Sysco Corporation

Rick Schnieders - Chairman, CEO Ken Spitler - President, COO Bill DeLaney - CFO Kirk Drummond – SVP Finance, Treasurer Neil Russell - IR

John Heinbockel - Goldman Sachs Ajay Jain - UBS Meredith Adler - Lehman Brothers Jason Whitmer - Cleveland Research Company Greg Badishkanian - Citigroup Mark Husson - HSBC Steve Chick – JP Morgan Alec Patterson - RCM Andrew Wolf - BB&T Capital Markets Bill Leach - Neuberger Berman, LLC Christopher Routhe - Piper Jaffray & Co.

Thank you, operatorand good morning to everyone. Thank you for joining us to discuss SYSCO's firstquarter fiscal 2008 financial results.

With me in Houstonand speaking on today's call are Ken Spitler, President and Chief OperatingOfficer; and Bill Delaney, Chief Financial Officer. But first, let me turn it over to our newly appointedAssistant Vice President of Investor Relations, Neil Russell.

Thanks Rick, and goodmorning everyone. Before we being, please note that statements made in thecourse of this presentation that state the company's or management'sintentions, hopes, beliefs, expectations or predictions of the future areforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995, and actual results could differ in a materialmanner.

Additional information concerning factors that could causeactual results to differ in a material manner from those in the forward-lookingstatements is contained in the company's SEC filings, including, but notlimited to risk factors contained in the company's annual report on Form 10-Kfor the year ended June 30, 2007 and in the company's press release issuedearlier this morning. I want to point out a couple of changes to our reporting.The income statement and the press release include a couple of additional lineitems.

First, we added a line item to show gross margin dollars. Second, weadded a line item to show operating income.

Although both measure can becalculated from our previous reports, we decided to formally shown the lineitems going forward. Please understand that all comparisons given during thecall refer to changes between the first quarter of fiscal 2008 and the firstquarter of fiscal 2007, unless otherwise noted.

Also, all comments about earningsper share refer to diluted earnings per share unless otherwise noted. With that out of the way, I will turn it back over to ourChairman and Chief Executive Officer, Rick Schnieders.

Thank you, Neil. Letme start by saying we had another solid quarter, delivering sales growth of8.5%, and leveraging that into 16.2% earnings per share growth.

We areencouraged by the fact that this is the fourth consecutive quarter whereearnings per share growth has exceeded 15%. We are pleased with how the new fiscal year has begun.

Wecontinue to take share in a difficult business environment, with high inflationcontinuing throughout the second quarter. We are executing our strategicbusiness initiatives, and we are gaining traction from these initiatives acrossour operations.

As we have communicated in the past, our initiatives are long termin nature, and take time to fully implement. A key component of our strategy is to invest in our future,to find better and more efficient ways to serve our customers and driveprofitable growth.

We are always trying to help our customers grow, whichpositions us to participate in their success. Now I would like to turn the call over to Ken, who will talkabout how our operations performed in the first quarter.

Thanks, Rick. Overall I am pleased with our performance inthe quarter.

Sales growth was in line with our expectations, and operatingincome increased by about 16%. Our operating companies performed well.

Similarto last quarter, our internal measure of product cost inflation remained higherthan normal, averaging just under 6%. Our operating companies continued tomanage their business very well in that challenging environment.

Our ability togrow gross profit dollars faster than operating expenses was key to ourresults. Something I said last quarter still holds true: while ouroperating companies performed well under the current conditions, we believe amodest inflationary environment over time is best for SYSCO and our customers.We experienced low gross margins as a percent of sales this quarter, which isnot unusual during times of high inflation and inversely, inflation favorablyimpacted operating expenses as a percent of sales.

This combined with effectivecost management by our operating companies helped drive our growth in operatingincome. Last quarter I shared a few metrics that helped drive thebusiness.

This quarter, I will expand on one of those topics: miles driven. Weare continually managing the miles driven in order to provide quality serviceto our customers and to minimize fuel expense.

As a result of increasinglyimpactful initiatives such as XY routing and designated delivery days, thenumber of miles driven increased only about 1% in the quarter. In summary, I am pleased with our operating results, and weare committed to continuous improvement going forward.

Now Bill will review thefinancial results.

Thank you, Ken. As Rick and Ken have just discussed, ourfirst quarter financial results were strong.

Earnings per share grewapproximately 16% in the quarter, primarily driven by sales growth of 8.5%, andoperating margin expansion of 31 basis points. Gross margin dollars grew 7.3%,while operating expenses increased only 4.7%.

These results include a $16 million decrease in share-basedcompensation year over year. We moved the grant date for incentive stockoptions from the first quarter to the second quarter of the fiscal year, and weexpect the benefit created by this timing change to be partially reversedduring the second quarter.

The first quarter results however, were negatively impactedby a $9.4 million charge for an anticipated accelerated future contribution toone of the company's multi-employer pension plans. Cash flow from operations increased about $19 million, orapproximately 11% in the first quarter to $192 million, primarily driven by ourgrowth in net earnings.

As we noted in the press release, capital expenditureswere $132 million during the first quarter, which is in line with our businessplan. Such investment even in challenging times is necessary if we are toachieve our long-term goals.

My last point of discussion will be the income tax rate. Theeffective tax rate for the first quarter of fiscal 2008 was 38.1%, a decreaseof about 60 basis points from the same time last year.

The decrease in theeffective tax rate was primarily due to the net tax benefit resulting from thecombination of two items. We recorded a tax benefit for a net operating losscarryforward related to state taxes, which was partially offset by a taxprovision for a foreign tax contingency.

The net impact of these two items wasa net benefit of about $5 million, which reduced the overall effective taxrate. While difficult to predict, we do not foresee this favorable variancecontinuing over the balance of the year.

In summary, we are pleased with our financial results forthe quarter, and encouraged by our overall performance for the past year. Weremain focused both on contributing to the ongoing success for our customers,and achieving SYSCO's long term financial objectives.

With that operator, we will now take questions.

Rick, can you talk about the macro environment a little bit?Are you seeing any real tangible sign of a purchasing slowdown by yourcustomers? Or is that happening and you are simply picking up enough share tooffset that?

Secondly, do you see your customers consolidating vendors orsuppliers at a faster rate here than they were six months ago or a year ago?

Thanks for thequestion, John and in fact, I think it is fair to say while not having terrificindustry numbers, we don't see a lot of growth out there. However to your pointexactly, we are watching the pieces, the new items that we are sellingcustomers out there, and we feel very good about that.

To the second part of your question about consolidation, itis pretty hard for us to determine whether there is any consolidation, otherthan whether they are using fewer distributors; other than the fact that we aregaining share in this challenging marketplace.

How much is drop sizegrowing roughly, this quarter or last quarter? Do you have a sense of that?

Yes, average dropsize, those numbers we have shared before are running about where they havebeen the last three years, which is in the range of 3% to 4% in the averagedrop size.

That has been fairlyconsistent. There hasn't been a pickup or a slowdown really of late, say thelast couple quarters?

No, and as Kenalluded to last quarter and this quarter, we continue to work with ourcustomers to get those additional items, but also to make sure that we arerouting our trucks properly, getting the right number of cases on the truck andwhere we can, to do some consolidation to get our average pieces up. That is franklyworking very well.

Finally, the gross margin impact from inflation looked to bea little lighter this quarter versus last. Is that more a timing of passthroughof your costs?

Is it more that? Or is the centralized procurement benefitpicking up sequentially?

John, we haven't doneany sort of statistical analysis on that difference. I think the difference isnot significant, the difference between the impact of inflation on grossmargins last quarter and this quarter.

We are still, as Ken alluded to in hiscomments, we are still pressure on gross margins related to the inflation. Onthe other hand, we are picking that up at the expense line, but even more thanthat, I think an indication of those operating companies and how hard they areworking to control their costs, we are seeing the real pickup at the expenseline, which is exactly where we expected and where we have to see it.

The procurementbenefits are picking up gradually, correct? There hasn't been any big step-upof late?

That is right.

I think there have been a couple of instances, I think itwas last year and also in fiscal '06 as well where you had some calendar shiftsfor accruals related to pension expense, and I was just wondering if you couldtalk about what the basis is for these timing adjustments on your actuarialassumptions?

The change we aretalking about this morning is on our stock comp expense, not on the pension. Inthe past, I believe the issues on pension have been more or less annually,year-over-year, and a lot of that is driven by the discount rate that we arerequired to use to discount back the projected benefit obligations.

The changewe are talking about today is on stock comp. That was a conscious decision.

We didn't put it all in therelease because it is kind of cumbersome. The long and the short of it is it isprimarily for administrative reasons, it just was becoming increasinglydifficult to process the options, get them in front of our comp committee, andfind a time that we could issue them outside of a black-out period, that wouldwork for everyone.

In the interest of being more accurate and optimizing thetime window, we pushed the grant date back from September to November. In fact, we will be going to the comp committee with ourrecommendations this week, and there will be a final meeting next week, andthose grants will be approved as deemed by the committee next week.

So that isreally all it is. It is more of administrative change.

As I have said here, wewould expect a good portion at least of that benefit to reverse in the secondquarter.

As relates to thestock compensation, you did mention that some of that, based on the change inthe grant date, that benefit will reverse itself this quarter. Can you give anymore specificity and quantify how you see the comparisons in Q2, and also whatyour outlook is on an annualized basis for options expense for the full year?

It is one of thosegreat questions that you would need to be a soothsayer to give you a preciseanswer. We haven't even gotten them approved yet.

It is dependent on how manyare approved and the mix of the people that are involved in that package and alot of other things. So I think as far as I will go with you today is we wouldexpect a portion of it to partially reverse in the second quarter, and I thinkwe'd be in a better position by the end of the second quarter, perhaps when werelease earnings, to give you a little better view going forward.

But I will tell you this, in the Q as we're drafting ittoday, we don't really expect this year-over-year change to be material.

I seem to recall last year that the share repurchaseactivity was a little bit front end loaded. I was just wondering if you couldconfirm what the level of share buybacks were in the latest quarter?

It was back end loaded I believe last year. It is just thereverse this year.

We picked it up quite a bit, and Kirk is sitting right here.Do you have a number, Kirk?

Actually, we evenedit out a little bit for the first quarter. I want to say it is about 187million, I think, in the first quarter.

So we have beenpretty aggressive buying back this quarter.

Can you confirm the number?

It is roughly 190million this quarter, versus about 65 million for the first quarter last year.

I would like to goback a little bit to just Ajay's question about pension, because I didn'treally understand what was in the press release about something about potentialacceleration. What exactly have you done, and what do you anticipate needing todo?

As we have disclosed, I think pretty consistently, weparticipate in several different multi-employer pension plans, which areessentially plans that our union employees are participants in and wecontribute to those plans. We have one such plan that in fact, in the past wedisclosed that there is some underfunding issues in the aggregate; not in eachof those plans but in the aggregate.

One of those plans, we have become more aware of in recenttimes, and in particular in the last month, that their underfunding situationis much more acute. In fact, even though we haven't been directly notified, wehave reason to believe through third parties that we will probably need to makean accelerated contribution here at some point in the relatively near future.So with that information, we went ahead with the best information available tous, and took a charge for about $10 million.

I would like to go back a little bit to the first set ofquestions about the macro environment. If you look at the public restaurantchains, they are clearly suffering tremendously.

It is unclear whether that isall because of food inflation but a lot of that seems to be just about theconsumer economy. I was wondering whether you have any commentary onindependent private restaurants, whether you are seeing similar kinds of issues?You said that growth has not been very strong.

Do you see slowdowns in newunits? Do you see people closing down?

I think some people are very gloomy about the restaurantbusiness, and I was wondering if you could comment. And then also, to whatextent is higher food inflation cause either consumers or restaurants to buyless product?

Meredith, I willstart and say that I think that the consumer confidence is not good at thispoint, causing this lack of real growth in the industry overall. You see it inthe retail sectors in general, I believe.

In terms of specific numbers, new operations opening,restaurants closing, independent restaurants closing, that information would lag us, butanecdotally, we don't see restaurants closing en masse. I would point out to you that over the last few years, asyou know, we have done a better job of stratifying customers and understandingour customer base better and I would also say today that based on that, we havea stronger core group of customers, and those customers tend to be in businessfor very long periods of time; ten years,15 years, 20 years.

That is kind of the heart of our business, and even, theyhave been through tough times before, 1990, 1991, we'll all go through toughtimes together in the future. Fortunately, our base of customers tends to be those thatare going to hang on, they understand the restaurant business well, and we seeless churn in our customers today than we did three, four, five years ago,because we were diligent about identifying that stratified customer group thatwe have out there.

Do you have any perspective on where food inflation will gofor the remainder of this calendar year, and maybe into the first quarter ofnext year?

Well, again, we wouldhave to be calling on the soothsayers. We are beginning to see just recently alittle bit of softening in some categories; dairy, for instance which reallyneeded to soften up.

I am sure you have followed that Argentinahas been out of the wheat market here for the last ten months or so, and onFriday they announced they were coming back into the market. Wheat prices atcommodity level are down just a bit month over month.

So we don't want to gettoo far out in front of ourselves here, but we think there may be a little bitof softening of inflation over the next few months now.

Rick, I know youtalked a lot about anecdotal impact of business reviews. I was curious if youguys have done any quantitative impact on the impact you have had onindependent restaurant profitability, something where you are really helpingthem drive either better top line sales, or more importantly, help theirprofitability with their menu development, or things of that nature, if youhave really been trying to track that as a big success point for your business?

I think at somelevel, a certain number of customers will share their profitability with ouroperating companies and with our marketing associates. Again, very anecdotally,we do get positive feedback from our customers, and I have got some storiesthat I could tell, and I am sure most of the folks in this room have stories,where we have had a particularly strong relationship with a customer, we havehelped them enormously and their business has grown.

So you know, absolutely, I think that is happening outthere. We have operating companies where we have done a number of businessreviews with the same customer and at some point, the only way we are going tocontinue to grow with that customer is to help them grow their business.

I think anecdotally, you know, we don't have any statisticson this, but anecdotally we do have customers where we have providedsignificant assistance to them and their business as a result has grown, andthey would honor that. I think they would say that that is true.

I think when we met a little over a month ago in Boston,there was a sourcing summit that you guys held internally to try to reallyreconfigure or reset the bar on sourcing. What are some of the best wins andchanges coming out of that over the six weeks or so?

Yes. That was just areset meeting to make sure that we were doing the best we could.

Some of thelearnings that we had out of that were how we rolled it out to the operatingcompanies. We were a little slow getting that out to them, so we have refined thatprocess, and we are quicker to market with the rollout.

That was probably themost significant learning that we had out of it. There was a lot of just thatsort of thing that we did.

Last question, Rick, there was a chart a couple years ago, Iremember seeing it very frequently, in terms of the number of operatingcompanies that had an operating margin above 6%, above 7%, something to thateffect. I think if I recall, almost two-thirds of them were above 6%.

Has thatchanged materially over the last couple years, into something like sourcing orRDC, or whatever else you have in your strategic road map does that change theearnings power potential of any of the operating companies?

Well, I think itdoes, Jason, but maybe even more important that that is it is all those thingstogether, but it's also just the ability of that management team or thosemanagement teams that were not at 7%, that were at 2% or 3%, their ability overtime to kind of get their arms around the business, and manage the net marginsof the business upwards. I think it has changed, but as you will also recall, Iam sure, is that those operating companies that were toward the lower end ofthat graph generally tended to be the newer operating companies, because theywere acquisitioned.

Time is really a big factor for all of us. We talk about howit is taking time for us to institute and install these initiatives.

That isabsolutely true. Same thing with an operating company.

It just takes time toget your arms around all the moving parts to drive your earnings higher. Thatchart in terms of the shape of it would not be significantly different.

Thenewer companies we have today are toward the lower end, and those that are moremature generally tend to be better, at the higher end of the chart.

Following up on food inflation, it sounds like it is sort ofa neutral impact to your bottom line, in terms of EBIT dollars, is that right?

I think that isright. I think that is absolutely right.

The bigger concern that we have andBill has said this for a while, is that as high inflation goes on for too long,the real impact is to our customers' business, and consumer confidence level andcausing the consumer rather than eating out three or four times a week, to eatout two or three times a week. That is by far the biggest impact to ourbusiness.

When you look at your independent customers, are they doinga better or worse job relative to the large chains, in terms of passing onthose price increases to their end user?

Well, I think thetruth of the matter is that some are doing better, and some are not doing sowell. We don't have any real statistics on that.

But I will also say that wehave worked hard in business reviews, and more broadly to help our customersunderstand the importance of adjusting their pricing in this market. I think we put out a marketing piece a monthago, Ken, to kind of emphasize that very point.

We do see that ourindependent customers are a little more nimble with the ability to change theirmenu, and change their menu pricing than the chains are.

With that said, it you are a pizzeria and your dairy costsgo up 25% or 50%, it is kind of hard to pass along real quick.

Moving over to acquisitions, are you seeing multiples comingdown and companies looking to sell?

Well, it is abifurcated market out there. I think you have seen the big public deals, andthe extravagant multiples that they have been able to command.

On the otherhand, we today continue to work the largest list of smaller acquisitions thatwe have ever had an opportunity to work. I think as in anything, there areopportunities, there will be opportunities at the larger end, the largeracquisitions.

I think that the multiples will get more realistic over time. Butwe continue to look at every possible new partnership that we possibly can.

Weare still very actively engaged in assessing the acquisition market.

Sometimes it takes time for the sellers to reconcile that, thetake out multiples have come down, and so have you seen that over the past fewmonths, or do you think it will take a little more time for the take outmultiples to come down some?

What we are seeing,there is still a fairly high expectation out there that we think will take alittle while longer to mitigate itself.

I think the otherthing is some of these folks have to decide whether they are really sellers ornot. There's being a seller, at a multiple of 12, 13 and there is being aseller at a lower multiple.

I am sure within their own organizations they'rehaving those discussions.

I want to ask aquestion about gas prices, and about the overall structure of your distribution system. Whenyou think about regional distribution centers, what kind of stress testing didyou do in thinking about $3 a gallon, $4 a gallon, $5 a gallon, and does an RDChave a much better gallon burn profile, if you like, than the previous sort ofstructure in the Northeast?

Well, I think wherewe see it is when you look at sort of the piece number. You want to look at itright down to the case level Mark, and so absolutely, and the RDCs allow us tokeep the trucks fuller.

The inbound trucks fuller into the RDC, the outboundtrucks to the operating companies. So there is a huge benefit there,particularly longer term, as we move more and more inbound freight throughthose RDCs.

It is a big environmental positive environmental impact, and a bigimpact in terms of the cost. The other thing that is happening that we feel very goodabout is that we are shipping more product by rail into the RDCs than weanticipated.

As you might expect, I mean, on a per case basis, the rail isabout one-half what truck is. So there are a number of opportunities, in termsof optimizing the costs, the fuel costs if you will, as well as theenvironmental impact that we have.

So we are going to have a smaller carbon footprintgoing forward.

I am assuming the [inaudible]do the same thing.

Absolutely, becausewe are closer to the customer, no question.

You are closer to thecustomer, but then the inbound freight doesn't look quite as good, presumably.

No actually, the realimportant thing on the inbound freight is making sure that those inboundtrucks, whether they are coming into an RDC or coming into an operatingcompany, making sure that those trucks are full. When you open that back door,it is stacked to the ceiling.

To push it a littlebit further, if you had some catastrophe in Venezuelaor something and you had to deal with $5 a gallon and you are having a meetingright now, what would be top of the agenda to discuss?

I think we would haveto look at expanding fuel surcharges for sure. But the other thing, silverlining in this whole thing, is that we are closer to our customers than ourcompetitors.

We do do a better job of routing those inbound trucks, so we areall going to pay essentially the same price for fuel. We just do a better jobon a per case basis on moving that product.

I can add to that bysaying that on the outbound side, we would be looking at reducing miles, andreducing the number of deliveries that we currently make. If you are getting three,then we would go two, if you are getting two, we would go one, that sort ofthing.

It is all about miles.

And in ourdiscussions so far, because we have been in a fairly high fuel environment herefor a while, our discussions with our customers as we have gone to betterrouting has been quite positive. You know, they understand.

They are just likethe rest of us. They pull up and fill their cars up.

They read the newspapers.So our customers appreciate the spot that we are all in, not just thedistributors.

Switching gears, if I could please, just on U.S. Foodservices,this any sort of update, any announcements coming out of that business, anyreorganization or any change in behavior?

They are closing onefacility in Cincinnati. That is theonly public information we've seen so far.

We have not seen any strategic moveon their part.

There are still a lotof rumors, Mark, but we can't put a finger on anything.

The deferred tax benefit, any update on whether or not youare going to be allowed to keep it?

Well, we certainlythink we are. We are still in the process Mark, and essentially where we are atnow, I don't think it has changed much since we were in Boston,or even since we drafted the K.

We have obviously taken a position, the IRS haspushed back, and we are in the appeals process now. I think the next step isprobably to get an appeals officer and that is moving along at a fairlydeliberate pace.

I don't think we're going to have a whole lot more news, atleast from what I understand, until the spring, and perhaps later than that. We could still be a year away from this thing, running itscourse one way or another.

We certainly continue to believe our facts arestrong. Obviously at the same time we are now in an appeals process.

So we willplay it out.

Are you still on track to increase your sales force by 4% to5% this year? And do you have the, what the increase was for the currentquarter?

I do. It is 5.1% onthe customer contact people.

We are really looking at 4% this year, which isreally would make me happy if we could stay in the 4% range. Right now we areat 5.1%.

So you are at 5.1%, but you think you might come in at thelower end.

I would be happy with4%.

As it relates to that, your sales target of 7% to 9%, I knowit is a long-term target; you didn't have it in the press release today. Giventhe volatility of what's around us and some of the comments on macro, can youconfirm post your quarter end that you are still pretty happy with how salesare trending and that the 7% to 9% figure is a pretty good range to continue tothink about for this year?

Yes, sir.

If you could give us an update on the Floridaredistribution center and when you expect it to be in operation? As it relates to that, I had a tough time estimating yourdepreciation and amortization, which comes in a little below what I wouldestimate, and I don't know when the RDC comes into play if the D&A startsto kick in on that facility, so if you could speak to that a little bit?

I will answer thefirst part of that as we are right on schedule with it. We are to start rampingup in April as planned.

The way I would look at the other, Steve, is just look at inthe context of our overall capital expenditures. We are at the higher end ofour range, if you will, in terms of percent of sales.

One of the reasons isbecause of the ramp-up in the Florida RDC. So I don't know that I want tospecifically comment on depreciation as it relates to that construction, but Ithink you should continue to expect us to be in that 625, give or take, zonefor CapEx for this year.

Well what I am looking at because you're at the high end ofthe CapEx plan but in the last two quarters the depreciation expense has beengrowing. It was year over year I think 0.4% this quarter.

I have a feeling thatsome of that might be, in April, does the depreciation start to kick in on the Floridafacility when it goes into operation in April?

Yes it is capitalizeduntil it goes in, and then it starts to kick in.

Bill, a little bit in the weeds but just on the breakout of your sales, intersegment saleslooked like they were flat year over year. We could talk about it offline ifyou want.

Do you have any sense of why that is, or is that impactful?

Can you defineintersegment for me, just so I am answering the right question?

Intercompany?

Intercompany, yes, Iam sorry. Your intercompany sales were kind of flat year over year and itusually grows a little higher than that.

I don't know if it's the mix of yourcustomer base? We could certainly take it offline.

We might go offlineon that one. I don't have an answer on that one.

The sales growth in the other specialty segment hascontinued to decelerate. I am just wondering how much of a food inflation ordeflation may be appearing in that number, maybe just a general comment aboutit?

We got hurt on theproduce side and the meat side, on both of those.

Hurt means deflation,or hurt means lost sales?

I think we had lost sales on the meat side, some lost salesdue to high prices, so customers somewhat trading down. On the produce side,produce is the most volatile category that we have, so the inflation/deflationswings in produce are so dramatic, that I think what we're seeing in theproduce is some deflation, but not universally in other categories of product.So we are still, going back to we are still seeing overall pretty highinflation generally.

Regarding the inflation number, essentially you could readit as if you had the right base numbers, flat sequentially? Is it fair to saythat the rate of inflation, the second derivative here is decelerating, anddoes that allow you to capture more passthrough?

I think if it is kindof a delta question, yes, I certainly think that we have seen a slowing in therate of inflation. In fact, if you look at the just numbers quarter to quarter,a slight decline in inflation.

So going back to our earlier conversation, wemight see, based on early information about wheat, dairy, cheese particularly,we might see a softening of that inflation number. But I wouldn't think aboutit in terms of going back to our normal 2% to 2.5%, or 2.5% to 3% inflationlevels.

Not to be negativehere. That is a good question and that is a fair answer, obviously, but I thinkyou have got to balance, a very, very slight maybe slowing in deceleration twoquarters in a row for our customers, where their costs are up substantially.

Iwould describe our market environment right now as quite challenging as itrelates to price.

In other words, theremay be a greater capacity for passthrough to be recognized in your gross margintrend, but don't immediately translate lower inflation into acceleratedvolumes?

I wouldn't translateit into either, that is obviously a prerogative. All I am trying to say here isit's still 6% inflation, or 5.9% or whatever.

I don't know that our statisticsare that precise, that I would draw a huge conclusion on deceleration. I thinkit's a very tough environment, we are certainly hopeful that it will start todecelerate.

I wouldn't bank on that one right now as we sit here today.

The debt structure, any further thoughts on how you arelooking at it going forward? I see in this quarter where basically sharerepurchase and debt taken on, kind of one for one almost.

Is there a fresh setof thinking, maybe a rating agency's point of view on debt structureformulating amongst you all?

We are certainly cognizant and staying in close touch withthe rating agencies, and folks that we do our banking with and that type ofthing. We continue to review our capital structure.

Don't take this the wrongway, the way, I don't think that is one of our primary issues right nowinternally in terms of that. We are comfortable with where we are.

We do seeopportunities to take our leverage up but with everything that has been goingon with the financial markets the last few months, we are going to take ourtime here and evaluate what makes sense for us.

I am talking strategically, capital structure-wise, the wayyou look at it. My understanding is that way you look at your debt capacity iskind of an arcane way of looking at it.

I was understanding that maybe it wasevolving. Has there been evolving of it?

I didn't know if itwas arcane. 1980s approach it has been described as.

We continue to look at itstrategically if you will and we do think we could take on more leverage, andrun the company very, very well. All I was trying to address, at this point intime, it is not a number one priority for us.

To try to get to your real sales growth in broad line,should we just use the overall product cost inflation, or do you have a morespecific number you could share with us?

I would do the mathon what we have given you, and you will be in the ballpark.

The other thing onthe broad line is I noticed that the growth there is good, it's outpacing thecorporate growth, but this quarter at least a slight downtick in the MA servedsales as a percent of broad line. In a non-inflationary environment it wouldpretty easy to say, yes the market share is down a little bit internally, orthe chains are up.

But given that it might be easier to passthrough inflationto chains, and so on, on a case basis, or on a volume basis, could we reach thesame conclusion that inside broad line the chain business is doing a littlebetter, growing a little faster than the independent, or is inflation skewingthat?

No. I think whatyou're seeing is we started up a new large customer during the first quarter,and they ramped up pretty rapidly, ramped up very well.

It is not a differencein inflation at the chain rate versus the independent rate. It is just the newcustomer.

As we talked about it so many times, Andy, you know those bigcustomers come on in chunks, and the growth in the independent market comes onjust in very small increments, so that is all that is.

Returning to the fuel side, now that diesel is back up, andsome people are predicting it is going to start heading up a lot, I have justdone some back of the envelope and I want to run this by you. About 2 to 3 bipsof exposure for every $0.10 year-over-year increase in diesel?

That isunhedged, using some numbers you guys have put out in the past. Is that in theballpark?

I don't know if you want to comment on it. Secondly, also, if you have hedged at all when prices werelower, what your hedge ratio might be at this point?

The first part ofthat I think is we would like to maybe take that offline, have you call Neiland we will just verify that. Frankly, I don't think we have that number.

We haven't reallycalculated that way, Andy, so we need to look at that.

Have you hedged outany of your fuel exposure at this point?

Beyond the end of theyear, December, not beyond that.

So we have been hedged through this calendar year but thosecontracts run out at the end of the December, so we have some exposure as we gointo the second half of the year.

At the current inflation, can you say how much you've hedgedout currently that we could sort of subtract out of your exposure?

It is about two-thirds.

Technically, we don't hedge, we just have contracts forwardon things.

For the accountants in the room.

I was a little bit confused about your option guidance. Itwas $0.15 a share last year, should we just plug in $0.15 this year, just topick a number?

The option guidancewas for the second quarter. We would expect the benefit from the first quarterto reverse partially.

Annual forecast,should we just assume it's the same as last year?

Assume it's notmaterial, it might be slightly less. It's not material.

Second quarter lastyear it was $0.04 a share, which was pretty material, about 10% of yourreported earnings.

When I say it's notmaterial, I am talking about the change year over year.

This year should weput $0.05 or $0.06 in? I know it is a just non-cash item, but it does affectyour reported earnings quite a lot.

Whatever expense youused for last year, if you use the same expense for this year, I think you willbe within a penny or two.

For the entire year.

But in the secondquarter --

I think it will be on the favorable side. There is a lot ofvariables we don't have our arms around until these options are granted.

When you say you aregoing to have part of the benefit in the first quarter reversed in the secondquarter. Does that mean we are going to have a $0.06 charge in the secondquarter?

No. It means youmight see half of the benefit, $16 million, I will let you guys do the math, itwas about a $0.015 at $16 million.

I don’t want to use pennies. Let's just usedollars because the taxes get a little interesting here.

Let me take a minute, that is a good question. Let me frameit up a little bit.

The reason you have that kind of volatility or one of thereasons from quarter to quarter, in terms of when the grant date is designatedis because of the makeup of the folks who get the options. The way theaccounting works, I am going to keep this pretty high level, but to the extentthat you've got folks that are toward the end of their tenure, and they arevested in our retirement plans and able to retire, the way the accountingventure works, is you have to expense the full amount of value of those optionsfor those folks who tend to be some of your higher paid people, at the timethat the grant is given.

That is why you see the skewing from one quarter tothe next and again, it is unfortunate in terms of the communication side but wejust thought administratively it was better to put the grant date out toNovember this year.

For the tax rate,should we use 38.3%?

No. I would look atlast year's tax rate.

I wouldn't use any lower than that. We will keep youposted.

This was kind of a one-time benefit here or net benefit as we talkedabout that the accounting requires you to take that benefit in the quarter, andthen it becomes realized. The gross part of this benefit was a state tax lawchange, so we took it all here in the first quarter.

I would look at lastyear's tax rate. It could be a little bit higher, or a little bit lower.

On the inflation issue again, I don't mean to belabor thepoint, I know you guys don't like to focus on it, you have been getting a lotof questions on this issue, but I know that 2% to 2.5% is really your sweetspot, that is an inflation level that is probably actually good for yourcustomers. At 6% today, we are obviously a long ways away from that.

If youcould help frame it for me. If 2% is a positive, 6% is a negative, what is aneutral level?

How do you look at that? Do you see us reaching that at sometime this year?

Thanks.

I think a neutrallevel is in the 3% range, probably not north of 3%. Again, we would have tohave a shaman or soothsayer in here to get us to a good prognostication of whatis going to happen.

We just don't know.

To your point, wedon't like talking a lot about it but we understand these questions are all onpoint. This is not a normal environment.

We understand that we need to speak toit. Frankly, it is something that we try to speak to with as much clarity as wecan in terms of how much it impactssales, gross profit margins and expenses.

It is a hard thing to get your armsaround. It clearly helps you on your expenses, and it clearly hurts you on yourGP percent, and we can debate the sales side of it philosophically.

At the endof the day, we are talking about it because it has had an impact on the lastcouple quarters.

Back to the question about inflation. Obviously, it has theimpact it does, gross profit dollars and expense percent, because you have afee per case and you pass along the cost of the products.

What percentage ofyour revenues are you passing along the cost and just getting a fee?

Meredith, we haven'treally disclosed that in the past. Keep in mind, we have fee per case business,but we also have a large of percentage markup basis.

We have both types ofpricing. That is our challenge even internally, it is not obvious how itimpacts you in terms of the percentages.

We have both types of business outthere. That is a number we haven't shared in the past.

Another question Ihave for you. I know that the procurement opportunity is still just getting offthe ground.

But what are your plans in terms of sharing that benefit and wouldit be your anticipation that we would actually be able to see the benefitourselves in looking at the gross margin, or would the majority of it be passedalong?

Well we are still working through to understand how this isall going to shake out, frankly, Meredith. So the answer is we don't know andthe other complication is that sourcing is now integrated with everything elsethat we do.

So just identifying a benefit, specifically from sourcing, is very,very difficult to do. We're wrapping all this together, RDC, supply chain workthat we are doing, sourcing and other work that we are doing in terms of ourstrategic initiatives, and to pinpoint where the benefit might show up is very,very difficult at this point in time.

I think to bestraight with you, Meredith, I don't think you will be able to see the benefitin terms of our public financial statements, we will continue to account theway we account. As we get deeper into this, through the use of our metrics,also just by having more products, items in the game, if you will, we should beable to better speak and even before we start speaking, to better evaluateinternally the progress that we are making on these initiatives.

The summit meeting that Ken was asking about, a lot of thatdiscussion in those meetings was just to make sure internally we're doing asgood as we can in terms of execution. We are still very early on.

I know we got into this in theconference up in Boston and there was some confusion or maybe disappointment inour lack of direction, but it is real difficult to sit here today and talkabout gross profit expansion when you have got the kind of markets that we'reworking in right now. We will continue to look at it internally with some of ourmetrics, and as we see things and if we think they are appropriate and materialand relevant, we will share them with you.

Just a couple ofclarifications. You mentioned about U.S.

Foodservice, that they were closing afacility in Cincinnati. Is that ayour market where they have been competing with themselves, so that will sortof open the market up, or is that just something else they are doing?

I think it'ssomething else. I don't think that's a market that they have two units in.

You talked about you had a very long acquisitions list. AndI wasn't sure whether that meant just your own list of opportunities that youare focused on, or is that where you have some reason to believe that the owneris interested in selling, or might be interested in selling?

That is where we havefairly solid information that the owner at least at some level is interested intalking about selling the business. However to Bill's point, sometimes thereare those psychological hurdles.

Initially they say they want to sell, and thenlater on they think twice about it and change their mind. Right now we have got a very active list.

Honestly most ofthose are relatively small. But it is good consolidation, a lot of them will befold-ins, those are particularly profitable to us.

We fold them into anexisting facility. So it is a good pipeline out there right now.

But they tendto be the smaller opportunities.

The only thing Iwould add to that is just that what has been going on in these financialmarkets, I think we are getting more calls from the smaller businesses thatmight be looking to sell. I think that is somewhat predictable with theuncertainty in the markets.

That tends to be somewhat of a reality check forfolks. The larger people, I think they have to go back to thedrawing board and strategically look at their businesses, and what they want todo.

We wouldn't expect to be seeing a whole lot right there now, and we arenot.

As we suggestedearlier, two things like government regulation and high fuel prices can be particularlychallenging for somebody that is in a small segment of the business. They run alot of miles.

They don't have a broad base of product to put on those trucks.So this is a challenging environment, as you know, and I think that causes someof these folks to think about monetizing what they have built over the years.

I have one morequestion. Have you noticed any marked difference in the business by geography?

The Midwestis a little bit softer right now.

You mentioned a large customer win, I think, within thequarter. Did that start off at the beginning of the quarter, and is that acustomer that you won from U.S.

Foodservice?

It started actuallyin the fourth quarter, Steve. It has ramped up all the way in the first quarterhere.

It came from a variety of sources. The business was spread out.

Obviously when your Q gets filed, we end up seeing a littlemore of the profits by segment. I don't know if we have to wait until then orBill, can you speak to maybe where the profits were?

You had a pretty goodlevel of margin expansion this quarter, in operating margin. Once we get the Q,do you have what the corporate overhead pieces might be, just broadly?

Wherethe margin expansion came from by segment, or do we have to wait until thefiling?

We are going to fileon Thursday. We have spoken to a lot the corporate benefit in terms of thestock comp, and you'll see there is a modest benefit from COLI and pension, andthat type of thing.

There is some good benefit there and then there is modestleverage at the operating line.

I want to thankeverybody for participating in the call today, and I also want to thank you foryour continuing interest in SYSCO. As you can probably hear from our calltoday, we are pleased with our current performance and we are also pleased withour direction for the future.

Have a good day, and remember, eat out often at one of yourfavorite restaurants. Thanks.

Bye.