西斯柯 (SYY) 2004 Q4 法說會逐字稿

Good day everyone and welcome to today's Sysco corporation fourth quarter and full 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, Steve. Allow me to add my welcome to everyone for joining us today on the call.

With me here today are Rick 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 and Service Operations, and Diane Day Sanders, Senior Vice President of Finance and Treasurer.

On the call today, Tom Lankford will cover our operating performance during the quarter. John Stubblefield will then discuss capital expenditures both for this past year and our expectations for fiscal year 2005. More specifically, John will address our ongoing investment in our supply chain initiative and the redistribution center and some of the benefits we see coming out of it.

Rick Schnieders will conclude our prepared remarks by addressing longer-term issues including remarks on restaurant industry trends and the effects of continued inflation on our customers. This will be followed by the question-and-answer session which Rick will moderate.

But first, let's pause a moment to give you our Safe Harbor language. 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 10-K, for the fiscal year ended June 28, 2003.

One further cautionary note. Our fourth quarter this year contained an extra or 14th week. As we give you sales numbers on the call today that compare percentages through last year's fourth quarter, unless we specify otherwise, those numbers are comparing the reported 14-week quarter this year to the 13-week quarter last year. A full reconciliation of any so-called pro forma sales numbers which adjust for the extra week this year is contained in our press release issued earlier today and which is available on our Web site at www.Sysco.com.

With that, I'll turn things over to Tom Lankford.

Thank you, John, and good morning to our Web cast participants.

Let me start by expressing my appreciation to the hard working men and women of Sysco who day in and day out put into practice our goal of helping customers succeed. As I go around the country and visit our operating companies, I'm always inspired by their dedication and spirit.

Here are the basics for the quarter, all compared to the same period a year ago. Sales were up 16.7%, reaching $8.139 billion, net earnings were up 15.6% to $280.6 million, and diluted earnings were, per share were 43 cents, or a plus 16.2%.

I'm going to discuss our operating performance in the context of, and in the same order you find them on the income statement.

First, sales. Sales in the quarter were up a total of 16.7% over last year's fourth quarter. If you adjust our sales for the effect of the extra week in the quarter by subtracting out 1/14 of total sales, sales for a comparable 13 weeks this year to the same period last year rose 8.4%.

Sales from acquisitions contributed 41 basis points in the quarter with sales from the meat cutting operations of Colorado Boxed Beef now known as Buckhead Beef of Florida, Overton, our fresh produce acquisition, and International Food Group, being the non-comparable acquisitions. Inflation as measured by the rise in our cost of goods was 8%.

The quarter experienced some moderate slowing of sales following the announcement of our record sales week prior to Mother's Day. This is a trend that we continue to experience in the first five weeks of fiscal quarter of 2005. It's our opinion that the effects of prolonged inflation are beginning to take a toll on both restaurant operators and their customers' willingness to dine out.

If you think about how a restaurant operator can respond to prolonged inflation or cost of goods, they have about five basic choices. First, they can buy the product at the higher price and pass the price increase along to the restaurant patron, which exposes them to potential lost sales if customers refuse to accept the higher prices.

Second, they can buy the product at higher price and not pass the price increase along, which will hurt their gross profit margins. Third, they can lower their quality standards or their portion sizes, again risking the ire of their customer.

Fourth, they can substitute product. Or fifth, they can negotiate with their distributor over the pricing and markup of the product they buy.

We think that all these outcomes are occurring to various degrees. And as a result, we're seeing inflation's impact in both our sales and our gross profit margins.

We continue to refine our customer marketing associate relationships. We're moving from a so-called peanut butter approach where we spread our efforts evenly over all of our customers, to one where we concentrate on our profitable accounts through the use of in depth business reviews to pinpoint where we can add value to their business.

Further, we continue to use business development managers to selectively bring on profitable, high potential new accounts. By being judicious in opening accounts, we also cut down on the turnover of marginal new account which have very little chance of becoming profitable. This may result in slightly lower total sales growth in the short-term, but we firmly believe that the process will result in better long-term profitability.

Let me turn now to gross profit margins. As we saw throughout much of our fiscal year 2004, gross profit margins in the fourth quarter were impacted by a higher percentage of sales growth coming from lower margin multi-unit customers.

During the quarter, our marketing associate service sales grew nicely. However, corporate multi-unit and Sygma sales grew at a faster rate.

In addition to just having lower margins, many of our deliveries to the multi-unit side of our business are priced on a fixed fee, plus the cost of goods. In an inflationary environment, the rise in the underlying cost of goods automatically squeezes the fixed fee when expressed as a gross profit margin percentage even though the gross profit dollars remain the same.

Similarly, where products are priced on a fixed fee per pound, plus cost per pound basis, such as meat and dairy, a rise in the cost of the product results in a higher sales price, but a lower profit margin as a percentage of sales.

It's important to note that the dollars of gross profit are the same in either high or low inflation in this type of sales. It's a percentage that changes.

Next, operating expenses. Our operating companies once again turned in an outstanding performance with our expense ratios declining to 13.66%, or down 34 basis points.

Expense control performance has been a focus throughout the fiscal year, and all of our segments, broad line operating companies, Sygma, and our specialty companies, turned in good performances in the fourth quarter.

Both our quality metrics, such as pieces per error, and our operational metrics, such as pieces per stop, and lines per stop, continue to show good improvements. This means that our customers' orders are incrementally larger, with fewer mistakes, and are a greater variety of items in delivery, in the delivery meaning that we have a larger share of their menu.

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. Just as we've seen in the last two quarters, the shift in customer mix is slightly 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 costs in the quarter were not impacted by inflation.

Just as expenses were a focus in fiscal year 2004, we will continue to emphasize expense control in fiscal year 2005. There's nothing like a little slow down in sales growth to really sharpen your focus.

We will be taking the opportunity in 2005 to make sure that we as a company are benchmarking against best practices throughout our organization. We will employ expense control tactics this year in order to put ourselves in a better position to execute on our long-term strategies, such as our supply chain initiative.

I'll wrap up this section by talking about the components of inflation. A year ago, meat was the highest inflation category, but in the past few months, dairy prices have spiked and taken over the inflation lead.

Given our mix of sales, the categories having the largest impact on our inflation number today are dairy, meat, poultry, and canned and dry goods. However, all of our categories except seafood and produce experienced inflation during the quarter.

We expect inflation to moderate as dairy prices, which tend to be more volatile, start to come down. Meat prices, however, look like they will continue to stay high for the intermediate term future which will also impact other protein categories such as poultry and pork which tend to follow beef pricing.

In responding to the issue of inflation, our marketing associates are working with our customers to address the increase in raw materials costs by re-developing menus and finding alternative products. For example, rather than featuring a fillet for $39, we may suggest to a restaurant operator an entree that features a smaller cut of beef combined with shrimp, which results in a lower cost to the customer and a higher gross profit to the operator.

One of the great things about Sysco is that with our autonomous operating company structure, there's quite a bit of ingenuity that gets applied to problems such as this.

At this point, I'd like to turn things over to John Stubblefield, our Executive Vice President for Finance and Administration.

Thank you, Tom.

During my time on the call today, I plan to cover three areas, capital expenditures and capital projects for this year and next year, progress on our supply chain initiative, and a short discussion of the timing of our certification of internal controls required by the Sarbanes-Oxley Act.

For the year just ended, our capital expenditures came in at 530 million, slightly above our original projection of 500 million. Notable capital improvements completed include our new fold-out facilities in Oxnard, California, serving the Northern Los Angeles market, and in Fargo, North Dakota.

We also completed a replacement facility in Southeast Florida, and substantially completed a replacement facility in Cleveland, Ohio, which is scheduled to open this month. Our redistribution center and supply chain initiative was our other significant capital project in fiscal year 2004.

During the year, we spent $134.8 million on the supply chain initiative project of which 27 million was expensed and 107.8 million was capitalized. This brings total spending on the project to $216 million, of which $152.3 million has been capitalized.

Looking forward to fiscal 2005, we are projecting capital expenditures of the 475 to $500 million range. Significant projects for the year will include the completion of our fold-out in Post Falls Idaho, serving the Spokane, Washington, market, a new fold-out to be announced, a replacement facility in a major metropolitan market, and the ramp-up of the first redistribution center and its associated systems.

With the redistribution center being put into service mid-year, shipping is scheduled to start in February, 2005, which will result in an estimated additional 4 to 5 cents per share of expense during fiscal 2005. This includes depreciation expense of $13.5 million for this fiscal year.

In that this is significant, it is important to review the benefits we see coming out of the project. As you know, part of the savings is derived from the handling efficiencies at the operating companies.

As a result of the project, we will change our warehouse handling processes and racking configurations. By sending product to the operating company that is already in the best pallet configuration, and economic quantities, the redistribution center will allow us to receive, put away, and pick product in our warehouses much more efficiently.

Next, as we begin purchasing more inventory and full truck load quantities, we expect to see reduced transportation costs and other shared savings benefits among all the supply chain partners beginning in the second half of fiscal 2005. Then, we expect to reduce our inventory levels at the operating companies for products stocked by the redistribution center by 30%.

This effect should become apparent in fiscal year 2006, as we work through the ramp-up process.

Finally, we expect to achieve capital avoidance and related cost benefits going forward as reduced inventory levels and more efficient material handling results and fewer warehouse expansions.

We recognize that we're giving you some very definite estimates on expenses for the RDC, but we had not at this point quantified the savings. We are going to be conservative on this issue.

Our costs for the first RDC and the supply chain initiative are pretty well defined and on target at this point, and it's appropriate for us to discuss them. The savings, however, are still mostly in the future, and will be realized incrementally and in a variety of areas.

Although we have models for the savings that we check against our progress to date, and we are on track to achieve the expected benefits, we are simply not comfortable discussing actual numbers yet. However, we are comfortable in saying that we expect this project to achieve a minimum return on capital of 20% by the end of the fifth year of the project.

While this project has to be looked at on its year-to-year impact, it also must be evaluated on its longer-term strategic and operational benefits and its ultimate role in facilitating Sysco's market share growth.

Finally, I'd like to talk a bit about our schedule for reporting on internal controls and procedures as required by Section 404 of the Sarbanes-Oxley Act.

Because of when our fiscal year ends, we were originally scheduled to be one of the first companies to report on these items. However, due to the change in effective dates, we will not formally report on Sarbanes-Oxley until the end of our fiscal year 2005, and just want everyone to be aware of that.

Now, I'll turn the microphone over to Rick Schnieders our Chairman and CEO.

Thanks, John. And just as Tom began by thanking our associates, I'd like to start by thanking the many restaurant owners and food service operators who supported us with their business.

These are challenging times. And by working together, we can continue to grow by forming long-term and deep partnerships. That is our mission, to help our customers succeed.

In that vein, I want to spend some time analyzing food service trends. First, it remains true that the food service industry is a huge industry. Over 900,000 points of access in the U.S. and Canada, with annual sales in excess of $450 billion at consumer level.

The demographics predict an industry with incredible vitality, time-starved consumers, demand for entertainment, an aging population, and increasingly diverse tastes and preferences. The long-term prospects of food service and dining out are very strong.

It would be irresponsible, however, for any of us in the business to not, to deny that the last couple of months of our fiscal year and continuing into this fiscal year, that there has been a convergence of factors that have slowed growth, particularly in restaurants. High inflation and gas prices have caused the softening of restaurant revenues as well as a softening in the general economic environment.

We are and have been working closely with our customers. During our business reviews with customers, we work collaboratively to find solutions. We explore alternative products, new marketing and promotional efforts, and labor saving initiatives, just to name a few.

Talking about the restaurant industry is like talking about averages. Averages don't tell the whole story. We have to dig deeper. The best operators continue to do well. And the best operators are our target customers.

Sysco's multi-year stratification analysis has allowed us to more efficiently allocate our resources toward those activities that will produce the highest returns. And one measure of our success in the area of resource allocation is our return numbers. For fiscal year 2004, our return on average equity was 38.7%. We continue to extract more profit from our asset base.

We've also improved our productivity, and you can see that in our expense ratio reduction. Yet, there is more work to do. In light of current conditions, we have instituted a hiring freeze as we are committed to managing our work force so that we can further improve productivity and operating leverage.

Sysco has the most advanced technology in the industry. We must make certain we're taking full advantage of all of its productivity boosting capabilities. We must do more with less.

Let me be clear. Sysco is stronger than it has ever been. Our earnings are growing well and have grown well.

While we have expended $216 million to date on the national supply chain, our return on invested capital, and return on average equity are at historic highs. It is our expectation that we will continue to meet these high standards.

And although there is a temporary slow down in restaurant sales growth, and remember, the good operators continue to make progress, this is a huge industry with lots of opportunity for Sysco and our customers.

Sysco sales function is better organized than at any time in our history. We continue to make progress in selling more product and services to our existing customers, and we are acquiring more new customers of a quality that should help us continue producing solid returns.

Thank you, and we will now take questions from people on the call. Operator?

Thank you, Mr. Schnieders The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone. If you are using a speaker phone please make sure your mute function is turned off to allow your signal to reach our equipment. We ask you that you please ask one question and one follow-up question. We will proceed in the order that you signal us and we'll take as many questions as time permits. Again we ask that you please limit yourself to one question and one follow-up question. If you have a question, that is star one. We'll go ahead and take our first question from John Heinbockel from Goldman Sachs.

Hey, Rick, question with regard to inflation and in the consumer. At what point do restaurant price, does inflation become enough of a problem where the consumer perceives more value back in the supermarket and preparing their own meals and not eating out as much? Are we getting close to that point? How does that dynamic play out now and over the next year or so, particularly if meat prices stay high?

Well, that's a very difficult question to answer, John. What I would say is going back to what we said during our comments, is that we're working closely with our customers to identify those price points on their menu, and one example I'll give you, kind of picking up on what Tom said, you know, a $39 fillet, what we'll do then is work with the customer and I was out to eat this weekend, work with a customer to help them find an alternative product, such as a flat iron steak, which comes out of the shoulder of the animal. And we have had tremendous success with that. And the cost on the flat iron steak is about 40% of what the filet is today. So we have a number of those kinds of alternatives and I would say again that the good operators out there are able to adjust their menus appropriately.

Good operators in terms of smaller, the independents, but the major chains, too, you see them shifting from beef to chicken. You know, I think Wendy's and McDonald's have announced that their largest supply, or their largest items today are chicken and poultry as opposed to ground beef. So I think that there's a great ability within the restaurant industry to change with the times, and to change with the challenges that we're all facing right now.

And then secondly, what are the prospects for renegotiating some of your meat and dairy pricing arrangements with your customers, you know, to move off of the cost per pound, you know, at least while there's higher inflation or do you basically have to stick with that until, you know, stick with that, with the idea that inflation will eventually subside?

No, I, we will have to stick with that pricing basis. However, again as one of my colleagues mentioned, the gross profit dollars produced by those cases are still good. And I would point out, since you raised this question, John, with contract customers, you know, we do have fuel surcharges in place to absorb that part of the cost increase that we're recognizing today.

Okay. Thanks.

Thank you, John.

Next, we'll move to Neuberger Berman's Bill Leach.

Good morning.

Good morning, Bill.

I just want to make it clear, if you take out the extra week and the inflation and the little acquisition, basically your volume was flat in the quarter?

Yeah, cases where, you're right, cases were essentially flat.

And when you say that's continuing in the first quarter does that mean we should expect volume to be kind of flat in the first quarter?

Yes, we're saying, well, no, I wouldn't say that. What we are saying is that for the first five weeks of the year we have experienced similar levels of growth. Very slow growth at this point.

The inflation number, of course, is one that will move around.

Right. And then the other question I had on the RDC cost 4 to 5 cents, is that incremental above and beyond what we spent last year or is that like the same as last year?

No, last year, we spent $27 million. We've actually covered about $58 million in the past three years, most of it coming in the last two years. But we have 4 to 5 cents additional cost in terms of just getting the RDC open and then ramping up.

So that's fiscal '05 versus fiscal '04 you'll have 4 to 5 cents?

Yes, that's right.

And the next year, does that go back down to two or something?

Yes.

So this should be the peak year?

Yes, this will be the peak year.

And will it affect any quarter in particular?

Yeah, it's pretty even, Bill.

So like a penny per quarter?

Yeah.

Okay. Great. Thanks very much.

Sure, thank you.

Next, Mark Hudson from HSBC.

Yes, good morning. Just trying to work out what this means for what your accounts are doing. If you got flat cases, have you actually, and you said you lost a few of the smaller accounts, did you lose any large accounts during the quarter, and have you gained any large accounts?

We have not had any significant shifts in accounts at all. We have picked up some business. We picked up some additional Applebee's business, for instance, on the larger account size. When we look at our metrics, Mark, on the independent side of our business, we are not losing business. In fact, what's happening is we're gaining lines per stop, which is one of our measures, as you know, of penetration.

So there's a general softness out there, there's also kind of going back to the earlier conversation, there's a reluctance of our customers to have any additional inventory in their storerooms. They're being very careful. And there is some switching to alternative products.

So when we look at the kind of the raw penetration number, the real penetration numbers, of pieces, or lines, actual lines that we're selling to customers, that number continues to increase. So we feel very good about that. And what are the other things that you had said, I think Tom had said, were there were several different things that a customer could do and one was push back on the distributor and you said all were happening.

Historically you've been in a pretty good position to say we're Sysco these are our prices we want to be sensitive and help a little bit, but you've resisted a lot of push back. Is that still happening or have you become more of a charity case?

No, I wouldn't say that we've become a charity case, but I think that given the prolonged levels of inflation that, you know, we've got great systems to help us manage the pricing, but when you look at our 8,000 marketing associates out there, probably a little bit of fatigue with them, and, you know, it doesn't take but a couple of basis points, you know, waiting one more week to put up a price or whatever on a couple of items to have a little bit of snowballing effect there.

But in general, I mean when we talk about sales, I guess the thing that makes us feel good here is that I feel like we've improved the quality of our sales. In other words this larger drop size, getting a higher share of the customer's menus of the customers that we want to keep, you know, we think continues to position us well for the future as the business rebounds.

And I realize this is the third follow-up question. Have you seen any sort of shakeout amongst other operators in this rather difficult time? If you're having a tough time there must be a number of other people in dire straits aren't there?

A shakeout at what level?

At the competitive level, either the regional guys or your other couple of national competitors?

I think that a lot of them are under some stress but very few of them are public, so it's hard to tell.

Although one measure, yeah, one measure of that, I would think, would be the activity in regard to at least some of the smaller independent acquisitions. We have, we continue to have ongoing discussions with distributors in the right geographies and of course we continue to have ongoing discussions with potential partners in the specialty area, whether it's produce or meat, and we continue to work hard in that area.

Great. Thank you very much.

Thank you.

Next, we'll move to Jeff Omohundro with Wachovia Securities.

Good morning. It seemed like this inflation environment would play right in your hands in terms of the Sysco brand given the price advantage of the products. And there has been some growth there. I'm wondering why it hasn't been even stronger? Maybe you can give us some view into Sysco brand competitiveness in this environment, and perhaps if you have any idea of how much it's related to this current cost environment, that'd be great.

Well, I think Sysco brand continues to be our main thrust, you know, we're now running for the total corporation just shy of 45%. And I think that we are able to convince the customers in general that Sysco brand is a greater value to them.

I would remind you that within the last three years, we introduced a huge category for us, and that was boxed beef, Sysco brand boxed beef, which has been just a tremendous success. And so the last couple of years that, where we've seen really high rates of increase of Sysco brand, we probably can't expect that kind of growth again, just because of the size, you know, the dollars that are associated with boxed beef. But we continue to make good progress in Sysco brand, and our customers appreciate the total overall value of the products.

Thanks.

Next, we'll hear from Jack Murphy with Credit Suisse First Boston.

Good morning.

Good morning, Jack.

A couple of quick questions. You highlighted, you know, mostly cyclical type of effects, and, but I want to step back and as you look at the real sales growth you've had over the last few quarters, or I guess last several quarters, it's been sort of a deceleration from historical levels. And I wonder, you know, as you step back and look at this quarter and the last couple, do you have any concerns or is there any sort of suspicion out there that there might be a deeper issue with your own core customer? In particular, I'm thinking of the independents versus the major chains, and if you're really seeing anything along those lines?

Yeah, I would give you some anecdotal evidence, and that is, we have seen a higher rate in the last 12 months of new independent restaurants opening. And when I say independent, it may be where there's a good successful operator in a town like Kansas City, and they recognize that they sort of have a formula, and you know, there are a number of folks that have really have figured out this business, and so they now have opened a second restaurant, so we've seen more restaurant openings in the last 8 to 12 months than we've seen in the last three to four years. So we're very encouraged about that.

We think that the independent sector is very vital and viable. And at the same time, we see meat, new concepts coming to market, in emerging chains. So we, you know, to your broader question, we think this is still a very, very exciting industry, one that is going to continue to grow.

Now, having said that, and going back to another comment that was made earlier, we still have our greatest growth opportunity in our existing customers, where we have only a 40, on average a 40 share. And when we go through our business review process, we bring the customers in to the Sysco warehouse and talk about how we can help them with their business, we have good dialogue with that customer, we see exceptional growth in those customers, and we are doing this year, fiscal '05, we are doing literally thousands of those kinds of business reviews.

Multi-hour business reviews, talking about the guts of the customer's business. And it's been very gratifying to see the progress that we've made there. A little too early to see that, you know, it hasn't moved the big needle yet, but it will, as we ramp up the number. You know, it takes a while.

You've got to do those, you know, give an operating company, you got to do those two per day, four days per week. So it takes some time. But those strategies are definitely on the right track, and they differentiate Sysco from our competition.

Those customers that you have those initiatives with, and where you're trying to grow share, do you think within their markets, generally, they've gained or lost share in the last 12 months?

In their market, my suspicion would be that it is flat.

Okay. Thank you.

Moving on, we'll hear from Eric Larson with Piper Jaffray.

Yeah, good morning, everyone. I know we've asked this question a number of times, with 45 a dollar a barrel fuel, any impact in this quarter and maybe even more important, given that it's at recent highs, coming into your first quarter?

Well, sure, it has some impact, but again, in terms of needle moving, it's not significant. I think we've announced before that our fuel costs will run between .3 and .4% of revenues and that's essentially where we are today. We're at the higher end of that today.

And I will tell that you that we don't think we're going to see significant, at any point in the future, significantly lower per barrel fuel costs. And so we are managing and Ken Spitler is here, as you know, and Larry Accardi, also, we are managing on a day to day basis those routes. We are getting more pieces per mile on those trucks.

And hats off to our operating companies. They're just doing an incredible job of managing that cost, and they will continue to do that. So from a competitive set, I think we're absolutely in the best position in the industry.

The other thing that we are doing is we're not running long miles for customers. And that's a tremendous impact, as you might expect, to that fuel cost. As well as a challenge in terms of the new DOT hour regulations for drivers.

Okay. Thanks.

I wanted, excuse me, I wanted to add to what Rick said there. That 151 locations is a great point of competitive advantage in times of high fuel prices an government regulation, because we're able to get our routes out and back with a whole lot less miles.

Okay. Good. And then the final follow-up to that question, is looking at your operating expense ratios going forward, obviously it's a big focus of yours, and it's going to be critical for earnings growth in the future. Is there a range that you would share with us, where you think those expenses as a percent of sales could go for the next year or two?

No, we wouldn't be able to do that. I would just caution all of us, Eric, that the RDC is a big part of our expense reduction strategy for the future. However, the first RDC will cover roughly 20% of Sysco's revenues, our volume, and so it's going to take us a couple of three to get open before we see any, you know, significant impact in terms of expense control.

Now, on the other hand, we continue to, if I can use the word sophisticate our best business practices. And today, the best business practice is portal at Sysco has literally hundreds of practices that our folks can access in terms of how to do things better and how to reduce their expenses and be more effective in their day to day work.

Okay. Thanks. And then just a final one, this might be for John, when the RDC is fully up and running, your capital expenditures as a percent of sales, while your absolute level of Cap Ex might not come down, but shouldn't that reduce your Cap Ex on your other operating companies going forward? Maybe your Cap Ex slides a little bit as a percent of sales in the next few years?

Eric, this is John and you're absolutely right. We would expect to see the need to reinvest those capital dollars in warehouse expansions to moderate, as we get these redistribution centers regionally located, and will give us the ability to handle a wider range of products with higher velocity through those operating companies without having to add to the physical structure. So we're very confident in that regard, that we'll be able to handle again a wider array of products more efficiently and effectively for our customers as we move forward with this. And we will see, as a percent of sales, those dollars for the capital, for the facility expansions to come down.

Okay. Thank you.

As we continue with questions, we'll hear from Alaina Mills with Atlantic Equities.

Hi, good morning, everybody. Just a question coming back on your guidance for expenses associated with the rollout and startup of the RDC facility. You mentioned that you have been quite conservative in terms of estimating potential savings. I was wondering if you could tell us how conservative you've been in terms of estimating the cost guidance that you've provided? Have you left room for perhaps taking a little bit more time, if you need it to make sure that you get everything right? Perhaps, you know, doing a bit more testing on the software platforms, or is there any slack at all in those figures?

Alaina this is John Stubblefield again and we have been, and I use the word conservative in terms of putting together this cost estimate. Based on where we are today, the building is up, it's beginning to become functional.

We're ready to receive products in that building as soon as the systems are fully tested and in that regards we have made great progress in integrating some four or five third party systems in into our core systems, the testing has gone exceedingly well, it is meeting our expectations and we're very much on track with that, so we don't see anything significant at this point that's going to hamper our February ship date out of that new facility. So while we have been conservative, we're very confident that we have clearly identified those costs that are ahead of us.

Great. That's good to know. One other question, which is a slightly different tack. I wondered if you could talk a little bit about your recent acquisition of International Food Group? I mean admittedly it is rather a small company in relation to your overall business, but I was wondering if you could give us a bit of color on where you see the greatest opportunities to grow Sysco's business internationally, and what regions you'll prioritize in the near-term, and do you perhaps even need to make further acquisitions overseas to address your ambitions in this space?

Well, and Larry Accardi is here, and IFG reports to Larry, I'll let him make a comment or two, but I guess in regards to one of the questions, in terms of regionality, in a sense there is no limitation. We've actually shipped cheese now into China out of IFG, and we're shipping into, they have in the past shipped into Central and South America, the Caribbean, other parts of the world. So this is not like we have, you know, our own airplanes. We're using other services to, in the end, move that product from the U.S. to the given geography.

So it's, you know, we're very pleased. It is a relatively small company. The activity is good. The interest is high. And it's a great acquisition, great leadership at that company, and we have high expectations. Larry, do you want to add anything to that?

Well, just as we talk to our customer base, many of them ask us about our ability to help them. [inaudible] now we have positioned ourselves not only to service that base, but also the customers that we desire to do business with. What IFG did not have was the infrastructure of inventory and warehouses to pull product from to be shipped internationally, and that's what we brought to IFG, and then with their expertise, we created a [inaudible].

Sorry, Larry, you're going in and out there.

I'm sorry? Again, I just repeating, I was saying that many of our customers have asked us about our ability to ship international, and then there are also some customers we desire to do business with that have franchise units internationally that IFG has created a value for us to be able to do that with their expertise. What we had was an infrastructure of warehouses and inventory here in the states, and in Canada, that will allow IFG now to have ship points to these international markets.

Great. And if I could just one very quick follow-up question on a another issue, can you just talk a bit about how hurricane Charley has affected your operations in Florida if at all?

Well, fortunately, or unfortunately for the people who where it came ashore, but fortunately it probably hit in about as an unpopulated area of Florida as it could have hit, still did a lot of devastation. If we could look back about 10 years to hurricane Andrew, which was even more devastating than this one, while it certainly had a terrible impact on the people there, from a standpoint of our business, it actually helped it during that period of time, with all the people coming in to do recovery work, and then the rebuilding process, we found it was a net positive for us, and I almost hate to say it but that's probably the same position we'll be in in the aftermath of Charley.

Okay. Thanks very much.

Thank you.

We'll continue with Andrew Wolf with BB&T Capital Markets.

Just a couple of questions on the expense line. Can you say what the impact for the quarter of the company on life insurance, the swing in that?

This is John Stubblefield. If you look at the quarter, we were basically flat with the results of the market and our investments, so there was no impact positive or negative in the quarter. As you look to last year, there was roughly a $13 million gain in the fourth quarter last year. So in a net impact is about a 13 million swing between the two quarters.

And also, similar question, the pension costs, for the year, and you know, your expectations for the current year.

Yes, this is John again. If you recall for our fiscal 2004, our total pension costs increased roughly $40 million over the prior year. What we're looking at this year, and it's a combination of a couple of factors, number one, is that we had a very good investment return for the year, something in excess of 16%, we also made roughly $160 million worth of contributions this year. Offsetting that to some degree, we had some minor changes in our assumptions.

The most significant change was taking the discount rate to 6.25% from 6%. Now having said all of that, the impact for fiscal 2005 over 2004 will be a reduction of approximately $6 million over the prior year.

That's good news. Last thing as a follow-up on the sales, you know, the internal sales growth on a nominal basis of 8%, could you kind of split that in two, as you did, you know, qualitatively, try to quantify for us, you know, what was it running early in the quarter? And you know, what has it been running last half of the quarter? And recently?

Well, Andy, that, I'm going to let you do the math on that. Through six weeks, we had announced that sales were 9.2, and we ended the quarter at, on a 13-week comparable basis at 8.4. So work your mathematics.

Great. Is the recent trend the last five weeks about the same as, you know, whatever the algebra works out to for the last eight weeks?

Yeah we're on record saying that.

That's very close and you know, I will repeat something that I think Mark Hudson said at one point and that's, you know, the nominal sales growth ex-acquisition, seems to be a number that, you know, when inflation goes up or down, it doesn't change much so that top line remains essentially the same. Again, you got to take acquisitions out of it. But other than that, it seems to flow pretty consistently.

Okay. Actually I want to ask one more question. Since you have been I guess appropriately conservative on potential benefits from the national supply efforts, I mean I've taken, tried to figure out what it's going to be and obviously, it's not an easy task, but I'm going to throw out a number and just try to get a reaction out of you guys. It strikes me that if you roll out eight of these things, it could accrue to about a nickel per share per RDC. Is that something that's in the ballpark?

I don't think we even know at this point, Ed. Even if we did know Andy, we wouldn't give you a reaction on it.

Well, thought I'd take a shot. Thanks.

We understand. [ Laughter ] You get paid to do that. We get paid to say we're not going to comment.

Thanks, Andy.

And next, Edouard Aubin from Deutsche Bank.

Good morning, this is Dixon in for Edouard. I had a quick follow-up question on your inflation rate. You mentioned that there were five main responses that you're seeing from your restaurant customers. I was wondering whether you could break out, of those five responses was there any particular one that you've seen more often than others?

Well, I would, you know, again, that's pretty tough, but I guess substitutability is the one that's going to have the biggest impact because we'll see our customers in their high expense areas, that center of the plate items, we'll see them making adjustments there, and, you know, if you've been out to eat and I hope you have, Edouard, in the last few days and few weeks, you'll notice that customers are adding new items to their menu. They may still have the filet on the menu, but I went out to dinner on Friday night, and I can tell that you that a restaurant that has a strip and a tenderloin, a filet on the menu, had also added what they call a hanger steak which is that steak I talked about earlier that came out of the shoulder of the animal.

And you see lots of other things, you know, lots of other protein items being added. One of which, by the way is pork, and that's kind of encouraging, because pork is probably an underserved protein on most menus today, and we have, you know, a little commercial break here, but we've got a great line of Sysco brand White Marble Farms pork that is just exceptional and so we see great growth in that area and we see customers doing that kind of substituting on their menu regularly.

What about from customers that might be potential, I mean, do any of your five response that you've seen capture customers that might be say trading down to some of the local suppliers that might be offering, you know, intermediate term incentives on their products? I mean is that captured anywhere in the five responses that you've seen?

This is Tom. As long as I've been in the business, there's always been somebody out there wanting to sell it cheaper and offering deals and today is no different than that. You know, we continue to see some of that.

Most of our customers, you know, if they go out and try it, they'll be disappointed in the products, and/or the service. And in fact, some of them are, we encourage them to try it when they see these big disparities because they usually don't fulfill their needs and we don't, it's something that's there and gnawing away and it's been gnawing away for the 35 years I've been in the business and it continues but it's not what I would consider a major obstacle to our style of business.

And that you don't think is a contributor to the flat volume?

What we need is some heightened general economic improvement. And we think that's a big contributor to what we're seeing in our business today. And that's driven, as we said earlier, by the fuel costs and by inflation.

Okay. Great. Thank you.

Thank you.

As we continue, Ajay Jain with UBS.

Yes, thank you. I just wanted to get some clarification on the operating expense figure that you provided for the RDC in '05 of, at the 4 to 5 cent range. And it seemed like based on the language in the release, that this is supposed to be incremental, and I think that that was confirmed earlier during the call this morning, so I guess what I want to verify is that if your pre-opening expenses for the RDC were already about 27 million this past year, and if that 4 to 5 cents is truly incremental and also includes depreciation expense, is it fair to assume that the total RDC-related expenses would be in the range of like 120 to 130 million? Does that sound about right?

No, no, I think the 4 to 5 cents would mean 40 to 50 million.

Well that's what I originally estimated, so that, I guess at 40 to 50 million is the representative range and then the 4 to 5 cents isn't totally incremental then, right?

This is John Stubblefield. You got to be careful because so much of the expense to date, or all of the expense to date has been that that's related to the systems and the initiative development, and as we move into 2005, we will have begun to have operational expenses that, as we move out of the developmental costs, will begin the operational costs. So you've got some blending going on in 2005 that you won't have going forward in terms of the costs of building the system.

But, no, I understand that, but I guess if, I think 27 million is what you indicated were the expenses that flowed through the income statement, and if 50 to 60 is the corresponding range for this year and that's inclusive of depreciation, which, you know, should be about 20, 20 million or so, then how can that be all incremental?

No, the 4 to 5 cents is incremental to the 27 million.

It is, okay.

And -- but, however, you said it, the depreciation is included in that 4 to 5 cents.

Okay.

And that's about 13 million.

That's about 13 million.

Okay. And I just had a follow-up question. I know that during the past couple of quarters you attributed the gross margin decline more to customer shift, customer mix shift versus inflation. And you know, given that you had comparable inflation at around 7% back in Q2 I guess meat prices were the main culprit back then, but you still had pretty decent operating margin improvement. Are you seeing any more resistance from your customers at this time, you know, compared to earlier periods in '04 which were also accompanied by high inflation?

I think that the only change, you know, in the fourth quarter was even higher rates of inflation. And you know, having high inflation for as long as we've had it now, you know, you just get, it's very difficult. Now we recover as we've said before, we recover that price increase very rapidly, both in terms of our contract business, and in terms of our street business.

What would you say your recovery rate was in the fourth quarter for the same period in which the inflation was incurred?

You know, mid 90%. We get it back. I'm not pulling the number out of the year. But we get it back. It's just that it's gone on for so long. It's so high and it's gone on for so long.

And it has gone into other categories.

I call it a little bit of battle fatigue.

Ajay, I think some of this is simply cumulative. I mean early on last year, we said we didn't see a lot of effects from inflation in our customers, in our costs, our gross profit margins. I think as we've gone on and we've now got 8% on top of 5% increase a year ago, people have had to take price increases on their product, they're pushing back a little bit more, and it's just cumulative.

Okay. Lastly, I just wanted to see if you could provide an update on how the circuit business is ramping up. I seem like at the time of your investor conference, just kind of reading in between the lines, that it seemed like the operating margins in Canada hadn't quite reached the minimum 3% threshold for your domestic business. Can you provide any color as far as how margins are ramping up?

You know, when we made the acquisition [Circa] we announced that our intention would be to have them at what I'll call for lack of a better word U.S.-style margins over a longer period of time, and we continue to be heartened that we're on or ahead of our schedule to get them in that point, so we're still thrilled with the acquisition. It's not only we've been able to introduce great Sysco brand products, we've been able to hire great marketing associates and improve the marketplace there, and today, we have no negatives to discuss about the [Circa] acquisition.

No, but I would just, just as a point of clarification, I would say that when we talked about getting [Circa] to what we have been able to do in terms of operating margins in the existing Sysco companies, we said that was a multi-year process, and what Tom just said was exactly right. And that is, we're making progress toward that goal, and in fact, we're ahead of it. We're not at the 3% level yet, but we're heading in the right direction.

Okay. Thank you.

Operator, we have time for one last call.

And we'll take our last question from Morgan Stanley's Ben Britz.

Hi there. I just wondered if you can clarify something you were talking about earlier this year. Forgive me if you mentioned this earlier in the call, but this customer rationalization strategy you're adopting, you've been looking at your recent new customers, and the profitability they're generating, and you were looking to the, you know, shedding some less profitable business. How is that changing in the light of your comments today about softening growth?

Well, the strategy has not changed. We've continued to, I think, do a better job in terms of our analysis. And maybe more importantly, in terms of communicating with our customers, you know, the background of this industry.

We want to work with them to understand what their profitability needs are, and we want to work with them also so that they understand our profitability needs and we feel good about that, we think that our, that the customers we've had those discussions with appreciate it, and they understand what we're trying to do. So, you know, I think that continues to move forward in a positive way.

And at the same time, I would also say, Ben, that we are working hard to drive down our costs of acquisition for those customers, so that we're, we want to make sure that we have as low of cost as possible in regard to our operations so that we can continue to serve customers in a profitable way.

I mean I think you were talking at one point about, you know, 1.5 to 2% of your volume, you thought my drop out at this process on an annual basis. Is that something that you still feel comfortable with as a level?

Yeah, again, it's a very difficult number but that's sort of the number that we continue to think around, yes.

Okay. Thanks a lot.

That concludes our question-and-answer session for today. At this time, I'd like to turn the call back over to Mr. Palizza for any concluding remarks.

Okay. Thank you, operator. Thanks again for everyone on the call. We recognize we probably did not get to everybody in the queue for questions. Please feel free to give me a call. My number again is 281-584-1308. And the lines are open. Thanks.

That does conclude today's conference call for Sysco Corporation. We thank you very much for your participation and have a very good day.