西斯柯 (SYY) 2005 Q2 法說會逐字稿

Good day, everyone and welcome to today's SYSCO Corporation second quarter fiscal year 2005 earnings release conference call. As a reminder, today's call is being recorded. And now at this time for opening remarks, I would like to turn the conference over to Mr. John Palizza, Assistant Treasurer. Please go ahead, sir.

Thank you, Augusta. Allow me to add my welcome to everyone for joining us 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 of Finance and Chief Financial Officer; Larry Accardi, Executive Vice President Contract Sales and President of Specialty Distribution Companies; Ken Spitler, Executive Vice President of Food Service Operations and President of North American Food Service Operations; and Diane Day Sanders, Senior Vice President in Finance and Treasurer. On the call today, Tom Lankford will cover our operating performance during the quarter. And Rick Schnieders will discuss longer term issues, things that SYSCO is doing in order to stay ahead of the trends in the food service industry. This will be followed by the question-and-answer session which Rick will moderate.

I have two housekeeping items to cover before we get to the substance of the conference call. First, I'm excited to announce that SYSCO's next analyst day will be held on November 15 and 16, 2005, in Virginia. This year, we will feature a full day of management presentations at the Landsdown resort in Leesburg, Virginia, with a dinner at a great SYSCO customer to cap off the day. Start dieting now, because I guarantee you, that you will eat well on this trip. We are, after all, a food company. The following day, and an event that everyone has been waiting for, we will be visiting the northeast regional redistribution center, in Front Royal, Virginia where we can get an opportunity to see the SYSCO national supply chain initiative up close and personal. It is a great opportunity to get a sense of the magnitude of the project, as well as a chance for you to gauge how well we're executing on what we've promised. We will be sending out invitations in February, but mark your calendars now. Again, the dates are November 15, 16, 2005.

Second, allow me to read to 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 filing, including, but not limited to, the annual report on form 10-K for the fiscal year ended July 3, 2004, and in our press release issued this morning. With that, I will turn things over to Tom Lankford.

Thank you, John. Allow me to start off by properly giving credit for our continuing success to the men and women of SYSCO who have worked so hard to make our Company a success. Food service industry has been challenging environment over the last few quarters and our people have stepped up to this challenge by continuing to improve their operations. This quarter we faced very tough comparisons to last year's second quarter when we had an EPS gain of 21 percent which included a $5 million gain from the sale of a facility. First, here is a quick summary of the quarter as it compares to the same period a year ago. Sales were up 4.2 percent reaching $7.33 billion. Net earnings were up 4.8 percent to $232.6 million. And diluted earnings per share were $0.36, an increase of 5.9 percent.

Let's start with the sales line. Sales in the quarter were up a total of 4.2 percent over last year's second quarter. Sales from acquisitions contributed .74 percent in the quarter, with sales from Overton, our recent fresh produce acquisition, and International Food Group contributing the majority of sales from noncomparable acquisitions. During the quarter we also completed several smaller acquisitions -- Nashville Tomato, another produce company, Honeyman's Meats and J.J. Derma's Meats, both specialty meat distributors in Toronto, Canada, and Robert's Foods, a broad line distributor in central Illinois. Sales from these companies are reflected in the percentage contribution of sales growth from acquisitions. Inflation as measured by the rise in our cost of goods was 3.8 percent for the quarter. As you heard from us last quarter, the sales environment continues to be tight. During the quarter we were also affected in two different ways by the holidays. Unlike Mother's Day when everyone wants to honor mom by dining out, Christmas and New Year's Day tend to be holidays when families stay at home for a traditional family dinner. This causes our sales at restaurants to fall off during the weeks which include those holidays and, in fact, many restaurants close on Christmas and New Year's Day.

This year, due to the way our fiscal year falls, New Year's Day fell in our second quarter, making comparisons difficult with last year when New Year's Day fell in the third quarter. In addition, both holidays fell on a Saturday, the busiest day of the week for restaurant operators. The effect was to eliminate a good chunk of sales from both holiday weeks, although we can't quantify the exact amount of sales lost. On a more positive note, excluding the holidays, sales moderately improved during the second half of the quarter. Our sales initiatives remain in place with excellent adaption and we're seeing good results from our business development and business review processes. We remain committed to developing additional quality sales with our customers. Let me turn now to gross profit margins. All of our segments experienced lower gross profit margins in the quarter. However if we look closer at the numbers, what we find is that within our broad line operating Companies, gross profit margins for our independent restaurants where our marketing associates add value and negotiate prices held up quite well. Gross profit margin pressures really came from our contractual and multi-unit sales.

Next, operating expenses. Our operating Companies once again turned in an outstanding performance, with our expense ratios declining to 13.71 percent of sales, or down 46 basis points from the second quarter of last year. Expense controls, where appropriate, continue to be a focus throughout the organization. Following last quarter, when our total dollars of expense rose just 3 percent compared to the same period a year ago, there were a number of skeptics who did not believe that much slower expense growth was sustainable. I hope this quarter's dollars of expense increase of just 0.8 of 1 percent over last year will convince a few more people that we have plenty of opportunities to improve on the expense part of the equation. We continue to make progress on both our quality metrics, such as pieces per error, and our operational metrics, such as pieces per stop and lines per stop. This means that our dollars of gross profit per stop are incrementally larger with a greater variety of items in the delivery. In addition, by making fewer mistakes, we keep our customers happy and we don't incur the cost of round tripping products, which at least doubles the cost of handling those products.

Of particular note this quarter, when fuel prices experienced the quickest rise we have seen in recent memory, our pieces per mile driven saw good improvement helping to offset higher than normal fuel costs. For those of you keeping track, fuel costs, which typically run between 30 and 40 basis points, as a percent of sales, spiked to 45 basis points in the quarter, resulting in a more than 40 percent increase in our fuel cost per mile compared to the second quarter of last year. All contained of course within our expense numbers. We will continue to emphasize expense control in fiscal year 2005. We think there remains a long way to go in wringing costs out of the system by making our operations more efficient and simultaneously improving service to our customers. I will finish this section by talking about what we have the least control over, inflation -- as measured by the rise in our cost of goods. The principal culprits from recent quarters have been meat and dairy prices. But these have moderated considerably and have been replaced by produce, up 15 percent, which has been impacted by bad weather in both Florida and California. Disposable products, with their heavy use of petroleum resins, have also seen a large price jump of almost 9 percent. Given our mix of sales, the categories having the greatest impact on our inflation number are produce, canned and dry goods, and disposables. Our expectation is that inflation will continue to moderate throughout the year. At this point, I will hand the commentary over to Rick Schnieders.

Thanks, Tom. I will open my segment by expressing SYSCO's gratitude to all of our customers for putting their faith in us. We can never lose sight of the fact that helping our customers succeed is the very core of what we do. And when our customers reward our efforts by giving us their business, it is most appropriate that we thank them for it. This morning, I would like to talk about two ways in which we continue to grow the Company. Our capital projects and our merchandising initiatives with SYSCO brand. First, the project that everyone wants to know about, the RDC. Our redistribution center and supply chain initiative reached a significant milestone recently. The RDC has been placing orders and received product during January of '05. We're on schedule to have the first order shipped to our operating Company, that one serving the Boston area, on February 14. After which, our rollout plans call for each subsequent operating Company in the northeast region to begin receiving shipments at three-week intervals.

During the quarter, we spent $19.5 million on the supply chain initiative of which 6.5 million was expensed and 13 million capitalized. This brings total spending on the project to $256 million of which 178 million has been capitalized. The remainder expensed. If you've been following our numbers for the RDC closely, you will note that for the first two quarters of fiscal 2005, our expenses for the project have totaled $12.2 million which is 5 million less than for the same period in fiscal '04, the first half of '04. You may also recall that during our conference call for the fourth quarter of '04, we stated that we estimated that the RDC project would add an additional $0.04 to $0.05 per share of expense for fiscal '05. In light of our experience during the first half of this fiscal year we have reworked our estimates for additional expense related to the RDC for the remainder of the fiscal year. Currently, we're projecting an incremental $0.03 to $0.04 per share of expense related to the RDC in the second half of this fiscal year. This represents a reduction from our original estimate, and I want to emphasize that it in no way represents a reduction in size, scope, or scale of the supply chain initiative. We were initially very conservative in our estimate, and as we move further into the actual buildout of the project, and into the operation of the phase, we think we can actually lower expense estimates.

The RDC project remains on schedule and ahead of budget. I'm looking forward to November of this year when we can show you what we've put in place in this project. Although it garners the most attention at this point, the supply chain initiative is not the only significant capital project we're engaged in during fiscal '05. Our current estimate for capital expenditures during the year remains at between 400 and $450 million. Other important projects include the completion in March of this year of our fold-out in Post Falls, Idaho, which will serve the Spokane, Washington, and neighboring markets, a new fold-out serving the Raleigh and eastern part of North Carolina, and a large replacement facility in Denver, Colorado. While this distribution and the associated facilities are essential parts of our business, what I really would like to talk about now is the food side of our business. We recently completed our annual merchandising conference here in Houston. And it was a great opportunity to view and sample many of the terrific products we supply to our customers. The conference brings together many of our top suppliers with our merchandising teams from the SYSCO operating Companies throughout the United States and Canada. Our corporate merchandising team is constantly challenging our suppliers to come up with new ideas and products to present to our operating Companies in the merchandising conferences where the suppliers showcase those ideas and products.

This year, I'm quite excited about the job that they've done in the seafood area. At the merchandising conference, we launched a new SYSCO brand, Portico Seafood. We've spent quite a bit of time working with our suppliers to develop a complete line of seafood that meets SYSCO brand quality measures. Our intention is to bring integrity and quality assurance to an area of food service where, frankly, this has been lacking. We've not captured our share of the seafood market in the past in part because we've not been able to offer a wide enough range of consistent quality products. We believe that now, with the right program, Portico Seafood and suppliers in place we can show significant gains in the seafood category. I'll also mention that we introduced Ranch and Grill beef products, a huge new brand for us, at the conference. With that I hope that I've stimulated your appetites and immediately after the call you will rush out to your local seafood restaurant and ask for Portico brand seafood. Operator, we will now take questions from the people in the call.

Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question today, you can do so by pressing the star key followed by the digit 1 on your telephone key pad. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that's star, 1 to ask a question. We will take our first question from John Heinbockel with Goldman Sachs.

Rick, a couple of things. There is obviously some noise in the sales numbers. You know, if you can look at sort of strip out some of the calendar effects and look back over the last couple of months, maybe include January in that, are we seeing progress in organic growth or are we basically still kind of bouncing along the bottom? And when do you think we get back to, you know, some measure of good organic growth, 6, 7, 8 percent? Is that, you know, sometime in the next six months or it's longer than that?

I don't know if I can be very specific about the last part of your question, John, but I will tell you that as we suggested in the script this morning, that we have begun to feel more optimistic. We're seeing some positives -- we were seeing some positive sales trends in the latter part of the quarter. If you X out those holiday weeks. And I would say again, we're challenged a little bit in terms of the measurement, but if you X out some of those areas where we've had some pretty significant weather, the northeast particularly, we're encouraged by the trends, by the most recent trends. So I would say that we're optimistic. We're cautiously optimistic. We're seeing a number of indicators that would suggest to us that we're indeed seeing some real growth again in the restaurant segment. But the weather has -- the weather has been -- had some impact on us.

The -- you know, as you look out, how optimistic are you, you know, as we sort of look between now and year-end, and what do you think are going to be the key variables that are going to move organic growth back up from a macro standpoint.

From a macro standpoint, I think a lot of it will be, you know, geopolitical, and economic, to the extent that we see a lift in the entire -- in the economic environment, the general economic environment, I think that will be a huge boost to us, and we feel good about that. At the same time, we are and have been as Tom suggested in his comments, we're continuing to see very good progress in the sales force initiatives, the business review, and the business development. So I, along with our -- what I think is excellent work in expense control, SYSCO today is positioned better than it's ever been positioned. We're seeing a lift now in sales, so I don't want to overstate this, but I would say that there are smiles on the faces of folks in this room and we were with our Senior Vice Presidents at a meeting last week, and there's a good sense of optimism out there at this point.

The second thing, I thought gross would actually be a little bit better than last quarter. You know, in terms of year-over-year performance, because of the moderation in inflation. Why -- you know, what prevented that from occurring, and it sounds like it's -- it may be in SYGMA.. What prevented that improvement from occurring, you know, sequentially?

Well, I think it is important to remember that although we've seen a moderation in inflation, we still have inflation. And -- but I would also say that we're optimistic about -- as the inflation continues to moderate, I think we're optimistic in terms of what gross margins will do. And again, as we indicated in the script, the operating Companies have done a really excellent job in the current environment in terms of managing their gross profit. And so -- but the biggest factor right now is we still are in an inflationary period, although reduced from a year ago.

So bottom line, you think it's still hold-over from inflation, putting pressure on gross, and we won't see that moderate until inflation comes down a fair bit more? Or --

Yes, I think that's accurate. And you know, we get back into normal ranges of inflation here of 2 to 2.5 percent. We will be -- I think that's a more manageable number for us in general. But you know, I don't want to beat a dead horse here but operating Companies and the systems that we have available us to, you know, we're gaining -- we continue to recover that inflation at a very high rate, in the upper 90s I would say, but there is a bit of a time lag. As you would expect, particularly on the multi-unit side of our business.

Okay. Thanks.

Thank you, John.

Thank you. Now we will take our next question from Mark Husson with HSBC.

Yes, just following up on John's question, you've been talking for about a year now about doing a more aggressive review of accounts and knocking out accounts that really haven't reached a level of profitability. Can you talk about the kind of mix of new accounts that you are actually winning, old accounts that you're losing, and the ones that you're deliberately getting rid of? Can you give us some assumed sense of that dynamic in those numbers.

Well I can give you some anecdotal I guess without knowing the specific numbers. I think in the past, we've talked in the past couple of quarters, we've talked about between our culling of accounts and because we're more discretionary, about the new accounts we're bringing on, we think that's a 1, 1.5 percent drag on the top line. We've continued to manage the business using our stratification methods of understanding our customers better, and applying the resources toward, you know, to those customers, where we've got the biggest opportunity for return. Those initiatives have been very, very successful for us. And I will tell you that without having any numbers in front of me today, that our -- what we call our batting average, that's the number of new customers we bring on board, that make it to a medal category, gold, silver, bronze, the batting average has significantly improved. And we're just very gratified at that. And what that means of course is that we're not bringing on those customers that ultimately will not be profitable for us. We're not bringing new customers on that ultimately will not be profitable for us. And that, you know, in the past, when we did that, we had some very, very expensive you set them up, you route the truck, and you go through all those gyrations and so that's been very, very good for us, Mark.

Okay. And just a couple of side issues, you had at some stage, I forget about four or five months ago put a freeze on hiring sales people? Is that now over? And then the second thing is, we saw Ourholes recently and it doesn't like they are any more competitive than they used to be but is there any change in the competitive environment?

No, we never had a hiring freeze on sales people. We had a general freeze on for a while. We have -- and we've kind of redefined it in terms of we talk about customer contact folks, would be -- which would be marketing associates, our on the street sales people, business review, business development, and product specialists. And we are growing those numbers, and we will continue. We've set out some aggressive goals to grow the numbers of customer contact folks. Again, making sure that their time and effort is spent where it has the greatest return for us. So we are still being very careful about new hires of all kinds, we're being diligent about that, and that's reflected in that number, that 46 basis point improvement in the expense number, and in fact, we would anticipate that that would continue on. So we're -- yes, we're out there aggressively working the market and at every level, whether it is corporate multi-units or independent operators.

Competition?

Yes, I mean you categorized it in a a few words as well as I could and that is that we just don't see much change. We will see change in a given market where someone will do something that we don't think is entirely intelligent. And then we see, you know, see folks back away from those activities. So at this point, I guess it is -- there is no real change out there in the competitive landscape.

Great. Thank you very much.

Thank you, Mark.

And next, we will hear from Steve Chick with J.P. Morgan Chase. .

Hi, thanks.

Hey, Steve.

Hey. I guess a couple of questions. Maybe for John. You know, I know that the sales number and some of the timing issues for the holidays is difficult to maybe quantify, but as I look at your period end, I think this quarter was January 1, and last quarter being December 27, or last year, rather, I always thought that New Year's Eve and the days leading up to that were the biggest days for restaurants, and so I'm wondering if you looked at that, analyzed that and its impact on the quarter and if there is a give back that we should think about as we look into the next one?

Steve, this is John Stubblefield. If you go back and historically look at our numbers for those specific weeks, you will see that our sales actually fall off as a run rate in those weeks as compared to previous weeks, and following weeks, as we move through the holiday period. So as you -- you know, your thoughts that they are actually good sales week, are actually not good sales weeks for us in total and in fact, typically, you lose a day's sales during that week, whenever it does occur, and as it was said earlier, what's especially impactful this year, is they fell on a Saturday. Which you would expect most folks to go out and enjoy that evening out away from the home, and that dining experience. So we kind of look at it as a double hit this quarter in terms of the impact, and then moving into the third quarter, you're right, you would expect then to see a little back wind, if you will, to our backs to help us move into that third quarter. And as Rick suggested, and for those of you folks who are living in the northeast and the midwest, you've certainly seen the impacts on the weather as we move into this quarter. So we're doing as well as you would expect seeing that weather impact. In fact, given that weather impact, we're -- as Rick suggested, not displeased with the beginning of the quarter. So all in all, I think things tend to balance out.

You know, Steve, it is not just restaurants that are impacted. Colleges and schools are out, hospitals had lower census during that week, it affects you all the way around.

Got you. Okay. And then a separate question, John. The inventory growth for the quarter, I think it was up say 14 percent, was pretty well above sales, and I don't think -- or I think you said that you didn't start receiving shipments for the RDC until January. Is -- can you just give us an idea of what we should be looking for for inventories I guess as we go into the next quarter and the end of the year?

Sure, Steve, you're right, inventories were up, I will remind you of the fact that the inflation impacts inventories as well as it does the top line, and we certainly see -- and a fair inflation for the quarter was something like 4 percent and part of that was the 4 percent. And the other part of it also has to do with the timing of the holidays. We buy product into the last half of the month of December, anticipating when the schools kick back in in January, so if you look again historically, our inventories rise at the end of the second quarter in anticipation of that, as well as the bit of a slow down in the business. This year is a little higher than that, inflation is certainly a part of it but if you look to our cash flows for the period, you also see we had a bit of a benefit from -- on the accounts receivable side with the end of the month being a slightly later than it typically is so cash flow was actually pretty good for the quarter. We're pleased with cash flows. So we would expect inventories, to your question, to move down back in the range at the end of the third quarter, and the RDC didn't have any impact at all for the second quarter, and it will have a moderate impact but not significant for the third quarter.

Okay. Great. Thanks.

Thank you. And next with Wachovia Securities we have Jeff Omohundro.

Thank you. First, going back to the hiring freeze, I just want to make sure that I'm hearing correctly, you do remain comfortable with your staffing levels and you don't feel like you've squeeze too much there, do you?

No, no, not at all. We feel very comfortable with where we are, and hats off again to our operating Companies who, you know, made the tough decisions, and tightened their belt, did the right things, and as we looked at those numbers on a weekly basis, we're very comfortable with where we are. As I said, we're continuing to grow our customer contact folks, our sales people, and yet we have become more efficient in our operating -- the operations of our business. Reflected again in the fact that we continue to make improvements in lines per stop, and pieces per stop, cases per stop. We're getting more efficiency out of the fleet, which would also indicate that we're getting more efficiency out of the delivery personnel. So no, we're absolutely, Jeff, very comfortable with where we are.

Great. And my second one, just maybe in general, if you could give us a little bit of an update on what your sense of the health of the independent sector is, in the current environment versus chains, and what your thoughts are for 2005, in that regard.

Yes, I think one of the very encouraging, again, anecdotal, but encouraging signs has been the opening of more new independent restaurants over the past six months or so. During the last quarter, actually, the second quarter of the year, we started getting information about new restaurants opening again, and we see that with opening packages and general activity out there. So, yes, I think the independent sector is very vibrant, and will continue to -- there's probably been a bit of a shakeout over the past few years, but solid operators out there, continue to do very well, those are our gold, silver, bronze customers, so I think that that independent side of the business is very good. And it is the side of the business that can respond quickly to changing trends in the marketplace. So they're fleet on their feet and they do a great job and we're pleased to have so many of them in number as our customers.

Thank you.

Thank you. Next we will hear from Eric Larson with Piper Jaffray.

Good morning, everyone. Just a first quick question. The gain on the sale of your facility last year, did that go -- I'm assuming that went through the other net line and not through your COGS or operating expenses; is that correct?

This is John Stubblefield you're exactly right, it did go below the line and that's reflected in those numbers for last year.

Okay. Great. And then John or Rick, whomever would like to answer this, I continually get positively surprised by the -- you know your expense, your operating expense ratios and the decline on that. What is an annual number that we could, you know, be comfortable in sort of modeling in our numbers going forward, and will this rate of improvement continue or will it moderate as you get into the next year or two?

Well, we feel very positive that we're going to continue to see improvement at the expense line of our business, and Eric, I will just remind you, and remind us that, the RDC is a big part of our expense control initiative going forward. The benefit -- 75 percent of the benefit from the RDC will happen at the operating Company, mostly in the form of expense reduction. We will be much more efficient as we deliver the inbound loads to those operating Companies, and in fact, on the outbound side, also. So we're -- we're comfortable, we're working -- we will work hard to continue to drive that number down. Maybe not at the 46 basis points every quarter, but for the year, I think that we -- year-over-year, I think we will continue to make good progress on that line.

Okay. Thank you.

Thank you.

Thank you. Next we will hear from Ajay Jain with UBS.

Yes, hi, Rick, you talked earlier about the fact that you obviously segment your customers very carefully according to their profitability, but it seems like for at least a year now, there has been a gradual decrease in the street account business which looks like it actually continued into this quarter, and my question is, now that we're seeing more normalized inflation levels, do you think it's realistic to expect that the customer mix is going to improve in the near term? Or is there something structural that you're seeing with the street penetration to the extent that you might not be able to regain some of that lost business?

No, we're not -- as I suggested earlier, not concerned on the independent side of our business. It is important to remember that the corporate multi-unit business that comes on, comes on in such big chunks, and so it tends to skew numbers in any given quarter and every given six months. And in fact, we continue to work on corporate multi-unit business, so there is nothing -- no structural change.

You know, the other point to that, is that we continue to increase the lines with those customers, and our anticipation is, is those lines will stick after the macro business begins to improve and cases on those lines will also improve, so we will see an uptick and a greater sense, in those numbers, then we will the rest of our business.

So over the balance of the year, you think it is reasonable to expect that that -- that those street account figures should increase?

It is certainly our expectation.

And I would also add that we're seeing good street growth right now. So we're, you know, we're -- again, it is always kind of -- you get that big chunk of multi-unit business that overshadows those independent -- the growth on the independent side, but that -- that kind of comes, you know, one fairly small account at a time.

Ajay, I would also add that if you look at our total territory street business, that grew at the same rate as our contractual business. So there was not a change in mix between territory and multi-units.

Okay. I also had one follow-up question, I know that there was already some discussion about this earlier in the call, but just on the calendar shift issues that were mentioned in relation to the slower organic growth, I was wondering if you would be able to further quantify the negative sales impact from the timing of New Years and Christmas specifically, like what you think the reported sales growth would have been absent these two specific timing issues.

this is John Stubblefield again. And we are just very reluctant to speculate as to what that impact is. We know there is an impact. We know there is significant numbers of customers out there that just flat aren't open on those days and that's business that's lost in that quarter so to try to quantify that, is just -- it would be at best a guess on our part.

Okay. Thank you.

Thank you. Next we will hear from Andrew Wolf with BB&T Capital.

Good morning. I wanted to follow-up on your comments on competition in the market. In your press release, Rick, you quoted saying that there is continued price sensitivity in your food service markets. How does that reconcile with your commentary that things haven't changed? Does it mean it's pretty tough and tougher than normal and it hasn't changed or could you elaborate on that?

We said continued -- continued pressure. I mean it is the same pressure that we've been having over the past six or eight months. It just hasn't changed. And as I also said in my comments here, a little while ago, you know, we -- it is kind of like a snake. You step on it in one spot and it will pop up again. No, I think that those are consistent comments.

The competition is only one part of. It the other part is our customers are either reluctant or concerned that they can't pass along price increases and so they're a little bit more sensitive to pricing than they would be under normal circumstances absent the increases in inflation we've had.

So some of that commentary includes or could point to things like trading down to Flank steak and those kinds of things as well? Is that accurate?

Yes, absolutely.

I will give you -- this is John Stubblefield. I will give you a good example of that. We saw in the second quarter tomatoes go to $50 a case from a more normal 12 to $14 a case and I would suspect if you went in to order a salad at a restaurant you had a lot fewer tomatoes in that salad than what you had previously so those kind of adjustments at the end of the day do reflect in the total dollars that are going through the system.

And I just wanted to follow-up on your comment that sales got a little better in the second half of quarter. I assume you're pointing specifically to broad line there.

No, actually, in both categories, including SYGMA. You see, when I say sales now, we're looking at -- trying to look at pieces over pieces this year versus last year. So the rate -- the rate improved in the second half of the quarter. The rate of growth improved.

At broad line as well as SYGMA?

Absolutely.

And lastly, I think earlier on, you said most of the gross margin contraction in the quarter was a result of SYGMA, maybe the specialty business as well, but could you put any color around the gross margin in broad line? I mean did it in fact -- was it flat or up or did it just contract less than the other segments?

Yes, the gross margins for broad line were basically flat for the quarter.

Okay. Can you give us a sense of what kind of sequential improvement that is in broad line? I mean are you now budgeting broad line, you know, broadly speaking, to be up on gross margin?

And let me qualify that just a bit. It was flat with the territory customers, it was down slightly in the nonterritory customers, and we would expect that giving again moderation in inflation, we would expect to see that trend continue through the next two quarters.

Okay. Thank you.

Thank you, Andy.

Next with Midwest Research we will go with Jason Whitmer.

Good morning.

Good morning.

Rick, I also want to tackle a little bit more of a bigger picture look on sales maybe from a reverse angle historically, clearly real sales growth has been much higher acquisitions has been much higher, it seems like a lot of the discussion is on some minutia of calendar shifts or weather impact, a little bit of customer stratification. There still seems to be a big gap here that's missing from your historical pace. Can you reconcile that and address maybe how you get that back up?

Well I would go back to the earlier comments made about what would help us the most, and that would be general economic lift here across the U.S. and Canada. But we feel that indeed that is happening. So you know, I don't -- you know, in terms of SYSCO vis-a-vis the industry, I'm not sure that I can give you a good answer, other than if we see -- if we see the economic -- the general economic trends in the consumer dynamics out there improve, I think our business improves. I would also say that we -- although we have made a number of smaller acquisitions, although strategic for us, that we continue to work on some very positive opportunities in terms of acquisition, so we still work and live by our long-term trends. Which we have stood by for a number of years. We would expect to have about 3 percent of our growth come from acquisitions. We would be in the -- the organic growth would be in the upper single digits and we think that -- for the longer term, those are the right numbers for us to be working toward, and setting our goals toward.

Would you say then, you may have a shift in priority or focus to, you know, have some more tangible and quantifiable sales initiatives, whether it be in the back half of this year or the next 12 to 18 months that you tackle market share or other end market plans beyond the macro or geopolitical landscape and is there any potential margin risk from that type of activity in either competitive bidding or any other type of initiative?

No, I think that there still is, as we said earlier, there is still opportunities with some corporate multi-unit accounts that we have been talking with, some larger corporate multi-unit accounts, and the other thing is that we're fold-outs. Our fold-outs continue to perform magnificently. So that, you know, in terms of market share, that is a big part of our direction, to gain market share, to get closer and closer to those customers. The RDC, although we have focused a lot on the expense side of it, the RDC unquestionably will be in the longer-term, not in the next three months, but in the longer term, will be a sales boosting agent. It puts us at a competitive set, that no other entity can get to. So we're -- you know, we feel good about our long-term prospects. And we feel better about our short-term prospects so we're -- I mean at this point, and as I said earlier, we feel that we are positioned better today than we've ever been positioned as an organization. The economy is getting better. We will -- we will be able to take advantage of that as an organization.

Thank you.

Thank you.

Next we will go to Thomas Crauly with Putnam.

Hi, just a quick question. For '05, what percentage for your cash tax is paid as a percentage of your tax expense for the full year? Can you give me a rough estimate?

You know, that's a great question and I don't have that number off the top of my head. What I will suggest to you is that for this last quarter that we just completed, the actual taxes paid in that quarter was approximately $238 million. And that's as compared to $191 million last year. And we're at the full pay rate, if you will, at this point going forward, and that is having the ramp-up of the deferral behind us, so I guess you can probably do the math about as well as I can, 238, there is one small caveat in that, and that we make two tax payments in this quarter, where as typically, you would think we would have one in a quarter because of the timing of the payments, so good question, sorry I can't give you anything more specific than that. But hopefully you can get some guidance from that. And if not, we will certainly be open to further conversations today.

So I can infer, though, that the ramp-up has happened and so I can extrapolate that the full-year will be more like the first half?

That's exactly right.

Okay. Thank you.

I want to just correct what John said, I think he said that those are quarter numbers, those were the 26-week numbers.

I'm sorry, you're right.

But the quarter numbers are really not that far off of that because of what John said, there's two payments made in the second quarter.

Thank you. We do have time for one more question from Rick Ludwig with John A. Leven and Company.

Over what time period do you amortize the capitalized RDC costs?

Well, there are several components to that. The shortest being as short as five years. The longest being as long as 25 years. So there is -- it is the whole range, depending upon the components of that capital expenditure. I would say the bulk of those are somewhere on the shorter end of that range as opposed to the longer end. Because of the IT piece of it.

And just one other quick question, in the past, you've disclosed, you know, sort of swings in your cost of life insurance on a year-over-year basis. Was there any meaningful change there on a year-over-year basis?

No, there wasn't. It was actually for this quarter, about the same as it was this quarter last year. So no significant deviation.

Terrific. Thank you very much.

Thank you.

Operator, we actually will have a couple of minutes, can you survey and see if there are any further questions.

And there are no further questions at this time Mr. Palizza.

Okay. Well, we would like to thank everybody for joining us on the call. I'm available for further questions in just a couple of minutes.

Thank you all.

Thank you.

Thank you and that does conclude our conference today, we would like to thank everybody for their participation. Have a nice day.