西斯柯 (SYY) 2005 Q1 法說會逐字稿

Good day everyone and welcome to today's SYSCO Corporation first quarter fiscal year 2005 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. Please go ahead, sir.

Thank you, Ed. 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, Multiunit Sales and President of Specialty Distribution; Ken Spitler, Executive Vice President of Foodservice Operations and Diana Day Sanders, Senior Vice President of Finance and Treasurer.

On the call today, Tom Lankford will cover our operating performance during the quarter. He will be followed by Ken Spitler, who will outline our supply chain initiative and redistribution project in some detail to include our current estimate of benefits we see coming out of the project over the next two fiscal years. Rick Schnieders will conclude our prepared remarks by addressing longer-term issues, things that SYSCO is addressing in order to stay ahead of the trends in the foodservice industry. This will be followed by the question and answer session, which Rick will moderate.

Before we begin, allow me to read 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, risk factors contained in the Company's annual report on form 10-K for the fiscal year ended July 3rd, 2004. With that, I will turn things over to Tom Lankford.

Thank you, John. Every quarter, Rick and I like to thank the men and women of SYSCO who work so hard to help all of us be successful. This quarter, those thanks are even louder and more earnest. We faced a larger than usual number of challenges in the quarter, including a record number of hurricanes in Florida and related severe weather in the southeastern United States and beyond, coupled with high fuel costs. The ability of our people to overcome these obstacles and take care of our customers was remarkable. Here are the basics for the quarter, all compared to the same period when a year ago.

Sales were up 5.6 percent, reaching $7.532 billion. Net earnings were up 8.2 percent to $225.9 million and diluted earnings per share were 35 cents for an increase of 9.5 percent. The most logical way to discuss our operating performance is in the same order you will find the items on our income statement. I will begin with sales.

Sales in the quarter were up a total of 5.6 percent over last year's first quarter. Sales from acquisitions contributed one-half of 1 percent in the quarter with sales from Overton, our fresh produce acquisition and International Food Group being the noncomparable acquisitions. Inflation, as measured by the rise in our cost of goods, was 5.9 percent.

During the fall of every year, we have a series of meetings with our sales leaders, which are our top marketing associates and top district sales managers; also, our top suppliers and all of our operating company presidents. These meetings are always a great opportunity for me and all of us on this call to meet with and discuss the state of business with both the people who are out there with our customers everyday and the suppliers who can tell you what is happening in the industry as a whole.

This year, what I heard is that the sales environment both for our customers and suppliers is tight, slower than we at SYSCO have seen in quite some time. Our response to the sales environment has been to deepen our relationships with our best accounts through the use of in-depth business reviews to pinpoint where we can add value to their business. When our customers' sales are slow, we cannot sell them more of the same product because the demand is not there from the restaurant patrons. But what we can do and the business process achieves is to sell them additional product that they may have been purchasing from someone else. We refer to this as selling additional line items, or penetration. For an easy example, if we're selling them pork chops, the business process will help to point out the great SYSCO brand of applesauce that could accompany the item.

This process also positions us to be able to capture additional volume from our customers when their sales start to pick up. For the quarter that just ended, our lines per stock improved by 5.8 percent over the same quarter last year, which I believe shows we're making real progress in our business review process.

Additionally, I can tell you that within our bovine (ph) operations, the number of our best customers, what we refer to as our gold customers, increased over 10 percent this quarter as the business review process helped to move more customers to that plateau.

Another important factor in the sales number this quarter was our being more selective in the accounts that we service. This comes in two forms -- better analysis of the sales potential in the accounts that we do open and choosing not to sell certain accounts that we're not able to serve profitably. This has resulted in slightly lower total sales growth in the short-term. For example, we estimate that we're giving up approximately one-half of 1 percent of sales related to former customers that we no longer have a relationship with. We are committed to continue to grow with our customers. Getting our customer mix right is an ongoing process, but it appears the majority of this process is behind us.

Now I would like to discuss gross profit margins for the quarter. As we saw through much of our last fiscal year, gross profit margins in the first quarter were impacted by a higher percentage of sales growth coming from lower margin multiunit customers. While we saw a 27 basis point drop in gross profit margins, this represents a sequential improvement from the fourth quarter of fiscal year of 2004, where gross profit margins declined 41 basis points.

Next, operating expenses. Our view is that in a tight sales environment, it pays to be especially vigilant on expenses. The total expense ratio to sales down 35 basis points compared to last year’s first quarter, we once again gained overall leverage on our operating margins. As you might imagine, there is no magic answer when it comes to controlling expenses. We have to be attentive in every area from warehouse operations to logistics, staffing, routing and procurement. We track dozens of metrics every week on our operations, so I'll highlight just a few that I think illustrate the way we watch expenses.

Of particular note this quarter was the fact that our number of stops in the broadline companies was down almost 6 percent. This indicates two things, both of them good for expenses. First, we're not making as many small deliveries to unprofitable customers and second, we're being more proactive in optimizing delivery size and frequency to our customers, which reduces the total number of deliveries necessary.

Our pieces per stop also saw a 5 percent improvement. And when you take that, in combination with the fact that our lines per stock were also up more than 5 percent, you begin to see how we're getting better and better at efficiently serving our customers.

I will wrap this section up by talking about inflation and where we see it going. This is the fifth consecutive quarter in which we've seen inflation in our cost of goods at or above 5 percent, although we have seen a sequential decline from the 8 percent inflation we experienced in the fourth quarter of fiscal 2004. The categories having the largest impact on our inflation are meat, poultry and dairy, each of which continue to experiencing double-digit price increases in the quarter. Being optimists, we expect inflation to moderate as dairy and poultry 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, principally because inflation in this category is related to lower supply and longer replenishment cycles. With the Japanese market opening up to U.S. beef exports again, this may place additional demand on beef supplies and help keep prices high in the shorter term. If the U.S. market opens up to allow imports of beef from Canada, the increased supply could help offset this additional pressure.

You should also keep in mind that beef prices impact other protein categories, such as poultry and pork, which tend to follow beef pricing. At this point, I would like to turn things over to Ken Spitler, our Executive Vice President of Operations.

Thank you, Tom. As Executive Vice President of Operations, I have responsibility for the broad line operating companies and I am Executive Sponsor of the National Supply Chain Initiative (ph). I don't want to assume that everyone on this call has knowledge of our National Supply Chain Initiative, so I will first provide a brief overview, followed by the current status of our implementation plans. Then, I would like to discuss the expected benefits and conclude by sharing the importance of this initiative to our overall market strategy of driving profitable growth.

Our National Supply Chain Initiatives is a strategic effort to move SYSCO from its current state where each operating company optimizes product flow to a future vision where we enact an end-to-end view of our supply chain. At the heart of this initiative is the intent to drive significant new efficiencies, economies of scale and closer collaboration with our suppliers, customers and transportation partners. And, we realize the importance of accomplishing these objectives without impairing an operating company's responsiveness to servicing their local customers.

In 2001, we launched an initiative to redesign and rebuild our entire supply chain process, starting with how we collaborate with and order product from our suppliers to the final delivery of products to our customers. We also analyze our computer systems and their ability to meet our new needs.

In 2002, we began to design the first regional distribution center in Front Royal (ph), Virginia. This center will be our largest existing warehouse facility at 850,000 square feet and will service the 14 operating companies of our Northeast region. The redistribution center is designed to handle about 50 percent of our current products sold in this region. There are approximately 300,000 cases a day. Generally, these are products that are currently ordered locally by the operating companies at less than optimal quantities. The supply chain initiative will consolidate such product performance from the operating companies in the region and place a single order for the product. This will allow optimal order quality quantities for the entire region to be sent by suppliers to the regional center. The redistribution center will then replenish all 14 operating companies on a daily basis, substantially reducing inventory levels at the operating companies and avoiding the need for local warehouse expansion.

The goal is to reduce total inventory of the Northwest region for the items carried by the RDC by one-third. We are planning to build a network of between seven and nine redistribution centers across the U.S. as quickly as possible. This initiative is not just about building regional warehouses. This initiative is about rebuilding our entire supply chain infrastructure and organization. That includes transportation management, demand planning, inventory management, redistribution centers, operating company activities and corporate office functions, and integrating each of these functions in a seamless manner.

Let me briefly describe some of the important changes we will be implementing as part of this project. A new transportation system and organizational structure will support our efforts to manage freight on a regional and national level, to improve our freight rates and guarantee our access to needed truck capacity. A demand planning and inventory management system will provide more advanced forecasting tools and inventory controls. It will allow us to aggregate and consolidate what are multiple local orders at the regional level. Sharing this information with our suppliers will allow them to develop more efficient demand and production plans and further lower the total cost of our supply chain.

We have also redesigned the way we load, handle and store our products and process our transactions, and that will create productivity savings in our own warehouses in our logistics, purchasing and financial functions. When completed, we'll take the industry's most efficient and adaptable supply chain to another level, allowing us to provide our customers with the products they want at the lower net cost.

This initiative is on schedule and on budget and the redistribution center will ship its first products in February 2005. On a staggered basis over the following nine months, 14 operating companies in the Northeast will shift their focus from receiving to receiving (ph) through the redistribution center. We are aware of the execution risk of this initiative and expect some bumps in the road. But I am confident that we will take the necessary precautions. We do not want to disrupt the flow of products our customers.

To mitigate these risks, we have organized a readiness team at each operating company and have established a 50 person implementation support team to provide extensive on-the-ground training and problem resolution for each operating company during their transition.

Now I would like to briefly share with you our estimate for the expected financial impact for the remainder of fiscal 2005 and fiscal 2006. At our fiscal year end conference call, we said that we expected startup related expenses for this project to have an earnings-per-share impact of 4 to 5 cents for fiscal 2005. We remain confident that the impact in fiscal year 2005 will not exceed that estimate.

In fiscal year 2006, we expect that the incremental benefits of this project will offset the incremental operating cost so that there should be no further negative impact to EPS. There could be a slight one-half cent per share contribution to EPS in 2006.

In closing my segment, allow me to describe the critical strategic importance of the SYSCO National Supply Chain Initiative to SYSCO's future with two examples. First, the initiative drives profitability by lowering our costs, but it also provides us with greater opportunities for sales with a national supply chain initiative by significantly lowering our procurement and service cost creates a much larger base of customers that we can service profitably.

Secondly, the supply chain initiatives will greatly enhance our ability to support profitable growth through acquisition and the building of new operating companies in expanding markets. With the completion of the national network of redistribution centers, the speed and cost of integration would dramatically improve. Redistribution centers will provide a plug-and-play standardized cost efficient back end supply chain that could quickly replenish an acquisition or fold-outs (ph) primary inventory. Both would immediately benefit from our lower cost in efficiencies and transportation, inventory, handling and transactions, as well as minimizing the need for warehouses expansions. Our specialty food companies will also be able to expand their sales more rapidly in a more cost-effective manner by using the national network of redistribution centers to move their products to all operating companies.

The bottom line is, although we have justified the initial investment by traditional measures of cost savings, the true value of this initiative will be in combining our world-class salesforce with a world-class supply chain. We then provide a customer value proposition of efficiency and service that none of our competitors could replicate, creating a sustainable, competitive advantage for the future. And now I would like to think turn things over to Rick Schnieders.

Thanks, Ken, nice job. In my section, I will spend some time discussing our capital spending program, then I will conclude by addressing some longer-term trends in the foodservice industry. For the quarter just ended, our capital expenditures came in at $99.9 million, just shy of $100 million, a somewhat slower rate than our original projection of $500 million for the entire fiscal year. Due to the projected timing of our capital projects, we now expect to spend in the range of $400 to $450 million during this fiscal year. We will be building of our next fold-out to serve the eastern North Carolina market and we expect to close on the land soon and begin construction during this fiscal year.

Our redistribution center and supply chain initiative continues to be a significant capital project, as you might expect. During the quarter, we spent $19.7 million on the supply chain initiative project, of which 6.5 million was expensed and 13.2 million was capitalized. This brings total spending on the project to $235.7 million, of which 165.4 million has been capitalized.

As has been suggested in earlier comments, our sales have been in a temporary soft spot for the last four months or so. Retail sales of all categories, including restaurants, have been slower than normal due primarily to less discretionary spending, principally as a result of higher fuel costs. Having said that, however, the people at the SYSCO operating companies once again performed magnificently.

We're focusing our resources on the right customers and the right potential customers. We're helping our customers find solutions to the many challenges they face, including high food inflation and reduced traffic. You've already heard about the results. We're selling more to our best customers and we've controlled our expenses appropriately at the same time. We're better positioned for the future than we've ever been and certainly better than our competitors.

There's an ongoing discussion concerning whether chains are growing faster than independents. Frankly, we find the data inconclusive. For the first time in two or three years, we have seen new independents entering the marketplace. Nevertheless, there are so many great independent and great chains in our space, that we have enough growth potential for the next ten years without any (indiscernible). This is an incredibly vibrant market. There is plenty of business available. Those foodservice distributors who will win are those that are able to rapidly adjust to an ever-changing landscape. And with the SYSCO's autonomous structure, we can move faster than any other organization.

I cannot emphasize too emphatically that SYSCO's foundation has never been stronger. We have made significant and important progress in the transformation to a more solutions-oriented sales force. We have invested in the future of SYSCO in the foodservice industry with a huge commitment to our national supply chain in the redistribution centers. Thanks to the foresight of the leadership going back to Mr. Ball and John Woodhouse, the financial strength of the company has never been better. Return on average total capital is 25 percent and return on average shareholders equity of 38.7 percent from last year are good measures of our continuing progress. There are challenges in our business. There have always been challenges, but we have just announced our 112th consecutive quarter of increased earnings. I sleep soundly at night knowing that the talent in our 152 locations is continually searching for better ways to help our customers. Thank you, and we will now take questions from people on the call.

(Operator Instructions). Edouard Aubin, Deutsche Bank.

Rick, just to clarify some of the issues regarding the RDC just to do the math with you, if you don't mind. First of all, is the 4 to 5 cents impact you're talking about starting February '05? And is it coming on top of the $27 million you've expensed for the full-year last year? And second, is it fair to assume that of that 4 to 5 cents, approximately 1.2 cents other than the increased depreciation and the rest is going to be increased SG&A? And if yes, am I correct in assuming that additional expense costs should amount to approximately $30 to $40? So basically, total expense cost for the year should amount to $57 to $67 million?

First of all, yes. Your numbers are pretty accurate. However, the 4 to 5 cents additional cost is for the entire fiscal year, so it's not just from February on. So that's spread across the entire fiscal year. That is over and above the roughly 27 million -- now I'm kind using your number, but I think that's about right -- over and above the $27 million from fiscal '04. So I think that pretty well covers it, and I want to make sure that we did answer everything that you asked.

That is quite fair. And based on these figures and basically extrapolating current trends, full year EPS could come in around $1.45. I look at consensus of 1.62 (ph) today. So I know you don't like to give guidance for the full year, but could you give an indication on which number you're going to be more comfortable with? And should we view '05 as a transition year from an earnings standpoint, if you could comment that?

Edouard, no we won't. We gave you a yes on the first one, we have to give you a no on the second one. We will not project what we're going to do for the full year.

Mr. Stubblefield is shaking his head.

And maybe just to conclude, regarding the RDC project, that's really a long-term question, but what is going to be the priority for SYSCO, in terms of improving your profitability or improving your top line? And more specifically, could you be in a position to improve the number of trucks per week you're mentioning to your customers in order to increase your account penetration? So basically, what is going to be the priority going forward?

The priority going forward, as we've discussed for the last couple of years, remains the same, and that is to control our expenses appropriately. And of course, the RDC, as Ken pointed out, is a huge investment, in terms of being ready to do that. It will help us lower our cost.

In terms of delivering more often to our customers, I'm not sure that is the best way. In certain situations, it may be. I'm not sure that's the best way to further penetrate those customers. In fact, with the packaging technologies today, unless a customer has a very small storage space, every category of product has fairly extended shelf life, even fresh seafood, fresh produce certainly and fresh meats. So I'm not sure that it's necessary for us in many cases to have to increase the number of deliveries to our customers.

What about increasing your own customer accounts, because I think it was mentioned in your opening comments?

Yes, and Ken talked to that specifically. With the lower cost structure in place, it will allow us to move another level of customers sort of at the bottom, if you will let me use that term, up into a profitability target area that will allow us to increase the number of customers.

Now having said that, I want to underscore that we still won't be able to deliver all customers. There's still customers that are unwilling or unable to buy the right quantities of product from us. And we will continue to work on all of those. But our cost structure has to be right and it will open the window of a larger number of customers for us to serve on a profitable basis.

Great, thank you.

John Heinbockel, Goldman, Sachs & Co.

Two things I want to explore. One, sales related and two, (technical difficulty) expense side. With regard to sales, what's your best guess as to the hurricane impact in the quarter? And then what have you seen in the last six to eight weeks? Are we seeing some stabilization in sales trends or are things continuing to get a little weaker as evidenced by what we might be seeing on the restaurant side? And then Rick, you've talked in the past what you think it takes to reaccelerate the top line. Is there any more clarity on when -- what is required and when that might occur?

Well hopefully my colleagues will pick up on couple of those questions. But we certainly have seen a stabilization. We have not seen -- in the sales rate -- we have not seen significant increases or decreases. Florida has, as you might expect, has stabilized significantly. So we are again gratified, as Tom pointed out in his comments, about our success rate in terms of the quality of the sales growth that we're seeing and where we're seeing that sales growth. And so we feel pretty comfortable with where we are. Would we like a shot in the arm from the general economic environment out there? Would we like to see things perk up a little bit? Yes, we would. And hopefully, when we get beyond some of the uncertainty that's out there perhaps related to the election and others, we will begin to see some nice increases. So we're positioned well for the future, and I don't think I answered all of your questions, John.

Well, do you know what the hurricane impact was, or is that too hard to get your arms around?

We have tried to do that; we just cannot effectively get a good number there.

I will tell you that the Florida Restaurant Association estimated that between 500 and 1,000 restaurants have been knocked out in one way or the other through one of these hurricanes. And so certainly, you can expect that to be some issues. And of course, today, they seem to have a campaign on to make sure that people realize that there's still a lot of Florida that's great for visiting. So we think they're very resilient, and we think they'll bounce back well.

So Rick, I guess to paraphrase, you think we are kind of troughing now, in terms of sales trends? It's not likely to get a lot worse, but it may take until maybe next spring or a little later to see a pickup, or do you think it happens sooner than that?

I think that's probably pretty accurate. Pretty hard to determine. The comps now going into our third quarter, first calendar quarter, become a little easier, same thing in the second quarter. So we are optimistic, as someone mentioned earlier.

The second thing, can you talk a little bit more about the expense performance, because your dollars were up 3 percent year-over-year, which is a major change in trend. I guess the last several quarters, you've been running up closer to six. So what is driving that and how sustainable do you think a 3 percent or so increase is? What has allowed you to change that trend here in the last quarter?

We actually think that going forward, our expenses dollars will be better, that we will continue to trend lower as a percent to total. We have worked awfully hard at a number of things, as we have outlined for you before. So we think that with our best business practices with some of our efficiency measures that we put in place, we think that -- the best I can say it is well positioned for the future as the activity becomes a little more robust.

John, as you look at the metrics that we look at every week, such as payroll per piece, employees per 100,000 cases, pieces per trip per mile, inventory shrink, (technical difficulty) they are all trending greatly in the right direction. And they all have a big impact on continuing to maintain a good control over expenses.

I will tell you too that, anecdotally, we see nice improvement in our insurance costs overall, that's workers comp particularly. But it's pretty hard to say exactly what drives that. We have good safety programs in place. But you're somewhat at the mercy of the probabilities out there. And I'll tell you right now that we're seeing nice trending toward world class performance, in terms of safety and across our operating companies. And that is great, because that's fewer of our associates that are injured and it's a lower cost to the organization.

Using the dollars can actually get better, not just that the percent can get better, but the dollar increase can actually go down from here farther.

One things we also had to recognize was that both inflationary pressures that are on the top line are also on our expense lines. And wages continue to go up year-over-year, the impact of fuel certainly is an issue today. It has gone up some six basis points over the same period last year. So, given everything you're heard so far this morning, we're quite pleased with only a 3 percent increase in expense dollars, given the inflationary pressures that are in the marketplace. So I think that sort of leverage will continue to be borne out throughout the year.

Okay, thanks.

Steve Chick, Morgan Chase.

Thanks. I guess first off, Rick, last quarter, you commented on a hiring freeze and I think thereafter, it turned out, I think you said on a Bloomberg interview, that you might have had a few layoffs. Can you speak to where that stands? And is there any way to quantify if the quarter saw any savings from that?

There's no way to quantify exactly -- did you first quarter savings?

Yes, if you had layoffs of --.

Actually, no, there would not have been. There might have been some slight additional costs, but nothing material at all. But where we are in the whole process is that we have done what we needed to do, and the big question I think as I said on that interview is making sure that we have the right folks in the right place that's providing value for our customers. So we're constantly -- the world is changing, our business is changing and we need to make sure that we have, as I said, the right folks doing the right thing. And in the end, all of us need to be providing value for our customers.

So, sorry, is there, are you still trimming, in a kind of trim mode with the workforce?

No, we are not.

Second question I guess related to the RDC. I was a little bit surprised that the P&L expense actually decreased year-over-year, in light of the 6.5 million, that is, which I think compared to something like 8.9 last year. And given the 4 to 5 cents of incremental cost, that was something that was a little bit more favorable than I expected. So if you could speak to that. And then secondly, your guidance for the benefits for FY '06, you said they should have offset the incremental cost that year and I was wondering if you could just quantify, if you had a sense of what those costs are expected to be in FY '06?

The first part of your question is timing. So we will see some ramp-up, a little additional, in the air.

When you enter into that February timeframe, you will have some costs that will become factors that are not there today. But given all of that, we're still looking at that 4 to 5 cent impact for the year. And to your second question, I think the guidance that we're comfortable giving at this point is that net-net, '06 versus '05, that you will see, give it a 4.5 to 5.5 cent improvement year-over-year.

So, sorry, again, I just want to make sure I have the details right. You will probably have another 4 to 5 cents of incremental cost next year that will be at this point offset by?

No, the incremental costs for next year will certainly less because of the activities around -- starting up and running will be less than what we're looking at. And then there's the benefit that comes on. So if you put it on the right line items, the P&L is going to be very difficult for you (indiscernible) when you consider what the bottom-line impact for '05 is versus '06.

Okay, thanks.

Bill Leach, Newburger Berman.

Rick, I've followed your company for about 20 years and I can't ever remember you having two quarters in a row where your internal volume is basically flat or down a little bit. Has anything really changed? Have you gotten maybe just so big that you just cannot grow the way you used to in the past, now that you're a $30 billion company?

Yes. There has been something that has changed, I think, and it's the general activity that you see in restaurant stock, publicly traded restaurant stocks. In the rest of the industry, I think you will -- you've probably already seen one of our major competitors now. So we have just an overall softness. When we look at, as Tom suggested in his comments, when we look at our penetration numbers with our customers, we're actually seeing nice improvement. We are selling more different things to the customer. But what's happening is where this year, they were buying 10 cases of french fries from us; this year, they are buying french fries from us and ketchup, but they're only buying eight cases of french fries.

So we're seeing incremental nice positive improvement in terms of the penetration, but we need to have a general boost in the economy. This fuel cost to the average -- it has impacted us a little bit, as John indicated, but not really. The companies have managed it well. It's really what is happening to retail sales out there in general and discretionary income. You have 20 fewer dollars in your pocket to spend because you've had to put that into the gas tank, it causes you to make some other decisions about some of the things you might be buying.

If we are just modeling your company longer-term, do you think you can sustain 3 to 5 percent internal volume growth?

Yes Sir, absolutely.

Okay, thanks a lot.

Ajay Jain, UBS Warburg.

I had a question on your current acquisition strategy. It looks like you have not gotten a very material contribution from acquisitions since around fiscal '03. I recall back in your conference earlier in the year, there really seemed to be more of an emphasis on acquiring specialty versus broad line companies going forward. So I was wondering if you could comment on the overall quality of the acquisition pipeline right now and when you sort of the expect to resume a more meaningful type of acquisition activity?

I think that's fair. We have slowed somewhat, although if you go back to the time period you were talking about, when we acquired SERCA, we acquired about between 7 and 8 percent additional revenues in that acquisition. So if you average that out for a couple of years, that still hits or exceeds our 3 percent target. We are working on, as we said before, we continue to work on a number of solid acquisitions. Some of them are in the specialty area, some of them are in the broad line. But we have, honestly, we have fewer, we have more holes, I guess a better way to say it, in terms of our meat and our produce business. So we continue to work very hard on those. And the larger ones are like big accounts. It takes awhile to make them real. And we are continuing to work very hard, I assure you, at acquisitions and big accounts.

Then I had one more question related to the competitive environment. I think later on this month, U.S. Foodservice is supposed to provide an update on it's road to recovery. And I know you indicated during the fourth quarter release that in spite of the difficult sales environment, that SYSCO is still taking up market share. But do you generally believe that Ahold is still in a distress type of situation like it was last year? And how worried are you about their recovery potential?

Actually, we would love to see them recover a bit and we would like to see a little more rationality out in the marketplace. So we're not particularly worried about that. We continue to focus on our customers, doing the right thing for them. Their strategy, I'm sure, is different than our strategy. So we just continue to follow what we believe are the right things to do for our customers. I may have missed the first part of your question.

It was just related to the -- I guess Ahold is supposed to provide an update on its U.S. food operations. And I was just wondering if you had any comment on how worried you might be or may not be about their recovery status?

Well, we are not worried. We're worried about what we do, and they will have to worry about what they do.

Okay, thank you.

Eric Larson, Piper Jaffray.

Good morning, everyone. My question revolves around national supply chain initiative. Can you put into context -- this morning, you also announced your fifteenth fold-out. How many more fold-outs would you need, and maybe the timeframe for seven to nine additional redistribution centers, and what the cost of each of those will be?

We have identified, at least internally, we talked about eastern North Carolina today. We have identified another probably six or seven markets that are on our radar screen right now, in terms of fold-outs where we need to be closer to our customers. The redistribution centers, the seven to nine, will get faster. As we open this first one and then the second one and make sure that we have all of the bugs worked out of it, will go faster, in terms of the construction of the remaining, whatever that number is, five to seven. So in probably five years.

Okay, that makes sense. Is a reasonable -- if you are then budgeting out let's say three to five years for capital needed to build your business, is the $400 million (ph) number something on average we could expect from CapEx?

I think you come closer to looking at what our run rate on a percent to sales is as we grow our sales and what that capital requirement would be, and we are fairly consistent in what that is year-over-year. There may be some bulges one year versus the other just due to timing. But we're fairly consistent.

Okay, thank you.

The one other thing -- the fold-out, because they are separate from the supply chain -- As Rick said, we have six to seven that we're looking at right now. But I cannot imagine us doing less than two of those in any of the years ahead of us, because it has just worked so well for us.

Jason Whitmer, FTN Midwest Research.

Good morning. A couple of further questions on RDC. If you're currently calling customers that don't fit your profit profile, but they might be able to be added back into that RDC, then why would you be getting rid of them now? And then secondly, within your RDC earnings expectations, is that just to be clear, just on expenses only in your base business case, or will there be some incremental opportunities to the upside when you throw in market share gains, etc.?

First of all, the question as it relates to getting other customers today that might well be potential customers tomorrow, we're putting a lot of effort into making sure that those customers that we can't continue to do business with aren't those kinds of customers necessarily. And of course, there could be some of those as they continue to grow in their capabilities. But if you do it in the right way, and that's have the right conversation with the customers, you leave that relationship on solid ground. And I think that's the intent going forward.

Also, a lot of potential customers that are not customers today may fall into that category. And I would say that would be the highest percentage. It's not customers we've necessarily gotten rid of, it's customers that are out there that we cannot address appropriately today.

Your second question, as it related to how we grow the benefits and leveraging off the RDC in the future, we believe that -- and not built into the numbers that we talked about for this year or next year -- is the capability to leverage our market share opportunities as a result of the RDC. We think that's definitely one of the upsides.

Very well. Have you already identified your second location for the RDC, and is there timing updates on that?

Yes we have, and we will probably start construction of that within the next six months.

It will be in the southeastern part of the United States.

That is as far as we want to go with telling you where it's at, though.

Last question, Rick, I want to talk a little further on the competitive environment. Have you seen, I guess within the promotional activity, have you seen anybody try to step in and use this market weakness as an opportunity to pick off any share and risk for growing margin, or has everybody down the list seen similar weaknesses out there, and maybe you can afford some further rationalization or consolidation in the marketplace?

I think everybody in the industry is experiencing it. There are no consistent strategies across the country or in any particular region or local markets. But we do see folks doing pricing, using pricing as the lead. And that happens periodically, but that happens in more normal times also.

One of the things you need to keep in mind, if you look at the profitability models and you look at our competitors who we are able to see profitability, they don't have a lot of room to do a lot of things, in terms of growing the top line without risking their profitability on the bottom. So there's some limit what can be done over an extended period of time.

Thanks.

Elaina Mills, Atlantic Equities.

Good morning, everybody. Just a question on actually the SYSCO brand business, which you have managed to continue to grow, even in this environment. Looking at the broader market for packaged food, there are a number of players who have recently seen their margins affected by higher input costs, and also packaging. And I'm just wondering if you can comment, within your SYSCO brand business on the extent to which higher commodity prices have affected the profitability of your offerings? And also, just talk a bit about a you're managing through some of the cost pressures. And if you could comment specifically also about whether you have been successful in offsetting higher input costs through pricing on some of the SYSCO brand products.

Actually, your last comment is exactly right to most of that, in terms of, for instance, packaging costs, increased packaging costs as a result of petroleum increases. We've passed that through quite effectively as we've talked about earlier, in terms of pricing. Since we don't own the packaging, we don't not own the labor to produce the product, it's (technical difficulty) we don't become as embroiled, I guess, with those issues as some of the packaged goods manufacturers might.

Are your suppliers not passing on the higher packaging costs to you?

Sure, but we then, that's part of the inflation number that you see and that we share. So we then pass that onto our customers directly.

Inflation is a function of commodity costs, freight costs, inbound freight costs and packaging costs all rolled up.

And one of the things we've continued to impress upon our customers and part of the business review focus is on this, and that is the cost advantages, even in a rising cost market that our customers can see from SYSCO branded products. So in some sense, it even becomes more important to the customers in these sort of environments.

Thanks. Also, if I could just come back to the RDC. Am I correct in understanding that you have actually increased your expected network size by one additional center? Because if I remember correctly, you used to talk about 6 to 8 facilities; we're now onto seven to nine?

We don't know exactly. We have done the modeling, but the models change and that.

We expect them to change over the next five years. We continually run that location. We have a location modeler that looks at all of the freight coming into an area. And we try to get control, the most advantageous lanes of freight in and out. So that modeling goes on as we speak, so we're modeling the west constantly around. But seven to nine is still the modeled out number.

Fair enough. And one sort of follow-up question on the RDC, in terms of the number that you're quoting for a potential impact to EPS next year. I wonder if you could just add a bit of color on the sort of run rate that you expect as it develops over the year. Because I would imagine that some investors may have been somewhat surprised by your expectation that the project could have a slightly positive impact on earnings in fiscal '06. Is the way to think about this that we should be expecting perhaps the first half of the year to be a period when your costs are outweighing benefits, and then by the second half, you might be on a run rate closer to a positive 1 to 2 cents per quarter (indiscernible) looking at it?

I wouldn't want to give guidance on the 1 to 2 cents per quarter. But essentially, your assumption is right, that we will start the first part of the year as we're still in the ramp-up process with heavier expenses. And then going into the second half of the year, we will start to see the plusses come back. It will be marginal at that point, but we're pretty confident of our number right now.

Great, thanks very much.

Andrew Wolf, BB&T Capital Markets.

I will ask sort of the flip side of that question, which is I think your previous guidance on the RDC expense ramp this year was about a penny negative swing per quarter. So I thought it was going to be fairly linear. But like other people have alluded to, the first quarter, you did not have that. Could you explain why that is, why that was, if I'm right about the assumption that you did say it was going to be a penny a quarter? And secondly, what it's going to look like for the last three quarters of the year?

It's just a timing issue.

A lot of the activity going forward now is the actual implementation, the conversion process, which is expense. And that will heat up beginning now and ramp-up further as we get through the rest of the year, Andy. So we would expect expenses to be heavier towards the second, third and fourth quarter than what they were in the first quarter. But still all in all, that 4 to 5 cents.

Same money.

Today's November 1st, (technical difficulty) 30 days, we will be ordering product, be ordering the first product to be moving towards the facility.

I would have to add to that and just say again that the software integration has gone extremely well -- on time, on budget -- and we're going to start running, as Tom mentioned, we're going to start running live data and ordering product here within the next (multiple speakers).

So I guess what you're saying, if things start getting intense right around now into the winter and into -- for the rest of the year, is that fairly?

That's fair.

Alright. To Edward's question, the numbers he was putting out there, I kind of missed that. Was that just the period costs that you were confirming he was close on, or were those numbers including the DNA hit?

None of us can remember those numbers at this point.

Okay, fair enough. A couple of housekeeping items. Company-owned life insurance swing, I think that worked against you this quarter.

It was basically flat this year for this quarter. And last year, we took about a $4 million, I believe.

$4 million positive.

$4 million positives, I'm sorry.

4 million positive least year. It was pretty flat this quarter.

Just the tax rate, should we keep it at 38-1/4 percent?

Yes. 38-1/4 is a good rate for the rest of this fiscal year.

Great, thank you.

Rick Modewick (ph), John A. Levin (ph) & Company.

The accrued expenses declined year-over-year about $35 or $40 million. What was that associated with?

There's a couple of key items here that really explain the biggest part of that. In that accrued expense line is also the prepaid pension. And when you look at the prepaid pension, we made an $80 million payment this year versus a $40 million last year, so that's a 40 million swing there -- that's a debit to that account for your accounts out there. So that's 40 million of the swing.

The other part is that we've funded the 401(k) match this quarter. We did the second quarter last year, that's a $28 million swing. And then there was a $26 million swing in incentives. Coming off of the 53rd week here, those incentives are paid out in the first quarter and that was a record year for us. And we started off a bit slower this year, so the incentive accruals are a little lower, so there's a $26 million swing there. So if you add those three items up, it amounts to some $95 million of that swing, which I think accounts for the biggest part of it.

Okay. And I just had another quick question. At the Wal-Mart analysts' meeting, they highlighted you guys as someone they compete with at Sam's. I think they cited their canned chicken. Are you seeing them at all, or is that just something outside of really what you're focusing on on a daily basis?

We've heard that too, actually. We're flattered that they would think of us as a competitor, frankly. But a lot of -- and I have been to Sam's stores and other of the warehouse type markets recently. The product selection, first of all, does not work well in a professional kitchen; in a kitchen that's serious about building a restaurant business, for instance. So small churches, small day-care centers, could they go and buy chicken strips and paper towels at a Sam's store? They sure can. But, in terms of the core of our business, we don't see them as a competitor. And they're a great company. Don't misunderstand, but they are just not at the heart of what we're trying to do.

One quick question also. If you look at your cash flow statement, your deferred taxes were a significantly higher contribution to cash flow than they were last year. Is that something that is going to be sustained over the year, that deferred tax provision as a percentage of the operating cash will be higher than it was last year?

Yes. I think if you look at our deferred tax position, it was actually -- we're through the biggest impacts. Year-over-year, there was a $119 million impact last year, there was a $125 million impact this year. So there's only a $6 million swing year year-to-year. And I think we have said in the past that as we have anniversaried the buildup of that deferred tax provision, that going forward, there will be incremental to that as we grow the business. So I see that as really fairly minor, in terms of the deferred position right now.

Thank you.

Marianne Kotas, Munder (ph).

My question have been answered. Thank you.

Well thank you all. Thank you all for joining us. We very much appreciate it. And I wanted to let everyone know that if you have further questions at any time, please call John Palizza and we will be signing off. Thank you, operator.

Thank you. That does conclude our call. We do appreciate your participation. At this time, you may disconnect.