Sysco's (SYY) CEO William DeLaney On Q3 2014 Results - Earnings Call Transcript

May. 5.14 | About: SYSCO Corporation (SYY)

Sysco Corporation (NYSE:SYY)

Q3 2014 Earnings Conference Call

May 5, 2014 10:00 AM ET

Executives

Shannon Mutschler - Senior Director-Investor Relations

William J. DeLaney - President and Chief Executive Officer

R. Chris Kreidler - Executive Vice President and Chief Financial Officer

Analysts

John E. Heinbockel – Guggenheim Securities LLC

Andrew P. Wolf – BB&T Capital Markets

Edward J. Kelly – Credit Suisse Securities, LLC

Karen F. Short – Deutsche Bank Securities, Inc.

Meredith Adler – Barclays Capital, Inc.

Ajay Kumar Jain – Cantor Fitzgerald Securities

Mark G. Wiltamuth – Jefferies LLC

Erin Lash – Morningstar Research

Operator

Good morning, and welcome to the Sysco's Third Quarter Fiscal 2014 Conference Call. As a reminder, today's call is being recorded. We will begin today's call with opening remarks and introductions.

I would now like to turn the call over to Ms. Shannon Mutschler. Please go ahead ma’am.

Shannon Mutschler

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

Before we begin, please note that statements made during this presentation that state the company's or management's intentions, beliefs, expectations or predictions subsequent to SEC filings and then the news release issued earlier this morning. A copy of these materials can be found in the Investor section of sysco.com or via the Sysco IR App, which can be downloaded from the iTunes App Store and Google Play.

Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the applicable GAAP measures are included at the end of the presentation, and can also be found in the Investors section of our website. All comments about earnings per share referred to diluted earnings per share unless otherwise noted. In addition, all references to case volumes include total Broadline and SYGMA combined.

To ensure that we have sufficient time to answer all questions, we would like to ask each participant to limit their time today to one question and one follow-up.

Lastly, our previously stated expectations of hosting an Investor Day meeting this summer in Boston, have changed. We have determined that it would be most effective to hold the meeting after the proposed merger with US Foods closes. Accordingly, we’ll update you once the firm date for the event has been chosen.

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

William J. DeLaney

Thanks Shannon. Hello everyone and thank you for joining us today. This morning, Sysco reported third quarter sales of $11.3 billion in net earnings of $181 million. Adjusted earnings per share, excluding certain items was $0.38 for the quarter, compared to $0.40 in the prior year. Market conditions during the first two months of the quarter were dominated by the impact of unusually severe winter weather conditions throughout much of the United States. As a result, we experienced very modest sales growth in January and February and delivery expenses were under significant pressure as well.

Conditions improved markedly in March as the adverse weather subsided, which likely contributed to consumers going out more both to shop and eat. We benefited from this turn of events as evidenced by our nearly 6% sales growth in March, almost twice the top-line growth we experienced for the overall quarter. In assessing our operating performance for the quarter and factoring in the challenging market conditions, results were generally inline with our expectations.

Sales growth were modest at 3.2% was aided by improved, locally managed sales trends in March. Gross profit grew nearly at the rate of sales growth and at a higher rate than we experienced during the first half of the fiscal year. We also reduced our operating cost for case in our Broadline business. We are encouraged by improved gross profit trends during the quarter and attributed much of our progress in this area to more consistent margin management practices in our operating companies, strengthening local sales trends and the low level of inflation we experienced during much of the quarter.

Moving forward, we assume our cost is regarding gross margin trends in the short-term as we begun to see a meaningful increase in product cost inflation in the high cost meat and dairy categories since the end of the quarter. The consistently improved cost per case results, we’re experiencing in the Broadline business have been driven by the benefits realized from several cost reduction initiatives we’ve implemented over the past two years, especially in the SG&A area of the business. As some of these benefits begin to ramp on a year-over-year basis, we expect to realize increased benefits from more of our transformation initiatives on the operation side of the business.

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

In addition, we work to ensure smoother transitions for each successful convergence, for example improved procedures in attention to data management help to make the go-live at Denver and New Orleans last month a more successful year. Regarding our initiatives to lower product costs, we expect to meet our stated financial objectives for this fiscal year and next as our category management efforts continued to gain momentum.

By the end of this fiscal year, the pilot all the wave 1 and majority of wave 2 categories were launched into the market representing $5 billion to $7 billion in annual spend and roughly a third of the total addressable spend. We continue to enhance the program’s effectiveness by showing best practices and improving communication both of the corporate merchandising and operating company level.

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

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

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

We are encouraged by our continuous improvement on multiple fronts throughout the company and believe that this transformational change will help our customers to be more successful through our added efficiency in our business and enhance our financial results. Personally engaging in transformation of this magnitude is both challenging and rewarding for me as well as for all of our 49,000 associates. I very much appreciate their efforts and dedication, as we move forward in this exciting and pivotal time in Sysco’s history.

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

R. Chris Kreidler

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

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

Gross profit in the third quarter increased 2.7% nearly at the same rate of sales growth.

Gross margin declined 9 basis points to 17.69%, which is the smallest decline we’ve seen in 15 quarters. After taking into account changes in customer mix, gross margin actually increased slightly compared to the prior year. Similar to what we saw with sales trends during the quarter, gross profit was substantially stronger in March, compared to January and February, increasing 4.8% during the month as weather and the locally managed sales trends improved.

However, as Bill mentioned, since the end of the quarter, we’ve begun to see a meaningful increase in product costs inflation in the meat and dairy categories, which together totaled roughly 30% of our annual sales. We expect this pressure may contribute to added gross margin pressure in the near-term.

Operating expenses increased $57 million or 3.5% in the third quarter of fiscal 2014, compared to the prior year period. A year-over-year increase in operating expenses was mainly due to increased Case volume and new cost from acquired companies, increased delivery and warehouse costs somewhat exacerbated by the unusually severe weather, increased corporate expenses, due mainly to timing, partially offset by lower sales organization costs and a decrease in retirement related expense, as a result of the restructuring work we completed last year.

Benefits generated from our transformation initiatives more than offset cost pressure in our delivery and warehouse areas, resulting in a $0.03 decline in operating costs per Case in our Broadline operations in the third quarter and a $0.07 decline for the first 39 weeks of the year with both periods excluding the impact of certain items. We remain confident in meeting or exceeding our objective of a $0.05 decline for the full fiscal year as we experienced continued year-over-year benefits from changes in our sales organization and the impact of lower retirement-related expenses.

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

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

Operating expenses including certain items increased $51million or 3.3%, certain items totaled $56 million during the quarter, an increase of $6 million over the same quarter last year. Certain items this quarter consisted primarily of two times; first, merger and integration planning expenses totaled $32 million and mainly related to professional fees.

Second, we’ve recorded a $20 million legal contingency accrual related to a previously disclosed investigation in California, a portion of which should not deductible for tax purposes. Certain items in the prior year period totaled $50 million including a $41 million charge withdraw from a multiemployer pension fund.

Business transformation expenses were lower in the third quarter compared to last year by $13 million and were lower by $45 million for the first 39 weeks of the year. About half of the variance year-to-date relates to a change we have made in how we allocate internal labor cost to the project. In the past, we allocated the cost of internal associates based upon the percentage of time they spend on the project.

We are now allocating either all or none of an associates cost to the project depending on whether they spend the majority of their time on the project. This has had the effect of shifting some expense from business transformation expense to general corporate expense. The remainder of the year-to-date variance in business transformation expense is the result of capitalizing more of the work effort than originally estimated.

As a result of the change in labor capitalization methodology and the increased amount of capitalization, we now expect total business transformation expenses for the year to be lower than our previous guidance in the range of $275 million to $300 million. And general corporate expenses to be somewhat higher.

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

Adjusting for certain items diluted earnings per share for the quarter was $0.38, which was down 5%, compared to the prior year. We estimate that the impact of the unusually severe weather in January and February reduced earnings per share by $0.01 to $1.05. Total capital expenditure is totaled to $117 million for the third quarter this year compared to $111 million last year. We continue to expect total capital spending to be in the range of $550 million to $600 million for fiscal 2014.

However, after including anticipated proceeds from asset sales net capital spending will be in the range of $500 million to $550 million. Free cash flow was $273 million for the third quarter increasing over the prior year period mainly due to improvements in working capital performance which offset weaker net earnings.

For the first 39 weeks of the year, free cash flow increased 22% to $484 million. As we began to wrap our particularly strong cash flow performance in the fourth quarter of fiscal 2013, we expect the level of year-over-year increases in free cash flow to moderate.

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

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

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

While we continue to have much work ahead of us we strongly believe that we are taking the right steps and making the right strategic investments to position our company for success in the future.

With that operator we’ll now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll move first to John Heinbockel with Guggenheim Securities.

John E. Heinbockel – Guggenheim Securities LLC

Hey, Bill. I’m pretty encouraged by right your gross margin management. So, the question is, is there a different philosophy with regard to how you were spending those dollars? How you think about elasticity, and if so what is driving that change in philosophy and how you, practically what things you are doing differently.

William J. DeLaney

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

From that standpoint what I was trying to convey in my remarks was, clearly we haven’t been performing at the level we’d like and we spend a lot of time – we’ve done a lot of work with our operators so to speak. And I think what you saw here is a small but meaningful step forward in terms of progress and, I use the word consistency, that’s probably our biggest opportunity in Sysco today and I think the benefits you’re seeing in this quarter were more consistent focus and striking the right balance, I guess that between growth, pricing and what’s good for the customer, anyhow just the basic day today stuff, there is nothing really overly proprietary here.

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

John E. Heinbockel – Guggenheim Securities LLC

Now is that in terms of giving lots on the improved execution. Is that more getting folks in the field to understand what you’re trying to do and elasticity issues or is it more actually putting sort of guard rails on what they can do out in the field?

William J. DeLaney

I would say, our folks in the field understand, I think what it is, is that bringing more focus to the issue with all that they have to deal with on a day-to-day basis and in that process, yes, brining least parameters and overtime a little more governance to that process. So again early days here John, but we certainly are trying to get more consistency in terms of how we approach it. But our folks understand the issue, they are very good operators. It’s more about bringing consistent focus to it.

John E. Heinbockel – Guggenheim Securities LLC

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

William J. DeLaney

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

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

So we are just trying to be a little cautious here, I mean the good news here is well, as you know we don’t want to see a lot of inflation over the meaningful long-term. It’s not good for our customers. I mean that inflation is working its way into the top line as well.

So we’re basically just common Al, I think gross margin as a percent of sales stand perspective. There is more pressure there right now than what we saw in the third quarter. But I think we’ll manage it reasonably well and as far as going forward, a lot of this has to do with supplies in the beef area and I think some of this will be with us for awhile. It’s really hard to predict what happens past three to six months, Al.

John E. Heinbockel – Guggenheim Securities LLC

All right. Thank you.

William J. DeLaney

Sure.

Operator

We’ll now move to Andrew Wolf with BB&T Capital Markets.

Andrew P. Wolf – BB&T Capital Markets

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

William J. DeLaney

In March Andy is more – there was not very much inflation. I think we probably saw some in the later couple of weeks of March. But I think March was really more of demand, people got out more and you saw the retail numbers I think, they came out here recently and so it’s just more – we saw more volume and as we alluded to, we also saw more on the locally managed side than what we see in the last two to three quarters which was encouraging as well.

Andrew P. Wolf – BB&T Capital Markets

Did you see that across the board, so the independence, I know in the past you said it’s really hard to track their same-stores sales but just anecdotally or how would you can with the independent business also stronger?

William J. DeLaney

Yes, so independence will make up a significant piece of this locally managed, and yes I would tell you we saw across the board in March. There was very, was really tail two quarters. It was brutally hard out there, I think for everybody the first couple of months and then in March. We saw a turnaround in the top line in pretty much every segment. We saw every restaurant like that.

R. Chris Kreidler

Yes, and Andy, I want to be careful and echo what Bill said a minute ago about this inflation, the reason we are calling it out as frankly it come up upon us pretty quickly. We don’t want it to be a surprise when we talk about it later on. But in the March quarter inflation was no different really than the rest of the quarter. And so, it really wasn’t yet in the March numbers as Bill said, that we started to feel at a little bit in the later two weeks. But it was pretty much inline with the quarter.

It came on, it went from basically nothing to something in April and so that’s why we are calling it out and it’s pretty narrow in terms of the categories but they are big dollar categories for us.

William J. DeLaney

I don’t want to get too much in the April because that's something we typically do. I would just say to you, we’ve had two solid months in a row in the top line. They look a little different, April is a month, April is a transition month and so I would say to you a couple of thinks, my sense is spring came little earlier this year than last year. I saw some of the clubs and that type of thing open up and that helped us.

Easter was little later and people were still I think looking to get out, so April the weeks were not necessarily consistent but it’s a month, we had another solid month on the top line and in the business. And I would just say the mix was little different between pricing and volume as well.

Andrew P. Wolf – BB&T Capital Markets

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

William J. DeLaney

I would say the weather, to go back to that was more East of the Mississippi, so that is virtually all of our markets other than California and West Coast. If I was particularly pronounced even though I would say, winner comes every year, it was particularly pronounced in the Northeast and the Mid-East, but we were shutdown at Atlanta for a couple of days. We didn’t deliver that kind of thing. So I would say those first couple of months, the weather impacted the vast majority of our businesses.

As you work into March and April here now, I would say it’s pretty much what we saw before, I think we are seeing very good strength in the Southwest, decent strength in the West, North-East and Mid-East still little sluggish. So these are matters of degree, but similar to what I call that I think in the last quarterly earnings release, we are seeing a little more strength certainly in the Southwestern part of the country than we are in the North and Northeastern part of the country.

Andrew P. Wolf – BB&T Capital Markets

Thank you.

William J. DeLaney

Sure.

Operator

And we’ll now move to Edward Kelly with Credit Suisse.

Edward J. Kelly – Credit Suisse Securities, LLC

Yes, hi good morning guys.

William J. DeLaney

Good morning.

Edward J. Kelly – Credit Suisse Securities, LLC

I wanted to just follow-up on gross margin, gross profit, we tried to look at gross profit dollars per case and obviously, this quarter you did better there in terms of year-over-year growth versus where you’ve been.

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

William J. DeLaney

Ed, we look at this thing across a lot of different ways. So, I’ll let Chris jumping in here in a minute as well. So, I want to be careful about the gross profit because that’s going to play out in different categories. When I would tell you is the way I look at it, as I look at case growth, I look at the mix of case growth between locally managed, which is largely your street business versus your contract business.

And then, I look at gross profit dollar growth, and then I look at cost per case – operating cost per case. So, we can put that together, I don’t want to shift in terms of your question on this call, but I would tell you obviously the first half of the year we had 1.2% gross profit dollar growth and that went to 2.7%. So, I’m encouraged with that. I think we can continue to improve from there. We’ll have to see how fast that develops.

So I feel good about that part. I think, we’ll continue to manage the cost per case well. I think, just and put this in some historical contacts, Chris and I were talking before the call. I’ve been around this business 25 years give or take, I would tell you, if you go back and look at Sysco’s history we didn’t always share all this, to mange our operating cost per case to be up a $0.05 a year was usually a pretty good year in normal times.

Our medium to longer-term model where we’re trying to find enough initiatives every year to keep that at flat cost per case, in this particular year 2014, we targeted a $0.05 reduction as Chris pointed out. So, I’m really pleased with how we are managing at the operating level, in terms of cost and encourage too much is not a trend make here, but I’m encouraged what we are seeing on the gross profit dollar growth. I don’t know, Chris is going to answer your specific question about what you put historic as well.

R. Chris Kreidler

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

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

Edward J. Kelly – Credit Suisse Securities, LLC

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

William J. DeLaney

Sure. We’re a year into this now, and as I mentioned, we’re deep into wave 1 and wave 2. And we think, by the end of the year we will launched about 30% of what we called the influenceable spend, which is about two-thirds of our spend 60% to 70%. We’re getting better executing that, so I would tell you there are certainly opportunity to improve, but we’re assuming getting better in terms of working within our corporate merchandizing team and with our OPCOs in terms of how we communicate these category, and issues as they come out there is a lot of categories out there being launched right now.

We’re getting better in terms of working with our OPCOs to work with our customers and their sales force and had the position of the opportunities for the customer as well again plenty of opportunity to improve over the next 12 to 18 months as well.

So, I think our execution is getting better, both on the communication side as well on the conversion side. We continue to see very good reductions in the cost of goods, certainly as much it ties better than what we originally plan. The sales line where we had some challenges earlier on there in terms of some of the conversions, I think we are getting better as a company in terms of positioning those conversions with customers and in the subsequent ways the sales trends are somewhat better than what we saw in the prior.

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

Edward J. Kelly – Credit Suisse Securities, LLC

Great, thank you.

William J. DeLaney

Welcome.

Operator

We will now move to Karen Short with Deutsche Bank.

Karen F. Short – Deutsche Bank Securities, Inc.

Hi. It’s just a couple of a questions on MAs. I guess, wondering, you made a comment in the press release Bill about improved weather and locally managed sales strengthened, I guess. So, I guess the first question is, what do you mean by exactly by locally managed sales strengthened?

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

William J. DeLaney

Yes, so let me take the first one Karen. So locally managed was something I’ve kind of coined here over the last 18 months. We use it more internally, but I don’t really like to speak externally differently, I do internally. So it’s an attempt which is getting traction now within Sysco. It’s to have more clarity for operating in our market precedence. So the certain segment sales which we will call street sales, local contract being another, basically where the customer and that decision maker that relationship is driven with a local OPCO, we’ve just kind of bundled that a little bit more than just talking about street from an accountability standpoint and from an influencing standpoint.

So it’s an internal terminology. We still look at street within that number. So we look at both, I would tell you I think you would know this over the last four or six quarters what we’ve seen is our corporate manager largely our national – large regional business has grown at a faster rate than our locally managed. And in fact, the locally managed growth is pretty modest, and it was modest again in January and February. So when I was referring to there, as it did strengthen in March along with the other book of business as well. And that is very encouraging and that is the key part of our growth and that is the key part of our profitability leveraging as well.

So it’s a big part of our business and something we put a lot of emphasis on and in the fairness, while these initiatives we’ve been driving out both in terms of the sales organization, cap man that kind of thing. That directly impacts that sales force, our local sales management teams and ultimately the customer, and so there has been a fair amount of distractions out there over the last year. And I think we are starting to see that we are – we are though a lot of that and beginning to manage it better.

As far as MA retention or MA numbers, we had situations in some of our companies last year where we as we had some of that distraction and disruption, we allowed our MA workforce to fall well below where our target members where. And we are coming back there, so we are not all the way back, but we had targeted growth numbers for this year and we are beginning to approach those to get to the level we want to get to.

We did eliminate several unprofitable territories about a year ago and we pretty much have worked our way through that process. As far as marketplace, please take this to – our people are always under high demand everybody comes after our sales people. We do generally a pretty job of retaining them. And I would say from the merger standpoint, our folks right now are excited, and whether there is some isolated situations there I wouldn’t necessarily attribute them to the merger and there maybe a challenge I think as we pull all this together but right now I wouldn’t tell you that's, it’s not a big issue from the Sysco side, and it could be initiative as we put the company’s together.

Karen F. Short – Deutsche Bank Securities, Inc.

Okay that’s very helpful. And then just on Denver, New Orleans you commented that there was most successful conversions yet, maybe can you just talk a little bit more about why and what you did, and then what are your plans you are going to make, if you said that and I missed that out, but fair conversions for the rest of the year.

William J. DeLaney

Yes, well Denver, New Orleans, first of all they are both very large companies, very profitable companies. So that was a big step. I mentioned one example in my prepared remarks where, data management, is kind of issue for us and that’s the basic thing that you look out in all conversions, but one of the things that happens when there is that much change going on sometimes, you don’t have this consistent focus as you need. So we took out learning from the previous conversions and did much better and we’ll continue to do better on that front.

I would also tell you on the customer side, we were more connected in particular with our larger regional and national customers in terms of how the conversion would impact them. And so as issues did arise, we were much more connective as an organization between the technology group and the sales group and that was a big part as well. So those are the two things I would call.

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

Karen F. Short – Deutsche Bank Securities, Inc.

Right thanks a lot.

William J. DeLaney

Thank you.

Operator

We’ll now move to Meredith Adler with Barclays Capital, Inc.

Meredith Adler – Barclays Capital, Inc.

Thanks for taking my question. Can you hear me?

William J. DeLaney

Yes, can hear you?

Meredith Adler – Barclays Capital, Inc.

Yes, good thanks. My first question is, you talked about MAs at your own company. Can you talk about at all that what’s happening at US foods?

R. Chris Kreidler

Meredith, this is Chris. We really can’t. We’re competitors in the market and while we are going thorough a tremendous amount of integration planning, we really are trying to avoid talking about their performance, their sales, their on challenges initiatives out there, so that’s something better directed directly to them.

Meredith Adler – Barclays Capital, Inc.

Okay, I also have a question, did you talk about the Easter shift at all impacting March, and probably would have been negative, and March was very strong, do you think it would have been stronger, it hadn’t been for the Easter shift?

William J. DeLaney

What is the first part of your question, really what would have been negative?

Meredith Adler – Barclays Capital, Inc.

In the Easter shift…

William J. DeLaney

Yes

Meredith

By March to April?

William J. DeLaney

So your question is, if Easter been earlier, would it been better.

Meredith Adler – Barclays Capital, Inc.

Yes.

William J. DeLaney

No there, I think a late Easter helped us. Interesting though, it didn’t really help us that much. I cant’ say this, our performance in Florida, which is where you would see most of the Easter benefit. What’s if that different wasn’t any better than the other regions until the week of Easter, and then we definitely saw the fact that, so we have a still more people in Florida, what you hear in Florida is regardless of the calendar, people tend to stay, a lot of people tend to stay until Easter.

So, it helped us, I think what really helped us a lot in March, Meredith was hurt us in January, February people. And good number parts of the country had been locked up in their homes, don’t want to get out and dig it out more. So I would say, a late Easter helped us somewhat, but probably not as much as just the other side of the weather discussion.

Meredith Adler – Barclays Capital, Inc.

Okay, great. Thank you very much.

William J. DeLaney

Thank you.

Operator

We’ll now move to Ajay Jain with Cantor Fitzgerald.

Ajay Kumar Jain Cantor Fitzgerald Securities

Yes. Hi, I hope you can hear me. First on business transformation, I know, Chris that you mentioned that you’re capitalizing more of the project in shifting some of the allocation on expenses, I’m just wondering if the merger development have had a impact on how you’re looking at business transformation, do you have to cleave things in anyway based on the business transformation process that’s going on entire well over US Foods. So I was just wondering in terms of the capital allocation priorities, if anything is changed.

R. Chris Kreidler

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

So we’re in planning phase for integration, but we’re not allowing it to impact what we’re doing from a business transformation perspective going after the benefits that the way look at the cost et cetera. What will impact it, and Bill alluded to it here a few minutes ago is, as we think about overlaying the merger into our company and especially from the business technology standpoint, we have to rethink about rollout schedules, we have to rethink how we’re going to put the companies together technologically, that will have an impact and we’re playing through various scenarios on that right now.

Ajay Kumar Jain Cantor Fitzgerald Securities

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

R. Chris Kreidler

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

Ajay Kumar Jain Cantor Fitzgerald Securities

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

William J. DeLaney

Yes. We wouldn’t necessarily give you anything forward-looking. I know we’ve talked a little bit about April here and just because there is a trend in March we wanted to give you some color about what's going on with that trend? I think the way I characterize it, is we went from almost nothing which is at 1% to something. There are three very specific categories we called out that are kind of double-digit inflationary categories, but is built at the rest are really not an issue. They are either flat or even slightly down. So what average is out to certainly more than 1%, but that’s not all will say and it’s only April we’ve got a couple more months before we build out the quarter.

Ajay Kumar Jain – Cantor Fitzgerald Securities

Great. Thank you.

Operator

We’ll now move to Mark Wiltamuth with Jeffries.

Mark G. Wiltamuth – Jefferies LLC

Hi, good morning. It’s Mark Wiltamuth at Jeffries. Is there any update for us on the net positivity you expect from business transformation? Now that you’ve changed the accounting a little bit on how the costs are going to be done?

R. Chris Kreidler

The way that we are allocating cost really doesn’t impact the benefit at all. We’ve been tracking it for those who’d followed us, yourself included Mark, of course. And the benefit side and the cost side, on the benefit side we said $600 million of benefit we had achieved over three years. Bill said in his prepared remarks, I’d reiterate it, we are still on track to achieve that, we hit our numbers for the first year. At mid-year we said we were still on track, but this year and we reiterated we still believe we are going to hit those numbers for the three years combined. On the benefit side no change.

What we are really talking about, what I refer to them the cost side. This is a long process and there is a lot going on and we are changing a lot. And as we go through this much change, we’re having to take new looks at how we allocate cost, how we think about expenses et cetera. So we had some restatements, we’ve talked about are not restatements, but adjusting the way we look at things and in this particular case we looked at the way we allocate our labor when we just said it is more precise to do with the new way.

So I’ve got two choices, I either have to restate or give you a new look at the guidance,

using the new methodology which is what we opted to do or we’ve to somehow go backward and tell you what it would have been in prior quarters, prior years and frankly that would have taken a lot more effort.

So we are giving you a new set of guidance, based upon the new methodology. Our variance this year from the old guidance that $300 million to $350 million a year is really about half and half capitalization of labor and methodology change on how we actually account for the labor. So that’s the change frankly, if we did it under the old methodology we’d still be in the old guidance. So we are just changing the guidance, so we can report it differently going forward. It does not impact the benefits.

Mark G. Wiltamuth – Jefferies LLC

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

William J. DeLaney

Again, we are not going to comment on the US Foods side. But I would tell you from our perspective, we’ve had an opportunity, very senior levels of management to speak with, virtually all of our top customers and at the local level our Presidents and VPs and salesmen out talking to many of their customers as well. And I think as time is going on people – we have been able to explain the reasons for the merger and the opportunities. And some of the challenges will come with that early days and transition and that kind of things.

So I would characterize the visits with the customers out from our perspective is very constructive, largely supported. And there were a lot of questions as you can imagine one of their key questions is to what extent will this disrupt service that type of thing as we go through the transition. And obviously that is a big priority for us to minimize that type of things.

So – so far I would say we had very good visits with our customers.

Mark G. Wiltamuth – Jefferies LLC

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

R. Chris Kreidler

Yes, they are not on our old system which was a kind of customized proprietary system for Sysco. They had their own somewhat customized proprietary system. They are not on SAP either. So the way we looked at this, and I think we talked about this a little bit is, each company has its system. We are moving towards SAP as a unifying system. We do believe and we asked it publicly that we think it’s the right system for the combined entities post merger and so we will have to build the bridge, so that both systems can communicate and talk to each other in the near and medium term and then a new road map to eventually get it all to the new ERP platform overtime.

Mark G. Wiltamuth – Jefferies LLC

Okay, thank you very much.

Operator

(Operator Instructions) We’ll now move to John Ivankoe with JPMorgan.

Unidentified Analyst

Good morning, thanks it’s (indiscernible) for John. I guess the first question, you touched on a little bit, but would that say, P and I think 10 facilities now, it would seem like it would have a pretty decent sample size to compared to the baseline OPCOs, so I was just hoping maybe you could provide some more texture around where some of the most meaningful differentiation is coming versus the OPCOs that don’t have the systems?

Is it on a profitability side? Is it in case volume growth? Are you just generally getting better customer feedback around the execution, just some color around that would be great?

William J. DeLaney

Yes, I would say 10 companies, well we are pleased with that, the scheme of 70 is still early days, and our focus is, as I pointed out in my comments over the last six to 12 months has been more about stabilizing the system and improving the performances. And we see that in those companies, so on the sale side in terms of the speed of the system that type of thing, we made a lot of very good strides there.

Our service levels continue to improve and get toward the level of our legacy companies if you will. We saw a lot of opportunities to manage the inventory more efficiently and effectively and we are working on some things there. So we are pleased with the progress that we are making, but I wouldn’t want to get into discussion relative to the legacy companies because it’s still earlier days.

Unidentified Analyst

Okay, and then I just changing gears a little bit, we don’t haven’t talked about in a lot recently, but I guess where from your perspective obviously you have many things going on right now. But where is Sysco ventures might fit in terms of your priorities, from a longer-term perspective especially given the fact that with the scale that you have – you probably have a trove of information about what’s working on restaurant customers’ menus from both the sales and profitability standpoint. So it seems like it’d be – something that could be a pretty major differentiation for you versus maybe other competitors in the space?

William J. DeLaney

We think, ventures is a key strategic opportunity for us. We are beginning to gain traction and we put together the platform with the company called Leapset about a year-ago. We’ve rolled out certain solutions in certain markets we are seeing some progress there. We still have a big opportunity here to get it more integrated into the business. We’ve made some progress there and working with several solutions, there are more solutions to come.

So I would agree with you that with this merger it give us an even stronger platform in terms of customers to leverage this capability and to build stronger more effective relationships with a greater number of customers. So it’s a key part of our strategy, and I think, as we get deeper into the merger planning work, we’ll be able to speak more specifically in terms of work structure and that type of things in terms of how we are going to drive it out.

Unidentified Analyst

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

R. Chris Kreidler

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

Now overlay that the merger and yes, we’ve got to take a new look at that we are. We’ve got a lot of people working through what that’s going to mean in terms of, what I’ll call one-time capital to make the networks work well together. Toast with that we’ll have to reevaluate. I got a personal believe that we should be able to get long-term run rate capital down to the low end of our range if not even slightly below that range is based upon scale. But that remains to be proven out in several years off.

Unidentified Analyst

Very helpful, thank you.

Operator

We’ll now move to Erin Lash with Morningstar.

Erin Lash – Morningstar Research

Thank you for taking my questions. I wanted to touch on some of the – has been the two had been doing and your partnership with Robert Irvine over the past couple of years and how effective that has been or maybe hasn’t been?

William J. DeLaney

Hi Erin, look we think it’s been very effective in the year two, right now, with chef Irvine and as we’ve talked about in the past one the reasons, we partnered with him and through Network is roughly 70% of our customers tune into that Network on a regular basis and in particular watch his shows. So he has been a great ambassador for Sysco both through the Network as well as personal appearances and working with our OPCOs and doing some nice work as well in the communities.

So we are very pleased with that partnership and we’ve got some new ads that are going to be coming out this year. And I think, you’ll continue to see is a significant positive for us from a marketing standpoint.

R. Chris Kreidler

I also say it’s given our marketing associates a lot to be excited about we get that feedback constantly from our MAs so that positive is well for our system.

Erin Lash – Morningstar Research

Thank you, that’s very helpful. And then I just wanted to ask about, the Sysco brand overall, and I think you are going to make some investments behind this Sysco brand and how to better to help that I think in front of customers and I was wondering what kind of the mixes between the Sysco brand and private label and how those affect our progressing?

William J. DeLaney

You’re talking about the product brand or the corporate brand, Erin?

Erin Lash – Morningstar Research

The product within the product sales?

William J. DeLaney

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

So I’m actually very pleased with the work that’s been done in the merchandised area over the last couple of three years in terms of going through and looking at all the specs in our various categories, as we even we before the category management work started but in conjunction without now as well as combining that with our customer insight work so, we don’t have a particular number in mind necessarily we are just trying to strike the right balance with our customers where we really do have a value-added product, we wanted to make sure that we’re positioning it properly.

Erin Lash – Morningstar Research

Thank you very much.

William J. DeLaney

Thank you Erin.

Operator

It does appear there are no further questions, and at this time, I’d like to thank everyone for their participation. You may now disconnect.

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