西斯柯 (SYY) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to today's SYSCO Corporation's fiscal 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 call over to Mr. Neil Russell, Assistant Vice President of Investor Relations. Please go ahead, sir.

Thank you, Tony, and good morning, everyone. Thank you for joining us for SYSCO's second quarter fiscal 2008 conference call. On today's call you will hear from: Rich 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 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, and actual results could differ in a material matter.

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 companies' SEC filings, including, but not limited to, risk factors contained in the Company's annual report on Form 10K for the year ended June 30th, 2007 and the company's press release issued this morning. Please understand that all comparisons given during the call refer to changes between the second quarter of fiscal 2008 and the second 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 of the way, I will turn it over to our Chairman and Chief Executive Officer, Rick Schnieders.

Thank you, Neil. Overall I'm once again pleased with our results growing sales by nearly 8% and earnings per by approximately 10% in the second quarter. Notwithstanding the challenging economic conditions, we continue to gain market share by helping our customers achieve their business objectives and improve our profitability by leveraging our sales growth. We are executing well and reinvesting in our business. Challenging 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 an unsurpassed ability to leverage our size and scale to benefit our customers. Over the past few years we've continued to stratify our customer base resulting in quality relationships with superior customers. The diversification and quality of our customers allows SYSCO to participate in a full range of business by limiting exposure to any given segment. Specifically one-third of our business comes from outside the restaurant industry such as hospitals, nursing homes and schools that are not directly correlated to discretionary consumer spending. For the past several months our industry has experienced various macro-economic pressure such as high inflation and fuel costs that restrict growth. However, we have dedicated associates focused on helping our customers succeed which we expect will continue to benefit us over the long term. SYSCO continues to grow faster than the industry and our pursuit of productivity gains should allow us to mitigate the impact of some of these pressures over time. Now I will turn things over to Ken, so he can explain how we execute this plan and how we performed in the second quarter.

Thanks, Rick. Our performance in the second quarter met our expectations as sales grew nearly 8%, and as Rick stated continued to outpace industry growth, demonstrating our ability to gain market share. In addition, we were able to grow earnings per share about 10% in the quarter. Inflation as measured by our internal measure of product cost inflation remained high, averaging about 5.9% for the quarter. Inflation from dairy products had the largest impact, but the balance spread across several categories. Although we don't forecast inflation, we anticipate product costs to remain high over the balance of the fiscal year.

Our operating companies managed their business well, with gross profit dollars growing faster than expenses, excluding the impact of two items that Bill will discuss later. Business reviews and hiring additional customer contact personnel continue to be very effective in allowing us to help our customers manage their business. Business reviews for example can help our customers succeed in a market that isn't growing by, among other things, exposing them to SYSCO's broad range of product and service offerings. As part of the review, we typically identify opportunities for the customer to improve their profitability which strengthens our relationship further. Business reviews also allow us to attract new business and importantly avoid lost sales. As we said before, conducting quality business reviews is embedded in how we go to market. Regarding cost management, we made additional progress during the quarter and in rolling out productivity enhancing initiatives that contribute to increased profitability as they become fully implemented. And certain instances such as designated delivery days and XY routing initiatives which are designed to reduce miles driven, improved productivity helps offset external cost pressures that we cannot control such as higher fuel prices.

While we are making good progress on managing miles driven, fuel expenses will unfavorably impact our financial results over the balance of the year. We estimate fuel cost will negatively impact year-over-year earnings by approximately $0.03 to $0.04 in the final two quarters of [fiscal] 2008. Our estimate is based upon both current spot prices for diesel in the cost of a forward contract we recently entered into for about 35% to 40% of our total fuel needs through June. Fuel expenses -- fuel expense was about $0.01 higher in the first half of the physical year compared to the prior year, as we benefited from a forward purchase contract that expired in December. In summary, we had another solid quarter from an operational and financial standpoint. I would like to thank the entire SYSCO team for their leadership and hard work. Now, Bill will review the financial results.

Thanks, Ken. As Rick and Ken just said, we had a solid second quarter. There are a few items regarding our second quarter financial results, however, that merit further clarification and which I would like to discuss. First, for improved governance and as we communicated last quarter we moved to grant date from [sent] of stock option to the second quarter this year, resulting in approximately $5.6 million of incremental expense in the second quarter. Second, operating expenses for the quarter include an unfavorable year-over-year comparison of $11.9 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 our financial markets. For the first half of fiscal 2008, sales grew 8%, operating income leveraged three points to 11%, and earnings per share grew 13%. These results reflect our ability to grow gross profit dollars faster than operating expenses.

Our financial results do include some significant fluctuations in both the first and second quarter on certain expense items including share-based compensation, company-owned life insurance and multiemployer pension plans. However, these fluctuations in the aggregate offset on a year-to-date basis. The key point that I would like to make here is that our solid growth and profitability is primarily a result of discipline execution at our operating companies. As we begin the second half of fiscal 2008, we are focused on continuing to increase our market share and improving productivity throughout the company by executing best business practices and carrying out our strategic business initiatives. Prevailing economic and market condition require such focus if we are to achieve our business objectives.

In summary we were pleased with our overall performance for the first half of fiscal 2008. Looking forward, we see significant opportunities both to grow our share of market and improve productivity. While we do not underestimate the challenges that lie ahead, we have tremendous talent throughout SYSCO and we were committed to achieving our business objectives. With that, Operator, we'll now take questions.

Thank you, sir. Today's question and answer session is held electronically. (OPERATOR INSTRUCTIONS) And we will go first to Steve Chick at JPMorgan.

I guess a couple of questions. Rick, I was wondering if you could comment on how sales trended during the quarter. It looks like it slowed a little from last quarter, but it might have been in the [CIGNA] segment more than anything else. And if you could, given the environment, I hope hoping you comment on what's you've seen post quarter after a month or so under your belt.

Sure, thanks, Steve. In fact, we saw pretty even results in the quarter. If there was anything that impacted the quarter, and this is not to whine, but we did have some weather-related impact in the second quarter. We had broad snow and storms across Oklahoma and the midwest and the northeast. So I think that's probably if there was any slight degradation in the rate of sales growth it was mostly related to that. I will tell you that for the first three weeks of the year that we seen, the first three weeks of the calendar year, first three weeks of the quarter -- third quarter, that we have seen very similar sales trends. We don't see any reason to suspect that those -- that the sales rates will get slower. So right now, and important to remember that March makes our quarter but on a comparison basis January and February are our slowest two months of the year. But again on a comparative basis we feel pretty good about what we see right now.

Steve, this is Bill. Just to confirm what you eluded to there. The broad line sales growth was pretty much the same both in the first and second quarter.

Great. Thanks. That's helpful commentary. Second, if I was wondering if you could comment on the landscape a little bit. I guess in terms of competition and maybe specifically what you are seeing out of U.S. food service. I think the last call you'd mentioned some activity in Cincinnati and closing of maybe one of their operating companies there. Any updates on what you are seeing out of them?

Yes, we have -- Steve, this is Ken. We had some rumors of some -- two more closings. But right at this moment I can't remember which ones they were. But as far as activity, same report as last time, really no change.

Okay. And separately in your announcement of, Rick, a new board member addition, I think was within the last month or so, you had some specific language mentioned about your focus on international opportunities and how that would help. And it seems like -- it seems to me like you guys progressively get just a little more open minded about expanding internationally. And I was actually wondering if you could speak to that a little bit.

Well, we never been accused of being open minded here in the food business, Steve. We are -- we are definitely kind of exploring the landscape outside of the U.S. and Canada. We feel good about the opportunities, particularly in certain parts of the globe, the growth opportunities. And we think that's long-term a huge opportunity for us. Having said that, as we have in the past would be very cautious and move with care. But we are definitely exploring the landscape out there as you said. And we were pleased to add also, just to highlight and we were pleased to have Dr Koerber on the Board. I have known him for about 10 years. He is a terrific executive, and will provide a level of strategic insights I think that will be beneficial to the entire Board and to SYSCO.

Okay. Thanks. And just last, Ken, that -- the $0.03 or $0.04 of additional fuel costs in the second half, are we okay in thinking about that kind of evenly in the third quarter and in the fourth?

Yes.

Okay, alright, thank you.

Thank you, Steve.

We will go next to John Heinbockel with Goldman Sachs.

Rick, a couple of things. Business reviews, what type of lift are you getting this environment compared to maybe a year ago or 18 months ago? Same kind of lift, better, worse, where do we stand with that?

I think it's about the same. It continues to drive lots of sales growth for us. The relationships we build with the customers that go through business reviews is superb. As we've mentioned before, one of the ancillary benefits although important benefits is that our churn of those customers that have gone through the business review is very, very low. So it's a business -- it's a relationship-building opportunity for us. So we continue to do more and more of them. We -- the operating companies are very committed to business reviews. Many operating companies today have two kitchen, two business with two kitchens. So there is a real commitment on the part of our operating companies. And it is producing significant results for us.

Secondly, bring us up to date on centralized procurement, where we are in terms of items, categories, dollars how that will play out as we head toward fiscal '09.

We are -- I don't know if we have any projections in fiscal '09. But right now, in terms of our categories and the dollars that we have targeted, we were right on track to have that done by the end of fiscal '08 and then moving into '09. But we don't have the next -- or at least I don't know the phase three or four --

Phase three.

I don't know what those specific numbers are, but we are on track, John.

What's the timing for phase three?

This fiscal year.

Well, the next phase then, is that in fiscal '09 initiative?

Yes, sure.

Alright. And are we seeing in your gross margin numbers today, we are seeing a very clear benefit from centralized procurement that's offsetting inflation or we'r'e not seeing that much yet?

Again, with our business there are so many moving parts that it's very difficult to determine where it's showing up. And I guess I for one at least am comfortable it's helping us -- helping mitigate some the impacts of inflation. But to draw one-on-one beat on it to say that this particular item has helped us this much, would be very difficult to do, John.

Okay. Then, finally, there is update on the IRS situation, or that's just kind of out there, likely to be resolved later this year?

John, we are in that early phase, I guess you'd call it, of the appeals process. We do have meetings coming up service later in the quarter. And I think probably the next time we talk on this call we will have a better handle on the time line. But I still think we were looking at about a 12-month period minimum to resolve this.

12 months from now.

Give or take. Yes. I think we will have a little better information next time we talk.

Okay, thanks.

And we will go next to Greg Badishkanian at Citigroup.

Great. Thank you. First question is, when you look at your real sales growth and overall sales growth, how do you think that compares to the industry? And you mentioned that January seems to be consistent with the last quarter you just reported. So why do you think you are able to kind of have pretty steady decent type of real sales growth with teams like a tough macro environment?

I think it is a tough macro environment, Greg. And the broader numbers that we look at, for instance, I think we look at [nap track] and we see a pretty challenging environment at least in those public casual chains. So we've -- we use that as a proxy for the industry. We feel good about our ability to outgrow the industry. We are continuing to take share from our competition. So, again, without being exuberant about our enthusiasm, or being too enthusiastic. We feel good about the direction we are headed in our ability to take business. And I will let Ken kind of pick up on that.

We kind of manage our sales growth in a particular way that we put in place about four years ago. And that is that we try to gain a certain percentage of new sales, and we do that by every year growing our sales force, which have by argument sake, I guess, twice the size of our next biggest competitor. And we manage loss sales and penetration. And we do both of those through our business review business development process, where we control the number of -- control the amount of business that we lose on an annual basis, and we continue to grow and measure that growth in our customers. So years back we put in this sales management concept that we think is paying off for us today in a very tough environment and will continue to pay off for us as we go forward.

Do you feel that you're getting greater penetration with your customers? Or would it be that your customers last look at the last quarter or two are just taking share versus their respective competitors?

Well, by measurement we are gaining in penetration. We measure each and every one of our customers so we know we are gaining.

Thank you very much.

Thank you, Greg.

And we go next to Ajay Jain at UBS.

Hi. Yes. I just had one quick question for Bill DeLaney on operating expenses. For stock compensation I know that you had calendar shifts based on the change in the grant date from Q1 to the second quarter. But it seems like for the first half of the year overall the comparisons on options expense were still favorable by about $11 million, if I'm not mistaken. So I'm wondering how do you see the outlook for stock compensation for the back half of the year now that the comparison seem to be little more normalized. Is that something you feel like you have enough visibility on right now?

Yes, Ajay, I think we do. I think the point I was trying to make in my comments, first of all in the first half of the year, is as you can see they're on the fund slow stay, but the stock comp was favorable, as you pointed out by about $10 million or $11 million, I guess it is. There were other things offsetting though. So when you look at our first 26-week numbers and you put aside some of the gains on property sales last year and the [cold lead] thing this year, which was favorable the first quarter a little bit, favorable the second, and then the stock comp bounced back and fourth. If you clear the deck with all of that, pretty much the 26 weeks I think is a good barometer for where we are at. Now with that said, as we look at the second half of the year, the stock comp should be modestly favorable probably in the ballpark of what were -- what we saw the first half of the year. There are still things that could impact that, but that would be my best judgment right now, and there is a lot of moving parts as you can appreciate that that can impact earnings. $0.01 here, $0.01there. But that particular line would be -- we would expect that to be modest.

Okay. So the $10 million to $11 million in the first half should be broadly representative?

Yes.

Okay. Thank you.

And we will go next to Meredith Adler at Lehman Brothers.

Hey, guys. Couple questions. Has there been -- it sounds like you are beginning to be very active in managing your fuel costs. But do you see any change in the outlook for having your customers pay you fuel surcharges. Obviously some do already. But is that becoming more common?

Well, I think it has become -- Meredith, this is Rick. I think it is becoming more common and we are certainly reviewing all of our options in terms of reflecting what's going on in the fuel market today. So fuel surcharges we want to make sure we were up to date on those, making sure we route those trucks more effectively than we ever have, and the operating companies are doing a terrific job in terms of getting more efficient at routing the trucks and putting more pieces on. So we will absolutely continue to pursue all opportunities and options to mitigate that fuel cost.

Okay. And then could you talk a little bit about what you see happening with your customers with this very high food inflation. Are you seeing significant changes in their behavior? Are you hearing anecdotally that traffic is down because the cost of a meal has gone up a lot?

I think we are hearing that it's soft out there. It's very hard to translate anecdotal information. Again, one of the strongest proxies we get is the [nap track] or we think is one of the strongest proxies so we use that as kind of a guide in terms of how well we are doing in terms of the marketplace. So there is no question, it's a challenging environment out there and we feel very good about our performance in the second quarter and we feel good about our opportunity to continue to execute on business reviews and the other initiatives we have got out there and to achieve mid-term and longer-term goals.

Great. And then I have a final question for Bill Delaney. You mentioned multiemployer pension liabilities as being volatile in the first half. Could you just talk about what it did in the second quarter and also the first quarter?

It really wasn't factor in the second quarter. We had a small gain last year and the plan, it wasn't that material that we are going against. But the bigger point I was trying to make, Meredith, is in the first quarter we had an unfavorable impact where we took a charge for a situation with one of our plans and I think it was about $9.5 million. So basically there was more of a first quarter impact on the unfavorable side and slightly favorable second quarter. So it's just one of those line items that we talked about here and there. But, again, my point I really want it to leave you all with today, is we will keep you posted on that and we'll speak to it as it's appropriate in the queue. But when you put it all together for 26 weeks that stuff all pretty much washes out.

And I assume it's very difficult from what I know about multiemployer pension liabilities, it's very difficult to forecast where they are going to go.

It is. We have several of them and some are in better shape than others in terms of funding. I can they will you we are very acutely aware of where they are, and we are working through those as best we can. The bigger challenge is that it's very difficult as the participating employer a lot of the time to have an impact on decisions that get made in terms of how those plans are administrated. So it's something that we have to deal with and we're very focused on it.

Okay. And, actually, I have one final question back to Rick. I have been trying to understand what kind of behavior a restaurant -- what the behavior would be as they see their sales slowing. Would it be fair to say that there would be a lag between the time that they would start to see traffic slow and when they would purchase less, because clearly they don't want to be, "out of stock" in any sort of important item that is on their menu. Is -- have you seen that with customers?

Meredith, it would be a very short lag time. Their inventories are very slim. If you look down the supply chain, the greatest inventories are with the suppliers and then the distributor level, SYSCO, and then finally at the customer. And very short inventories, just a few days. So anything that happens in that restaurant is going to happen very quickly versus what's going on in terms of their business itself, the patrons that they have coming through the door.

Okay. So if they are seeing a slowdown --

I'm sorry.

Ken, go ahead.

Meredith, we see them make immediate adjustments to their inventory almost on daily basis. So any lag you would see immediately.

Okay. That's very helpful. Thank you.

(OPERATOR INSTRUCTIONS) Next to Westcott Rochette at Bear Stearns.

Thanks a lot, guys. Can I just have a moment to talk about the balance sheet landscape for a lot of the independents in terms of how you manage your receivables as -- if we move into a more of an economic slowdown, whether you see an increase in restaurants running into some difficulties paying their bills, how you balance that extending credit versus not. And just maybe a reference back to -- maybe '01's not the best time frame, but going back to '90 and '91, how the pickup in potential bankruptcies or closings in light of adjusted how you manage through that. Thanks a lot.

I will start Wescott, and I guess the one comment I would make is kind going back to the script and that's where we talked about the quality of our customer base today having improved over the years, partly because of the way we segment them and stratify them, and some the difficult decisions we made in regard to not so profitable customers several years ago. So we feel good about our -- the quality of customers that we have as an organization. And we -- I guess the other thing that makes me feel good and I'm sure the rest of us here is that we have 8,000 or 9,000 marketing associates on the streets every day sort of managing those restaurant and helping them with our receivables. Helping them helping us and making sure we keep those customers as current as possible. So at this point in time I wouldn't -- I don't think we would raise a red flag about deteriorating conditions or deteriorating pay rates.

Yes. It's very hard for us to tell in January as it typically is -- you see little slowing of payment. But it's insignificant. And I think your real question is how do we manage it if they start paying slower and we have very stringent credit policies that we maintain in almost any environment. It's very difficult to make up once you write off a customer that profit. And low margin business you have to be very tough on credit. We don't sell credit. Never have sold credit and never going to sell credit.

Alright. Thanks a lot, guys.

Thank you.

And we will go next to Andrew Wolf at BB&T.

Thanks. Good morning. Wanted to follow-up on the fuel question. Those numbers you gave, first for the half, $0.01, and the expectation for the second half, those are gross, right, before any ability to pass it through?

Yes, that's our fuel expense number, Andy.

Okay. And Meredith asked this, but let me parse it a little bit. What percent of the con -- what percent of the contracts, or what percent of that sort of contractility you can pass through with a bit of a lag?

With our customers that we have agreements with, I would say 90% of them have some sort of agreement written in that we can pass on some fuel surcharge based on generally speaking a sliding scale of diesel price. We have no agreements on the street side. Not every one of our CMU customers have that agreement. So I hope that answers your question.

Yes. It's pretty close. Better than it was. I wanted to ask you, first of all on the quarter, was there any help from acquisitions, or have you anniversaried any acquisitions that would have evaded the top line? It was like .2% last quarter.

Yes. I think it's similar this quarter, even less, .1% maybe, I think, so it's about $30 million, I think.

Okay. So fairly diminimus.

Yes.

And lastly on the acquisition environment, Performance Food Group, before they decided to sell, had said that the environment from an acquirer's point of view had got an little easier, and that the expectations were down and more people might be interested. Do you have any comment in that regard?

I guess they were right.

I think they were talking about the rest of the -- although maybe they -- that's what they were talking about. Assuming they were talking about the rest of the universe of potential acquiries.

I think there is going to be adjustment in terms of people's thinking regarding the multiples, some of the multiples we saw even in our industry, you might say we are a cause of ultimate -- or resulting problems that we have, and in terms of the credit markets, etc. So anybody's guess. But I think expectations are going to be lower in the future.

And what we see a lot of the smaller family businesses that are looking to exit the business, those are what we typically fold into our bigger operating companies. Generally speaking, their expectations have been lower here recently.

I think, Andy, the only thing to add with all that said you can appreciate some of these larger deals with what's happening with the private equity market is there's -- it's harder to get financing for any large deals for financial sponsor-type of transaction. So that's the other dynamic that's out there right now.

Okay. Thanks a lot.

Thank you.

And we will go next to Jason Whitmer at Cleveland Research Company.

Hi. Good morning.

Good morning, Jason.

Rick, are you seeing any change to the competitive sets, specifically surrounding pricing or anybody trying to chase some business in this environment considering how much softer end market demand has turned?

Kind of go back to what Ken said earlier when the question was asked about our largest competitor. And we really don't. Although as we said in the past we see some erratic behavior in part of some customers in certain markets. Kind of a rational pricing, if you will. It's not across the board and that hasn't changed. We still see a little of that here and there, but broadly speaking we're not seeing any change in pricing practices by our competitors.

And Ken, the second RDC on schedule and any kind of progress report on how that's ramping or how you'd expect that to ramp versus the first one?

It's on schedule for shipping and -- or ramping up in April. We anticipate the ramp to go much faster this time because we have 90 common vendors. So all is well at this point.

Will there be a visible impact on the P&L? Obviously there's a material impact last go around. Will it be modest at best this time, would it be incremental on the cost of the ramp?

I think it would be incrementally modest. There is a ramp up. And we've kind of tried to allude to this. It's hard to project, because we don't know exactly when we will start shipping there. But it's -- I would think there is a little bit of I guess a negative impact, if you will.

At the very end of the -- very end of our fiscal year.

In the fourth quarter. Yes.

And, Ken, can you provide any context to transportation savings overall. I think you mentioned routing and designated delivery days. Will you throw in the RDC into that and all the other components you have got working on the back end. Can you just provide some color as to how quicker that's moving, or maybe just some relative perspective versus last year versus two years ago, because obviously you are seeing good success there.

Yes, our miles are down this year. Although our sales are up. So that's a positive impact of really all of the things that we were doing. They all kind of go together. And it's an ongoing process. It's not a -- I think we characterized it as a routing initiative as if we could do it once and we are done. Actually it means that we were kind of viewing our transportation network in a different way today and that is every week, every day, we are looking at reducing those miles to say that we are going to be able to mitigate the cost of diesel as it is, I think that is probably not feasible. But every -- we are changing -- we are attacking it as best we can and trying to mitigate those expenses again and what we have control over and it's working very well for us.

And lastly, Rick, I wanted to come back to an acquisition question. Is there a way you can look at not just maybe broad line businesses but other ways to grow the broad line business? Because I'm seeing in the past it's largely just been pure acquisition of these businesses. But any tools you can acquire? I think a couple years ago you actually mentioned that there are other core competencies that SYSCO has that you could use to build upon that could actually also be market share [cals]. Any thoughts on that?

Without being specific, we could still stand by that. That we think that there are -- I will use this term roughly, but adjacencies that makes sense for us taking advantage of the competencies we have sold over the years. So absolutely it is in the scope of the options we are looking at.

Great, thank you.

Thank you.

And we will go next to Chris Ruth at Piper Jaffray.

Hi. Good morning.

Good morning.

When we look at market share gain opportunities, the opportunities you've been talking about, on the balance of the year, do you see greater opportunity in chains or independent business, absent any major acquisitions?

Well, I mean, I don't want to be wishy washy, but it depends. Obviously the larger customers, the larger chain customers come not lumpy base -- lumpy factor -- lumpy way. And the independents on the other hand are coming in their very small businesses or very incrementally very small. So this year we have had nice business, nice chain growth. But our street sales continue to grow very evenly, too. So it's a hard question to answer. But again keep in mind that when we bring in a big customer it's a lot of business right now. And the independent business just comes in gradually over a period of time.

Right. Okay. And then, finally, I would assume you have some food inflation assumptions built into your sales outlook on the year. I know it's hard to forecast, but do you at least contemplate a normalized inflation rate of 2% to 3% or something closer to recent levels of 5% or 6%. Can you provide any color on that?

Not really. I think it would be premature to think that inflation is going to come down to historic levels. I think we're going to see -- we will continue to be a little higher than the 2% to 3% that you referenced. And again, it moves all the time. If we get bad weather in California, produce markets spike very, very quickly. Dairy prices can change on a dime. So it's one of those unknown factors. So again going back to almost everything we said, we have to make sure is we have any operating companies in the corporate office the ability to move quickly when things change on us, whether it's fuel prices or inflation on food or whatever. And that's really our goal to respond quickly and appropriately when the market changes.

Okay, very good. Thanks.

I think I will add there quickly, just so you -- I think everyone knows this, we were getting close to wrapping around some of the beginnings of these high inflation numbers as we get deeper into the third quarter. As Ken pointed out and Rick now, we would expect it to still be relatively high. But there may be a math aspect of this at some point that will start to subside.

And we will go next to Bob Cummins at Shields & Company.

Yes. Thank you. Actually my question was based on acquisitions. And you talked about that a good deal. I guess I won't bore people by trying to follow up further. But anyway, appreciate the call.

Thank for being on, Bob.

(OPERATOR INSTRUCTIONS) We will go next to Alec Patterson at RCM.

Yes. Hi. I just wanted to confirm the guidance you've given on the options outlook, because I thought on the end of the first quarter call you described the change in the program where it will also impact the back half of the year, seeing an increase in options expense, and now I think in response to Ajay's question you suggested it would actually be down quite a bit.

Let me start if I'm not answering straighten me out here. What we said on the last call is a better position by now to give you a flavor for the second half of the year, and so to put this in some type of context, the first quarter was favorable I think to the tune of $15 million or $16 million primarily because of the timing difference. This quarter was unfavorable $5 million to $6 million primarily timing difference, so it's unfavorable from $10 million to $11 million. And my best judgment sitting here today is that we would see another favorable variance the second half of the year for about $10 million. Again, it could be off different things affect this as we go through the cycle. But I would expect for the year it would be favorable.

So then for the year, roughly speaking, around $20 million favorable.

Correct.

Okay. I just want to get that clear. On the inflation that you are passing through, similar rate as first quarter, though if you look at some of the PPI numbers for the food industry, you see what seems to have been a step up with the most recent numbers and certainly things haven't gotten any better across a variety of food commodities. So I'm just wondering to what degree do you discern an incremental benefit for the procurement program against the inflation head wind? Are we seeing incremental, like you're shaving a point off of that rate now, versus maybe half a point before? I'm using numbers but just trend wise is what I'm trying to get at.

Yes. I will go back to our answer earlier, Alec, and say very difficult to determine what that number might be. We are encouraged by our progress. I think the number now is somewhere around the end of the year we will be purchasing $3 billion. But even that $3 billion purchasing centrally, that $3 billion is not going to move that number significantly. And then our ability to measure it, frankly, is very difficult because all of the other moving parts. But overall I'd just again say we are on track in terms of goals we set and we feel good about it.

Or maybe a different way of asking that is at least at this point given the levels of inflation on what seemed to be accelerating inflation in the industry, are you finding the procurement providing you with a competitive weapon at this point, or is it still to make a difference on the overall COGs outlook for your company versus competition?

I think it's too diminimus at this point. Anecdotally, I would say -- as I said, I think we feel pretty good about it. But the numbers are still too small and there are so many moving parts to it that it's difficult to determine the actual impact.

Okay. Alright. Well, fair enough on that. And then just lastly, what sort of experience are you guys having with credit? The availability of it, funding working capital if need be, etc. I know you have got a nice free cash flow story, but just generally speaking to the degree you need it?

Well, again, we touched on this earlier. What we -- obviously, when you get in times like this, there is a sanity check that we all go through, both the operating company here in corporate. So we're going through and looking at our larger customers. And as the earlier -- that's not where we are going?

I think he is asking about our availability

Yes. Your availability.

Our availability to borrow? It's probably never been better, I think. Right now the financial markets are very favorable for high quality borrowers of corporate debts. So we were looking at that. And obviously spreads have widened and treasury has come down quite a bit. So interest rates are pretty favorable right now, long term.

Okay. Are you looking at refinancing potentially?

Were looking at it.

Okay.

We're always looking at it.

Maybe taking on more debt potentially?

Well, that's something that we talked about before. And we certainly had the capacity to do it. We just want to make sure as we do it our priorities are straight in terms of what our opportunities are, whether they be more transactional or share repurchase that type of thing. So we are still evaluating that part of it.

Okay. Understood. Thank you.

Thank you, Alec.

And we will go next to Steve Chick at JPMorgan.

Hi. Thanks. Yes, just a follow-up. I was wondering what the increase in customer contact personnel was in the quarter, and if you are still on track for a 4% rate of growth for the year.

Steve, actually we were at 4.5% through the second or first two quarters and I think we will stay steady and around 4%.

Okay. Alright. And then second, I guess for Bill, just I -- maybe I missed it but your other income was up a little bit year-over-year for the quarter. I don't think that has to do with [Coli] or anything. Looks like about $8.3 million versus $3.3 million a year ago?

Yes. [Coli], you're right is in the operating expenses. The bulk of that is the sale of I guess I described it as technology that we had that they restructured their business and we took that opportunity to sell our interest in it. So that gave us a gain of I think about $3.5 million and that's one of the things, Steve, I was alluded to earlier. Some of these aren't really big enough to get into specific disclosure. But in the first quarter we were going against the gain from the prior year on the land sale. That was unfavorable. This is favorable. So again at 26 weeks most favorable -- most of it washes out which is nice.

Okay, so about $3.5 million.

Correct.

Alright. Great. That's helpful. Thank you.

And we will take our final question from Meredith Adler at Lehman Brothers.

Hi, I don't know whether you're going to answer this question. There is going to be a process where performance food looks for other buyers before this transaction is completed with Blackstone. Do you have any interest in any pieces of performance food? I mean, they're -- they call the customized business has strong reputation.

Well, you are right, Meredith. We're going to be very cautious. I will just tell you we continue it to look at acquisitions of all kinds that make sense and all sizes. And that is as much as we would say at this point.

Okay. Great. Thank you.

Thank you.

Well, this does conclude our question and answer session today. I will turn the conference back to Mr. Rick Schnieders for any closing remarks.

Thank you, operator. And I want to thank everybody for joining us this morning. We very much appreciate your interest in SYSCO. I would like to just highlight one thing, and that is, that as we said several times on the call and it was in the press release, too, that the 26 weeks is really because of the pluses and minuses the way we are looking at our business and performance. And then the bottom line is we feel very good about the 26 weeks, and we think that it's right in line with our overall financial objectives. So with that I would again thank you all, and please eat out often, and we will -- if you have any questions in regard to the call or in regard to the press release, please call Neil Russell here in Houston. Thank you.

This does conclude today's conference. We do thank you for your participation. You may disconnect at this time.