西斯柯 (SYY) 2007 Q4 法說會逐字稿

Good day, everyone and welcome to today's Sysco Corporation fourth quarter fiscal year 2007 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. Rick Schneiders, Sysco's Chief Executive Officer and Chairman. Please go ahead, sir.

Thank you, Dana. I'd like to welcome everyone joining us this morning and appreciate you taking the time to be part of our conference call. Let me start by saying I'm pleased with our performance in the fourth quarter. We delivered solid sales growth of 8.5% and leveraged that into 19.5% earnings per share growth for the quarter. As you may recall, in February, we announced an organizational restructuring that took effect at the beginning of the new Fiscal Year. The intent of the restructuring was to support our goal of growing the business. Ken Spitler now manages all operations as President and Chief Operating Officer. Supply chain and sourcing now roll up under Larry Pulliam, who reports to Ken. I expect these changes to further align our different business segments and to improve productivity within the organization, as we continue to grow sales and to progress with our business initiatives. While fiscal 2007 and 2008 are transition years, where we are in various stages of implementing our initiatives, we're pleased with the progress we've made and expect to continue to build on fiscal 2008. We'll start things off with Kirk Drummond taking care of a few administrative items. After that Ken will talk about how the business performed during the quarter. Bill Delaney, our recently appointed CFO, will update you on our financial results for the year and I will wrap things up with a few closing remarks and then open up the call for your questions. With that said, I'll turn things over to Kirk.

Thanks, Rick. First, we have emailed invitations for our 2007 Analyst Day to be held in Boston on September 20th & 21st. Please contact us if you is not received an invitation. In addition on September 5th, Rick and Bill will address the Goldman Sachs Global Retailing Conference in New York. We will be delighted to see you there. Now I will read our Safe Harbor language. Statements made in the course of this presentation that state the Company's or Management's intentions, hopes, beliefs, expectations, or predictions of the future are forward-looking statements 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 from those in the forward-looking statements is contained in the Company's SEC filings, including but not limited to the risk factors contained in the Company's quarterly report on form 10-Q for the quarter ended March 31st, 2007, and in the Company's press release issued this morning.

Please understand that all comparisons given during the call refer to changes between the fourth quarter of fiscal 2007 and the fourth quarter of fiscal 2006 unless otherwise noted. The net impact of the EITF O4-13 will only be discussed from a year-to-date perspective because beginning with the fourth quarter, we were comparable year-over-year as this standard was adopted in the fourth quarter fiscal 2006. We were not comparable during the first three quarters of fiscal 2007. As a reminder this accounting pronouncement involves revenue recognition where we purchase product from a customer and then later resell the product to the same customer. The result of this change in accounting principle reduced our reported full year sales growth 0.7% from 8.1% on a non-GAAP basis to 7.4% during fiscal 2007. The lower sales increased our reported gross margins for the year by 12 basis points and it increased our operating expense ratio by 9 basis points. With that out of the way, I'll turn it over to Ken to talk about how our operations drove the financial results in the fourth quarter.

Thank you, Kirk. Overall I'm pleased with our performance for the quarter. Total sales growth was in line with our expectations and we increased pre-tax earnings by approximately 19%. While growing earnings at twice the rate of sales is likely not practical over the long term, it is gratifying that our operating companies delivered such a strong performance. I prefer not to focus on inflation, but the 6% inflation we experienced during the quarter was higher than normal and much higher than that of the previous three quarters. Our operating companies managed their business very well in that challenging environment. I'm particularly encouraged by our ability to grow gross profit dollars faster than we increased operating expenses during the quarter. In other words, our operating companies worked with their customers to effectively pass along higher product costs while doing an excellent job managing expenses. While our operating companies performed well under the current conditions, we believe a more modest inflationary environment over time is best for us and our customers.

With that said, I'd like to spend some time talking about how we manage the business to increase sales, control expenses, and grow earnings. On the sales side, we look at the number of business reviews we've done, the number of customer contact people we've added, and the level of lost sales we've experienced. Our business reviews have become a core part of how we operate. We focus these sections on helping our customers grow so that we can grow along with them. Over time, we've seen significant improvements in the sales from these customers that have participated in our business review process. While we expected this growth, we're also encouraged that the reviews are significantly improving customer retention, in other words, avoiding lost sales. The most effective way to impact sales growth is to reduce lost sales. Business reviews are a real competitive advantage for us. The scope and scale of what we do cannot easily be duplicated by our competitors. In addition, we increased our customer contact group by 5% in fiscal 2007 and expect to add another 4 to 5% in fiscal 2008.

On the expense side, I'll review a number of important metrics that are vital to leveraging sales growth. In the past years, we have sought a real opportunity to control our transportation costs by increasing the number of cases delivered per truck. We have been very effective in improving this by moving from approximately 585 cases per trip in the year 2000 to approximately 695 cases in 2007. We are now also focused on managing the number of miles driven. We're working on a number of initiatives to reduce our miles driven per route. Two other numbers I look at are errors per thousand cases shipped and injuries per 100 employees. Errors create customer dissatisfaction and increase our cost of handling because we essentially handle a case multiple times to correct the error. In the past, we used to make about three handling errors per thousand cases delivered. Today, we make less than one.

Safety is of the utmost importance, primarily from a quality of life perspective for our employees, but also from a workers comp expense perspective. We have reduced our annual injuries per 100 employees from nearly ten to less than six over the past several years. Although these metrics that I have reviewed with you are a small subset of the ones we look at, we have hundreds of operational metrics. They're intended to give you an idea of the level of detail we use to improve our productivity and grow our business. Now, Bill will review the financial results. Bill?

Thanks, Ken, and good morning, everyone. As Rick and Ken have just discussed, our fourth quarter financial results were particularly strong. Our operating companies manage their businesses effectively and, despite food cost inflation, contributed to the significant expansion in our operating profit margins as well. Turning to our financial performance of fiscal 2007, sales surpassed $35 billion, pre-tax earnings grew 16%, and diluted earnings per share increased by 18%. Sales grew 7.4% including the impact of EITF O4-13 which reduced our reported sales growth by 0.7%. The operating leverage that accompanied our sales growth is encouraging and these results are especially gratifying since we were rebounding from a challenging year in 2006. Free cash flow, defined as cash flow provided by operating activities of $1.4 billion less capital expenditures of $603 million, approximated $800 million for the year, a significant improvement over the prior year. We expect our capital spending to range between $625 and $650 million in the new year. Acquisition activity was modest in Fiscal 2007. In addition, we returned nearly $1 billion to our shareholders through dividends and share repurchases.

I also want to provide some perspective on the earnings impact of several unrelated but significant items this past year. Specifically, the favorable impact of reduced pension expense and stock compensation expense together with comparatively higher gains related to our Company owned life insurance, was largely offset by incremental incentive accruals and expenses incurred related to our strategic business initiatives. Looking forward to 2008 and acknowledging that, with the exception of pension expense, these items cannot be projected with certainty. We do not expect the aggregate impact of the change in these items to materially impact our fiscal 2008 financial results. I would also like to share some additional perspective on income tax expense for the year. While our tax rate in the fourth quarter of fiscal 2007 was comparable to the fourth quarter in 06, the overall annual rate decline from 39.35% in 2006 to 38.25% in 2007. This decrease is primarily attributed to lower stock compensation expense and greater Company owned life insurance gains that I mentioned a moment ago. While difficult to predict, we do not foresee a significant change in our tax rate for Fiscal 2008.

In summary, we're pleased with our financial results. We understand that one quarter does not a trend make. We've always focused on producing solid, sustainable operating results and we'll continue to do so. More recently, we've begun to develop processes and metrics in conjunction with our strategic initiatives. These tools will further sharpen our focus and enhance our ability to accomplish our long term goals. With that, Rick will share his closing remarks.

Thank you, Bill. As mentioned before, we had a strong fourth quarter and fiscal year with solid sales growth and exceptional expense leverage. By the end of 2007, we moved strategy from the formative stage to the implementation stage. It was particularly gratifying to achieve a major milestone of $1 billion in net earnings for the first time in our Company's history. I'm optimistic as we begin fiscal 2008. I feel strongly that we had the right initiatives and people in place to execute these initiatives. We got back on the growth track in Fiscal 2007 and I believe we will continue to build on our momentum. We're beginning to see some of the benefits of our initiatives, but keep in mind it's early. We have ways to go and the benefits will come over time. We're the largest player in a competitive industry. We continually invest back into the business to allow us to maintain and grow our competitive advantages which we expect will enable us to continue growing the business into the future. We hold a strong position in the industry and we are working on continually improving it.

Throughout Sysco's history our growth has consistently outpaced that of the foodservice industry. We are encouraged with the progress of our business initiatives to date and remain confident that the successful execution of these initiatives will position us well to participate in the growth and success of our customers for years to come. Therefor, although the industry growth has moderated somewhat in recent years, we are targeting 7 to 9% annual nominal sales growth going forward. This target excludes the impact of major acquisitions, which to the extent they are completed, will produce additional sales growth. We expect to continue to improve our operating leverage, which should allow us to convert this sales growth into low to mid double digit annualized earnings growth. Operator, we'll now take questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) We'll take our first question today from Jason Whitmer of Cleveland Research Company.

Hi, good morning. Good quarter.

Good morning, thank you.

Rick, can you help us with maybe a review of your four to five strategic initiatives. You obviously referred to them multiple times but maybe with where you're at within your own progress report, where you expect to be in the next 12 to 24 months and maybe what are the most important levers for your Company going forward, thanks.

Yeah, thank you, Jason. In regard -- and I'll ask my colleagues to help me here -- but in regard to the major initiatives, we certainly are pleased with the progress we've made with the RDC. We're at full ramp in the Northeast and operations there are going very well. The construction in Alachua, Florida is also going along very well, so we're pleased with the RDC. And two other important parts of the national supply chain are DPR, the Demand, Planning, Replenishment system which is being rolled out, independent of the RDC, to other operating companies. That's going well. And we're particularly pleased with the third piece of the national supply chain and that's TMS, the Transportation Management System, which is now in place for all operating companies across the system.

The second major initiative would be sourcing, and sourcing is going along very well. We're completing the second tranche. We had our first small kind of pilot in sourcing that represented about six product categories and $300 million of spend. We're now in the second tranche and we're very pleased with the progress we're making there. Still lots of work to do. We're still just at the very beginning of that process also. Integrated delivery, really kind of a code name for optimizing our warehouse and delivery operations. Ken alluded in his comments to the effort to reduce our miles driven on those routes and that too, a lot of work but going very well in the initial stages. And finally, I would mention our demand, the work we're doing in demand around the customer and understanding better what our customers needs are and making sure that we have the service offerings that match up to those needs. So those are the major initiatives, Jason.

And when you look specifically at your sales drivers, is there anything beyond the core business reviews and the customer contact reps, things you can identify over the medium term or over the long term that you look to really try to drive that outperformance versus the industry that can be tangible for us just to measure you on?

Well, I think mostly, it's more of the same, so the business reviews, business development, making sure we're following through on those. But every of these initiatives that I just mentioned are directly designed to grow our sales, so I would say that all of them will contribute to sales growth into the short-term and into the longer term. Ken, do you want to add anything?

No, I think that covers it, Rick. I think we're just beginning in the demand side to do some pricing work. It's in the very early stages, but we're very excited about it at this point. Not ready to talk about it yet but in some tests.

Great. Thank you.

We'll take our next question from Mark Husson of HSBC.

Good morning. I just wondered if you could be a little bit more granular on some of the costs that were sort of floating around. I think you mentioned pension costs but also bonus accruals in the past and the fourth quarter last year, you told us what the bonuses were and how that swung year-over-year. You'd also mentioned fuel costs last year. Maybe you could just talk about trends there. And also pension costs for the coming year and finally depreciation, which seemed to be growing rather slowly. Could you just talk about why?

Sure, and Mark, I'll turn it over to Bill Delaney to respond to your question.

Okay, Mark. Let me break it down a little bit I think. As far as the fuel cost, we have higher fuel costs this year than last year. A good portion of that -- but it's not overly significant, it's pretty much in line with our increases and some of that is pricing. We did buy in last year which today we're pretty happy with that decision. And we have a contract in place through the end of December, so our costs are up, but they aren't up dramatically. There's a little bit of mileage increase there as well, but overall we feel we're managing the fuel cost pretty well at this point. What I'm going to try to do is connect maybe the other some of the other items you mentioned here in two different ways. I mentioned in my comments that we, if you bundle these items -- there's five major items we have spoken to at various points throughout the year: pension; stock comp; the Company owned life insurance cash render value gains; and then offsetting that to some extent -- those have been primarily favorable and some of those have been fairly large favorable spendings.

We've brought our constituents or investors up to speed throughout the year in terms of Investments we've made in both strategy initiatives and also acknowledge the fact that last year and the year where the Company didn't perform to its historical standards, we didn't pay out the bonuses here in the corporate offices, so we've got a big swing there. So what I was trying to put across there in my comments was, if you put all of that and net it all out and we're not saying you should or shouldn't but if you were prone to do that, they essentially offset for both the quarter and for the year. Now in the third quarter, we did give you a little selective guidance there because we were looking at a very unfavorable swing on the bonus accrual side, which was more than what it had been earlier in the first three quarters of the year, so I can tell you that the bonus accruals came in pretty much in the range that we discussed in the call last quarter and in the 10-Q. The one thing that came a little more favorable than we would have been able to project, because you can't project these things, was the obviously the stock market was very strong and that resulted in some favorable gains in our cash render value with the Company and the life insurance, so to cut through it all, we probably picked up about a $0.01 versus where we thought we would have been when we were talking to you about it a quarter ago.

$0.01 for the quarter.

$0.01 for the quarter. Not over last year but versus where our mind set was when we were talking to you at the end of the third quarter.

Okay. So you've got a lot of -- is it business as normal then for fiscal '08 and also could you just talk about depreciation which only grew at 5%?

Yeah. I think that's really the major point we're trying to make here is that we expect going into the new year that -- the pension expense is really the only one I can sit here today and tell you with any certainty and that will be very modestly favorable we believe in '08. The stock comp, that varies somewhat. Our options will be granted this year later in the year, so we may have some quarterly fluctuation of a modest amount but generally, not knowing what the market is going to do, we don't really attribute much of our outlook in terms of what's going to happen on those lines. Certainly we would expect incentive accruals to be much closer in magnitude with '08 versus '07 and, quite frankly, on the strategy as we've operationalized more of it and put more of it into our various corporate departments and we're really not in the position to track that the way we have in the past and it's pretty much become more of our corporate overhead as well as what we're trying to do operationally. Depreciation, Mark, I may have to do more work on that and we'll come back to you and talk about it in the K and at the Analyst Meeting. But we have spent aggressively over the last couple years on several very good projects in the CapEx line and I think, at this point, we just haven't seen the acceleration that's come from that, but I don't have any particular insights. Kirk, do you have anything you want to add?

No, I really don't. The only thing I could say is we are making longer term investments, that the assets will be longer term which would lower your depreciation.

Yeah, because some of the early spending on the RDC was software writing which presumably was written off very aggressively, very early.

Yes, but then the other -- a fair amount is buildings and then the buildings as we go forward with facility expansions, fold outs, things like that, those have got much longer lives.

Thank you very much.

Thank you, Mark.

We'll take our next question from Meredith Adler of Lehman Brothers.

It's actually [Sean Roberts] for Meredith today. I'm just looking at your real sales growth line over the past several quarters. How do you feel that that indexes versus the industry and I guess what, in particular, gives you comfort that that can accelerate next year?

Well, again, I'll ask my colleagues to pitch in here, but in terms of real sales growth, when we look at what's going on in the industry today, we feel comfortable that we continue to outpace the industry and take share from our competitors. So we're very comfortable with that. The other thing that we've talked about, for a number of quarters now, is sort of that illusory number of inflation and frankly, it's one that moves around, can move around very very rapidly, so we're focusing on the nominal top line sales growth, ex major acquisitions and just making sure that we leverage that nominal top line growth.

I think, Sean, the only other thing as Ken pointed out in his comments, the inflationary environment is a difficult environment to operate in when it gets to 6% and it's challenging for our customers as well as our operating Company Management team. So I think it's difficult to see the strong real sales growth, when you've got customers whose purchasing budgets are being impacted by higher costs. So we feel we're doing a pretty good job managing and there's always interplay, as Rick points out, between your real growth and when you have inflation.

Yeah, and what Ken pointed out was the ability of those operating companies, which was absolutely terrific, to be able to manage through that and sure, we took some amount of hit on the gross profit line, but the operating companies did a terrific job managing their expenses, beyond any positive impact we may have gotten from the higher inflation, so we're seeing the operating companies leverage their business very effectively. They are going to continue to leverage their business and I would expect most of that to come at the expense line.

Can you maybe describe that process of passing through the higher cost to customers and how that might differ between a independent versus the chain versus institutional customer?

Sure. I mean, half of our business is roughly a contract basis. Half of it is independent side, and on the independent side of our business, we're just working with the customers on a daily basis, sort of negotiating on an item by item basis. And so it's a realtime activity that takes place and so as new pricing, higher or lower comes into play, it takes some amount of time to get that price change into our customer base, into the independent customer base. On the contract side of our business, it's pretty cut and dried, for most items, the non-commodity items, prices would change on a monthly basis, for commodity-type items, those that are going to generate a bulk of the revenue and a bulk of the purchases, those change on a weekly basis so that's kind of, on a real high level, that's the way the mechanism works.

And they have full transparency into your costs on the contract business?

Well, sure, because they know what their markups or their fee structure is, so they see the cost, sure.

We'll take our next question from Steve Chick of JP Morgan.

Hi, thanks. Good quarter.

Thank you.

You know, Bill, I don't know if you have this handy, but your prepaid expenses jumped a bit this quarter. In fact, it looks like by the most I've seen it looking back in the past. I think it doubled what it was in the third quarter. Do you happen to know why that is?

Yes, I do. We'll talk more about it in the K, Steve, but we do have a litigation accrual out there that we -- we're involved in a product liability claim that we believe we're very, very well insured for, but it's progressed to the point where we've set up both an accrued expense and a prepaid for roughly the same amount, and that's the proper accounting. So basically, we've added about close to about $50 million to the accrued expenses and $50 million to the prepaid and other line to account for that. There's no P&L impact.

Right, okay, good. No cash impact I guess either?

Correct. It's totally non-cash, non-P&L at this point.

Okay, great. And then to clarify, I understand you don't want to get in the minutiae of the operating expense items and so forth. Did you say that the net favorable impact was a $0.01 for all of the items or was that just COLE for the quarter?

Okay, let me be real clear on this. What we said is on the year-over-year that it's largely, they largely offset if you look at all of the items. Going back to the third quarter when we gave some selective guidance on the bonuses, we did that because it was much larger number than it had been and to be honest with you, probably at that time, if we were to have provided this, which we wouldn't and didn't, we probably would have thought that we would have had a hard time for it to be breakeven in the fourth quarter. With the stock market being strong, it turned out that the cash surrender value came in much better than what we thought, which allowed it to basically offset for the fourth quarter. So bottom line, the COLE gave us about a $0.01 for the quarter.

Okay.

Versus a year ago.

But Steve, the total of those major items did balance off for the quarter.

Yeah. The point is they're roughly offsetting for the quarter and for the year. It's just that if you go back 90 days, I don't know that we would have thought they would have offset, but again we're talking a penny but since you're asking that's the situation.

Okay, now, that's helpful and then last, did you -- so for the business reviews, did you say what you did complete for the year and how many you plan going into 2008?

No, we didn't. I haven't collected that data as of yet but I'm sure it's in the 40,000 and we expect that to grow slightly going into 2008.

I think one of the underlying things we're saying there, Steve, is that we've been doing this long enough now that it's really become pretty much an accepted best business practice. It's what we do and we'll continue to track them internally, but we're probably not going to talk about quite as much about the aggregate numbers going forward.

Thank you.

Thank you, Steve.

And we'll take our next question from Ajay Jain of UBS.

Rick, I know you've got a policy of not commenting on the ongoing financial impact from the RDC, but with the second facility coming on stream this year, how do you feel about the year-over-year comparison? Are the benefits that you're seeing now for the Northeast RDC enough to offset the depreciation expense and pre-opening expense that you're going to expect to hit the P & L from the second distribution center in Florida?

Yeah, Ajay, thank you. The real, going back now for a year, for four quarters, because the RDC is so now intertwined with the business itself, the operating companies, we're not commenting partly because again, it becomes very difficult as most of the benefits accrue at the operating Company. So we don't comment on the specifics of the RDC itself. However, I'll just go back to what I did say earlier and that is that we are at full ramp, the operation is running very. very smoothly, we're very pleased with it and we are going forward with the Florida RDC at this point and it's on schedule. It's going very, very well.

Okay, and can you also confirm what the increase was in headcount for marketing associates and customer contact personnel, both for the quarter and for the year?

5%. 5% for the year.

And for the quarter?

I don't think we know that number. We could get it, but it's a little early to collect all of that data from the operating companies, but it is 5% and it's probably a good number for next year.

Okay, great. Thank you very much.

Thank you, Ajay.

(OPERATOR INSTRUCTIONS) We'll go next to John Heinbockel of Goldman Sachs.

Hi. A couple things. The long term goals, what's the timetable for that? Is it five years or something different?

Well, I don't know that we've talked about specific, but I would say it's three to five years, but kind of ongoing we're thinking about it ongoingly but three to five years.

Now, the 7 to 9, the normalized inflation is probably what, around three?

We think in terms of 2.5.

Okay, you're sort of thinking 4 to 6% real growth on average over that time period?

Sure, but however the numbers work out, but yeah, we're really focusing on that top line nominal growth excluding major acquisitions.

Yeah, how would that or does that tie in roughly to -- I know we've talked about this in the past -- how much of the strategic initiative savings get reinvested and how much go to the bottom line. Does that sort of tie into a 50/50 split or something different?

Well, we really haven't talked about those numbers, and I'll tell you that I don't know that we know those numbers yet. There's still work to be done, but we are going to share some of those strategically, share some of those savings strategically to help our customers grow our business, grow particular categories and some will come to the bottom line.

All right, and then on gross for the quarter, the number was very good considering inflation and also the drop in corporate brand penetration. Are you seeing now a fairly -- and I don't know if you have a number, but from the strategic sourcing initiative, is that now ramping up in terms of dollar terms at a fairly good rate? Was that much better than the third quarter ramping up at that level or not quite?

Well, I think it is ramping up, John. We don't have any numbers at this point in terms of the overall impact but the first spend, the first pilot project, six categories was $300 million. The second tranch is about $1.3 billion. We're doing some initial work on the third tranch. And so again, if you add the $300 million and the $1.3 billion, you're still at a fairly small number versus in comparison to the total purchases.

You guys do have a, you can track every quarter the amount you're saving on sourcing, a dollar amount?

Oh, yeah. We track it.

Okay, and it's sort of increasing pretty consistently on a sequential basis or are we seeing, do we see a jump in the fourth versus the third or not really?

No. I mean, I wouldn't want to get into that level of detail, John, and lead you astray there. I think that frankly at this point, we don't know and it's numbers we really don't want to get into.

John, this is Bill. I mean, Ken mentioned these hundreds of metrics we look at. Many of those along these lines and it's very detailed and they move around and it's a process, as we've described from the beginning, so it's not quite as scientific as some might want it to be.

All right, and then finally, I guess it sounds like you're not in demand for your customers, we're not seeing any real weakening there in light of what's happening with inflation and the economy in general. That's held up pretty well?

Yeah. I think the demand is at most customer types is very very level and we don't see significant change at this point.

Okay, thanks.

Thank you, John.

We'll take our next question from Alec Patterson of RCM.

Yes, thank you. Just following up on John's questions about the nominal sales target, implicit about a 5 to 6% real growth rate, is that comfort level sort of inflation ignorant? I mean, in other words, are you really expecting real growth to reaccelerate to that or do you really need to get inflation down to the 2-3% level to attain that?

Well, again, our target is for nominal which would include the inflation and the real sales growth and, as we've said several times over the past year or two, is that because of all of the things that move within those numbers, we're really focusing less on the inflation at this point and looking at that nominal sales growth because ultimately that's what we have to leverage to grow those earnings.

I think again it's important to impress upon everyone and I think John just asked this question, these are goals that we've targeted for ourselves over the longer term, whether you say three to five years as Rick had pointed out, so one of the things we're trying not to do is to get into the quarterly component of each delta here, and because they move around. We've gone back and as I'm sure you all have and looked at growth in the industry over the last several years and looked at what Sysco has done in those environments and based on industry history and our performance in different environments, we felt this would be a more realistic goal to set over the next three to five years.

I mean, I ask you because really the metric that's more important than this nominal sales number is your gross profit dollar growth as a vehicle for leveraging your operating expense and hitting your bottom line targets, so I guess I'm wondering is -- are these nominal sales growth targets really sort of getting towards the gross profit dollar growth target, in sort of a candid way?

I don't think so, and I think that the thing that we learn every year and every day in this business is there's gross profit, there's expenses and we believe that these are realistic growth goals for us to manage the business around. For example, if you take a look at this quarter, if we just look at it kind of line by line, we would say well our margins were off but our expenses were unusually low versus the prior year, so which is the most relevant? Well I think the most relevant is in inflationary environment, our operating margins improved by about 0.4 of a point. And even that is a little bit more than we would ask you to expect going forward, but I don't know that I would necessarily agree that the gross profit is the defining line here. I think the way we're looking at it is you've got a sales line and then you've got an operating margin line and when you get to the operating margin line we expect to to expand that over time and to leverage those earnings and a lot of things enter into this, product mix, customer mix and then these types of environments we're working in today.

Be we do expect most of the gain, as we've suggested previously, most of the gain will come at the expense line. We are working hard to make sure that our systems are in place to drive our expense ratios down.

Okay, yes. Thanks. The shipping and handling for the year was that up at less than a rate of sales?

Yes.

Yes.

But in comparison, absolutely less.

Okay, great. Thank you.

Thank you.

We'll take our next question from Andrew Wolf of BB&T.

Good morning. Congratulations on a nice quarter. And obviously in the quarter from everything you're saying and the numbers, how they flushed out the bottom line, you managed there in the quarter nicely against inflation, obviously with the systems and everything like that. But Rick, I mean, let me just be candid, my view of the world is and I'd like to bounce it off you, is if inflation stays high, it just can't be anything but tough for your customers and vice versa. If dairy stops inflating 20% and comes back down, that will be good and if it stays up at 20%, I just don't frankly see how it helps them, either their bottom line gets retracted or they try to pass it through and restaurant prices go up. Could you just sort of, do your folks have a view internally on how you're looking for, your sort of, what's a sweet spot for inflation and what investors should think about in that regard?

I think a sweet spot for inflation is roughly that 2 to 2.5% number that is kind of the traditional number. We operate better in that environment. We think that our customers do also, but I will tell you, Andy, that we work very, very hard with our customers to help them manage through these difficult times. So things like we will help them do pricing on their menus to make sure they are staying up with the costs they are experiencing and that they are putting that into their menu costing. We help them find alternative products to introduce to their patrons as either a special item or on their menus. We have fairly sophisticated menu printing and reprinting services that we provide for our customers also. And so I think -- the other thing is that when you start talking about the industry as a whole, it's kind of like averages and it becomes very difficult. We have many, many operators who are terrific at managing in these difficult times. They up their promotional spending. They draw customers into their restaurant. They manage their menu appropriately and they manage their menu pricing appropriately. So I think there's a core of customers that are here today and will be here in ten years who will go through these more difficult times and be very, very successful going through them, so what we can hope is that we just help those customers, help our customers in these more difficult times.

As I said, Andy, this is Ken, in my opening comments, we don't think that that level of inflation is good for our customers or us. We would like to see it less than that 6, down in the 2 to 2.5 or 3.

Thanks, and Rick just last to follow on, because the way you spoke about some obviously certain operators being much more adept, and averages sort of being if not misleading, less insightful, is there any -- would you classify or draw any distinctions between how an independent operators, say stronger independent operators which Sysco is I think very well penetrated with versus your typical chain, do you think of a strong independent, is that what you're talking about the independents have?

Yeah, in general, because they have greater flexibility. They can move more quickly than chains can, but frankly chains are pretty good at moving pricing also, so there's various Management teams in those major chains, but the independence are certainly a little more fleet of foot. They got one operation or two operations or five operations and they can kind of adjust to the circumstances that present themselves.

We find that the independents are able to move from product to product a lot easier in terms of menuing, so that -- I think that's an advantage for them. They can roll it out pretty quickly.

Thank you.

We'll take our next question, I'm sorry, sir. We'll take our next question from [Rick Ludwick] of Searock Capital.

Hi, how are you?

Fine, good morning.

I just had a couple quick bookkeeping questions. With respect to the tax situation with the government, is that, do you guys have any update on that?

Rick, Bill here. No, we're still in the fairly early stages of the appeal process. We've written our protest and respond to their letter and we've written ours and we're going to work through this thing and probably will take the better part of the year before we have some type of stronger conclusion in where it's going to play out, but we feel very good with our position as we said all along.

Terrific. And just a quick question. Did you disclose or can you disclose what the allowance for bad debt associated with the receivables? Has that changed meaningfully as a percent of the receivables year-over-year?

Well our bad debt numbers this year were very close to last year. We set a record last year. Very small percentage of our revenues.

We had a good year in terms of what we call write-offs this year and we'll have more detail for you on that in the filings.

Okay, when is the filing expected to come out?

I think it's the 29th of August.

Terrific. And to the extent that you guys have changed the accounting for the COLE last year and now it's starting to filter through with sort of creating this volatile income stream or unpredictable income stream that I think the change was intended to avoid, I mean, have you had any thoughts of going back to the old method of accounting here or what are your thoughts on that?

Yeah, I've been thinking about it for two weeks to be honest with you getting ready for this call. In all seriousness, Rick, the thing is, is we misinterpreted an accounting proclamation when we changed at the beginning of fiscal 2007. We thought we could go to the cost method which, frankly, would be a lot easier and would make it simpler for you to understand as well. Turned out we misunderstood that so then at the end of the third quart ever we went back and restated. The impact was not material for the year. It's not even material for the quarter but to your point, again, it does create a little bit of volatility, more of an irritant than anything else in terms of our communication. So it's not a big deal. It's just something, on a smaller scale like pension expense , it's something that's going to be volatile and in this case, it's going to -- one thing I think I can tell you is when you see the equity markets perform well, we should get a little bit of a benefit and when they don't perform well, we'll get hurt a little bit, and but the accounting we're using today is the appropriate

Thanks.

The only accounting we can use.

Right on, I've got it. Thank you.

Operator? We'll take two more questions. Okay?

Thank you, sir. We'll go next to Mark Husson of HSBC.

Yeah, I have a bit of a follow-up here. Just one on the general competitive environment. U.S. Foodservice kind of get your attention has disappeared into the more of some interesting private equity people. But their EBITDA interest coverage is not much better than one. What do you think that does to the competitive environment and what does it look like right now? Do you see anything up front?

Really haven't seen much change at all. A lot of rumors flying around but no real change.

I guess the second question would be, if we're right and the low EBIT margin has something to do with the fact that they have some large chunks of unprofitable business, is there any conversations happening that you can talk about, about whether you might like some of those businesses or not?

We like all their business, but no, there's no conversations going on we can share with you.

Okay, I like that last bit, and then -- -- final question is you had mentioned I think in the last Analyst Meeting that as food retailers are increasingly selling good food and prepared food, there may be some opportunities in that market, and maybe also in Asian cuisine and things like that. When you look at to try and boost your growth rate, are there some other markets that you're starting to work with?

Well, I think that's a big one, Mark. The other one that we continually work with, it's a smaller segment certainly today is this meal assembly business, which is best characterized perhaps by the company Dream Dinners out of Seattle which is a really good operation, and great customer of ours, where consumers can go in and prepare meals for the next two weeks or month or whatever at very reasonable prices, good menus, good ingredients. So I think that's one small sort of trend out think that's an opportunity for us that we're taking advantage of but, frankly, we need to do a better job with the retailers who I think have gotten better at take out food and more aggressive with take out food and we are focusing more heavily into that market.

Okay, great. Thank you.

Thank you.

We'll take our final question today from Westcott Rochette of Bear Stearns.

Thank you very much. Just a question on kind of where you see the inflation environment right now, kind of have we peaked and kind of what's your outlook or built into your outlook say over the next 6 to 12 months.

Well, Westcott, I would tell you that we're not smart enough to figure out what's going on in the inflation area over the next even few months. As you know, there's a lot of pressure certainly in the corn markets. There was the largest corn crop in history, I believe planted this year, but it really is a difficult thing to predict, so I don't know. And I'll ask Larry maybe, Larry Pulliam is with us this morning. Larry can give us some updates in regard to what he's seeing in the product categories themselves.

Rick, I would have to agree with your assessment on it. But, we track commodity costs in just about every category from all of the grains, dairy, livestock, fuel, packaging, and we measure it on an ongoing basis, we measure it on year-over-year and clearly, I know you've seen some of these things as well, this last quarter it was just unbelievable, corn prices, grain, soy bean, and we really don't have a good feel of where it's going to go. We track it very closely. We monitor it. We see the impact it has on our food products and, as Ken said, we have the capability of having the penetration with our territory street customers and (inaudible) customers so that we can help them to move to certain other products, but we honestly don't know where it's going to go. We have no idea or don't have a good feeling that it's going to be lessened in the near future.

Okay -

And think seems to be a lot of different things at play, political, some droughts, the fuel situation, it's a little more complex than I think we've faced before but we're prepared for it and we're prepared to leverage whatever comes at us.

And just in general, I know you guys talked about how different customers are dealing with inflation. Are you seeing in working with your customers generally increasing product menu in order to deal with it or just kind of absorbing it for the near term and kind of the pacing of where we are in that cycle? Because I mean, I guess it wouldn't be just a temporary price increase by all accounts. Inflation is kind of on a relatively higher sustained level, so can you just kind of --

Well we want to work with our customers on a regular basis because these kinds of changes, as we've suggested here this morning, can happen often. They can be pretty volatile. They can go high very quickly. The pricing could go low very quickly, so what's important for us with those 8,000 salespeople out on the street is making sure that they have the ability to communicate with those customers and when they see changes in a particular product category that they help their customers make the appropriate price changes on their menus. It's the only way they are going to survive, so it's part of the way we work.

Okay, thank you very much, guys.

Great, thank you. And I would like to thank everybody who has been on the call with us this morning. We feel very. very good about the quarter, as you probably heard in our comments today, and we feel very, very good about 2008 and beyond, so again, thank you for your interest. Thank you for participating in the call today and have a good day.

That does conclude today's Conference Call. Thank you for your participation. You may disconnect at this time.