Sysco Corporation (SYY) Q3 2010 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Sysco Announces Third Quarter Fiscal 2010 Earnings. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Neil Russell, Vice President, Investor Relations.

Thank you, Casey, and good morning, everyone. Thank you for joining us for Sysco's Third Quarter Fiscal 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 projections 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. Please understand that all comparisons given during the call refer to changes between the third quarter of fiscal 2010 and the third quarter of fiscal 2009, unless otherwise noted. Also all comments about earnings per share refer to diluted earnings per share, unless otherwise noted. With that out of the way, I'll turn the call over to our President and Chief Executive Officer, Bill DeLaney.

Thank you, Neil, and good morning, everyone. For the third quarter of fiscal 2010, Sysco reported net earnings of $248 million. Earnings per share were $0.42, an increase of 10.5% compared to the prior year. Sales increased 2.4% for the quarter, the first year-over-year quarterly increase in sales since our September 2008 quarter. This increase was driven by improving case volume and benefits from foreign currency translation. Case volume grew year-over-year in the third quarter. The numbers week-to-week were a bit uneven but we saw a sequential improvement in each month throughout the quarter. As we have indicated in our last call on February, March trends typically drive third quarter results and our performance for the quarter was favorably impacted by stronger sales growth in March than we originally anticipated. Deflation was 0.8% for the third quarter, which is substantially less than the 3.4% deflation we experienced in the first half of the year. Deflation subsided sequentially each month as we move through the quarter, with March coming in essentially flat. These changes were driven by higher prices in dairy, meat and produce. Operating margin improved year-over-year to 4.8%. I'm particularly pleased with our associates' ability to leverage of the sales growth we saw during the quarter. All of our employees are dedicated to helping our customers succeed and remain focused on driving continued improvements in service and productivity throughout the organization. Our financial results reflect Sysco's ability to execute effectively in a dynamic and highly competitive market. We currently have a number of initiatives underway which are intended to improve certain operating processes, which we described at our Investor Day last December. Many of these initiatives have contributed to our operating margin performance over the last several quarters in our Broadline Companies. These include efforts to standardize warehouse operating systems, utilize discrete engineered labor standards and implement activity-based compensation. While the implementation of some of these changes is nearing completion, we have a pipeline of various other initiatives in the early stages of rollout that we expect to complete over the next 12 to 15 months. This include initiatives to implement new systems to determine the most efficient product placement on our trailers, scan orders as they are taken off the trucks and better manage fuel consumption and fleet maintenance. In addition, we remain on track with our business transformation project. We have substantially completed the design phase, and we are currently building and testing the underlying ERP system and processes with extensive resources dedicated to this critical phase. We anticipate going live with the implementation of the ERP system at our first offering company in early calendar 2011. As a result, we're beginning to process for getting our shared services operation up and running to support the first location and the others that will follow. During the third quarter, we purchased a facility in Houston that will house this organization, which will be known as Sysco Business Services [ph](9:11). We expect to begin staffing this facility in the second half of this calendar year. It's important to understand that we are not simply waiting for our ERP system to go live to realize benefits from this project. We are making numerous changes along the way to prepare for the transformation, and many of these changes will provide modest benefits before we actually go live. An example is the standardization of warehouse operating systems that I've mentioned a few minutes ago. Along the same lines, we have been populating [ph](9:41) our new online Order Management System, which will replace our eSysco platform and are now in the early phases of rolling it out to some of our contract customers. We're excited about the progress we're making and will continue to keep you informed of further developments along the way. Now I'll turn things over to Chris, so he can provide additional details on our financial results for the third quarter.

Thanks, Bill. Good morning, everyone, and thanks for joining us. As Bill mentioned, we reported net earnings this morning of $248 million for the third quarter of fiscal 2010, an increase of 9.5% compared to the prior year period and the highest third quarter on record. Sales increased 2.4% which was driven by year-over-year case volume growth; foreign exchange rates, which increased sales by 1.6%; and the impact of acquisitions, which increased sales by 0.6%. Offsetting these increases, estimated deflation was 0.8%, which is measured as the estimated change in the cost of products we purchased. Operating margin in the third quarter improved to 4.8% from 4.6% last year, a 19 basis point improvement. Operating costs were higher in the quarter by $20 million. While there are multiple line items variances, the increase was primarily due to payroll expense that was $35 million higher in the current period. Approximately half of the increase in payroll expense was driven by higher incentive compensation accruals year-over-year. Last year in the third quarter, we released our bonus accruals when it became clear that we would not meet our 2009 performance objectives. However, based on performance to the third quarter of this year, we believe that it's likely, we will meet our 2010 performance objectives and we continue to accrue them accordingly. The majority of the remaining year-over-year increase in payroll expense was due to the impact of changes in foreign exchange rates, assuming from the conversion of our Canadian results into U.S. dollars. It's important to note that while payroll expense was up for the reasons I just mentioned, headcount was actually down 2.6% year-over-year in the third quarter. There were a few other notable operating expense variances compared to last year's third quarter. First, company-sponsored pension expense was $9 million higher in the current quarter which is in line with the guidance we gave in our 10-K. Second, last year, we had a $9 million loss in the third quarter related to COLI. This year, we recorded a $5 million gain resulting in a $14 million favorable comparison year-over-year. Third, fuel expense was $13 million lower than last year. And fourth, the provision for bad debt we recorded in the current period was $12 million. This compares to $31 million in the prior year period, resulting in a $19 million favorable year-over-year comparison. The current provision is based on recent activity, and simply means that there are fewer customer accounts meeting our criteria for write-off. For the current quarter, our bad debt expense as a percentage of sales was 0.14%. Earnings per share for the quarter increased 10.5% to $0.42 per share. The $0.42 of earnings per share include the $0.01 favorable impact related to an increase in the cash surrender value of COLI compared to $0.38 of earnings per share in the prior year, which included a $0.01 negative impact from COLI. Turning to a brief update on our business transformation initiative. Today, we are updating our fiscal 2010 estimate of the net impact of this project. The revised estimate I will provide you represents the net impact of the project on our financial results. This means that it includes estimated benefits from the project as we define them, and it excludes costs for those Sysco employees that we have redeployed and dedicated to this project. As we've discussed previously, we do not consider the cost of employees that were redeployed to the project to have an incremental impact on our financial result. And to be clear, this is the same basis underlying the estimates we provided at our Investor Day last December. We now expect the project will decrease diluted earnings per share this fiscal year by an estimated $0.03, which is lower than the $0.05 estimate we presented at our Investor Day. As Bill discussed earlier, the project work is on schedule and the change in estimate is not an indication that we're behind schedule. The change is primarily attributable to two reasons. First, the balance between expense and capital spend has been more weighted to the capital side than originally estimated. As a result, EPS has not been impacted as much. At the same time, our cash expenditures for the projects are on track with expectations and consequently, we have not changed the total estimated cash outlay of the project. Second, we're seeing slightly higher benefits than anticipated at this stage of the project. The benefits expected for this fiscal year are modest and come primarily from payroll savings. For example, when we redeployed people to the project, we anticipated that we would backfill certain positions. However, we've not yet done this to the degree originally projected, and this has resulted in a greater benefit. Turning to cash flow. Cash flow from operations for the first 39 weeks of the fiscal year was $466 million compared to $985 million in the prior year period. Cash flow from operations in the current period is net of IRS settlement payments, which totaled $475 million. Working capital has slightly increased from the end of the prior fiscal year in June 2009. Receivables, payables and inventory have all increased due to the increase in sales in third quarter. In addition, receivables tend to trend upward at this point in the year. This is due to a seasonal shift in sales mix, with sales from multi-unit customers and full districts representing a larger percentage of our sales. The other significant category of changes would've been working capital relates to the decline in accrued and deferred taxes. These declines are driven by IRS settlement payments made during the year and correlate to declines in cash. Capital expenditures for the quarter totaled $190 million. Looking ahead, we now expect capital spending for the full year to be in the range of $575 million to $625 million as we continue to invest in our business. This spending includes maintenance items such as ongoing fleet replacement and facility repairs, as well as growth items such as acquisitions, expansions of current facilities, potential foldouts and technology. Technology spend includes capital related to our business transformation project. In closing, I'd like to thank all of our associates for their hard work during the third quarter and for your interest in Sysco. With that, operator, we'll now take questions.

[Operator Instructions] We'll take our first question from Meredith Adler with Barclays Capital.

I'd like to start by talking maybe a little bit about the growth you are seeing and whether there's anything in terms of the nature of the customers that are showing growth. Is there some variation between them and are there any surprises there?

The growth were seeing it's -- first of all, it's just nice to see some growth. And I would say that were seeing it across pretty much all the lines of restaurant segments for different reasons. And so I think the quick serve or QSR continues to be pretty strong on a relative basis, although the comparisons there are tougher because they held up pretty well a year ago. What we think we're beginning to see with the consumer spending picking up somewhat is that the family-style, which as you know, basically, a family restaurant with all different varieties. That generally drives our business and that seems to be picking up as well. And I would say, even on the high end, where over the last year and a half, maybe almost two years, some of the high-end steakhouses, those types of places, those numbers are beginning to improve as well. Partially, I think, just because the comparisons are relatively easy, we've had a really tough year and a half or two years. So again, it's good to see the growth, it's still somewhat modest, but I would say it's across all segments.

And then I have a question about the shared services, whatever you call it, not just the facility but the operation. I'm not sure whether you talked about it in those terms when you had your analyst meeting. Could you maybe just describe what functions will be moving to the shared services operation?

We probably didn't talk a lot about that in detail at the analyst meeting because we want -- it's far along in our design work. So generally and then obviously, this is something that we're continuing to refine our thoughts on and communicate internally. But generally, what you would find there would be more of your administrative type of services.

Administrative services that service lots of operating companies?

Yes.

And then my final question is just about the competitive environment, because you do have a comment in your press release about it still being a highly competitive environment?

Right.

Any more comment?

We put that in there on purpose, or at least I did, from the standpoint that, like I said, we're pleased. We've seen strength in the economy here for a while. We think we're beginning to see the consumer participate. And as a result, we're seeing some growth with our customers, and obviously in our top line. I wanted to temper that a little bit with just the reality that it's still very competitive out there. And I wouldn't expect that to change a whole lot in the near term.

We'll take our next question from Neil Currie with UBS.

I just wondered if you could maybe give us some insights on your outlook for deflation and any trends you're seeing in April so far, whether you're actually starting to move to inflation now?

Our track record on projecting inflation and deflation isn't really strong. But what were trying to say, Neil, to you in our comments this morning is we believe that the deflation has subsided to the point where, as we say, in March, it was pretty flat. And we don't have a lot of information yet so far this quarter. But it looks like it is starting to pick up modestly. So I think we are back in an overall net inflationary environment, albeit very modest.

In terms of underlying demand, you obviously talked about easy comparisons because it was so tough last year. But I wonder if you could talk to what's going on behind the underlying volume growth that you're seeing right now? How much of it is share growth, and how much of is -- how much have you seen a pickup in demand recently?

Well, we're clearly seeing a pick in demand, and as I said, we're real pleased to see that. Obviously, it's good for our customers, it's good for our people. The psyche is, is that everyone in this industry is -- it's been difficult for the last year and a half or two years. So from that standpoint, we're seeing an overall pick up in demand. Yes, we think were still taking share. That's a hard question to answer at a given point in time. But we do not have any reason to believe that we're not continuing to take share. So we're pleased with the year-over-year numbers. I think if you go back two years, we would tell you that we're still a little bit below where we were two years ago. And I think that's consistent with our headcount reductions and that type of thing as well.

And finally, I wonder how fragile or robust you think this recovery is? And if gas prices were to get notably higher over the summer, how would you think that might impact both demand? And do you opt only onto [ph](22:31) your customers?

Well, we have fragile in one of our early drafts, Neil. We took it out because we think we've moved past fragile, but we're not quite robust. So somewhere it's in between there. I think what we need to see is -- personally, I'm really encouraged that we're starting to see the consumer start to participate. That's what we've said, all along, would be the key for us, is we can see case growth and that allows us to do what we're really good at, which is leveraging that case growth. So that's our best read in that situation right now, I think.

We'll take our next question from Greg Badishkanian with Citigroup.

Just in terms of a little bit on the kind of the food inflation and promotional environment. As you kind of go into an inflationary period, how much does that help you relative to when you look back two quarters ago, you're running even last quarter, negative low single digit? How much benefit do you get as you get to an inflationary environment?

Greg, that's hard to quantify. What we've consistently said, and for those of us who have been around this business a long time, it does hold up. The preferred environment, we could pick an inflationary environment, it would be one of the modest inflation, one, two, maybe three points inflation, for a couple of reasons. One is it that's a level that typically, our customers have been able to handle over the years with their customers. And two, we can manage that fairly well. So that's the more favorable environment. The environment where we're in a year to two years ago, where we're looking at 6%, sometimes 8% inflation, that's not good for anyone. That's not good for the customer and certainly, not good for the industry. And then what we think we're coming out of the deflationary environment would be the least attractive, probably of the three. Although, I have to say we've been real pleased with how our folks have managed through that over the last 6 to 9 months or so, so it'll help us some. But I think the main thing, when you look at our business right now, where we're at right now is we need to see case growth, our customers need to see volume increases. So at relatively low levels of inflation, that shouldn't be a barrier.

At then in terms of the promotional environment, as you start to see inflation, as you start to see some decent volume growth and that only builds as the consumer gets stronger, do you think that, that's going to abate the promotional environment?

I think it will affect it. There's always a lot of promotion activity that goes on in our business, both with our customers and we do some, as do our competitors. I would hope that it results in a more targeted and more cost effective promotional environment. Whereas, what we were seeing six and 12 months ago is just kind of constant [ph](25:29) type of promotion activity, that is not clear that, that really was successful for a lot of people that implemented that. We really didn't approach it that way. We took a more targeted approach.

We'll take our next question from Andrew Wolf with BB&T Capital Markets. Andrew Wolf - BB&T Capital Markets: Bill, I think when you updated us last quarter, you said January was cases were up. But it sounded like barely, and I think, sounds like from your tone, February is sort of the same and then March strengthened up. Can you tell us a little about how you think -- and I'm inferring but I'd like to ask you directly, how April went? Did you see that kind of follow through? And could we expect perhaps an update on the Mother's Day, since May is a big month for the company?

Now you're asking a lot there on Mother's Day. But as far as April, Andy, that's when we took fragile out of the early draft. I think we've seen now the month of April, and it's pretty comparable to what we saw in March. So again, we're not out of the woods to this recovery yet. But we're seeing two good months in a row, and April is encouraging. We'll see on Mother's Day. The tricky thing on Mother's Day is what I alluded to earlier. That is our biggest week of the year. And it's always an exciting week within the operating companies. But in terms of what that number is, hopefully, it will be up over last year. I think it'll be interesting to see where it is relative to two years ago. Andrew Wolf - BB&T Capital Markets: And just on the SAP update, some of those things sounds like getting some of the benefits perhaps above budget. Sounds like they could be longer lasting than just this fiscal year. Whereas, the accounting may not be, it may just be the way the project's rolling out. But should we, perhaps, anticipate some updates to beyond fiscal '10, perhaps when you present your fourth quarter numbers?

Yes, you can anticipate updates. Our current intention is when we come out with fourth quarter, we'll give -- and I think, Sysco's traditionally giving guidance on a few items for next year, capital expenditures et cetera. And we've said that we will try to update you on the business transformation for 2011. We will also be taking a fresh look periodically, we're going through it now, on the entire chart that we presented in December. We may not present that in our fourth quarter update, but we would intend to present that, certainly, at our Investor Day later in the fall, winter. So you can expect updates as we go forward. Andrew Wolf - BB&T Capital Markets: Okay. I mean, it sounds like it's certainly coming in early at, but it's being run pretty tightly and some of the benefits are better than expected. Would we be getting ahead of ourselves if we took something away from that to the positive side?

I'll echo what you just said. I think it's being run very, very tightly. I think the team that's running that is doing a good job of cost control. I wouldn't get to it you fork yet [ph] about seeing more benefits here. As we described and we were pretty careful to describe but say, you understood it. Some of the benefits we're seeing right now is we didn't backfill yet some of the positions that we thought we would backfill. That doesn't mean we won't backfill them. Obviously, we don't hire people once we need them. But there's a chance we still will backfill some of those people and so that benefit would then go away, but we're giving you the best look that we've had right now. And that says that forward this year, we're not going to spend as much as we thought. But it was important that we noted that we're not changing the overall cost of the project. Eventually, we believe we're going to spend the money and it will be broken down between the capital and the expense fairly similar to what we had anticipated when we described it at Investor Day. Andrew Wolf - BB&T Capital Markets: And just one last question is a follow-up on the -- now that there's some inflation coming back. As your sales people and your operators are seeing week-to-week, sequential increases in protein and other categories, dairy, maybe keep produce out of this since it spiked. But sort of some more normal incremental inflation, the market basically absorbing that, which it normally does or are you seeing some sticky pricing and a little gross margin pressure?

Well, we've seen -- like I said, Andy, it's Bill again. We've done a nice job managing the margins, I think through this last year. But it's been very competitive on the street, I would say especially right around the first of the calendar year and we've continued to work on margins here over the balance of the quarter into April. As far as the stickiness, I would say to your point, most of what we're seeing on the inflationary side is more commodity driven right now, but it's not radically up. Dairy's up but dairy's been down for quite a while. So I'd say we're -- so far would been able to pass along most of it.

We'll take our next question from Mark Wiltamuth with Morgan Stanley.

Wanted to ask a little bit about your operating expense progression. You just lapped the big cost cuts from last year. The operating environment is getting a little better. I mean, what do you think is a reasonable progression for operating expense growth in percentage terms?

Well, Chris is hesitating, so I'll start. I wish I knew the answer to that exactly, but I think what we need to call out here, Mark, is I think we're at an inflection point. So for the last year, year and a half, the way we have been looking at the business is how aggressively can we, should we cut relative to the decline in volume. And as you can see, we've been able to manage our headcount pretty much in line with the volume decreases and that's necessary in this business, given the people and people relate is 70% give or take of our total cost structure. So I think we've said here for the last few months any way that we've sort of continued productivity improvements, which we expect to continue to enjoy, like I talked about earlier. We've cut a lot, it's really, really hard to cut a whole lot more. And as we go forward, with the premise that we're expecting to see some modest growth, I think you'll see us, and we actually for the first time, I think here in several quarters, we are up year-over-year with our sales headcount, marketing associates and so on. And so we will add there, and we have been adding there over the last six months or so. But I think the other areas, assuming we see a relatively modest pickup in cases, we still have quite a bit of capacity in our facilities and in our trucks continue to leverage. So I think nothing really changes other than the environment here. So you could expect us to continue to try to drive the earnings faster than the top line.

And those changes you've made to the marketing associate headcount, do you think they've had time to kind of have an effect on market share or is it still too early?

I think it's a little early. I mean, the thing to keep in mind is even though the net number they've been flatten out for a period of time, we're always refreshing the pool of sales people. So when we're at our best and things are quicking, there's always a percentage of that sales force that's what you might characterize as a training mode. And so the folks that were coming out last year, they're a little bit better than they were last year, a little more experienced [indiscernible] so -- but I would say what we're speaking through here today, that it takes generally, to the honest with you, it takes 18 months to three years for people to fully hit those stride in the sales area.

Could you give us an absolute number on how much the volumes had changed? I mean, we're kind of doing it back of the envelope mass, we think it's maybe around 1%. Is that about right for the volume gain?

Mark, we've never really talked about specific volume increases. For the first time, this release we actually indicated whether they were up or down. One of our goals is to try to get to a point where we're comfortable talking about volume increases, but there's some math we've got to play through before we can actually get comfortable releasing that number. There is a number that I know all of you guys get to call the real growth, I guess, which you just take the number that we put out in terms of sales and then you adjust it for the acquisition to ForEx, and the deflation or inflation and you get to a real growth number. I think that's what you were referring to when you got to the 1%. Yes, I mean, I think a lot of you guys do that calculation. You can kind of see the trend in that number. Again, we don't put that in the release because whereby today would be non-GAAP and we can't talk about it.

We'll take our next question from Ajay Jain with Hapoalim Securities.

Just in relation to the $0.03 dilution for ERP. Can you confirm the earnings impact in Q3 and what you're anticipating this quarter?

No, we're not really talking about it on a quarter-by-quarter basis, Ajay, and that's kind of what we indicated back at the Investor Day. Our goal is to give you an annual impact from that so that you guys can put it into the models, which I know are important to you. Trying to do it quarter-by-quarter is going to be very difficult for us to predict in advance because of the significant timing, things that occurred during the quarter. So we're not doing that today. In the 10-Q, we do actually talk about ERP expense. Well, I'm not sure if it's broken out to ERP expense date, it's probably not. But we do indicate we've spent, I believe, 70% of the range that we gave you.

And do you have any comment, Chris, on the lower interest expense and why it was down a little bit sequentially?

Yes, we have swaps, which were not employed at this time last year. I didn't actually go back and look at the effective interest rate between this year and the last year. I'm not sure it's significantly different, so I'm guessing that the majority of that difference was the swaps.

And I know you guys mentioned that sequentially, the volume trends improved each month in the March quarter, and it sounds like volume trends are still pretty solid through April. So with improving in case volume trends, are you any closer to making the decision for the Indiana RDC because it sounded like a couple months ago that the only thing holding you back was just a more material improvement in demand, so if you can comment.

Ajay, it's Bill. We are, but we're not just quite there yet and the one other factor -- so to your premise you're question, that's exactly right. We were looking to see some meaningful improvement because it's basically the 24-month time period from the time you break ground until you're in full ramp on one of these deals. I won't call it complication, but the other factor that centered the equation here is synchronizing the Midwest RDC with our ERP rollout to those companies that are impacted there. So I don't expect us to break ground this year beyond to be honest with you. But I do expect later in the year to be in a position to be more specific on that. But it's kind of moved off of the volume issue and it's just trying to sync this thing up towards the most efficient relative to how we do the ERP rollout but with our operating companies.

And finally, I think you guys made some changes last year on your bonus structure, at least, at the corporate level. So after you factor in the comparisons from last year and the changes in your incentive structure, I'm just wondering how material that impact could be on bonus accruals for this quarter because I'm assuming that the corporate level, the majority of bonuses were still paid out in Q4, is that correct?

Well, yes, they're paid out. We accrue from throughout the year. We really didn't make any changes last year, Ajay. Two years ago, we made some changes, relatively modest. We went to return on capital as opposed to return on equity and that type of thing. The thing that hasn't changed is it's pretty much driven on improvement, earnings per share improvement over the prior year, and then the other axis on the grid is a three-year trailing average on returning capital. I think the substantive difference this year is we have earnings improvement, so we would expect to pay our bonuses this year, where as last year, we didn't pay them out at the corporate level.

But is it material enough that you think it's appropriate to call out?

Well, we did so...

Yes, we've called out the year-over-year change. The absolute amount of it now. I mean, we've been accruing to work periodically, and it doesn't rise to the level of materiality, to be honest.

We'll take our next question from Jason Whitmer with Cleveland Research Company.

Will, you've absorbed a few more responsibilities over the last quarter so, as Ken is retired, can you might tell me about some strategic, some tactical and maybe some people changes, whether in Houston or in the field that you've been evaluating or executing?

Yes, I'd be happy to, Jay. As you had said, it's not really just -- Ken's retirement, that's a significant event for us here at Sysco. Steve Smith has also announced his retirement. In conjunction with that, we are making some changes. All these changes are effective with the new fiscal year, so where in what I would characterize as a transition period right now. We're also in a period where -- over the last week or two, and in particular the next six to eight weeks, we're very, very focused on doing our profit plans with all of our operating companies, as well as here at corporate. But essentially, what you'll see going forward is Mike Green will take over responsibility for the U.S. Broadline operating companies. Larry Pulliam will continue to oversee contract sales, our distribution services corporate group, as well as SYGMA and our specialty company. So those two gentlemen will be overseeing the business. Reporting in to Mike will be Scott Sonnemaker and Chuck Staes, who currently report in to Mike; and we've added a third gentleman, Mike Headrick, who will oversee our companies in the South. Mike's a longtime Sysco veteran, a very astute business person, we're excited to have Mike step up here. And then in conjunction with that, we've also identified 11 other folks, as well as what we're doing up in Canada, which I would characterize as more market VPs, and this is all new for us, Jay. If you go back, I don't know, I guess 15 years, I think around the mid-'90s, we went to the senior VP of Ops Structure, which was a first for us. And at that time and for many years after that, most of those folks, generally, we have four regions, they might have 15 maybe as many as 20 companies, which was effective but probably not overly manageable in some ways. As you know, in recent years last year to, in particular, we've gone to a more of a pod structure, which I think has been the transition to get us to where we're headed today which is more what I would characterize as a market structure. We're trying to be very customer centric and so with this market structure, we're going to have 11-plus Canada folks overseeing markets, they will not be running operating companies. They'll be working very closely with the operating company presidents in their marketplace to drive out our go-to-market strategy, to effectively implement the 212 business transformation work, to enhance what we're doing on the talent management side of the company, to better develop customer relationships that might crossover local lines, as well as -- and hopefully bring even more effective focus to our acquisition work. So I'm excited about that. It's a new structure and we'll begin to transition into it here as we go into the new year. In addition to that, we've had Kent Humphries, who has done a great job running our Canadian business to pick up expanded responsibilities and Kent's going to report in to Larry, head of our contract sales effort across the country. And Kent brings, not just a lot of experience, but a lot of, frankly, enthusiasm; and energy to that position and tremendous relationships, both within Sysco and with the customer base. In addition to that, Alan Hasty, who currently runs our Cleveland company is going to come down to corporate and work with Bill Day and his group to -- Alan's primary responsibilities will be to work in our BSCC merchandising areas. So we have made several moves, there'll be some more that I'm sure you'll learn of, which will be more replacing some of the folks that we've promoted and those will come out as appropriate over the next couple of months. But essentially, to cut through it all, as we go through these changes, we transition through the retirement of Ken and Steve. I just thought it was appropriate to leverage the talent that we do have in a bigger way and we have a very deep bench in Sysco. We've got a lot of people that are more than capable and want to contribute more, and that's what's behind these changes.

The shared service announcement, that sounds like if you're doing a separate facility being down in Houston a number of times, it looks like you have a big campus to begin with. But a sep [separate] facility, I'm curious how big is corporate now and how big is the shared services and headcount as you build that from scratch?

Well, we're going to come back to you with the specifics on that, but in the difference between the campus that you seeing which, for the record is two buildings, but it is big and there's plenty of square footage. So hopefully, Jay, it'll be an opportunity for us that we'll have some capacity here over time. But the difference in this facility that we're going to be moving into is it formerly was a call center for another major company and we think it's best suited for our business going forward. It's quite large, it's several hundred thousand square feet and I won't be able to speak to the numbers and all that, I think as we get closer to the end of the calendar year.

We'll take our next question from John Ivankoe with JPMorgan. John Ivankoe - JP Morgan Chase & Co: First, just a housekeeping question on fuel costs. I think it was mentioned that it actually was a benefit in this quarter. If you could remind us or tell us how to think about the next six or 12 months? And then second question, maybe a little bit longer, it's just kind of the overall state of the industry in terms of health of competition, if you think most of the competition has gotten out of the woods and is going to benefit from this improving environment or there might be things that I don't understand, and there could be even closures or more share loss of the competition, and whether this is the right environment for you to be looking at acquisitions as we begin the upturn?

John, this is Chris. I'll take the fuel costs one first. Fuel costs, we look at it as a net between the cost of fuel and surcharges. On a year-over-year basis, we saw a benefit. The guidance that we've given is we expect the fuel costs to be as much as $50 million to $80 million better than last year, and the fuel surcharge to be about $60 million roughly worse than last year. So net-net, depending on where we fall in that first range, we should see a benefit year-over-year and that's recent guidance. So that's where we thought -- that's where we believe the net fuel charge will wind up for the year.

I think as far as the competitive side, John, look at the improving climates, good for everyone. I mean, it's good for our customers, it's certainly good for us, and I would expect it's good for our competitors now. I think going forward, we're extremely well-positioned to grow and to continue to invest in our business. The one interesting thing as we've talked before with the model for this business is when you're not growing, assuming you can manage your receivables relatively well, you actually don't need a lot of capital unless you're going to expand your business. So when you do grow, that does put some pressure on the working capital. So I think from that standpoint, if we have some competitors out there that are able to grow, then they'll be dealing with that, and I'm sure they'll be able to deal with that. But I don't see a whole lot of change on the competitive environment. On the acquisition angle on that, we keep hoping for angles here and perhaps, a better environment will help us all come to more realistic terms on valuation, some of these situations and people will be more motivated to strike some common ground and evaluation now that the business is beginning to improve. So I think it could be a good thing.

We'll take our next question from Bob Cummins with Wellington Shields & Co. Robert Cummins - Shields & Company: It strikes me that this is only the beginning. Obviously, your numbers are up a bit over last year, the top line I mean, but it seems -- as we all know, Americans love to eat out, and the environment I think, as it's developing, is going to encourage them to eat out even more. And obviously, from your point of view as a company, you don't have a lot of bodies to your staff as the business increases, you just load more goods on the truck, which is very profitable business. It seems to me that both top line and bottom line results over say, the next four quarters or so should continue to gain substantially year-over-year. Am I right in thinking that? You don't have to comment if you don't want to.

Well, I'll start and let Chris clean it up here a little bit on the financial side. But I think if you take a purely operational point of view, you're exactly right that with an improved environment out there, our customers should see more traffic, and that translates into more opportunity for us to grow and to be more efficient. We've done a nice job, Bob. We've done -- we've been able to grow our pieces per mile and all that type of thing, but it's difficult to grow your pieces per stop when your customers' business is offend. So certainly that would be a metric that we would expect to improve. There's no way of knowing on these things, and if you go back and look at the psychology and over last year, two years, we've kind of struck, I think a reasonable middle ground. We've never said that we thought that the industry was going to just go totally south for an extended period of time. We certainly acknowledge that the last year to two years have been difficult and the industry has declined. I think the reasonable case is it continues to be what we talked about up in New York in December, which is a modest nominal growth for the industry over time, and that would translate to good things for us. There's some below the line things for next year that I think we've called out and that you would need to deal with. And I'll let Chris kind of transition to that conversation.

Yes, I hate to be the finance guy that delves this cold water on anything especially since you stated it in such a nice way. I agree with everything Bill said in terms of kind of the medium term, short term, where we're just looking at year-over-year lapse. We've gotten some good benefits this year from COLI, which is not the way you want to make your numbers, obviously, but that's just what's happened in the market. We certainly would not anticipate that type of benefit occurring every year. We've gotten some benefit this year for fuel. We've gotten some benefit year-over-year from bad debt expense. So some of the things we've talked about in these calls as being year-over-year benefit, of course, we can't count on them having those come back in our favor next year. Next year, is the year where we just need to have operating performance, and I'll go back to what you said, the sign book good, the trend book good, and we're very hopeful. Bill alluded earlier that this month, the next month, are doing all of our profit plan for the operating company and we're rolling all that up to see what we really believe we can accomplish next year, and we're all anxious to see what our operators, to post close this to the customers believe. As we roll that up, and then bake it into our one-year forecast with all these items, we'll have a better idea of what 2011 looks like.

And we'll take our final question from Meredith Adler with Barclays Capital.

The first is, will you be making an announcement this year about sales for Mother's Day, and I wasn't sure if you did that last year?

I'm sorry, sales from where?

Mother's Day, you used to make an announcement every year.

Did we do that last year? I don't think we did last year, Meredith.

No, I don't think so. Do you think you'll do it this year?

Probably not.

And then my final question is just about back to fuel expense. You do hedge in some fashion a certain percentage of it. Can you talk about how much of it is hedged through the end of the year? I was kind of surprised that you had such a big range on the cost, given that you only have one quarter left for the year. So I was wondering is it less hedged now?

We do put in place hedges. We essentially hedge a portion of our fuel. When we look at how much the hedge we factor in the fact that a lot of our contract customers whether they'd be SYGMA or contract customers, there's already effectively a hedge in those contracts in terms of the fuel surcharge. So we look at what effectively unhedged, and we go out and we put in place hedges on a substantial portion of that. I think the number is roughly 40% of our overall gallon per hedge. We roll those forward month to month, and that just means that we keep going out another month, another month, another month as we see the need to do that. So we're never completely hedged in terms of real financial hedges in the marketplace. 40% is roughly the number where we've been at. The guidance number comes from several things. One of which is we just don't know what fuel costs are going to do in the next couple of months and so the guidance is still reasonably wide.

Thank you. Ladies and gentlemen, this does conclude today's presentation. We appreciate your participation. You may now disconnect.