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Sysco's Q2 Earnings Rose 21.4%; Net Earnings Up 20.3%

HOUSTON - Sysco Corp. (NYSE:SYY), North America's largest foodservice distributor, reported today that earnings per share rose 21.4% while net earnings increased 20.3%.

Diluted earnings per share increased to $0.34 compared with $0.28 in the same period last year. Net earnings climbed to $222 million compared with $184.6 million in last year's second quarter. Sales increased 10.8% to $7.0 billion versus. $6.3 billion in last year's second quarter and operating expenses as a percent to sales improved to 14.17% compared to last year's 14.76%

Richard J. Schnieders, chairman and chief executive officer, said, "The solid sales and strong net earnings performance during the quarter was a direct result of our 47,400 associates and their daily commitment to helping our customers succeed. Our strategies, skills and products allowed us to increase market share and record a sales growth rate of 10.8%."

Sales from acquisitions contributed 0.8% percentage points to the second quarter sales increase compared to 6.8 percentage points in last year's second fiscal quarter.

Schnieders noted that Sysco's internally measured food cost inflation for the quarter was 7.3% primarily due to price increases in the meat, dairy and poultry categories. This compares to 0.9% food cost deflation during the prior year's second fiscal quarter.

"This marked our third consecutive quarter of increasing food costs," Schnieders noted, "and we experienced food cost deflation for three consecutive quarters prior to that. I am optimistic that the inflationary spike will be tempered somewhat as we go forward, and that food cost trends will return to more stable levels.

"For the fifth consecutive quarter we leveraged operating expenses as a percent to sales to generate increased operating income," Schnieders continued. "Our operating expenses as a percent to sales declined 59 basis points in the second quarter primarily as a result of the knowledge and other benefits that our technology systems continue to provide and our efforts to share best business practices at all 145 Sysco distribution facilities. In addition, our fixed costs during the quarter were not impacted by inflation, which also contributed to our reduced operating expenses as a percent to sales.

"That excellent expense control more than offset a 28 basis point decline in our gross margins during the quarter, which was expected and can be principally attributed to two factors. The first was a change in our customer mix - specifically the growth of multi-unit business during the second quarter. In addition, gross margins were impacted by the inflation effects of the increased sales of our meat products during the quarter."

Schnieders added that sales at The Sygma Network, Inc., the company's chain restaurant distribution specialist, increased 21.6% in the second quarter to $863.5 million. Sysco's other specialty operations, including custom-cut meat, produce, hotel supply and Asian foodservice, combined for sales of $571.9 million, a 20.2% gain over the prior year's second fiscal quarter.

Thomas E. Lankford, president and chief operating officer, added, "Our operating companies continued to record significant gains in key productivity performance metrics during the second quarter. These results, in areas including pieces per stop, lines per stop, pieces per error and overtime costs, contributed to our strong earnings gains in the quarter and also were beneficial in the expense control efforts. We firmly believe that our people and our systems are the best in the industry and together they continue to enhance shareholder value.

"With the recent implementation of the new business development manager position, our operating companies have done a great job of cultivating new customer relationships with foodservice operators that have good potential for future profitability," Lankford continued. He also noted that sales, profitability and expense reduction efforts all were positively impacted as operating companies continued to work with unprofitable customers to develop strategies to bring them to profitability, adding that in certain cases, this effort resulted in Sysco exiting some accounts.

Lankford also commented on the company's internal growth efforts, including an announcement that a foldout distribution facility would be constructed in Post Falls, Idaho, that is expected to be operational in 2005 and previously announced foldout companies in Fargo, ND, and Oxnard, CA, are progressing according to plan.

"Strategic investment in our business remains a fundamental component to our internal and external growth initiatives," continued Lankford. "Accordingly, capital expenditures for the second quarter totaled $145.6 million, or a six month total of $248.7 million, and we continue to project capital expenditures of approximately $490 million for the fiscal year. Sysco's National Supply Chain project progressed according to plan during the quarter and to date $154.3 million has been expended on the project since it began in fiscal 2002." Lankford also added that second quarter expenditures for the Northeast Redistribution Center, which is expected to begin operations in the fall of 2004, were $41.7 million, $33.3 million of which was capitalized.

"Our performance in the second quarter provided further proof that our growth strategies are fundamentally sound and successful," concluded Lankford. "We believe that Sysco continues to grow sales and earnings at a rate above the industry average and we remain confident that we will continue to increase our market share from its current 13% level."

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