西斯柯 (SYY) 2004 Q3 法說會逐字稿

Good day, everyone, and welcome to today's SYSCO Corp third 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, Stephanie. Allow me to add my welcome to everyone for joining the SYSCO Corporation conference call for the third 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 Specialty Distribution; Ken Spitler, Executive Vice President of Food Service Operations; and Diane Day Sanders, Senior Vice President of Finance and Treasurer.

On the call today I'll summarize the quarter and also give everyone some of the SYSCO factoids we supply to help you understand our business. Tom Lankford will then go into more detail regarding operating performance during the quarter, and Rich Schnieders will address strategic matters including progress on our national supply chain initiative. This will be followed by the question-and-answer session which Rick will moderate.

But first, a word from the lawyers. Statements made in the course of this presentation that state the Company's or management's intentions, hopes, beliefs, expectations, or predictions of the future are forward-looking statements. Actual results could differ materially from those projected. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company's SEC filings, including, but not limited to, the annual report on form 10K for the fiscal year year ended June 28, 2003.

Now for the third quarter results. The quarter can be summarized as one of consistent progress in sales. Similar to the second quarter of this year, gross profit margins were impacted by a higher percentage of sales growth coming from lower margin multi-unit customers, and to a lesser extent from inflation, which moderated from its peak last quarter, but which was still high by historical measures. This was more than offset by expense leverage, which once again turned in an outstanding performance. Sales in the quarter were up a total of 9.9% over last year's third quarter.

Within that number, sales from acquisitions contributed only 0.36%, with sales from the meat cutting operations of Colorado Boxed Beef, now known as Buckhead Beef of Florida, being the only non-comparable acquisition. During the quarter we continued to experience inflation in our cost of goods, with inflation as we measure it for the quarter, rising at the rate of 5.24%, down from a rate of 7.26% in the second quarter. Given our mix of sales, the categories having the largest impact on our inflation numbers are meat, dairy, poultry, and canned and dry goods. However, all of our categories except seafood experienced inflation during the quarter.

Our expectation is that inflation will continue to moderate, particularly as we anniversary the higher rates that began in the May-June time frame of last year. However, meat prices look like they will stay high for the intermediate term future, which will also impact other protein categories which tend to follow beef pricing. We are also seeing certain staple categories within our canned and dry area begin to show sustained price increases.

Gross profit margins, down 47 basis points from the same quarter a year ago, were more than offset by excellent expense control, or expenses as a percent to sales declined 70 basis points compared to the third quarter of last year. The result was net earnings of $195.8 million, an increase of 16.3% over the third quarter of 2003. Earnings per share on a fully-diluted basis rose to 30 cents, up 15.4% from a year ago.

For the quarter, in terms of sales broken out by our reporting segments, broad line foodservice was up 7.6%. SYGMA rose 22.4% and our other category consisting principally of specialty meat, fresh point gas supply and Asian foods was up 14.3%. During the quarter, as part of our ongoing share repurchase program, we repurchased 7.2 million shares, at quarter end we had 15.0 million shares remaining on our share repurchase authorization. Total debt at the end of the quarter stood at $1.536 billion, of which $1.420 billion was long- term debt, making our long-term debt to total capital ratio 38.5% within our stated target range of 35 to 40%.

Now, I will 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 start by expressing my gratitude to the hard-working men and women of SYSCO, who day-in and day-out put into practice practice our goal of helping our customers succeed.

Our third quarter of fiscal 2004 in many ways typifies our operations at SYSCO: solid, consistent, sustainable, and profitable growth. The third quarter of every fiscal year always presents us with the most challenges. Weather almost always disrupts sales in some parts of the country, and following holidays in December people in general tend to eat out less during January and February. This year I think that weather was our biggest challenge with very cold temperatures almost everywhere from the Pacific Northwest to the Midwest, and all the way to the East Coast through much of January and February. If you're from New York or Chicago, and listening to this call, you know what I mean.

In spite of this, our operating companies responded to the challenge, and our weekly sales trends showed consistent improvement over similar periods a year ago and were in line with our expectations. As weather moderated later in the quarter, our rate of sales growth got stronger, and, in fact, we began the fourth quarter with a record sales week.

Gross profit margins for the quarter declined 47 basis points, versus last year's comparable period, to 19.09%. Similar to the second quarter, this decline can be explained in part by a shift in customer mix. I am sure many of you are aware the strong sales numbers being posted by many public chain restaurants. This has been reflected in our SYGMA division sales, where sales grew in the quarter at a 22.4% rate, much faster rate than our broad line companies. Multi-unit customers have lower gross profit margins than our independent restaurant customers. In addition, contractual multi-unit sales within our broad line operating companies grew at a faster rate than our market and associate sales, which grew at a very respectable 8.5% rate for the quarter.

Total operating expenses as a percent of sales showed an excellent performance, declining 70 basis points in the quarter to 14.35%. The expense controlled performance was across the board, with our broad line operating companies, or our specialty companies, turning in good performances in the third quarter.

Our quality metric, such as pieces per hour, continued to show very good improvements, not only for companies that are just adopting SYSCO order selector technology, but also continued improvements in operating companies that have had the technology for a while. Our operational metrics, such as pieces per stop and lines per stop, once again showed incremental gains which means that each time we make a delivery to a customer, we're selling more to that customer with a greater variety of items in the delivery.

Activity-based compensation for our drivers has also had a good impact. As our pieces per trip measure has shown a nice increase, while our driver overtime cost has shown a respectable decrease. In addition, our costs are being helped by operating companies making selective decisions to exit certain small accounts where the order size is just too small.

All of this means that we're driving down the cost of doing business while still pricing our goods and services very competitively, which means that we can also show nice gains for our shareholders. Coupled with our operational improvements, we're also bringing renewed focus to our customer marketing associate relationship. That's a fancy way of saying we're being smarter about where to to spend our sales efforts and our marketing dollars. We are concentrating on profitable accounts through the use of in-depth business reviews with our customers to pinpoint where we can add value to their business. We're also using business development managers to bring on profitable new accounts.

By being more selective in opening accounts, we also cut down on the churning of the new accounts. This process may mean that top line growth will be slightly less over the short-term, but we believe that the process will result in better long-term profitability.

Similar to last quarter, the shift in customer mix to slightly more multi-unit sales, also had a beneficial effect on our expense control performance. Multi-unit customers require less operating expenses in terms and selling, delivery and order selection. Additionally, inflation continues to give us some benefit on expense control, as our fixed costs in the quarter were not impacted by inflation. The net result was a strong gain in the quarter, no matter if you measure it by increase in operating pretax earnings, which were up 15.4%; earnings before taxes, which were up 16.8%; net earnings of plus 16.3%; or diluted earnings per share an increase of 15.4%.

On that positive note, I would like to turn microphone over to Rick Schnieders, our Chairman and CEO.

Thank you, Tom. Tom began by thanking our associates, let me add to that by thanking the many foodservice operators who have supported us through their patronage.

The foodservice business in general and the restaurant business in particular require constant attention to detail and offer very little margin for error. Often times our customers are relying upon us to get them their groceries for that day's meals. The efforts of our associates in getting the right item in the right place at the right time at a competitive price, while also maintaining high standards of quality and food safety are what have allowed us to become the best provider of product to the foodservice industry.

I'd like to reinforce the point Tom made concerning operational efficiencies. We've no intention of resting on our laurels. We feel that we're just getting started on moving this industry to new levels of efficiency. As many of you know, SYSCO operating companies have a considerable amount of latitude in running their operations. As a result, there's a wide range of profitability between our best performers and our lowest performers. We don't have to invent fancy new technologies to significantly raise the profitability of this organization. All we have to do is continue to raise the average level of performance by improving the operations of our lower-performing operating companies.

With 81 broad line operations in North America, the business practices necessary to improve our lower-performing companies have already been created and put into use by our top performers. One of our jobs is to foster the transfer of Best Business Practices between the companies. If we can do that and at the same time implement our Supply Chain Initiative through the use of our redistribution centers, we think that we can continue to lower the cost of doing business in the food service industry for a long time to come.

We continue to invest strategically to grow our business. Capital expenditures for the third quarter of fiscal year 2004 were $131 million and stand at at $379 million for the first three quarters of the fiscal year to date. We estimate that total Cap Ex for the current fiscal year will be approximately $500 million. Our National Supply Chain Initiative, which is a key part of our investment spending in 2004, continues to make good progress. We estimate that the construction of the Northeast RDC will be completed in the summer of 2004. We're now estimating that we should begin receiving product into the RDC in January of 2005, with shipping to our first operating company to occur in February of 2005. It is anticipated that a phased rollout to the rest of the operating companies in the northeast will will then occur throughout much of the rest of calendar 2005.

During the third quarter, costs related to our National Supply Chain project totaled $28 million, of which $25 million was capitalized and $3 million expensed.

We also continued to expand our geographic footprint through our foldout activities. In February, our foldout in Fargo began operations and our foldout facility north of Los Angeles is scheduled to open in May of this year.

One of the reasons we can continue to strategically reinvest in our business, is that our cash flows from working capital remain strong. In the third quarter of this fiscal year our accounts receivable and inventories grew at a rate slower than our sales growth. Day sales outstanding for accounts receivable and inventories were down, while our DSO for accounts payable were up on a 13 week and 39-week basis compared to last year. In other words, our cash provided by operating activities was robust.

I'd like to take a step back now from everyday matters and talk a little about corporate governance and corporate responsibility. We've been working hard at doing all of the required testing and audit work that have resulted from the Sarbanes-Oxley Act and will issue a report on the effectiveness of our internal controls at the end of next fiscal year as the act requires. However, at SYSCO we believe that corporate governance and responsibility go beyond simple compliance with the law and must be rooted in both the values of an organization and the systems it has to review and respond quickly to what may be happening within the organization.

With respect to values, our founder, John Baugh [ph], set the foundation for ethical dealing with our employees, customers, and suppliers. Just by way of example, when the Company was formed 34 years ago, our Board of Directors established a number of commitments for the Company that I'd like to share with you.

First, the focus of SYSCO's people is to remain centered on meriting the trust of our customers. Second, truthfulness is the basis upon which trust is established, and a foundation for the practice of moral and ethical conduct. Third, the pound is to consist of no less than 16 ounces, and 100 cents of value must be exchanged for each dollar of revenue received. Fourth, product quality must meticulously conform to label descriptions. Fifth, customer service goals are expected to be fulfilled as promised.

During the ensuing 34 years, we've worked very hard every day to live up to these principles of truthfulness and honesty. To back up that commitment to ideals, however, John Baugh established, and we have continued to enhance, weekly reporting for all facets of our business. If something is not going right, weekly reporting quickly highlights the issue and gives us sufficient time to deal with the situation before it might become a major problem. In this day and age, it may seem fashionable to proclaim yourself compliant with the latest ethical litmus tests, but here at SYSCO we've been firmly grounded in ethical behavior since the very beginning.

Let me wrap up by saying that we love food and the foodservice business. Dining out is one of the true pleasures of life that brings enjoyment and variety to the day. The restaurant owners and foodservice operators in the United States and Canada are highly creative and among the most vibrant parts of their economies. In short, it's a great business. I would encourage you again, as we have before, all of you, to go out and eat at a restaurant near you on a regular basis. After all, as our new advertising campaign says, "Why cook?"

We will now take questions from the individuals on the call. Operator?

Thank you, if you would like to ask a question, please press the star key followed by the digit 1 on your touchtone phone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Once again, if you would like to ask a question, please press star 1 at this time, and we'll pause for just a moment to give everyone an opportunity to signal.

Our first the question comes from Ajay Jain with UBS.

Yes, good morning. You attributed the -- I guess, the gross margin decline mostly to sales mix and since the degree of gross margin pressure was quite a bit higher than Q2, can you talk about how sustainable you think the shift in customer mix is likely to be over the balance of this year and also into fiscal '05. Do you expect the growth in multi-unit business to potentially accelerate, relative to what you've been seeing in each of the last two quarters?

I wouldn't think that we would see an acceleration of multi-unit business. However, I would also include that the inflation continues to have a pretty significant impact on the gross margins. So, we're, you know, again, we think that that, the sales growth, multi-unit sales growth will not accelerate any more rapidly than it has, than we've experienced recently, and, on the other hand, we've seen some moderation in inflation, which should allow us to moderate the gross margin improvement or, actually, improve the gross margin improvement.

Okay. And I just had a quick follow up. Since you mentioned the impact of weather, can you discuss how material the impact of rising fuel cost has been?

Well, the rising fuel cost, first of all, it's important to know that fuel costs themselves are a fairly small portion of our overall costs. In fact, as a percent to revenues, about a third, a third of a percent, so .33, 33 basis points. And, in fact, one of the most gratifying things about SYSCO is, again, that ability of our operating companies, those autonomously run organizations to respond to these kinds of eventualities, and they're doing a better job of getting more pieces on the truck, doing a more effective job of routing the trucks, so we're not seeing an impact, virtually no impact to the cost of fuel.

Thank you.

Our next question comes from Edouard Aubin with Deutsche Banc.

Yes, good morning. I was wondering if you could clarify a little bit your statement on the food inflation. You mentioned that you expected food inflation to moderate in the near future. However, several large food manufacturers have recently announced that they would increase prices in the near future due to commodity price increase. So net net, do you expect food inflation to be higher year-over-year in the fourth quarter than in the third quarter?

No. I would kind of stand by the trend that we've seen, and that is that we've gone from about 7.25 to 5.25%, so we've seen a 2% reduction in the amount of inflation. And, of course, the companies that you're referring to, the suppliers that you're referring to, most of their business would be in retail, the retail business. So different mix of products for us.

Where we've seen most of the inflation, most of the impact from inflation, has been specifically in the area of beef, and very high. We've seen moderation in beef pricing and, in fact, we anticipate that we'll see some more moderation going forward now. The kills have been down in the slaughter houses, there have got to be some cattle out there, so I don't think that we see a significant reduction, but we wouldn't anticipate in our business, the foodservice business, to see significant increases in inflation.

Right, and last month, Fresh Points announced the acquisition of Overton [ph] Distributors, in the past, if I am correct you had mentioned that Fresh Point was one of your least profitable division, at least from an ROIC standpoint. And I was wondering if it, first of all, was still the case and if not, what type of progress have you made at Fresh Point over the past few years?

Great question, thanks for asking, Ed. In fact we have seen significant improvement in our Fresh Point operations, and we're very pleased with the progress that they've made, and the Overton acquisition, as you pointed out, is an indication of that progress, and we are now comfortable -- very comfortable making that acquisition as a great company in a good location for us, and we have our eyes on several other opportunities across the country.

Great, thanks.

Let me circle back a little bit to the inflation question. As you may have heard on the call, one of the things we did say is that in the fourth quarter we'll start to cycle again some of the higher inflation numbers that we started to see last year.

You may recall that through the first half of the fourth quarter last year, inflation ran at about 8/10 of 1% rate, but by the end of the quarter we were posting about 2.5% inflation rate, which meant that in the latter half of that quarter we were seeing 5% inflation. So as we cycle around against that, we should see some moderation in inflation as well.

Thanks.

Our next question comes from Kenneth Zaslow with Morgan Stanley.

Good morning.

Good morning, Ken.

If I were to look at your internal sales adjusted for inflation, would you say SYSCO has gone through the largest part of its pruning process, and we should start to begin to see -- we saw a little bit of an acceleration in terms of, I know you don't call it real sales growth, so I'll call it internal sales growth adjusted for inflation, accelerate. Is that a fair point or is this -- kind of where, kind of at that 3 to 4% for the rest of the year because of the pruning?

Well, I think, you know, to use your term, pruning, we continue to see our companies appropriately being more discretionary about the accounts that they have, making sure that they are, indeed, profitable, that their strategies match up with ours. So that process is going to continue on for a while. However, you know, we'll get to the point in the next quarter or so where we're going to sort of anniversary the beginning of that, and so I would anticipate we'll see some additional sales growth going forward here in the next quarter. That is attributed to that whole process. That is making some, doing some pruning, and then ultimately anniversarying that pruning.

And can you give us an update on the progress with the new business development managers, like how many are in -- how many do you have, where do you expect to go with it and any, at least anecdotal stories to how it's actually improved your sales growth.

Sure, I think that any one of us around the table could probably jump in here, I'll ask Tom or Ken to make comments also, but working very directly with the operating companies, we all just came back from our council presidents meeting where we gather all of our presidents of our companies from across North America together twice a year. This was our spring meeting, and there is no question that the enthusiasm for the business development process is very high.

We're still in a learning mode, but I would say that we've made superb progress, more to be made, but we're really on the right track here. When we have more mature business development in a particular company, we're seeing nice growth and, more importantly, profitable growth, and that is the focus today. It isn't just growth, it's profitable growth and of course you see that in the net numbers of the organization. So I'm -- I'm very pleased with where we are. More work to do, but we're getting there. And, again, I'd ask Ken or Tom to make any comments they might make.

I guess the only comment I would make is that we've some companies that are what you would call early adopters. In our case today, they've got fairly significant, a half a dozen people or so directly involved in each of these processes, both the development and their reviewer relationship process, and when you look at them, their sales increases are fairly significantly above the average. So certainly it bodes that as the rest of the companies get deeper and deeper into this, that it'll certainly -- it'll certainly all our growth sales will grow profitable sales.

We have it established, I think in every company, every broad line company in the nation, and we're probably, as a judgment, 50% established with doing it right. We get -- where people doing it right, we're getting excellent feedback on the results, so it's exactly what -- the feedback on the results are exactly what our expectation is.

What percentage of the total sales force will be, will you have these new business development managers and how far along are you in terms of that? You know, are you 50% finished with this process, or just give us, I guess, a little progress report on that side.

Well, I would, I would offer that as Ken said, we -- 50% of the companies are doing a good job, they have the right people in place. But in terms of the actual results that we expect, and we're confirming those expectations as we go, we're just getting started in the process. So we've got an awful lot of work to do yet.

However, as Tom mentioned, we have a number of companies who've been in this particular model working with this model for now, maybe three years, and their results really confirm for us that it's the right model for SYSCO. And so we've got -- we've got work to do yet. We're getting the right pieces in place, we're getting the right commitment and the operating companies, really understanding the process, but it takes time. It takes time hire the right folks, to train the right folks, to get the organization sort of all aligned with the process itself. But it's -- you know, the benefits are, the major benefits, I would say, are a couple of years away yet.

Thank you.

Let me see if I can add to that. First of all, basically, both of these positions are working through DMA and the district managers, so it's a shift in how we're doing things, it's not a -- what I would call a total complete reorganization. And the number of people that would be involved in this process is probably reasonably small percentage.

As you know, we have about 8,000 market associates supported by close to a thousand district managers, and I would think that in each of these positions, probably one for every 20 to 25 market associates is probably where we'll end, you know, over the next year or two.

Thank you very much.

Our next question comes from Andrew Wolf with BB & T Capital Markets.

Hi, good morning.

Good morning.

Tom mentioned, you know, that the chain restaurants are doing well, good strong sales. Rick, what's your assessment on the independent restaurateur at this point. Is the average independent having positive same-store sales, are the number of new restaurants opening, let's say, outpacing those that are closing, those kind of metrics?

Well, actually, anecdotally, Andy, one of the things that we've heard here recently is that we're now starting to see in various markets new openings of independent restaurants which has not happened in the last couple of years to any great extent. So that's very encouraging. The other distinction that I would make is that as you look at our stratification and think about our stratification of our Gold and Silver customers and then those to the other side of that graph. You know, the Gold, Silver customers, they 're -- that's a very solid base, a very stable base of business for us, and they generally are, have been in business for, you know, 10, 20, as much as 40 years. So in terms of customer base and opportunity base, you know, it's huge right there, still in our Gold, Silver customers and our potential Gold customers out there.

So, so the new customers, you know, I think we're seeing again, anecdotally we're seeing some activity out there that's very encouraging, folks are feeling better, the economy in general is doing better, but frankly it'll take a while for those customers, those new customers to get to the point of the maturity, that they're a good solid customer for us. However, we're very encouraged to hear there, you know, there is that kind of activity out there again now.

Great. And just moving over to the redistribution initiative, looks like the expense this quarter were perhaps a little lower than I thought they would be. Could you just comment on that and perhaps lay out what you expect in the fourth quarter and next year for expenses on the redistribution side?

Yes, if I can, I will hand that to John Stubblefield.

Thanks, Rick. What we saw in this quarter was -- and we'll see some variation in every quarter going forward, but it just so happened that this quarter, the expense spend was a little less than what it had been running over the last several quarters. Going forward for the next several quarters, I would expect that the spend would be on average what we've seen over the last three quarters. There could be slight variations from quarter-to-quarter as to what goes into the capital portion and what goes into the expense portion dictated by those activities going on specifically in that quarter. So, you know, we've not come up with firm guidance yet for next year, but I think at a beginning point it will be somewhere in the range that we saw this last year, maybe slightly less in total dollars overall.

Okay, given the timetable Rick laid out, do these costs, you know, anniversary at some point, let's say, when you get -- start to receive product for next winter?

Well, they certainly anniversary on the capital side because the large part of the capital spend will be finished by the end of our second quarter of fiscal 2005. However, we will have those ongoing expense as we convert and transition those companies into that redistribution center, and then as we begin building that second center, we'll see capital again come back into play, but certainly not to the extent that we saw in that start-up phase. Ken, do you have anything that you'd like to add to that?

No, it's just that we will be operating it, so that the operating [inaudible] costs associated with it beginning in January.

Exactly. We'll come out with some guidance as we get closer to the end of our fourth quarter as to what to look for this next fiscal year.

Okay. Just one last thing. I don't want to get ahead of your guidance but some current costs do include really one-time items like developing software and systems and that kind of stuff?

That's exactly right. However, as we do go through the transitional phase, there will be costs incurred getting the companies moving their processes into that redistribution. That will be expense items that are incurred on the front end.

Right. Thank you.

Thank you.

We'll go next to Mitch Speiser with Lehman Brothers.

Thanks very much. A few questions. First a question on the RDCs. It looks like you did push back the opening time to do it from like October or so to February. I just want to understand why the couple month delay?

We've been very aggressive from the very beginning in terms of our development expectations in keeping people very focused on getting this done as quickly as possible. But more importantly, also committed to the fact that this is going to be as effortless as we can make it in terms of a transition. Having those two things somewhat at odds, we have erred, if there's an err to be said, on the side of being aggressive and stating a date, but at the same time being realistic in terms of the testing and building of the systems that have to come together to get this completed. I guess I've got to say is that a project as massive as this with as many moving parts that come in within a couple of months of what, very early on was a blank sheet of paper's expectations at the finish date. We're quite pleased with it, to be quite honest about it.

And most of that pushback is in this testing phase of this integration of the four new software packages, which is really tough. It just has to be transparent to the operating companies and to our customers, and so we're taking extra precautions and making sure that when we fire it up, it works the way it says it's going to.

So you feel good about the February '05 rollout now. You don't think there will be any more delays?

We are right on time with it right now.

Mitch, we get a report every week, and it's kind of an update of all of those processes that have to be integrated and it's done on a color-coded basis, and what we look for every week is all green, and for the last four or five weeks we've had all green. We have a very high level of confidence in systems and in the integration process.

Great. Moving along, I believe last quarter you mentioned that the travel and leisure segment has experienced an uptick. It wasn't mentioned as a sales driver this quarter. I would just like to get an update on your travel and leisure sales, and maybe about what percent of your overall business is focused on that travel and leisure area?

Well, that's a little bit -- the last part of that is a little bit of a hard number to come to, because if you take a look specifically at hotels and motels, for instance, we have definitely seen an uptick. But related to that, of course, in any given city, whether it's New York or Chicago or where ever, related to that is the restaurant business that's associated with the travel. So, you know, the general economic activity, certainly helps us an awful lot. And I guess I'll ask John or Larry Accardi if we have any specific information in regard to the occupancy rates, etc, in the hospitality industry, in the travel industry.

Yes, Rick. We do. In fact, we have seen, during the months of January and February, that occupancy is up overall 3.4%, and we see that trend continuing through March, actually, we're seeing in March of more of like a 4 to 6% increase. Interestingly, in the upscale and luxury segments, that business has gone from from 6 to 8%, and in the luxury from 10 to 12%. And we're [technical difficulties] continued growth in that area. I might add that our guest supply company, since our acquisition, has continued to show sales growth in might be some very tough times for that industry so we feel like that this is a result of our improvement in market share in this business.

Great. And lastly, just on the inflation picture, which is decelerating but still a bit onerous, I believe you do, to your street accounts, at least you do deliver like twice a week. I'm just trying to understand -- it seems like that you're not passing on your cost increases completely or there is a bit of a time lag. And just, you know, with two deliveries a week why wouldn't the price increases to your customers be almost in line with the cost increases that you're getting from your suppliers? Thank you.

Well, our systems, first of all, I guess, we should indicate, are very, very close to the market. So in the case of, in your example it is exactly right on average, we'll deliver twice a week, and the pricing for a Tuesday delivery is determined on Monday, and the pricing for a Friday delivery is determined on Thursday. So, we're very, very close to the market.

Are we recovering 100% of the costs? Probably not quite, no. But we are, you know, we're recovering in the upper 90s, and I would say that, again, systems are very, very effective in doing that, and we're very pleased that they are so response .

Tom, anything else you might add to that?

No. I think our systems are excellent in terms of both inflationary and deflationary. We don't have an exact number but it's just a few basis points that may fritter away in terms of not being able to recapture them because we have -- in many instance we have some advance knowledge of increases that are coming.

Thank you.

Thank you.

Our next question comes from Jeff Omohundro with Wachovia Securities.

Thanks. Just a question on SYGMA and the rapid growth that we've seen lately. I wonder if you could help put it in a bit of context in terms of the growth and available infrastructure and capacity and how that's been managed?

Well, in terms of capacity, one thing about that business, as opposed to the broad line, the SYSCO broad line business, it's much easier and much quicker to respond to a particular customer's needs. We can -- those facilities can be, you know, built or retrofitted on a very quick basis. We can get a fleet positioned quickly.

Quickly being now, you know, again, it might be a couple of months, we get notification from a customer. Might be a couple of months. But it isn't like building a broad line company that takes us you know 12 months or 14 months to build. So, right now, we've got a little bit of capacity in SYGMA in certain parts of the country, but if there were an opportunity, somewhere we don't have a SYSCO -- I mean a SYGMA distribution center we could be ready to go pretty quickly. So that's a business that responds rapidly to demand.

Okay. And on the broad line business at Allen [ph] Management Additions, would you say that that's a proactive step, it's not any issue on client retention trends or anything like that, is that correct?

No, absolutely not. As a matter of fact our client retention trends are better than they've ever been. It is the recognition of a fact that we've shared with various folks outside observers of SYSCO, and that is that even our best accounts, our Gold accounts, on average we only have about a 40 share, and this is a design, if you will, where by we can move that share number up.

And as Tom suggested earlier, with the business where we have a mature business development process, business review process, that's indeed what we're seeing. We see very nice growth. We are able to, I guess the important thing is that we're able to provide more value for our customers by using a business development business review process.

It's all about putting our best people against the best accounts and the best potential.

Thank you.

Thank you.

We'll go next to Eric Larson with Piper Jaffray.

Good morning, everyone.

Good morning, Eric.

Say, Tom, I noticed you left out Minneapolis as part of the country that would recognize how cold it was this year. I guess you must think that we're just used to it up here, huh?

Well, I figured that variations were probably less noticeable to you, but more to us.

Well, I'll invite you out up here for next January and we can hang out. How does that sound?

This goes back to Rick, or maybe even Tom can answer this, whoever feels willing to answer, but when you look -- I'm going back to an earlier question, when you look at your broad line business, now adjusting for acquisitions and some other things, it's hard to tell all the exact numbers, but sequentially, for the last three or four quarters we've seen the nominally growth rate kind of tick down. And I know that this stuff goes in cycles, etc., and it might be more of a -- of timing of SYSCO operational events, etc, but with items and pieces per stop increasing etc, with build up in the economy, I would think that your -- just your overall broad line sales would start picking up sequentially. Is there something I'm missing there?

I think it does go back to an earlier question and answer, and the question was in regard to pruning of accounts, and I think that the activity associated with our doing that sort of activity, and doing it, hopefully, in the right way. But that has certainly ratcheted up over the last couple of quarters. Coupled with, we are getting better at being -- we're being more discretionary in terms of the new business that we're bringing on, and I just, you know, kind of skeletons in the closet, if you will.

But one of the things we did not do well, and we're getting much better at, is we would bring on too many accounts that were never going to, their strategies weren't going to fit with SYSCO and they were never going to be a profitable account to to SYSCO. So we are being much more careful about that. Both of those activities, the right things to do, but they are providing some drag on the top line of the business.

Okay. That's very fair.

And then just one other followup. Maybe Tom can answer this. Tom, when you source your produce for the company, I know your produce, let's just say you're a $25 billion revenue company, it'll be more than that this year, but it's about 10% as I recall of your total sales. Given the volatility in produce in the market the last -- particularly this fiscal year and a little bit before, how do you manage your way through that without running into some of the issues that maybe some other of your competitors have.

Well, first off, 10%'s a number that's a little high on produce, at the least a couple of percentage points high there, 6, okay, we're about 7% would be the right number. So, irregardless, it is -- it's still a large amount of product. But, again, you know, we're either pricing weekly or more frequently, with about 60% of our customers and 40% contractually, in the case of produce, would be no more than one week. We don't have any long-term contracts or any guarantees, and, so, therefore, that's why it's pretty much a pass through on the ups and downs, that seems to be different than what our competitors are experiencing.

Okay, thanks much. I know you've disclosed this number before. How many operating companies will go into your redistribution center when it's all said and done?

The first one will have 14 operating companies.

14. Okay. Thank you, everyone.

Thank you, Eric.

We'll go next to Mark Husson with Merrill Lynch.

Hi, this is Monica Aggarwal for Mark. Excluding the impact of inflation and mixed changes that are on the gross margin expense line is the underlying improvement in operating margin tracking the reported 20 to 25 basis point improvement of the last three quarters?

I'm sorry. I heard the first part of that, but I didn't get the last part of the question, Monica.

If you take out the noise inflation and mix changes that have an impact on gross margin and expense line, is the underlying improvement in operating margin equal to 20 to 25 basis points that you've reported in the last three quarters?

Boy, John, I'm going to have to ask for some help here, but I'm not sure we can get at -- if you take that noise out, I'm not sure if we can get at the number.

I think that's the right observation. It's very difficult with the many moving pieces we have to pinpoint what is the components of our operational margin improvement relating back to specific items. So it's very, very difficult to get that precise in terms of what the effects are. We know that from a macro sense certainly, everything that we've talked about results in that great leverage we continue to have through our operations.

And when we look at the improvement of our companies, kind of in total, the graph that we've shared with this group, before, certainly, we are still, very, very comfortable that they are making improvements, that there's still room for improvements as we suggested earlier in our comments. And I would also say that, you know, from a comfort level, as we install Best Business Practices throughout the organization, the ability of the operating companies to take them into their operation, and make them profit improvers, you know, we're very gratified with that process at this point.

We now have the Best Business Practices website up, so an individual operating company, if they - if they have a particular area where they want to improve it, they can go in an get specific activities to deploy that will improve their operations. So, from that kind of an anecdotal look, I guess, we're very comfortable with the direction, kind of the operational effectiveness direction of the companies, and our overall ability to continue to produce net improvement on our bottom line.

Okay. I do realize that was a difficult thing to get to. But, if you look at the impact of inflation, is the deterioration in gross margin similar to the leverage in SG&A. Do they offset each other quite nicely and the same thing with mix change or, you know, does one line get more benefit than the other?

No. I would say that they do not offset, inflation numbers do not one-for-one offset. So if we see some decline in gross margin and a decline in operating expense, I think that what we see at the operating expense line is the ability for those, those companies to certainly take, take advantage of the inflation. But in addition to that, we're seeing, again, practices installed in the companies, deployed within the companies that are generating real long-term savings. We see it in efficiency numbers. We see it in -- one measure that we use is people per 100,000 cases, so we see continual improvement in those kinds of efficiencies, in those real efficiencies in the operations.

Okay. Thank you.

Thank you.

We will go next to Bob Cummins with Shields & Company.

Thank you, good morning, everybody.

Good morning, Bob.

I wanted to get back to the question of customer mix and in particular the faster rate of growth that you're seeing with the multi-unit accounts. I realize some of that is because you've weeded out less profitable marketing associate accounts, but on the other hand I'm just wondering if there's a change in strategy here. Is the rapid growth on the multi-unit business simply because those customers themselves are growing their businesses faster than the local operators, or is it a policy decision on the part of SYSCO to re-emphasize multi-unit business whereas before you were being extremely selective in the new accounts you were taking in there. Just kind of a broad philosophical commentary on your areas of emphasis.

There's not been, Bob, a change in our philosophy. We still would hope to grow our marketing associate-served business at a more rapid rate. A couple of things that happened -- a couple of things that happened in this part of the business, the multi-unit business, and that is that the business comes on to us, or comes into the organization in pretty big chunks. So it's not like getting a number of independent operators, marketing associates, serve customers. Major business like this comes in big buckets, if you will. And so that has some impact on the growth.

Additionally, however, we have seen, and you have seen too, I'm sure, the increases in same store sales in some of the chains, and we're, we're certainly benefiting from some of that, and probably another indicator of the general economic environment out there that things are just picking up throughout. We see better, we see nice growth in the kind of of mid-range of business, the quick casual business, for instance, we see a good growth in that area.

Good morning, Bob. One other comment here. Our informal internal measure remains to grow $2 for our market associate-served sales for every dollar of a chain sales and of course that's got to be based on a little bit longer time frame.

Okay. Thank you.

Thank you.

Our next question comes from Jack Murphy with Credit Suisse First Boston.

Thanks. Two quick questions. One, regarding the comments on activity-based costing. Could you say how much overtime labor expense is as a percent of total and what the longer term opportunity might be there. And secondly could you give us the impact of the 14th week in the fourth quarter on sales and earnings?

In terms of the activity-based pay that we're using, I don't know that we can give you a hard number there. Again, those companies, we do have some metrics. Those companies that have used activity-based pay on the delivery side, that's where we've had it the longest, it's the most mature, when we do comparisons, those companies have a nice improvement again, by comparative. Good improvement in terms of their expense ratio.

So it's a more efficient way to deliver deliver groceries to our customers. In addition, we get our equipment back earlier in the day, we're able to get it cleaned up, loaded again for the next day, benefit to our customer because we're getting the order to them in a more timely manner. So, activity-based pay, there's so many components of that, but we do see, as a comparison, those companies that are more mature, they're doing a better job in terms of their cost reductions, their efficiencies in the delivery, delivery part of the business. And, John, I would look to you for the specific number, in terms of the 14th week.

1.8%?

Yes, I think it's pretty linear, you know, what the effect of that one week out of 12 increase is. That's pretty much what our expectation would be.

When I said 1.8, I was looking at the 52 versus 53.

For the year, right.

For the year.

Okay, great. And just one quick follow up, back on activity based. What kind of swing do you see between, say an average company and the company that's doing really well on reducing overtime expenses?

Ken or Tom, I will turn to you on that.

Again, what are you looking for?

You were talking about, you know, an expense savings, sounds like on overtime. What kind of a swing from the average company to these ones that you're saying are doing particularly well?

Depends on the size of the company, of course, but let's just say a big, one of our our big operating companies that moves from an ABC pay to -- from an hourly pay usually will cut the overtime about $20,000 a week.

Per company.

Yeah.

Okay. Thanks.

And due to time constraints, this does conclude today's question and answer session. I would like to turn the conference back over to our speakers for any additional or closing remarks.

Thank you, operator. This is John Palizza. Obviously, my phone lines now become open. You can reach me if you want any further follow up at (281)584-1308 if you don't have that on your speed dial already. Thank you very much for calling in.

This does conclude today's teleconference. We would like to thank you for your participation. You may now disconnect