西斯柯 (SYY) 2003 Q1 法說會逐字稿

Good day, everyone and welcome to today's Sysco Corporation first quarter fiscal year 2003 earnings release conference call. Today's conference is scheduled to last approximately one hour. As a reminder, today's call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Mr. John Palizza, Assistant Treasurer. Please go ahead, sir.

Thank you, Paula. I would like to add my welcome to everyone for joining our first Sysco Corporation conference call. With me here today is Charles Cotros, our Chairman and CEO, Richard Schnieders, our President and COO, Tom Lankford, Executive Vice President of Food Service Operations, John Stubblefield, Executive Vice President, Finance and Administration; and Diane Day Sanders, Vice President and Treasurer. On the call today, I will give everyone an overview of the quarter and we will turn the call over to Richard Schnieders for discussion of the performance of our acquisitions and new business. Following that, Charles Cotros will take over for the question-and-answer session.

Let me start by reminding you that statements made in the course of this presentation that state the company's or management's intentions hopes, beliefs, expectations or predictions of the future are forward-looking statements. Actual results could differ materially from those projected. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's SEC's filings included and not limited to the annual report on form 10-K for the fiscal year ended June 29, 2002. Without further ado, let me turn to our first quarter results. I will first hit the high points, then discuss the income statement and the factors impacting it, and finish with the balance sheet and cash flow statement. I would add at this point that in an effort to provide investors with more complete information on a timely basis, our earnings release this quarter includes not only earnings information but also a balance sheet and cash flow statement. I would characterize this quarter as being in line with our long-term goals.

We saw a solid sales performance, gross profit margins were up nicely, and the exception to a typical quarter, operating expenses were up in line with our gross profit margin gains. Typically expenses as a percent of sales rise at other rate slower than the increase in gross profit margins. I will discuss this in more detail in a moment because the devil is in the details. The expense control exhibited by our operating companies was actually quite good in the quarter, although it was offset by higher corporate expense. The result of all of this was a net earnings gain of 11.4% to 182.6 million dollars.

This is the first quarter in which we are no longer amortizing goodwill and adjusting for the effects of goodwill amortization, which we took in last year's results and did not take this year, net earnings increased 9.2%. Earnings per share on a fully diluted basis rose to 28 cents, up 16.7% from a year ago. With respect to the income statement, sales in the quarter showed a strong performance increasing 10.2% to $6.424 billion from $5.829 billion last year. Within the total sales number, real sales, which we define as total sales minus noncomparable acquisitions and minus inflation or plus deflation, ended the quarter up 7%. This continues our trend of sequential improvement in real sales growth.

Beginning with last year's second quarter, we have seen real sales rise from 7/10ths of a % to 2.7% in the third quarter, 5.2% in the fourth quarter and now 7%. During the quarter, sales attributable to acquisitions added 5.4% to total sales growth. Sales from acquisitions consisted primarily of Sysco's SERCA, which was acquired at the fiscal start of our fourth quarter, 2002. Deflation was 2.2%. On a weekly basis, sales in the quarter showed a very consistent uptrend, which is a continuation of the sales trends we saw in the third and fourth quarter of fiscal 2002.

For the first 11 weeks of the quarter our percentage increases over a year ago were in a very tight range, with very little variation from the highest week to the lowest. After we cycled the events of September 11th, we saw much larger gains on a year-over-year basis. We estimate that the effect of cycling the slowdown in sales resulting from last year's tragedy, added roughly 1% to real sales growth in the quarter. While this may not sound like much, keep in mind that the quarter only contained 2.5 weeks of post-9/11 comparisons. In terms of sales broken out by our reporting segments, broadline food service was up 10.8%, Sigma rose 9.1% and our category, consisting principally of specialty meat, fresh [INAUDIBLE], was up 4.8%. Looking across our operations geographically, I would characterize sales as showing a souffle effect. Being somewhat firmer around the edges and relatively softer in the middle. Having said that, all regions saw positive real sales growth and were within a relatively tight band. Gross profit margins rose 12 basis points to 19.76%.

We continue to see gross profit margin improvement in our traditional broadline companies. The continuing story here is our customer and brand mix. In the quarter, marketing associate service sales rose to 57.2% of broadline sales, up from 56.2% a year ago. Let me clarify that the number we are using for marketing associates service sales does not include Sysco SERCA, as we will not be comparable for another two quarters. Marketing associate serve sales are typically to independent restaurants where we can add value and fill their needs for a differentiated product and service offering.

Our 8,000 marketing associates continue to be one of the essential elements of our growth, both in sales and in the continued rise in our gross profit margins. Sysco Brands, another key driver in our performance, saw sales rise to 56.7% of marketing associate serve sales. Up from 55.4% in the same period a year ago. As a percentage of total sales, Sysco Brand sales were 42.8%, compared to 42.4%, again exclusive of sales at Sysco SERCA. The gains in gross profit margins by our broadline operating companies were partially offset by the gross profit margins at Sysco SERCA operating companies which operated a lower level of growth profit and are not comparable. Our specialty companies had a small negative effect on gross profit margins.

Operating expenses as a percent of sales rose 12 basis points in the quarter to 14.95%, an increase of 11.1% from the same quarter a year ago. There are really two sets of expenses we need to discuss here. The first is expenses by our operating companies. Here we saw expense ratios benefiting from the addition of the Sysco SERCA companies into the mix and very good expense performance by the specialty companies in our other segment. Expenses benefited from our continuing roll-out of Sysco order selector, activity-based compensation and Sysco loader system. Sysco order selector, which is currently in the 38 broadline operating companies, significantly reduces the number of mispicks in the order selection process.

Due to the continued fine performance of SOS, the decision was made during the quarter to accelerate the roll-out of Sysco order selector and have it installed in all broadline companies by January 2004. Corporate expenses rose in the quarter due to a $15.5 million expense to reflect a decline in the value of the equity component of investments which are maintained to meet obligations for certain nonqualified retirement programs. The result of all this was that pre-tax operating earnings increased to $309.1 million, an increase of 10.1% over a year ago and in line with our increase in sales. It is interesting to note that 41 of our 67 broadline operating companies had operating margins in the quarter of over 6% and 93% of all of our broadline operating companies showed operating margin improvement over a year ago. Those of you who were at our endless field day in June, will recall that we talked about future performance that could see more modest gains in gross profit margins than we have seen in the past but coupled with declines in operating expenses, achieving operating margin gains similar to past performance.

Our performance this quarter shows that we are moving in that direction, and it demonstrates that our operating companies listen and respond to and are aligned with our way of talking -- thinking about the business. Moving through the rest of the income statement, interest expense was $16.8 million, up slightly over a year ago, reflecting a modest increase in the amount of debt outstanding. We anticipate that the level of interest expense will be slightly higher in each of our next three quarters of the fiscal year, due in part to our recent acquisition of Abbott Foods. The effect of income tax rate remained unchanged at 38.2 5% yielding net income of $182.6 million, up 11.4% over the first quarter of fiscal 2002. During the quarter we repurchased 3,778,800 shares giving us 654,176,221 average shares outstanding and on a fully diluted basis 663,542,498 shares.

At quarter end we had 21.8 million shares remaining on our share repurchase authorizations. On a fully diluted basis, earnings per share rose 16.7% for the quarter to 28 cents, up from 24 cents in the same quarter a year ago. Turning to our balance sheet, cash at the end of the quarter was 163.2 million, up 39.6 million versus a year ago. Inventory rose 9.6% to 1 billion, 227 million.

Day sales outstanding of inventory calculated using average daily sales, were 17.27 versus 17.54 at the end of last year's first quarter. We consider this a good performance in light of sales gains and the fact that we began operations in a new foldout facility in Las Vegas in the quarter. Accounts receivable were 1 billion, 869 million dollars and on a day's sales outstanding basis were 22.65 versus 22.87 at the same point a year ago. Again, we view this as a nice performance in light of our sales gains, and indicative of our operating company staying close to their customers in these sluggish economic times. Accounts payables were 1 billion, 420 million at the end of the quarter.

Total debt at the end of the quarter stood at $1.329 billion consisting of $50 million of commercial paper, 13 million of current portion of long-term debt, and 1,266,000,000 of long-term debt. Approximately 72% of our long term debt was at fixed rates and 28% was at floating rates. Our long-term debt to total capital ratio was 36.6% , right in line with our stated target of 35 to 40%. On the cash flow statement side, capital expenditures for the quarter were $88 million. Our plan continues to call for total Cap Ex for the year of between 450 and 500 million.

The deferred tax provision was $105.6 million, as we continue to realize the benefits of the reorganization of our supply chain. The deferred tax provision should continue to rise during much of fiscal 2003, and we expect it to decline in fiscal 2004 as we begin to make the tax payments previously deferred. Cash from operations -- operating activities was $127.2 million in the quarter. During the quarter we saw deflation of 2.22%. The deflation principally came in the categories of dairy, fresh and frozen meat, seafood and poultry. Each one of these categories has a different reason for their deflation. If you are interested in the detail, I suggest you give me a separate call after the conference call.

These are the same categories that were deflating in our fourth quarter of fiscal 2002, and on the whole we view the deflationary pressures on these categories as lasting one to two more quarters. At this point, I would like to turn the microphone over to Richard Schnieders, our President and COO, so he can discuss our recent acquisitions and operational achievements during the quarter. Rick.

Thank you, John. In terms of acquisitions, this quarter marked the second full quarter with Sysco SERCA in our numbers. We are pleased with results we are seeing there and would characterize them as slightly better than planned. The issues facing Sysco SERCA are similar to issues that Sysco has faced in the past, getting their customer mix and their brand mix in balance. When we acquired SERCA we knew that their mix of customers was heavily in favor of multiunit customers as opposed to marketing associate serve customers. We also knew that the sales of their private label brand were only in the low teens.

With respect to Sysco SERCA's customer mix we are working on programs to emphasize independent restaurants and to hire more marketing associates to give us better coverage of our customer base. On the Sysco brand side we feel we are making very good progress. We have already begun shipping over 30 truckloads of Sysco produce a week into Canada. And this past week also began shipping our butcher's box block beef to the Sysco SERCA companies. In addition we have gotten success in Sufflia [PHONETIC], our premium brand frying oil. It has an outstanding reputation with food service operators in the United States. Overall we are quite pleased with the direction Sysco SERCA is taking.

There is still quite a ways to go but we are off to a good start. Following the completion of the quarter, we announced the closing our previously announced acquisition of Abbott Foods. We are delighted to welcome Larry Abbott and his team to the Sysco family. Abbott, situated in Columbus, Ohio, fits into a very neat spot for us, sitting as it does between Cleveland and Cincinnati where we currently have operating companies. We have long thought that Abbott Foods was one of the finest independent broadline operators and we know that they will be a fine addition to Sysco.

With respect to the start of our second quarter, we are quite pleased with what we see. Although, we are comparing with weak numbers from a year ago, real sales growth momentum has continued for the first three weeks of the second quarter. Clearly we are off to a good start. With that I would like to turn things over to our CEO, Charles Cotros, for the question-and-answer session.

Thank you, Rick. Operator, at this point, we will take questions.

Thank you, sir. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit 1 on your touch-tone telephone. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order you signal us and we will take as many questions as time permits. Once again, please press star 1 if you would like to ask a question; and we will pause for just a moment. And our first question comes from Jonathan Feemy with Suntrust Robinson Humphrey.

Hey, guys. Congratulations on a great quarter. Just one question, I wanted to ask. Could you -- given some of the sluggish economic trends we have seen from not only the -- just economic indicators but big publicly traded restaurant companies, you know, how is it do you think that -- I mean -- that you are seeing real sales growth momentum, only 1% of which is coming from, you know, easy comps due to September 11th? Is there something different about your customer base, do you think? Or customers you are focusing on, or is that you would say the restaurant industry is not as bad as maybe some other people think?

That is a good question.

Right now we feel like that the direction that we have taken and the focus that we laid out a few years back is certainly paying off at this point. We have focused on our street customers. We still have some great multi-year customers and we enjoy their business. But as we expand our sales organization, which today exceeds a thousand, we are gaining what we think market share from our competitors. I can't put it any other way. We admit that business is soft in certain markets. We have seen a rebound from the activity immediately following 9/11, but still not back to where we would like for it to be. But right now, I would say that where we are gaining our sales momentum is the penetration of our customers, but I would say at this point, that we are certainly seeing sales coming from our competition.

Thank you. Just one follow-up question for John. I wanted to clarify the souffle effect. When you talk about the souffle, is that a map of the United States, or is this some other --

No, it is a map of the United States.

Okay, so I guess I am well done, then. [ laughter ] Thank you very much.

Thank you, John.

And our next question will come from Bill Leetch of Bank of America Securities.

Good morning everyone. John, could you clarify exactly how much the change in goodwill accounting added to the comparison?

This is John Stubblefield. I will be glad to answer that.

The effect for this first quarter was approximately $5 million. And as John Palizza stated, if you then take that out of last year's numbers, the adjusted increase over last year is something slightly over 9%. We have reflected that as we set out to do at the end of the fourth quarter.

Is that an after-tax number as well?

No, that $5 million is before-tax number.

That is tax deductible?

Absolutely.

On a per-share basis it was about a penny or something?

No, no, it is about half a penny before tax.

Okay.

And after tax also.

And Charles, do you think a 7 to 8% kind of internal volume growth number is doable this year?

Well, obviously that is sheer speculation. All I can say is right now in the beginning weeks of this quarter, we have seen our sales continue to build great momentum. Our companies are working awfully hard. We would hope that we could continue to grow that real sales number beyond where we are today.

We feel very confident, if you remember at our meeting in California, we said that we were removing the word "cautiously" from our language and said that we feel very optimistically about going forward. So I think we are seeing the results are justifying those comments.

Your target is still to grow internal volume high single digits; is that correct?

That's correct.

And Diane, do you have any comment on the estimates of $1.17 for a year and 28 cents for the second quarter?

No, we don't comment on earnings estimates.

I thought -- this is your first conference call, I thought I would give you a chance to do that.

We work into these things very slowly, Bill.

Next we will have a restructuring program; right?

No, no.

Okay, thanks a lot.

Thank you, Bill.

And Eric Weisman of Goldman Sachs has our next question.

Hi, this is Simeon Gutman. How much of the 15.5 million of the corporate expense is recurring or is it all one time?

Let me speak to that briefly.

John spoke to the reasons behind it. Again, this is John Stubblefield. Sysco has nonqualified retirement programs which are funded by a company owned life insurance policies and within some of those company owned life insurance policies there are equities. Now, the accounting for the insurance policies requires that those policies be carried at their asset value at their cash surrender value. We have to adjust the carrying value. Asset as the adjustments to the underlying assets or securities change. And certainly with the sharp downturn in the market for the third calendar quarter, our first fiscal quarter, we had to realize a significant impact in this quarter.

What we would hope to see and what we have seen so far going into the fourth calendar quarter is that if you use the S & P 500 as a proxy, the S & P 500 was down 16% for the third calendar quarter, it is up approximately 10% for this fourth calendar quarter. We would hope to see a recovery of some of that into our current quarter. We will going forward continue to mark these to the cash surrender value of the underlying assets. I guess I will also just point out that for the -- all of fiscal year 2002, the impact of the marketplace on these equities was something in the range of 11 million dollars negative. So what made this quarter stand out was the sharpness of the decline and the last quarter, and then the significance of the $15.5 million.

Great. Aside from I guess the order selector, what other cost containment initiatives are you guys pursuing, I guess real near-term and possibly a little bit longer out?

I will reverse those questions. This is Richard Schnieders. Our most significant expense reduction project is the RDC. And we are very pleased with the progress there. We are in a design phase yet. We anticipate that the first facility itself will open in Virginia in June or July of 2004. So that is a little more mid- to long-term, but we are encouraged by what we see in terms of our analysis and the resulting design.

On a short-term basis I would say that one of the -- still one of the most significant opportunities we have is activity-based pay, particularly for our drivers, where we are not quite halfway installed on that -- those base of delivery associates, and in those companies where they have installed activity-based pay and where they have done a good job of managing it, we have seen a very nice improvements in their expense ratios in their delivery category, which is one of our highest -- you know, highest costs, I guess, in the organization.

We have loader probe being rolled out, which is a -- kind of an extension of Sysco order selection system, and we have -- we continue to put I guess the good word is pressure on our operating companies, because of the extensive benchmarking process that we use today. And they can see very clearly where they are doing well in expense control, and where they are not doing so well. An when they are not doing well, they have, you know, sort of personal motivation to talk with their colleagues across Sysco, across North America, and find out how they can improve their operations. So that whole benchmarking opportunity and best business practices, still is in its infancy, but gaining traction, and producing results as we -- as we continue to learn how to bring it into Sysco.

Okay, and finally, and I am sorry f.m. I missed it, about the 3.4 million of other income, you guys just talk about what is in there?

Yeah, I will. This John Stubblefield again. Predominantly almost half of that is a result of the sale of a facility that we had available for sales disposal, half of that came from that one activity. That was a gain, and then the rest of it was made up of a myriad of small things throughout our operations.

It will come back down probably in the next quarter?

We would anticipate that, that's correct.

I would like to make a comment here. As we look at the news release, and there was a question about the impact and the $15.5 million, to me the thing that is exciting about this release is the fact that our operating companies had an excellent quarter. Had we not had this charge to earnings, they were reporting a $15.5 million additional earnings, which relates to about 10.5. So to me, that is important.

I think that's a highlight of this report, is that our companies continue to operate as a high level. We continue to leverage our sales growth like we said, is one of our long-term objectives, and we continue to improve on our expenses. So this is -- and my -- in my mind is an excellent quarter. Okay, the next question?

Our next question comes from Jeff Omajundros, from Wachovia Securities.

Good morning.

Hi, Jeff.

I just have one question, and it relates to the continued ramp-up of Sysco Brand sales, which certainly have benefited your results. I wonder if you could share with us a little bit about the incentives to your sales first on selling those products. And how high do you think that goes before, you know, you have pushed too hard? Thereby risking alienating some certain customers.

That's a good question. You know, we always say that our suppliers, in fact we just recently, in fact, just last night, concluded a two-day recognition days of our top suppliers, and first of all the thing that we insist on is that our Sysco brand continues to be top quality products.

With that being said, our sales people are incented to promote their brands, which also show to the customer that, one, we have every bit of confidence in the products, and we continue to expand that. Now, I might say, also, if you remember in the -- in John Palizza's comments, still 60% of our sales are national brands. So we recognize the tremendous value that national brands has in our mix. We feel like we can continue to grow that Sysco brand, particularly in the MA-serve customer where we do have the incentives to push it beyond where we might become a nuisance, I don't see we are being there yet.

I think we have a long opportunity to grow, and our suppliers are recognizing the opportunities it offers them, so we are not getting strong support from the suppliers as well as we are getting strong support from our salespeople.

Charles, I would add to that, this is Richard Schnieders, that our customers vote on Sysco brand with their pocketbooks. And these items certainly are a benefit to our suppliers in Sysco, but they are a tremendous benefit to our customers, because of the way we design value into the products. I won't bore the entire audience with one of my mundane stories, but again the customers have well accepted the product. It is not something that we are forcing on the customer base. It is something that they really have voted with their -- as they pay their bills every month. So it has been -- it is gratifying. We have operating companies today in total that exceed 60% Sysco brand. So that is -- that is obviously a target out there.

Thanks.

Thank you.

And Greg Bondushkani from Salomon Smith Barney has our next question.

Yeah, hi. I guess my question is related to deflation. Being 2.2%. If you can -- if it is possible to sort of give us a sense of how that impacted your results. I know it impacts your inventories negatively, you know, when you sell product. But, you know, is there a major impact on your overall business and how do you, you know, do you pass on that to your customers as well? Do you give them the benefit of that?

This is Tom Lankford. Let me take one stab at that.

It is much easier to operate in an inflationary environment. But quite frankly, with our systems and our ability to price and to work with our marketing associates, I think it is a point of competitive advantage in this time of deflationary markets, that we think we can gain share on our competitors because we are better able to handle it, pass on the appropriate amount to our customers, but at the same time, not have it negatively impact us.

There is something else there we need to mention at this point.

It was also mentioned in John's opening comments, is that we continue to reduce our days of inventory, which also has an impact, because you are turning inventory over at a faster pace, which has a smaller impact versus somebody that has 30 days worth of inventory.

And our systems today support those kinds of activities. We know our variances on a day-to-day basis. If there is a change up or down and the operating companies being close to their business, and manage those variances very, very closely.

And Charles Cotros' point, those product categories showing the greatest amount of [INAUDIBLE] at this point in time are also those categories that we carry the shortest days of inventory in, thereby even accelerating that replacement cycle, that product coming into the inventory. So as everybody has pointed out, our systems very well support our ability and -- to not only not be impacted but also pass through to the customers on a very timely basis those changing prices, and I think it can go both ways, both up and down, through to our customer base.

You know, this is -- this deflation that we are -- have been experiencing for the last number of quarters, has probably helped our customers as they experience some softness in sales. They are realizing some lower prices that have probably helped them significantly. So right now if I had my way, I would like to have a little bit of inflation, but I guess right now, because of the softness in the economy, deflation has helped there.

Good, thanks.

Thank you. Next question.

Next we will go to Eric Larson of U.S. Bancorp Piper Jaffray.

Good morning, Eric, how did they get you up so early?

I have to get up earlier than the east coast people, don't I? Just a couple -- one thing I missed, because I couldn't write fast enough, John, you mentioned the number of operating companies that actually had operating margin improvement in the quarter, what was that number?

93%.

Oh, okay, 93%. And I am assuming that these charges to adjust to cash surrender value, they are a noncash item, aren't they?

That's exactly right.

I needed to ask that because it wasn't clear at that point. And then the final question I have, in your cash flow statement, you have got an increase in restrictive cash of 25 million in the quarter. What is that?

One of the things that we have done to offset having to maintain letters of credit to back up our self-insurance plans, is we have replaced those with an insurance trust and basically that number has to be reported as restricted cash because it is actually not available for operations.

Okay.

The real benefit of that is that instead of having a cost to put those letters of credit in place were actually have a -- an earnings off of those cash, a balance set aside that equates what we are having to pay on a short-term basis. So there is a small positive earnings impact as opposed to using letters of credit.

That makes perfect sense. So of your ending cash of 163 million, then, in the quarter we should think of it of 25 less in terms of what you are able to grab, put your hands on?

Exactly right.

Okay, good, thank you, everyone.

Thank you.

And Jack Murphy of Credit Suisse First Boston has our next question.

Good morning, congratulations on a great quarter.

Thank you.

I wonder if you could say what you think the industry growth rate is, not so much government numbers, but where you think your real market share gaining number is in the quarter, and if you could drill down and let us know what you think that is in terms of new accounts versus just growing existing accounts?

That is a difficult answer. In our industry, if you contrast it to the retail grocery industry where you are taking shelf items with bar codes, scanning them, getting really good, solid information. In the restaurant industry, with so many independent operators, so much of our products are ingredients into something else that is being prepared. We see numbers all over the board from various groups. One is the food institute, their numbers tend to be higher than we have put a lot of stock in.

Technomies [PHONETIC] does a nice job out of Chicago, although those are generally trading numbers. We are probably in the -- there is 2% growth roughly, but plus or minus a percent. So the industry, we see a lot of vibrancy, particularly in the independent sector along with some of our good solid chains. Wendy's has done an outstanding job. Their salad program really has been very good for Wendy's, and has worked well for Sysco. In the independent sector, those individuals are able to move pretty quickly when there is a change in the marketplace. They can put a new menu in place virtually by tonight. They can put menu boards up with specials on, so they are very fleet of foot and that is an exciting part of the business and we think they are doing quite well right now.

Okay, I guess maybe approaching it from a slightly different angle, of that sort of 4 to 5 percentage points faster than you seem to be growing in the industry, you know, is it that you -- the clients that you have are simply growing a lot faster than the restaurant business in general? Or are you having some unusually good market share gaining opportunities because, for instance, a large competitor is struggling right now?

All of the above. I think right now, like I said earlier, that -- that our salespeople, we continue to grow our sales organization. We have always had internal goal of adding 10% to new territories. We have never achieved that. But we are now at a rate of 5 or 6% increase. That helps. And I still think that right now, that we are enjoying a market share gain from our competition. And so I think that is basically while we continue to outpace the industry.

Just the last question, do you have any concerns about the financial strength of some of your smallest customers? Has there been really any change there? And if you can just remind us how you sort of managed through that?

This is John Stubblefield. Once again, we got to point to systems as one of the real strengths we have in this area. We also point to our MAs, our sales people that are out on the street daily in contact with those customers who have a real feel as to what is going on.

You know, we have not seen anything in this quarter that would tell us it is any different than it was last quarter or last year, and again I point to our results of last year in terms of bad debt expense. And it was again a -- a record year for us, in terms of performance, and we continue to have better years year-over-year in that area. So we look to our systems, we look to our people, and once again, making the right selection process on the front end with the right customer certainly helps it down the road.

I think John mentioned that our bad debt write-off last year was very good. And also our continued reduction, and receivables, that tells us that comparing this quarter that we are just reporting to the same period last year, we reduced our days outstanding, which tells me that we are managing our receivables.

Okay, thank you.

Thank you.

And next we will go to Mark Huston with Merrill Lynch.

Good morning, Mark.

Good morning. I wanted to ask a little bit about the fresh business.

Of course, if you give the street information they always go further, the worst possible number and try that over a million times. The other business was something like 4.8%. Can you say what is in there? That is the custom cut meat business. Is the fresh point, the salad business, in there? Which parts of the business does is the Wendy's salad business, and how does that whole thing work? Could you talk through why this is a weak number and some of those kind of issues?

The meat business -- this is Richard Schnieders. The meat business we continue to be very, very pleased with in terms of sales growth. They have learned very well how to work with our operating companies, so we are seeing nice growth in the meat products through those operating companies. As well as growth in the meat distribution systems themselves. And the -- and we are seeing some, we have indicated that is one of main categories for deflation in the meat area.

Fresh point continues to -- continue to refine that process, and we are seeing this year significant improvement again in the participation of our operating companies buying certain specialty items and split pack product from fresh point. Guest supply sales continued to be softer than we would like. However, they were impacted more than any other category of our business after the tragedy of last year. However, having said that, they did an excellent job of managing their business. And their bottom line results were excellent. We -- guest supply is from a sales perspective -- is doing quite well now. We are very excited about that company, and very excited about the management team in place there.

So -- and produce, by the way, going back to fresh point, fresh point was impacted too. They do a lot of business in hotels. So after September 11th of last year, that was -- that was one area that got hit the hardest. But again, making nice improvement in all -- in all other categories if you will, on a bottom line basis.

Further to Mark's question, the Wendy's salads appear as part of the Sigma's operations.

Right. Okay, and in sales is a difficult thing to procure. With lots of volatility in the price, how are you protected against that?

Well, we are not protected -- we are protected in the sense we change our pricing on a daily basis. There is certain large customers we work with to contract for a long period of time, up to a year, on certain categories of product. Lettuce might be a good example of that. So we are -- that is not an issue for us, and we do work with the customer to help protect them.

Right, thanks very much.

Thank you.

Our next question comes from Andy Smith of AG Edwards.

Hi everybody. Good morning. A previous question alluded to what I wanted to ask about, specifically with U.S. food services now seeing weaker organic sales growth, could you comment on the competitive environment with them specifically?

Well, you know, right now, we have -- we have said that this all along that they have a full plate. You know, they have -- they have made some major acquisitions over the last few years, and, you know, we made a major acquisition back in 1988 when we bought the second-largest food service company, CFS Continental, and I will admit, that was a very difficult consolidation. It took a lot of time, a lot of patience, you are merging two cultures and you are really merging competitors that were competing with each other for years. Right now you have certain markets in the United States today where US food service has not one, not two, but maybe three distribution centers.

And I can just imagine how much turmoil they are going through right now. This is a classy example of where one plus one doesn't equal two. And I can tell you when we did our conversion, we lost business because of the fact that competitions is out there recruiting your people, they are recruiting your customers, and it is really a very, very difficult. Theirs is magnified by the fact that they have more than two, in some cases three, merges to deal with.

And they are trying to do it in a very fast time, where I could tell you in our case we still have certain companies in our operation that are still being -- being converted over. So it is a very difficult thing, and right now, we are positioned to take advantage of any opportunity that is out there.

And do you think you are gaining more from that or from smaller competitors who might be struggling these days?

I think that we are probably hitting on all cylinders. Right now we are dealing with every competitor out there. When you deal with the major players, a lot of times you are competing on the national basis with your major national accounts.

When you are talking about street business, then you are dealing directly with that local supplier, that local purchase provider, so right now we are focused on competing and giving great service and it comes from major national suppliers or the locally owned, in our estimation it is all new business.

Thank you.

Thank you.

And next we will go to Bob Cummins of Shields & Company.

Thank you and good morning, everybody.

Good morning, Bob.

I wanted to ask you a question about your share repurchase activity during the September quarter, for good or bad, you had an opportunity to buy a lot of stock at very attractive prices, which clearly you did, and now the stock has moved up and is trading near an all-time high. I am just wondering if we will see a cutback in your activity as a result of that, or to what degree your share buy-backs are simply driven by cash flow rather than the stock price? Can you just comment on your overall strategy in that regard?

Bob, our strategy is always to be as opportunistic on the price as we can. And with the calculations we make, we are still buying it at an accretive price. We bought it at under $30 clearly in the first quarter, we bought almost 3.8 million shares. So we will continue to look at pricing, try to buy on the dip, and again, our program is really to use excess cash flow and try to manage our long-term debt-to-capital ratio. So I think you will just continue to see us do what we have always done.

We shouldn't necessarily assume, just because your stock is at 31, that we will see a substantial cutback in the rate of activity?

Not necessarily. We will be opportunistic.

Not because of the price of being at 31, because maybe this time next year, when it is at 41, we wish we would have bought more.

Okay. I am recording that. [ laughter ] Thank you very much.

Bob, one last comment, we don't think -- we don't see how we can ask investors to buy the stock if we are not willing to buy the stock.

That is a good point. I agree. Thank you.

Okay, thank you. Maybe we need a disclaimer here that Charles is going to be retiring in December. [ laughter ]

Our next question comes from Pam Davies of [INAUDIBLE]..

Hi, my question was on pensions so it has been answered, thanks.

It has been answered. Thank you, Pam.

And next we will go to Steve Chick with JP Morgan Chase.

Hi guys. I guess I have a couple of questions. I was wondering, if you look at the total food service market, let's call it 170 or 180 billion, the distribution market, what -- can you approximate what the total market would be for the street business?

Well, I mean, I -- the way we -- we have cut that one way, at least, is if you look at the -- at retail, that is retail consumer spending away from home, it is about a $420 billion spend, and about half of that has been identified in the top 500 chains. The top 100 chains do about $123 billion. So, you know, just based on those numbers, you would say, well, about half of it is independents.

If you take a look at that second 400, not the top 100, but the next 400 chains, some of those chains get fairly small. And we would include that in our street business. It might be a five-store chain, it might be an eight-store chain -- we would include that generally in our street business and address that with, you know, local marketing people and oftentimes marketing associates. So for that piece of the business, you know, somewhere in excess of 50% of the revenues are certainly available to us on a street -- you know, if that's 200 billion times .38, there is still a lot of opportunity out there for us.

Right. Okay, good. And then, you know, I don't know, you have maybe approximated this before, what would you say your average penetration is I guess on average with your -- you know, your typical street customer?

Average about 35%. 35 share on the average.

Okay.

370,000 independent customers, and again, that is our opportunity, is to grow our business in those customers that we already have.

Right.

And what's the -- if you have on some of the higher ends for some of the customers you service, are they -- you know, what would be the high end of penetration with some of the best customers?

Oh, most of it. I mean, frankly, I mean, we have some customers where we have a lot of customers, we have outstanding relationships and we do virtually -- I am talking about on the street now, we do virtually all their business.

Even with them, we have still opportunities in some of our larger customers to further penetrate what is available.

Right, got you. Okay. One other thing, if I could. John, you mentioned that the deferred tax, and, you know, the I guess in '04, it is going to start to reverse in terms of the cash effect. Is that -- would that be -- shall we, in terms of modelling it out, is it a -- will it be a total reversal or just partial?

No, what you will see is that the total amount will stabilize and then there will be an ongoing deferral and an ongoing payment so that we will reach a -- so to speak an optimum point and then it will stabilize at that point going forward. So it would -- there will be a build up and then there will be a bit of a drop-off and then there will be a stabilization.

Got you. Okay, good, thanks, great quarter.

We anticipate it will still be incrementally positive.

Right.

Next we go to Stewart Trail with Hunter Global Investments.

A follow-up question on the deferred tax there. You think it will still be an incrementally positive even after it stabilizes?

That's correct. You know, our anticipation is to continue to grow this business in the high single digit real sales growth rate, so given that, did he believe we will continue to incrementally grow that going forward.

So when we look at the cash flow statement, say 12 to 18 months from now, the deferred tax line will still be in addition to cash flow?

I think that's accurate.

I guess my concern is --I mean you guys have essentially been able to take out a big loan from the government -- I mean you are not paying cash taxes at the same right that -- rate that you are booking them on the income statement.

That's accurate.

Without that kind of benefit, it looks like your cash flow is actually -- it is not growing as quickly as it is with the deferred tax, it has become a major source of cash. I am just wondering why more companies don't do this, if it is so positive on a cash flow basis.

Well, again, you can't -- first of all, you have to have a business reason in order to -- to acuate the cash flow opportunity, the deferred taxes, and the way Sysco is structured and the RDC continues to support that is our merchandising function essentially has been and is a Co-op structure. And so that is what certainly justifies what we have done in a very real way, and this is not unusual in the American business to have this kind of structure in place.

That's right. We operate as a cooperative and as a result of that, the deferral opportunity is there.

And also, just from a cash flow basis, I am going to ask my colleagues to help me here. We had a $75 million swing based on the last year, John.

Well, last year, let's see, we had additional taxes payable last year in the Q1, because in the fourth quarter of the prior year, it gets a little complicated. But we didn't have to pay taxes because of the effects of tropical storm Allison. That was swung over into the first quarter of 2002, which is an additional $75 million worth of taxes paid last year in the quarter.

Let me also add that you have to remember that at this time last year, you know, we were at the end of September, we were affected by what happened with September 11th and so if you look at working capital flow, that quarter last year versus what's going on this year, our sales picked up toward the end of the quarter. It is kind of -- it is a little hard to compare.

Okay.

And again we still focus on, and as Charles pointed out early on, our improvement in accounts receivable or improvement in inventory days which gives us great confidence that we are managing working capital very effectively.

We should not think about this as -- I don't want to call it temporary, but a 12 to 18 month kind of phenomenon, it may not be such a big addition but it won't necessarily reverse the other way?

That's accurate.

Thank you.

Thank you, Stewart. Thank you for calling. We have time for one more question, operator.

Okay. And that last question will come from David Cordell of Browning Capital.

Yes, just a quick question on your design benefit pension plan. Last year, the pension expense was $51 million. What do you expect it to be for fiscal 03?

I don't know if I can give you a projection on that right now. I think we would expect it to go up. But in terms of an exact number, I am not sure I could tell you what that would be right now.

Ballpark it? Like or a range?

You know, I just really -- I don't feel comfortable doing that. It is an actuarial calculation and it is complicated. I don't feel like I could make an accurate predictions.

I guess it would be safe to say it is going to go up this next year, it is, we believe, from on very high level, it is not going to be a very significant impact to us.

I wouldn't expect it to double, that's for sure, no it would be just a fraction -- fractional increase is what I would say.

Got it. And could you kind of give us a ballpark of where you think cash flow from operations or free cash flow for the operation might be for the year, looking at the year as a whole?

We would sure like to see it back over what it was last year. So we target, you know, cash flow from operations. It was probably close to a billion. Is what we would sure like to see.

A billion for the year?

That's what we would like to see.

Great. Okay.

And we continue, as we talked about before, we continue to manage our inventories well, our accounts receivable. You know, I will use Charles' phrase, it is -- the company is hitting on all cylinders and we anticipate to have a nice increase in cash flow.

Thanks a lot.

I would like to thank everyone for calling in today. This was our first conference call, and thank you all for participating.

That concludes today's conference. We do thank you for your participation.