西斯柯 (SYY) 2005 Q4 法說會逐字稿

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

Thank you, Laurie. I would also like to welcome everyone listening to the call. Joining me today are Rick Schneiders, our Chairman, Chief Executive Officer and President; 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 Foodservice Operations and President of North American Foodservice Operations; Ken Carrig, Executive Vice President and Chief Administrative Officer; Larry Pulliam, Executive Vice President Merchandising Services and Diane Day Sanders, Senior Vice President of Finance and Treasurer. Our lineup for the call today is as follows. First I'll give a brief overview of the quarter followed by Rick Schneiders who will cover our operating performance during the quarter in more detail. John Stubblefield will then address some of the financial matters that we need to cover such as the effect of adopting option expensing in fiscal 2006 and pension costs.

With the activity that we have seen in the meat markets during the last few months, we've asked Larry Accardi, who oversees our specialty companies, to share with us his insights into the beef market. This will be followed by the question-and-answer session which Rick will moderate.

Before we get started with the substance of the conference call, I would like to briefly cover two items. First, a reminder that SYSCO's next Analyst Day will be held on November 15, 16, 2005 in northern Virginia. The first day will feature management presentations and end with a terrific dinner where you'll have the chance to talk to members of management in a more relaxed setting. We are a food company and we always like to do research at our customers' restaurants. The following day, November 16, will we visit the Northeast Redistribution Center in Front Royal, Virginia. Mark your calendars now. Again, the dates are November 15, 16, 2005.

Second, I will read to you our Safe Harbor language. Statements made in the course of this conference call that state the Company's or management's intentions, hopes, beliefs, expectations or predictions of the future are forward-looking statements. Actual results could differ materially from those projected. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company's SEC filings including but not limited to the annual report on Form 10-K for the fiscal year ended July 3, 2004 and in our press release issued this morning.

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

Now here's a quick summary of the quarter as it compares to the same period a year ago. Sales were at $7.98 billion, down 1.9% compared to last year's 14-week fourth quarter where sales were $8.14 billion. As the fourth quarter of fiscal 2005 was a 13-week quarter and the fourth quarter of fiscal 2004 was a 14-week quarter, a better comparison is achieved by adjusting for the extra week in last year's fourth quarter. We did this by subtracting an average week, 114, from last year's sales. Once you do that, sales on a comparable basis were up 5.6%. Net earnings in the quarter were $284.7 million compared to last year's fourth-quarter net earnings of 280.6 million, up 1.5% and diluted earnings per share showed an increase of 2.3% going from $0.43 per share a year ago to $0.44 in the fourth quarter of this year. Having now given you the what, I will turn things over to Rick Schneiders to explain the why.

Thanks, John. I'll start by expressing my gratitude to the 44,000 associates who are the people who make our success possible. Fiscal '05 was a very challenging year during which we faced a number of obstacles including a multitude of hurricanes in Florida, high fuel costs, unusual inflationary pressures and prolonged bad weather in the East Coast and Midwest. Throughout it all, the men and women of SYSCO kept their attention focused on serving our customers and I really want to thank them for the hard work and dedication they put in to bring the year to a successful conclusion.

This morning I will focus on the basic business. Let's start again with the sales line. On a 13-week to 13-week basis, the 5.6% increase in sales in the fourth quarter represented a continuation of the positive volume trend we saw in '05's third quarter. The interesting thing about sales in the quarter is that the rate of nominal sales growth remained relatively constant as inflation came down from 3.8% last year to 1.6%. What this means is we saw positive growth in our unit movement and product. We spent the last seven quarters battling the effects of higher than usual inflation or cost of goods and we think that based on history, inflation is finally getting back to a more normal range.

During the quarter we actually saw deflation in poultry and dairy while disposables with high petroleum resin input continued to see a high product cost increase. Meat costs, which Larry will talk to you in a minute, trended downward. The good news from inflation carried over to the area of gross profit. Overall, we saw only a 13 basis point drop in gross profit margins which is our best performance in 10 quarters in terms of the change.

On the operating side, our operating companies had good performance with expense ratios declining to 13.55% of sales for the quarter, or down 11 basis points. Notable this quarter was our continuing improvement in pieces per error mispicks which is a measure of how accurately we are picking the product in the warehouses. We showed a 12.9% improvement over the same period last year and in fact, we have shown a 70% improvement in the metrics since '02. When you think about how much it costs to recover from a mistake where you put the wrong product on the truck, disappoint the customer, bring the product back to the warehouse and then send out the correct product, you can understand how important it is to eliminate mispicks.

Also of note in the quarter was the fact that are pieces per trip and pieces per mile both continued to show improvement. This means that not only are we getting more product on each truck but the truck is on average driving fewer miles to make its deliveries. In a time of higher fuel costs, such attention to detail, and our operating companies are great at this, such attention to detail is increasingly important. On the subject of fuel costs, I must say that they remain stubbornly high. In the fourth quarter a year ago, diesel fuel as an expense represented approximately 33 basis points as a percentage of sales whereas this year, it represented 46 basis points. Our fuel cost in the fourth quarter this year were up 33% even though we had one less week in the quarter.

Our supply chain initiative continues to be on track and on schedule. The Northeast Redistribution Center is now shipping to 12 of its 14 plant operating companies with volumes of over 100,000 cases per day. When all 14 operating companies are receiving shipments of all plant products from the RDC, which is scheduled to occur in January, we anticipate case volumes of 300,000 per day. The initial experience we had with operational efficiencies and inventory reductions have continued to be repeated as we have rolled out two additional operating companies. We're also making good progress towards obtaining a site for our second RDC which will be in Florida. We expect to be able to make an announcement very shortly.

It is important to keep in mind that the RDC is not our only growth initiative and I would like to bring you up-to-date on a couple of other important things that we are working on. Last quarter we talked about investing in our sales and marketing force, our customer contact points to help grow sales. We've made progress in that area and grew the number of customer contact personnel by almost 2% in the fourth quarter compared to where we were at the end of the third quarter. We intend to continue to grow the number of our marketing associates, business review managers and business development managers.

Also on a growth note, we completed a number of acquisitions during the fourth quarter. We added to the geographic coverage of our specialty meat operations through the purchase of Facciola Meats in San Francisco and Royalty Foods in Central Florida. Announced during the fourth quarter and completed at the end of July was the acquisition of Fowler & Huntting, a specialty produce distributor in Hartford, Connecticut which represents our first entry into the Northeast for FreshPoint.

In the area of foldouts, we are progressing with our Raleigh, North Carolina foldout and anticipate opening that facility in June of 2006. Our new facility in the Gulf Coast region of Alabama is slated for completion in December of this year. Finally, in order to accommodate the combined volumes, the Roberts Foods and the pre-existing SYSCO sales in Central Illinois, we're building a new facility in Lincoln, Illinois to serve and grow in that market. We continue to position SYSCO for future growth. With that, I would like to turn things over now to John Stubblefield.

Thanks, Rick. I have three things to cover; the effect of option expensing of pension contributions for the quarter and the year and our effective tax rate. First option expensing. In keeping with the applicable accounting rules, SYSCO will begin to recognize the expense associated with stock options and other share-based plans beginning in the first quarter of fiscal year 2006. Currently, we present on a pro forma basis the impact to net earnings and earnings per share for these plans at compensation costs for the plans been determined using the fair value method of SFAS number 123.

For fiscal year 2005, the pro forma compensation costs related to options and the employee stock purchase plan is approximately $111 million. The Company estimates that the amount of compensation expense that will be reported in fiscal year 2006 under SFAS 123R related to stock options and the employee stock purchase plan will be approximately 116 to $124 million. The earnings per share impact would be approximately $0.11 to $0.13. The potential impact of adopting the new rule to fiscal year's 2006 results is dependent upon several factors including the number of options granted in fiscal year 2006, the fair value of those options at the date of the grant, the level of participation in the employee stock purchase plan, the related income tax benefits recorded and the diluted shares outstanding. The variability and the tax benefit reported on the related compensation expense is due to the uncertainty as to whether the Company will receive a tax deduction or the ultimate amount of the tax deduction relative to the compensation expense reported. As a result, the Company's overall tax rate may fluctuate. Our estimates are based on certain assumptions as to the factors I just discussed and the actual impact may differ as actual results vary from the assumptions.

With respect to our pension, it is important to note that during the fourth quarter we made an additional $134 million contribution to our pension funds bringing total contributions for the fiscal year 2005 to $214 million, the maximum for which we could take a tax deduction in fiscal year 2005. This compares to $160 million in fiscal year 2004 with none being contributed in the fourth quarter. I bring this up for two reasons. First, early in the year, we thought that we would not be making any further contributions over the $80 million made earlier in fiscal year 2005. The decision to increase the funding came about as we received more data concerning our projected pension funding level, pension obligations, pension computation, discount rate, and asset returns. Secondly, you should understand that this additional contribution negatively impacted cash flow from operations.

Next, our tax rate. Our effective tax rate in the fourth quarter was 36.97%. The lower tax rate was a result of an income tax benefit of $8.5 million we recorded which reduced the Company's tax expense and effective tax rate. The benefit primarily related to a valuation allowance previously recorded on state net operating loss carryforwards which were reversed as management reassessed these in the fourth quarter and determined it was more likely than not that they would be realized.

Finally, I'd like to talk about our bad debt experience for the year as I think it gives some good insight into the health of the restaurant industry. For the year just ended, our expense for bad debt write-offs net of recoveries was 7 basis points as a percentage of sales, a new record for SYSCO. What this indicates to me is that the restaurant industry is in good shape. This is the third year in a row SYSCO has experienced record lows for expense for bad debt write-offs and I think it shows that the good restaurant operators continue to grow and prosper. Now we'll turn to Larry Accardi.

Thanks, John. I'd like to talk first about developments in the beef market. After a prolonged cycle of rising prices, during the fourth quarter we began to see some relief from higher prices. In our specialty meat companies, prices for fresh beef dropped between 4% to 6% depending on the grade and the cut of meet. We expect to see further cost of goods reduction in the first part of fiscal year 2006 as the opening of the Canadian border to imported live cattle should bring more supply to the beef market. While this has an initial detrimental effect on sales, it takes more pounds to equal the same amount of dollars sales. Over the long run, we believe that lower cost of product is better for our industry. Lower cost for beef means that our customers, the restaurant operators, can begin to lower their menu prices for beef, feature more cuts of beef and recapture some of the profitability they have given up over the past two years of rapidly escalating prices.

From our viewpoint, it is important to remember that beef is priced using a fixed fee plus cost of goods per pound formula. What this means is that as prices go down, gross profit as a percentage of sales will rise even though gross profit dollars remain unchanged. What is important to us in this equation is that lower beef prices will help spur additional sales of beef and more poundage sold translates into more gross profit dollars for SYSCO. What we're seeing is very similar to a cycle that occurred in 1992 and '94 followed by lower product cost and an upswing in demand creating higher sales.

During the fourth quarter, we saw a second case of so-called mad cow disease in the United States and as far as we can tell from looking at our beef sales, there has been no discernible impact on the demand for beef. We continue to see robust demand for beef.

Now, let me turn to another area of my responsibilities, multi-unit sales. Chain and multi-unit sales form a large part of the industry and a large part of SYSCO's sales. In fact, within our broad line companies, sales where we have a contractual agreement for multi-units constitutes over 40% of SYSCO's sales. Over the past year, we have been examining our go-to market strategy with chain. As part of that, we brought in Bob Davis, a former SYSCO operating Company President, to be our Senior Vice President of Contract Sales. One area that Bob has been focusing on has been emerging chains. We know we can be a better partner to this growth of this foodservice industry. The decentralized nature of SYSCO has meant that a restaurant concept that starts in one market may become a very important customer to the operating company in that market but when the concept opens a new restaurant in another market they don't get consistent level of service from the operating company in a new market. We can do a better job with this very good group of growing customers. As part of that effort, we're creating positions in each region to coordinate our efforts with emerging chains. We have the industry's best infrastructure and we intend to use it for future growth. Thank you.

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

(OPERATOR INSTRUCTIONS). John Heinbockel, Goldman Sachs.

A couple of things. I remember us talking maybe 18 months ago about some of the depressants on restaurant sales and one of those things was retail gasoline prices. We have now kind of gone to a new level and it looks like we may go a fair bit higher. Can you touch on what do you think that is doing or will do to real growth as we move forward? Is there any sign as you look at the last couple of weeks or month or two that that is starting to happen? What are your thoughts on that?

Actually, John, we think that it appears that the consumer out there has sort of settled into the idea of higher fuel prices. As you can see from the announcement today, we continue to experience better growth than we have seen over the last 15 to 18 months. So we are encouraged by that. We would certainly like to see it settling down in this fuel market if you will. But right now, we are encouraged by the activity that we see on the street.

What do you see as you look at that real growth of 3%? How has that kind of progressed over the last couple of months or even we can do a lot higher than 3 if fuel prices, if gasoline prices stay where they are or we just settle in at around that level?

John, frankly that would be pure speculation on our part. We have been encouraged by the last several months as we have indicated, the trends. Frankly we are enthusiastic about '06, fiscal '06. But to give you a number or to speculate on a specific rate of growth would be very difficult.

Secondly, with respect to RDC, do you guys have any updated thoughts on two things? One, what it will contribute in '06 and two, I think you thought that at the end of year five it would generate -- each RDC would generate 70 million plus of savings. What are the current thoughts on those two metrics?

We are still very -- I'm going to answer the second one first. We're still very, very encouraged about the progress that we're making. We indicated in the script the reduction in inventories and the operational metrics that we see at the operating companies. If you recall, 75% of the benefit comes from the operating companies themselves. I would say on my behalf that we are ahead of where we anticipated being. The RDC came off from a system's perspective integrating five very complex systems. It was just gratifying to see what our IT department and the folks at RDC did. It worked flawlessly and again as we have indicated, the operational metrics are very positive.

On an '06 basis, we are going to -- we estimate that the expenses related to the supply chain in the first quarter of '06 will be approximately equal to the expenses in the fourth quarter of '05 or approximately 15 million. We are currently completing the ramp up, up from our ramp up of the Northeast RDC as well as planning subsequent RDCs. As expected, the majority of benefits from the Northeast Center will be realized during the second half of fiscal '06. This is when we expect the RDC to be operating at full volume. We said we would have all 14 companies operating and all suppliers, all first-round suppliers, in the RDC by January of this year. Therefore, any estimate for fiscal '06 will become clear as we begin to realize these benefits and we're going to update everyone on our fiscal '06 estimate as the project develops.

But you would say it won't be worse than break even? It might be a little better than that depending upon how the ramp goes?

John, we're just going to have to continue to update you as you go. We are in the ramp now, the first six months of the year when you ramp and we'll do as we have done before. As soon as we have good numbers, will provide those to the investment community.

Mark Kalinowski, Buckingham Research.

A question on the SYGMA business. It looks like the top line there was up pretty nicely despite one of your major customers, a burger brand showing some pretty negative comps lately. Just curious what is driving the nice trends there and if there has been any major new customers added over the last few months? Thanks.

Thank you, Mark. This is Larry Accardi. We have added some additional customers to the SYGMA network in probably eight of our facilities. Major, I don't really think there is any major ones. It's very -- some of the very familiar chains in the marketplace. But that is what you're seeing. It's just incremental volume for the new customers.

Do think there are similar opportunities for future quarters?

Yes.

Good deal.

Steve Husson, HSBC.

It's Marc Husson at HSBC. Just a technical question on the tax charge for 2006. We don't actually know what that is going to be because you don't what kind of tax treatment you're going to get from options and presumably the tax rate could end up being higher than we experienced in the last year. Is that right?

That is correct. What we have looked at and what we believe they use as a base going into 2006 is that 38.25% tax rate and as things do develop through the year, we will keep you advised as to what the changes might be.

And then switching on to meat and beef and so on and the mix there. As beef prices went up, you had talked about having to invest some of that or eat some of that margin as you had difficulty passing the price through as timely as you would like it to. When it starts to fall, do you actually end up flattening margins for a couple of weeks as you let the price fall before you amend prices? The second question is I guess to Larry, would you rather sell a pound beef, pork or chicken?

Mark, I will take the first. Yes, we anticipate and our suggestion in the script that we had seen an improvement in gross margins, that is that decline in gross margin percentage, had been the lowest in 10 or 11 quarters and that is exactly right. We are able to just -- we constantly stay close to that market and we are able to grab back a bit of that margin that we had to give up when the inflation was so high.

And that is ongoing?

Oh yes. Anytime there's a movement in the market either way we stay with it and that is ongoing.

And the other thing just on -- talking about gasoline. You talked about it a bit. From our recollection, you don't do anything to actually hedge your fuel prices. What are you doing to sort of mitigate the cost and what happens if we go to $75 or $100 a barrel? What are you looking at?

Well, a number of things. Yes we do forward by oil or diesel. So that is something that is ongoing and we will be -- we're at about 40% of our needs right now and we will be going forward to 100% of our fuel needs being contracted. The other thing that we do is that we have fuel surcharges with major customers that are on a contract basis. So that is real important to us as you might imagine. And those are escalating or scale surcharges to the customers based on the price of fuel. We would still like to see lower fuel prices however.

So if fuel prices go up, your SG&A goes up but your gross margin goes up because that is the line the customer pays you one or do you offset the SG&A?

In that case, our margins actually would go up. That is captured as part of margins.

Steve Chick, JP Morgan.

A couple of questions, Rick, I guess. With the business reviews being completed, can you give us an idea of I guess what percentage of your street accounts have been touched so to speak and what the penetration rates have done within those accounts?

A relatively small percentage of our customers have been touched. As you know in our business reviews, we're focusing on our gold silver accounts, those customers that provide the greatest lift for us in terms of gross margins. We are anticipating and have experienced -- we have experienced midteen growth in those customers that have gone through a business review and we don't see any reason for that to be different in the future. We think that in fact the business review process is maturing and we feel very good about it and we will do -- last year was kind of a first year and we did a nice job but we didn't do nearly as many last year as we're going to do this year. Ken Spitler is here with us this morning and I will tell you that the operating companies are working hard to do numerous -- put it in those terms -- numerous business reviews over the next 12 months. It has just been a great process for us, Steve, and the results are very encouraging.

I guess for this current quarter, broad line sales were -- the growth rates with and without the extra week were far below the rest of the Company in sales and I'm just wondering when we might see these business reviews contribute to broad line sales growth. I mean can we see that -- I guess is fiscal '06 going to be -- we're going to see some of this midteens growth contribute to that? Is that safe for us to assume?

Well, I actually think we're seeing some of that now. But again, going back to my earlier comment, we have done the reviews with so few of our customers but we think it is contributing right now. We think the business review -- but going forward as we do more business reviews, it will continue to incrementally improve the rate of sales growth and no reason to expect it wouldn't.

That's helpful. Second question, I know you guys don't provide specific earnings guidance but as I look at TheStreet mean estimate for next year, it is roughly $0.20 a share and double the rate of growth over the results that you have put up for this past fiscal year. The mean estimate is like $1.68 over -- give you credit for the $1.47 that you just reported. That's double what you have been doing for the whole year. Are you guys -- would you say the consensus estimates look high to you next year or is that something that seems pretty achievable in light of what you have got budgeted and so forth?

I mean answering that question would be giving guidance, Steve. We don't publish those expectations and we work hard to take care of our customers and grow our business and we are building and investing for the future so I think that is all we can say about it.

That's fair. I thought I would try. Last thing, if I could, just with RDC, can you describes how -- I guess broadly how you handle things from like deals from vendors and vendor rebates and deals as you go to the customer? Has that changed much as you bring a lot of the buying say out of the regional operating companies into the RDC or 50% of the buying I guess you could say. Does that change the nature of the deals that you are structuring with a manufacturer and how you go to market to your customers?

Steve, this is John Stubblefield. We have been very upfront all along. The savings that we're getting out of the RDC on the front end relate to the back end of the supply chain primarily. Those costs are being, or those savings rather, are being shared with the suppliers and since we did make, and are making, the investment, we are using a lot of those savings to help offset the cost of that investment. As we move forward with the longer range plan with our supply chain process, those savings will flow through to the customer. But on the very front part of this because they are all on the back end are being captured by the suppliers and by ourselves. Again, longer range, everyone is going to win out of this process, especially the customer.

I guess what I was asking, not to get too much in the detail of it, but if I am an operating company and I've kind of negotiated some deals and gone to the customer on a regional basis, I would think that structure changes as you bring a lot of that volume into the RDC and I was wondering how you were managing that, if things are going pretty smoothly from that standpoint.

Really from that standpoint, things haven't changed and those benefits that have been out there continue to flow as they've had in the past so that is not a change at this time that has taken effect.

Thanks, guys. Congratulations.

Jason Whitmer, FTN Midwest Research.

Rick, I wanted to again ask a broader picture on your sales and what you have been experiencing the last year, really last few years, relative to your own expectations. Are you satisfied with mid single digits or can you find a tangible plan to get back to that double-digit plus range? I still think that is some of your long-term target to be in that low to midteens. But are you off plan on your sales or are they just kind of end-market development and do you anticipate a time when you can get back up into the double-digit range sooner rather than later?

Well, the double-digit number that we gave was a nominal number including acquisition and inflation. So high single digit volume change and then some assumed inflation along with 3% acquisition. And where we are short right now -- well, we're short in two areas I think. But one area we're short in certainly is acquisition. However, we have been pretty clear that for acquisitions our 3% target is over the long-term and if you look over the last five years, our average is about 3.5% revenue growth from acquisitions. We have -- the last 12 to 15 months frankly have been tough in terms of the movement, the volume change, the positive volume change in our business. What we are encouraged by now is what we're seeing in the third quarter, fourth quarter and we are very optimistic about '06. So yes, I think we still standby our long-term financial objective. We would like to see more sales growth. We are encouraged, as we mentioned just a minute ago, by the business review process and how it is growing in the operating company. So yes we still standby our long-term objectives and we are investing in this business. It's the only thing we know how to do and we have got an infrastructure that is unparalleled in this industry certainly and we're going to continue to build on that and get closer and closer to our customers and be able to do a better and better job for our customers.

And would you be able to comment at all on the end-market condition? Among the restaurants in general, obviously it has been somewhat of a soft summer. From a broader context, have you begun your independence versus the chains and then maybe from a competitive environment, what your peers within the distribution arena might be doing to respond to that. Thanks.

I would say that the independent side of the business, you see the public chain comps. The independent side of our business remains pretty good. We are -- for the first time in three or four years, we're starting to see new independent restaurants open up. Sometimes it might be a second unit or a third unit of a good operator in a particular company, a particular city, but that category of our customer seems to be doing well. They are the ones that are fleet on their feet. They are able to change their menus when prices change and respond to new customer trends.

The other thing, as Larry mentioned earlier, we have a new focus on emerging chains and frankly it's an area where we haven't done as well. We haven't responded to that particular as well as we should have. With our new focus and with the new direction that we have got on emerging chains, I think that that will be a very important part of our growth going forward. It's just that -- it's a category, as Larry said, it's a category we didn't do well with because our coordination between those autonomous operating companies wasn't very good. What Bob Davis and his team are tasked to do and are doing is to work on that coordination. So we feel good about that.

From a competitive environment, we don't -- frankly, we don't see much change. There are a lot of good competitors out there. Our toughest competitors frankly are those independent specialty distributors in every market. Houston has got dozens of them. New York's got even more. L.A. has got hundreds of specialty meat, produce, seafood, paper distributors and those are the folks that are -- they are so focused on their business that they are good competition for us. But everybody is hungry right now and I would say that our approach to the marketplace, our strategy in the marketplace, again focusing on helping our customers and using the business review process, the business development, is paying dividends for us and we believe paying dividends for our customers.

Andrew Wolf, BB&T Capital Markets.

I wanted to follow-up on some of the RDC questions. From the way the press release is written, the 17 million that was expensed this quarter and the 15 million you just mentioned you expect in the first quarter, it sounds like -- is that a gross number? I just want to clarify that or is that net of benefits that you are already realizing?

Andy, this is John Stubblefield. It is a gross number and as we progress through the RDC, it is going to become more difficult to clearly identify and attribute those cost savings that we have to the RDC process. So to your question, it is gross and we are going to try to do the best job we can of relating those savings to the numbers. But I have to tell you as we move forward through this, we're going to end up talking about SYSCO net earnings absent any RDC impact either positive or negative.

And can you breakout of the 17 million or 16.9 that you just booked, what the D&A increase was or part of that?

It's roughly about 4 -- Andy, I'll get back to you on that.

I don't have that number right at hand, Andy. Sorry.

Quickly, can we kind of approximate? It looks like the run rate from let's say the second quarter really started ramping up in the third. So can we use that as a quick approximation that most of that was turning the switch on the RDC?

A good part of it was, absolutely.

And maybe this last one is for Rick. I know obviously you don't what to talk about dollar amounts and benefits. I have heard that now from the CFO as well. But can you give us a description perhaps -- just describe which benefits you anticipate to begin to roll into the numbers as you said sort of as you head to the back half of the fiscal year?

Operational benefits of the RDC? Oh, I'm sorry.

Lower costs, you talked about a lot of things in the past but what are you really anticipating is going to start to impact the numbers and the business?

There will be a number of them. Let me segment into two broad categories. 25% of the benefit comes from the RDC itself and that is -- a lot of that is transportation and just administrative costs to do processing of invoices and that sort of thing. But 75%, the biggest portion of the savings, will come from those operating companies. So let me give you a couple of metrics that we are seeing right now. One is that our operating companies are seeing many fewer trucks come to their back door and as the ramp continues they are going to see even fewer trucks and they're getting the same number of cases but the trucks that are coming have more cases on them and they're much more efficient at unloading those trucks. In fact, the average truck today when it backs up to a SYSCO dock takes about two hours to unload. An RDC truck takes 15 to 20 minutes. And those are significant differences in just the cost of moving product. And when those trucks show up at the back door, in excess of 50% of the product coming off the truck goes right into a picking slot. You have been into our warehouses before and in the old environment what happened is we down stacked cases onto smaller wood. We took the -- the forklift driver then took that small wood pallet, put it in overstock. At night when the pick slot went empty, they had to go find that overstock, move it down into the pick slot. Over 50%, and we anticipate that number will improve, will continue to improve. Over 50% of the pallets now come in and go directly into that pick slot. So those are just a couple of -- it's pretty hard to put a dollar amount on each one of those although I assure you we are measuring very carefully all the impact. Those are just a couple of examples of the benefits that we are seeing in the operating companies.

And lastly, the press release says that currently the RDC is shipping 120,000 cases. It is going to 300,000 the beginning of the calendar year. That's a 150% increase. Us guys on the outside are trying to figure out what your returns really are. Can we use that as a proxy for what you're looking for internally as a kind of a benefit increase?

That's a tough question. The ramp is exponential. So we started off and Ken, I do not know if you have these numbers. How long did it take us to get the first million cases? From April to --?

Yes, it took us about two months to get to the first million cases and then we doubled that in about a month.

Doubled that in a month and we're doubling it again. So the actual cases flowing through the RDC are truly exponential at this point. And we only have about 40% of the suppliers in the RDC and they will all be in the RDC by January. As we said, we have got 12 of the 14 companies and all of the operating companies will be -- all the operating companies in the Northeast will be on board by October. Then it will take a little more time to get the rest of the suppliers in.

And just lastly on the sales side, I think you said your marketing associates are up about 2%. That's year-over-year or sequential or --?

That is sequential fourth to third quarters but I just want to make the clarification. It's customer contact personnel, that is marketing associates and business review and business development. So it is all those folks that directly touch our customers and work with our customers on a day-to-day basis. Most of which by the way, Andy, you know are marketing associates.

Is that a comfortable -- a number you're comfortable with or do you -- do you think that can grow? Are there enough good folks that you can hire out there and train up rapidly enough without impacting earnings?

I think that's right. I think on an annualized basis, that's about 8%. We probably won't do quite 8% for the full year. But 6% plus, I think we are comfortable with that rate of growth.

This is the last question, is getting back to that 6% type of run rate on sales folks, can that be managed to not be dilutive to earnings or to be neutral?

Absolutely.

Eric Larson, Piper Jaffray.

Just a couple of questions. Maybe this is one that Rick could address. Over the last couple of years we have noticed that really the private label, your SYSCO brand sales have been relatively constant as -- and it's picked up a little bit. What is the absolute growth in your SYSCO brand sales today?

What is the absolute growth?

Yes. I mean is it -- it's obviously growing probably with sales but your percentage seems to be pretty constant. Is that a fair assessment of SYSCO brand?

Yes, I think it is. Those numbers move when we introduce big new programs. Let me give you a couple of quick examples. One, when we introduced Butcher's Block boxed beef, which is a SYSCO brand program, it spiked. Because of the big volume associated with beef it spiked our SYSCO brand pretty nicely.

And we have just introduced two new big brands in February of this year, one is called Ranch and Grill, which is a more value beef line, boxed beef line of lesser cost than Butcher's Block would be but it's big volume. The other one is Portico Seafood and we have -- Portico Seafood is a new frozen brand for SYSCO, and seafood is a category where we are underserving our customers and we hope that, anticipate that Portico will help us get to where we need to be. So, I mean, it is relatively even.

And then going back to -- maybe this is a John Palizza question but if you look at consensus numbers for the year, it's difficult from my point of view to see if any -- do you think there are analysts that are already including your stock option expense in the estimates or do you think they're relatively devoid of those calculations yet?

Eric, I think there are only one or two analysts that may have the option expensing in the number at this point. Obviously, we hadn't given them any guidance on what the expense was so it was pure speculation on their part.

And then, just a final question, just that we're all on the same page, will those expenses basically be spread about evenly across all of the quarters? That $0.11 to $0.13 would it be about an even spread across the four quarters?

This is John Stubblefield. Yes, it will be.

I just wanted to verify that fact. Thank you.

William Leach, Neuburger Berman.

Good morning. Actually Eric asked my question on options. But John, do you have any guidance for interest expense and shares outstanding?

We will continue our share buyback program and as that tends to be, it is fairly consistent through the year but there are times that we do pick up the pace a bit. We have -- I'll look to Diana on the current availability on our current share repurchase programs.

Basically, let me talk about interest real quick also and then we will give you the number remaining on our share buyback program. We think our interest is probably going to be in the range of about 90 million this year, and average shares outstanding will probably be declining again next year, of course, if we purchase as planned. And on the program we have about 15 million-ish left on the program. It's a current 20 million program.

And you said 90 million for interest expense?

Somewhere in that vicinity, yes.

And John, when you report your quarterly earnings this year, will you be restating fiscal '05 for comparability for the option expensing?

No, we will not. However, we will do the pro form and the footnotes so that you can have clear sight as to what the impacts are.

Ajay Jain, UBS.

I just wanted to see if I could clarify your increased staffing plans for marketing associates. I know there was just some discussion of that a few minutes ago. Previously you have indicated that we should expect sales headcount to increase by at least 6% in fiscal '06 and Rick, I believe you mentioned earlier that there was an increase of 2% in the number of so-called sales contact personnel in Q4. So is it fair to say that to some extent the planned ramp up for '06 has already happened or are the 500 new marketing associates totally incremental to '05?

Oh, yes, absolutely, it has begun already. The message went out to the operating companies at third quarter and they are acting on it appropriately and managing their business. As we've said, someone asked the question earlier, I think Andy asked the question about managing that many new folks into the system and -- we have 150 roughly locations today and each one of them has to do their part in terms of that increase. So you are talking about a relatively small number of folks. Those folks will be trained and acclimated to the system and begin producing quite rapidly.

So with all these new people coming on board is it likely to be a staggered increase in MAs throughout the year or could it be back-end loaded after they are adequately trained?

I think it will be staggered pretty evenly.

And you confirmed before that there should be sufficient sales productivity to offset any kind of costs associated with this training?

Absolutely.

Elaina Mills (ph), Atlantic Equities.

Actually since so many of my questions have been asked and answered, I was wondering if I could just probe into and go into a little bit more detail on the whole business review process and how that has impacted your business. I am really trying to understand how we should think about this. Maybe this is a question for Rick. Is what you are experiencing sort of a one-time lift in your share at the account after you go in and sit down with them and go through the process so that after the adjustment, you're growing off of a much higher base or do you feel that it is really generally just accelerating in a more sustained fashion, the pace of growth within that account going forward? I mean are these accounts experiencing midteens increases in their underlying business because of some of the processes or initiatives that you have put into place together on the back of these reviews such that you are participating in that growth and that we should expect that to be sustained going forward or is it really that you're taking share?

No. I think we're definitely taking share. Now some of our customers are experiencing -- we have some great anecdotal evidence that some of our customers are experiencing a lift in their business thanks to our helping redesign their menus and reprice their menus. But I would say that that is not the norm. So yes, we are taking share. What we will do and what we have found by the way is in terms of supporting the process, we have a number of customers now who have gone through the review process more than once and we continue to see opportunities with those customers in terms of their business and in terms of our business with them. So I think that is encouraging.

The other big part of it will be is that, as a mentioned earlier, we have been focusing on primarily our gold customers and then some silver. We will continue to work the process through the system with our gold, silver, bronze customers. So we have a lot of work to do over the next several years and in fact, as you might expect, with a silver customer, there is more opportunity than with gold and with bronze, more opportunity that silver. We're seeing those customers move up in categories as we do business reviews with them. So most of that is anecdotal but we are very pleased with the progress that we're making and it is a huge effort, Elaina, it takes a lot of work, three or four hours with each customer in an operating company, going over their menu, talking with them about operational issues. In the end, it is, as I said, I think it's been very good for our customers and good for SYSCO.

That's very, very helpful, Rick. Thank you for that. Have you said what sort of proportion of your customers have gone through this? I mean can you quantify sort of what share of your business has experienced the lift that you're talking about here because it's -- it would help us I think to appreciate how much more upside you really see from this initiative going forward.

The only number I have -- the only indication I can give you right now is a very, very small percentage of our customers have been through it. We mentioned that the business review process really got started about 12, 13 months ago. There was ramp time to get all the training done, get all the people in place and so I think it has been actually in this calendar year since we have really had virtually everybody in place even though we're going to add more business review folks next year, (inaudible) personnel. It's just in its infancy.

That's very helpful. Just one other question. You have in your prepared remarks talked about pricing trends that you're seeing, various categories of products that you sell. Just wondering if you have an outlook for inflation for the first quarter and for the fiscal year '06 based on what you have been seeing so far?

I would have to point you toward the producer price index and we don't do inner quarter indications of inflation/deflation. If you look at what is going on with the producer price index, I think you will see a real flattening in terms of what that index shows in terms of inflation/deflation.

Fair enough. Is the inflation that you have seen so far into the first quarter fairly consistent with what you saw in the fourth quarter of fiscal '05? Around the 1.6 level, is that how you're tracking now?

I can't respond any more than what we already have.

Fair enough. Thank you.

Bob Cummins, Shields & Co.

Final question. I feel honored. I have a couple of financial questions. John Stubblefield talked earlier about the effective expensing stock options and also contributions to the pension fund. Just to clear up the accounting for options, my understanding is that that 116 million or whatever it turns out to be is strictly a non-cash charge even though it does affect reported earnings per share. Is that true?

Bob, this is John. Yes, you are right. It is a non-cash charge to the extent that we get a tax deduction for it and we get some tax benefit off of that. But it is a non-cash charge.

Now conversely as I understand it, the contribution to the pension fund, the 214 million you mentioned for the year, is obviously a cash outlay but is not an expense in the P&L statement.

That's exactly right and I would encourage you to again to do the math around both of those things and taxes also to get to what our true cash flow position is for the year, vis-à-vis, our operations. So you are right. The pension contribution is a cash charge but it is a nonoperating charge and it is also tax-deductible. Thanks, Diane. So you get the tax benefit from that.

Now I would guess SYSCO, being a conservative company, that your pension funds are probably close to fully funded.

You are right to the point that we took the full allowable deduction that tells you we're pretty close to fully funded and that our contribution next year will be -- you didn't ask but the contribution next year will be somewhere in the 65 million range.

65. So basically, the decision to put such a substantial amount into the pension funds is calculating the benefit of the tax deduction and so on?

That's right. And certainly into the future expense, you get the benefit of that contribution to the plan for your future expense and operating cost.

We have no further questions. Mr. Palizza, I'd like to turn the conference back to you for any closing or additional comments.

Thank you, Laurie. I appreciate everyone for joining us on the call today. Should you require further clarification, although I doubt after everything we have said this morning that it should be necessary, you can call me at 281-584-1308. Thanks.

Thank you, all.

Thank you, everyone. That does conclude today's conference. We do thank you for your participation. On behalf of today speakers, I would like to wish everyone a great day.