DBRS Confirms SYSCO Corporation at AA (low) and R-1 (middle)

DBRS has today confirmed the ratings of the Senior Unsecured Debt of SYSCO Corporation (SYSCO or the Company) and SYSCO International, Co. (based on the guarantee from SYSCO) at AA (low) and their Commercial Paper at R-1 (middle). SYSCO’s ratings remain on track and are supported by the following:

(1) SYSCO’s position as the largest food-service distributor in North America, giving it advantages of scale and purchasing power, leading to superior margins.
(2) Its long record of sales and earnings growth.
(3) Its very strong financial profile.

SYSCO’s recent financial performance is slightly below historic levels of sales and earnings growth, but the Company has continued to prosper despite two significant industry challenges related to fuel prices. Restaurants, which are SYSCO’s primary customers, have experienced a broad-based sales decline because of increased fuel prices. As a distributor, SYSCO incurs very high fuel expenses directly, while there is a time lag in its ability to raise prices to cover these additional costs. These challenges tend to be worse for smaller competitors, which do not enjoy SYSCO’s market share and route density.

While cash flow from operations was down slightly in F2006, the absolute level is still extremely strong and amply supports SYSCO’s internal requirements. Long-term prospects remain excellent. SYSCO’s dominance of the industry continues to grow as the company makes investments to improve the business. Initiatives include increased spending on systems technology to enhance efficiency and service levels. In addition, SYSCO has increased the number of customer-contact personnel and transformed their sales role from “order taking” to “business reviews” that are conducted with customers in order to increase sales to the existing customer base.

SYSCO has also undertaken a major initiative involving the development of up to nine regional distribution centres, further distancing SYSCO from smaller competitors. The first regional distribution centre opened in F2005, but operations are still being refined and the bulk of the expected savings have not yet being realized. The second centre is under construction, but will not be operational until F2008.