西斯柯 (SYY) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to today's SYSCO Corporation third quarter fiscal year 2008 earnings 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 your moderator for today, Mr. Neil Russell, Assistant Vice President Investor Relations. Please go ahead, sir.

Thank you, Anthony, and good morning, everyone. Thank you for joining us for SYSCO's third quarter fiscal 2008 conference call. On today's call you will hear from Rick Schnieders, our Chairman and Chief Executive Officer, Ken Spitler, our President and Chief Operating Officer, and Bill DeLaney, our Executive Vice President and Chief Financial Officer.

Before we begin, please note that 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. Actual results could differ in a material manner.

Additional information concerning factors that could cause actual results to differ in a material manner from those in the forward-looking statements is contained in the Company's SEC filings including but not limited to risk factors contained in the Company's annual report on Form 10-K for the year ended June 30, 2007, and in the Company's press release issued earlier this morning.

Please understand that all comparisons given during the call refer to changes between the third quarter of fiscal 2008 and the third quarter of fiscal 2007 unless otherwise noted. Also, all comments about earnings per share refer to diluted earnings per share unless otherwise noted.

With that out of the way, I'll turn it over to our Chairman and Chief Executive Officer, Rick Schnieders.

Thanks, Neil.

Early this morning SYSCO announced sales growth of 6.7% for the third quarter and earnings per share growth of 14.3%. These results represent our seventh quarter in a row of double-digit earnings per share growth.

Considering the challenging economic environment I'm once again pleased with our results. Particularly with our ability to continue to leverage our sales growth into improved earnings per share.

The financial results this quarter reflect the ability of our broad line companies to leverage effectively in a difficult sales and operating environment. Our continued success is a result of our commitment to satisfying the needs of our customers. I'd like to take this opportunity to thank all of my fellow SYSCO colleagues for their ongoing support of our customer's success.

Without question, the current operating environment is challenging for SYSCO and our customers. But I'm pleased to report that SYSCO is responding well to those challenges as our results published this morning demonstrate.

We are executing at a high level as we continue to invest in our business. SYSCO is not only the leader in our industry today but we believe our continued investment in people, fleet, facilities and technology positions us to build upon our leadership for years to come.

The third quarter is one in which we normally experience some seasonality as March represents a disproportionate amount of sales and profits for the quarter. This year on a comparable basis March was not as strong due in part to the early Easter holiday which created some headwind as people departed their winter or spring holidays and returned home earlier than in the prior year.

Additionally, difficult weather in the Northeast and Midwest provided a significant operating challenge during the quarter. Ken will elaborate on more specific regional data in his comments.

Difficult economic times have always provided opportunities for SYSCO to further differentiate ourselves in the marketplace because our customers increasingly look to us for support and business solutions.

As the industry leader, we have a unique ability and responsibility to leverage our size and scale to benefit our customers. Furthermore, we have continued to stratify our customer base over the past few years resulting in quality relationships with superior customers.

Our business covers the full spectrum of foodservice facilities from independent white tablecloth establishments to quick service restaurants and everything in between. We continue to see the benefits of having a diversified geography and a diversified customer base as well as a wide breadth of products.

For the past several months our industry has experienced various macroeconomic pressures such as high food inflation and fuel costs that continue to restrict growth. However, our more than 50,000 dedicated associates are focused on helping our customers succeed which we are confident will contribute to our long-term success.

Looking forward, our key long-term goals continue to be first, 7 to 9% long-term sales growth. Second, lever that up to low to mid-teens EPS growth, and third, maintaining strong return on equity and return on capital ratios over the long-term.

Now, I'll turn things over to Ken so he can review in further detail our operational results for the quarter.

Thanks, Rick.

Our performance in the third quarter met our expectations and our sales growth of 6.7 continued to outpace industry growth. More importantly, once again we demonstrated our ability to leverage, in particular at the broad line companies resulting in our earnings per share growth of 14.3%.

The ability of our broad line companies, our core business, to manage expenses and expand operating margins in this environment reflects the talent and work ethic of SYSCO associates across our network.

One of the ways in which we are managing expenses is through productivity improvement. An example of improved productivity is that on average our trucks carry at least 15% more cases per load than they did in 2001.

Food inflation is measured by our internal measure of product cost inflation remained high, averaging about 6.2% for the quarter. The product categories of dairy, canned and dry goods have had the largest impact for this quarter.

The balance of inflation costs were spread across several categories. Although we don't forecast inflation, we anticipate product costs to remain high for the foreseeable future, however, as evident in our financial results, we have done a good job of managing these product cost increases.

Our operating companies manage their business well with gross profit dollars grows faster than expenses in spite of the impact of certain items that Bill will discuss later. Additionally, we continue to manage margins effectively in a high inflationary environment.

On a regional basis sales growth during the third quarter was strong in the Southwest which was offset by a relative weakness in Florida. The slower growth was a result of the early Easter holiday and the impact of more concentrated housing crisis in that region.

Business reviews and hiring additional customer contact personnel continue to be very effective in allowing us to help customers improve their business. We continue to see benefits from customers who go through a business review and, as we said before, conducting quality business reviews is embedded in how we go to market.

Regarding our cost management, we made additional progress during the quarter in rolling out our productivity enhancing initiatives that should further contribute to increased profitability as they become fully implemented, designated delivery days and XY routing initiatives that were designed to reduce miles driven, improve productivity, and helped offset external cost measures that we cannot control, such as higher fuel prices which were approximately 30% higher in the third quarter.

We continue to make good progress on managing miles driven, fuel expenses will be unfavorably impact our financial results for next quarter. Fuel expense was about $12 million higher in the third quarter compared to the prior year.

We expect fuel costs will negatively impact year-over-year earnings by approximately $20 million to $25 million in the fourth quarter of 2008. Our estimate is based upon both current spot prices for diesel and the cost basis of our forward contracts we have in place for approximately 40% of our total fuel needs through June.

Also, I am pleased to report that our second RDC in Alachua, Florida, has opened on schedule and is now shipping product to five operating companies. While we expect the ramp up of this facility to be substantially faster than our first RDC in Virginia, we will see some start-up cost pressures in the short-term.

In summary, we had another solid quarter from an operational and financial standpoint. I'd like to thank the entire SYSCO team for their leadership and hard work.

Now, Bill will review our financial results for the third quarter and year-to-date.

Thank you, Ken.

As Rick and Ken just said, we had good third quarter and I'm pleased with our year-to-date results as well. For the third quarter sales grew 6.7%, operating income leveraged 2 points to approximately 9%, and earnings per share grew by 14%.

For the nine-month period sales grew 7.7%, operating income grew 10.2%, and earnings per share grew 13.5%. These results reflect our ability to grow gross profit dollars faster than operating expenses. Our solid growth and profitability was primarily the result of disciplined execution at our operating companies.

There are a few items regarding our third quarter financial results that I would like to briefly discuss. First, operating expenses for the quarter include a negative year-over-year comparison of approximately $18 million related to our investments in company-owned life insurance. The underlying value of these policies will continue to be impacted by any volatility in the financial markets.

Additionally, we had favorable comparisons related to stock-based compensation of $4 million and pension expense of $2 million that helped to offset some of the shortfall from the life insurance policies. For the quarter these items resulted in a net $12 million unfavorable comparison.

During the quarter we issued $750 million of senior unsecured notes using the proceeds to pay down commercial paper. The bond offering was successfully executed with attractive pricing that demonstrated the investment community's confidence in our financial structure. This transaction allowed us to secure historically low long-term interest rates on these bonds which comprised 35 to 40% of our long-term debt.

Capital expenditures totaled approximately $400 million for the first three quarters of our fiscal year, slightly below plan. As a result, we have lowered our fiscal year 2008 capital expenditure estimate to a range of $550 million to $575 million.

Our return on average total capital, return on total capital, calculated as net earnings divided by average equity plus long-term debt, continues to be strong. For the rolling twelve months ended March 31, our return was approximately 20%.

We believe that this is an important financial metric and we will provide regular updates in the future. As we begin the fourth quarter of fiscal 2008 and look forward into 2009, we remain committed to the success of our customers.

In summary, we are pleased with our overall performance for the third quarter and for the first nine months of fiscal 2008. Looking forward, we see significant opportunities both to grow our share of market and improve productivity in all areas of our business. While we are fully cognizant of today's difficult market environment, we're committed to achieving our long-term business objectives.

And now I'll turn it back over to Rick.

Thanks, Bill.

As you've heard from Ken, Bill, and me this morning, we are pleased with our overall results for the third quarter and the nine months to date. SYSCO has a long history of performing well not only during good economic cycles but in difficult ones. We've been steadily taking share from our competitors, and I expect us to continue to do so in the future.

We now have time for Q&A but before we begin, let me note that I'll be here for the initial portion of the Q&A and then we'll need to depart at about 10:45 Eastern time for a financial conference in New York. So Ken and Bill will moderate the Q&A after that.

With that, Operator, we'll now take questions.

(OPERATOR INSTRUCTIONS) We will take our first question from John Heinbockel at Goldman Sachs.

A couple of things. You talked about March being tough. Have you seen a bounce back in April?

And along with that, do you think, or how do you get your arms around the possible benefit you'll get from the tax checks flowing through your customers to you? So I mean are we sort of in a period here where things are going to get better for a while and then maybe double dip or what's your take on top line?

Good morning, John.

Well, the first thing I would say is it's probably too early to be confident about what the fourth quarter looks like. I just kind of reiterate it, we're comfortable with our long-term financial objectives.

In regard to the tax checks, I mean, it is sort of adds to speculation anybody's guess at that point. We would be happy to see a bump in the marketplace, but pretty difficult to determine what 500 or $600 will mean to the average.

As you guys look at your information, do you think because, obviously, there's been sort of a downward trend on what appears to be real growth or unit growth. I know that's, there's a lot of things in there, but have we seen any clear signs there is a stabilization, things getting better, or it's still too tough to tell?

I don't think we have any clear signs of that right now, John, you know, this is a very volatile environment but, again, I guess that I would just say again that we're confident about our position in the marketplace. We do well during difficult times, and we're just so well positioned in the way the Company is organized and the way it's performing today, that we're good with whatever comes down the pike at us.

Secondly, you guys have done a very good job on the expense side. Maybe talk a little bit about what you can do differently going into the new year to maybe lower the rate of growth in SG&A dollars further if that can be done, just on the case that maybe gross profit dollars do come down a little further?

I'll start, and then I'll ask Ken to jump in or Bill or anyone else to jump in, but I guess broadly what I would say is that we are carefully watching every nickel that we spend, and we're just being very diligent about anything that, paper clips to trucks at this point, so I think that message has gone through the entire organization.

I think if you go out to the operating companies, and we have, we're in the profit planning process right now, you see a real heightened awareness in terms of where we are, where we are in a macroeconomic environment, and what they need to do to control their expenses.

John, this is Ken.

Our process kind of remains the same. We go through in our first level of management of expenses is those things that we feel that don't affect our people.

We have yet to get deep into the personnel side, so those things that we've reduced so far have been areas that we felt were a little fluffy, if you will, things like conferences and those kind of costs, so that was our first wave. Second wave begins to be if we still see weakness and still see a gross profit dollar slip would be in the area of head count.

All right. Then finally, inventories look to be up about 10% or so. Was any of that forward buy product and if so do you think that increase is going forward?

I'll take that one, John. It's Bill.

Inventories were up, I think, about with sales growth. We didn't -- I don't think we reduced inventory days. I don't think they were up materially this quarter. We've got some work to do there.

I wouldn't over play any over buy side of it. I think bottom line is we've got a lot of investment in some of these initiatives and we're continuing to learn as we go, and to Ken's point, that's all part of this process we're going through right now both here at corporate and on the operating companies that we're taking a hard look at all of our asset management opportunities and inventory's at the top of that list. Actually, receivables came down a couple tenths a day I think year-over-year, so we made some decent strides there in what's a fairly tough market.

All right. Thanks.

Thank you.

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

Hey, guys. A couple of questions.

Could you talk a little bit about fuel surcharges and, obviously, you have surcharges in most of your contracts, but are you able to pass any of that along to the independent customer or I don't know if you're even trying very hard to do that?

Yes, we certainly for years have had surcharges on, or the ability to put surcharges on for our contract customers. We do have modest fuel surcharges for independent customers across the system today, and we review that on a regular basis as the fuel costs go up, the fuel surcharges go up, as the fuel costs come down, fuel surcharges come down also, and that's both in the case of independents and contract customers.

And what are you seeing in terms of the competition? Are they also pushing through fuel surcharges and do you think they're also pushing hard on the cost of product?

Sure. Absolutely. We do know that many of our competitors, if not most of our competitors, have fuel surcharges across the board, so we think that it's just the right thing to do in this environment.

If we can convince our customers to buy more product from us, and that's certainly our goal, then we lower that cost per case related to that fuel surcharge. So our kind of sales story there, and it's the right one, is that the more cases you buy from us, the lower the cost per case related to that fuel surcharge.

Got it. And then I was wondering if you could maybe talk a little bit about what you're seeing in terms of the regional wholesale competitors. Is there any sense that they are looking to sell out more actively than they were a couple years ago?

Well, depends on how you would define the regionals. There's some very large regionals, three or four very large regionals. We have no indication of their interest, however, again more broadly, we have a lot of activity going on related to potential acquisitions.

As we've talked about, it's very, very difficult out there right now, and an individual, independent distributor's ability to sort of leverage the cost the way we do across the system and it's just very difficult, and I think that there's a willingness now on the part of some of those owners to monetize their business.

And my final question is just about receivables. I noticed that bad debt as a percentage of total receivables went up a little bit. Is that, I know you guys talk about not taking credits or offering credit, I should say. Are you seeing any issues in terms of your customer's ability to pay you?

Meredith, Bill.

We'll take a closer look at that. I don't actually think our write-offs or anything like that are up at all as a percent to sales, but we'll look at that a little bit closer. Where I would characterize we are in receivables right now is pretty much where we are in terms of the business climate, I mean it's a little early to fully evaluate that.

When you have large customers you always have situations that you have to deal with, but just from a cultural standpoint, we manage credit locally at our op cos as well as here at corporate on the larger accounts, and to the best of our ability we don't sell credit, so we will work with customers, obviously, when you get into situations and we know them well, and we some parameters around the whatever might be a workout agreement or something like that, but so far we haven't seen any major problems but we are keenly watching that and managing that at all levels because, clearly, in times like this there will be some situations that we'll have to deal with.

I did look at it as a percentage of the receivable balance not as a percentage of sales.

Okay.

Thanks.

I think actually our days are down a couple tenths of a day, so we're actually pleased with that.

Great. Thank you very much.

Thank you.

We'll take our next question from Greg Badishkanian at Citigroup.

Yes. Great. Thanks.

In terms of looking at just food inflation, would you say that that had probably a net neutral impact on EBIT dollars? And then also just looking at your independent customers, how they fared in terms of passing those prices onto their customers.

In terms of inflation, I think that we would say that it's pretty well a net so it helps us on the expense line and hurts us on the gross profit line. Any benefit that we see on the expense line is sheer productivity improvement thanks to the great work of our operating companies.

And your question about the independents, Greg?

When you look at those, have they been doing a better or worse job lately in terms of passing on the price increases you're sending to them to their end customers?

I think in general they do a pretty good job of changing their menus, and one of our responsibilities, at least as we see it, is to make sure that either through business reviews or communication directly from marketing associates that they're adjusting the prices on their menus, and I feel quite good that that's happening.

Plus the fact that they've been in inflationary period for a while, they've had to get better at it.

Greg, one thing you'll see in our release and as we speak here with the call that we talked a lot about growing gross profit dollars faster than expenses. Now that's not exactly rocket science type of statements. The reason we do that is because it's really almost, it's impossible to evaluate on each line the impact of inflation.

To Rick's point we generally know what puts pressure on the gross profit line and it makes the expenses look a little better than they probably are. So our focus here is on growing cases and managing our cost per case, and really as long as we can grow that operating profit faster than our sales growth, we feel like we're doing a pretty good job with the inflationary environment, which as we've spoken to, has been with us now for a year.

You did a nice job of that this quarter. Looking at the pricing environment, you've got US Foodservice, you've got Performance Food Group, have you noticed any changes coming out in terms of the some of the bigger players?

No, really we haven't. It's kind of business as usual, and PFG has yet to go through, I think the process is about to finish, but hasn't finished yet.

Good. Thank you. Very helpful.

Thank you.

We'll take our next question from Steve Chick at JPMorgan.

Thanks.

I guess first off I just wanted to follow-up on the question kind of about sales trends, I guess post quarter end and how we should think about things. You mentioned Easter and the early Easter had an impact on March. Have you seen kind of a give back of that impact as you're kind of post quarter end here?

And then related to that, your 7 to 9% organic sales growth guidance, given kind of the nominal top line comparisons are a little tough, should we kind of think about maybe being at the low end or a little below that in the short-term and maybe gaining back into that range as we head into next year?

Steve, you know, of course, that we don't give guidance. I will tell you, however, we're glad to see the sunshine around most of the country. It was a pretty tough quarter in terms of the weather.

So by and large I would say we feel comfortable about our ability to operate in this environment as well as more positive environments, and too early to tell about the quarter, as we've said earlier, but we think that those operating companies will respond appropriately and we stick by our longer term projections.

Okay. All right. That's helpful.

And then maybe for Bill, I know we'll get the segment profit data come when you file the Q, but obviously your operating expenses were pretty extraordinarily good this quarter, in fact, they were down sequentially even with your COLI and your fuel hit. Once we get the Q, did you see segment margins that were up for instance within the broad line segment? Can you speak to that a little bit?

Steve, actually Ken alluded to it in his comments so yes, on the broad line sector in particular we saw some good operating leverage and we are pleased with that.

So these costs, the cost control initiatives, it sounds like you're pretty comfortable that if things remain tough, you know, growing SG&A well south of sales and even maybe lower than gross is sustainable at this point.

Yes, we can, Steve.

That's our total focus right now here, Steve, is to make the best out of the market that we're in and grow the boxes and manage that cost per case.

Okay. All right. Thanks. Two last ones if I could.

One, I wanted to confirm, Bill, is FY '09, is that a 53-week year and then --

I hope so.

Okay. All right.

It's all right if it's 54.

Okay. All right.

Steve, it's 52.

Sorry, next year?

Next year is a 52-week year.

Is a 52-week year. Okay.

And then second related to your buyback, if I look at your share count, your buyback activity, it does look like for the quarter a lot of the buyback was completed in the first month through January with a lot less so done in the last two months. Can you just remind me where your authorization is with your buyback and kind of what your view is on that as we go forward here?

We've got about $7 million, a little over $7 million still authorized, so we've got plenty that's authorized to take us through the balance of the fiscal year.

And you're right. If you look at the year, we bought in a little heavier first part of the year, and then last year you've got to be a little careful because we bought in heavy in the fourth quarter last year, so we'll continue to evaluate that going forward.

Okay. Good quarter, guys. Thanks.

Thank you, Steve.

We'll take our next question from Jason Whitmer at Cleveland Research.

Good morning.

Rick, can you give us a little update on what you're thinking independents versus chains versus kind of the peer set out there, and whether that's unit growth because it seems like the entire market's slowing down in unit growth or just overall performance within those existing four walls, it does seem like the MA based sales mix is coming down a bit recently, I don't know if that's fully due to new customer wins or if there's something else going on. Just some of the recent thoughts in terms of the health of the independent would be helpful.

Yes, I mean, some of what you see now is we do have, as we've talked about before, you get the corporate multi-unit business in big chunks, and we have been good enough, thanks to our sales efforts, to acquire some very substantial business over the last twelve months. On the other hand, I really feel, although as we said probably enough at this point, it's a very difficult environment.

I feel that in general our independents are doing well. It's easier for them to make adjustments obviously. They don't have to go through some corporate office bureaucracy to get price changes done, they can do that on the fly virtually. We see a lot of that taking place right now.

We're helping our customers with substitution of items on their menus with redoing their menus, doing that by the hundreds literally, so again, and I hate to say it again, it's a difficult environment. In that environment I think the independents, most of the independents are doing quite well.

And you mentioned earlier that you're steadily taking share, certainly it's visible in this environment, but how would you prioritize your objectives to take share in a faster clip as you look out the next five years, whether it's pushing through this environment or coming up with other, getting some more payback from your initiatives? What is your thought process on how you can really go to market a little stronger fashion to take share at a better clip?

Well, I mean, it is a delicate balance. We are going to protect our earnings, but we're looking at more granularly at every marketplace, every customer, to see where we can gain share, whether that share of wallet in an individual customer or whether that's a broader market share, so we're very focused on that, and everything that we're doing, I mean frankly, is focused on the customer and our ability to better serve those customers, so we're confident we will continue to take share at increasing rates.

And do you think the core top line catalysts of today, the business reviews or even just adding sales reps to the field maybe Ken can provide an update on where we're at with that? Do you think that's moving, or the actual traction of that in this environment is accelerated as maybe peers can't keep pace with that?

You know, I don't know what our peers are doing, but we're actually have a concentrated effort on increasing that business review at this point going into next year as we see it, again, as integral in the way that we go to market, and we're actually increasing those folks faster than we increase our marketing because in particular in this environment we see that as helpful to our customers and when it's helpful to our customers, it's good for us.

That's helpful. Thank you.

We'll take our next question from Ajay Jain at UBS.

Thanks. Most of my questions have been asked already.

I remember last year around this time you guys had some comment about the outlook for bonus accruals which get paid out in the fourth quarter, and I know there is some specific metrics that are used in the determination for the year-end bonus payments, but is there anything of significance in terms of how favorable or unfavorable things are shaping up as you look at the year-over-year comparisons on bonuses specifically?

No, Ajay, there's nothing meaningful there or we'd be telling you about it. Last year was an unusual situation where the year before we hadn't paid out bonuses, so we're going from zero to a much larger number, so that's not a big issue looking forward.

Okay.

And in relation to Ken's prepared comments earlier on the second RDC coming on line and now that it's partly operational and shipping the five op cos, is it possible to quantify the start-up costs and any additional depreciation expense for that facility? I'm just trying to figure out if the incremental impact on the P&L is going to be significant over the next couple of quarters.

I'll comment on Ken's comments. No, we're not going to be able to quantify for you the impact. What we're trying to tell you there, which I'm sure you already understand, is anytime you start up something of that magnitude there will be some short-term cost pressures and that will have some impact on our earnings but nothing overly significant.

So it's just trying to balance the message here looking forward. So we've got a lot of good things going on. We're excited about what we're doing in Florida.

It is coming on faster than the other one, but just trying to manage expectations here a little bit, and really over time just trying to get folks to understand that we -- the way we manage our business, we don't do weekly reviews of every SBI, we do weekly reviews of how well we're running the business, and that's one of the many things in the engine right now.

We have to ramp the people up before the ramp the cases up and therein lies the cost.

Okay. But relative to our internal budgeting, have there been any cost over runs?

No.

No.

Frankly, Ajay, it's going very well, it's very smooth and we're shipping groceries.

Okay. And just one last question.

What with last week's news on Wendy's, can you confirm whether you've had conversations with the new owners and if you think there are any implications for your Wendy's and Sigma business in general?

The new owners are a customer also, so we do business with Triarc with the Arby's business in several locations so we have a, what we feel like is a pretty good relationship with them, so we don't see any changes coming there.

Okay. Great. Thank you.

We'll take our next question from Bob Cummins at Shields & Company.

Thank you. Good morning, everybody.

Good morning, Bob.

Looking at your numbers, your sales growth was 6.7%, and your food inflation was 6.2, so it's clear that any real volume growth was on the minimal side. But I'm just wondering if you have a sense for how much -- I assume that your industry in general is probably down from last year in real terms, but I wonder if you have a sense for how much the restaurant and foodservice industry in general, how it might be comparing with prior year results?

Bob, depends on what you look at but we're estimating by triangulating some of the data that we get to a little maybe over 2% negative right now.

In real terms?

Yes, that's the number that we're using.

Great. That's very helpful. Thank you.

Thank you.

We'll go next to Wescott Rochette at Bear Stearns.

Thanks, guys.

Just looking at your segment results looking at first Sigma, Sigma seemed to accelerate a little bit which would be, I guess, inconsistent with Wendy's performance which is one of your bigger customers there. Was anything going on in that division in terms of contract wins that would help explain the pickup in that segment?

Oh, yes, I can answer that. We have been working really hard in there. We had a couple of the operating units that were negative and we've turned one of those north, and we're working hard on the other one in a positive way. We are getting a new customer or not ready to announce that will help, but we're bouncing off the bottom there.

Okay.

And then moving down looking at the other line, which has moved relatively flat, would part of that be just due to economic pressures of your customers kind of pulling back on some of the specialty meats and trying to maybe trade down in terms of their product? Maybe your broad line's not buying as much.

Oh, we're having some difficulties in the meat companies that where some of that is market generated meaning the price of beef. We're seeing some improvements in that now, but it's been a very difficult quarter for us in the meat companies.

Has there been any evidence of your restaurants trading down to lower price meats trying to do what they can to bring their menu costs down?

We've seen some of that, but that's not our issue there. It's performance.

All right5. And then lastly, thinking about your cost initiatives with your vendors in terms of your purchase initiatives, with vendors getting kind of squeezed by inflation themselves, have they been more or less receptive to your continued consolidation in terms of better pricing for you on your supply chain initiative, your purchase initiatives?

We'll let Mr. Pulliam answer that. He's here with us

Wescott, I would say we've seen little change there. Our initiatives are actually committing volume to those suppliers and helping them to take costs out of their system which provides us with a lower cost, so generally have a good feel about where we're going with sourcing.

Can you just give broad update of where you're progressing on that or where you are in terms of have you rolled out --

We're on schedule pretty much.

All right. Good quarter. Thanks, guys.

Thank you. (OPERATOR INSTRUCTIONS) We'll go next to Andrew Wolf at BB&T Capital Markets.

Good morning. Congratulations for managing so well in this environment. A few follow-ups, some of the things that were said.

Ken, when you said the Southwest was doing well, it could be anywhere from California to Texas. Is it that broad or is it more traditional Southwest Arizona?

It's more traditional southwest. California is traditionally been like a really powerful for us. It's not bad, but it's not as good as it has been so the strength is really in the traditional Southwest.

And on Florida and the weakness there, I always thought that with Easter came families, vacationing and spring break, and there's obviously a regional issue with housing. But are you saying that what happened really was folks actually went east and cut their winter breaks short? Could you just help me understand that?

Left early, yes. Left early.

The season ended early.

Yes.

And that more than offset any benefit that might have happened from the other way around?

There's just weakness there anyway and that, and then compounded by the fact that they left early created a bad -- a not good situation in Florida for us.

Okay.

On the RDC I understand you don't want to be that specific in the guidance, but I think it's fair to say it's not going to be anything close to what Front Royal was in --

No.

And would you say in terms of how long it, not just in quantity, you know, but also in terms of how long the drag work would occur?

I am sorry, what was that?

Well, not just in dollars, but also in length of time. I would assume that --

Yes, that's going to be a lot faster. Already seeing that.

And you also mentioned that the dollar expense swing from fuel is going to kind of double from $12 million to 20 to 25. Now, is that a gross number before you can recoup some of that or is that just net of --

That's a gross number.

Okay. What's been the experience in terms of how much you can recoup when it goes up that quickly?

Recoup?

It's been relatively modest so far. As was point out earlier, we've got contracts with our larger customers but we'll update you in the Q as that becomes a more meaningful number.

Okay.

And your business in Canada, you said that the business is running down 2%. Is that sort of the U.S. or is that kind of North America including Canada?

And also, the exchange rate in Canada's been very favorable. Could you help us quantify in any way how that might have affected your quarter?

The rate or the business?

Well, that was a two-part question, one business and one financial.

The business is about the same in the U.S. as it is in Canada. The rate, I believe, is neutral, isn't it?

Favorable.

Favorable.

It's not a big number. It's slightly favorable. It's not material, but it is slightly favorable.

Okay, Rick.

I just wanted to be so we're clear, the 2% down is kind of our view of what the overall U.S. market for foodservice for our business is right now.

We're seeing about the same.

Now the difference, I think the only difference we're seeing in Canada is the inflation's not quite as high in Canada as what we're seeing here.

And Canada is doing very well. I mean, they're operating very well.

And lastly, Rick, I'm glad you're still there. On the market share side, it kind of sounds to me as if given what's going on in the market you guys can win through attrition and just letting a lot of the capacity go away either through acquisition or just outright failure more so than having to be proactive by adding, you know, going to price or something. Is that sort of kind of the game plan if you will?

Yes, I think that's right. I think acquisition and attrition in the marketplace is a good strategy for us rather than to sacrifice price in any big way.

I think it'd be fair to say we're a lot more focused on our customers than worrying about what the competitors are doing right now. If we can keep our customers moving forward or at least holding ground in this type of environment then we're going to be in good shape.

Andy, you said you're glad I'm here. I'm not glad I am here. My flight's been delayed.

I guess that's another function of the weather or the airline industry. Anyway, thanks and congrats on the quarter again.

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

Good morning. I may have missed it. Did you guys have any M&A impact in sales?

Nothing significant.

Okay.

And also just the COGS inflation number you guys put out, I forget, is that inclusive or exclusive of the sourcing program, in other words, is that unique to you or kind of an industry trend across your product categories?

It's our best measure of our product costs and would include sourcing which is relatively de minimis right now in the overall mathematical part of it.

Okay. I thought you were running close to about 5% of COGS that was under the program.

I don't think -- Ken.

That's probably --

Again, when I say de minimis that means 95% of it isn't so it's not really driving the number, I guess is what I'm trying to say.

It may be contributing but not driving the number.

Okay. Fair enough.

And then on the shipping and handling trends for the year excluding fuel, I know you've got the mileage programs and other things going. How is that trending maybe as a percent of sales or any sort of indicator that we could get on that?

Alec, you're talking about the kind of XY routing and how we're getting more efficient routing in our trucks?

Yes, in terms of how it boils down to that shipping and handling number excluding the fuel component.

Just broadly, if you took the fuel out, the shipping and handling our warehousing and delivery would be showing slight improvements. We're very pleased with the productivity improvements that we're seeing in the warehouse and delivery.

Miles are down, and to Rick's point, we're doing a nice job in the warehouse right now.

So if your real growth is just a little bit more than flat, then I would assume shipping and handling ex fuel is flat to down?

It's down.

It's down.

Yes.

With a capital D?

D-O-W-N. How does that work?

Okay. Fair enough. Thanks very much.

Thank you, Alec.

Our next question is a follow-up from Meredith Adler at Lehman Brothers.

Thanks.

I think we've asked questions about the ability of your customers to pass along the higher costs, but are you, I mean you kind of answered the question that the industry volume is down about 2%. Is the message coming from customers that there is a fair amount of push back from their consumers in terms of the higher prices or just because of the economy and fuel prices?

I think it's more -- I don't know it's a factor a pricing going up on menus, I think it's more a factor of cost of fuel and disposable income.

Okay.

And then I just want to follow-up on the question about the RDC. I understand you don't want to quantify the costs. I think you said it's not huge.

Will it continue into the fourth quarter and then actually you said you had five op cos up and running. For that region how many op cos will you get to eventually?

No, five is the number for that RDC.

I see. I'm sorry.

We're shipping them all every day right now.

And that's really just different from the way we ramp the other one when we started one op co in one product zone, and then the next zone and then the next op co so we just ramped everybody up at the same time.

Okay. The costs will continue in the fourth quarter?

That's what we were speaking to, Meredith, fourth quarter, probably even a little bit in the first quarter of the new year.

Okay. And then just along with that, you should be working on the next RDC, is that right? Can you give us an update?

Not yet, but we have it designed. It's done.

It's done?

We haven't decided when we're going to start it up yet.

Okay. Do you have a location, though, is that right?

Yes, we do.

Indiana, was that right?

That's correct.

Okay. Great. But you haven't started construction yet?

No.

Okay. Thank you very much.

And we will take our final question as a follow-up from Steve Chick from JPMorgan.

Just on the targeted increase in your sales contact personnel, Ken, sometimes you give us the number on what it was for the quarter, and if you kind of still are on track for a 4% increase or if actually that might be a place where maybe you could save some costs.

We're not looking to save any costs there, that's not the, that's not our program. Again, we've had more, it's flat right now third quarter, typically in the fourth quarter is where we start bringing on the marketing associate training classes, but right now we're behind pace on that 4%, not as a, but way up on our business review folks.

Okay. And I'm sorry, when you said it was flat for the quarter is that kind of, it was up -- flat year-over-year?

Uh-huh.

And it was up if I remember 4.5% in the first half?

Right.

Okay. Thank you.

But we're up on total contact, we're just flat on M&As, just a clarification.

Steve, one of the reasons we've kind of backed off on that level of disclosure is to Ken's point, it'll move around from quarter-to-quarter. It's very much market specific.

What you're going to do in a Carolina type of market and what you might do in the Midwest in terms of rate of growth would be different, so it's just, we understand the importance of growing our customer contact people and we'll continue to do that.

Okay. Thanks.

With no further questions left in the queue, I'd like to turn the conference back over to Mr. Schnieders for any additional or closing remarks.

I'm pleased to still be here and to be able to say thank you to all of our operating company folks out there. We're pleased with our performance and we could not, obviously, have done that without great follow through at the operating companies and all of our 50,000 associates, so thanks to them and thanks to all of you who participated in the call today. Have a good day.

This does conclude today's presentation. We thank everyone for their participation. You may disconnect your lines at any time.