西斯柯 (SYY) 2004 Q2 法說會逐字稿

Good day everyone and welcome to today's SYSCO Corporation Second Quarter Fiscal Year 2004 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.

Thank you, Rob. I would like to add my welcome to everyone for joining the SYSCO Corporation conference call for the second quarter of our Fiscal Year 2004. With me here today are Rich Schnieders, our Chairman and Chief Executive Officer, Tom Lankford, our President and Chief Operating Officer, John Stubblefield, Executive Vice President for Finance and Administration, Larry Accardi, Executive Vice President Merchandising Services, Multi Unit Sales and President of Specialties Distribution, Ken Spitler, Executive Vice President of Foodservice Operation and Diane Day Sanders, Vice President and Treasurer.

On the call today I will open with an overview of the quarter and also given everyone some of the quarterly data we supply to help you understand our business. Tom Lankford will then cover operating performance throughout the quarter and Rich Schnieders will discuss strategic matters including progress on our national supply chain initiative, followed by the Q&A session, which Rick will moderate.

Let me start by reminding you that statements made in the course of this presentation which state the company's, or management's intentions hopes, please, expectations or predictions of the future are forward-looking statements. Actual results could differ materially from those projected. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's SEC filings, including but not limited to, the annual report on Form 10(K) for the fiscal year ended June 28, 2003, and the quarterly report on Form 10(Q) for the quarter ended September 272,003.

Now for the second quarter, results. The quarter can be summarized as one of continued steady progress and sales, profit margins were impacted by a higher percentage of sales growth coming from lower margin multi-unit customers and, to a lesser extent, from higher inflation. This was more than off set by expense controls which ones again turned into terrific performance.

Sales in the second quarter were up a total of 10.8% over last year's second quarter. Within that number sales from acquisitions contributed 0.77%. Sales from acquisitions consisted of Asian foods, the Denver distribution facility acquired from Marriott Food Services and the meat cutting operations from Colorado Boxed Beef, now known as Buckhead Beef of Florida.

During the quarter we continued to experience inflation in our cost of goods, with inflation as we measure it for the quarter rising to the rate of 7.26%. Inflation was centered in the categories of meet, dairy, poultry and canned and dry goods. However most categories of food experienced inflation during the quarter. Our expectation is that inflation in the meet category will begin to come down a bit as the previously undersupply of beef is somewhat eased by the fact that many of our principal beef export markets have been closed by the BSE incident in late December.

Gross profit margin is down 28 basis points from the same quarter last year a year ago, were more than offset by excellent expense control where expenses as a percent of sales declined 59 basis points compared to the second quarter last year of last year. The result was net earnings of $222 million, an increase of 20.3% over the second quarter's of 2003. Earnings per share, on a fully diluted basis, rose to 34 cents, up 21.4% from a years ago. For the quarter in terms of sales broken out by our reporting segments, broadline food services up 8.7%, SYGMA rose 21.6% and our other categories, consisting principally of specialty meats, fresh cut supply and Asian foods were up 20.2%.

During the quarter as part of our ongoing share repurchase program we repurchased 4 million shares. At quarter end we had 22.2 million shares remaining on our share repurchase authorization.

Total debt at the end of quarter stood at $1.533 billion, consisting of $124.6 million of short term debt, $12.3 million of current portion of long-term debt and $1.396 billion of long-term debt. Our long-term debt to total capital ratio stood at 37.1%, opinion our stated range of 35 to 40%.

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 also welcome our webcast audience.

Our second quarter of fiscal 2004 built on the progress we made in the first quarter of Fiscal Year. Sales growth continued with consistent positive trends. In addition, the leverage we gained with our sales indicates that our incremental sales were to our good profitable customers and that we continue to work with our unprofitable customers on way to bring them profitability.

Gross profit margins for the quarter declined 28 basis points versus last year's comparable period to 19.43%. This decline can principally explained by two factors, customer and company mix and inflation. This quarter the relative importance of these factors has shifted. In the area of customer and company mix our SYGMA sales or gross profit margins lower than our broad line company grew at a 21.6% rate ,much faster than our broad line companies. [Twelfth unit customers] tend to come in larger increments and impact gross profit margins until they become comparable. In addition, contractual multi-unit sales within the broad line operating companies grew at a faster rate than our market sales. I would like to emphasize that our marketing associated sales, or U.S. broadline company's grew a very healthy rate of 9.3%, it is just that our multi-unit sales grew at a faster rate. The sales growth until multi-unit was principally attributable to a nice increase in a number of restaurants served, strong sales increase at many of our multi-unit customers and additional volume coming from our recently acquired Denver distribution facility.

With respect to inflation our meat sales did have some impact on gross profit margins. As everyone is aware by now meat prices have experienced a very high rate of inflation. There are a number of factors at work here.

First, fresh cut meat is a higher dollar, lower gross profit percentage product. As it grows as a percentage of the sales mix there is an impact on gross profit margin percentages.

We believe that the impact on inflation is also a factor on gross profit margins this quarter. We have now experienced inflation that is higher than our normal historical trends for approximately the last eight months and we are adjusting to it. The reason I say this is although gross profit margins are down in our broad line segment for the quarter it contributed less than one half of the total gross profit margin decline for the quarter.

Total operating expenses as a percent of sales saw an excellent performance declining 59 basis points in the quarter to 14.17%. The expense control performance was across the board for our broad line operating companies and our specialty companies turning in good performances in the second quarter.

I would like to point out at this juncture that the expense control is being achieved the right way, through better asset performance and utilization of technology to help us drive down the costs of doing business. We think that we have created a virtuous cycle here, as our companies learn best business practices from one another and therefore our expectation is that we will continue to see expenses decline as a percent of sales.

At the risk of sounding as if I am repeating we've said for the past five quarter our key expense trending metrics continue to show improvements. Our pieces per stop and lines per stop once again showed incremental gains which means that each time we make a delivery to our customer we are selling more to that customer and a greater variety of items being delivered. With also made gains in terms of pieces per trip which means our truck routes were more efficient.

Of continued note is our pieces per hour statistic which improved approximately 37%. SYSCO Order Selector, which is a technology driving improvement in pieces per hour is now in 49 of our U.S. broadline operating companies and and is scheduled to be installed in all but 12 of our U.S. broad line companies, operating companies, by the end of this April, 2004. As we continue to roll the system out, we also get better in using the existing locations we expect that our overall pieces per hour metric will continue to improve for the foreseeable future. The operating companies continue to make good use of best practices and share their notch between companies a key component in raising the level of performance of all companies.

The shift in customer mix is slightly of more multi-unit sales also had a beneficial effect on our expense control performance. Multi-unit customers require less operating expenses in terms of selling, delivery and order selection. Additionally inflation continues to give us some benefit on expense control as our fixed cost in the quarter were not impacted by inflation.

Also a contributor to a lesser extent to the operating expense performance was corporate expense. These items occurred in the quarter and involved a variety of nonoperating charges and credits. This quarter we recorded a credit for the cash surrender value of our corporate-owned life insurance of $12.2 million compared to the same quarter last year in which we experienced a $5.6 million credit. We also recorded $8.4 million of expense for redistribution development versus $3.5 million in the same quarter last year. The net result was that as a percent of sales, corporate expense contributed 14 basis points to the total 59 basis point decline in the expense ratio.

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

Thank you, Tom.

Credit for the performance in the quarter as always is our 47,000 associates who work constantly to improve our operation and also to our customers for whom we earned a larger share of their business. This is a business where you need to stay continually focused on your customers and it takes that to make them be more successful. We are blessed with people and a culture where everyone whether a marketing associate, a warehouse selector or delivery associate, understands that our customer depends on us every day to get them what they need when they need it. We continue to invest in a prudent and strategic manner to grow the business.

Capital expenditures for the second quarter of the Fiscal Year were $145 million. Our estimate for total Cap Ex for the current Fiscal Year continues to be in the range of approximately $490 million.

Our national supply chain initiative is a key part of our investment spending in 2004. The Northeast redistribution center is currently under construction with always all of the exterior walls and roof in place. We estimate that the RDC will become operational in the fall-winter 2004. During the second quarter costs related to our national supply chain project totaled $41.7 million, of which 8.4 million was expensed and 33.3 million was capitalized.

At the same time as we are building our redistribution center we are not neglecting our basic infrastructure. Our fold-out facility north of Los Angeles is scheduled to open in May of this year and during the quarter we announced the fold-out for the Spokane, Washington, area which is scheduled to open in April 2005. In addition our fold-out in Fargo, North Dakota, is schedule to commence operation in February. Finally during the quarter the second quarter to have thousand four we opened a new state-of-the-art replacement facility in Miami, Florida, and a new replacement facility is scheduled to open in Cleveland, later in 2004.

I'd like to turn now to an area that SYSCO has always placed high on its list of priorities but which has come to more to the forefront in recent days and that's food safety. In late December we saw the first reported case in the United States of BSE, more commonly known as Mad Cow Disease. We applaud the actions of the U.S. Department of Agriculture during the crisis and we believe that food products in the United States are the safest in the world. However we would like more to be done. Therefore we will be working with industry sources to implement the following initiatives.

First, a national live animal identification program which traces a beef or dairy animal from birth to harvest. Second, increase the number of animals available for testing to confirm that current surveillance programs have complete control of the disease. Additionally encourage the development of more rapid testing analysis procedures to reduce delays of inventory through the supply distribution chain. Third, implement tighter controls by the U.S. D.A. in their governing of feed milling companies. It's essential that zero tolerance be achieved so that beef animal by-products do not enter beef and dairy cattle rations. Fourth and finally, encourage all suppliers of fresh beef and furthered processed beef products to exclude the use of advanced meat recovery from all products.

We want the public to cost to feel safe about the food supply in the U.S. and will be working hard to help raise the standards.

I would conclude by saying that this is a great business we are in, the foodservice business. It continues to show great resiliency as well as creativity. Americans have continued to eat out through our most recent BSE scare and now that we are beginning to see some improving trends in restaurant sales and travel we are even more bullish on our business. I would encourage all of you who are listening today to go out and do some research on this topic by dining at your local restaurant soon and often. Operator, we will now take questions from people on the call.

Thank you. The question and answer session will be conducted electronically. [Caller Instructions] Our first question will come from Mitch Speiser with Lehman Brothers.

Just a question on the cash flow break out. Excluding deferred taxes and accrued income tax, I believe operating cash flow was down by 7%. I believe the accrued expense line was the biggest negative delta. Could you just walk us through the working capital adjustments in the quarter and if you think things will swing more favorably going forward, thank you.

This is John Stubblefield and let me address those questions. I think there's a couple of things we need to take into consideration when we are looking at cash flows. If you bear with me I will walk you through it.

If you begin for the thirteen-week period with 178,000,741 as cash flow from operations we need to add back to that 159,741,000, as that represents the taxes that were paid for this period and that is compared to last year for the same quarter last year when we made no tax payments. In addition, there is a deduction for the coop deferral increase this quarter over the prior, which gives us then an adjust cash flow from operations of 334,121,000. That, as we calculate it is approximately 151% of cash flow to net earnings.

In addition to this quarter we also had a payment for our 40 K contributions in excess of last year of almost 29 million, and additionally we had a $20 million pension contribution which we did not have last year for the same quarter. So when you take that into consideration, adjusted cash flow from operations would have been 382,921,000, or 173% to net earnings.

If you look at the 26 week period we had the same sort of adjustments, and that is taxes add back to cash flow of operations of 161,641,000, a change in the co-op deferral would be a reduction of that of 14,000,500, giving us adjusted cash flow from operations of 511,963,000, or 119% of net earnings. Additionally the 401K contribution this year over last year for the 26 weeks was approximately $5 million, and the pension contribution over last year was some $40 million, giving us a total adjusted cash flow from operations of 556,663,000.

So those are the major items that impact cash flows and as you can see after having taken those into consideration we are very pleased with the cash performance for the quarter and for the 26 weeks.

You seem to have been ready for that question and thank you very much.

You're welcome.

With Goldman Sachs, up next is John Heinbockel.

How much culling of unprofitable customers was done in the MA category for the quarter, and did that in any notable way take your growth rate down in that category?

John, I think there are two things there that you allude to. One is the active and appropriate part that our operating companies have been playing in being more diligent in regard to the profitability of our customers and as Tom said in his comments we are working hard to make all of our customers profitable or more profitable. And, in fact, it's very hard to estimate that number, particularly when you take into account that not only have we exited some portion, some small portion of those unprofitable customers, but we are also being more diligent about bringing on new business. So we are being, the criteria or more appropriate and difficult I think to bring a new customers on. So those two factors combine -- very hard to get to a number but those two factors combined. There has certainly been some drag on our top line sales growth and marketing associate served sales growth. But in the end it means the profitability is better in the total system because of those, again, activities that are taking place at the operating company level.

Secondly, maybe give us a sense, what did the internal growth trend look like during the quarter? If you went from beginning to end is there a kind of accelerating trend or pretty steady? You look at restaurants, are things getting better top line wise because of the trend with your customers or not?

I think things are perhaps getting marginally better. I know there's a bit of euphoria out there about the economic activity. I'm not sure we would be that euphoric about it. If you look at our quarter it follows exactly along our traditional patterns of growth. Having said that it's important to remember that the last couple of weeks in the quarter are always a little slower because of the holidays. We go into that, for one thing the last week of the quarter is a four-day week versus five-day week. But when we look, and we have, we look at the actual trends throughout the quarter they parallel what we've seen in the past. So it's a bit more of the same and frankly we are encouraged by that. And as we've said before, we still have such a small share of the market in such a small share of our customers wallet that we still have huge opportunities in our business.

And the pick up in SYGMA and multi-unit, anything there, you talked about the chunkiness of that business. What identifiable pieces of business, was there 50 million from this account, 100 from that, or is it all too small to be material?

I am going to ask Larry Accardi maybe to help me with that, but no. There's a couple of nice pieces of business there, some of it's just incremental. I think you probably saw the announcement by Wendy's, our largest customer who had a little over 9% real as a sales growth, store to store comparison in December. That certainly contributed to some of the sales growth at SYGMA, but Larry without being two specific I think that we have picked up a couple of nice pieces of business across the U.S.

That's correct. We have enjoyed some new business with both the Applebee's group as well as the Panera and Panda chains and then also our same store sales have been up with the Whataburger group and Wendy's. And then I might add with did pick up some [INAUDIBLE]business in that Denver acquisition with Red Lobster and Olive Garden.

One final thing, if up inflation backs off, this is the high watermark and it backs off would we likely see a one for one step up or close to one for one step up in real growth which we are not talking about any more but would we likely see that in the next six to nine months, an upward trend in real growth do you think?

I think that's a good analysis. The other thing we have said in the past particularly a year and a half ago when we saw the deflation, the kind of high deflation that we saw, we will anticipate that we will see some margin pick up also as we see the inflation moderate and ultimately come back to a more normal state , a more normal number.

Okay. Thanks.

Again ladies and gentlemen that's star one if you would like ask the question. Up next is Mark Husson with Merrill Lynch.

On private brands, with the growth in the SYGMA business would you expect private brand as a percent of sales to perhaps come back a little bit, but at the recent trade show there seemed to be no shortage of ideas in terms of private brand. Could you talk about private brand in the percentage of total, percentage of broad line, percentage of street, however you want to talk about it.

Mark, that's SYSCO brand.

SYSCO brand, yes.

And we really appreciate everyone those of you who were able to make it to Houston a couple weeks ago and participate in the field trip and, Mark, you are exactly right, and even our operating companies who were there also at the conference remarked about how many new ideas, new products that they were seeing and there was a great deal of enthusiasm on the part of those folks who are the decision makers, who go back to our operating companies bring those new products in, help the sales and marketing departments get them out into the street. Actually we have seen good, I think, and I want to make sure that I heard you correctly but with the increase in the SYGMA sales being higher you would expect to see the overall ratio of SYSCO brand perhaps to go down and in fact that has not happened. We've stayed at this point relatively flat as a total corporation in SYSCO brands. Within the last couple of years we've had some big hits, some kind of low hanging fruit. And one great example of that would be our premium box beef program that we call butchers block and that took off very well for us. It increased our numbers very dramatically and now we are kind of -- we are in a bit of a more steady state.

However, we do continue to see great acceptance of the SYSCO brand in Canada and those numbers are climbing. If you recall, one of the things we said early on when we first started talking about what was then SIRCA but now SYSCO Canada is our desire to have the same kind of ratios in Canada, SYSCO brands to non-SYSCO brand product. And again we are seeing very, very enthusiastic respondent and acceptance by our customers in Canada those products, particularly in the boxed beat area, in the produce area, in the oils, edible oils category, we are seeing those customers not only accept the product but prefer the product.

So all in all we feel good about SYSCO brand. We are in business to sell our customers those products that we want but we think because of the value that's built into the SYSCO brand some of which you saw when you were in Houston our customers really do get greater value out of those products.

This is John Stubblefield. I will add a bit of color to that. If you look at our additional foodservice companies and you look at the MA served customer group for the quarter we grew the SYSCO brands component 40 basis points. And that's slightly better than what we've been running for the year. For the year we were 30 basis points. So to your point our customers continue to see the increasing value to them in their operations from SYSCO brand where we bring the greatest value to the customer.

That's helpful. Final question on beef inventory, given the prices we saw it go up and down quickly we've got sort of visions of Buckhead and Newport having massive amounts of carcasses hanging around aging, with Rocky punching them, but will the value of that inventory go up and down with market prices and if so how do you deal with that at quarter end in terms of evaluation?

Again, this is John Stubblefield. Again we do revalue that inventory based upon the costs as it incurs. However in the meat companies we're only on a lot costing basis so we average it over the period within our broadline companies it is on a last purchase basis. So we did have some gross margin reductions for the month of December due to inventory evaluations but it is something that we deal with and live with ongoing and we did and I will let Larry speak to the inventory.

Well, we also were anticipating the market going down prior to the BSE announcement and therefore our inventories were not at what we would consider even normal level, they were actually a little low anticipating decline this month. So we were okay in the sense that we were okay that we didn't have the extended inventory in December.

In the beef businesses, though, if had you taken a last purview of the value of the inventory in the beef business would it have been a significant hit to the company in the quarter?

I wouldn't call it significant, Mark. One of the things that's interesting, and we went back and tracked through our traditional companies the sales of beef products, for the last three weeks of our second quarter, that would be the last three weeks of December, actually we found that beef sales fell off those last three weeks and that kind of goes in what Larry was talking about. Some of that was some price resistance on the customers part. The other part of it is in fact some of that does trend down at the end of the calendar year. Interestingly enough, for the first three weeks so far of January that we've tracked, beef pounds are increasing over last year. So we find that encouraging.

What's encouraging to me, Mark, as we talk through some of these issues and they are great questions, what's encouraging to me is when we see these kinds of moves or these changes within our business, whether it's beef or fuel prices or whatever, we as an organization because of our underlying systems are able to go and get the data and figure out what the heck is going on and where it's happening and what's the impact. And so it's great comfort to me, and I know John Stubblefield and others around the table here this morning, that we are able to answer the questions in a very real time basis and make the adjustments that always have to be made in a business. But we can make them in such a quick response, a rapid response manner that gives me a great deal of, I can sleep easily at night.

That's good. Thank you very much.

Ladies and gentlemen, if you find that your question has been answered you may remove yourself from the question queue by pressing the pound key. From Credit Suisse First Boston we will go to Jack Murphy.

Good morning. Can you just go into a little bit more he detail on the inflation in terms of what your run rate is for the last four quarters, whatever kind of more current year you can give us rather than just kind of full quarter from the last quarter? And then separately could you talk a little bit about wham you see for acquisition contribution of the growth rate in the coming few quarters given what's been closed?

I have to go from memory now here and I will ask my colleagues to help me. Actually let's go backwards. Let's handle the acquisition question first and then where he go to the inflation question.

We have been pretty open with sharing our goal of growth coming at the 3% of top line revenues and we would in the longer term or the midterm we would stick to that number. As you heard just a little while ago the number for the quarter was .77% which is not the 3% number. But I think that we are very comfortable with stating and continuing to strive for that 3% number. It may be a bit chunky as we are experiencing a slow down right now if you will, that .77%. But if you go back with the SIRCA acquisition that was in the range of 5 percent, 4 to 5%.

However to your general question we think that there are still plenty of opportunities in a number of levels for us to continue to acquire viable businesses. We are working on fold in opportunities right now at a rate higher than we've ever worked on them, and fold ins are those smaller acquisitions. Sometimes they may not even warrant a press release. But we are working on a number of those right now. We continue to work on our internal acquisition strategy and that's the fold outs, we talked about those.

And then there are specialty businesses where we are constantly in discussion with owner operators, businesses that we are interested in because of their products or because of their geography, and we will continue to look at those. There are still broadline opportunities, larger broadline opportunities that we would have interest in and we continue to keep our ear to the ground there. So I think we can answer affirmatively that we continue to look for good partners out there, good acquisition candidates, and that we think that there are for the foreseeable feature enough of those to make sense for our SYSCO and four hour growth patterns and the goals we set for ourselves. The inflation matter and again I will have to go back and do this from memory, Diane Sanders has it, thank you.

We started seeing fairly significant deflation in our fourth quarter of Fiscal Year '02 and then that tempered through the next few quarters until we began seeing inflation again in the third quarter of fiscal '03. It went from just under 1%, then up to 2.5 to 5% to 7.3 this last quarter. We went from fairly significant deflation to fairly significant inflation over several quarters.

Looking at just the last few weeks whether you include part of the quarter that closed or not but just on some sophomore recent level weather it's run rate of last four weeks or six weeks or eight weeks or whatever to get a sense of where inflation is trending more recently.

Well, we don't have anything that we've done currently with this quarter but you would have to anticipate with the beef prices coming off and then as Diane set out, we began overlapping some of those prior increases so our experimentation is we will see that number trend down somewhat this quarter and follow out through our fourth quarter tend to trend downward where we approach a normalized level of that one to 2% level that we see longer term.

Last follow up back on the acquisition pieces. I recognize that you have small deals that don't really warrant a press release and the like. In the short term lacking any big deals of late is there any reason to believe that, at least in the short term foreseeable future that it would be any higher, meaning the next quarter or two, be any higher than what you posted in the most recent quarter?

Go ahead, Tom.

I'm sorry, Rick, are you asking us to comment whether or not we have anything significant in the pipeline? Obviously we are not going to comment on that.

That's not what I'm asking.

Let me suffice it to say that we are always out there working and looking. Sometimes it takes awhile for them to take effect and sometimes they happen.

Whether it's two quarters or four quarters away frankly we want to make sure we are making the best decisions for the company and for our investors. So we continue to use very high criteria for our acquisitions which is reflected in our long-term return on capital and return on equity numbers which we are very proud of, and we will continue to operate in that manner and make sure that we've got the right kind of partners and that the price we pay for them is appropriate.

Okay. Thanks.

Up next is Kenneth Zaslow with Morgan Stanley.

You guys have done a good job on expense control management. What do you think you guys could do long-term in terms of reducing that operating expense margin down to -- could it go down as low as 12%? What is the target, or how do you look at it going forward and how far down can it go?

One caveat and I will ask my colleagues to help me answer that question. One caveat and we've said this before openly, the inflation number is helping us somewhat on the expense control. We recognize that. We don't have any way to measure it exactly but we do, we don't want to kid ourselves ourselves at the same time. To your broader question, how low can it go? We are not sure. We are not so much worried about the 12% number as we are making incremental improvements quarter after quarter in our business and our operating processes and our best business practices. I think you heard Tom talk about some of the metrics that we watch and they sound pretty mundane like we when we say them vehicle pieces per stop and pieces per trip and errors per thousand cases, those are very, very significant numbers and you hear continuous improvement in those numbers and that is, everybody is on top of everybody's to do list every day. That's what's important to us and it's whether it's 12% or 13% or 11 percent, I'm not sure what's important to us that we get that incremental improvement quarter after quarter, year after year.

Rick, another issue there is again, not to focus on a absolute number, but looking at that operationally leveraged earnings that we get with the mix of the customer. So understanding that a certain segments of a customer as a higher cost serve and we are happy to acquire that higher cost to bring that service to the customer so leverage is the key to this ongoing success.

My second question is what do you attribute the sales growth in specialty to? Is it mostly because of meat inflation or is it good volume or real sales growth going on in there, also?

I think there is some inflation in there. However those specialty businesses are not all meat businesses. We didn't see the kind of inflation in produce, for instance, that we saw in the beef business. In the Asian category we didn't have the kind of inflation that we saw isn't the meat business either. It's a combination of both, Ken, and we are still very, very encouraged as you might expect by all the specialty businesses. They are showing nice returns for us. We already indicated that we are keeping our eyes open in regard to acquisition opportunities. So we are very pleased with their performances.

And in the meat business, for instance, specifically, the moving parts associated with that business there are so many of them that, for instance, as someone indicated a little earlier in our conversation, going into the holidays we see very high meat prices and then a couple weeks before traditionally, we see those prices tail off pretty dramatically just because of the drop in demands. There is a lot of demand going into the holidays for things like tender loins and strip stakes. As you get a week or two before the holidays that market dries up, the pricing goes down and you don't see a recovery until sometime after the February time frame when the weather starts to get warm again. So there's so much going on there I would just saying it's a longer trend or longer term look at it we don't see any significant changes in those trend lines in terms of volumes.

Great. Thank you.

Rick Shields and Company, Bob Cummins.

I know that you are trying to avoid talking specifically about real volume growth but being until lists we are going to keep on trying to analyze it, I'm sure. And superficially to take a 10.8% sales increase and deduct .8 for acquisitions and 7.3, let's say, for inflation, it doesn't indicate much real growth. I assume the 7.3 reflects the inflation on the cost of sales line. I'm wondering isn't there away to calculate what your inflation rate was for sales per se?

Bob, this is John. As you well know we look at these things every way we can and we have not come up with a way that we are comfortable to be able to really convert an increase on the cost line to the appropriate increase on the top line. Part of that is that I think as we said before we believe that during inflation there are opportunities for us to convert some of that inflation maybe to increase sales volumes. So it's not all a throw away, it's not all a negative in terms of the benefit that we are able to achieve out of some levels of inflation. However I think we all agree that at a 7% level, none of these are comfortable that these are sustainable levels and at some point will you sue begin to see an impact to the ultimate customer.

Intuitively, do you feel as though your real sales growth slowed in this quarter as a corporation?

Well, again, if I look at our profitability I would say that maybe we had some trade-off between real sales growth and inflation to profitability. I sure am not answering your question because it's very difficult for to us get a handle on that. The sense we have is that the overall level of business hasn't reached the recovery state that we would like to see yet.

Okay.

But I would also say that we are focusing on smarter sales growth, Bob, and I'm frankly encouraged by that based on the results, the numbers, you do the subtraction, 2.5% or 3 percent, but would we like that number to be higher? We probably would, but not at the expense of profitable sales growth. So that's a real focus for us all the way down to the daily activities in those operating companies. And I think that we will be talking about this again next year because I really feel like we have reoriented the thinking a bit and we are getting good follow through with those operating companies. They are being more discriminating in terms of the kinds of business that they are looking for, the kinds of business they are bringing into their operations and just how they are managing it because of the -- our access to knowledge today or, maybe not acknowledge but our access to information today just allows us to make better and better decisions.

Bob just so I have one more comment you asked about our sense. Our sense is that compared to the market that we are satisfied with the progress we are making. We are never thrilled but we are satisfied.

Okay. Well thanks to all of you. I very much enjoyed your conference recently. It was very worthwhile.

Thank you, Bob.

Thank you.

Again, [Caller Instructions]. Steve Chick with JP Morgan.

Hi, thanks. Not to focus two too much on inflation but I was wondering if you could broadly described the in impact of the cost of inflation between the broadline segment compared with the SYGMA segment, and if there's a disproportionate -- I guess for both the sales and margin standpoint, is it safe to apply the inflation number if we are trying to back into a real growth rate and do the back of the envelope, is it safe to assume that it's equal as we contributed or apply it to both?

Steve this is John again. No, it isn't equal. As you would expect the SYGMA business has lots of contracted prices between the customer and the manufacturer. So those price increases come at a different rate. They might also go down at a different rate, so there is not always a direct correlation between the two. Typically the direction is the same but the spread is different. We don't speak to, specifically in terms of what the SYGMAs inflation rate is versus the broad line but it is less than and I think you can understand why it would be.

Okay. Second thing, just with your depreciation and amortization expense, you had a year over year increase of over 2% and it looks like it was 5.9 last quarter and you are in a period of investment. Is there a rate that we should think about in terms of year over year growth and D&A? Is that expected to accelerate or is that a pretty good normalized rate to think about as you look at for the rest of the year?

I would say, Steve, that's a pretty good normalized rate. We estimate somewhere in the, say, two to 5% range. So I think it's fairly incremental I believe if you look at our Capex and we've done that fairly incrementally and I think it will follow.

Okay. Thanks.

Thank you, Steve.

Up next is Andy Smith with A.G. Edwards.

Hi, everybody. If you look at the sales growth by segment I think you had said earlier that the broadline was up 8.7% but the market associate sales were up 9.3% and I think you also said the multi-unit sales grew faster than market associated sales. Am I missing something there? Can you explain that again?

We have other categories of customers that may be smaller categories, but we do have some other categories. Then we have the impact of the SYGMA numbers which are in the multi-unit numbers, if that helps.

Would the SYGMA be separate from that, from the broadline division?

They are.

But we do have multi-unit customers in our broad line and they as a group also grew faster than our MA served customers.

So then.

But you have two other groups of customers that we generally, other and local contract customers that we don't break out.

And those ran at a slower rate in the quarter.

Yes, particularly the bid and other.

Okay. Thank you.

We will go now to Andrew Wolf with BB&T Capital Markets.

Hi, I tried to calculate your inflation rates excluding beef and I got 3%. I would imagine you must have made a lot of calculations. Could you tell me if that's in the ballpark?

Andy, we are not ignoring you. We are looking.

That's about right.

Okay. So beef inflation, except for last week, seems to be came in contact back down to flattish we can look to something to normalized towards 3%?

I think our midterm prognosis here is two to 2.5 to 3% on the top end. That would be a much more normal range with the current.

With the current quarter maybe being a transition quarter?

I will say the current quarter will be a transition quarter. We will see how much of a transition quarter.

On the gross, I think you mentioned you were able to push through a little more of the product cost of inflation. Did that happen in the beef side or is that in the rest of the business which is like to the stay inflationary?

We stay very close to those markets. We have, as we do our pricing, of course on our market associate served business that's day-to-day pricing but our on contract business we have two categories, if you will. One is commodity, one would be non-commodity. The commodity pricing, the meat products, the dairy, that's cheese and eggs, that sort of thing, are done on a weekly basis. The other products that are more stable are done on a monthly basis. But those commodity items that do fluctuate are repriced on a weekly basis. So we are getting, if we look at the numbers we are getting in the high 90s back on that business, 90% of the cost we are passing that on to the customer.

You are saying in your contracted business or up and down the street or both?

I was saying in total.

Okay. Great. And just lastly you had a 7 million other income number. Could you just give us some flavor what was in there?

This is John again. Principally the difference from our normal run rate in that is due to a facilities sales that we had this quarter. About $5 million.

Thank you.

Thank you.

[Caller Instructions]. And with [Munzer Capital] we will go to Mary Ann [Kodeth].

Could you just give us a reminder, as a percentage volume of all your sales could you remind us what beef represents.

About 17-18%.

Thank you. Secondly, on the Canadian side that still is a drag on your total margins. Can you give us the plan for sales and margin expansion over the next couple of years?

It's it is a drag based on averages. However they are making as we alluded to earlier, they are making very nice progress with SYSCO brands, introducing SYSCO brand into the Canadian geography. As we do that the margins continue to improve. So we are at this point I would say very pleased with the progress that we are making on SYSCO brand and on the margins in Canada, on the GMs in Canada.

Could you give us your sales of margin outlooks for that group?

In terms of?

Well, from what I understand the acquired businesses are still in the 3-4% area of margin, and I'm just wondering do you think they will get up to the corporate average and, if not, where and, if so, how long will it take you?

We've always stated our intention was to get them up to the corporate average but it would take quite a bit of time. So this is not something that's going to happen in the next year or so. But we are seeing great incremental improvement quarter over quarter, year over year.

I would also remind everyone that we had existing Canadian business, broadline distribution companies in Canada before we acquired the SIRCA operation. And although they were not at the quiet at the corporate standard, they had made significant progress and they continued to very well. So they are ahead of that acquired SIRCA business. So we have every reason to believe that we will continue to make progress there and we will ultimately get to the corporate averages.

But that's a two to three-year type of time frame?

Oh, yeah. I will pick two years, that would be great.

Okay.

Ladies and gentlemen our last question this morning will come from Mitch Speiser with Lehman Brothers.

Thanks. Could you comment on the fact that some of your publicly traded competitors have been talking about some competitive issues that have hurt their margins? You haven't mentioned anything. I was wondering if you are seeing any pockets of competitive pressure that might be more than average. And then, secondly, just on the new trucking rules, if you can just give us a quick rundown as to if you think there will be a material impact or if you will be able to pass on some of these incremental costs. Thank you.

I will answer the competitive one. We will always assume there is plenty of competition all across North America and as far as pockets I don't see anything that is different in that and I think Ken may want to address the trucking rules.

We've been very concerned about the change in the DOT rules. We don't see very much impact at this point on our out bound. We do see a potential for some problems on the inbound side, the coming two ways. One is just a capacity issue. We are very much involved in mitigating those as we talk so I don't expect that there's going to be any significant cost to us and, again, there could be some capacity issues out there that we are addressing now.

In fact this supply chain initiative with the RDC will give us a leg up as they start to roll-out by receiving more and more product per truckload or carload. That will be a significant help to us.

Mitch I would like to go back to your question on competition for just a second. And I don't want to question our competitors in any way but I want to say, again, about the comfort that we get with the quality and the quantity of data and information that we have access to today. You think about the last just six or eight weeks in the turmoil in this business we've had as we talked about we've had inflation, high inflation in the beef area, we've had some moderation in that after the announcement of the BSE, beef markets have come back a bit as Andy was suggesting. We've had the BSE incident, time of the year, weather, all of those things, and I understand challenges, we understand challenges in the business. But because of the underlying systems within SYSCO, SOS being the biggest one at this point, we are just able to respond on a real time basis and I would hate to be in a business where you couldn't do that. And so there are competitive pressures as Tom says all the time and we respond to those and I hope we responds to those appropriately. But there is so much going on that if you don't have some sort of a dashboard where you can look at the R.P.M.'s and look at the speed, et cetera, and make changes very, very rapidly then I think it's a tough time. And it has been a tough time but I would say, again, thanks to the 47,000 SYSCO employees, they've just responded remarkably well and we appreciate their efforts.

Thank you.

There are floor further questions in queue at this time. I would like to turn the conference over to you for any additional or closing remarks.

That's it. We are done.

That does conclude today's teleconference. We do thank you for your participation and hope that you enjoy the rest of your day.