ago and really didn't want to hear a lot about weather. But I will tell you weather has been pretty brutal here first four, five weeks that we've had. Four of the five weeks I think have been very difficult last week in particular. You see the weather reports, we had issues throughout the southeast. We didn't ship in New Orleans. You saw the reports in Atlanta. The good news is its January and early February so March is a key part of this quarter and we still have an opportunity to make some of that back. But I'd say weather has impacted us quite a bit so far in January, early February.

Mark Wiltamuth - Jefferies

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

Bill DeLaney III

I can't tell you as any more pronounced in that areas and any place because obviously those are high dollar boxes so you kind of get somewhat competitive depending on the size of the customer. But I wouldn't attribute any particular piece of it to meat category.

Mark Wiltamuth - Jefferies

Okay. And for Chris, is there anyway you can give us a rough idea of what kind of interest rate we should be looking at for the big refinancing for the U.S. Foods deal?

Chris Kreidler

No. I wish I knew myself our strategy as I talked a little bit about it to hedge interest rates, but I mean this environment we've chosen to basically hedge about half, which means if they continue to languish or indeed decline, we won't give away all the benefit, if they go up, we're partially hedged. So that's kind of where we're hanging out right now. We'll continue to evaluate the markets as well as the yield curve going forward and look for an opportune time to lock in and obviously we've got to get much further along in the deal process and the regulatory approval process as well, but right now, I can't give you much more guidance.

Mark Wiltamuth - Jefferies

Okay. Thank you.

Operator

And we'll take our next question from Andrew Wolf with BB&T Capital Markets.

Andrew Wolf - BB&T Capital Markets

Good morning. You sounded kind of optimistic about this year market conditions restaurants are getting may be back to positive traffic. I just wanted to ask you to explain a little about what you're thinking there sort of generally why you might think that? And then secondly, as part of the same question, have you seen you just talked about Atlanta and what's going on there but between the fourth quarter and the recent snow events and cold weather in the east, have you seen a bigger variance in the performance between places that had normal weather out west let's say versus the east you could share with us that might give us a sense if that is the case?

Bill DeLaney III

Andy, I will. So, let me start with the second one. I tried to give you a little color on that in my prepared comments. And so right now yes, I'm looking very hard at the West because we haven't seen that kind of weather out there. So we're seeing, I think, I called out the Southwest and to be fair I'd say the Southwest, if you go back the last two or three years has been probably the strongest part of the market.

If you look at some of the more industry-wide survey work that's done on consumers, the Southwest shows up quite strong. And I would say right now we're trending -- it's hard to do this Andy because I have to adjust for that variability you were alluding to, in terms of our individual performances.

But I'd say, if I just look at the West right now, things are a little bit better there, which gives me the confidence that some of this actually, clearly is being driven by weather in terms of early days here in this quarter. So with that said, the other thing I called out was, we've seen now for several quarters that the Northeast and what we call our Mid-East markets have seen more pronounced sluggishness and it's not to say we don't have opportunities to execute better in those markets but at the same time when I look at them across that entire geography that seems to be a tougher part of the country in terms of growth right now.

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

I think there's some technical issues that are somewhat clouded by the weather right now with some of the tax hits that the consumer took early last year that I'm hopeful that those will turn into positives here as we get towards spring and into summer. So I think the mindset is better and it's fragile. I'm not going to kid you on that. And when you look at the economic data, it's good at a certain level of macro and not so good in our piece of the industry, but I'm basically going off of, some of the sentiment surveys that we see in terms of the consumer, some technical things that we see in terms of what happened last year, early part of the calendar year.

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

Andrew Wolf - BB&T Capital Markets

It's interesting, do have any, and last question but it's a follow on to what you just answered. Do you have a sense of the same store sales for your independence and is that something also you have by geography? And could also shed light on in the context of regional variance?

Bill DeLaney III

I don't have a great sense of that. We will obviously have our sales data where we can look at that at various levels of details in terms of what we call penetration that doesn't tell you what the accounts same-store sales are right?

I would tell you it varies. So whether you're talking big change, or whether you're talking about more street oriented type of operators, the stronger operators I think are holding up reasonably well in this kind of market and the people that are more on the margin are struggling more.

So we see a fair amount of variability across customers as it relates to penetration. My best judgment and I don't have any data on this Andy is that it's reasonably flat right out in terms of restaurant sales overall, same-store sales. I think if you – some change, we're doing better than others obviously.

Andrew Wolf - BB&T Capital Markets

Got it. Thank you.

Operator

And we'll take our next question from Ajay Jain with Cantor Fitzgerald.

Ajay Jain - Cantor Fitzgerald

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

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

Bill DeLaney III

Yes. Good morning, Ajay. I would – I think I'm on at that thing, well, I tried to get across to my comments. I'm pretty cautious on this quarter right now on the top line just given what we have been dealing with the first four or five weeks. As I said, the March drives this particular quarter. So if we catch up a break with the weather and maybe we've seen the worst of it. In terms of parts of the country where you don't expect to see this kind of weather that's really the issue.

So when weather affects us is when you have these freezers and snowstorms in the Southeast and the Southwest that's a problem, okay. When they carry into April that's a problem, when they started early November that's a problem. Winters going to be winter in the Northeast and the Mid-West and we understand that. So I'm somewhat cautious because of the weather and how we started out this quarter. But, there is still a lot of good weeks ahead of us in terms of volume as we get toward later part of February and March.

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

Deflation, we're not always seeing deflation. We are seeing categories that are maybe down a little bit, up a little bit. We have got some inflation in meat and seafood I think going right now. So deflation would not be good for us. Again, what we – was more ideal for us would be to have that inflation number get back around 2 maybe even a little bit higher that gives us a little more room to maneuver in terms of our expense management and at the same time work with our customers and the way that they can handle the cost increases.

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

Ajay Jain - Cantor Fitzgerald

Great. Thank you.

Bill DeLaney III

Thank you.

Operator

And we will take our next question from Meredith Adler with Barclays. And your line is open. Please check your mute button. Again, check your mute button, your line is open. Due to the silence on this line we will take our next question from John Ivankoe with JPMorgan.

John Ivankoe - JPMorgan

Hi. Thank you. The question is how your customers might be responding to the merger, or I guess the news of the merger. I mean is it situation, I guess FTC excluded one plus one could equal two or do you sound some nervousness of your – within your customer base or consolidation of power and that's the case what will you do maybe differently in six to nine months to retain some business that some of your competition might otherwise be trying to get?

Bill DeLaney III

Good morning, John. Look, I would say this, from the day one of the announcements through today and going forward to close and then beyond close, certainly one of our big goals here is to have a very active, effective communication program with all of our stakeholders. So it's our customers, our suppliers, our associates, shareholders, government media all that type of things.

So we are early days of dealing with that. We are in constant contact with our customers. We have equipped our OPCO presidents and there sales leadership with pieces to communicate with the local chefs associations, restaurant associations. So I would characterize that early days as we got good ongoing discussions with our customers, certainly there is some that have some concerns we work through those. I would say many are excited to understand what the benefits are. And how long it will take to close and when will all that happen.

And I would say largely customers are pretty open minded and they are looking for those benefits. So whether it's going to enhance their business from – how they might order product with us or wider assortment of innovative products. The fact that we will take cost out of the system over time how that translates to their opportunity to work with Sysco. Those are all things that we are taking with our customers about. We clearly see this as a very good thing for our customers, frankly I see this as a very good thing for the industry over time and certainly we will see as a good thing for Sysco.

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

John Ivankoe - JPMorgan

Thank you.

Bill DeLaney III

Thank you.

Operator

And we will take our next question from Meredith Adler with Barclays.

Meredith Adler - Barclays

Thanks for taking my question. First, I just would like to talk a little bit about how much of that category management are done with -- finished wave 1. I think you made some comments about what the impact was, you think it's recovering. Could you just be more specific about what happens with revenues or customer reaction, with the category management?

Bill DeLaney III

Yes. I will take a shot at that Meredith. So essentially the whole idea of category management is to optimize the assortment of pricing theory in an effort to help our customers optimize and enhance the products that are available to them as well. Along the lines, we certainly see opportunities here to enhance our relationships with our suppliers and prove product development innovation and reduce our SKUs where that make sense. And to take cost out of the system as relates to our cost of good. The challenge as you would expect as you go into something like this is the conversion process.

So I would say to you in the pilot wave or pilot categories there was four of them. We did a very good job working with our suppliers; we did a very good job identifying opportunities for cost savings and we are realizing those. What we are learning as we go is to strike the right balance in terms of the cadence and the conversions with our customers and to make sure we are equipping all operating companies' sales management and the MAs with the tools that they need to have the conversations about conversions with the customers in the right place.

So where we are making process at this point I think it's on the conversion and we expect to continue make process as we get deeper in wave 1 and wave 2.

Meredith Adler - Barclays

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

Bill DeLaney III

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

But, I would say this in a more straightforward way as I can. It's really more about just making sure, since the conversion is relevant to that customer many of them are. We are not converting every item for every customer. But to make sure that we are having good constructive dialog in terms of why it's different for the consumer. And as you play that out over 7,000 territories with 10s of 1000s of customers and something you have done for the first time certainly there are challenges. But, I would tell you again, I'm seeing improvement on that and performance there as we get into wave 1 and expected to continue to improve.

Meredith Adler - Barclays

Okay. Thank you. And then another just sort of food question that confirms something Chris said about the cost per case, I think you set down 5%, I wasn't sure if he was saying down 5% for second half or down 5% for the full year?

Chris Kreidler

Meredith, I actually said down $0.05 per case will be down at least –

Meredith Adler - Barclays

$0.05?

Chris Kreidler

$0.05 per case for the full year.

Meredith Adler - Barclays

Okay. And this, do you include the pension change as part of the cost per case?

Chris Kreidler

Yes. That's an all end case per case.

Operator

And we will take our next question with Edward Kelly with Credit Suisse.

Edward Kelly - Credit Suisse

Yes. Good morning guys.

Bill DeLaney III

Good morning.

Edward Kelly - Credit Suisse

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

Bill DeLaney III

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

Chris Kreidler

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

Edward Kelly - Credit Suisse

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

Chris Kreidler

Right.

Edward Kelly - Credit Suisse

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

Chris Kreidler

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

Bill DeLaney III

I would say the bigger issue on this quarter rather than some of the sluggishness in December that we have already talked about. If you compare the first quarter to the second quarter your inflation number went from 2 to 1. And that's probably the bigger –

Chris Kreidler

Inflation and actually your ForEx was a little higher as well. When you put both of those in there and your sales number is not a significantly off of where we were.

Edward Kelly - Credit Suisse

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

Bill DeLaney III

As I said, we came up with somewhat short of our internal goals here for the quarter and that was on the gross profit dollar line. But, I would the spread was about the same as it was in the first half. We had a top line miss and we will continue to have gross profit pressure and margin pressure on all categories to customers actually so I – what I'm looking at the spread is about the same as in the first quarter.

Chris Kreidler

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

Edward Kelly - Credit Suisse

All right. And Chris, you are going to lapse in acceleration and the acquisition benefit in the back half year?

Chris Kreidler

Yes.

Edward Kelly - Credit Suisse

So I guess you would expect that benefit to slowdown, I guess is that, right?

Chris Kreidler

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

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

Edward Kelly - Credit Suisse

Nice. And then just one last question for you on SAP. Now that it looks like you got through Boise, what's the next big OPCO going to get done, is that – within the next group and are you comfortable now that some of the changes you made get you over the hurdle to get a big OPCOs on just as well now?

Bill DeLaney III

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

Edward Kelly - Credit Suisse

Okay. Great. Thank you.

Bill DeLaney III

Thank you.

Operator

And we will take our next question from Greg Hassler with Bank of America.

Greg Hassler - Bank of America

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

Chris Kreidler

It will certainly be closer to the time of the transaction whether we take advantage of market conditions and confidence levels prior to that. It will depend upon a number of factors and terms of when we'll actually pull the trigger to do some of this refinancing.

Greg Hassler - Bank of America

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

Chris Kreidler

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

Greg Hassler - Bank of America

Okay. Thank you very much.

Chris Kreidler

Thank you.

Operator

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

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SYSCO Corporation (SYY): Q2 EPS of $0.40 in-line. Revenue of $11.2B (+3.7% Y/Y) misses by $150M.