西斯柯 (SYY) 2003 Q4 法說會逐字稿

Good day, everyone, and welcome to today's Sysco Corporation's fourth 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'd like to turn the call over to Mr. John Palizza, Assistant Treasurer. Please go ahead, sir.

Thank you Greg. I'd like to add my welcome to everyone for joining the SYSCO Corporation conference call for the fourth quarter of our fiscal year 2003. With me here today are Richard Schnieders, our Chairman and Chief Executive Officer, Thomas Lankford, our President and Chief Operating Officer, John Stubblefield, Executive Vice President of finance and administration and Diane Day Sanders, Vice President and Treasurer.

On the call today I will give everyone a quick snapshot of the quarter and year together with some of the SYSCO quarterly data we supplied to help you understand our business. Tom Lankford will then cover our operating performance during the quarter and Rick Schnieders will discuss cash flow increases, progress on our national supply chain initiative and moderate 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, our management's intentions, hopes, beliefs, expectations or predictions for 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 filings including, but not limited to, the annual report on form 10-K for the fiscal year ended June 29, 2002.

Further, during the call today we will discuss real sales growth which may be a non-GAAP financial measure under the Securities and Exchange Commission regulation. We define real sales growth as total sales growth less noncomparable acquisitions and adjust it for inflation or deflation. The reconciliation of real sales growth and total sales growth is contained in our press release issued earlier today which can be found on our website at www.SYSCO.com.

I have one other housekeeping item to cover before we get to the substance of the conference call. Sysco's analyst field trip will be held on January 15 and 16, 2004 in Houston, Texas. This year in addition to management presentations we will be visiting the annual SYSCO merchandising show where our suppliers meet with our merchandisers to showcase new products and promotions. It is a great opportunity to get a sense of the size and scope of the SYSCO merchandising effort as well as an opportunity to meet some of our suppliers and get their view of SYSCO.

We will be sending out invitations in September but mark your calendars now. Again, the dates are January 15th and 16th, 2004.

Now let me turn to our fourth-quarter results. The quarter can be summarized as one of good steady progress in sales, gross profit margins and expense control. Sales in the quarter were up a total of 10.5 percent over last year's fourth-quarter. Within that number real sales were up 6.1 percent while sales from acquisitions contributed 1.9 percent, and inflation increased 2.5 percent.

Sales from acquisitions consisted of Abbott Foods, (indiscernible), Asian Foods the Denver distribution facility acquired from Marriott foodservices and the meat cutting operations of Colorado Box Beef now known as (indiscernible) Head Beef of Florida. You'll note that the contribution from sales due to acquisitions is considerably lower this quarter that it was last quarter when it was 7.3 percent.

This is because the former SERCA companies which were acquired April 1, 2002, were fully comparable for the entire fourth-quarter of 2003. During the quarter, we continued to see inflation with inflation for the quarter rising at the rate of 2.5 percent. Inflation was principally in the categories of meat, poultry, canned an dry goods, and paper and disposables. Rate of inflation rose throughout the quarter and we continue to see it trend upward.

Gross profit margins declined slightly down 10 basis points from the same quarter a year ago more than offset by excellent expense control. The result was net earnings of $242.7 million, an increase of 17.9 percent over the fourth quarter of 2002. Earnings per share on a fully diluted basis rose to 37 cents -- up 19.3 percent from a year ago.

For the full fiscal year, 2003 earnings were $778.3 million -- up 14.5 percent over the previous year. And on a fully diluted basis earnings per share were $1.18, an increase of 16.8 percent. For the quarter in terms of sales broken out by our reporting segment, Broadline foodservice was up 9.6 percent, Sigma rose 9.6 percent and our other categories -- consisting principally of specialty meat, (indiscernible) guest supply and Asian Foods was up 25.9 percent.

During the quarter, as part of our ongoing share repurchase program, we repurchased 3.5 million shares. At quarter end, we had 9.1 million shares remaining on our share repurchase authorization.

Total debt at the end of the quarter stood at $1.372 billion, consisting of $101.8 million of short-term debt, 20.9 million current portion of long-term debt and $1.249 billion of long-term debt. Approximately 88 percent of our debt was at fixed rates and 12 percent was at floating rates. Our long-term debt to total capital ratios stood at 36.2 percent, in line with our stated target range of 35 to 40 percent. In addition, we closed the quarter with $337.4 million of cash on the balance sheet.

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

Thank you John. Let me continue on the theme of strong steady growth during the quarter. Sales were very consistent throughout the period with all but 2 weeks in the quarter showing total sales gains of over 10 percent compared with same period a year ago. Similarly, real sales gains during the quarter were also very consistent with mostly registering gains of seven percent or better also compared to the same period a year ago. The largest drag on a real sales gain was inflation which began the quarter at .83 percent and rose to 2.52 percent at the end of the quarter.

Let me turn now to the issue of gross profit margins. Gross profit margins for the quarter declined 10 basis points versus last year's comparable period to 19.33 percent. This small decline can be explained by three factors -- customer mix, product mix and inflation.

With respect to customer mix, our corporate multiunit local contract sales grew faster than our marketing associate (indiscernible) sales. This is not to (indiscernible) grow at a healthy rate. In fact, they increased at a rate of 8.7 percent. However multiunit and contractual customers tend to come in larger increments. They can impact your growth profit margins for a short period after they come online.

With respect to the product mix we saw some impact due to our fresh cut meat operations. There are two factors at work here. First, the fresh cut meat is a higher dollar lower gross profit percentage product. As it grows as a percentage of the sales mix, as it did in the fourth quarter, there's an impact on gross profit margin percentages. Although gross profit dollars are increasing nicely.

Secondly, fresh cut meats saw a large price -- rise in pricing in the quarter. Although we worked very hard to maintain our dollars per pound of gross profit, because we had a higher cost of goods the gross profit as a percentage of the sales dropped.

Total operating expenses as a percent of sales showed an excellent performance -- declining 50 basis points in the quarter to 14 percent. Here we saw very good performance by our Broadline operating companies. Our key expense trend in metrics continued to show us making good progress on working more efficiently and effectively. Our (indiscernible) stock and line items per stock both continue to show incremental gains which means we're selling more to each customer every time we made a delivery to them and we are penetrating that customers' menus will more products.

The operating companies are making good use of best practices, where sharing a knowledge between companies is a key component in raising the level of performance in all companies. Smaller contributors to the outstanding operating expense performance was corporate expenses. These adjustments occur every quarter and involve a variety of non operating charges of the credit. The end result was as a percent of sales corporate expenses contributed 8 basis points of our total 50 basis point decline in expense ratio.

At this point, I'd like to turn the microphone over to Rick Schnieders -- our Chairman and CEO.

First and foremost as I do every quarter I'd like to personally thank our 47,000 associates across SYSCO for a terrific performance. Our mission is to help our customers succeed and when we do that, we will also be successful. I think the quarter shows that tougher sales comparisons are not an impediment to real growth.

We have a relatively small share of 13 percent in a large and growing market. There's plenty of business out there so tougher sales comparisons are not an excuse.

Next I'd like to address cash flows from operations. Earnings are great, but it takes cash to run a business. During the quarter, cash from operating activities was a strong 488 million and was 1.37 billion for the year. Our working capital continues to show nice improvement. Inventories were down, compared to the third quarter of the year even though we had strong sales performance with a source of 46.6 million of cash flow.

Accounts Payable also showed a nice improvement, accounting for 84.8 million of cash flow in the fourth quarter. Accounts receivable were up modestly over the third quarter and the largest impact on our receivables line relates to our business with contractors that serve the military. As anyone knows who has done business with the government and its contractors, payments are slower than the private sector and they can be larger and lumpier when paid.

In fact, almost all of those longer dated receivables were collected during the month of July.

The deferred tax provision for fiscal 2003 was 481 -- 481 million of which 161 million was in the fourth quarter as we continue to realize the benefits of the reorganization of our supply chain. Beginning in fiscal 2004 we will begin to pay some of the previously deferred taxes and, therefore, the cash flow going forward will be less although we expect it to be incrementally positive on an annual basis.

At this point, as long as I'm discussing our (indiscernible ) accounting issues, I'd like to address our pension obligation and its impact on our fiscal year 2003 financial statements.

During the year, we made cash contributions to our pension plan of $160 million -- an increase of $80 million over fiscal 2002. The combination of the performance of the equity markets and lower bond yields leading to our use of the lower discount rate for value in the pension liability were such that at the end of the year we recorded a non-cash charge against shareholders equity in the line item entitled "Other Comprehensive Loss" and the amount was 119.7 million.

As we do at the end of every fiscal year we reexamined the assumptions surrounding our pension accounting. We've lowered our assumptions for expected rate of long-term return to 9 percent from 9 1/2 and the discount rate we use was 7 percent from 7 1/4. We anticipate that this change in assumptions will result in our cash contributions to the pension plan during the fiscal year remaining at the same level as it was during '03.

We continue to invest strategically to grow the business. Capital expenditures for fiscal '03 were 436 million. Our estimate for total CapEx for the current fiscal year is $490--$510 million. Our national supply chain initiative will be a key part of our investment spending in 2004. The Northeast redistribution centers currently under construction there (indiscernible) Virginia with structural steel now being erected and walls being tilted up. I was there a couple of weeks ago and it's indeed an impressive facility.

We estimate the completion in the summer of 2004 for this first redistribution center.

During the fourth quarter expenses related to our national supply chain project totaled 7.1 million while for the entire year expenses were $21.4 million.

I'd like now to talk about SYSCO's priorities for use of cash. We firmly believe that after we have prudently grown the Company by internal means and through selective acquisitions we should return excess cash to the shareholders. We do this both through our dividends and our share repurchase program.

Our dividend payout last fiscal year was 262 million or 33.7 percent in net earnings. We supplement that with our share repurchase program which last year totaled $478 million. Dividends and share repurchases combined last fiscal year were 740 million or 95 percent of net earnings. In fact, over the last five years, we've returned to shareholders $2.69 billion -- $921 million in the form of dividends and 1.77 billion in the form of share repurchases. This was 94 percent of net earnings over that period.

Let me finish up by saying that we continue to be convinced that we're in a terrific industry that is growing the creativity of the restaurant and foodservice operators with whom we work on a daily basis, is a constant source of energy and creativity for us and we're excited about our ability to continue to grow. We want to only ask one thing of you, go out and eat in a restaurant near you. It's fun and it's also good for our business.

With that, I'd like to start the question-and-answer session. Operator, we will now take questions.

Thank you. Our question-and-answer session will be conducted electronically. To queue up for questions today please press the star key followed by the digit 1 on your touchtone telephone. And as a reminder, if you are on a speakerphone please make sure that your mute function is turned off to allow your signal to reach our equipment. (CALLER INSTRUCTIONS) We will pause for just a moment. John Heinbockel with Goldman Sachs.

Couple things just on the real growth. Based on your mid quarter update it just looked like real growth slowed in the back half of the year to some number. I'm not sure what the breakout is between first half and second half, but what am I missing if that is not the case and if it was the case, what drove that? Was that a tough week or 2, weather factored -- where are you guys generally running now?

We don't give any guidance in terms of where we are today in the quarter or where we think the quarter will be, but your analysis is essentially correct. I guess one thing that I would point out and for those of you who have followed SYSCO for a while -- over the last three or four years -- periodically we have reviewed those customers that are less than profitable if I should say it that way and we have been over the last couple of months being more stringent about that and making sure that our operating companies are indeed addressing those issues where we have customers that essentially can never be profitable in our system and so I think that there might be some impact from that. It's not a huge number, but in our business with inflation, we give the inflation numbers, the growth, there's so many moving parts that pinpointing one part of the quarter is a little bit difficult to tell. I'll just stand by my statement that I ended up with in my comments and that is we feel great about this business. We see no trend change in terms of eating out. With all we've been through as a nation over the last couple of years, we continue to see the rate of eating out improving.

We see good vitality in most sectors of our business, most segments of our business, so we we're very very optimistic, John.

I mean (indiscernible) continue to take share from food and home -- we know that -- and you're going to gain share within that. I just wanted to -- as you know I am a little concerned about the comparisons getting tougher and what would happen to the real growth even if the two-year numbers help up and -- but not, certainly not concerned about the fundamentals of the business. So any slow down you think was kind of self-induced and I guess that will be with you for a little while until you cycle culling some of these customers -- is that fair?

Yes I think that's right. Again I would say that's pretty modest -- almost hard to measure, various factors out there whether it might be a slight timing issue when a holiday hits a quarter, those kind of things all have an impact also. So in terms of our real sales growth, we're comfortable with that. When we look at cases, when we look at pieces growing, we're very comfortable and, frankly, positive about the activity that we see out there and our ability I think Tom -- in Tom's comments he talked about our pieces per stock (ph) and we're seeing pieces per stock growth which is a good measure of the business at the restaurant level. So we're, again, all the trends are very favorable.

Just one final thing on that, is the math if I take the first half and kind of weight it and take the back half which was the last seven weeks I kind of get a number five maybe 5 to 5 plus in real growth. Am I doing anything wrong in getting to those numbers or am I missing something?

I am going to point the microphone to John Stubblefield.

Yes, Rick, let me tell you a couple of things regarding our sales growth. First of all look at the top line and you will see that our topline was very consistent throughout the year in terms of growth and we did have this pretty significant fall off in terms of acquisitions in the fourth quarter and also point to the fact that if you look at a real sales growth for the period ending June 28 -- actually stronger than the period in the March the 29 so we actually have a slight pickup there. One of the impacts for the quarter clearly was the inflation piece of it. We saw inflation trend upwards in the quarter -- during the whole quarter -- and that will influence your analysis that you just spoke to, and you certainly made a good point is that the real sales growth numbers that were going against last year continued to rise through the year. In fact, this same quarter last year, real sales growth was 5.2 percent so I think I take great heart in the fact that we're able to grow over six percent real sales growth on five percent plus real sales growth last year. So as Rick said I think we're (indiscernible) encouraged and optimistic about the trends in the business.

Okay and finally where do you guys stand with SERCA in terms of immigration and what type of contribution -- what impact did SERCA half (indiscernible) full quarter, topline margin just generally -- what progress are you making, what impact might it have had?

Let me start. I'll do this real quick and then I will have Tom make operational comments. But we're very pleased with the integration as we have said before. Our primary thrust or the first thrust was going to be SYSCO brand and the product is being not only accepted but welcomed with open arms across Canada from St. John's all the way to Vancouver Island, it's just been very gratifying. So we're pleased with that.

The operational improvement, that the people are absolutely wonderful, the folks that have joined us from SERCA, we have good facilities. So we're very encouraged by that. It's still in the grand scheme of things a relatively small number but I will tell you that they continue to make progress at every line on the income statement. Tom -- do you want to add anything?

John, first of all they are behaving exactly as we hoped they would. What we found in Canada in general was that there was a higher percentage of chain business and we oriented them to spending a lot of time and effort putting up their street business and so you see exactly what you would expect. You'd see their margins rise, we would also see the level of expense rise as a result of that investment, but the net of the two figures is very positive. We have introduced SYSCO brand there and it's been greatly excepted. It's been a real success story for us and it's interesting when we first started -- introduced it (indiscernible) sell it and after a month or two customers were writing about us and so the customers actually sold more than I think (indiscernible) had a big impact by growing our brand there, growing our people. We've been doing a lot of training (indiscernible) so we're extremely enthused about (indiscernible) (inaudible).

Do you hope margins can get to SYSCO levels at some period in time.

Over time (indiscernible) (inaudible).

Mark Husson with Merrill Lynch.

Good morning. Couple of questions. I am sorry to go on about the sales line again, but I mean in the past your measurement of inflation in real sales growth has been (indiscernible) interesting quarter by quarter. And this one as John was saying, I don't know if you've got the sort of full thrust of what the street is worried about here, it look like inflation in the first bit was almost nothing, second bit was five percent and real was something over seven and then decelerating something below five percent. Can you -- are you really confident that you can split out inflation from real? And are we right in assuming you work out inflation first and other real bid is a residual number?

This is John Stubblefield. That is exactly right as how we bill back to the numbers you know -- it's internally generated estimate. We think it is reasonably accurate. Our methodology is being used over a pretty significant period of time and it's applied consistently throughout. So I think our confidence level is high, that it is a good benchmark for the market.

All right. Mark, I would add to what I said earlier and that is when we look at our pieces grow, the challenge we have sometimes is, if you have a mix shift so if we have more meat being sold that may impact that inflation number. When we look at our actual pieces number we don't see quite the amount of the inflation that we do when we look at the dollars. So as I mentioned before, there are a lot of moving parts to this business and, I guess in the end, the other thing is is a very important number but it's the topline number that you end up multiplying to get the earnings.

So backing from what you just said if the pieces you are seeing not as much inflation as you do when you look at the dollars it means that on the pieces you're seeing are more real than if you look at the dollars?

Yes, I mean again that is interpretation and I would agree with you and again may reflect some mix change in our business. The dollar number doesn't adequately measure.

Now that SERCA has cycled is that big enough to have an impact on the sales line, real inflation or not?

No, it doesn't. I will tell you the growth rate in Canada is slightly higher than it is in the U.S. We are encouraged by that. Again there is kind of that welcoming of the SYSCO story in Canada but it does not have a huge impact on the total sales growth number.

The other thing is that you had said when you bring new customers online is they sometimes come on a little bit less profitable because of the cost of integration and so on. You have been a bit cautious in talking about new customers as a result of the (indiscernible) (indiscernible) checkout, the numbers are up by what now, 2 percent -- can you talk now about what business you may have won in the last quarter or so from that source or from general business wins?

I can't name a significant account that would've come from U.S. (indiscernible) in the San Francisco Bay Area -- it is just a little bit here and there more (indiscernible) $5 or $10 million customers that can make a decision (indiscernible) moving their business.

We picked up some more -- again like Tom said -- it is not a huge number, but we they got some bits and pieces. We picked up some additional Applebee's business in various parts of the country. Most of which you don't see the numbers on yet. And that's coming through SYGMA, but that is just kind of general here and it's not big names that anyone would recognize.

You still have a significant sales person recruitment drive from the industry in general, maybe (indiscernible) specifically?

We generally don't recruit from the industry per se. Our doors are open to applicants. We got a pretty refined methodology of hiring marketing associates and in certain areas of the country, we get a lot of calls and I think there is an ongoing -- when I talk to presidents they've all seen the hard 1,2,3 market associates from U.S. Foodservice but again we're not out there targeting them more than they're calling us.

I guess the other thing that we're, Mark, and I guess this is clear too, but we're not waiting for our competitors to have problems. The strategies that we continue to deploy -- our long-term strategies, taking care of our customers, adding value added services, building the SYSCO brand. And so there certainly has been some impact from the problems that U.S. Foodservice has suffered but that's not part of our strategy. We're different company then they are, we operate differently than they do, and so we are staying right with our original message and our original game plan.

Eric Larson with Piper Jaffray.

Good morning, everyone. Could you -- this is more of an industry question, but maybe it relates into some of questions on your revenue line that may have impacted the second half of your quarter, but the good (indiscernible) you and maybe performance continue to do very well, but all of the manufacturers' suppliers are showing softness, weakness, declining volumes, declining profitability in the industry. Is there something going on in inventory adjustments or something that would explain the weakness on the suppliers' side?

It might get quiet on this end of the line because of course we read that too and I am not sure that we have a good answer for you, Eric. It's certainly a valid question. One of the things that we continually have done going back 20 or 25 years now is to work with a lot of smaller suppliers. In fact, a lot of innovation tends to come from the smaller suppliers and they also on average tend to provide a higher percentage of SYSCO brand product for us. So those customers -- sorry the suppliers that work closely with us on their products and on the SYSCO brand product I think are continuing to do quite well and appreciative of their relationship of SYSCO.

Anecdotally, we do talk to (indiscernible) a lot of our suppliers on a regular basis as it's very important to us and quite a few of them have stated that our growth was most of the growth they've had so that would seem to tie in a little bit with your comments.

It's been striking across the entire supplier side whether they're large or whether they're small. Final question I have you have always kind of said you believe that you can grow your earnings annually 15 to 20 percent. Is that still what you would say, going forward here?

Yes, absolutely, and -- .

Excuse me, Rick -- what we said is we expect to have real sales growth in that mid single digits real and that, through various strategies, we believe we can leverage that five to seven percentage points to its earnings per-share growth.

okay.

But if you do those numbers -- I will go back to -- and we're going to do the year this year is going to be right at 15 percent. If you do those numbers -- the 20 percent might be on the high end but we're still comfortable with certainly in the mid teens. So yes.

Mitchell Speiser with Lehman Brothers.

A few questions. First on the food cost inflation you did mention that you did have to absorb some of the increases during the quarter. I was wondering if that was due to timing? If it had to do that dollar markup vs. percent markup, how that played into it? And just going forward how confident you feel that you can pass on cost increases in the form of pricing to maintain the percent margin and then a couple of follow-ups. Thank you.

This is Tom Lankford and I will take the first part of this. Normally, if we look at it we see inflation in a normal year in a 1 to 2 percent range over the course of a year. In our systems, you can pretty easily assimilate that as you go along. When you have that where we've gone from less than a percent to 2 1/2 percent in one quarter, it's just a little faster than you can take in. Part of it is just the fact that it's coming faster and the other part of it is just so much of it has been meat (ph) what you see is there. As I talked about in my remarks it's a matter of pricing per pound and trying to recover from that. So I don't think that in normal circumstances we have any problems working through it.

It's very difficult to segment out that part that is a compression of the margins because of the pricing that on the pound per basis let's say instead of a percentage basis so as those costs rise, you don't have the opportunity to make the same growth margin percentage (indiscernible) so it's very difficult to segment out the impacts of what that might be.

One other follow-up to that is when you look at our street or territory business, very little of that is contractual. And even our contractual business, almost all of that is more than 30 days long (indiscernible) seven days so it's not like we're committed for long periods of time.

Great and also can you talk about within your existing account base, how much you compete head-to-head with U.S. Foodservice on? And if you had you think increased your share within existing accounts, vis a vis, U.S. Foodservice?

I'll take a crack at that. How I try to explain that is as the second largest distributor out there, obviously, we see them pretty much across the United States and so they've got almost as many locations out there as we do although they seem to be concentrated in certain cities, but the market they're competing for accounts, they are certainly a factor. Once an account makes a choice of their main broad line distributor, usually it's one or the other of us and then the real competition within the account is more of a myriad of small specialty distributors as opposed to the U.S.'s (indiscernible).

Mark, specific to your question we can't tell you how many or whatever our customers necessarily are also buying from U.S. and if you look at our share gain I think we will all agree that we do continue to have share gain that it comes I would say some from U.S. but also from many of those smaller and specialty distributors that are out there.

One small measure we do have and we continue to work on this metric but that's lines per stop and our lines per stop are growing now. That means we're getting more individual items in our individual customers and it's at the highest point that it's ever been. So, again, one small measure as I said we've got so many moving parts but I think that is indicative of the progress that we're making and those line gains are gains that are important because you continue to get that business even when the restaurant business might tail off a little bit.

So having additional lines in the customer is another good share measure within that individual customer.

That (indiscernible) extremely important measure that may be hard to communicate over a phone in terms of the confidence that the customers have in us.

Great, and just moving along. On the pension side, last year in your first quarter 10-Q, you mentioned that I believe it was given adjustments in your pension fund accounting, it would be about 5 million per quarter of an expense. And that's incremental, I believe that was last year. Was wondering if you can give us an update on how these pension lot adjustments may affect your quarterly or annual earnings for fiscal '04?

This is John Stubblefield again -- I had misheard when Rick was giving his opening comments. I just want to clarify the discount rates that we're using for fiscal 2004 is going from 7 1/4 percent to 6 percent and as you will know, that is the biggest driving factor in terms of valuing the current year expense. The impact of that, as well as the lowering of the long-term earnings rate on the investments, will have an impact of some $30--$35 million on next year's expense line. So we do anticipate seeing some impact on expenses as a result of that and we will factor that into the quarters going forward.

Okay and moving along. The days sales outstanding for accounts receivable and inventory please?

We -- again as Rick said -- we had nice improvements quarter over quarter. We ended up on the receivable side if you look at it compared to last year about 43.443 (ph) days -- little less than a half a day increase over last year for the same period. On inventory we're actually down about 4/10 a day compared to last year. So those 2 reacted very well considering what we went through this year in terms of some of our significant customers impacting our receivables. And as was stated very early on into the year receivable number is a significant military receivable that's been collected in July. So we're quite pleased with the receivable and the inventory performance for the close of the year.

We're also very pleased with the payable numbers. Companies being very careful about paying on time and not paying ahead of time. So --

Just two real quick ones. What you think the impact of the extra week will be in terms of earnings per share? I could figure out myself but just want to hear what you believe the earnings impact would be and just lastly if you could give us the allowance for doubtful accounts which typically is in the Q or the K -- that absolute dollar amount? Thank you.

In terms of the impact of the 53rd week, quite simply, it's a 2 percent increase in terms of the weeks that we have this coming year over last year. And that's probably about as good an estimate as you can use on your EPS impact as any. I don't know what we have at hand -- we can get that back to you in terms of the allowance for doubtful accounts. I will say that we again had a record year in terms of our performance with bad debts. We came in at 9 basis points net of collections and I think when you look back at the course of the year that's truly remarkable. So we're quite pleased with the performance of the operating companies in terms of bad debt experience.

Ken Zaslow with Morgan Stanley.

Can you give a little more color on where SYSCO actually cut operating expenses? Really nice improvement, I just didn't get the real -- just looking for a little bit more color on that. And going forward where do you see the real opportunities in light of the slowing percentage of (indiscernible) account percentage of totals?

I think that in terms of expense control, there are again certainly a lot of things going on in those operating companies. Let me start off by saying that although inflation we have to be very careful about moving our prices up as our cost goes up, the inflation also helps us to a limited degree on the expense line. Another big contributor in terms of expense improvement would be -- and this has some impact on the margin line also -- would be the continual mix shift in product to larger dollar cases and that would be predominantly meat and seafood.

So those two things certainly contribute to expense control, but more importantly I think are the actions of our operating companies and day to day whole business process is being much better taking more high impact actions. They understand the importance of the various things that are going on out there. For instance, we're continually being more efficient in certain departments of our company. So -- payroll, for instance. We are working to figure out ways that we can -- sounds like a simple thing but it's one of the hundreds of little actions that are taking place out there. We're figuring out ways to more effectively and efficiently do the payroll functions within our operating companies. It makes a difference.

We mentioned earlier that the pieces for stock (ph) continue to grow on our average customer average stock and that will have an impact on our expenses also. The operating companies are fully aware of those opportunities and they are really focused on what needs to change in order to make those numbers better. Tom or John.

The comments I'll add is that, basically, as we (indiscernible) company functions as we look at our (indiscernible), delivery and administrative cost all were down for the quarter of make ourselves slightly down but -- not having paper work in front of me so the best business practices which is basically our way speeding up practices that we've long had and trying to get that disseminated after our operating companies quicker than we determined what was the best way to do or best two ways to do any particular job we have (indiscernible) because they see that saves them money, gives them better productivity and gives them better service for the customer which at the end of the day is (indiscernible) (inaudible) .

So do you see a more lot more opportunities going forward.

Yeah, we think we're just getting rolling here. We think (indiscernible) continual processes as we move forward.

Two quick follow-ups to that. One is, how quickly after the summer of 2004 will SYSCO's operating profit benefit from their new RDCs?

We anticipate approximately a six-month rollout period where we're ramping up. Going to start, once the doors open, we're going to start very slowly with a limited number of suppliers and even a limited number of operating companies. And then as we gain confidence in the systems and our ability to manage them, we will add more suppliers, roll in more operating companies. We're probably talking about six months to get fully operational -- that's probably not even accurate, but mostly operational. So it is going to be 6 to 12 months.

I'll also say that some of the benefits will accrue to us prior to the opening so as we work with our suppliers to bring them into our system, into our accounting system, we do the order management, the building, etc. There will be benefits that accrue to us and to our suppliers. Their costs will go down and for that we -- our costs go down and we also get paid for some of those services we're providing for those suppliers.

And then the last question is, should 2004 be Sysco's peak in terms of CapEx or should we assume that is a level because they bring on RBCs over the next couple of year, I mean, how does (indiscernible) your CapEx for 2004 and going forward, I guess?

I think you will continue to look at CapEx as we have historically in the range of percent of sales. We're looking in a range of 500 million this next year in CapEx and given everything that we know at this point that's probably a reasonable expectation going forward in terms of the relative dollars reinvested in the percent of sales.

Andrew Wolf with BB&T.

Follow-up question on the redistributions center. You really said you spent 21 million there that you expensed. Can you tell us what the expense load will be next year?

John, do you have that number of front of you?

Expense load is going to be somewhere in the neighborhood of $30--$40 million but we got to be careful of that because a lot of it has to do with the timing and how we've progressed towards getting the training done in the operating company. So we're a bit hesitant to get too firm with that number, but it's going to be in that neighborhood for (indiscernible)

Does it plateau in that neighborhood at 30 to 40 so up 10 to 15 or whatever this year and then (indiscernible).

(indiscernible) We need to be clear about that. It plateaus in a sense that that's the highest it gets and it drops off significantly ten years going forward. Because all the software expense, all the integration, all of that work drops off because it's sort of set now. And so that number will be reduced. From a CapEx standpoint as we talked about just a minute ago we're going to continue to build RDCs but most of that of course will be amortized and depreciated so it will be a lesser number after 2004.

Okay. That helps -- is most of this scalable expense like developing software are is it more training that you got a repeater -- do you got a sense for what that is?

expenses of (indiscernible) (inaudible) ongoing expenses training (inaudible).

My last question is on the dead horse issue of sticky pricing. It's so important to us, I just want to ask you one more time so you can get another answer. When do you think you can pass through this inflating, meeting other product costs which I think as you calculate real sales growth will help that number, obviously, your topline help your gross margin and this is so important. What is your experiencing -- this abrupt change from deflation to inflation how long a lag is before you can start passing through the full (indiscernible)

I will explain it for the third time now which is we believe we are very adept at passing through these changes and we believe that giving moderate changes in our inflation rate that we can pass those through very rapidly.

When you have a significant uptick, we can still pass them through. There is a little bit of lag in some instances, but again, most of those products which are subject to the higher rates or higher fluctuations in terms of inflation or deflation are typically those products that we price on the shorter time period. That is on a weekly basis or even a daily basis in some cases and it's those products that are less subject to fluctuations that at worst we have some thirty-day commitments out there. But by and large, the majority of our business is priced on a daily or weekly basis.

Tom said earlier that in normal times we expect 1 to 2 percent inflation, we would stand by that number and as we see inflation above that we would expect it to moderate back toward the 1 to 2 percent and one example -- one concrete example -- we continue to see the U.S. government reduce the requirements for Canadian beef. So we're to see Canadian beef back in U.S. market. It's going to -- as it went away, inflation in beef increased.

As we see Canadian beef come back into the market we're going to see some moderation of that particular category. About 8 to 9 percent of beef in the U.S. comes from Canada. So it certainly has an impact, and it has an impact worldwide when Japan, for instance, starts -- quits buying Canadian beef. So I think we're going to see a moderation in the inflation number hard to put it -- hard to tell exactly when that will happen but I think we will see some of that over the next two quarters. That moderation effect.

And one last question as a follow-up to that. Just on the competitive environment out there when people see gross margin contracting and it's less this quarter than last quarter which suggests passing through some pricing slowly as you're describing. Again, you just sort of generally described the competitive environment. Has anything changed there?

I will answer that -- we might all have a different opinion to that. I think we see more rationality coming into the marketplace than perhaps we saw six and twelve months ago. I think we've been open about the fact that not as a strategy but we had one of our major competitors who is using tactics in different areas of the cities, different regions of the country, where they were doing, frankly, stupid things. And we see less of that going on right now and as for instance, the U.S. Foodservice sorts itself out and has to make a legitimate profit, there's got to be rationality returning to the pricing in the foodservice market in the U.S.

I will add to that as Rick said we may have different opinions we're seeing it less but as Rick said, it's (indiscernible).

Jeff Omohundro with Wachovia Securities.

Two questions. First wonder if you could give us an update on your sense of acquisition pipeline and acquisition environment? And also just one housekeeping questions follow-up on that 53rd week. I'm assuming you're going to recognize that in Q4. Is that correct?

That is correct. On the acquisition front, we continue to be very interested in finding those companies which do fit our requirements and that is geographically product people. We're also looking at -- and we have been successful in doing acquisitions of some fairly small companies that we were able to fold into existing operations. All of those sort of things get us the ability to better serve our customers in a particular market. We don't see any significant change out there in terms of the acquisition environment. We certainly are as active as we have always been.

Actually one more -- how has the venture with Starbucks proceeded and how much your sense of customer response and is that sort of venture something you could expense?

Richard J. Schnieders Actually we would hope to expand, that we talked with other suppliers about having similar relationships. That is exclusive relationships for the foodservice market. And we think that makes sense from our perspective and think it makes sense in certain categories of product with certain suppliers peered a think that we would like to do more of that kind of have more of those kinds of relationships and in general, I would say that -- that also presupposes that the relationship with Starbucks is going well. And it is. It's going extremely well.

In fact, the demand has been so great they've had to hire some additional salespeople to support our operating companies. The customers -- we get calls, regularly, from customers and we're talking here about restaurant operation primarily independent foodservice operations. We continually get calls asking about the Starbucks product. In some cases, those are not customers of ours, not current customers of ours and our arrangement, our agreement with Starbucks and then our agreement with the customer is that we will sell them Starbucks as long as they buy other groceries from us. We cannot afford to make a drop or make a delivery just selling the Starbucks product. But if we can couple that with other products, other items that we have in our warehouses it works very well for us. We think it's good for Starbucks and we think it's good for our customers.

Final question comes from Bob Cummins with Shields & Company.

Final question -- I feel like I am on the spot here. (MULTIPLE SPEAKERS) I would just like to ask you a broad question about the foodservice environment that you're seeing in recent months. Obviously, the whole industry was negatively affected after September 11th, with pullbacks and travel affect on consumer spending etc. etc. Going on two years after that, are you seeing uptick in the general environment of the foodservice? Is there a trend back to normalcy where businesses have still been depressed? Just give us a kind of overview on the state of the industry. We know you always grow in good times and bad, but how does the overall industry environment look in terms of demand?

Bob, it depends on -- if you look at external sources, if you read the technomics reports or the food institute you would think that the business has come back generally and almost to levels prior to September 11th. I don't think that's quite accurate. I think that, in general, we have seen nice improvement in the restaurant sector of -- the business which is the one that's going to be the most impacted. But we would like to see -- we'd like to get back to the rates of increase that we're seeing prior to September 11.

But, again, I would say that we're encouraged by in the restaurant segment of the business -- we're encouraged by the activity out there, the good operators are taking advantage of every opportunity they can and they are growing their business and so I would say it is almost back to normal and if you look at the national metrics, the technomics and the food institute, you'd see them indicating growth in the restaurant business pretty close to what it was prior to September 11th. Travel is still a tough tough segment of the business and so hotels are not back to where they were and that's a piece of our business are relatively small piece of our business and it does have some impact on the restaurant business.

But if we look up and down the street, I think we're encouraged by the level of activity and the trends that we see in terms of eating out continue to head upward. We gained share. Terrible term -- we gained share of stomach. We said a number of times on this call we're excited about the industry and it continues to perform well for us.

That does conclude our question-and-answer session. I'd like to turn it back to Mr. John Palizza for any closing remarks.

Thank you, Greg. Thanks, everybody, for turning into the call. I know many of you continue to have questions. I assure you my telephone line is open. 281-584-1308 -- hope to talk to you all later today. Thanks.

That does conclude today's conference. Thank you for participating. You may now disconnect.