Sysco CEO Discusses F4Q10 Results - Earnings Call Transcript

Aug.16.10 | About: SYSCO Corporation (SYY)

Sysco Corp. (NYSE:SYY)

F4Q10 Earnings Call

August 16, 2010 10:00 AM ET

Executives

Neil Russell – Vice President, Investor Relations

Bill DeLaney – President and CEO

Chris Kreidler – Chief Financial Officer

Analysts

Meredith Adler – Barclays Capital

Andrew Wolf – BB&T Capital Markets

Greg Badishkanian – Citi

Jason Whitmer – Cleveland Research Company

Mark Wiltamuth – Morgan Stanley

Neil Currie – UBS

John Ivankoe – JPMorgan

Operator

Please standby. Good day, everyone. Welcome to the Sysco Announces Fourth Quarter Fiscal 2010 Earnings Conference Call. As a reminder, today’s call is being recorded.

At this time for opening remarks and introductions, I’d like to turn the call over to Mr. Neil Russell, Vice President of Investor Relations. Please go ahead, sir.

Neil Russell

Thank you, James, and good morning, everyone. Thank you for joining us for Sysco’s fourth quarter and fiscal year 2010 conference call. On today’s call 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 in the course of this presentation that state the company’s or management’s intentions, beliefs, expectations or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ in a material manner.

Additional information concerning factors that could cause actual results to differ in a material manner from those in the forward-looking statements is contained in the company’s SEC filings including, but not limited to, risk factors contained in the company’s annual report on Form 10-K for the year ended June 27, 2009, and in the company’s press release issued earlier this morning.

As disclosed in our earnings release this morning, our operating results this year included an extra week of operations due to the timing of the last day of our fiscal year. As a result, the fourth quarter of fiscal 2010 included 14 weeks of operations, compared to the fourth quarter last year, which included 13 weeks. And fiscal year 2010 included 53 weeks of operations, compared to the prior year, which included 52 weeks.

On the call today, we will discuss year-over-year comparisons that include the impact of the extra week of operations. However, to provide financial results that are more comparable on a year-over-year basis, certain metrics will be provided which remove the estimated impact of the extra week. These adjusted metrics are non-GAAP financial measures. You can find a reconciliation of these non-GAAP measures to the applicable GAAP measures on our Investor Relations website at sysco.com.

Also, all comments about earnings per share refer to diluted earnings per share, unless otherwise noted. Lastly, we ask that you reserve December 2nd on your calendars for our Analyst Day in New York. Additional information will be provided in the next couple of weeks.

With that out of the way I’ll turn the call over to our President and Chief Executive Officer, Bill DeLaney.

Bill DeLaney

Thank you, Neil, and good morning, everyone. I’d like to begin this morning by recognizing our management team and all of our associates for both their commitment and hard work. They kept their full attention on servicing our customers and effectively managing expenses throughout a second consecutive challenging year.

This morning Sysco reported net earnings of $338 million for the fourth quarter of fiscal 2010. We were pleased to see case volumes once again increase year-over-year. While we have seen no consistent pattern of improvement on a week-to-week basis, we are encouraged by the fact that we have now experienced positive volume comparisons for the past several months.

In addition, we experienced food cost inflation as measured by the estimated change in our cost of goods during the fourth quarter for the first time in a year. Specifically, inflation contributed approximately 2.2% of our overall sales growth for the quarter, driven mainly by higher prices in the dairy, meat and produce categories.

I’m particularly pleased with how well our operating companies continue to manage their expenses. Along with supporting the growth of our customers, improving our operational effectiveness remains a key area of focus throughout Sysco. While industry conditions are more favorable than they were a year ago, our marketplace remains highly competitive. This environment has increased pricing pressures which we have and will continue to work through with our customers.

Specifically, we focus our efforts on differentiating our product and service offerings, more effectively utilizing our scale to better integrate our enterprise-wide capabilities and reducing our cost structure overtime. We believe that we’ve been able to take share as a result of these efforts.

Reflecting on the entire fiscal year, we sold more than $37 billion of product, shipped more than 1.2 billion cases, generated $2 billion of operating income, recognized record earnings of $1.99 per diluted share, produced cash flow from operations of $885 million and distributed $580 million of dividends to our shareholders.

Turning to our multi-year business transformation initiative for a moment, we currently have more than 300 people dedicated full-time to the project. Over the past two years, we have completed much of the design and technology development work and are currently testing systems and processes. The project that we track and we currently expect our first operating company to go live early next calendar year.

Subsequent rollouts will occur in waves of 5 to 10 operating companies through the end of 2013. This project is the single most important initiative we have undertaken since the formation of Sysco. As previously communicated, we are investing significant amounts of financial and human capital to better position Sysco for profitable sales growth for years to come. We will continue provide periodic updates as we move forward with the work.

On last quarter’s call, we discussed the new operational leadership structure we were preparing to put in place. Mike Green is now leading the U.S. Broadline companies and Larry Pulliam is overseeing Contract Sales, Sigma, Distribution Services and the Specialty companies. Additionally, we have recently realigned our U.S. Broadline leadership responsibilities into 11 geographic markets. These changes became effective with the beginning of our new fiscal year.

This new structure enhances our go-to-market strategy, allows us to more effectively implement our business transformation project, helps us develop and strengthen customer relationships across over local lines and improves our approach to building our pipeline of acquisitions. In addition, the new organization structure provides a broader platform to further develop our most talented and experienced leaders now and in future.

I would like to close my prepared comments this morning in the same manner in which I began, by thanking our 46,000 associates for their efforts and engagement over the past year. While encouraged by volume trends that continue to be favorable, we recognize that the broader economic climate may remain tenuous for some time.

Accordingly, we are committed to aggressively deploying all of Sysco’s resources and capabilities moving forward to effectively support our customers and fully realize the opportunities available to us in the $200 billion food service industry.

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

Chris Kreidler

Thank you, Bill, and good morning, everyone. What I’d like to do first this morning is provide a brief summary of the formal GAAP results. These GAAP results include the impact of the extra week of operations that Neil mentioned earlier. That means these numbers compare 14 weeks of operations in the fourth quarter of 2010 to 13 weeks in the fourth quarter of 2009 and 53 weeks of operations in fiscal 2010 to 52 weeks in fiscal 2009.

On a GAAP basis for the fourth quarter, sales were $10.3 billion, an increase of 13.9% compared to the prior year and operating income was $584 million, an increase of 8.1% compared to the prior year. Net earnings were $338 million, an increase of 7.1% and earnings per share were $0.57, compared to $0.53 in the prior year or an increase of 7.5%.

On a GAAP basis for the year, sales were $37.2 billion, an increase of 1.1% compared to the prior year and operating income was $2 billion, an increase of 5.5% compared to the prior year. Net earnings were $1.2 billion, an increase of 11.7%. Earnings per share were $1.99 compared to $1.77 in the prior year or an increase of 12.4%.

As I mentioned, those year-over-year comparisons on a GAAP basis are not comparable because that extra week of operations in the fourth quarter impacts all the year-over-year comparison. So what I’d like to do now is discuss our results for the quarter and year excluding the impact of that extra week. That means these adjusted numbers compare 13 weeks of operations in the fourth quarter of 2010 to 13 weeks in the fourth quarter of 2009 and 52 weeks of operations in fiscal 2010 to 52 weeks in fiscal 2009. This should give you a better sense for what’s going on in our business and is the same basis the management team has been using to analyze our financial results.

On an adjusted basis for the quarter, sales increased 5.8% compared to the prior year, driven mainly by case volume growth and the impact of food cost inflation, which we estimated to be 2.2% for the period. In addition, changes in foreign exchange rates increased sales by 1.3%.

Adjusted operating income was essentially flat in the fourth quarter, increasing only 0.4%. Adjusted operating expenses were higher in the fourth quarter by $76 million. The increase was primarily due to $30 million charge related to Corporate Owned Life Insurance or COLI and $29 million in higher incentive compensation expense.

Bonus accruals were lower last year in the fourth quarter because we did not meet all our 2009 performance objectives. However, based on the financial results announced today, we met certain 2010 performance objectives and have accrued for bonuses accordingly. Additionally, gross margin was slightly lower, which we largely attribute to the pricing pressure as Bill mentioned earlier.

Adjusted net earnings for the fourth quarter were $314 million and were essentially flat compared to the prior year, declining less than $2 million. Adjusted earnings per share were $0.53, including a $0.02 negative impact from COLI. In the prior year period, earnings per share were also $0.53, but included a $0.03 positive impact from COLI.

Turning to the year-over-year comparisons, while sales declined 0.9% for the year on an adjusted basis, it really was a year with two distinctly different halves. The first half of the year was marked by deflationary pressures across most food categories and case volumes that were negative year-over-year. Consequently, sales in the first half were down 5.7%.

However, in the second half of the year, deflation moderated and turned inflationary while case volumes began to increase year-over-year. As a result, sales in the second half of the year increased 4.1%.

Throughout the year we managed our costs very aggressively with particular focus on pay related costs. At the end of the fiscal year, headcount was down 2.2%, demonstrating this progress. This is on top of the 6% reduction achieved in fiscal 2009.

Our sales per employee has increased 1.3% this year and 5.7% over the last two years. We continue to implement and see benefits from our various operating initiatives, which helped us leverage more of our sales to the bottom line.

Adjusted operating expenses declined $132 million or 2.6% in fiscal 2010, compared to fiscal 2009. The decrease in operating expenses was primarily the result of more than $70 million reduction in fuel expense, a $65 million favorable change related to COLI and a $40 million decline in bad debt expense.

These decreases were partially offset by a $37 million increase in company’s sponsored pension expense. As a result, adjusted operating income increased $62 million or 3.3% to $1.9 billion for the fiscal year.

Adjusted net earnings for fiscal 2010 were $1.2 billion, an increase of $100 million or 9.5% compared to the prior year. Adjusted EPS was $1.95, aided by a $0.05 tax benefit related to the company’s IRS settlement announced in the first quarter of fiscal 2010 and a $0.04 favorable impact from COLI.

EPS in the prior year period was $1.77, which included a $0.07 negative impact from COLI. This is the end of our discussion of the results of operations on a non-GAAP basis. Comments from here forward in the call reflect GAAP amounts.

Turning to a brief discussion or brief update on our business transformation initiative, the project decreased diluted EPS this fiscal year by approximately $0.02. This resulted lower than the $0.03 estimate we provided on our third quarter call, due primarily to timing and our ability to capitalize more cost than anticipated.

Turning to cash flow, cash flow from operations for the fiscal year was $885 million, compared to $1.6 billion in the prior year period. Cash flow from operations in the current period was impacted by IRS settlement payment totaling $528 million and early pension contribution payment for fiscal 2011 totaling $140 million.

We now paid more than half of the total IRS settlement amount and will pay approximately $212 million per year in fiscal 2011 and 2012 to the pave of our normal estimated tax payments. Due to the timing of those tax payments during our fiscal years, there is no cash impact on our first quarter, fiscal quarter of either year, $106million cash outflow in each second quarter period and a $53 million cash flow in each of the third and fourth fiscal quarters.

Capital expenditures totaled $157 million for the quarter and $595 million for the year in line with our guidance. Spending for the year included investments in technology including our business transformation project, fleet replacement and purchase of a facility for our future shared services operation and replacement or expansion of facilities in Vancouver, Toronto, Houston, Philadelphia and Plainfield, New Jersey.

In July, we announced the acquisition of Lincoln Poultry & Egg Company in an all cash deal. Lincoln Poultry serves more than 800 customers located mainly within the central United States and generates approximately $200 million in annual revenues.

We believe that their high quality operations and strong customer relationships will be an excellent growth opportunity for Sysco. As discussed previously, we continue to be active in the acquisition market, working to identify opportunities that we believe may be a good fit for us.

Looking ahead into next year, there are a couple of important items that we want you to keep in mind as you think about fiscal 2011. First, fiscal 2011 will be a 52-week year. The 53-week anomaly we had in fiscal 2010 occurs every six years. The next year we have this issue again will be in fiscal year 2016. And second, we recognized certain gains during the year to be mindful of, a one-time tax benefit of $29 million in the first quarter of this year related to our IRS settlement and $22 million in total gains related to COLI that impacted operating income throughout the year.

In addition, we are also providing a few guidance metrics for the year ahead. We expect capital spending for fiscal 2011 to be in the range of $700 million to $750 million as we continue to invest in our business, including $160 million to $180 million of capital related to our business transformation project.

We expect pension expense for the year to be approximately $60 million higher than fiscal 2010. This increase is primarily due to a decrease in the discount rate used to determine pension expense, which is in turn driven by the significant decline in long-term interest rates over the last year.

Finally, we estimate the net impact of the business transformation project will reduce EPS by $0.06 to $0.09. This range is a bit lower than the projections we provided last December at our Investor Day and is primarily attributable to our ability to capitalize more of the cost of the project.

In closing, while the business environment in fiscal 2010 was challenging, our operating companies did a great job of managing through those challenges with a strong focus on growing cases, reducing costs and improving productivity. That focus has continued into the New Year and we are confident that Sysco is well positioned to successfully address the new challenges and opportunities that we will experience in fiscal 2011.

With that, operator, we will now take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll take our first question today from Meredith Adler with Barclays Capital.

Meredith Adler – Barclays Capital

Thanks very much. First question I would like to ask is just, if you could talk a little bit more about the competitive environment. You talked about a lot of pricing pressures. Could you just maybe elaborate on that a little bit?

Bill DeLaney

Good morning, Meredith. This is Bill. Yeah, it’s -- we’ve been talking about it really for the better part of a year, I guess. And what we’re seeing out there is I think what you’re seeing across all the spectrum of the economy right now. Our customers are doing everything they can to improve their service to their customers and at the same time manage their bottom line more effectively and part of the equation is to get more people in their restaurants and part of it is managing cost. So we’re regularly working with customers on how to do that.

As I mentioned in my comments, we tend to focus largely on differentiating ourselves and giving them a lot of the value added services that we talked about in the past. From a pricing standpoint, I think probably about this time a year ago was when it really I think went to another level and it continues to be quite competitive out there.

So as you know and as we’ve talked before, the way we manage the business here is we obviously focus on the top line and then we focus on the bottom line and then we try to manage our expenses in a way that will leverage that and at the same time offset any gross margin pressures we may see.

Meredith Adler – Barclays Capital

Great. And then I just have another question, maybe if you could talk about sales. Is there anything that you can point out, either regionally or type of customer, where you’re seeing either the greatest improvement or the least improvement, anything that kind of stands out?

Bill DeLaney

Yeah. We look at that. Now, we’ve got all different ways to slice and dice it here with the new organizational structure and we look at it weekly and monthly and quarterly and it would be -- I would be hard-pressed to tell you there’s any one region that’s particularly outperforming another or -- Florida continues to be difficult. This is going on for years now. Hopefully, we’re going to start seeing some improvement down there.

But I can’t really tell you geographically that there’s a big trend or variability one way or another. As far as the customer mix, that’s an interesting question because as with all numbers, whether you’re talking about your earnings or your sales or your margins or your mix, you’ve got to look at where you were last year and where you are now. So there are different views out there in terms of what the industry is seeing. I would say that we’re seeing about the same performance both on the QSRs, we’re seeing on, say, the meat companies as what we’re seeing on the more family-oriented dining with our Broadliners but for different reasons.

QSR, I think those numbers seems to be performing quite well right now but the top line comparisons are a little tougher than a year ago. On the meat company side, we’ve had two really, really hard years there. As you can appreciate, the bulk of that business is, at least a large percentage of it is high end and that’s been very difficult segment of the market.

Our numbers are actually starting to improve there albeit off of two tough years. And then in the family dining, I’d say pretty much mirrors the market. So at least from our perspective, we’re not seeing a lot of changes but part of that is the baseline.

Meredith Adler – Barclays Capital

Okay. Great. Thank you very much.

Operator

Next, we’ll hear from Andrew Wolf with BB&T Capital Markets.

Andrew Wolf – BB&T Capital Markets

Thanks. Good morning. Want to follow up on the question on competition. Just when you think about the source or when you ask about the source of your operators, is this other competitors coming in with just lower pricing or is it more chains and maybe even some of the bigger independents, let say, or what have you, actually kind of bidding it out, calling up and saying we need relief, let’s try to create an option for our business?

Bill DeLaney

Well, Andy, I think it’s both of those. They tend to be interrelated but it’s more than that. I mean, it’s also us understanding the depth of the relationships we have with our customers and understanding that even though the environment is better than it was a year ago. It’s still very tough environment out there for any business and so we spend a lot of time, invests a lot of resources both with our Street customers and our contract customers to stay close to them and understand what their needs are and try to be as proactive as we can.

So in fairness, is there more of that, what you described probably going on today than there was a couple years ago, probably, and are we dealing with it effectively? I think so. But the reality is, this business is always very competitive and the margins are relatively slim. So it’s a combination of us being proactive and then in certain situations reacting to the specific needs of our customers, which tend to be precipitated by the competition.

Andrew Wolf – BB&T Capital Markets

Thanks. So I mean, let’s say we’re in a new economy that doesn’t really have a robust rebound. Do you think the attributes of demand for food service distribution might have shifted more towards the price and away from quality and reliability or could, theoretically have shifted if things don’t pick up?

Bill DeLaney

I don’t think it’s a shift. I mean, I think it’s just a deeper or more acute emphasis but certainly in terms of how we look at the business, both from ourselves and as we work with customers, if you don’t have a topline, it’s very difficult to leverage anything. So certainly you want to make sure your product costs are in line and that your operating costs, you need to continue to get more productive and more efficient.

But I don’t think you ever want to move away from what the customer expects relative to your particular eating establishment. So service will continue we think to be very, very important. I think it starts there and -- but with that said, we are in a slower growth environment. We understand that and that’s why you see us both in the short-term over the last few years as well strategically, be very focused on reducing our cost structure over time, that will give us more latitude to continue to compete well.

Andrew Wolf – BB&T Capital Markets

And just last follow-up on the sales environment. It strengthened at least for the quarter and I understand you’re saying the weeks, week by week, it’s still somewhat erratic and I understand that to mean. Your customers are obviously having variable results and so forth. But if you look at it on a monthly basis and include July because the advanced sales from commerce looked pretty good for July, is there any discernable pattern? Obviously, I’m trying to see if it’s up or sideways, can’t be down I suppose -- could be down, I guess. But are you seeing any signs of strengthening when you look for the quarter through July?

Bill DeLaney

Andy, I think what we’re trying to address in those comments was we’ve had several months now going back. I think if you look at last year, Chris talked about two halves, let’s break it into thirds. I mean, the first third we were in pretty deep dive both on the case volume and on the deflation. And we started to see that turn in November and then it did turn in December and last several months.

So we’re continuing to see case growth even into July. We continue to see comparable inflation. The point we’re trying to make there is what we haven’t seen is kind of a step-up in that rate of growth and we would like to see that but the reality is we haven’t seen that, from week to week, it will move around and that could be as simple as just how the calendar falls.

So the point we’re just trying to sensitize it to, it’s choppy but it’s definitely still positive. And to your point there are mixed messages that are coming out of the industry trade right now.

Andrew Wolf – BB&T Capital Markets

Thanks and that’s very helpful. I appreciate.

Operator

Our next question will come from Greg Badishkanian with Citi.

Greg Badishkanian – Citi

Great. Thanks. And just as a follow-up on the sales question, obviously very, very robust volumes relative to how the economy is doing. Market share have anything to do with versus your other distribution competitors?

Bill DeLaney

Greg, could you repeat that?

Greg Badishkanian – Citi

Are you seeing market share gains driving that acceleration in the real sales volume or is it strictly kind of the overall market kind of lifting?

Bill DeLaney

No, we look at it -- first of all, let say, it’s hard to precisely answer that question. The industry numbers continue to get updated but we think which tends to be where we go for a lot of our perspective. We think you’re going to see a second year that’s down. So you’re looking at two years where the industry has been down. And we’re flattish to maybe up a little bit, depending how you look at the numbers.

So we think we’re taking share, it’s just hard to get too aggressive with that comment when the industry is down like that. So no, we’re taking share on a relative basis and we believe if you look at the industry information that people are in the medium term a little more optimistic than they were six or 12 months ago for future growth of the market, although in the short term it’s not so clear.

Greg Badishkanian – Citi

Okay. Good. And then just with the recent acquisition of Lincoln Poultry & Egg, maybe a little bit more color around that, kind of how you think that’s going to do for you?

Bill DeLaney

I think it’s a very traditional type of Sysco acquisition. It’s in a market where we have good market presence but this is a real good company with a good management team. And we think it’s going to complement what we’re doing out there in the Midwest very well.

Greg Badishkanian – Citi

Great. Okay. Thank you very much.

Operator

Move on to Jason Whitmer with Cleveland Research Company.

Jason Whitmer – Cleveland Research Company

Good morning. Bill, I want to come back a little bit to your pricing pressure versus trend comment, seems like competitively not a whole lot’s different today than maybe over the last 12 months. But maybe could you provide some thoughts on the swing in inflation as it relates to pricing power?

So looks like the 2.2% is fully product cost but how much of that has been realized? Is that what you’re talking about is more of a pinch there in the spread between what you’re experiencing in wholesale versus what is getting passed through?

Bill DeLaney

You know, Jay, that could be part of it. I purposefully didn’t go there just from the standpoint of -- that’s a very hard phenomenon to qualify. We’ve talked about that in the past. So I think what you’re getting as -- when you move from a deflationary environment, which -- while that hurts you on your gross profit dollars, it tends to actually help you to some extent on your percentages.

And you move into some nice inflation that we are seeing now that could pull the pressure. There’s a lot of things that obviously impact margins, various components of margin in terms of mix, the product mix, the business mix, the customer mix, all that type of thing, what the numbers were last year.

So I think that could be part of it. But I think in the broadest sense in terms of giving you a feel for what we’re seeing out there, I think it’s somewhat of a cumulative build to what we’ve seen over the last year, just the marketplace where there’s just -- everyone’s trying to grow and they’re trying to -- more than anything they’re trying to make money. So I think that’s the bulk of it.

Jason Whitmer – Cleveland Research Company

I think where there’s some confusion, this would have made more sense two or three or four quarters ago, when sales were under pressure, where there’s more customer product mix shift. And now that sales are good and margins as face value look worse, so I’m hoping you can reconcile either the timing of all that or maybe more importantly, we’re trying to get our hands around as where this goes over the next six months, 12 months, within some of those core components, whether competitive or not but core components of your business, are there any real inflations to be watching here or is there something structurally building here before we even get to the SAP expense dollars.

Bill DeLaney

That’s fair. I accept the question. I think, look, the margins are a little bit like momentum. They’re out there and so while the pressures have been out there for a year or so, it takes a while for some of that pressure to work its way through the system and even though -- let’s say half of our business is Street business and that tends to get priced on a daily or weekly basis, the other half is not. It’s contractual and those types of fluctuations tend to take a little longer to work their way through the system.

So I think part of it is a time lag that one would expect over a period of time. And then part of it is just how we manage our business. I mean, if you’re running a Sysco operating company or if you’re running Sysco, you look at your top line, you try to figure out how you’re going to grow your bottom line and we’re very focused on the fact that we know it’s competitive out there. We know we need to fight hard to continue to earn the business of our existing customers and to grow with them and hopefully attract new customers.

So I think a lot of it’s just more the environment. I can’t tell you that -- I don’t believe there’s a structural change. It’s still a relatively modest -- I think we’re off about a quarter of a point for the quarter. We’re flat for the year. But I would acknowledge, I think you could see some margin pressure here over the next couple quarters.

Jason Whitmer – Cleveland Research Company

That’s fair. When you look forward a little bit further out, I know you’re trying to tackle 50 basis points of margin expansion just on the core and another 50 from SAP over time, but where and when should we start to see, looking for those to develop? Is that something that could be tangible here in the next 12 months or is that still more of a three or four year time horizon?

Bill DeLaney

I’m going to let Chris jump in on that one.

Chris Kreidler

Yeah. I’ll jump in. and what you’re referring to is, I think, is going back to our Investor Day Presentation where we talked about, basically a point of margin improvement, half of which would be our traditional initiatives, productivity improvements and half of which would come from ERP.

Jason Whitmer – Cleveland Research Company

Correct.

Chris Kreidler

The valid answer to that is as we roll out the tools with ERP, we’ll start seeing those improvements. We’re at the very, very early stages of starting to roll out things like Sysco market, eSysco, things of that nature, so over the next 12 months you might see -- we might see bits and pieces of it, but I don’t think it’s going to be significant enough to flow through to the numbers that you all see. I think it’s more likely 24 to 36 months before we start to see that impact as we outlined in our timetable.

Jason Whitmer – Cleveland Research Company

Chris, are you talking more about the SAP specific benefits from that or is there another component just on the core blocking and tackling separate from that?

Chris Kreidler

I’m referring more to the SAP stuff. The core blocking and tackling what we refer to is the step that we are always working on. And I think we spoke about the initiatives that were already underway that we just hadn’t fully rolled out and then new initiatives, I think we talked about that points and some other things that we had barely touched upon yet that will be rolled out over time. Those are the types of things that are always ongoing that we use to offset the normal increases, that we seen in our price structure, cost structure.

Jason Whitmer – Cleveland Research Company

Great. Thanks, guys.

Bill DeLaney

Hey, Jason. This is Bill. Just to add here, because certainly the questions are on point. There’s a lot of numbers in this quarter’s release and Chris has done a great job taking you through some of the chunkiness of it, but I would just point out that while there is some ladies legitimate margin pressure out there and we are certainly are acknowledging that, but when you adjust for the week and adjust for the COLI, we’re very pleased with the quality of the earnings growth at the operating level this quarter.

Jason Whitmer – Cleveland Research Company

Great. Thanks.

Bill DeLaney

Yeah.

Operator

Move on to Mark Wiltamuth with Morgan Stanley.

Mark Wiltamuth – Morgan Stanley

Good morning. With the case volumes steadily improving, where do you stand on the redistribution centers at this point?

Bill DeLaney

Yeah, we’re more optimistic, obviously. We did defer moving forward in the Midwest because a big part of that business case is generated by anticipated case growth. So we’re close to moving forward there. Haven’t quite pulled together all the administrative things that we need to do. But we’re prepared to move forward here hopefully next year and we’ll come back to you on that in the Midwest and that’s a very key third leg now in the RDC initiative.

Mark Wiltamuth – Morgan Stanley

Okay. And just to get at your point that costs were managed well this year, are you finding any new opportunities for cost cutting as you’re going through the SAP processor process or is that kind of already reflected in your comment that 24 to 36 months away, we’ll start to see some cost improvement.

Chris Kreidler

I’ll jump in on that. I think as we go through the ERP implementation process, if you just back up and think about what we are doing, we are redesigning all of the processes by which we conduct our business. Did we get them all down on paper, when we first started the initiative? No. So as we pursue this and go through the process of implementing the change, I think it’s fair to say we’re finding new stuff that we can go to work on and new places where we might be able to do things either more efficiently or less expensively.

Do they amount to a significantly increased savings amount compared to our business case? No. But the answer to your question is I think we’re always finding new ways to save and improve as we go through this process. But again, we’re redesigning our business kind of from the ground up.

Mark Wiltamuth – Morgan Stanley

Okay. And then maybe putting SAP aside, you were moving forward and rehiring MAs. How does that stand and should we be looking for costs to gradually be up in percentage terms this year or what should we be thinking about for our SG&A numbers?

Bill DeLaney

I’ll start and let Chris clean it up here a little bit, so. On the SG&A side, we would continue to expect to leverage those numbers to the extent that we get sales growth. So to the specific question, MAs, we are up year-over-year on MAs and that was something that we had fallen behind on.

But I would tell you this because the only area that we see any meaningful headcount increase for the new year, given the levels of volume we’re seeing today, would be on the sales and marketing side. So we would certainly expect to leverage the SG&A line. Now, with that, I mean, we have cut quite hard here over the last two years in terms of headcount. So we do need to see some growth to attain that leverage.

Chris Kreidler

I’ll just jump in and add. I was doing some quick numbers last night. From Q4 of this year looking back two years to Q4 of 2008, our headcount is down just shy of 4,000, close to 8%. And that includes the fact that we have now started rehiring MAs. And so our MA headcount has actually started to grow back in the last couple quarters.

So I’ll echo Bill’s comment. I think the company did exactly what it needed to do, given where cases were going and where the economy was going. We cut very hard and appropriately. We started hiring MAs back because we do believe the market’s turning and we are starting to see case growth. At some point, we will have to give serious consideration to whether we start hiring back in some other areas as well to prepare ourselves for larger amounts of business and growth.

Mark Wiltamuth – Morgan Stanley

Okay. Thank you very much.

Bill DeLaney

Thank you.

Operator

Next, we’ll hear from Neil Currie with UBS.

Neil Currie – UBS

Thanks for answering the questions. Just wanted to just clarify on the gross margin decline, when you say that the decline was all price or was there anything else in there?

Bill DeLaney

It’s never all price, obviously. Not to be too much of an accountant. But it’s your cost of goods and your price. So it’s both and it’s also mix in terms of the product mix and the customer mix. So there’s a little bit of all that but I would say a lot of it is on the pricing side.

Neil Currie – UBS

Okay. Thanks. And just in terms of you’re starting to see inflation compared to last quarter starting to pick up now. Could you just go into which categories you’re seeing the strongest price increases and perhaps comment on your ability to pass through these price increases and where do you see this going over the next six months ago also?

Bill DeLaney

I’ll take the first part because that’s easier and we’ll open it up here to the second part. We’re actually at a pretty nice level right now. 2%, as we said historically, we’ve seen it all here over the last several years. We’ve seen deflation. We saw a lot of inflation for a good while and then we saw deflation.

If we could maintain a relatively constant environment of 2, maybe 3 points of inflation, that tends to work for our customers. It works for us and our systems and that type of thing and that’s about where we are right now. The particular categories I think we mentioned, where we’re seeing the most inflation right now would be in the -- I think it’s in dairy and meat area and the produce area.

Now, the second part of your question is a much tougher one to answer in terms of where it’s going. Some of the phenomenon that is going on with wheat prices and what that might mean within the food chain over time.

So you’re hearing people talk about deflation in terms of the broader economy on one hand and then perhaps a lot of inflation in some of the commodities on the other and right now we haven’t experienced that. Our inflation report for July was comparable to what we saw for the quarter. But we’ll have to watch that very closely. Chris, you want to add anything to that?

Chris Kreidler

No. I mean, you all are seeing the press releases from other companies that are warning about commodity prices over the next quarter or two. We read the same stuff and so if all that comes to bear, we’ll have some inflationary pressure but our source is about the same as yours.

Neil Currie – UBS

In terms of how you’ll handle that, we just look to pass through or wait to see how customers feel about it? Or is a lot of this just contractual?

Bill DeLaney

Some of it is contractual to your points or some of that will roll on a weekly and some on a monthly basis. On the street side, we just work through it with customers like we do any sales or marketing opportunities, so. But generally, like I said, when you’re at lower levels, it’s something they can handle more than what we were seeing a couple years ago when we were at 6 or 8% inflation.

Neil Currie – UBS

Okay. Thanks very much and congratulations on the underlying results.

Bill DeLaney

Thank you.

Operator

(Operator Instructions) You will now hear from John Ivankoe with JPMorgan.

John Ivankoe – JPMorgan

Hi. Thanks. Just, first a quick clarification, on the ERP and EPS investment in fiscal ‘11 I think you said, Chris, $0.06 to $0.09.

Chris Kreidler

Yeah.

John Ivankoe – JPMorgan

Is that incremental relative to ‘10 or in total?

Chris Kreidler

When we use the term incremental, what we’re basically saying is that $0.06 to $0.09 of additional cost that we would not otherwise incur where we not doing the ERP implementation. You would then take that number, whatever it is, between $0.06 to $0.09 and compare it to $0.02 which is what we reported this year and that’s the year-over-year change.

John Ivankoe – JPMorgan

Okay. Great. That’s what I thought. And secondly, in terms of -- I guess some of the restructure, if you will, of the operating companies with some regional supervision and I think, Bill, you mentioned in terms of -- that that would give you, A, it would give you better look for some acquisitions but also serve customers across geographies. Of course I immediately think about change. Do you think that there are any chains or might that become a more strategically important over time to add some big chunks of business that might currently reside with some of your competition on the chain side?

Bill DeLaney

Well, we believe we certainly have opportunity on the contract sales side. With that said, the Street business is very, very important part of our business model, so we need to focus on both. But to your point, what we’re really saying to you there is, we believe, whether it’s regional chains or national chains where maybe more of a market type of emphasis within that group, these are sometimes big groups.

We think just having the type of people that we put in these jobs were highly experienced, very accomplished people within Sysco, many of them have a very strong sales background. We certainly think the customer and the sales opportunity is something we can capitalize there, along with the acquisition. But it’s also an opportunity, when you’ve gotten as large as we have and as geographically disperse, I think that level of management will allow some of us to stay focused on the key drivers to the business over time.

John Ivankoe – JPMorgan

Okay. Great. Thank you.

Operator

And that’s all the time we have for questions today. That will conclude today’s conference call. Thank you for your participation and have a nice day.

Bill DeLaney

Thank you.

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