Good day, everyone, and welcome to the Sysco Reports Second Quarter Fiscal 2011 Earnings Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Neil Russell. Please go ahead, sir.

Thank you, Jennifer, and good morning, everyone. Thank you for joining us for Sysco's Second Quarter 2011 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 on the course of this presentation that states 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 statement 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 July 3, 2010, and in the company's press release issued earlier this morning. 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. This morning, Sysco reported second quarter sales of $9.4 billion, operating income of $437 million and EPS of $0.44 per share. Sales grew 5.8% over the prior year, while operating income decreased 5.5% and EPS was $0.01 lower than last year's second quarter. Volume growth was softer than what we experienced in the previous two quarters, and expense pressure increased in our selling and delivery areas. However, the primary factor in our producing lower earnings compared to the prior year was the decline in gross margins of just over 0.5%. For the second consecutive quarter, we experienced double-digit rates of product cost increases in three categories: Meat, Seafood and Dairy, that comprised 1/3 of our total sales dollar mix. These are key product categories for many of our customers and absorbing steep and rapid price increases is difficult for them, especially at this early stage of what we all hope is a sustainable if somewhat uneven economic recovery. While we actually produce real volume growth in these categories, we are unable to increase our case growth enough to offset the fact that our product cost in these categories grew at a faster rate than our selling prices. While not impacting our earnings as significantly as inflation pressures, the strategic pricing initiatives we discussed last quarter also contributed to gross margin erosion in the second quarter. We are, however, encouraged by the double digit year-over-year volume growth we are experiencing with the items included in these programs, and we remain confident that the long-term benefits of these initiatives will meet our expectations for profitable market share growth. In assessing our performance for the quarter and for that matter, the first half of our fiscal year, we clearly struggled to achieve some of our key…

Thank you, Bill, and good morning, everyone. For the second quarter, sales were $9.4 billion or an increase of 5.8% compared to the prior year, driven mainly by the impact of food cost inflation, which we estimate to be 4.5% for the period. In addition, acquisitions within the last 12 months increased sales by 0.6%, and changes in the foreign exchange rates increased sales by 0.4%. During the quarter, our SYGMA division grew sales more than 13% and Broadline sales increased approximately 5%. Sales in the quarter were somewhat impacted by a holiday mismatch that's worth taking a minute to explain. This year's second quarter included two holidays, which are typically lower sales volume days, Christmas and New Year's, while last year's second quarter included only one of these holidays. At each quarter, it had the same number of holidays, in other words, that they were comparable. We estimate that sales would have been approximately 80 basis points or $630 million higher year-over-year. Operating income decreased $25 million or 5.5% to $437 million during the second quarter, driven by a decline in gross margin as a percent of sales and an increase in operating expenses. While gross margin increased 2.8% or $47 million during the quarter, gross margin as a percentage of sales declined 55 basis points year-over-year to 18.6%. Similar to last quarter, pressure from high inflation, strategic pricing initiatives and changes in segment mix continue to be the main factors impacting gross margin performance. We estimate that about 10 points of the margin decline related to a change in segment mix, as is similar to the decline we experienced last quarter. As I mentioned earlier, SYGMA once again grew sales at double-digit rates during the quarter and since SYGMA operates a lower margin business, this mix shift unfavorably…

[Operator Instructions] And our first question will come from Meridith Adler with Barclays Capital.

This is Sean Kras for Meridith. Can you comment on maybe the trends toward change taking share from independent customers which can be less powerful business for you guys? And, I guess, the company can offset the margin pressure from the mix shift over time?

As far as change taking share from independents, yes, that's been a slow but steady trend really since I've been in the business, which is over 20 years. So I think that continues. It's not a rapid change, but it certainly continues to be the case. I think if you look at some of the industry data, you'll see in terms of restaurant closings, most of those are on the independent side, you have a net basis. With that said, I just think it's always important to point out that there are a lot of independent restaurants out there and certainly, we have tremendous relationships with many of them. And when you have great operations or if you're a great operator whether you are on our side of the business or whether you're on the restaurant side, let's say, you're going to do well. So the better operators are continuing to do well both on the distribution side and on the operator side, and we would expect that to continue. But there currently has been a gradual shift from independent to chain. But I wouldn't say it's picking up steam or anything like that.

But just maybe how the company kind of offsets some of that pressure over time I guess, the margin pressure implied by that?

Yes, well, that certainly plays right to a lot of what we talked about up in New York back in December which is that phenomena as I mentioned has been going on for a while. For a couple of decades, we had great demographic tailwinds in this business, and the industry growth had slowed here in the late 90s and most of the new millennium, and I think we're all aware of the environment in the last couple of three years. So essentially, our strategy is just two-fold: one is to continue to work as closely as we can with the customers that value a partnership with Sysco become more and more relevant to their success and at the same time continue to take cost out of our system, both in the short term through a lot of key operational initiatives that we talked about in the past in terms of managing our miles and looking at our engineered standards in the warehouse and all that type of thing. But even beyond that, over the last couple of years, we've committed ourselves to a transformational project here, which we believe will position us well to continue to take shares for the years ahead, but also allows us to take some additional costs out of our system.

And our next question will come from John Heinbockel with Guggenheim Partners.

If you look at that perishable inflation, do you that it ultimately get passed through? And I would imagine we're getting to a point it's been out there for a while where it could get passed through soon or is that just something that you're going to have to eat a chunk of that, given the macro? Or do you think it does get passed through eventually?

Well, I think eventually allowed to get passed through, John. We're two, two and a half year highs, you've got a lot of these commodities that I'm sure you follow regularly as well. So as I mentioned in my comments, these boxes -- these are expensive boxes in these particular categories, especially in the Meat and Seafood areas, so they're very significant part of the spend budget for our customers. And so it's difficult for them to absorb price increases in the short term and as a result, we've struggled to pass it along in the right way. So I expect that over time, generally and gradually we'll be able to do that, but I think it will take a lot longer.

Do you think you're a price leader? Meaning -- I sort of look at your competitive position versus everybody else, and if you're hurting, everybody else has to be hurting a heck of a lot more. Where you could be in a position to push some of this through and others would follow, or is that a great concern that maybe others don't follow and you end up losing share?

I think you have to kind of look at it in context over the years. I think how we position ourselves still continues to be the case. We want to be competitive. We think if you look at our overall offering to our customers, we feel we're competitively priced and the survey work that we get back from the customers that do a fair amount of business through Sysco they see us being competitive. I don't know that I would characterize ourselves as a price leader, per se. But with that said, John, in the environment that we've been in, as we’ve kind of crossed over into an interesting time now where there's growth in the marketplace, but it's modest growth. The psychology of the market place is probably as good as it's been in some time. But everything feels a little tenuous. So it's still very competitive out there. I think the one thing you're seeing is we're trying to strike the right balance between obviously growing our earnings but making sure that we hold our position with our customers and find a way to grow share where that make sense. Case-by-case, maybe a little bit more on the aggressive side here over the last six to nine months.

And if I look at the 1/3, so the other 2/3, it looked like inflation there is 2% or less. Are you having any trouble passing that through or that's going through pretty much as you get it?

I mean, you're right. I think it's pretty moderate in the other categories. Other than the -- I'd say in the core Grocery category, let me focus on that, which is a good percentage of what we sell, it's modest and we've been able to pass out a lot. I think we have opportunities to grow our volumes on those categories, and that's something I think that when I talk about us being more and more focused on executing our business plan, I think there's opportunity there.

One final thing on the -- you've taken pricing on those specific items and are getting double-digit volumes, is that following through and you're seeing increases in the drop size or total purchase, the baskets that include those items? Or was it not yet generating increased share kind of across somebody's purchasing book?

You're talking about the pricing initiative?

Yes.

Tough to answer. We certainly -- as I said, we're seeing the volumes as you point out. Our drop sizes, I can't tell you that they have improved appreciatively but I don't know that it has anything to do with that. I still think that's it's a low-volume growth, it's going to be tough to improve your drop size. We've done a lot of good work in that area over the last two or three years. So I think that's -- the whole key to that, John, is we want to grow those categories in those particular product lines but to your point, we want to become more relevant in those areas to our customers. So I'd say that's more of a medium to long-term goal. So I think we've seen it in pockets but I can't tell you that's moving the needle at this point.

Next we'll take a question from Andrew Wolf with BB&T Capital Markets. Andrew Wolf - BB&T Capital Markets: First, on the 80 basis points from the holiday swing, I gather that means on New Year's Day, the restaurants are closed and maybe some of the fast food restaurants are open some. Just trying to -- could we just put that all in Broadline or should we sort of spread it out pro-ratably between the segments? Or somewhere in the...

It's an estimated calculation, and it's across all of our business. So we just put it across everything. Andrew Wolf - BB&T Capital Markets: Do you think it's more in Broadline, given that those independent stores are also the most likely to be absolutely be closed or some of the fast food stores are still open at least, or am I just trying to make it more fine than you're willing to because it's an estimate?

I think you're looking really, really hard. I don't think we would say that.

I think it's more about people being out and about, Andy, than it is who's open, who isn't. Andrew Wolf - BB&T Capital Markets: I guess, last quarter you're feeling pretty good. You said it was the best quarter in a couple of years or so or maybe more, in case volume. And as I look at this quarter, it seems like a fairly abrupt shift. I know you're not saying it's completely rolled over, but it's rolled a lot. So what do you -- I guess, my question really is, do you think that's more something competitively going on where maybe you're being undercut in price or something or is it more the behavior, which I think you alluded to in your press release, but I just want to hear you talk about it, the behavior, the restaurant, tourists, how they're ordering, maybe they're being more cautious with supply, or maybe it's a trickling down to their customers, is the marketplace actually starting to change a little bit in terms of restaurant trips?

I think, Andy, if you go back the last three quarters representative. I think these are -- I'm thinking I’m in the ballpark here, check with Neil, you can look it up later, but if you look at the fourth quarter, our real growth was around 2%, 3% in the first quarter, 1% this quarter, if you adjust for what Chris was talking about there, and if you give us that on the holiday phenomenon. So it's falling off some. I mean you're talking about gradations of a point. Comparisons are tougher. We're now beginning to wrap at least a flat quarter whereas in the first quarter, we were going against the down quarter. Some of it's in the math and some of it is the environment. And we're out there with 8,000 salespeople every day and with our account execs working with our top customers and all of our customers across the country and trying to strike the right balance between price and growth and supporting their efforts to run their business. So I think it's more the choppiness that I referred to that you're in a recovery right now that depending on what you pick up and who you read, the psychology is better, the underlying growth is a little uneven depending on the source. You have seen a big pick up in traffic but you are seeing bigger tickets when people go in. The QSR seems to be doing a little bit better. As you broaden the discussion to some of the articles you see on Retail, there's a little bit of a bifurcated recovery going on here with your higher-end consumers spending more than the regular people. That's a formidable expression there. So I just think there's a lot of different things going on here. And while we are, we believe, in the early stages of recovery, it's uneven, and I think you're going to see some uneven results. But all in all, I'm still feeling good about certainly our people and the effort and our ability to improve as we go forward. Andrew Wolf - BB&T Capital Markets: And so in the press release, just to read from it, it said inflation, I think, caused a -- significant food cost inflation negatively impacted our customers' purchasing budgets. So I understand that for a consumer, the price of something goes up a lot, they've got to cut back elsewhere. But I guess, for a restaurant operator, if the price of meat goes up, why would they but less canned goods or something unless demand was down, less people are coming to the restaurants. So I'm just trying to -- or is there some shifting in their buying habits or did they sort of get cautious, I'm just trying to understand what that means, actually.

So what I was trying to explain there is about a third of what we sell in terms of dollars and for the operator, what I was talking about earlier, these cases or boxes in these particular areas, they're expensive boxes. When you see 10% and 12% increases in significant cost items in terms of your inventory, it does force you to take a hard look at your spend budget in an environment where even if things are picking up, you're still extremely cost-conscious. It's just a general observation I think that the people, I think you agree with this, are still very, very focused on their bottom line and making sure that they're taking as much cost, they're managing their cost as well as they can. So we just have to high cost items, their commodities, it's very easy to identify what's going on in these marketplaces, and so they tend to be highly competitive items. Andrew Wolf - BB&T Capital Markets: That did clarify it. Because I know how much rapid inflation does change behavior, until people sort of figure out where it's all going to spread out.

And our next question comes from Ajay Jain with Hapoalim.

Bill, I just wanted to follow up on that the earlier question about in terms of whether there's anything specific you're seeing that's causing your customers to buy less than compared to the last couple of quarters? And I wanted to ask you specifically if you're getting the same type of customer response to the strategic price investments as you did earlier in the year?

Let me be clear, Ajay. I'm not saying that our customers are buying less. What I'm saying, we believe we had real volume growth and what I'm saying is they're very focused on their spend budget and they're very meticulous in terms of how they do spend their money. So on average, I'm not saying that they're spending less, I'm just saying that they're pretty locked in on what they're going to pay and all that type of thing, and rightfully so. As far as the initiatives, can you give me that question again?

Yes, I mean, do you think that you're getting the same type of sales lift or customer’s response to the strategic pricing investments as you did when the program was first initiated earlier?

Well, again, these are different programs and there's different parts of the country that we’re rolling these out in. So I would say in the early stages, we're still seeing similar results. You heard me mention the word execution here a few times, so I mean, it does come down to how well we roll it. So it's not constant in every rollout. But generally, we're still seeing good results as you expect, Ajay, the competition does react to things. So to some extent, we've seen some reaction and we had to deal with that but we're pleased with what we're seeing at this point.

And from looking at Sysco for a while, I don't think it's totally unprecedented for you guys to have negative case volume trends when you're dealing with high single-digit inflation. So I'm just wondering if you can offer any comment on whether the inflationary pressures have gotten any worse in the current quarter and is there a potential that negative case volume trends could be a reality in the near term?

Well, we hope not. I mean, what we're reading and what we sense is like I've mentioned here a couple of times is actually the psychology in the restaurant community and the operators is as good as it's been here for two or three years. We certainly hope that, that translates into higher purchasing levels over time. Yes, we're not at a negative level right now. Again, we're barely positive if you just look at the map. Maybe about 1% positive if you adjust for the holiday phenomenon. So I still think that we'll have a good opportunity to see volume growth through all the second half of the year. As far as this quarter in particular, I think as you know from following us from a long time, the month of March is a really important month as far as this quarter, both on the top line and the bottom line because of a lot of the seasonality. So that will drive a lot of results, and you haven’t heard us made a lot of excuses so far in this call but I think the bigger issue we're dealing with right now in the short term is weather. Obviously, last week was a very difficult week in a good part of the country, including down here Texas, believe it or not, actually saw in Dallas. We had some issues in the Southeast early in January. So we're actually -- when it's kind of a level playing field, we're pleased with the start in January but there are some weather issues out there, and the reality is that March is really going to drive the quarter.

I know you've been hiring some more marketing associates and making some adjustments in your headcount. But it looks like payroll costs were still up in the second quarter but at a lower rate than in Q1. So can you just talk about the pace of hiring right now based on the market conditions and whether you might be looking to cut back on payroll costs even further over the back half of the year?

The payroll costs were up I think we've been pretty candid I think with everyone that if you go back and look at the last couple of years, we've taken a lot of headcount out of this company over the last few years. And so there's some limit on how much of that you can do in an environment where you still expect to grow albeit on a moderate level. With that said, we continue to prune and there's been some modest reductions throughout Sysco late fourth quarter, early first quarter. So we continue to do our job and certainly look at headcount and productivity and all that type of thing. As far as sales in particular, there's some operating companies where they have great opportunity relative to the market or perhaps they cut too far in the sales side, and we have invested in those companies a little bit more than, say, the rate of growth this year necessarily so. And I would certainly expect as we go into the new year, in our planning process, that our investment in sales people will be more commensurate with what we expect our growth to be.

Next we'll take a question from Mark Wiltamuth with Morgan Stanley.

This is actually Joe Parkhill in for Mark. I was just wondering I don't know if you mentioned this already. But in the categories where you're seeing double-digit inflation, are you seeing any volume responses when you are passing some of the pricing through?

Can you be a little more specific, you mean in terms of growth?

So when you're passing through a portion of that double digit inflation, are your volumes getting affected by that?

Actually, if you look at this on a relative basis, we're seeing decent volume growth in those particular categories, maybe even a little bit better than the other categories. I think we're out there, very aggressive. These are standard play items. These are items that typically, over the longer term, are very important to holding traction with accounts and so yes, it's an ebb and a flow and obviously, each situation is different. But generally, we've been able to grow the volume. It's just that the rate of the cost increases is 10%, 12%. And it's hard to -- we're growing the gross profit dollars to your point, it's just hard to grow the price point at that level and still make the sale. So it's a Catch-22, I guess, is what I'm trying to say.

I mean, it sounds like your volume is doing well where you're making investments in price and then also these categories, I mean, is there a category out there that's weaker than what you expected?

Yes, there is but I'm probably not going to get into that, Joe. There's always opportunities.

And then just finally just from a modeling perspective, I mean can you help us a little bit on what SG&A will look like in the future? I mean, is this something that you're going to grow in line with sales? Or is there some initiatives that you have that could potentially leverage sales in the future?

This is Chris, I'll jump in. Obviously, you've heard us talk about the ERP implementation and over time, we expect that we'll be able to leverage the SG&A line. That's not something that you should expect from us in the next couple of quarters. That's only after we roll out the initiative. I think one of the things you're seeing on the selling compensation line, of course, is the commission schedule basically pays on sales dollars to a great extent. And so when you have high inflation, you're going to unfortunately be paying more on the commission line and that's part of what's driving those sales costs up right now.

Next we'll take a question from John Ivankoe with JP Morgan. John Ivankoe - JP Morgan Chase & Co: I remember last year when your sales looked a lot better than the restaurant industry, we talked about your non-restaurant accounts, which I think are about a third of your business doing a lot better. If there's some comment on the Institutional business, whether we should expect it to grow kind of in line with restaurants over time and just your observations there? And I have a couple of follow ups, as well.

Yes, John, I think you should. A lot of that business as you know is more on the contracts side than the street, but certainly so. We're seeing good growth in those areas. We've got great relationships with some of the big players in those areas, and we certainly expect to grow those segments at least as fast as the traditional restaurant side of the business. John Ivankoe - JP Morgan Chase & Co: Just looking at the second quarter relative to the first quarter in terms of the real sales, much of the reported restaurant industry actually, and I think you're sensitive to this, did show some improvement in the second quarter relative to the first quarter. And I'm sorry if you kind of touched on this a number of ways. Do you think competition is even more aggressive incrementally? Is there feeling better about their businesses, I mean, are you noticing an uptick in competition?

I don't think I can say that. I mean, it's been pretty acutely competitive out there for the better part of a year and a half, two years. So I just think it hasn't subsided. I wouldn't want to say that it's stepped up at all, but it's... Sometimes you tend to think when the volumes come back and people start feeling a little bit better that the competitive forces might lessen some. We're not seeing that. John Ivankoe - JP Morgan Chase & Co: And the final question, if I may, regarding some of the things that really hurt you on the gross margin line in the second quarter, arguably gotten worse in the third quarter, I mean some Dairy, certain Meat, certain Seafoods are kind of setting new, all-time highs. I mean, should we just accept gross margin decline for the back half of 2011 or is there anything that you can do to, perhaps with your pricing architecture with your customers to allow you to get back some of that lost margin?

Well, we're not accepting it. To the degree that we can mitigate it, that'll be the tail of the tape here. But there are some structural things in the marketplace and just some basic market conditions that we've alluded to. But certainly, half a point of erosion for six months is not how we plan the year and that's not how we plan the second half of the year. So yes, we'll continue to look for improvement on the initiatives that we’ve talked about. We'll continue to work very closely with both our suppliers and our customers to find the right balance here on how all those pricing works its way through the system. So I would certainly hope that we've improved, I wouldn't expect it to totally dissipate.

John, one of things we're watching for and you're starting to read it in the press a little bit is about the restaurant operators' willingness and ability to pass on some price increases to the ultimate consumer. That's not something that I think they were prepared to do during the very early stages of the recovery. You're starting to read in the press for some of them at least are thinking about doing that in 2011 and as part of that shift that I think we'd all like to see because that allows the supply chain to start passing through some of the cost increases as well.

[Operator Instructions] And next we'll take a question from Greg Badishkanian with Citi.

Just wondering in the second fiscal quarter, how much does weather have an impact on your sales volumes?

There were some weather, Greg. I think you saw in some of the restaurant reports in, I think, the Northeast in particular bore the brunt of it in December. It's hard to compare whether year-over-year, I'm sure we had some weather last year in December. I'd say it was a minor factor, certainly not big enough to call out in terms of the quarterly performance. But like I alluded to, I think so far in January, it's been big enough to call out.

Kind of looking out when you do your price initiatives in certain segments, what's the competitive reaction to that? Is there like a delayed reaction within a maybe a step-up pricing or do you just gain the volume and over time does something else happen to change that?

Well, I think anytime a company that's positioned the way Sysco is in the industry does something in a very focused way, there's going to be a reaction. So I think it takes a while probably. These are done, like I mentioned, in different parts of the country at different times. And we're essentially talking under a street type of business. So I think sometimes it takes a while for the customer, I guess, in this case, more than the competitor to understand what we might be doing or not doing and then respond. So a short answer is it depends. But as I mentioned earlier, there's always going to be a reaction especially in this type of climate where the case growth is pretty modest.

Maybe you can just give us a few examples of some of those pricing initiatives that you've done, and I know you've talked about some of that in the past. For example, just maybe kind of just to make it a little bit more easier to understand?

Actually, I don't recall talking about it in the past. We don't find it too often, but there's some competitive issues here. So I think we'll kind of keep it right where we have it.

And that does conclude our question and answer session for today, as well as our conference call. We do thank you for your participation, and have a great day.