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

DBRS has today confirmed the long- and short-term ratings for SYSCO Corporation (SYSCO or the Company) and SYSCO International, Co. (based on the guarantee from SYSCO) at AA (low) and R-1 (middle), respectively. The ratings are supported by the Company’s position as the largest food service distributor in North America, which gives it advantages of scale and purchasing power and leads to strong margins. The Company continues to achieve consistent sales and earnings growth and has a solid financial profile.

SYSCO has performed well despite challenges related to food and fuel prices. Restaurants, SYSCO’s primary customers, have experienced broad-based sales declines due to increased food and fuel prices. Also, as a distributor, SYSCO incurs high fuel expenses directly and there is a lag in instituting pricing changes to recover these additional costs. SYSCO has overcome these issues through its ability to pass on most costs to its customers; however, the driving factor of sales growth has shifted to inflation from organic growth. SYSCO’s financial profile remains solid due to the strength and stability of its operating cash flow, free cash flow generation ability, and the Company’s disciplined financial management to date.

DBRS expects SYSCO’s earnings may be pressured over the near to medium term based on the difficult economic and food inflationary environment. That said, the earnings profile should remain strong due to the Company’s solid market position and its ability to pass on most cost increases to customers. SYSCO’s financial profile is expected to stay relatively stable, positioned at the lower end of the current rating category. DBRS believes that free cash flow after dividends will be slightly lower than in recent years, mainly due to an increase in working capital. It is expected that SYSCO will require a moderate increase to debt in F2008 to finance share repurchases. DBRS expects SYSCO will continue to make small tuck-in acquisitions; however, any large debt-financed acquisitions or an accelerated share repurchase program could pressure ratings going forward.

Note:
All figures are in U.S. dollars unless otherwise noted.