西斯柯 (SYY) 2009 Q1 法說會逐字稿

Good day, and welcome to today's SYSCO Corporation first quarter fiscal year 2009 earnings conference call. As a reminder, today's call is being recorded.

At this time for opening remarks and introductions, I'd like to turn the call over to Mr. Neil Russell, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Tricia, and good morning, everyone. Thank you for joining us for SYSCO's first quarter 2009 conference call. On today's call you will hear from Rick 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's intentions, beliefs, expectations, or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ in a material manner. 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 company's SEC filings, including but not limited to risk factors contained in the company's annual report on Form 10-K for the year ended June 28th, 2008, and in the company's press release issued earlier this morning. Please understand that all comparisons given during the call refer to changes between the first quarter of fiscal 2009 and the first quarter of fiscal 2008, unless otherwise noted. Also, all comments about earnings per share refer to diluted earnings per share unless otherwise noted. With that out of the way, I will turn it over to our Chairman and Chief Executive Officer, Rick Schnieders.

Thank you, Neil. Here are the headlines. This morning SYSCO reported record first quarter operating earnings of $505 million, an increase of more than 11% compared to last year. Sales grew more than $400 million to $9.9 billion. We also reported record first quarter diluted earnings per share of $0.46, up 7% year-over-year. I'm pleased with these results as SYSCO continues to grow share and increase operating leverage despite a difficult business environment. Ken and Bill will provide additional details of our first quarter results, and I'll be back to facilitate a Q&A session. Ken?

Thanks, Rick, and good morning to all of you. Our operating companies produced exceptional operating leverage in a very soft sales environment. Obviously, these are difficult economic times, not just for us, but for our customers, too. Therefore, improving productivity and controlling expenses are very important. During the first quarter, SYSCO's US broadline companies performed particularly well as evidenced by a 6% year-over-year improvement in cases per man-hour, a 3% increase in cases per trip, and an 8% reduction in diesel gallon usage.

Performing quality business reviews with our best customers remains a top priority, as it is increasingly important for us to strengthen those relationships by supporting our customers' efforts to provide value-added offerings to their patrons. We continue to improve the quality of these business reviews with the business review process through better preparation, increased focus on the goals of each review, and timely and thorough follow-up subsequent to each review.

Also, we are encouraged by the progress we see in our supply chain initiative. Productivity has steadily improved in our Front Royal, Virginia RDC, and we remain on target for the ramp-up timeline for our Alachua, Florida RDC. Our national transportation management system continues to enhance our overall performance as well. Simply stated, we continue to find ways to be more efficient in the near term, which we believe will continue to pay dividends in the long term.

Inflation, as measured by our product cost increases, for the quarter was an extraordinarily high 8.3%. While we have managed the inflationary environment successfully for several quarters, we are keenly sensitive to the difficulties that this unprecedented period of high food prices present to our customers. We hope to see inflation moderate over the long term and input costs have recently declined. An example of the outstanding execution required to produce these kind of results is evident in how well our company responded to four named hurricanes across our system during the quarter, including Hurricane Ike which impacted us right here in Houston. Within hours of the eye of the storm passing over the city, our Houston operating company, assisted by associates from several other surrounding companies, was delivering to our customers. We are proud to have worked alongside organizations like the Red Cross, FEMA, and numerous hospitals, nursing homes, care shelters, to assist those in need. SYSCO was not only early to respond to the relief efforts, but importantly was first to be back out on the road working with our customers within a day of the storm. I expect SYSCO to emerge from continues cycle stronger and much more efficient. And with that, I'll turn it over to Bill for discussions of our financial results for the quarter. Bill.

Thanks, Ken. Good morning, everyone. I'm extremely pleased with the quality of the earnings we reported earlier this morning. As Rick and Ken have previously noted, the ongoing economic slowdown and turbulent markets in general certainly contributed to our modest sales growth. With that said, our ability to produce 7% diluted earnings per share growth despite an unusually high tax rate and a $30 million unfavorable COLI comparison highlights the quality of the first quarter earnings.

One area that warrants further discussion is the first quarter tax rate which was impacted by two main components. First, the loss of $22.9 million recorded to adjust for carrying value of corporate-owned life insurance to the cash surrender value is nondeductible for income tax purposes. As a reminder, the COLI value will continue to fluctuate each quarter as the underlying securities are tied to market performance. Second, the company recorded a tax adjustment for a previously unidentified tax contingency arising from a recent tax audit. I should note this adjustment is not related to the ongoing appeals process with the IRS regarding our cooperative structure.

Notwithstanding the current financial markets, our balance sheet is a tremendous competitive advantage for SYSCO. We continue to manage our assets and capital effectively as evidenced by our trailing 12-month 21% return on total capital and 33% return on equity. Our A1/P1 commercial paper rating proved beneficial to us in the past, present, and we expect it to continue to benefit us in the future. Although our borrowing requirements during the first quarter were modest, we believe we will continue to access the capital markets effectively.

In summary, SYSCO can and will continue to reinvest in our business. Our investment priorities in order are capital expenditures, pursuit of acquisitions, growing the dividend commensurate with earnings, and repurchasing our common shares. Before we go to the Q&A, let me turn it back over to Rick.

Thank you, Bill. As you have heard, we're pleased with our first quarter results. It is a tough environment, but the quality of earnings is impressive. Our operating companies have done an outstanding job. Our trucks have more cases on them, we're driving fewer miles per route, and our customer service continues to lead the industry. As we speak, 8,000 marketing associates are taking orders up to 5:00 PM today. Those orders will ship tomorrow to more than 400,000 customers with premier service levels.

I want to say again, however, this is a very challenging environment. In the second quarter, we continued to see a softening of sales growth. We will continue to focus on supporting our customers while improving productivity and managing expenses. SYSCO is well positioned to weather the storm and well positioned for the long term. Operator, we'll now take questions.

Thank you. (OPERATOR INSTRUCTIONS) We'll pause for a moment to assemble our queue. We'll go to Greg Badishkanian with Citi.

Thank you. A few quick questions here. First, food inflation was around 8.3% in the quarter, so that's higher than it's been, the 6% range. And just wondering how you think that's going to trend over the next few quarters, when you think maybe declining commodity costs will start to lead to that inflation moderating? Just because I know you have a lot of contracts. Just wondering about the timing of that.

Greg, good morning. As Ken indicated in his comments, some of our input costs are beginning to decline now. We see some subcategories of product now that are certainly the rate of inflation of slowing, a couple of subcategories where we're seeing some deflation. At the same time, we've got some categories that have fairly high inflation. I would -- as we suggested that we would hope to see some moderation in the inflation rate here pretty shortly within this quarter or the next quarter.

Very good. And also, as you look at your real sales, it was down a few points, about 3% or so, based on my calculations, and yet you were able to bring down your SG&A as your operating expenses as a percentage of sales. So I'm just wondering -- maybe give us some color, just in terms of the different initiatives and how much of that was due to cutting miles or just different buckets where you've been able to really keep a lid on expenses?

Well, we've got fairly high variable costs, so we're able to [steer] the business appropriately both ways. Certainly the initiatives going back to -- just to point to one, and if you can't just point to one, but I will use it as an example -- XY routing. Ken mentioned that we're driving, I think 8% fewer miles than we were a year ago.

8% gallons.

I'm sorry, gallons. And our miles are down also. So it's those paying attention to literally hundreds of activities within those operating companies that are paying results. And so we feel very good about, again, about the quarter and about the company's -- the operating company's ability to manage in a rough environment.

And just from what we see in the industry, looking at the major public companies, et cetera, seems like the industry is doing a lot worse than you had. So I'm assuming you've picked up some share. Is that what you see based on your data or based on your talking to people in the field? Is that -- what color do you have in terms of maybe market share?

I mean, I think that's something we have been very proud of. In fact, as we've said on many occasions, we tend to do better in tougher times, in relation to the rest of the industry, because of our financial strength and our overall -- the overall management of the company. So we are pleased to -- again, with our ability to, again, at that time operating company level particularly, be able to make it all work in a challenging environment.

And if you are taking a little bit of share, are you hearing anything about some of your competitors? I know you have a lot of them across the country. But anyone -- do you think over the next few quarters, if this condition continues with the economy, could you see some of those major players maybe go out of business or exit the industry?

Well, I mean, it would be pure speculation. I think the challenges right now are that for many competitors who have to go to the bank and borrow money to grow their business, so to get additional inventory, buy new fleet, expand their warehousing, that's very difficult in this environment. That's where I think in the midterm it gets pretty tough for some of our competitors. We're not wishing any bad luck on anybody. I just think with the realities are -- with the financial strength that Bill highlighted in his comments, I think it goes to the bottom line that we're well positioned, vis-a-vis all of our competitors and vis-a-vis the industry.

Thank you very much.

We'll take our next question from Jason Whitmer, Cleveland Research.

Good morning. Rick, can you provide a little more color on the state of the end market, particularly restaurants, traffic flow, as well as maybe further closures from some more restaurants out there? And maybe not just restaurants, but also touch on institutional and how that's been trending?

Hi, Jason, this is Ken Spitler. Yes, definitely we're seeing the traffic slow down. It's a very tough environment for our customers. We haven't seen a lot of closures yet. We're really not anticipating -- the closer you get to the holidays, I think everybody is, even if you are close, have difficulties, you are going to try to get through the holidays, and those typically are good times for our restaurants. So I don't want to make that sound like it's -- there's not problems there. They have traffic problems.

I think I heard you quickly ask a second piece of that, and that's on the institutional side of the business, which we would include schools, colleges, hospitals, and nursing homes, and as you point out, Jason, the -- 63% of our revenues come from restaurants. The rest come from, obviously not restaurant business, and that does tend to be a little more stable in this environment. So the schools, colleges, and healthcare in general -- that business continues to go along well. In fact, our healthcare business today, it's very robust.

Do you have any thoughts on elasticity? With food inflation potentially coming down over the next couple quarters, do you think that we'll revert in some of the case volume deterioration we've seen over the last six to nine months? I remember at the analyst meeting a while back, you were looking for long-term sales growth -- whether food inflation was driving more of that, or case volume driving more of that food inflation, more normalizing -- any updated thoughts on where that could trend on the elasticity if people would start buying more cases if prices come down?

We haven't done any scientific studies. We've gone back and looked at some historical data which does tend to support, as inflation comes down, the case growth will improve. I can't give you the exact numbers, the relationship there, but we would anticipate that. That food inflation moderating is going to make it significantly better for our customers out there to manage their business.

Last question. Along the process of doing business reviews and really getting closer to customers in this environment, sounds like you've been doing some deeper customer analytics. What have you learned there, either with your share of the customer or with the share of some that you don't have, and how do you continue to gain share or extend your share lead in this environment coming out of the environment -- What are some things you have learned in doing some of those deeper dives?

One of the things we've learned, there seems to be no end to the opportunity. First of all, the business reviews are great relationship building, and I think we've said this before, but one of the things we found is that our lost sales related to customers that go through a business review go to virtually $0. So that's very powerful. We continue to -- customers who've gone through multiple business reviews, we continue to see good growth in those customers. So we have lots of opportunity there. Ken?

Yes, and I think part of that question was what are we learning from it. We continue to be focused on the menu itself and how that drives traffic and profitable traffic through their business, which is very important, of course, to them. So we still focus on the menu with our customers and that drives their business. What drives their business drives our business.

We found, too, that during these more difficult times, the receptivity of customers and non customers alike to business reviews has been very, very high. So we don't have any lack of customers interested in coming into the operating companies for a business review.

Great. Thank you.

Thank you.

We'll take our next question from Meredith Adler, Barclays Capital.

Thanks for taking my question. I would like to just start -- go back to the question about inflation. We have definitely seen a decline in some commodities, especially for the grain. But I have heard from some sources that meat prices and [whole] proteins are likely to go up. I think that's the FDA forecast as well. Is that something that you have factored into your thinking, or are you seeing any of that?

Well, as usual, if you look at the averages, it's a bit deceiving. So what we find today are the middle meats, those meats that are used to cut steaks. So the strip loins and ribeyes and tenderloins, they're actually fairly significantly lower than they were a year ago. On the other hand, you've got the end cuts, the chucks and the rounds, that are higher. Part of the reason for that is that a lot of that gets ground into hamburger, and the demand for hamburger right now and ground beef is fairly high. It's obviously a lower cost item on the menu. So that's where it becomes tricky talking about inflation in general or inflation in a category. In this case, you see a -- you have to look deeper than the category. You have to look at the subcategory. So all that depends, and I think it's safe to say that we'll -- because of demand, we'll see -- we won't see upward pressure on the middle meats, the steak cuts, for awhile, unless we have a foreign country that jumps in and buys a bunch of boneless ribeyes and [strip] steak. That could change that. So just so many moving parts to the question and the answer.

Even with supply being down, which it has come down especially for beef?

I still think you see middle meats not having a lot of upward pressure for awhile, the steak cuts. Again, I don't know what will happen to the hamburger and the chucks and the rounds and that sort of thing.

Okay. Another question, then, would be just, you are taking share. I was wondering, though, if you are gaining new customers, how does the profitability of a new customer compare with growing sales at an existing customer? Which obviously you are doing some of that too, because of the business reviews, but maybe could you give us a sense of how the real growth you got this quarter balanced between new and existing customers and then what the profit difference is?

Actually, the best -- Meredith, this is Ken Spitler. Of course, the most profitable thing we can do is increase business on an already profitable customer. That's the best thing that happens. In terms of new customers, what we watch very carefully is the ratio of new customers to lost customers to customer penetration, which is growing the business in the customer base. And you need a balance of that to continue to be profitable in the distribution business. So you've got to keep having new customers on board. We're actually seeing a higher rate than normal coming on, but conversely, we're also seeing that there's a bit of moderation in the penetration. So, yes, that -- as yet, that hasn't been big enough to affect our profitability, but it's something that we watch every week. So I don't know if that was helpful to you or not.

No, that's very helpful. Then the final question that I would have would be about fuel costs and fuel surcharges. I think there was a time when it was really only the contracted business that had fuel surcharges, but in this recent environment, fuel surcharges became more common for all kinds of restaurants. Is that still the case? And how does that compare to your costs? Are they successful at covering most of your fuel costs?

It moderates, I think around -- currently, and it changes, of course, with how you are hedged. Currently it's moderating about 70% of that cost, and right now we're -- we do have a fuel surcharge on everyone. The difference between the -- it's a blanket charge -- or a per delivery charge on the noncontracted business, and generally speaking, it's a sliding scale for the contracted customers. It's still markedly over last year, of course, down from sequentially from last month. We're looking -- it's one of those things that is very sensitive, so we're constant looking to see if owe if there should be one and what it should be, and there's a it lot of factors, of course, with that. Of course what everybody looks at is the price at the pump. Sometimes doesn't have any direct relationship to what we're doing.

And most of your competitors -- ?

Meredith, this is Bill. Let me jump in here, maybe to cut off another question, or probably create three. We're filing our Q tomorrow, and there will be a little more detail in there. What we're projecting right now -- for the first six months, obviously we've got four months behind us, three months that weave reported. We would expect -- and this factors in, the forwards that we have in place as well as today's price at the pump -- that we would expect our fuel costs gross to be up $40 million to $50 million for the first six months, and we would expect to recover the bulk of that through fuel surcharges, assuming no changes in the spot prices and assuming no changes in the fuel surcharges. Going forward for the rest of the year, we're about -- two-thirds of our volume is locked in on forwards, and about one third of it we'll be buying spot. So we are, as Ken alluded to locked into some higher prices right now on the buy because of the forwards, and we'll continue to evaluate the fuel surcharges as he also said.

So there's not much chance that you'll see the fuel surcharges be a profit to you right now.

We have no design to make a profit on fuel surcharges. As you heard, we are not covering those costs.

We're just trying to cover the incremental year-over-year costs, Meredith.

Great, thank you.

Thank you.

We'll take our next question from Andrew Wolf, BB&T Capital Markets.

Thanks. Start with the fuel surcharge, as a follow-up. Just doing some quick calculating, tell me if I'm way off, looks like the fuel surcharge this year is about 25 bips roughly, run rate, per quarter. And what I'm trying to get to, maybe I'll just ask it directly, would the gross margin have been reported the 6 bips of expansion if not for the fuel surcharge, or would it have been flattish or slightly down?

It would have been down a little bit, Andrew. I'm not too good at bips. What you'll see in the Q tomorrow is roughly $20 million increase in gross fuel expense and about a $23 million increase in fuel surcharges.

Got it. The other similar type of question for granularity is on the -- when Ken reported the 6% increase in cases per man-hour, could you give a little commentary on that? Like what is in -- what kind of class of employees are in the denominator? Is it just warehouse workers, or is it workers, all the employees at [OpCo]?

We measure it all the ways. But what I was referring to there, typically when we talk about productivity, we talk about what it -- how we get a case out of the warehouse and transport it to a customer. So it would be the people that are directly involved in that, which would be occupancy, transportation, and warehouse. So -- is that clear?

It is. Is that systems driven? Or are you actually using robotics? Substituting capital for labor? How is that productivity being driven?

Actually, it's been several initiatives that we've had out. One is, we've talked about many times going from double jacks to triple jacks, which means that -- simply means that when we pass through the warehouse, we have three pallet positions on a piece of equipment where we had two. It allows us less travel time. When you are talking about warehouse productivity, there's several things you are looking at. The big thing -- and a big area that we have been watching is just the travel time. So if you can cut a trip through the warehouse to select orders, cut several minutes off of that -- when you start multiplying those minutes times thousands times hundreds of thousands times millions, it starts really making a big difference. Then, of course, we're always -- when you reduce -- one thing feeds into the other. When you reduce the number of miles that you drive, you've got more time at the customer's back door -- your productivity goes up there also. So, no this is all operationally driven, if that's -- if that's the question.

I think, another way, it's not a new computer system, it's new processes. So they are systems, but they're human systems. They're new processes within warehouse and transportation.

Part of it goes back to many -- five or six years ago we started redesigning our warehouses strictly to be more productive. Has everything to do with how many times you let product down for the percent to the order selector and the distance that they travel, how many stops that driver has, how easy it is for -- it's strictly operational.

Okay. I know this is ongoing, and one of the great attributes of the company is new things keep getting developed, but just in terms of the double to triple jacks, sounds like maybe you're changing how you pick to be more efficient, just in terms of the whole -- let's say the US system, or include Canada, whatever, where are you at in that so we can get a sense of -- there's three more quarters of a lot of productivity gain here or they're at the end or they barely scratched the surface? On the things you just identified in particular.

I think we're beyond barely scratching the surface here. I think we certainly all -- you don't just go out and change out all your equipment overnight, either, from doubles to triples, because that's fairly significant capital expenditure. So we've been doing it over time. I don't have a number, but I would argue that if I said 50%, that we're -- in the warehouse, we're probably comfortable saying that. That's a very much a guess at that point.

I think what isn't a guess, although it's somewhat open-ended, is that we have years left of productivity improvements that we can make. Some of that will require systems changes. Some will require process changes, but we still have -- we recognize lots of opportunities yet that we will get to over a period of time and do that appropriately and within the culture of SYSCO.

But it's not something that we do -- it's something that we -- I mean, we live this way, and we have people dedicated to finding new and better ways of doing things, and we're all -- we're currently looking for some big bang stuff, some things that we can do that are industry changing. I don't have in that my pocket, by the way, but we are looking -- as industry leader we think it's our -- we have the ability to do it.

Okay. I guess, Rick, just on this theme of driving down your cost structure, a few years ago you laid this out as pretty much I think your top priority, as you saw the way the industry might go with family formations, the end of the big spike in dual income households and so on. So I guess my question is it seems to be working quite well, frankly, on reducing your cost structure through some of the things we've been discussing, but if I recall, I think there was -- an idea that you might use price as a lever to gain market share, and perhaps you are doing that. Could you just speak to that, whether you think -- well, A, are you doing it somewhat? A lot? And B, do you think the environment is ripe for that type of approach where you actually could see -- if you led with price more so than SYSCO has in the past, you could actually get some of the customers maybe you have been wanting to get for awhile?

I think the answer is that it's more surgical than broadbased. I think we still stand by that. In fact, we're working hard on pricing and understanding the elasticity, whether it's related to a customer, related to a product. We think there are opportunities there. But we still have some learning to do. Your initial thought, though, is right. Our biggest opportunity is still in terms of cost control. We have been very pleased with other ability -- and again, I'll take my hat off to the operating companies -- our ability to manage gross margins. But we have also said in the past that there is a lot of stickiness in this business. So price is not -- you can't just go out and wholesale reduce a whole bunch of prices and expect to gain 5 points of market share. It is -- as I said before, it's very surgical. So we have to be careful, and we have to be smart about it. And it's not going to drive 5% market share gains in a short period of time. So it's just kind of paying attention to the many things that we have to pay attention to in a business that appears to be pretty straightforward -- in the end has a great deal of complexity to it.

Thank you. If I could just ask one more, because I guess it's the flip side of that in a way, is on the industry consolidation and acquisition environment, do you think that multiples, expectations of sellers are unrealistic or heading towards realistic? Could you give us a sense of that? And this cycle, obviously down cycles are good times for a company like SYSCO, for acquisition opportunities, but how do you think the credit crunch might play into that as well?

Andy, I'll take a shot at that. It's Bill. I think we are beginning to see the impact of the credit crunch and of the cumulative economic challenges out there that a lot of folks are dealing with. It's mixed, and it's like what Rick was saying on pricing. It's going to be somewhat tactical or opportunistic in terms of individual people's situations, but I'm not going to sit here and say we've got a huge backlog of deals, but we're working on more deals than we were a year ago. I feel like we will see more of that just because of the reality of what I think we alluded to earlier in the call, is it's a very difficult environment to borrow money in. First of all to grow your business, and second of all, if you are highly levered, folks are going to run into some challenges. So we thought we'd see this quite honestly a year ago when things turned in the markets and -- but what's been going on in the last two months I think is different and deeper and we would expect to see more opportunities going forward.

Fair enough. Thanks.

(OPERATOR INSTRUCTIONS) We'll go next to Alec Patterson, RCM Capital Management.

Good morning. Wanted to turn around the question on the the inflation impact and try to see if it creates an issue if we were to fall into a deflationary situation, because you guys have done a lot to mitigate the rising costs, and the real sales impact has not been as much to offset what you have gotten on a gross profit dollar per unit basis. So I'm just curious, in this environment, if suddenly we fell into a deflationary situation where prices were flat to down, how do you think that would play out on a gross profit dollar per unit and gross profit dollar growth basis?

Well, I think, first of all, we have been in deflationary periods before, and I would say we've done a very good job. We've got a lot of experience. In fact, we already after heads up to our operating companies in terms of reminding them what to do when you've got a category or subcategory of product that is deflationary. So they're very tuned into it and I think very experienced. And what will happen, or what has happened in the past, we would anticipate it, is we'll see a little bit on a percentage basis you'll see a little more pressure at the expense line, but we'll pick up gross margin line. So those are pretty much in balance if you will. If you look at inflation or deflation, we don't give ourselves anything for picking up at the gross margin line or the expense line net. What we do give ourselves credit for is what Ken talked about a minute ago, and that is be able to improve our productivity in any environment. So that's where we're getting our leverage. That's where we're getting our real leverage. We're not counting on inflation or deflation.

Just a matter of opinion, but I think our systems are better at handling deflation than they are inflation.

No, I appreciate that and clearly it's working to your advantage -- your systems, your scale advantage, et cetera. But I guess I'm just trying to get a handle on the current environment we're in, where traffic through -- away from home consumption is so depressed right now, and you guys are advantaged taking share and what have you, but I'm just wondering, is there -- and I hate to paint a negative picture, but if inflation is actually giving you guys an opportunity, in terms of sourcing, what have you, to take share because you're able to outprice or underprice, as need be -- is there an issue with deflation, coupled with potentially a negative traffic scenario for the industry, where there's a gross profit dollar issue?

Alec, let me weigh in here, since everyone else has had their shot. That's one of those great questions where probably there's not one answer to. I think the way you initially posed the question, you used the word suddenly, so yes, I think if there was a sudden inflationary spiral, that would create highly unusual pressures that we haven't -- I don't know if we've ever seen in this industry from where we're at right now. With that said, what would be a better environment for our customers and for us would be a lessening of inflation and we would expect that would be a more likely scenario, and the challenge in this market, I guess, from what I see, and I don't have quite as much years as Rick and Ken do in the business, but I saw some other earnings releases over the last week or two. If we were just in a recession right now, that would be one thing. But what's going on in the environment is much broader than that -- it's very psychological. The financial markets are weighing on people. So I don't know that you can just talk about inflation or deflation or recession in isolation. I think you have to look at in terms of what would be other ramifications. So if there was a significant lessening of inflation, if that somehow got the consumer to feel better about their pocketbook, then there might be some offsetting positives to that we would expect in terms of traffic at our customers, and so I'll end where I started which is I think the pace of this would be pretty important. If it happened gradually, I think that would be a better scenario.

I think the other thing to keep in mind, Alec is that we again, in comparison to our competition, we think we're much better positioned than our competition to deal with the swings in pricing. But I would also go back to -- because I think you suggested that inflation was helping us with share gain, and I'm not sure that's what we're hanging our hat on in terms of share gain. Our share gain, we believe is primarily coming from more fundamental activities and initiatives that we have out there -- specifically, again, business reviews. Business reviews and our go to market strategy, unrelated, uncoupled to inflation is really the way we go share, and we're not counting on inflation or deflation to help us in any particular way.

Fair point from all of you. I didn't mean to dwell on a negative. I'm just trying to think through a scenario that is not unrealistic going forward. And just on that point, the sourcing program, wondering if I could get an update, what phase we're in or where we're in the phase, and any changes in the goals from that in the next 12 to 18 months?

Well, our sourcing continues. We had a very robust first quarter. We -- I don't even know what phase we're in any more. It's just part of our business now, Alec. We continue to learn from it. And I guess I would have to say that we're pleased with our ability to buy better than we were buying in the past. But we still have lots of things to learn. It's a small percentage of our total spend. And we will continue to adjust and experiment and learn as we go forward.

So no real change then.

No.

Okay. And lastly, Bill, you were making a comment about first six months, fuel cost impact of up $40 million to $60 million if I heard that correctly.

$40 million to $50 million.

$40 million to $50 million, sorry. Is part of that reflecting -- I thought there was a hedge in place in last year's first half of the year. Is that being captured in this increase?

Yes, we had a favorable hedge last year compared to what spot prices were at the time. Today we have -- I got -- we have favorable forward contract -- last year this time compared to spot prices. Currently we've got several forward contracts that are higher than the current spot levels. So that is a big part of it. We talked about it a little bit at the end of the last quarter, and actually I think at that time we estimated an increase for the six months of $55 million to $65 million, so we've brought that down primarily because we still are buying, like I said earlier, about one-third of it spot, and obviously prices have come off a lot. So we think when the six months is over, $40 million to $50 million is a pretty good ballpark. We expect to recover most of that on the fuel surcharges. Hopefully things will stabilize a little in this economy. We'll have some better thoughts for you for the second half of the year.

Sounds fair. Thank you very much.

Thank you.

We'll take our next question from Bob Cummins, Shields & Company.

Thank you. Good morning, everybody.

Hi, Bob.

One large company that I follow that also generates a good deal of excess cash has publicly announced that they don't intend to buy back any more shares for the near term in view of the turmoil in the financial markets and wanting to conserve funds. Just wondering what your policy will be. I see your share repurchase expenditures were down a little from a year ago in this quarter. Your stock seems awful appealing at $25 a share. But fill us in on what your strategy will be going forward.

Bob, I'll start, I guess. I think you would see us continue with the strategy that with you've seen in the last few years. We'll continue to buy shares back. The only reason it was off a little bit in the first quarter is we were in a blackout in the early part of the quarter, so we're actively buying today, and as I mentioned in my comments, we -- that would be -- we look at share repurchase as a legitimate opportunity to provide return of capital to our shareholders, but in terms of priority, we certainly are looking at CapEx acquisitions and the dividend first, so it's somewhat of a residual, but unless there was a significant pop in CapEx or an acquisition opportunity of a larger scale came along, I think you would see us continue the pattern that we're at right now.

We would agree with you that we, especially now that we see the shares as very attractive.

Yes, I should say. Thanks for the information. I appreciate it.

Thank you, Bob.

We'll take our next question from John Heinbockel, Goldman Sachs.

This is Simeon Gutman for John. A couple questions. Can you clarify -- did you mention what 2Q sales to date were rising?

No, we do not do that, Simeon. We do not give that kind of guidance.

Second, if this environment for supermarkets seemingly take share, just based on the food at home, food away from home numbers, and continues for an extended period of time, how can you help your customers combat it?

One way, we can provide several answers to this question, but certainly one way is to help our customers understand the take-out market, if you will. And if you look at the restaurant business and slice and dice it a bit, you've seen take-out business increasing at the restaurants at fairly nice rates. I saw a number the other day -- don't go to the bank on this but a 20% increase in take-out. I think some of that is being fueled by the reality that the major retailers and the good regional retailers, grocery retailers, have done a nice job over the last few years in terms of improving their take-out offering. Having said that, we're not abdicating that space. We have a good program with a number of regional players out there, and larger players where we provide them ingredients for their take-out business -- we do ingredients and the packaging and that sort of thing. But going back to the restaurants for a second, it is crucial that they have a comprehensive take-out program, so they have to have the right packaging, they have to have an ability for the customer to enter their order via the Internet and all those sorts of components. They have to have a marketing program. So we help the customer with all of those to give them a strong take-out program. So that's one example. And I'm sure there are others.

All right. And I guess there's a lot of moving parts to this, but in the back half of next year, if gas prices remain where they are, diesel should certainly be a tailwind. Is it as simple as just taking that as a percentage of your cost and figuring out how much, or do you guys have an idea?

When you say back half of next year, are you talking about calendar next year?

Calendar, even a little bit into your fiscal.

I would say, again, as far as where we're at right now, we're locked in on these forwards for two-thirds of our purchases, so it will not be a tailwind this year. We'll update you in terms of the second half of the year as we have better information around when we release earnings for the second quarter. The forwards pretty much expire through next summer and early fall, I think, and then at that point we'll just have to see where the stock prices are, that type of thing.

It's also important to remember that we're not trying to beat the oil market. We have enough trouble just in the food market. So we're not trying to beat the market or be smarter than anybody else in oil. What we're trying to do is ultimately take the volatility out of that component of our costs.

Okay. And a couple things on financial items. The COLI, the multistate employer and the company-owned or the company-owned pension -- the run rates that were accrued, I guess beginning in this quarter, should those continue to stand based on assumptions or does the COLI still fluctuate with the markets but the pensions still continue on the same run rate?

Let me go easiest to hardest here. The pension, the quarterly performance you saw for the pension you can pretty much annualize that comparison to last year in terms of the company's qualified pension plan. The stock comp, so the pension hurt us, $4 million to $5 million, the stock comp helped us by a comparable amount. That's going to be pretty accurate as well. We still do need to tweak that a little bit here as we issue options here later in November, so that's not quite as hard a number, but it should be pretty close. The multiemployer plan will fluctuate. What you saw this quarter was we didn't have any situations where we needed to set up provisions for multiemployer liabilities. A year ago we did. As we've noted in all of our ongoing disclosures, we have other situations out there that could bring that to bear again, and we'll just to have update you as that goes along. And then the COLI, as I mentioned in my comments, a large part of those investments are tied to marketable securities. There is a lot of unfavorable volatility in the markets in the first quarter, and there's been comparable unfavorable volatility so far this quarter -- so as we sit here today you should expect to see similar results. If the market were to bounce back, then that would mitigate that.

And back on the company-owned pension, I think the assumptions, I believe, are set beginning of the year -- fiscal year for you, which was in the summertime, but this year you continue to accrue at whatever rate was set. Does that have implications as you go into next year as far as funding underfunded status? I think the markets have considerably changed a little bit since the middle of the summer. Or does it totally depend on what you use for the assumptions for the following year?

To your point, we're fiscal year, so we -- if you will, trued up our funding position at the end of June, and that impacted our expense. To a lesser extent, our funding -- we actually prefunded a little bit this year because we were in good cash situation. So if you fast forward, we'll true all that up again here at the end of June of this year for the following year, and there's a lot of things that impact it, but certainly you are right on point, I know there's been some articles that what's been going on in the markets today, when your markets are down 30% to 35%, that would have an unfavorable effect on our funding position. We think we're still relatively fully funded as we sit here today, but in terms of the expense, that would hurt us for next year. However, there's other variables, such as the discount rate that we would need to address at that time as well. So to the extent that corporate rates have risen, and they have, one thing we did get fortunate on is our bond financing deal back in February. We locked in at 4% to 4.5%, and those rates are 2 to 2.5 points higher today. So that would offset it. To cut through it all, I think net net it would be unfavorable, but that's a long way from now and other things could impact it.

Finally, the last update on the IRS tax case I think you characterized the discussion as beibg constructive. If you can provide any color on that?

Really constructive. They're better -- like I said, they're better than they were a year ago this time in that we are having dialogue. They are constructive. We feel our facts are strong. I wish could I give you more. It's just one of those processes that is going to take some time to work through it appropriately. So it's moving in the right direction. It's going to take some more time. We feel very good with our position.

Okay. Thanks.

Thank you.

And our last question will be a follow-up from Meredith Adler, Barclays Capital.

Thanks again. Just back to the COLI situation, have you thought about eliminating or finding some other way to do this? I know some other companies that had COLI and it created unnecessary volatility in earnings.

Yes, every day we think about it, Meredith. It's very volatile right now. In a certain way we have addressed it in terms of the plans that that particular investment underwrites -- or supports, even though it technically doesn't support it on the accounting side, but those contracts are out there to support supplemental retirement benefits for our senior leadership. And we have actually cut back on the formula in those plans and we have also pared back the future eligibility for those plans. So over the longer term, we've done some things. In the shorter term, there's still some pretty viable tax reasons to fund it the way that we do, and unfortunately the accounting requires to you essentially mark it mark to market, which probably isn't technically right, but it's effectively the same. So it's a trade-off between the volatility and the tax benefits, and as much as we'd like to lessen the volatility at this point, we're planning on staying the course.

Okay, great. Then I just have a question about labor costs. You have improved productivity -- management did take a pay cut, I think starting July 1. Were there cuts in other employees' pay to commission for marketing reps go down?

No.

No, I think the only thing we did there is, obviously when you have the kind of inflation that we've seen, I think our folks have looked at their commission programs, make sure that they're appropriate, but no direct cuts.

Okay. Then just finally, about credit, I know you haven't seen a lot of restaurants go out of business, but do you feel comfortable with the way the operating companies are dealing with credit for their customers?

Well, comfortable and credit aren't two words that you usually use together a lot in our business, but, we would reiterate what we've said all along. We feel we do a good job managing credit, and obviously a lot of that -- most of that is done at the local level, as all of our business tends to be local to a large extent. So we feel good about how we're managing it, Meredith, but clearly these economic times are providing challenges, and there are situations where people are going out of business. There are situations where we're having to work with folks on payment plans, and so it's -- we've said from the beginning that we would expect credit to be more of a lagging indicator, and I would stand by that, but we definitely feel we're managing it well.

Thank you very much.

Thank you.

And at this time for closing remarks, I would like to turn the call back over to Mr. Rick Schnieders.

I would just like to go back and reinforce again that we believe that SYSCO is better positioned than any food service distributor to thrive in the years to come. And secondly, I'll make a political comment. We want to encourage everybody to go out and vote tomorrow. And after you vote, please take a friend or loved one out to dinner. All the poll workers, if possible, but please enjoy a good meal out as soon as possible. Thank you all.

Again, ladies and gentlemen, we thank you for your participation on today's call, and you may now disconnect.