西斯柯 (SYY) 2003 Q3 法說會逐字稿

Good day, everyone and welcome to today's SYSCO Corporation Third Quarter Fiscal Year 2003 Earnings Release Conference Call. 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.

I would like to add my welcome to everyone for joining the SYSCO Corporation conference call for the the quarter of our fiscal year 200 3. With me here today are Richard Schnieders, Thomas Lankford our President and Chief Operating Officer, John Stubblefield, Executive Vice President for Finance and Administration, Larry Accardi, Executive Vice President, Merchandise and Services, Multi Unit Sales and President of Specialty Distribution, Ken Spitler, Executive Vice President of Food Distribution and Diane Day Sanders, Vice President and Treasurer. On the call today, I will give everyone an overview of the quarter together with some of the basic data I know you all crave. I will then turn the call over to Thomas Lankford for further discussion of our operation performance during the quarter. Richard Schnieders will then discuss cash flow issues, progress on our strategic initiatives, and moderate the question and answer session.

Let me start by reminding you the statements made in the course of this presentation, the state the company's or management intentions hopes, beliefs, expectations or predictions of the future are forward-looking statement. Actual results could suffer materially from those projected. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are contained in the company's SEC filings included but not limited to the annual report on form 10-K for the fiscal year ended June 29th, 2002.

Further, during the call today, we will discuss real sales growth, which may be a non-GAAP financial measure under Securities and Exchange Commission regulations. We define real sales growth as total sales growth less non-comparable acquisitions and adjusted for inflation or deflation. A reconciliation of real sales growth to total sales growth is contained in our press release issued earlier today, which can be found on our web site at www.Sysco .com.

Now, let me turn to our third quarter results. I would characterize the third quarter as a very good performance in a difficult environment. Given that during the quarter the East Coast was blanketed by 3 feet of snow, Denver was hit with 5 feet of snow and the war with Iraq began, sales in the quarter held up very well. Showing a gain of 13.8% compared to the third quarter last year. Gross profit margins declined slightly down 30 basis points from the same quarter a year ago, offset by good expense control. The results of this was net earnings of 168.4 million dollars. An increase of 11.2% over the third quarter of 2002. Earnings per share on a fully diluted basis rose 26 cents, up 13.0% from a year ago.

During the quarter, we had real sales growth of 5.7%, while sales attributable to acquisitions add add 7.3% to total sales growth. Sales from acquisitions consisted of SYSCO /Cerca, Abbott Foods, Pronamic, Asian Foods and the Denver distribution facility acquired from Marriott food services. With the completion of the third quarter, SYSCO Cerca is fully comparable to a year ago.

During the quarter, we saw inflation return rising at the rate of 0.83%. The inflation was principally in the categories of meat, dairy and poultry. This marks the end of a string of three consecutive quarters of price deflation and our view is that we will continue to see moderate amounts of inflation in the near term.

In terms of sales broken out by our reporting segments, broadline food service was up 14.4%, Sigma rose 9.9%, and our other category consisting principally of specialty meat, fresh point, guest supply and Asian foods was up 16.6%.

During the quarter, as part of our ongoing share repurchase program, we repurchased 4,764,000 shares. At quarter end we had 12.6 million shares remaining on our share repurchase authorization. Total debt at the end of the quarter stood at 1.386 billion dollars consisting of 81.5 million dollars of short-term debt, $24.7 million current portion of long-term debt, and $1.280 billion of long-term debt. Approximately 71% of our debt was at fixed rates and 29% was at floating rates. Our long-term debt to total capital ratio stood at 36.8%, in line with our stated target of 35 to 40%.

With that, I'd like to turn things over to Thomas Lankford who will give you more detail and color on the income statement and operations.

Thank you, John.

We certainly faced our challenges during the quarter. The weather in the East and Midwest was especially cold and wet. And we had record snowfalls up and down the Eastern Seaboard and in Colorado. The beginning of war with Iraq and the downturn of the travel industry also impacted the amount of people eating away from home. When faced with these difficulties our operating companies really stepped up and delivered a 5.7% sales growth sales gain.

As we talked to the suppliers and look at industry sources we believe that the growth trend in the food service market is somewhere between minus 2% and zero. So there is strong evidence that we continue to take market share.

At this point, I would like to discuss gross profit margins. Gross profit margins for the quarter declined 20 basis points versus last year's comparable period to 19.56%. Similar to the second quarter, we continue to see gross profit margin improvement in our traditional broad line companies offset by the impact of SYSCO Cerca and gross profit margins.

The reason for gross profit improvement or gross profit margin improvement in the traditional broad line companies is our SYSCO brands which saw sales rise from 56.3% of market associated sales up from 55.7% in the same period a year ago. SYSCO brands are such an integral part of what we do for our customers that I think we sometimes take it for granted how important our brands are to our business and to our customers. As a result, we don't spend nearly enough time talking about SYSCO brand products. So let me spend just a moment on them.

SYSCO brands are created by SYSCO to give our customers products that are designed for use in the food service industry, not just adopted from the retail trade. We designed the quality specifications, we inspect the product for compliance and we build value into the product for the customer. That value comes in a variety of ways.

For example, better overall price or better price per serving, or labor savings, more usable product or higher quality. We believe that we're giving the customer a better product. Our customers, by continuing to purchase more SYSCO brand as on overall percentage of what we sell, are telling us that they believe that it's a better product as well.

The gains in gross profit margins by our traditional broad line operating companies were offset by the gross profit margins by the SYSCO Cerca operating company which operate at a lower gross profit margin and are still non-comparable. This should be the last time you hear this out of us. Beginning back on April 1st of this year, SYSCO Cerca became fully comparable. Gross profit margins at SYSCO Cerca has improved sequentially in each of the quarter that we acquired them. But because the customer mix and brand mix are not yet similar to our existing business, we have a long way to go to get them to the gross profit level of our traditional broad line companies. Because we have so much room for improvement, our expectation is that for the immediate future, SYSCO Cerca should help to improve gross profit margins.

Let me give you a couple of examples that give me the confidence to make that statement. We've introduced 500 SYSCO brand items into Canada. 300 of which are produced in Canada. We have also brought on board 30 new Canadian suppliers. SYSCO brand sales in Canada for the third quarter grew 22%. Over the second quarter of 2003, the previous quarter. Clearly, we're getting great acceptance of SYSCO brand in Canada, which we believe will carry forward.

Gross profit margins were also impacted by the return of inflation. While a slow, steady rise in the government of goods benefits our business, sharper swings in pricing makes life, at least temporarily, more difficult. We move from 9/10th percent deflation in the second quarter of this year to 8/10th of one percent inflation in the third quarter. Which is a big swing in our business. That basically means that we were playing catch-up on the cost of goods all quarter. Let me put that a different way. As the cost of goods moves up more quickly than we would like, it is difficult to raise prices to customers as quickly.

Gross profit margin trends for our traditional broad line companies showed improvement throughout the quarter. Operating expenses as a percent of sales showed good performance declining 10 basis points in the quarter to 15.05%. Here we saw very good performance by our traditional broad line operating companies. Here, aided by the SYSCO /Cerca companies, which have lower expense ratios.

When we look at our key expense control metrics for our traditional broad line operating companies, all of the metrics improved. Our pieces per stop and lines per stop both went up. Which means that not only were we selling more to each customer every time we made a delivery to them but we were also increasing our share of that customer's menu.

We saw a very good performance in our pieces per error ratio which we attributed to our continuing rollout of the SYSCO Order Selector system known as SOS. Our customers expect error-free deliveries and more perfect orders translate into an additional competitive advantage. SYSCO Order Selector helps us give our customers better service, saves us money at the same time.

Other operating metrics that improved during the quarter included the ratio of employees per 100,000 pieces shipped, pieces per trip, which translates into less rolling stock out and payroll per piece.

At this point, I would like to turn the microphone over to Richard Schnieders our Chairman and CEO.

Thank you, Tom. First and foremost I would like to personally thank our 47,000 associates for a terrific performance in a quarter that saw more than a few challenges.

Next I would like to talk about cash flows from operations. During the quarter, cash from operating activities was a strong $428 million, and $884 million for the first nine months of the year. Of particular note, our working capital showed nice improvement over the second quarter. Inventories were down compared to the second quarter. Even though we had more sales and were a source of $14 million in cash flow. Accounts payable also showed nice performance, generating $114 million of cash flow in the third quarter. Accounts receivable were up modestly over the second quarter as we discussed last quarter, the largest impact on our receivables line relates to changes in our customer mix of receivables. The credit quality of these customers is quite good. And we're comfortable with these receivables.

The preferred tax provision for our first 39 weeks was 320.5 million, of which 107 million was in the third quarter, as we continue to realize the benefits of reorganization of our supply chain. We expect the cash flow effect of the tax deferral related to the supply chain reorganization to continue at about the same level for one more quarter, beginning in fiscal 2004, as we begin to pay some of the previously deferred taxes, the cash flow going forward will be less; although, we expect it to be incrementally positive on an annual basis. The percentage increase of incremental positive cash flow should roughly match the percentage of growth and sales.

We continue to invest strategically to grow the business. Capital expenditures through nine months of year were $310.4 million. Our estimate for total cap ex for the year is 425 to 450 million dollars. Our redistribution center is currently under construction in Front Royal, Virginia with estimated completion date of summer 2004. During the third quarter, expenses related to our national supply chain product, that is the redistribution center, totalled $4.5 million. Well, for the first three quarters of fiscal year 2003 expenses totaled $14 million. Since the initiation of this project last fiscal year spending has totaled $59.6 million.

This is the largest project undertaken to date by SYSCO . We're projecting total expenditures for the start-up costs, systems and facility under construction as between $275 and 325 million. Thereafter, each additional facility is projected to have an estimated cost of between $65 and $75 million.

The redistribution center has the potential to make fundamental changes, fundamental differences in the way we manage our business in the future. One completed our RDCs will handle over 50% of our inventory while cutting down on inventory safety stock. At the same time, more inventory selection will be available to our operating companies and to our customers. We expect that we will also be be able to reduce the amount of capital we need to spend on expanding our existing distribution centers. I's a great example of how we continue to position SYSCO not only for immediate success, but also for success in the long term.

Finally the quarter also saw what I can only charitably describe as a distraction with the competitor announcing that they had mis-stated earnings due to the way they accounted for supplier allowances. I think by now we have all worked our way through the issues concerning supplier allowances but I would like to reiterate that rebate and allowances are payment to SYSCO for the marketing and merchandising activities we perform for suppliers. They're an integral part of our gross profit margin structure and are completely proper and legal. We have always accounted for them properly. And we have disclosed the existence of these payments to our customers.

In bringing this up, my point here is to emphasize that throughout all of the publicity that has surrounded this issue, our message to our associates has been clear, concentrate on taking care of our customers. We know that if we take care of our customers, we can continue to profitably grow this business, and continue to take market share.

We have, in fact, received calls and inquiries from our competitor's customers who were concerned about having a stable supplier for their business; however, we are going to be be selective and deliberate about potential new customers. We will not chew up our capacity and run the risk of disappointing our good, existing customers by chasing after profitless sales. With that, I would like to start the question-and-answer session. Operator, we'll now take questions.

Thank you. The question-and-answer session will be conducted electronically. If you would you like to ask a question, please do so by pressing the star key followed by the digit one on the touch-tone telephone. If you are using a speaker phone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, it is star one if you would like to ask a question and we'll pause for just a moment to give everyone an opportunity to signal. And our first question comes from John Heinbockel from Goldman Sachs.

Can you guys walk through the timing of some of the RDC expenditures? As I understand it, just the midpoint of your range, it's $300 million of total cost, 75 is cap ex and 25 goes through the P&L and you spent 60 million of that already, 30 in cap ex, 30 in operating costs. How does it play out from here on out? How does the remain 240 or so get spent this year and on into next year.

This is John Stubblefield, John, and the answer to that is still somewhat to be determined. As you would expect, in a project like this where you have administratively, you've got the organization process that's going on, from the IT standpoint, have you systems that are being developed and integrated and from the building, physical assets aspects of that, you have that an ongoing project also. We would expect to see those expenditures fairly spread out over the next three to four quarters. There may be be some quarters that are moderately higher than other quarters but I would expect to see ongoing the expenditures much in the same ratio as we've seen in the past. Roughly, three quarters, I would guess, of the dollars in this project are capital dollars. The remaining of those dollars are expense dollars, as they relate to the developmental side of the project. So while we look forward to this being completed through the summer of 2004, this is specific timing quarter to quarter, still is a little bit has yet to be determined.

John -- that doesn't suggest for fiscal '04, that there might be $150 million of cap ex related to this project, at least the start-up piece. I don't know if you will do another center in 2004, I guess not, but $150 million on top of what you had planned -- I don't think you've given a number of what you plan to spend. But it will be temporarily high at a high level in '04, and then back off in '05?

Those numbers are included in our ongoing projections of cap ex, so this wouldn't be additive to those discussions.

Okay. So 150 is built into your current expectations.

Well, the 425 to 450 that we're projecting for this year, John.

Right.

Includes what we think we're going to be spending this year. We haven't yet given any projections for next year for cap ex, but it will include all the RDCs capitalized expenditures when we do that.

John, we would also expect that our cap ex would run in the range that it has been running in as a percent to total revenues.

Mm-hmm.

1.5 to 1.75%.

And John, this is Thomas Lankford, one other point. As we roll towards this opening date, cap ex expenditures that we would typically from have from the operating companies that are in that region will be be reduced as we won't be expanding their facilities.

Okay.

I think it's also important to note on the front of this, both a significant part of the capital expenditures and also the expense side of the of the project or for the benefit of the ongoing overall project, which we will not see re-occurring, going forward.

Yeah. Okay. Just one other thing, the doctor for now, it's kind of past. Some of the weather issues, and, you know, maybe some of the war issues. Have you seen any -- any changes in the real organic growth trend to the upside, either because of those -- those factors have abated or some of the U.S. food business is flowing in or is it pretty steady where it's been tracking?

I -- I think that it's a little too early to answer that question definitively, but as you saw in the news release this morning, we had a record week in the first week of this quarter with a 2.7% gain over our previous record. So we're -- I guess I would say that we're encouraged by the activity, without having quite enough data to say that fully at this point.

Okay. Thanks.

Moving on, we'll take our next question from Jonathan Feeney of SunTrust, Robinson Humphrey.

Good morning, everybody.

Good morning Jon.

To start off on the U.S. Food Service situation. Would you say that -- some of your competitors are talking about not only getting a lot of inquiry from customers but also hiring a fair number of personnel from U.S. Food Service. Could you characterize, you know, whether you've been -- you've been hiring, adding marketing associates and would you -- secondly, would you -- are you pleased with the level of customer inquiry you are getting from, you know, former or potentially former current U.S. Food Service customers or do you think it might happen a little bit more quickly.

I will answer that, Thomas Lankford. First, I think that we have had hired -- in various markets, a few people, probably collectively when you roll it up, it's probably a fairly significant number that are, again, looking for a good stable, long-term company. As it relates to customers I will break those out into two types, the multi-unit piece of that, and I would characterize, I think Rick characterized that in his comments that probably all of them have been calling other distributors, including us and usually the time frame for them to make decisions is somewhat elongated and so we probably have the opportunity to see what will happen there and certainly with we look at the real growth figures for the quarter we would have to assume that some of the street customer business gains that we had came from customers that had been dealing with U.S.

Okay. Thank you very much.

Mm-hmm.

Bill Leach of Banc of America Securities has our next question.

Good morning.

Good morning, bill.

Good morning, bill.

Congratulations on another great quarter. I'm wondering looking forward, the weather will not be be an issue, and the war's over, but you know, you are lapping the horn now again, with tougher comps. Your real volume was up 5% in the fourth quarter last year and 7% in the first fiscal quarter, is your hope to continue to grow roughly 6% in internal volume growth against those tougher comparisons?

Absolutely. We continue to be, as I said, a little early encouraged and we are not changing our long-term growth targets and we feel good about that.

And in terms of margins this quarter now you will be totally apples to apples with Cerca. Can we expect the company to continue it's normal slight margin improvement year-to-year?

We would hope that we would see, including Cerca, nice margin improvement for the same reasons, you know, going back in our history. We're focusing on SYSCO brand as Tom talked about earlier in Canada. We're focusing on customer mix, and we continue to do that in the U.S. too, by the way. So we -- we think that as we look Cerca operation, that they're moving along at a good pace. They're achieving what we expected so, yeah, we feel good about that.

You mentioned in the press release you made two small acquisitions in the quarter. How big are those?

Well, they're small.

Yeah, we've not commented on the dollars, I don't believe, in terms of total revenues but they are -- they are very small. And as a result of that, they are fold-ins or tuck-ins however you want to define that to existing operations. The Colorado Beef acquisition will be a new location for us, and in the mid-part of the state to better serve those customers.

Okay. And lastly, is there any way you can quantify the cost saves that you'll generate from the opening of the redistribution center?

We certainly have internally done a good deal after analysis as to what we believe those benefits are. We are not comfortable talking about those benefits. It's going to be a ramp-up process that we will prove the concept, so to speak, as we move forward but we are confident there will be benefits not only for SYSCO but for our customers and suppliers, as we move through this process. It's going to be -- you know, those of you who have followed us for a long period of time and we began talking about our SYSCO uniform systems and how that was going to been fit our operation, but caution that we're going to see this occur over a period of time, and I think this, again, is going to be one of those instances.

And that will be fully open in the summer of 2004?

We begin the operational ramp up in the summer of 2004, and we will expect that initial ramp up to take three to six months.

Okay. Thanks a lot.

Thank you, Bill.

And Andrew Wolf of BB&T Capital Markets has our next question.

Good morning. I want to ask you about the gross margin. You know, you said Cerca is improving, yet the overall gross margin contracted a little more this quarter than last. I think that implies that the non-Cerca broad line gross margin expansion, you know, slowed sequentially. So when you -- when we look for explanations, was it more the gross margin, you know, you couldn't pass along the price increases or was there something going on competitively out there on the landscape or is there something else in it? Also when you talk about, you know, what you are looking for in terms of passing on inflated costs, when do you think you can begin to, you know, pass through the price increases you are getting now?

Andy, the slower gross margin improvement can be attributed to customer mix. So we have taken on, and as you know in the major -- in the corporate multi-unit business, you get that in big chunks so it has some impact in that regard, but all in all, we feel pretty good what the companies have done in terms of responding to the gross margin pressures out there that were the result of the change from deflation to inflation.

Yeah, I mean, from the competitive perspective, I think we -- we don't see a lot going on. You see some irrational pricing pop up throughout the country here and there, but it doesn't last long, and, you know, our companies again, respond appropriately to that. And as we've said before, we think that our gross margin expansion will not be as robust as it has been over the last several years but on the expense line, we are very encouraged by continued progress from our broad line companies, with Cerca, and frankly from our specialty companies also.

Okay. And just to follow up on, you know, this idea that, you know, you flipped pretty quickly that quarter, specifically from deflation to inflation, you know, in proteins and dairy, you know, was there a bigger impact in the quarter that it happens than, you know, let's say one or two quarters out, you know, when -- should we assume that there will be be some some margin lift because you've been able to pass on prices by then?

You know, in general, we would concur with your analysis. It's a little hard to find data points for all of that. And, of course, we'll'll be be able to answer your better in about six months. Yeah, I mean, I guess we're hopeful that we will continue to see margin management at the operating companies, pricing, good pricing policy, and, in fact, we -- we, as I said, we're watching that very closely and the companies have responded well.

And I just -- one more question is on the redistribution, and the expected benefits and I understand, you you are not yet ready to talk about that too much. But can you talk a little about where, you know, you expect the cost savings to come? Is it because you are currently buying a lot of product now through redistributors and just expect a pure -- to pay less because you are not paying their profit, or is it more in terms of rationalizing the supply chain.

This is John Stubblefield again, and we buy very little through redistributors so that's not a big issue for us. But what it will amount to is buying full truckloads of product from suppliers that we are not buying a full truckload by operating company from that supplier. So being able to aggregate demand to a supplier is certainly one point of saving.

The second is also having to do with the buy and that is being very -- very advantageous in terms of logistics and moving that product effectively from that supplier to the redistribution center for future delivery to our operating companies.

The second -- third part of that would also be the advantage that we can have in having that product then redelivered in the right pallet configuration to those operating companies to take costs out of those companies where today they have to handle that product as it comes into the door to be able to put it away and have it available for future selection. We also see that there's advantages in taking out of the whole supply chain from all the way back to the customer, actually, to the point of manufacturer inventory out of the system and that's going be to be a huge savings for the whole supply chain.

And then on top of that, being able to, as we've said earlier to postpone those expansion and facilities that today we have to continue to expand in order to -- to further serve our customers in those marketplaces.

Thank you.

And next we'll go to Mark Husson with Merrill Lynch.

Yeah, good morning. You said before that what you are seeing is in terms of sales growth going forward for the next couple of quarters is consistent with your overall guidance going forward. Could you give us a reminder of what that medium term guidance is in terms of likely sales breakdown.

It can't -- Mark, it's not medium term guidance. It's really comfort with our long-term goals that we have published and spoken about many times. That's high single digit real sales growth and we're -- we're comfortable with that number for the foreseeable future, you know, barring any geopolitical events or significant weather events.

This is John Stubblefield. Again, I think the important piece of that is from a macro sense and what is the food service economy going to do going forward? And Tom alluded to the fact that we believe that the industry is slightly negative to at least flat during this time period. We certainly look forward to the ongoing recovery, especially in the business travel and event-driven sort of segment of our business, which today is quite soft.

Okay. John, while you are there, when you look at the potential for one chain customer, if you were to gain one chain customer, can you talk us through some of the -- if and when we see such an announcement on the screen, can you talk us through the sort of economics of landing a big customer, even if it's at a low margin and how that impacts your operating ratios?

Well, Mark, this is Rick, I will let John answer that. First thing is you won't see an announcement from SYSCO about our gaining the customer. I'm sure you won't see the announcement from U.S. losing the customer. I guess there are a couple of things and, again, I will let John answer your question, but when we -- a large customer moves from one distributor to the other, it takes a while. It takes a number of months to make sure the systems under place, that we've got the people hired, we have the inventory in the warehouses, so it does take a while and there are some start-up costs associated with that on our side and on the part of the customer. So I don't know what the -- I don't know if we can put a definite number on that, but --

No, it's very difficult to do that. And Rick did a nice job, Mark of answering the question. I think the only other piece to that is, is that some of those large customers may well be served by our Sigma division, and some of those large customers might well be served by our traditional broad line companies. So I think it's the mix of how those companies come together in terms of determining what that ultimate impact initial costs and long-term benefit might be. Sigma, as you well know, doesn't have excess capacity out there, so it's an incremental leasing of warehouses, securing of logistics equipment and hiring and training of the people, where on the broad line side, it might well be a bit more -- or a bit less incremental in terms of the initial start-up expense.

But we -- Mark, I think you realize we know our customer profitability, better today than we ever have and we are being very, very, careful, as I said in the close to my comments. We're not going to chew up capacity and we're not going to disappoint our existing customers. That's our main focus and we think that's a strategy that's working well or us right now.

If I could ask -- because obviously, Ameriserve went and you had a lot of loose capacity there that needed you desperately and you were able to price that accordingly. I guess the customers are a little bit more cagey about pricing and so on or is it it just a little more -- are they just interested in capacity than price.

Actually if you go back to Ameriserve, we went after and picked up very little of that business. It was not business that we particularly wanted. So as a capacity there is at some point a capacity problem. You don't take a distributor of that size out of the marketplace and not have capacity problems but there's also an expectation of what price it's going to be on a per case or percentage basis, and how profitable can that be for a distributor.

And the other thing we need to keep in mind, Mark, since you brought it up, Ameriserve went bankrupt three and a half years ago, I believe. At the end of December 2002, MDS, Marriott Distribution Services, exited the distribution business also. Although U.S. food services has not gone out of business, this is the third major signal in the industry that, you know, you really do have to pay an appropriate amount of -- to have your groceries delivered and I think that's the message getting through to the customers.

One final question if I may, John. Are there any random numbers in the quarter in terms of, you know, insurance costs or benefits or any sort of one-offings we ought to know about?

Nothing of any any significance, Mark.

Okay. Great. Thanks very much.

Thank you.

And Jeff Omohundro with Wachovia Securities has our next question.

Yes, good morning. My question relates to supply chain efficiencies. I wonder if you could touch on SKU count management over the last year. I know a few years ago that was an effort to see some reduction in that. And also, in terms of SYSCO brand, how has the pace of new product development been there and has there been a change?

I'll answer the second part of your question, Jeff, and in terms of SYSCO brand, development, one of the things that happens, almost like bringing on large customer is that you bring on a large program, for instance two years ago, we introduced Our Butchers Block Box Beef program, and as you might imagine, the dollars associated with that are quite large. So it drove SYSCO brand increases pretty significantly for a couple of years. So we're fighting against those numbers a little bit right now; although, we have good R&D going on. The products departments downstairs are doing very, very well.

We've introduced a couple of new brands one is a vegetarian brand, particularly targeted to schools and colleges and hospitals. Another is a Mediterranean brand, Mediterranean cuisine. It is a Mediterranean brand, but, those, even with those introductions, they are not of the mass or the size that Butcher's Block would be. But, still, great work going on in the merchandising area, developing new products, looking at new opportunities.

This is a business that changes rapidly. You've got -- frankly, you've got consumers who are very -- what's the word I'm looking for? Fickle? Fickle. Fickle. And they continually change what they are demanding in the marketplace. So our folks with those 8,000 marketing associates on the streets respond well. They send messages back in here in terms of what's needed by our customers and merchandising develops those products needed for the market.

Jeff, let me answer the SKU question. We did have an initiative several years ago that actually continues perhaps a little bit lower profile and we did make some small incremental improvements. However, as I've spoken to industry groups before, I've talked about our system is probably a little bit messier in that a lot of local controls or operating companies, and, again that's from being close to our customers, and we're trying to make sure that we have the products that our customers need, as opposed to being dictatorial about what -- you know what our operating companies will stock. So probably, you never get to Utopia in terms of the product mix that you carry, but it continues to be a focus because we know that there's a cost continued with stocking the products.

Very good. Thank you.

And Eric Larson with Piper Jaffray has our next question.

Good morning, everyone.

Good morning, Eric.

I know this is maybe a difficult exercise to do, but, you know, your expense ratios in the quarter were really actually a lot better than I would actually have thought which is a compliment to your operations. Is there any way to quantify what the impact of weather may have had on, how good could your ratios have been in the quarter, without some of the major events.

You know, I will concur with you that we were very very pleased with our expense opportunities in the quarter, particularly in light of the weather issues because typically if you look at what it costs to ship a case or a truck, whichever it may be, in weather events when you are not -- when you are shipping it and bringing it back because the customer closed early or didn't open or whatever, is a multiple of what it costs to go out, so I think -- actually, I'm very proud that we were able to do the expense work we could given the weather.

Yeah. No, it was -- it was quite impressive. The -- the other question I have is your -- your year-over-year ratios of sales by marketing associates, I think has declined in every one of your quarters this fiscal year. I'm assuming that's just because of the blend of acquisitions would that be be the explanation for that?

That's certainly part of it. The other part is that as Rick spoke to earlier, you know when you bring on some of these non-MA served customers they are of a size that could impact the mix for a short period of time, but your analysis is accurate; however, I will say that our emphasis and our belief is that we will continue to grow that MA served segment of our customers at a faster rate than the overall growth rate. Again, from time to time we may get that going a different direction, but we will bring it back to the right mix.

Okay. Thank you everyone.

Thank you, Eric.

And Mitchell Speiser of Lehman Brothers has our next question.

Thanks. Good morning. A couple of questions. First, John, I think you mentioned that the industry is generally soft. I was wondering if you rank, kind of what is the strongest business at this point in time, and kind of what is the weakest in terms of any multi-unit street and then maybe get into the contract feeders, and maybe even hotels and stuff.

I would -- I would say in general, the biggest impact is in the midrange restaurant business, the fast casual, the family dining, that business is quite good. As you might expect, although a small percentage of our total sales, our military business has been very good. B & I business, our hospital business, nursing home business, all of those are -- continue to be very strong. So -- so most of the categories, I would say, were -- were in good shape, and we have picked up some fairly significant amounts of corporate multi unit business.

The couple of areas where we -- you know, as John alluded to earlier, anything associated with travel today has been somewhat soft. And then the QSR segment has been -- I'm sure you saw the Wendy's numbers. The QSR segment has been somewhat soft also.

So by and large, it's kind of nice to have a broad base of customers, as we do, because when one segment suffers a little bit of a tilt, we pick it up in another area. So we're realizing nice sales growth because of the variety of business we're in.

Great. And also can you give us a sense of what the days sales outstanding were for inventories and accounts receivable?

Well, depends on how you calculate them and the reason I say that is because we have an internal calculation that we use here, which uses rolling five weeks, which I'm not comfortable sharing with that audience, because the -- it's a non-GAAP measure, and I would have to provide you with some sort of table of reconciliation, which is -- however, using traditional financial measures, which is for inventories using cost of goods sold, I would say that -- if I put my reading glasses on, it looks like inventory DSOs were down from 22.7 in December, to 22.2. So down half a day. It looks like accounts payables were up to 26.9 from 25.14, and accounts receivables looked like they're up 27.7 from 26.9.

So two out of three are going in the right direction. The third one, receivables we've talked about in the past is changing the customer mix causing that to go up, but, again, we're very comfortable with the credit quality of our people.

I would just add, I think the performance of the operating companies really improved this quarter over last quarter. As we discussed last quarter, we did see a little bit of an increase in our DSO, particularly in inventory. I think they've done a great job this quarter and as Rick enumerated a while ago, significantly contributed to a better cash flow performance this quarter.

Great. Just lastly, can you give us a sense of what higher year-over-year gas prices, how much that might have impacted margins in basis points?

Yes. Fuel -- fuel for this quarter as a percent of sales for broad line companies is .37% of sales that was up about 6 basis points over over last year so we've done a very good job of continuing to manage our -- our deliveries, even though we have seen a fairly significant increase in fuel costs on a per gallon basis.

Our revenue efficiencies and pieces per trip have been able to keep that down to 6 basis points.

Have you seen gas prices begun to come down year overyear yet?

Yes we have begun to see week-over-week declines in fuel pricing, so that our anticipation for the rest of the quarter is that we'll see, you know, back on par with where we were a year ago in terms of overall fuel prices.

Thank you.

And from Credit Suisse First Boston, our next question comes from Jack Murphy.

Thanks. Just want to revisit the inflation for just a minute. As you look into the current quarter that you've begun, to what extent do you expect continued sort of reinflation compared to the prior quarter? And, you know, if you expect that, do you also see continued pressure on the gross margin from that reinflation?

What we believe, looking in the near term is that these prices will probably hold in this range, in terms of something around a 1% inflation. We also believe that once that has stabilized then, again, our -- our pricing competency will allow us to manage that very well.

Okay. And one last question, just on the RDC rollout. Could you tell us what type of inventory working capital investment might be involved there, and should we -- is there anything in the coming quarters we should look for in terms of incremental inventory work, capital investment?

We are not prepared yet to start talking about those specifics; however, I will say that once we begin the ramp up, that we will see a -- a short-term increase in inventories as we make sure that we don't put ourselves to ever disappoint our customers. So we will see in the short term a ramp up of inventory as we fill that redistribution center and we begin working down the inventories that exist in the operating companies, but in the medium and longer term are certainly a reduction in inventory.

Okay. Thanks.

And Bob Cummings of Shelton and Company has our next question.

Good morning, everybody.

Good morning, Bob.

I wanted to follow up a little bit on Cerca. Obviously relative to other broad line acquisitions, this was a very large one. Is it possible over time that your margins there, I mean not just gross margins but, say, EBIT margins can get up to the level of your U.S. broad line distribution system? Or are there just inherent differences in their business that make that unlikely? And secondly, how much growth potential is there? Is Canada as fragmented as the United States in terms of distribution? What kind of market share do you have now in Canada and how do you see growth opportunities there?

It -- we would like to think that our gross profit in Canada could approach where we are in the U.S. I think there's probably a higher percentage of multi-unit business there that will keep us from being exactly comparable but I think we can come pretty close. The business is probably not as fragmented as it is in the U.S. and -- but we do see a reasonable economy. I think that there have been some quarters here recently where their economy is growing faster than our economy has grown. So we continue to be very bullish about our prospects in Canada.

And at the EBIT line, Bob, I would say that we think, again, that we -- we can get comparable to the U.S. It will take a number of years. You know, we're starting at a low base there, seeing nice improvement. We've modeled in continued nice improvement. So we may not get all the way there but we'll get pretty close.

Our share in Canada is actually higher than in the U.S. We have about a 20 share in Canada, as as opposed to the U.S. where we have 12, 13 share but there's still enormous opportunities and it's a -- you know, there are certain pockets there in Canada that are really nice food service markets and I would highlight Vancouver, Montreal, certainly Toronto, even Halifax, Calgary, on and on -- I mean, they just have some great food service markets in the country. So we're very encouraged by -- by what we've seen up there, particularly the personnel that came with the acquisition, the management team and all the other good folks at Cerca, just outstanding individuals.

Great. Thanks. That's very helpful.

And our last question for today will be be from Steve Schick with JP Morgan Chase.

All right. Thanks. A couple of questions. I was -- I was wondering as you look into, I guess, the next quarter with having cycled through Cerca, can you give us a sense of the acquisitions that you've done to date that will be be in that quarter. What type of growth rate do you expect, assuming no other ones are completed? For the fourth quarter?

Steve, you're asking for the actual for this quarter, what the growth from acquisitions will be for fourth quarter this year?

Right. I mean, did you 7.3, and I think given what you've announced, it looks like it could be be in the area just above 2. Is that safe to say?

Is it -- it's about two, yes. Did you say just above two?

I said -- yes.

Just above two, that's right.

Yeah, between 2 and 3%.

Okay. And second, in your press release, just the weekly -- the record sales that you earned for that week, the 536 million, I think you're comparing that against the record week, it looks like from March 8th, and it might be interesting to know what the year over year growth rate was for that week being the first week of the fourth quarter. Do you have that handy?

Yeah, we have it handy but we don't give out that information on a weekly basis.

Okay. All right. Thought I would try.

We were proud of it, though. [ LAUGHTER ]

And then, last, if -- can you comment -- have you see any changes from U.S. Food Service competitively, I guess, as they go through their investigation, obviously, they are struggling. Have you seen any changes as -- you know, within the marketplace from their standpoint, whether it be, you know, sales force attention or pricing?

From our standpoint, they've been a strange competitor for quite a while, and so I think it may have changed a little bit, but I think they've -- they have a different agenda than what we are, in terms of our approach to taking care of customers.

We don't want to pick on our competition, but they have sun significant disadvantage and that is that they don't have one enterprise-wide system. They are on a number of different systems out there. As we plug in things -- I talk positively now about SYSCO , but as we plug in SOS and our SWIM system and our transportation systems, that's -- that's so much easier for us today. It is consistent across organization.

And then our ability to get great data across the company. We drilled down this morning and find out what happened, what shipped in our operating companies last night. We know the gross margins by case. We know where we have deviations, et cetera. That kind of data just gives you a lot of decision-making power. So, you know, not to -- not to pick on anybody else, but just to say that we feel good about where we are positioned in general in terms of our technology and our people and the industry, in fact, we feel good about the industry.

Right. No, I understand. That but I mean, as you're getting inquiries from their customers I'm wondering if you are seeing any -- you know, if they are trying to struggle to keep the customers with them, or getting a bit more irrational at all?

Wouldn't you, Steve?

Yeah. Okay. I guess that answers it. If I could, one last since I'm the last question here, do you a sense -- what percentage of your sales or business is within the markets that were impacted by weather, the East Coast and the Midwest. Do you have that percentage handy?

We don't have a percentage. But if you ballpark, it it's probably a third to -- to --

I would say 40%.

I would say 40% to -- anywhere from a third to 40% of our marketplaces.

When you hit the East Coast all the way from Carolinas, up to Maine that's a lot of people.

The Midwest had a lot of real cold weather, even though they didn't have the snowfall. I think a pretty wide spread impact across our business.

Okay. Thanks.

Sure.

Thank you.

And that concludes our question-and-answer session. I will turn the call over to Mr. Schneiders for any additional or closing remarks.

Thank you, operator and thank you all for calling in. As I said just a couple of minutes ago, in regards to Steve's question, we feel very good about where SYSCO is positioned today. We feel great about our people. We feel great about our systems. And, in fact, although we all recognize we're in difficult times, we feel very good about this industry. It's going to continue to grow in the long term, and as I said, we're positioned to take advantage of that growth. So thank you all for calling.

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