西斯柯 (SYY) 2006 Q2 法說會逐字稿

Good day, everyone. And welcome to today's SYSCO Corporation's second quarter fiscal year 2006 earnings release conference call. As a reminder today's call is being recorded. At this time for opening remarks and introductions I would like to turn the conference over to Mr. John Palizza, Assistant Treasurer. Please go ahead, sir.

Thank you, James. Allow me to add my welcome to everyone for joining us today on the call. With me here today are Rich Schnieders, our Chairman, Chief Executive Officer and President; John Stubblefield, Executive Vice President and Chief Financial Officer; Larry Accardi, Executive Vice President, Contract Sales and President of Specialty Distribution Companies; Ken Spitler, Executive Vice President and President of North American Foodservice Operations; Larry Pulliam, Executive Vice President of Merchandising Services; and Kirk Drummond, Senior Vice President of Finance and Treasurer. On the call today I will give a brief overview of the quarter, as it prelude to Rick's news discussing in greater detail our operating performance during the quarter. Rick will be followed by Ken Spitler who will update everyone on our supply chain initiative and redistribution project. John Stubblefield will conclude our prepared remarks by addressing four interrelated items; our share repurchase activity, our interest expense and debt levels, and our balance sheet. This will be followed by the question-and-answer session which Rick will moderate.

Before we get to the fundamentals of the call, I have some brief announcements regarding upcoming conferences where SYSCO will be speaking. On Tuesday, February 21st, our CFO, John Stubblefield, will be presenting at the Consumer Analyst Group of New York at their Annual Conference in Scottsdale, Arizona. On March 7th, John will also speak at the Bear Stearns Retail Apparel and Restaurant Conference in New York. Later that month on March 21st our CEO, Rich Schnieders, will address the Merrill Lynch Retailing Leaders' Conference also in New York. We hope we will see you at one of those events.

Now, allow me to read you our Safe Harbor language. Statements made in the course of this presentation that state the Company's or managements' intentions, hopes, beliefs, expectations or predictions of the future are forward-looking statements. Actual results could differ materially from those projected. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company's SEC filings, including but not limited to risk factors contained in the Company's Annual Report on Form 10-K for the FY ended July 2, 2005, and in the Company's press release issued this morning.

To start things off here's a quick overview of the quarter. All compared to the same period a year ago. Sales were up 8.7% reaching $7.971 billion, sales from noncomparable acquisitions contributed 1.3% in the quarter from eight different companies; Robert's Foods in the broadline category, three fresh cut meat companies and four specialty produce companies. Inflation remain benign in our cost of goods during the quarter rising a mere six-tenths of 1%. Cost associated with petroleum products and resins remain high leading to higher prices in our chemical, janitorial, and paper and disposable categories, but a number of other categories, such as, produce, poultry and dairy have declined resulting in a small rise in the cost of goods overall. For the quarter net earnings were $204.2 million and diluted EPS were $0.33. In a nutshell, sales grew nicely in the quarter, gross profit margins exhibited good increases but expenses pressured operating margins. Now, I will turn things over to Rick Schnieders for a more detailed discussion of operations.

Thank you, John. I take a somewhat simplified view of our results this quarter. I look at how we performed with respect to the operational items we can control and then at how we were affected by things that were beyond our short-term control. Viewed in this manner I think we had a pretty good quarter. Why we can really drive results and have an impact, sales, gross profit margins and controllable expenses, our performance was very good. Conversely, we were negatively impacted in the quarter by option expensing, a negative comparison on the cash surrender value of our corporate-owned life insurance, pension expense, and fuel costs. All items over which we exert little short-term control. In order to put a framework around our discussion of these items, I will discuss them as I work my way through the income statement.

In our business everything starts with sales. With an increase in sales of 8.7% during the quarter we have continued to build on the sales momentum we achieved in the first quarter of this FY. There's really no magic to the consistently strong sales we were experiencing. It derives from a disciplined application of our basic sales initiatives that we've been talking about for a while. Our operating companies continue to implement our business review program with excellent success. During the quarter we estimate that we completed approximately 8,500 business reviews bringing the total to almost 18,000 for the first half of fiscal '06. By using the business review process to provide customers with useful incites and information to help them run their businesses more successfully, we changed the nature of the customer/supply relationship. Customers that have been through the review process have responded to our suggestions and ideas by consistently purchasing more product lines. We continue to see purchase -- a percentage sales increase in the mid-teens from customers who go through the business review process. We also continued to add to the number of customer contact personnel throughout the quarter. Through the end of the first half of '06 we increased our customer contact personnel by approximately 3% compared to the same period last year. This put us right on track to meet our stated goal of adding 6% to our total number of customer contact personnel by the end of this FY. If you add these two programs to the ongoing sales strength exhibited by our 8,000 marketing associates and their ability to day-in and day-out service our customers, you have a recipe for high single-digit sales growth right in-line with our long-term goals.

For the quarter gross profit margins were up 21 basis points. Our best gross profit performance since the second quarter of fiscal '02. There's several factors at play here. First, our ratio of marketing associate-served sales and our broadline division increased by 26 basis points from 53.8% in the second quarter of last year to 53.34% in this year's second quarter. This is primarily the result of the basic sales initiatives I discussed earlier. In other words, more marketing associates and customer contact personnel conducting a significant number of business reviews translates into more marketing associate sales. Having more marketing associate sales helps gross profit margins because gross profit margins on marketing associate-served sales are higher than on contractual sales. Secondly, as you heard inflation has come down to a more historically normal level. This is resulted in a steadier pricing environment, which helped our gross profit margins for the quarter. Although we have great systems to capture inflation and put it in our pricing as soon as possible, it's difficult to stay in front of rapidly moving price inflation. In a stable pricing environment that lag goes away and the result is an improvement in gross profit margins.

Operating expenses were our biggest challenge during the quarter, so let me discuss the areas of largest impact. First, just as they have been for the last few quarters fuel costs were a significant contributor to the rise in expenses. For the quarter fuel costs rose more than 40%. That equates to an extra $13 million of expense that we had to absorb. We are very aware of the high delivery costs we face in this environment and we're not counting on lower fuel costs soon. The percentage increase in the number of miles we drove in the quarter was considerably less than the percentage increase in sales in the quarter, but the high cost of diesel fuel over powered our efforts in that area. We were actively pursuing ways to reduce delivery miles and maximizing our routing efficiencies while maintaining our superior customer service levels.

Secondly, we faced a tough comparison regarding the cash surrender value of our corporate-owned life insurance. Just to remind everyone of what these are, these are life insurance policies owned by SYSCO and our executives to help fund certain retirement benefits. They are variable life insurance policies, which are invested in mutual fund-like products, which get mark-to-market at the end of each quarter. Last year in the second quarter we saw a gain of $14.3 million, compared to a gain of 3.5 million in the second quarter of this year, or a negative comparison of 10.7 million. Third, we continue to invest in our National Supply Chain initiative. For the quarter, the net expense after benefits was 14 million. You will hear more from Ken Spitler about our progress on the RDC in a moment. But I want to point out that we're still in the operational ramp-up phase of the product -- project, which means that we continue to incur expenses and accept the benefits. That's to be expected with any project of this magnitude. But we remain convince to the competitive advantages and long-term benefits it will provide.

Fourth, pension expense represented approximately $5.9 million of additional expense in the quarter. And the final factor of note impacting operating expenses this past quarter was options expense. For the quarter options expense added 29.3 million of additional cost or approximately $0.04 per share. All of this adds up to higher expenses for the quarter. As I said at the start of this narrative most of the things that really had a negative impact on earnings are outside of our control on a year-over-year basis. It's important to stress, however, that we continue to make good progress on our basic operating metrics. Overall, our operational metrics are continuing to show improvement in such important areas as pieces per stop, lines per stop, pieces per trip, and employees per 100,000 pieces. If we can continue to take care of these and the other basics of our business we are certain that over the longer term SYSCO will continue to prosper as a result.

I will wrap-up this section by saying that we are pleased with the direction of sales and the vitality we see in the restaurant and foodservice sectors. As we work our way through some short-term expense pressures and comparisons we think we have positioned SYSCO for a stronger performance in the future. At this point I would like to turn things over to Ken Spitler, our Executive Vice President and President of North American Foodservice Operations.

Thank you, Rick. This morning I want to give you a brief update of our supply chain initiative and the RDC. When we last spoke to you we talked about holding case volumes constant for 60 to 90 days or a 60- to 90-day period while we reexamined some operational issues at the RDC. In February, we will begin to add more case volume to our RDC in Front Royal, Virginia. Initially, we will be bringing on more products from suppliers who are already shipping to the RDC. We anticipate that by April of this year we will begin to add additional suppliers in the RDC. We are moving towards full ramp-up at the RDC -- at the Northeast RDC in a controlled and measured fashion, such that a majority of the case volume ramp-up of the Northeast RDC will be completed by the end of the FY.

Additionally, earlier in January we completed the purchase of land for our second RDC in Alachua, Florida. The second RDC is designed to service our five broadline operating companies in Florida and we anticipate construction of this Florida RDC will be completed within the next 14 to 16 months. As the construction process begins in Florida we are also examining sites in mid -- for a Midwestern RDC in the Illinois, Indiana and Michigan areas. What all this activity means is that we continue to believe in the National Supply Chain initiative, we'll produce benefits outlined in our business case for redistribution, and we are very much committed to seeing it through to its completion. In a project of this magnitude there are going to be periods of time where expenses on the project exceed measurable benefits, and we are in such a time frame right now. However, this project is absolutely the right thing for this Company over the long haul. The benefits we derive from the better -- from better procurement practices, better warehousing techniques and the visibility into the supply chain pipeline will position SYSCO far ahead of anyone else in the foodservice industry. And now, I will turn things over to John Stubblefield.

Thank you, Ken. This morning I want to talk about interest expense, our current debt levels and working capital. Interest expense this quarter was up $11.5 million over the second quarter a year ago. This derives principally from a couple of items, which I will detail for you. First, we increased our average amount of commercial paper outstanding during this year's second quarter to $450 million from $135 million in the second quarter of last year. In addition, average commercial paper rates rose from 2% in the second quarter of fiscal 2005 to over 4% in the same period this FY. Second, our long-term debt position, including the current portion of long-term debt was approximately $560 million higher at the end of the second quarter of this year than last year, at an average interest rate that was higher than last year.

At the quick summary of interest rate expense and debt levels -- now let me address why debt levels increased. In the first half of this year we were quite active in the share repurchase area, spending approximately $473 million to buyback 5.6 million shares in the second quarter and 8.6 million shares in the first quarter. Secondly, we made an additional $66 million contribution to our pension plan during the first half of this FY. Finally, as our sales growth has picked up our working capital requirements have increased. We have experienced a $265 million change in our inventory, accounts receivable and accounts payable in the last sixth months, principally related to increased sales. When we look at our working capital components from a DSO point of view, inventories, accounts receivable and accounts payable are all within what we consider normal ranges. In fact, the DSO for inventories, accounts receivable and accounts payable for the second quarter of this year are all very close to where they were at the end of the second quarter a year ago.

Historically, we see stronger cash flows during the second half of our FY and we expect to experience that pattern again this FY. Additionally, we plan on slowing the rate of purchases under our share repurchase program with a view towards repurchasing approximately 3 million shares during the second half of fiscal 2006. Therefore, we anticipate that overall debt levels will be reduced in the second half of this FY, bringing long-term debt to total capitalization ratios into that 38% to 40% range by the end of the FY. We estimate that our interest expense for the full FY will be approximately $100 million. I will now turn things back over to Rick so we can take questions from people on the call.

Thank you, John. Operator?

Thank you. [OPERATOR INSTRUCTIONS]. First question, Mark Husson with HSBC.

Yes, good morning. I just wanted to go back to the Regional Distribution Center one more time. So from what you said at the investor conference in I guess November, has there been any change in scheduling or your thought processes about the costs of this business?

None.

Okay. And then just looking at the next two bits in terms of rollout, I know that you will have buried all the expenses for software developments in the first RDC. What other kind of expenses are you expecting and over what period of time for rolling out Florida and perhaps Illinois?

Mark, this is John Stubblefield, and I will start off the answer by saying while we have substantially completed the software development of this project, they'll continue to be changes, additions, improvements that we will have as we go through as you would expect, so there will be some, I would characterize it as fairly minimal software development costs that will be capitalized going forward. However, the big part of putting a RDC online is that training part of the operation and that will be a cost that we will begin to talk about as we near the completion of this second RDC and begin the implementation in our operating companies in the Southeast -- or in that Florida area, so we can become operational. Ken, do you have anything that you would like to add?

The second and third ramp-up should be considerably shorter in that we already have the customers on board and we've made a -- we are making corrections to the systems that we need to do now.

We already had the suppliers on board.

Suppliers on board, right.

Okay. And then the final -- different question just on private brands in the gross margin, normally when you see a gross margin you do a bit better private brands and normally you've done a bit better. You didn't mention them, is that because they are about flat year-over-year?

Yes, actually, Mark, SYSCO brand is down slightly year-over-year. We've talked about this in a couple of conferences and I believe we talked about it at the last conference call, also. But we are looking hard at SYSCO brand to make sure that SYSCO brand products are truly brand products and that they are providing real value to our customers. So where we have got some commodity items that had the SYSCO brand on them today we are reviewing that to see if that's the optimum -- so let me give you a mundane example.

Like flour and so forth?

Flour, yes, 50 lb. flour. Why should 50 lb. flour be in SYSCO brand. And so we are asking that question of ourselves now. We've had previously about 44,000 SYSCO brand SKUs. That number has come down buy about 3,000 just by -- and those were low-hanging fruit, relatively slow moving items. So we've got -- we do have some intentional rationalization of the SYSCO brand taking place. However, the power brands, the power products, they are the corner stone of what have we do and this only gives us an opportunity to re-emphasize the SYSCO brand and it's important to SYSCO and the importance to our customers.

Mark, this is John Stubblefield and just to the point of clarification, it's also important in looking at gross margins is that our system -- our Marketing Associates-served Sales and our Broadline Division in this past quarter went from 53.34% last year to 53.08% this year --.

No, the other way around.

So what we've got is that the change in mix with our customers also helped with gross margins.

53.8 --.

0.8.

-- last year -- 53.08 last year to 53.34 this year.

I think I've got that. Thank you.

Okay. Is that a percent there?

Yes.

I'm sorry.

Yes, John turned it around.

Our next question will come from John Heinbockel with Goldman Sachs.

A couple of things on the sell side. Were there any calendar items that would have impacted sales positively or negatively either way in the quarter? And then is that sort of, should we take as we enter the third quarter here given what we saw out of restaurant companies in January, that the strength you've seen at the topline is pretty much continued into this current quarter?

There is a slight maybe one day difference this year, a bit of an advantage for the second quarter over last year. And so we will have a one-day difference in the third quarter. But we feel we are very encouraged by our continuing progress in all of our sales initiatives and the result.

The -- if you look at the business review process I think you guys have talked about or have you now had with any of the accounts second and third reviews? Because I'm sort of curious when you get past the -- cycling the first uplift, is there a second and sort of third benefit to be seen as you go back and have further discussions with these clients?

John, this is Ken Spitler, yes, we have -- we are in the second and third in many of our gold customers and we continue to find benefit for them. As a matter of fact, they are anxious to come back for their second and third ones.

What do you see -- do you have enough history to know what you see in the second or third visit relative to the mid-teens?

I haven't looked at that in particular to those customers, but we haven't had any drop-off in our performance.

Yes, so if you look at in total the continued performance of those customers that have gone through business reviews, it continues to be in that mid-teen. So that includes those second and third-time participants or attendees.

That's all business reviews including some that are in two and three?

That's right.

Yes.

Okay. All right, thanks.

Thank you.

Bill Leach with Neuberger Berman has our next question.

Good morning.

Good morning, Bill.

I just had a question on your option expense charge, 29.3, is that an aftertax or a pretax number?

No. Bill this is John again. The 29.3 is a pretax and that's why that converts into a $0.04 aftertax EPS number because we are still not receiving the full tax deductibility of that expense at this point in time. Now eventually we will receive that benefit but not at this point.

Well, everyone else I follow is making it a tax deductible item. Why are you the exception?

Well, it's only tax deductible to the fact -- to the point that they're nonqualified option exercises or grants and many of ours at this point are still considered qualified, therefore, not getting the tax deductibility benefit.

And can you update your guidance for that charge for the balance of the year?

We still think what our current guidance was is in the range -- depending again on this tax deductibility it could be a penny a quarter higher than what our previous guidance was. But I'm very cautious about giving any further guidance from what we've already given because it's very hard to determine the timing of that tax benefit.

Yes, this is John Palizza. I think we're pretty comfortable saying that our previous guidance stands but we will probably be at the upper end of that range.

So --?

From what we can see right now.

I'm mean as I recall your guiding the $0.03 per quarter, so should we assume it's like $0.04?

No, we guided to that $0.14 to $0.17 for the year. You have got sixth months now so you can figure out the rest.

And John, next FY are you going to get some tax benefit that would lead to a much lower tax rate, then --?

You know --.

-- because your tax rate is pretty high this year?

Right, and as those options are exercised and if they are exercised in such a manner that they become nonqualified then we will get that benefit. Given that these options stretch over a period of time there is a period of time for those to run to determine whether or not they are qualified versus nonqualified. So I apologize for the ambiguity in this area but that's the way the rules are written.

Okay. The other question I had, Rick, can you give us a little more color on some of these operating expenses? Do you expect those to continue about the same rate in the second half in terms of fuel and so forth?

Yes, I think fuel you are going to have to assume that it's not going to get substantially cheaper than it is today. We are planning on it being at about the same range as it has been for the first sixth months. The comparisons get a little easier starting in the last quarter of this year. That doesn't make us feel a lot better. But on the other hand, I think that we have real focus on loading the trucks, being more efficient in terms of the routing of those trucks. So we just, there will be incremental improvements certainly in the operating metrics. We will just see how the oil markets play out and see what that means to our bottom line.

And the other items you cited the pension expense, the life insurance, the RDC, how do those look?

Certainly for the balance of this year we wouldn't see anything significantly different, certainly not on pension expense because that stuff sticks for the balance.

Well, I think we are going to shy away from any specific guidance here on the RDC at this point.

What about the life insurance is that a one-time item?

No, that's mark-to-market each quarter and it's largely dependent upon how those investments perform in that quarter. And you can use the S&P 500 or the Dow index or any number of components to try to measure the impact of that. But we are still at the gain or loss, the risk, if you would, or reward of the overall marketplace in that investment.

Okay. And last question, John, what's the estimate for interest expense for the full year?

Well, the previous guidance was 90 million for the year and as you heard earlier today we upped that to 100 million.

100 million. I missed that. Okay. Thanks a lot.

We'll move on to Meredith Adler with Lehman Brothers.

Good morning.

Good morning.

I have two questions really, well, I guess three. The first is when you talk about sales, I've heard my sort of research out there in the marketplace says that there is a new aggressiveness within the organization that you guys are out for sales. Which is good. Obviously, that's good. But the question is, how much sort of trade-off between sales and margin are you guys willing to tolerate? Is there -- is that in the thinking at the operating companies as they get aggressive on sales or is there no real risk of that?

I don't think -- I think that, again,our focus is on Business Review Process which is not a pricing gross margin issue and so we are providing -- we feel like we are providing real value to those customers that go through a business review. And based on Ken's comment of customers going through two and three business reviews now, it is obviously having a -- it's a benefit to our customers. So it kind of takes us all out of that pricing gain. So I don't think there's that issue.

The other thing that is kind of related to that that we feel very positive about is that marketing associates-served sales grew faster than the rest of our business and that's where the margins tend to be higher, but it's also where we have more control over the pricing itself. So I don't think there's a trade-off here between gross margin -- and our gross margins were up 20 something basis points for the quarter.

Can I --?

In light of that growth, that sales growth.

Okay, my next question is back to private label, you talked about the fact that there's a shift in your thinking. But I'm wondering when you actually look at the fact that private label is down slightly are you actually able to tie that to SKUs that have been eliminated or commodity items that you are really not emphasizing?

No, we really don't have the capability to do that certainly in the short-term. In the longer run we watch those numbers but it's pretty hard to tie those.

Okay. And then my final question is about the RDC. You obviously made it an important decision to slow the project down to be sure that you had everything working properly and efficiently. That I assume reduced the benefits, but if you look at a timeline and then look at the costs, how are you tracking versus your original expectations in terms of cost and benefits? And is that simply a timing shift or is the project actually when you get say at the end of this year when it should be all up and running, will you have spent more money than you originally anticipated?

No, it's a timing shift.

Yes, it's a timing shift. We are very comfortable with the operational metrics that we are seeing and the benefits that we are seeing. It's just a slight -- any of these big projects are pretty hard to pinpoint exactly when they are going to come to completion. But when we look at the underlying operations and the benefits at the operating companies and the way the operating companies have embraced the RDC, it's -- we are gratified by it and we stand by our operational expectations.

And so that means that to date its costs are about where you would expect but the benefits because you've slowed the project down are coming in more slowly?

Yes, it's all to do with cases. Yes.

Okay.

Cases through the system.

Cases through the system.

Okay, cool. Thank you.

Well, thank you.

Next we'll hear from Steve Chick with JPMorgan.

Hi, thanks. I guess, Rick, the -- just to follow-up on your sales commentary, can you be a little more specific on how sales trended during the quarter and comment whether at post-quarter end if you've exited or if you are trading above or you have -- current reporting sales above the levels that you exit the second quarter at?

I think, Steve, I will have to stick with my earlier comment and that is that we are very encouraged by the sales growth during the quarter and we are encouraged by -- although it's early in the quarter -- we are encouraged by what we see in the third quarter.

Okay, like -- yes, I guess last quarter you kind of went a little further and said that you were at levels that were better than where you exited at the last, but I guess you are not going to get a little more specific than that. Is that fair?

Not right now, we are not yet.

Okay. And on the calendar shift, is there, can you be a little more specific on, maybe within basis points and what that might have contributed?

It would be basis points. It would be, I mean and -- one snow day here or there would wipe out any differences. So it's a minimal impact.

Okay. So it sounds pretty immaterial?

Yes. I would characterize it that way.

Okay. And one more, I guess housekeeping, if anything, the acquisition dollars that you guys disclosed in the press release, I guess with the FreshPoint acquisition and the Western Foods, those are going to be accounted for within your acquisition sales numbers, not organic growth; is that right?

Steve, this is John, that is correct, and the other acquisitions were of a dollar range that we just don't comment on. But those that are significant in dollars we will account for as acquisition growth.

Okay, that's fair. And so last question, if I understand it right for your operating expense dollar growth for the quarter if I take the numbers you guys have itemized and quantify and I -- let's say back those out, your operating expenses were really flat year-over-year. And given the increase in your sales force and your customer contacts it really means that you are making some pretty good operating expense improvements in other areas. Am I looking at that correctly?

Yes, I mean I think that that's, without confirming any numbers, I think that's exactly right. And that was the point that I tried to make that operating companies themselves have done an outstanding job of managing their business in a very tough environment. And we are very pleased at the operating company operations level, yes.

And so as, given you are halfway through with the salespeople increases you feel pretty confident you can continue making good progress like that into the, as you go on; is that fair?

Yes, sure.

You can count on it.

Yes, absolutely.

Okay. Thanks, guys.

Thank you, Steve.

Jason Whitmer with FTN Midwest Research has our next question.

Thanks, good morning. Rick, one of the most attractive aspects of SYSCO in the past was extremely consistent sales and earnings growth with exceptional returns. I understand where you are trying to get to on the topline goals in the high singles, low doubles and, hopefully, translate that back into the low mid-teens on the earnings front. Do you think that you can get back into that pace of consistent performance in all these metrics? And would you consider this year, next year as transition years? Just trying to get a sense of the timing as to how you can get back to the good old days of sales and earnings growth.

Yes, Jason, we still stand by our long-term goals. We feel comfortable with those. We think that what you see this quarter is more indicative certainly in the sales line, the gross margin line of what SYSCO has done in the past. And where we are a little bit short right now, obviously, is in our target in regard to acquisition growth; our 3%. And if, we would assume that 3% acquisition target for this quarter we would have been right there on our long-term goal. So, yes, we feel very positive that we can continue to achieve those over the long-term.

Jason, this is John. And if you just look at it from a mathematical standpoint and you look at those exceptions, what we say exceptional in terms of the amount of increase this year over last year, pension and fuel, especially, and if those levels just stayed the same next year those are dollars that we don't have to overcome. So when you look at it in that context our comfort level goes up.

Sure. And I guess the way I was thinking of it is before sales and gross margin were not very good and expenses were great, now all of a sudden we have the flip flop of that, I just kind of wanted to see what your visibility might be where everything can start lining up to more consistent performance on all fronts.

Just a clarification. Sales were great, gross margins were great. We feel good about, again, our underlying expenses if you "X" out those extraordinary items that John has enumerated. So even at the expense line we feel very comfortable with the way the organization is running.

Good. All right then last question for you, Rick, I understand business reviews, I understand any more customer contact reps in the end market to help take some more share, are there any other tools that you are giving your people to, go out and get more incremental business?

Oh, sure. Some of them are, may not be headline worthy, but what I can share with you that's related a little bit to business reviews would be the score system, which is a pretty sophisticated homegrown CRM, a customer relationship management system that we've got. Additionally, kind of the counterpoint to business review is business development, which is a little less mature in our companies. But if you recall business review is specifically targeted at growing business within our existing customers and business development is thought of in terms of getting new good customers. And so that's a little less mature but that is gaining ground out there. Folks are understanding better how to deploy those folks, deploy our efforts and we feel good about that.

Great. Thank you.

Thank you, Jason.

We will move on to Mark Kalinowski with Buckingham Research.

Hi, just looking at the dividend, you announced an increase in it to $0.17 per share per quarter on November 10th. That puts you at roughly at 2.2% dividend yield. Has the Company ever considered seriously taking a more substantial increase in the dividend? I'm seeing some of the restaurant companies I cover go that route and the stock seems to be reacting favorably to that type of development. What are your thoughts?

This is John, again. And we like to think that we take a balanced view as to how we deploy those cash resources that we have and cash flow that we do a very good job of generating. And part of that is continuing to look for the acquisitions and reinvestment back into our business through our capital expenditures. As you well know, a commitment to dividends we look at as a very long-term commitment. While we think we are increasing that prudently each year and keeping it at a very reasonable rate of increase we also want to make sure we have the flexibility to continue to grow the business and give something back to shareholders through a share repurchase program. So we take a very balanced look at it and I think we will probably continue that same route.

Sounds good. Thank you.

Elena Mills with Atlantic Equities has our next question.

Yes, good morning, everybody. I just wanted to come back to the whole question of business reviews and get a little bit more color on sort of where you stand in terms of time frame. Obviously, including the 8500 reviews that you disclosed in the second quarter, how many more do you target to complete this FY and then again in 2007?

Originally, we had planned to do between 27,000 and 30,000 this year. It looks like we are going to be above that and we will continue to that many the following year.

Okay, great. And I just want to come back to the whole question of what kind of trends you note after implementing these reviews. How should we think about this? Is this really sort of a one-time lift in penetration so that you basically move to a higher sales run rate with the account and then you come in on the heels of that with the second and third review to again lift up the penetration? Or have you noted and should we, therefore, expect a general acceleration of growth in the base business that you carried into the review?

Well, as we've talked about before, Elena, the -- our share of wallet with our average customer runs something less than 35% -- 35 market share or customer share. And we have huge opportunity yet in the base of our business to continue to improve that share of wallet. And, in fact, that's what we continue -- at this point continue to see even with more than one business review per particular customer. Our sales growth continues to grow with that customer. There is lots and lots of room out there for us to sell more to our existing customers.

The other thing we are doing is beginning to bring customers, potential customers in that are not purchasing anything from us and take them through reviews and have been very successful with that on a limited basis.

And do those customers, therefore, sign on once you've taken them through that process?

I have a limited numbers on that but the data around it is phenomenal.

Great. And just one other quick follow-up on this point, I think so far you've talked apart from this newer initiative with potential customers, but you've talked about this review process very much targeting your so-called "metal accounts" the gold, silver and bronze customers. I'm just wondering if you see value beyond the customer acquisition question in expanding the review to nonmetal customers and, if so, how many more would you envisage including in the process going forward?

We actually think the best is yet to come when we start approaching those customers that are buying limited amounts from us. So we are excited about starting to bring, start to bring in those customers that aren't buying so much from us.

Yes, it becomes a resource allocation issue, how many people, how much time have you got. And so because of some of the data that we have we now know better who are those nonmetal customers with the greatest potential and so that's where our resources need to be focused and not on that broad base of 350,000 customers; you just can't do that. But you can on a targeted -- in a targeted way identify those nonmetal customers that have the real big potential that Ken was alluding to.

Great. And just one final question, if I may, given the personnel additions that you've made YTD around 3%, can you give us an idea of the year-over-year trend in your compensation expense? And also comment on the extent to which that may have been affected by any change of compensation structure, particularly, with respect to those employees who are primarily focused on business reviews and some of the new marketing associates that you've added? And if you could also just confirm in that context what your current thinking is on staffing? I mean should we be expecting annual personnel numbers to grow at a mid to high single-digit pace going forward?

Mid -- I'm sorry, what was that number?

Mid to high single-digits.

No, I think that the numbers that we are seeing this year, our goal for this year is a reasonable number to think about ongoing. So, yes, we will continue to add more salespeople. I will say, however, from a salary and benefits perspective and from as we indicated in the script, a number of employees per 100,000 cases, those numbers continue to improve, which means that we are getting more efficient in our total operation. So we are getting, again, more pieces on the truck. We are doing a better job of routing those trucks. So that all translates into a better operation and the, again, kind of the resource allocation issue, the resources are being allocated to sales growth.

Does that mean that your employee compensation expenses has been below the 3% employee additions that you've made?

No, I wouldn't say that. But I would --.

Okay. Fair enough. Thanks a lot, Rick.

Thank you, Ellen. Yes, it's based on a case basis.

Our next question will come from Bob Cummins with Shields & Company.

Thank you. And good morning, everybody.

Good morning, Bob.

I wanted to focus just a minute on fuel expense, my understanding has always been that when the cost of fuel goes up you have a right to put a surcharge on the price of the goods that you are selling to the customers. And I realize its gone up a whole lot more than it ever has before. And I'm just wondering are you having problems in doing that or how much of the 13 million increase in effect was offset on your P&L statement by higher revenues due to surcharges?

Well, Bob, you are right, we do have surcharges for non-street business, for non-marketing associates-served business. However, you never -- particularly when you have a really rapid increase in fuel costs you never get it all back. On The Street side of our business we just have to manage our pricing appropriately to overcome those costs. So it's some of both. It's some where we have surcharges, contractual surcharges in place on the corporate [Walk-in] business and then on The Street business you have to manage it on a day-to-day basis. So we don't get it all back. I wish we did. Over a longer period of time, I don't know what that is, one year, two years, if the price of fuel remains fairly stable we will get back to flattening out our costs in relation to that.

Do you have any idea of how much of that 13 million actually was passed on?

No.

Okay. Thank you.

Thank you.

We will now hear from Eric Larson with Piper Jaffray.

Yes, good morning, everyone and congratulations on your revenue gains and gross margins. Quick question -- I know we are kind of beating private label to death here, but I think the real question is over time after you sort of philosophically figure out what products you want in that mix what can that percentage go to over the long-term, is there more upside to that?

I think it depends, Eric, on the type of products that are developed under the SYSCO brand. So as we've said in the past one of the real values to our customers -- and it's becoming a more important value to them -- is labor savings. So where we used to sell strip loins, beef strip loins to customers now we sell them individually portioned strip steaks. And it's that kind of transition that will take place in other categories of our products. So more and more labor saving-type products. And to the extent that as we convert those products, as we develop new products and they are in big categories like beef or pork or poultry it's going to move the needle. If they are not, if they are more -- if they are smaller categories of product it's not going to be as impact full to that SYSCO brand percentage line.

But I should also say that we feel good about, we talked about when Mark was on the phone, we talked about the 50 lb. flour that perhaps doesn't make all the sense to have SYSCO brand on that product. It should offer us on those commodity-type items better purchasing advantages, too. So we have to, you said philosophically. We are kind of in the middle of this whole thing right now, but we feel good about the direction that we are headed and we are convinced that as we manage that mix, that SYSCO brand mix within itself, we can -- it can be an optimum -- continue to be an optimum or a positive to the bottom line and the topline of the Company.

Okay, fair enough. And then the final question is, it goes back to your share buyback, your slowing down of the share buyback program second half, I think John Stubblefield said 3 million shares to be bought back in the second half, which is really on a quarterly run rate it's about a quarter of what you've been doing. I may have missed why there is more of an emphasis or refocus on reducing debt, is it maturities or why are -- what's the -- why is the reason for the change in that use of cash?

We have targeted over the longer term to buyback in something in the range of 17 to 20 million shares a year. We were pretty aggressive the first half of the year. We were quite comfortable with the pricing that we were able to acquire those shares at. The second part of that equation is, is what is our debt to total long-term capitalization. And we want to get back into that 38 to 40% range which we think affords us great flexibility in financing the opportunities in the future. So it's just a matter of staying with what our long-term plans are. I mean we got a little ahead in terms of the share repurchase in the first half of the year. We will moderate that slightly in the second half. For no other reason than the fact that we want to get that debt back as a percentage in that range that we stated.

Okay. Thank you.

Andrew Wolf with BB&T Capital Markets has our next question.

Good morning. I'm hoping you can clarify something with the RDC. The language used in the press release speaks to the majority, getting to the majority of your projected weekly case movement by the end of the year. Could you clarify that by being more specific? I mean you are pretty close to the majority now. I mean, how much do you plan to close the gap to full capacity?

Well, Andy, I think we would be reluctant to give you a specific number but we will be substantially -- our earlier projections of 300,000 cases a day, we will be substantially near that number.

Well, that's what I was looking for. You don't have to give me a number. I just wanted to make sure you weren't --.

No, no we've --.

-- putting your necks on the line a little bit on the statement. [Laughter] So that's good enough. And you are at about 50% now; is that right?

Yes, that's right. A little above that.

Okay. Would you give us a sense, I don't know if you want to go to this question, where breakeven is between 50 and 90, 95?

No. I think -- there is so many factors at play there as we've said many times before, 75% of the benefit comes at the operating company level and to get our arms -- even though we measure all those metrics, but to come down with a breakeven number on, for May 13th, or so many cases it would be virtually impossible for us at this point.

Is the process in control enough that we can at least in our minds think that as that -- as the shipment goes up you are obviously heading more towards breakeven?

Yes.

I mean is it the normal thinking process? I just want to at least clarify -- I want to get you to --.

Yes, Andy, that's right.

It is very much in control. We feel very good about that.

Okay. And on fuel, if there's given the way geo-politics are currently and all, if there's a supply disruption and fuel spikes again, let's say, can you just sort of layout generally your hedging programs in that regard?

Well, we have a methodical hedging program and I don't know exactly where we are right now in terms of percentage of fuel hedged, do you know?

No, because we backed off when it got peaked during the hurricane.

Is it in the 30, 40% range?

Probably right.

Yes, I mean without looking, we would have to get this number for you specifically, we are in the 30 to 40% range right now. We are heading -- we're buying more fuel right now -- or hedging more fuel.

And lastly, back to the gross margin where you talked about your customer mix towards The Street and I think, Rick, you sort of alluded to there's some deflation and the distributors, it sounds like the pricing environment is fairly rational. It's not all being competed away, is that how I should take that away? That's my last question.

Yes, the -- I wouldn't say it's -- we didn't say deflation, we said significantly lower inflation. Inflation was 0.6%, 60 basis points roughly, 61 basis points this quarter. And I forgot the last part of your question. Oh, the impact on margins.

I'm just trying to link that to the competitive environment and when things are inflating, meat and proteins and others, dairy, generally I think that Food Services Distributors lose on that and when there's disinflation or actually deflation at least in some of the categories usually there's a time to make some of that up unless it's competed away and I'm just trying to get a sense of where you think the industry is on that.

Yes, I think in general it's more -- we are in a more rational environment, a more stable environment than we've been in for the last couple of years with the really rapid increases of the, huge inflation that we had during certain parts of the last couple of years.

Thank you.

Thank you.

Due to time constraints that will end the question-and-answer session. I will now turn the conference over to John Palizza for any additional or closing remarks.

I have one thing that I just want to say before John takes over here, that we feel very, very good about our sales progress. At the same time I would ask us not to overlook some of the other fundamentals of this business that we haven't talked about today and that's return on invested capital, return on equity and if you do the calculation our economic value-added or EVA. This is, the financial -- the fundamentals, the financial fundamentals of this business are so strong, so we feel great about the increase in sales, but we also feel good about the long-term foundation of the organization. So thanks for your time. John?

We thank everybody for being on the call. For those that still have questions remaining after a somewhat extensive review that we've had here this morning, please feel free to give me a call at 281-584-1308. Thanks everybody and we will talk to you soon. Bye.

And that concludes today's conference call. We thank you for your participation and have a nice day.