西斯柯 (SYY) 2006 Q4 法說會逐字稿

Good day everyone and welcome to today's Sysco Corporation, fourth 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 call over to Mr. Kirk Drummond. Please go ahead, sir.

Thank you, Operator. Allow me to add my welcome to everyone for joining us today on the call. With me here today are Rick 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, Merchandising Services; and Ken Carrig, Executive Vice President and Chief Administrative Officer.

On the call today, I'll give a brief overview of the quarter; John Stubblefield will then provide greater detail on our operating performance during the period; Rick Schnieders will conclude our prepared remarks by discussing our outlook for fiscal year 2007; this will be followed by the question and answer session which Rick will moderate.

Before we get to the substance of the call I have one short announcement regarding an upcoming conference where Sysco management will be speaking. On September 6, our CEO Rich Schnieders will address the Goldman Sachs Global Retailing Conference in New York and he will be joined by Ken Spitler, our Executive Vice President and President of North American Foodservice Operations. We would be delighted to see you there. 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 within the meaning of the Private Securities Litigation Reform Act of 1995 and actual results could differ materially. Additional information concerning factors that could cause actual results to differ materially in the forward-looking statements is contained in the Company's SEC filings, including, but not limited to risk factors contained in the Company's annual report on Form 10-K for the fiscal year ended July 2, 2005 and in the Company's press release issued this morning.

To start things off her's a quick overview of the quarter, all compared to the same period a year ago. Sales were up 6.6%, reaching $8.509 billion. Sales growth in the fourth quarter of this fiscal year was impacted by a new accounting pronouncement EITF 4-13 which reduced reported sales growth by approximately $99.8 million, or 1.3%. John Stubblefield will address this issue in greater detail later on in the call.

Sales from eleven noncomparable acquisitions, including four specialty meat companies, six specialty produce operations, and a newly acquired Sigma operation contributed 1.5% to the quarter sales growth. We experienced mild deflation in our cost of goods during the quarter with the cost of good declining 17 basis points. Costs associated with most nonperishable product categories increased, while many perishable categories such as produce, poultry, and dairy declined. As a reminder, for those seeking a reliable proxy to Sysco's cost of goods trends, I again will direct you to the producer price index for all processed foods which was flat during the same period. For the quarter net earnings were $254.1 million, and diluted earnings per share were $0.41. In summary, this quarter exhibited many of the same characteristics we saw earlier in the fiscal year. Sales grew nicely in the quarter, but expenses continued to pressure operating margins. At this point I'll turn things over to John Stubblefield for a more detailed discussion of operations.

Thank you, Kirk. Good morning. I'm going to start this morning with a brief explanation of EITF 4-13 and how it affects our reported financials before I get into the details of the quarter. First, and most importantly, EITF 4-13 has no impact on Sysco's pretax or net earnings results. However, since last year's sales and cost of sales results are not restated sales growth calculations, comparisons to gross margins, and operating expenses as a percent to sales and earnings as a percent to sales are all affected. In short, the accounting pronouncement requires that in situations where you purchase products from a customer and later resell the product to that same customer you net the purchase and sale out and only record the gross profit resulting from the final sale.

This situation arises for Sysco when our customer has a proprietary item which they either have manufactured or sourced but they require our distribution and logistics capabilities to get the products to the restaurants. For example, a restaurant chain may manufacture a proprietary product such as breads and pastry mixes, but not have the capabilities to deliver the products to their restaurants. In such a situation, Sysco buys the product from the customer, we take it into our warehouses, mark it up and resell, and deliver it to the various restaurant locations. The impact of EITF 4-13 on our sales growth was 1.3% in the fourth quarter, and three tenths of a percent for the fiscal year. For the fourth quarter being impacted to heaviest since that was when the standard was adopted. The result of the change in accounting procedures which lowers our reported sales and cost of sales by approximately $99.8 million, raises our reported gross profit margins by 23 basis points, and increases our expenses as a percent to sales by 17 basis points. With that out of the way let me talk about the fundamentals of the quarter.

During the fourth quarter, we continued to execute on our growth initiatives which resulted in strong sales growth. Business reviews, business development, and growth in customer contact personnel all contributed to solid sales gains. During the course of the fourth quarter, we conducted more than 9,000 reviews with our U.S. customers and we continued to receive strong results and positive responses from all participants across the country. Sales were also aided by our continuing to add to our customer contact personnel. During the fourth quarter our sales force grew by 125 new associates bringing our total increase of customer contact personnel for the year to 619 or an increase of 6.2%. That surpasses our stated goal of growing our sales force by 6% in fiscal 2006.

Gross profit margins in the quarter were up 52 basis points to 19.86%, including a 23 basis point benefit from adopting EITF 4-13. On a comparable basis gross profit margins were up 29 basis points compared to our last year's fourth quarter. This gross profit expansion is primarily the result of deflation, merchandising efficiencies including the benefits realized by the RDC and supply chain initiative, and product and customer mix.

Just as they have been throughout this fiscal year, operating expenses were our biggest challenge during the quarter. First fuel costs were a significant contributor to the rise and expenses. For the quarter fuel costs rose by more than 30% or an extra $10.7 million of fuel expense that we had to absorb in our operations compared to the same quarter of last fiscal year. We are very conscience of the higher delivery costs as we face and we are stressing with all of the operating companies the importance of efficient loading and routing of our trucks and they once again have responded to the call. As both pieces per stop and pieces per trip increased again in the quarter.

As noted earlier, in addition to reducing our top line sales growth by approximately $100 million, adoption of EITF 4 -13 also increased Sysco's operating expenses as a percent of sales by 17 basis points for the quarter. Stated another way, $100 million was reduced from the numerator in the equation thus increasing expenses as a percent to sales. For the fiscal year, EITF 4-13 adoption increased operating expenses as a percent to sales by 4 basis points.

Another factor impacting operating expenses this quarter was share based compensation. For the quarter, share based compensation added $27.1 million of additional costs which was approximately $0.04 per share, in line with our previous guidance. We also continued to invest in our national supply chain initiative during the quarter and our expenses and direct benefits had a net negative impact on earnings before income taxes of approximately $8 million in the fourth quarter.

Today, a majority of case volumes are flowing through the Northeast RDC. We continue to anticipate that the Northeast RDC will be handling nearly all of the plan case volume flow by the end of this calendar year. Beginning with the first quarter of fiscal 2007, we will no longer break out the RDC expenses as the RDC is fully integrated into our business with the cost and benefits tightly linked between the RDC and the operating companies.

Another item, pension expense, represented approximately $5.9 million of additional expense in the quarter. For the year pension expense was $23.7 million higher than the prior fiscal year, in line with our previous guidance. One final expense difference was the management performance based incentive compensation for this year's fourth quarter was approximately $16 million below last year's fourth quarter. For the fiscal year, management performance based incentive compensation was approximately $27 million below last year's figure.

In terms of some fiscal 2007 guidance, there are some numbers I'd like to share with you to assist in your models and projections. First of all, I'll address capital expenditures which were $150.3 million in our fourth quarter and $514.8 million for fiscal 2006. We expect that our capital expenditures will be in the range of 575 million to $625 million in fiscal 2007 as we continue to invest in growth through RDC's, fold outs, fleet additions, facility expansions, and facility replacements. Another item, total debt, is projected to be between 1.6 billion and $2.2 billion in fiscal 2007.

One final topic I'd like to address relates to a below the line change you'll see in our first quarter fiscal 2007 results. As many of you know, Sysco has corporate owned life insurance or COLI policies on key individuals that are used to fund our obligations to the supplemental executive retirement plan and our deferred compensation plan. In the past, we were required to mark these policies to market using the fair value method on a quarterly basis. Beginning with the first quarter of fiscal 2007, Sysco will begin accounting for these life insurance policies under the investment method as allowed by FASB staff position FTB 85-4 -1. In doing so, we will record a cumulative change in accounting adjustment which will be estimated to be a loss of approximately $40 million. This represents a reversal of the cumulative amount of gains recorded in years prior to 2007 on existing agreements.

Going forward by accounting for these policies under the investment method, we will no longer be recording a gain or a loss due to the change in the fair market value of these policies unless there is a permanent impairment to the investment. At this point I'd like to turn things over to Rick Schnieders, our Chairman, CEO, and President for his comments on the quarter and the opportunities that lay ahead in this new fiscal year.

Thanks, John. Good explanation of some complex issues. As we move into fiscal 2007, I'm excited about Sysco's prospects in both the short and the long term. Throughout '06 we built upon our sales momentum and I'm confident we will continue to do so in '07. Our business reviews have proven to be tremendously successful too in strengthening our relationship with our customers. During fiscal '06 we conducted almost 40,000 reviews, with great success and our goal for '07 is to perform 40,000 additional reviews. What we have found in last year is that our initial reviews with customers receive a very good response because we help the customer think about their establishments in ways that can able them to achieve more profit. Subsequent reviews with the same customers have proven to be equally important, and beneficial for both Sysco and the restaurant operators and all food service operators. This is because our customers know what to expect in later meetings and the value of the low pressure setting and bottom line results of the process. The exchange of ideas about product, menus and services is much more open in second and third reviews. The business review process goes a long way towards changing our relationships with the customer from one that is centered purely on sales to one that is a collaborative relationship with sales in the end being one of many byproducts.

In business reviews we clearly have a better sales process than anyone else in the foodservice industry. Our portfolio of I care's and business building tools is unmatched. We have a significant head start on competitors who may attempt to duplicate our reviews, and of course, we a trained personnel in place to continue to build on the process.

This concept has legs. Our customers have embraced it and benefited from it and we intend to use this sales growth tool for a long time, and build on our industry leading sales position. If you have seen a recent sales numbers from publicly, for publicly traded casual dining restaurants, you know that the comparable sales numbers have been down over the last few months. During that same time period, Sysco's sales numbers have shown consistent increases ranging from 6 to 9%. I think it's fair to infer that Sysco is taking market share. It's also a fair assessment that Sysco's proving to be the distributer of choice for foodservice operators that require dependable products, dependable delivery times, and other value-added services. Business reviews are a key component of our market share gain and we intend to continue growing market share through our reviews and other growth strategies.

To complement the business review process, we have also been adding customer contact personnel. During fiscal 2006, we added more than 600 associates to our total number of marketing associates. Business review managers, business development managers and other professionals that interact with our customers on a daily basis. For the most part, that growth in personnel in '06 was investment spending. As we estimate that it takes 18 to 24 months for a new marketing associate to reach maturity and begin to make a positive contribution to profitability. The good news is is that we expect to see the benefits of their contributions in fiscal 2007. We are not slowing down, however. We plan to add another 7% to our customer contact personnel in fiscal 2007. We have the largest and best sales force in the foodservice industry and we will continue to build on and leverage that advantage.

Beyond sales we have other reasons to be up beat about fiscal 2007. For one, we expect to be comparable in many of the expenses that pressured earnings throughout fiscal 2006. This includes stock option expensing, which we project to be no greater in '07 than the $0.17 impact we incurred in fiscal '06. In addition, we expect that pension expense, which increased by $24 million in '06, will be approximately $40 million lower in '07 than the fiscal 2006 expense of $131 million. That projected $40 million reduction in pension expense is based on a rise in interest rates which will result in an increase in the rate at which we discount our projected benefit obligations.

In short I'm bullish about Sysco's prospects in fiscal 2007 as we begin the start of a new fiscal year. With the hard work and effort of all of our valued Sysco associates I'm confident we will have a very successful and prosperous fiscal 2007. Operator? We'll now take questions.

Thank you. [OPERATOR INSTRUCTIONS] The first question today comes from John John Heinbockel, Goldman Sachs.

A couple of things. I don't know what the EITF impact would have been in prior quarters but if was roughly similar to the third, that would sort of imply a modest drop off in top line momentum. Did you see anything, any type of drop off given what your customers have been going through or you really saw no change if you adjust for that, the accounting change? And then I guess more recently, you say the second half of the fourth quarter on into the first because I think things really slowed down in July, did you see anything there in terms of a moderation or no, you pretty much hold steady?

John, this is John Stubblefield. Let me just clear up the math around the EITF 4-13. The 1.3% impact in the sales growth over last year needs to be added back to the 6.6 to get to true comparison year-over-year, and to take your assumption that maybe it was the same, well you're right, it could well have been. We didn't go back to measure it. It could well have been the same last year which means then that our sales growth before the reflecting the EITF 4-13 would have been roughly 8% and I'll turn it over to Rick.

Yes. The only other thing I would say is if you add the 1.3 to -- just to do the math, 6.6, the number of 7.9 which is higher than the year-to-date number of 7.8 so we feel very very good about the fourth quarter and to your question specifically, we feel very good about July.

So you guys are seeing really zero slowdown as the new business, as the casual diners have fallen off a cliff the last couple of months. Is that fair?

On the contrary, we continue to be very encouraged by the process that we've talked about in our sales growth.

Okay. On the -- just on the expense side, what's the -- we've talked about pension and stock option. What's the dynamic, do you think, with regard to fuel directionally, labor given the 7% increase in customer contact personnel and incentive comp, that you referenced. Do you think all three of those will be up sequentially from this year?

Well, if we look at our most recent progress in terms of productivity, the productivity improvements by the -- our associates throughout the organization continues to improve, so just in terms of costs for -- in labor costs to characterize it the way you have, we do not see any issues there. We will hopefully have some increases in the incentive performance numbers, but that will be reflected in the performance of the organization. As you know, John, this company has always tied incentives directly to the performance of the total company. The really big unknown remains fuel.

Yes.

And none of us here can predict -- we've had some good news today with lessening of tensions perhaps in the Middle East that's driven oil prices down this morning. We can only hope for a number of reasons that we see the political process take control here and we see some moderation. But again, we're not relying on -- there's nothing we can do about that so what we insist upon in our operating companies is to continue to route those trucks better, to continue to put more pieces on the truck and my hats off to the operating companies out there, Ken Spitler's leadership, Larry Accardi's leadership, we're driving fewer miles, we're getting more pieces per mile on those trucks and we're going to continue to do that. We have very specific plans in place to drive that productivity of that fleet and to keep that cost, that fuel cost number in check.

All right and then finally, can you just touch on where do you stand with centralized buying? And I know it's a big opportunity, maybe you can frame the opportunity say relative to RDC but where do you guys stand with that and will we see some of that this year?

Well, first of all I'm not sure we would call it centralized buying, but our sourcing initiatives which are -- have begun in '06 and will be much more robust in '07, we're encouraged. We don't have any metrics to share with anyone at this point , but we think that there are huge opportunities by banding together as an organization. We've already done it for the past four or five years. We've worked hard to buy things like fleet, tractors and trailers together, batteries, paper clips, those kinds of things, and the organization is positioned well today to take advantage of a more standardized sourcing program, and toward the end of this year we anticipate to see benefits from that and going forward into future years significant benefits by buying as a $30 billion plus organization.

Okay, thanks.

We'll take the next question for today from Steve Chick, JP Morgan.

Hi, thanks. I guess to clarify John, you had mentioned that for FY '07 I think in the range of 1.6 to 2.2 billion; is that right?

Right, Steve.

Okay. So that's a debt level that's I guess flat year-over-year or up say some 600 million, and with the higher levels of capital spending, is that -- can we kind of back into what you're saying about free cash flow? What do you plan on buying back, I guess a fair level of stock going into next year?

I think you've identified it properly. We believe cash flows will be traditionally strong again this next year as they have been this year. We will look to our share repurchase program to keep our targeted debt levels within our range, so it could well mean that there would be fewer shares bought back this next year, but again, we use that as a tool to properly leverage the balance sheet, so specific to your question, we can use that to back into your share repurchase program. Now to that point, we have currently just less than 20 million shares open on our authorization from the Board.

Okay. And I guess -- so it looks like your free cash flow, if I look at your shopping cash, less capital spending this year was in the area of 600 million with the higher level of CapEx predicted next year, do you expect free cash to be flat with that or should it go up?

Well, again, we don't specifically forecast free cash flow as part of our guidance, so I would expect that given that the increase that we would expect to have in sales that we would see the same relative increase in free cash flow next year.

Okay, and then related to that, the higher capital spending level, can you be a little more specific about where that's going? Your fold out projects, nothing is seen out of the ordinary in terms of what you have planned. Is it Florida that the RDC there and maybe a little more granularity on your spending.

Well, I think as a combination of number of things. There are some facilities targeted for replacement next year and in addition, we will begin construction of the Southeast or the Florida RDC. Additionally, we will have targeted three fold outs this next year. You'll also see a bit of an increase in transportation equipment this next year both as we continue to grow our business and secondly, with the upcoming changes and engine requirements and emissions, we will probably be opportunistic in replacing some of our fleet on the older end of it, maybe a little sooner than what we might have normally but to take advantage of those opportunities, and look at Ken Spitler and see if there's anything specific to that.

Yes. We are buying some more tractors this year, and we do have, I think this is a little bit different this year, is we do have several replacements of facilities both on the sigma side and the broad line side.

And on the RDC expenditures I guess for Florida, is it still -- the 100 million cash expended per RDC after the Northeast, is that still the right number to use for the one subsequent?

Yes.

Okay and how much of that is capital?

Principally all of that will be capital.

And is that 100 million basically being incurred in FY '07?

Yes, the biggest part will be incurred in '07, it will ba a little carryover maybe to '08 but the principal part of that will fall into '07.

That helps and then last if I could, so Rick when you talk about operating expenses improving into next year and you mentioned the $40 million swing, I think you get, in pension, it looks like year-over-year that might help by barely 100 basis points. Should we as we think about it, should we think about operating expenses growing at a lower rate than sales growth next year and if so, can you say about by how much?

No, I won't confirm the numbers, Steve, but we anticipate that operating expenses will improve year-over-year, absolutely.

Okay, so but will they -- improve year-over-year but should we think about it growing in terms of absolute dollar growth year-over-year, should it grow below sales growth?

Yes, we anticipate leverage, absolutely.

Okay, and will that--?

But the pension number, you confused me a bit there because you included the pension number. When I'm thinking of operating expense, I'm thinking about at the operating company level and the specialty company level. We anticipate leverage at that level before that benefit, if you will, of the $40 million swing in pension.

Okay, yes, so the 40 million would be incremental?

Absolutely.

To help even further?

Absolutely. We are going to continue to manage these businesses to leverage our sales growth.

Okay, so I guess implied in that with your comments on option expense and everything, the cost controls and the efficiency of the operating companies, it really has to be the -- that and sales leverage has to be the biggest thing here then.

Oh, absolutely.

All right

As usual. As it was this year too. We looked at, if you looked so we said before publicly, if you look at the underlying performance of the Company, taking out those five or six whatever it is, expense headwinds, the operating companies did a terrific job in a very very difficult environment. And what about on the RDC cost side? Should we think about that abating as in terms of the hit to P&L? Yes. I think that what we've said there is that going into '07, middle of '07 as we get to pretty much full ramp that the benefits will start to accrue to Sysco as opposed to seeing expense, net expenses.

Okay, thanks.

Thank you, Steve.

Our next question today comes from Meredith Adler, Lehman Brothers.

Couple of questions. Just a follow-up on that very last question of Steves. Are you saying that the cost will outweigh the benefits in fiscal '07 or starting in calendar '07 for the RDC?

The benefits will outweigh the costs in '07 in fiscal '07.

Will we see that in the first quarter?

I'm afraid that it's too difficult for us to tell at this point.

Okay.

But if we continue to see more cases move through the RDC, which we are, we're still adding cases, we're adding suppliers at this very point, we would anticipate, but in fact, it's going to ramp, again, throughout the year as we add those cases, so the biggest benefit is obviously going to come in the third and fourth quarters.

Okay. And then I was wondering if you could talk a little bit more about mix, which was a driver in the fourth quarter. It's not exactly clear that from looking at some of your metrics which aspect of mix helped you, it doesn't look like your Sysco brand sales was up, doesn't actually look like your broad line sales from MA's were up, so--?

Well, I'm going to turn it to Larry Pulliam here and talk about Sysco brand and we're going to look at a couple of numbers Meredith as he does that, but I'll ask Larry to give maybe a little more color around what's happening with Sysco brand sales and in fact we're very pleased with the direction that we're headed and Larry?

Yes, Meredith. As you may know, we've kind of been analyzing our brand sales over the past year or so to insure that we have the right brand, that we're meeting the customers needs, and we've been open about that that might reduce some of the brand sales, primarily almost commodity type items where the products may not offer an advantage to the customer. So, at the conclusion of this year, as we analyzed the brand sales--.

'06.

'06, yes, is pretty interesting. Actually, the sales growth for those brands increased by 2%, and most encouragingly -- we have different levels in qualities of the brand, and our highest quality brands are increasing and growing at a much faster rate than the normal or the lower quality brands. For example, Sysco supreme brand grew at 7%. Sysco imperial grew at about 2%, or I'm sorry, at about 3%, so those brands are indicative of our direction to meet the customers needs and grow the product. Now, admittedly, the overall percent of sales for the Sysco brand decreased in fiscal '06 by 1.17%, so we did see a decline in the total mix of sales by customers, but the dollars growth in the brand, well, did I totally confuse you by those numbers?

No, I think what you're saying makes sense, the higher quality and probably higher priced items did go up but as a percentage of the total sold, it's down.

That's correct, and so that again, to what Larry said, we anticipate that certain commodity items as we look at them may not be appropriate to have them under a Sysco brand and in fact we've reduced some of those Sysco brand items over the year, but our direction is to make sure that if it's got the Sysco brand on it, that it's true value add for our customers.

Meredith this is John Stubblefield. Let me just add to that answer as it relates to our customer segmentation and remembering that one of the segmentations we do by customer is MA serve customers versus the rest of the customer base, and if you look at the fourth quarter, that MA serve customer base, now this is of the total Sysco organization, grew from 46.1% as a total to 46.6% in the fourth quarter. Now to compare that to where we've been growing for the year with that customer base for the total year, it grew from from 45.6 to 47 even, of the total take up. So what that says is, is our strength in those MA serve customers again pointing to that business review, business development process, paid great dividends for us in that fourth quarter.

Further just to kind of one more slice and dice on that question, although we won't share any specific information regarded to our gold, silver, bronze customers, the top level customers, the gold customers are growing faster. Their sales rate, the number of customers and their sales rate is growing faster than any other category, and it goes down sequentially, so the number two would be silver and then bronze all the way down to unprofitable so it's exactly the kind of trending we want to see as we think about the business reviews and our focus on those customers that provide the biggest -- that have the best fit for us strategically.

Great. And I have another question for you about Sigma. Which the growth rate decelerated pretty noticeably this month or this quarter. The change in accounting that EITF 4-13, did that particularly hit Sigma harder?

It did. This is John again, and it did despairingly impact the Sigma sales growth for the quarter as opposed to the rest of the organization. It was heavier concentrated with that group of customers.

Yes, and that's as you might expect it to be because those are the customers that are going to have the purchasing clout, or buying power to buy shrimp or whatever it happens to be in larger quantities and then have us deliver that product.

Do you have a number for growth at Sigma if you adjust for that accounting change?

We have not gone through that calculation at this point.

Great. And then my final question would be about penetration. You're clearly having success with business reviews, you say your gold customers are growing fastest, and I think you before have said that your penetration of your best customers was about 40%. Are you seeing any noticeable change in penetration or is it the growth that you're seeing because they're growing faster because of your good suggestions and all?

Well, I think there's some of both of that and if there's one really good, or a couple of good measures of penetration, it would be in pieces per stop, that's the delivered pieces per stop and lines per stop and in both cases, we continue to enjoy the benefits and the increases that we've been experiencing for the last year and a half or so. So I don't have a specific number in terms of 40 to 42%, but -- and we really need to cut that again, but at this point I think we're confident that we're seeing penetration in all customers on average but I would go back to that, my example of the gold, silver, bronze customers where they're growing faster than the others we're obviously gaining more share in those customers than in any other customers.

I actually have just one final question. We see RDC, this first RDC project very close to being a driver of profitability in the region. Is it your intention to take that better profitability and invest it in lower pricing so that your customers are sharing in the benefits of the RDC?

Yes. Not exclusively. We want to do that strategically, so whether it's a product category or whether it's a customer, we want to make discrete decisions about that rather than just give all that profitability away. We've invested an awful, as you know, we've invested an awful lot of money and we need to have a return on our investment, but to the extent that it makes sense strategically for us, we will share some of those savings as we go forward with customers and we will share them across specific product lines. So for instance, if we think that there's an opportunity in the rib eye stake market in a particular point in time, we may make a decision to buy in, use the RDC as the distribution facility to the operating companies and share some of those savings with our customers, but again, it's going to be on a very -- as I said, a very discrete basis making good decisions for the Company and good decisions for our customers.

Great. Thank you very much.

Thank you.

We'll now hear from Jason Whitmer, Cleveland Research Company.

Thanks, good morning. Can you hear me?

Yes, good morning.

Wanted to dig a little bit further into expenses, considering there's some clear headwinds that are quantifiable but then there seems to be another gap there of even your core business that have seen some expense pressures. Can you provide a little more color on that maybe what is internally also serving as a head wind on your overall operating expense ratios?

Other than again if we look at our -- if we looked at the operating units, the operating companies and we exclude those five or six things that we've been talking about now for nine months or so, for 9 or 12 months which would be fuel, RDC, interest, pension, COLI, if we exclude those, we continue to see better productivity in our underlying business. So even, just to give you a sense of that, even in terms of our healthcare costs which we all read about daily, we continue to make good progress there. Although the -- our costs are up somewhat, we are able to overcome that by the productivity improvements of our associates, so from a productivity, from an efficiency standpoint, again, you got to X out all that stuff and it's a little bit difficult to do that because it's a moving target in fuel particularly, we continue to see improvement in our productivity of our workforce and we're very pleased with that.

So if I do X all that out and you do a good job providing us the quantifiable numbers there, it still seems like, and maybe I'm not seeing what you're seeing at the productivity level of the operating companies versus the Corporate level but it still seems there's a pretty wide gap there of unfavorable trend on operating expenses and I want to see why that is and when that could change or how much of that could change over the foreseeable future.

This is John Stubblefield again, and I'm going to ask you to look back at fiscal '05 and during fiscal '05 we had pretty significant inflation that was going on and one of the dangers of looking at percentages, especially margins and expenses comparing to a sales number that has a lot of inflationary dollars in it, you sometimes lull yourself to sleep thinking you're doing a good job with expenses because you look at the percent and not the dollars, and I think what Rick is saying is if you look at the absolute and you look at the dollars and you look at how the operating units are managing those dollars that given our expected future sales growth that we would expect to continue to lever those dollars as we go forward, and again when you go through a period like the fourth quarter and much of 2006 fiscal, we had very little inflation and in fact deflation occurred for some periods which distorts those numbers the other way. I just want to caution us not to get too caught up in percentages. At the end of the day we take dollars to the bank.

Sure. And what are your best opportunities then to take dollars out of the system? Some of the internal projects, I know you've got software platforms you're working on and I know there are productivity is getting more product on the truck, but what can we use as a benchmark to watch your progress on that going forward?

Well, I'll tell you how we're looking at it, although it's going to be, I think it might be a challenge. I'm trying to think about how or what public information -- our goal is -- let me say it this way. Our goals this year for operating companies and for the Corporation in general are related in terms, are related to reduction in cents per case so to John's example there, we're not talking about percentages. We're looking at raw dollars of cents per case reduction as we deliver those goods and that's total cents per case, total cost into the system. Now, I can't give you any specific numbers of that, those are internal numbers, but that's the way we look at the business and that's the way we'll measure ourselves going forward.

Are you able to provide a general trend line of how that's been over the last couple years because I know you had a couple really good years of expense control and this year seemed to be the opposite of that. So the overall trend of how that's flowed.

Yes, well, the problem is we haven't backed out the exceptional items; however let me give you some general information.

Sure.

To John's point, our expense ratios have gone down over the last four or five years but our cents per case as an expense have gone up, so that's the key number. The dollars are the key numbers to watch.

Okay and then lastly, any further update on your strategic rethinking of your old thinking?

Well, could you ask that one more time?

Yes, sure. Last call you talked about strategic reshaping of some of your old assessments?

Yes, yes, okay thanks. And we talked about one already and that's kind of strategic sourcing where we have readjusted some of our thinking and restructured some of the work that's getting done, so sourcing is a big part of our focus right now in terms of the strategy. We talked about that earlier and the other is going back to the question you asked in regard to efficiency, and that's integrated -- integrating our delivery functions to make sure that we get better, not only in light of the higher fuel costs but just in general that we get more efficient as an organization going forward. So warehousing and operations, a big part of what we're doing and then we are also working on part of that, the supply chain looking at our inbound transportation and making sure that we're in control of that piece of our business. So today, we receive about 20,000 inbound loads a week, and we think we have some opportunities going forward to make sure that those inbound trucks, although we don't own them, that's not part of our fleet, that they're full to the brim and that we're managing that inbound fleet even though we don't own it better than we ever have in the past.

Great. Thank you.

Thank you.

Our next we'll hear from Ajay Jain, UBS.

Yes, hi, good morning.

Good morning.

In terms of the relative sales trends by -- across the segments it looks like it was disproportionately weighted to the specialty companies. Is the 30% growth in the all other category kind of an anomaly and I guess conversely, was there any major account rationalization that's behind the deceleration entrenched for Sigma that's apart from the accounting change?

No. Nothing in regard to Sigma. Sigma is in fact doing better than it did in the mid year so we feel good about that. Just naturally, first of all, in the specialty companies as we allude to in the -- we've alluded to in the conference call, a number of acquisitions there, so I don't know what the net number is, but there were a significant number of acquisitions in the specialty business and as you might expect that's newer business to us and it's smaller. It's a smaller base, so the growth was -- we're very pleased with it. Specialty companies have done well. The meat, produce, gas supply they all continue to do very well, but nothing out of the ordinary there.

Okay. And I guess relative to your mid quarter sales update, obviously on a consolidated basis, your sales improved as the quarter progressed, but for broad line specifically, can you comment, Rick, as to whether the sales decelerated as the quarter progressed or was it in fact the opposite?

I guess I better, Ajay, I just better stay with our standard language in that we're very encouraged. I'll say this specifically about broad line. Very encouraged by our continued progress and it's a broken record, but the business review process continues to drive sales growth and we're obviously taking share from the competition and the trends as we highlighted earlier in addition to the entire company, the broad line businesses, it's 82% of our revenues, that's kind of going off the top of my head, but roughly 80%, 82% of our revenues, it's a big part of what's happening in Sysco today and they're doing a specific job and as we said the business reviews are fueling that sales growth. So we're just really encouraged, Ajay.

Okay, great. And I guess just looking forward into '07 now that you're starting to anniversary the impact of the account reviews and I think, it seems like account reviews have been contributing to most of the top line growth. Is it fair so say the sales will be more headcount driven in '07, that you'll be more dependent on investment in your newer sales people?

Well, I think somewhat because as we said it takes 18 to 24 months for a new marketing associate to reach productivity and profitability, but we actually saw better sales growth from business reviews in '06 than we did in '05 as a percentage, and we see no letting up. We think that as we said in the script, we think that the process has legs, and we see no letting up at this point after having done multiple reviews with a number of customers, we do continue to see good sales growth. So we think there's several more years of opportunity out there from the business review process, and the -- now the number of new customer contact folks, marketing associates, business review managers, et cetera, will be just a plus to all of that good activity.

Okay, great. Thank you. I guess my last question is specifically on the first quarter outlook for options expense. I know the impact is supposed to be comparable and it's very front end loaded since the majority of your grants are issued in Q1 I believe. Can you give any color as far as what we should be expecting relative to the $0.05 that you incurred in Q1 of last year?

Ajay, this is John. Thank you for answering my question. No, you're right on. You're right on. It's going to be very similar.

So $0.05 is not unreasonable?

That's correct.

Okay. Thank you.

Thank you.

Bob Cummins, Shields & Company is up next.

Okay, thanks, and good morning, everybody. As you were saying earlier, there were a lot of items extraneous items that have been affecting your earnings and I for one am a little confused about some of them. Maybe I could just go through a few. There's a change in your handling of corporate life insurance which involves a $40 million charge to earnings. Is that correct?

Bob, this is John. That is correct. That's the cumulative gain ever since we started investing in those types of policies to fund those plans.

Okay. So that will be in essence a one-time charge in the first quarter?

That's exactly right. It's one-time below the line charge for the first quarter and then we don't have to spend a good part of our lives discussing what happened in the broader market that impacts our P&L going forward.

So that will be a below the line item? That is basically what I'm getting at, where we'll see it on the P&L statement?

Absolutely.

Okay. With regard to the RDC in Virginia, I think you mentioned an $8 million figure in the fourth quarter. Is that the net of expenses versus benefits? In other words, it's still a drain on earnings presumably?

It is still a drain on earnings. That is the net of the total cost less the direct benefits attributable to the supply chain initiative and the Northeast. So, the net expense to the P&L and the fourth quarter was the $8 million.

And wasn't that figure higher a year ago?

It was.

Do you recall what it was in the fourth quarter a year ago?

If my memory is right it is approximately 17 million.

And I think you've indicated you expect for fiscal year '07 as a whole a positive impact even though you don't intend to break it out separately anymore?

That is our expectation.

Okay, great. Do you have an estimated tax rate for the coming year?

The tax rate has become so complex with the option expensing, whether or not it is actually deductible or not. The only guidance I can give you is the 39.25 basically rate for the year and then option will cause that to vary somewhat.

Okay. All right. On the EITF accounting, basically, have your -- maybe I didn't study the numbers closely enough, but was that reflected for the full year fiscal '06?

It was. Well, no, I'm sorry. It was reflected only for the impact in fourth quarter, but then we said for the full year that $100 million amounts to 4 basis points. So the first three quarters were not captured, so to your question, we will have a difference in the first, second, and third quarters of fiscal '07 as it relates to EITF 4-13 because we're not restating the prior year numbers until we get to the fourth quarter, fiscal '07 where we would have comparable numbers again.

Right. Okay. So each year we'll have to make some kind of, each quarter we'll have to make some mental adjustment to see what the impact is?

We'll help you with that.

And finally on fuel costs, I think a lot of businesses are concluding that oil prices are going to stay at these higher levels that we've seen over the past recent years and months, and doesn't that have to be ultimately reflected in the pricing of your products? I'm just wondering whether through fuel surcharges or basically additional markups on your cost, if that's an embedded cost, I wouldn't think the strategy of the Company would be to absorb that indefinitely. Can you just kind of shed some light on that strategy?

Yes, that would not be our strategy to absorb that. In fact, Bob, we've already done a number of things and to your suggestion, we have fuel surcharges with contract customers and we have some operating companies that have fuel surcharges with other customers out there. It would be fair to say, however, at this point we're not recovering all of the increases in fuel costs. We're going to work hard to do that, to recover all of it, but that takes a little bit of time. We even have to make sure we're -- I mentioned earlier, our inbound freight, our inbound product, we have to make sure that we reflect those costs appropriately in the cost of the product so it's a fairly -- it's a fairly complicated, it's not just a one solution, so there are a number of things that we're doing, but our strategy is definitely not to absorb those. We cannot afford to absorb those costs at the rate that fuel is increasing at this point.

Right exactly. Okay, thank you very much and keep up the good work.

Thank you, Bob.

We have time for one final question today and it comes from Andrew Wolf, BB&T Capital Markets.

Hi. I'm going to ask five or ten, like everyone else. No, I'm sorry. I apologize for that, everybody. On the RDC, I want to check my numbers similar to -- I've got 50 million for the year just as a net, drag to earnings. Is that accurate?

Andy, I haven't added them up. I'll take your word for it.

Well, does that sound like it's in the ballpark? I mean that's a pretty easy number.

Yes, I think it's in the ballpark.

So you're saying that minus 50 is going to go to some positive number next year and that we could try to figure out what that swing is going to be?

Yes, that's right.

But you're not going to give us any numerical reference points going forward; is that right?

That's right.

Okay. The other RDC question I wanted to ask was--When we look at this 8 million being down sequentially as I think Bob Cummins pointed out, is that because the gross margin -- sort of it's basically a fixed cost base at this point, there in Virginia, not completely fixed but more or less more fixed and really the benefits rolling into the gross margin?

That's accurate. Gross margin and reduction expenses at the operating Company levels.

Okay. So it's a combination thereof?

Yes, sir, and if we look at those option companies in the Northeast, Andy, the 14 that are served, we're confirmed that -- we are confirming that the RDC is indeed doing both of those things. That is helping improve our margins and our expenses.

Okay. From things you've said in the past, the lower expenses, I think, at the regional companies, you've been realizing a lot of those already. So I would infer from that that now you're starting to get as you work through a lot of logistical issues and what have you with vendors more of the gross margin benefit. Is that the right take away?

Yes. I think that's right.

Okay, because I'm trying to get to, you had a very good gross margin quarter, you said some of it's deflation, some of it is other things and really, I'm just trying to sort of on the gross margin side, trying to see how sustainable not the exact number you got but just the idea that the gross margin rate has firmed up here and that the RDC is part of that.

That is correct but I don't want to overlook that we still have opportunities we believe on the expense side because until we get all of those suppliers in and all of those products that are going to flow through the RDC, the operating companies still have to, to a large extent be prepared to do a lot more the old way as opposed to the new way. So we still believe, you're right, bigger opportunities ahead maybe on the margin side and the expense opportunities are still there.

Just my last question is a pretty easy one I think here. On this new -- the EITF 04-13, that shaves to 100 million from the sales line. Is that a pretty typical number or was there anything a lot different about this quarter?

No. I think there could be some seasonality in that number, but I think that it's probably pretty typical going forward. Like I said, we did not go back and try to recast last year's numbers. It was just too much effort in order to do that and not required to do that, so I would anticipate that will be fairly typical going forward.

Okay, thank you very much.

That does conclude today's question and answer session. Mr. Schnieders, I'll turn things back over to you for any additional or closing remarks.

Thank you, Operator and we want to thank everybody that's on the call today for your participation and for your questions. And as we have said throughout here, we are very encouraged about our business and the industry itself is such a great industry, but bottom line is the operating company, specialty companies in Sysco continue to do outstanding performance in a tough environment so we thank them also and look forward to talking with you again next quarter.

That does conclude today's conference. We would like to thank you all for your participation and have a great day.