SYSCO Corporation F3Q08 (Qtr End 03/29/08) Earnings Call Transcript

Apr.28.08 | About: SYSCO Corporation (SYY)

SYSCO Corporation (NYSE:SYY)

F3Q08 Earnings Call

April 28, 2008 10:00 am ET

Executives

Neal Russell – Assistant Vice President Investor Relations

Rick Schnieders – Chairman, Chief Executive Officer

Ken Spitler – President, Chief Operating Officer

Bill DeLaney – Executive Vice President, Chief Financial Officer

Larry Pulliam – Executive Vice President Global Sourcing and Supply Chain

Analysts

John Heinbockel – Goldman Sachs

Meredith Adler – Lehman Brothers

Greg Badishkanian – Citigroup

Steve Chick – J.P. Morgan

Jason Whitmer – Cleveland Research

Ajay Jain – UBS

Bob Cummins – Shields & Co.

Westcott Rochette – Bear Stearns

Andrew Wolf – BB&T Capital Markets

Alec Patterson – RCM

Operator

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. Neal Russell, Assistance Vice President Investor Relations, please go ahead sir.

Neal Russell

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.

Rick Schnieders

Thanks Neal. Earlier 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 and to improve earnings per share. The financial results this quarter reflect the ability of our Broadline companies to leverage effectively in a difficult sales and operating environment.

Our continued success is the 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’ve 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 food service facilities, from independent white table cloth 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 success which we are confident will contribute to our long term success. Looking forward, our key long term goals continue to be: first, 7-9% 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.

Ken Spitler

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 Broadline companies, resulting in our earnings per share growth of 14.3%. The ability of our Broadline 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 as 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 evidenced in our financial results, we are doing a good job of managing these product cost increases. Our operating companies manage their business well, with gross profit dollars growing 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 a more concentrated housing crisis in that region. Business reviews and hiring additional customer contact personnel continued 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 imbedded in how we go to market. Regarding our cost management, we made additional progress during the quarter in ruling 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 improved productivity and helped offset a general 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 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-$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 startup cost pressures in the short term. In summary, we had another solid quarter from our 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.

Bill DeLaney

Thank you Ken. As Rick and Ken just said, we had a good third quarter and I’m pleased with our year to date results as well. In 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 have 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 35-40% 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 12 months ended March 31, our return was approximately 20%. We believe that this was an important financial measure 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 are committed to achieving our long term business objectives. Now I’ll turn it back over to Rick.

Rick Schnieders

Thanks Bill. As you’ve heard form 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.

Question-and-Answer Session

Operator

(Operator instructions) And we will take our first question from John Heinbockel at Goldman Sachs.

John Heinbockel – 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?

Rick Schnieders

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. You know I’m just going to kind of reiterate it, we’re comfortable with our long term financial objectives. In regard to the tax checks, I mean it’s sort of absolute speculation, anybody’s guess at that point. We would be happy to see a bump in the marketplace. But probably difficult to determine what $500-$600 will mean to the average.

John Heinbockel – Goldman Sachs

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 and I know there’s a lot of things in there. But have we seen any clear signs there, any stabilization, things getting better or it’s still too tough to tell?

Rick Schnieders

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 you know 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.

John Heinbockel – Goldman Sachs

Secondly, you know 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.

Rick Schnieders

I’ll start and then I’ll ask Ken to jump in, or Bill or anyone else to jump in. But you know 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, paperclips to trucks at this point, so I think that message has gone through the entire organization, I think if you’ve gone to the operating companies and we have one of the proper 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.

Ken Spitler

John, this is Ken, our process kind of remains the same. We go through, and our first level of management of expenses are 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 headcount.

John Heinbockel – Goldman Sachs

Alright 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 increases going forward?

Bill DeLaney

I’ll take that one John, its Bill, inventories were up 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 overplay any forward buy side of it.

I think the 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 is at the top of that list. Actually, receivables came down a couple tenths of a day I think, year over year, so we made some decent strides there in what’s a fairly tough market.

John Heinbockel – Goldman Sachs

Okay, thanks.

Operator

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

Meredith Adler – 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.

Rick Schnieders

Yeah, 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.

Meredith Adler – Lehman Brothers

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?

Rick Schnieders

Sure, absolutely. We do know that many of our competitors, if not most of our competitors have fuel surcharges across the board. So you know 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 chase related to that fuel surcharge.

Meredith Adler – Lehman Brothers

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 sellout, more actively than they were a couple years ago?

Rick Schnieders

Well it depends on how you would define the regionals. There are 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 costs the way we do across the system, it’s just very difficult and I think that there’s a willingness now on the part of some of owners to monetize their business.

Meredith Adler – Lehman Brothers

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?

Rick Schnieders

Meredith, no, 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 of sales, but we’ll look at that a little bit closer. Where I would characterize where 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 know you always have situations that you have to deal with. But just form a cultural standpoint, we manage credit locally at our op co’s as well as here at corporate on the large 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 have some parameters around whatever might be the work out 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.

Meredith Adler – Lehman Brothers

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

Rick Schnieders

Okay, alright, because actually I think our days are down a couple tenths of a day and so we’re actually pleased with that.

Meredith Adler – Lehman Brothers

Great, thank you very much.

Operator

And we’ll take our next question from Greg Badishkanian at Citigroup.

Greg Badishkanian – Citigroup

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

Rick Schnieders

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?

Greg Badishkanian – Citigroup

Yeah, 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?

Rick Schnieders

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.

Ken Spitler

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

Bill DeLaney

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 it 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.

Greg Badishkanian – Citigroup

You did a nice job on that this quarter. And looking at the pricing environment, you know you’ve got US food service, you’ve got performance food group, have you noticed any changes coming out in terms of some of the bigger players?

Ken Spitler

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

Greg Badishkanian – Citigroup

Good, thank you, very helpful.

Operator

And we’ll take our next question from Steve Chick at J.P. Morgan.

Steve Chick – J.P. Morgan

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

And then related to that, your 7-9% organic sales growth guidance, you know 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 below that in the short term and maybe gaining back into that range as we head into next year?

Rick Schnieders

Well 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, you know, I would say we feel comfortable about our ability to operate in this environment as well as more positive environments. And you know, 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.

Steve Chick – J.P. Morgan

Okay, alright well that’s helpful. And then maybe for Bill, I know we’ll get the segment profit data 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 coaly and your fuel hit, once we get the Q, I mean did you see segment margins that were up, for instance within the Broadline segment? Can you speak to that a little bit?

Bill DeLaney

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

Steve Chick – J.P. Morgan

Okay and so these costs, the cost control initiatives, it sounds like you’re pretty comfortable if things remain tough. I mean growing SG&A well south of sales and even maybe lower than gross is sustainable at this point?

Ken Spitler

Yes we can Steve.

Rick Schnieders

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.

Steve Chick – J.P. Morgan

Okay, alright, thanks. Two last ones if I could, one I wanted to confirm, Bill is FY09, is that a 53 week year?

Bill DeLaney

I hope so.

Ken Spitler

Or it’s a 54.

Steve Chick – J.P. Morgan

Okay.

Bill DeLaney

Steve, it’s 52.

Steve Chick – J.P. Morgan

And then second related to your buyback, if I look at your share count and 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.

Bill DeLaney

Yeah we’ve got about 7 million [overlay] 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.

Steve Chick – J.P. Morgan

Okay, good quarter guys, thanks.

Operator

And we’ll take our next question from Jason Whitmer at Cleveland Research.

Jason Whitmer – 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 is slowing down in unit growth or just overall performance within those existing four walls.

It does seem like the MA base 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. You know some of the recent thoughts in terms of the health of the independent would be helpful.

Rick Schnieders

Yeah I mean some of what you see right 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 12 months. On the other hand, I really feel, although as we’ve 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 you know, again, 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.

Jason Whitmer – Cleveland Research

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 over the next five year’s 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 in a little stronger fashion and take share at a better clip?

Rick Schnieders

Well I mean it’s a delicate balance. We are going to protect our earnings but you know we’re looking at more granularly at every marketplace, every customer to see where we can gain share, whether that’s share of wallet in an individual customer, 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 you know, we’re confident we will continue to take share at increasing rates.

Jason Whitmer – Cleveland Research

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

Ken Spitler

I don’t know what our peers are doing, but we actually have a concentrated effort on increasing our business review at this point going into next year as we see it is again integral in the way that we go to market. And you know we’re actually increasing those folks faster than we increase our marketing associates 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.

Jason Whitmer – Cleveland Research

Great, that’s helpful, thank you.

Operator

We’ll take our next question from Ajay Jain with UBS.

Ajay Jain – UBS

Hi, thanks, most of my questions have been asked already. You know 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 was some specific metrics that were used in determination for the yearend 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.

Rick Schnieders

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.

Ajay Jain – UBS

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 to five op co’s, is it possible to quantify the startup costs? And maybe 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.

Bill DeLaney

I’ll comment on Ken’s comments. No, we’re not going to be able to quantify for you the impact, but what we were trying to tell you there, which I’m sure you already understand is anytime you startup 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 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’s 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 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 that we’re managing right now.

Ken Spitler

Of course we have to ramp the people up before we ramp the cases up and therein lies the cost.

Ajay Jain – UBS

Okay but relative to your internal budgeting, have there been any cost overruns?

Ken Spitler

No.

Ajay Jain – UBS

Okay.

Rick Schnieders

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

Ajay Jain – UBS

Okay and just one last question, with last week’s news on Wendy’s, can you confirm whether you’ve had any kind of conversations with the new owners and if you think there are any implications for your Wendy’s and SYGMA business in general?

Ken Spitler

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

Ajay Jain – UBS

Okay, great, thank you.

Operator

And we’ll take our next question from Bob Cummins at Shields & Co.

Bob Cummins – Shields & Co.

Great, thank you, good morning everybody. Looking at your numbers, your sales growth was 6.7% and your food inflation was 6.2%, so it’s clear that 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 wondered if you have a sense for how much the restaurant and food service industry in general, how it might be comparing with prior year results?

Rick Schnieders

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

Bob Cummins – Shields & Co.

In real terms?

Ken Spitler

Yeah, that’s the number that we’re using.

Bob Cummins – Shields & Co.

Okay, great, that’s very helpful, thank you.

Operator

And we’ll go next to Westcott Rochette at Bear Stearns.

Westcott Rochette – Bear Stearns

Thanks guys. Just looking at your segment results, looking at first SYGMA. SYGMA seemed to accelerate a little bit which would be 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?

Ken Spitler

Yeah I can answer that. We have been working really hard in there, we had a couple of operating units that were negative. 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, we’re not ready to announce, that will help. But you know we’re bouncing off the bottom there.

Westcott Rochette – Bear Stearns

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. I know your Broadline is not buying as much.

Ken Spitler

We’re having some difficulties in the meat companies. 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.

Westcott Rochette – Bear Stearns

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

Ken Spitler

Yeah, we’re seeing some of that, but that’s not our issue there.

Westcott Rochette – Bear Stearns

Okay.

Ken Spitler

Performance.

Westcott Rochette – Bear Stearns

Alright 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 and your supply chain initiative and your purchase initiatives?

Ken Spitler

I’ll let Mr. Pulliam answer that, he’s here with us.

Larry Pulliam

I would say we’ve seen a little change there. You know our initiatives are actually committing volume to those suppliers and helping them to take costs out of their system which you know provides us with a lower cost. So generally have a good feel about where we’re going with sourcing.

Westcott Rochette – Bear Stearns

Can you just give broad up data of where you’re progressing on that or where you are? In terms of, have you rolled out [overlay].

Larry Pulliam

We’re [overlay].

Westcott Rochette – Bear Stearns

Okay. Well good quarter, thanks guys.

Operator

(Operator instructions) We’ll go next to Andrew Wolf at BB&T Capital Markets.

Andrew Wolf – BB&T Capital Markets

Hi, 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.

Ken Spitler

It’s more traditional Southwest. You know California has traditionally been like, really powerful for us but it’s not as good as it has been. So the strength is really in the traditional Southwest.

Andrew Wolf – BB&T Capital Markets

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? Can you just sort of help me understand that?

Ken Spitler

Yup, left early.

Bill DeLaney

The season ended early.

Andrew Wolf – BB&T Capital Markets

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

Ken Spitler

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

Andrew Wolf – BB&T Capital Markets

Okay on the RDC, I understand you don’t want to be that specific in the guidance but I mean I think it’s fair to say it’s not going to be anything close to what Front Royal was.

Ken Spitler

No. Not at all.

Andrew Wolf – BB&T Capital Markets

And would you say in terms of how long it, not just in quantity, dollars, but also in terms of how long, length of time, the drag work would occur.

Ken Spitler

That’s going to be a lot faster. We’re already seeing that.

Andrew Wolf – BB&T Capital Markets

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

Ken Spitler

It is a gross number.

Andrew Wolf – BB&T Capital Markets

Okay and what’s been the experience in terms of how much you can recoup when it goes up that quickly?

Bill DeLaney

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

Andrew Wolf – BB&T Capital Markets

Okay. And your business in Canada, you said the business is running down 2%, is that sort of the US or is that kind of North America, including Canada? And also the exchange rate in Canada has been very favorable, could you help us quantify in any way how that might have affected your quarter.

Ken Spitler

The rate or the business?

Andrew Wolf – BB&T Capital Markets

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

Ken Spitler

The business is about the same in the US as it is in Canada. The rate I believe is neutral, isn’t it? Favorable?

Bill DeLaney

It’s not a big number, it’s slightly favorable.

Rick Schnieders

It’s not material but it is slightly favorable. I just want to be clear, just so we’re clear, the 2% down is kind of our view of what the overall US market for food service, for our business is right now.

Ken Spitler

We’re seeing about the same in Canada.

Rick Schnieders

I think the only difference we’re seeing in Canada is the inflation is not quite as high in Canada as what we’re seeing here.

Bill DeLaney

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

Andrew Wolf – BB&T Capital Markets

And lastly, Rick, I’m glad you’re still there, on the market share side, 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, going to price or something, is that sort of the game plan if you will?

Rick Schnieders

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

Bill DeLaney

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.

Andrew Wolf – BB&T Capital Markets

Thank you.

Rick Schnieders

Andy you said you’re glad I’m here, I’m not glad I’m here, my flights been delayed.

Andrew Wolf – BB&T Capital Markets

I guess that’s another function of the weather or the airline industry, anyway, thanks and congrats on the quarter.

Operator

And we’ll take our next question from Alec Patterson at RCM.

Alec Patterson – RCM

Good morning. I may have missed it, did you guys have any M&A impact on sales?

Bill DeLaney

Nothing significant.

Alec Patterson – RCM

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 is that kind of an industry trend across your product categories?

Bill DeLaney

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

Alec Patterson – RCM

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

Bill DeLaney

I say de minimus, that means 95% of it isn’t. So it’s not really driving the number I guess what I’m trying to say.

Rick Schnieders

It may be contributing but not driving the number.

Alec Patterson – RCM

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.

Rick Schnieders

Alec are you talking about the kind of XY routing and how we’re getting efficient routing of trucks?

Alec Patterson – RCM

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

Rick Schnieders

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

Bill DeLaney

Miles are down. And to Rick’s point, we’re doing a nice job in warehouse right now.

Alec Patterson – RCM

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?

Ken Spitler

It’s down.

Alec Patterson – RCM

It’s down. With a capital D?

Rick Schnieders

D-O-W-N, how’s that work?

Alec Patterson – RCM

Okay, fair enough, thanks very much.

Operator

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

Meredith Adler – 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 pushback from their consumers in terms of the higher prices or just because of the economy and fuel prices?

Rick Schnieders

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

Meredith Adler – Lehman Brothers

Okay and then I just want to follow up on the question about the RDC, I understand you don’t want to quantify the cost, I think you said it’s not huge, will it continue into the fourth quarter and then actually you said you had five op co’s up and running, what is the, for that region, how many op co’s will you get to eventually?

Rick Schnieders

Five is the number for that RDC. We’re shipping them all, we’re shipping them all everyday right now.

Ken Spitler

And that’s really just different from the way we ramped the other one where we started with one op co and one product zone and then the next zone and the next op co. So we just ramped everybody up at the same time.

Meredith Adler – Lehman Brothers

Okay and the costs will continue in the fourth quarter?

Rick Schnieders

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

Meredith Adler – Lehman Brothers

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

Ken Spitler

Yeah but we have it designed, it’s done. We haven’t decided when we’re going to start it up yet.

Meredith Adler – Lehman Brothers

Okay and do you have a location though, is that right?

Ken Spitler

Yes we do in Indiana.

Meredith Adler – Lehman Brothers

Okay, great, but you haven’t started construction yet?

Ken Spitler

No.

Meredith Adler – Lehman Brothers

Okay, thank you very much.

Operator

And we will take our final question as a follow up from Steve Chick from J.P. Morgan.

Steve Chick – J.P. Morgan

Thanks. 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?

Ken Spitler

Well we’re not looking to save any costs there, 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 brining on the marketing associate training classes. But right now we’re behind pace on that 4%, not as a, lay up on our business review folks.

Steve Chick – J.P. Morgan

Okay and I’m sorry when you said it was flat for the quarter, is that kind of, flat year over year?

Ken Spitler

Uh huh.

Steve Chick – J.P. Morgan

Okay and it was up if I remember 4.5% in the first half [overlay]?

Ken Spitler

[Unintelligible].

Steve Chick – J.P. Morgan

Okay, thank you.

Operator

And with no further [overlay].

Ken Spitler

But we’re up on total contact, we’re just flat on MAs, just a clarification.

Rick Schnieders

Steve one of the reasons we kind of backed off on that level of disclosures, you know to Ken’s point, it’ll move around from quarter to quarter, it’s very much market specific. I mean what you’re going to do in a Carolina type of market and what you might do in the Midwest in terms of the rate of growth would be different. So we understand the importance of growing our customer contact people and we’ll continue to do that.

Steve Chick – J.P. Morgan

Okay, thanks.

Operator

And 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.

Rick Schnieders

Yeah 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 have participated in the call today. Have a good day.

Operator

This does conclude today’s presentation, we thank everyone for their participation, you may disconnect your lines at any time.

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