西斯柯 (SYY) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to today's SYSCO Corporation third 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 would like to turn the call over to Mr. Neil Russell, the Vice President, Investor Relations.

Thank you, Patrick. And good morning, everyone. Thank you for joining us for SYSCO's third quarter 2009 conference call. On today's call, you will hear from Bill DeLaney, our Chief Executive Officer and Chief Financial Officer, and Ken Spitler, Vice Chairman, President, and Chief Operating 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 statement 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 28, 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 third quarter of fiscal 2009 and the third 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'll turn it over to our Chief Executive Officer, Bill DeLaney.

Thank you, Neil. This morning SYSCO reported third-quarter operating income of $405 million. Year-to-date operating income was $1.3 billion, a 1% increase compared to last year.

Sales for the quarter were down 4.5% and are flat for the year-to-date period. Diluted earnings per share were $0.38 for the third quarter and $1.24 for the year-to-date period. a 1.6% decrease for the first three quarters of our fiscal year. These results reflect the able of our operating companies to produce quality earnings in the midst of severe market conditions. While creating operating leverage in a declining sales environment is becoming more challenging, we remain steadfast in providing value to our customers and relentlessly managing our cost structure throughout the SYSCO organization.

During today's call, Ken and I will provide additional details of our third-quarter and year-to-date results, and update you on our plans for the business. For now, I'll turn it over to Ken for a discussion of our operational results. Ken?

Okay. Thanks, Bill.

Overall, I'm pleased with our ability to continue to support our customers and control expenses in what continues to be a difficult business environment. Providing excellent customer service and giving our associates the tools they need to perform the job remains priority number one for SYSCO. By focusing on the broad line business, we continue to distance ourselves from the competition and expand our market leadership position. Also, the sigma segment continues to improve performance as evidenced by increased sales and operating income. Without question, the key to our success in this environment is continuing to improve operational efficiency. And I'm pleased with how our operations have responded.

For example, for our broadline companies during the first nine months of 2009 compared to the same period last year, our diesel gallon usage was down 7.5% compared to a mileage decrease of 5.7%. Kilowatt hours were down 8%. Cases per trip were up 2%. Cases per man hour have improved 5%, and sales per employee have increased 6%.

Inflation as measured by our product cost increases was 3.3% during the third quarter. Inflation for the year-to-date period was 6.2%. We experienced a steady decline of inflation throughout the quarter in various categories. We are experiencing further moderation of inflation in the current quarter as input costs continue to decrease. Historically, inflation of 2% to 3% has proven to be a manageable level for both SYSCO and our customers.

During the quarter, we entered into additional forward purchase agreements for diesel. Currently, we have contracts in place for approximately 70% of planned consumption through the fourth quarter, and approximately 40% of planned consumption for the next 39 weeks of next year. We continually manage enterprise-wide headcount in a manner consistent with the sales environment. At the end of the third quarter, our headcount was approximately 47,000, down 6% year over year. We remain persistent in finding ways to increase productivity throughout our business, and expect these improvements to extend beyond the current environment. As the macro environment improves, we expect to be well positioned for the long term as a result of these changes.

We have progressed further in the design phase of our enterprise resource planning, or ERP, projects and expect to be in a position to share costs and benefit estimates by the end of the calendar year. This technology enhancement is the enabler for the future refinement of our core business model. Our focus is to implement an integrated software system that will enhance our productivity and make it easier for customers to do business with SYSCO.

We have begun to experience a moderate increase in acquisition-related discussions in recent weeks. We are hopeful that this trend will result in more tangible opportunities in the future. With that said, we recently completed the purchase of Palace Foods, the leading food service distributor in Ireland, with approximately $200 million in annual sales. With Palace, we believe we have partnered with a great SYSCO-type company, one known for its outstanding customer service and consistent financial performance, which will extend our experience in the international marketplace.

In closing, I would like to take this opportunity to thank our associates for their ongoing commitment to support our customers and improve productivity in all aspects of our business. And with that, I'll turn it over to Bill for a discussion of our financial results.

Thank you, Ken.

There are a few additional items I'd like to address regarding our third quarter and fiscal year-to-date results. As previously mentioned, sales of $28 billion for the first 39 weeks of fiscal 2009 were essentially flat compared to the prior year. Looking forward, we believe we will continue to experience a difficult economic environment for the remainder of fiscal 2009, and, therefore, expect our recent sales trends will not improve during the fourth quarter. This will likely place corresponding pressure on operating earnings during the fourth quarter of '09.

Earnings per share of $1.24 for the first nine months decreased 1.6% compared to the same period last year. Excluding the $0.11 per share impact of COLI in the first nine months of 2009 and the $0.02 per share negative impact of COLI in the first nine months of 2008, diluted EPS increased 5% for the first nine months of fiscal 2009 as compared to the prior-year period. We believe this comparison, which removes the impact of unrealized losses resulting from financial market volatility better reflects our operating performance. Similar to previous quarters, our effective tax rate during the third quarter was unusually high at 40.6%. Approximately 1.5 to 2 percentage points higher than the typical run rate.

The $8.7 million COLI loss for the quarter, which is not deductible for income tax purposes, contributed to this higher tax rate. For the third quarter, operating expenses were $85 million lower than the previous year. The decrease in operating expenses was driven by lower payroll expense of $90 million, which was the result of decreased headcount and reduced incentive compensation. This reduction in operating expenses was partially offset by increased bad debt expense of $20 million for the third quarter. We remain committed to effectively managing our credit exposure as evidenced by the fact that our accounts receivable days outstanding are comparable to that of the prior year.

Nevertheless, our customers are not immune to today's cash flow pressures as we've experienced a $36 million increase in bad debt expense to $62 million for the first 39 weeks of fiscal 2009. While significantly higher than our experience in normal times, this represents just 0.22% of year-to-date sales. We expect to trend of increased year-over-year bad debt expense to continue in the fourth quarter. Year-to-date cash flow from operations of $985 million remains strong through the third quarter, essentially flat with the prior year. Given both the challenges and opportunities inherent in the current market, we continually review our capital allocation priorities. As such, we have completed our stock repurchase program for this fiscal year, and we will develop next year's program in the coming months. We also have further reduced our CapEx spending plan for fiscal 2009 from approximately $600 million to about $525 million.

During the quarter, we further enhanced our liquidity by issuing $500 million of unsecured notes. The bond offing was successfully executed with attractive pricing that demonstrated the investment community's continued confidence in our financial structure. This transaction also allowed us to secure funds at historically low long-term interest rates. In summary, we are encouraged by our overall operating performance thus far this year. Although our industry continues to experience dynamic changes, we remain focused both on contributing to the ongoing success of our customers and achieving SYSCO's long-term financial objectives.

With that, operator, we will now take questions.

Thank you. (Operator Instructions). We'll take our first question from Simeon Gutman with Canaccord Adams.

Good morning, guys. Question on the demand environment. It looks like the real growth is somewhat stable. Or is that too early to call, given that you're going into some important months coming up ahead?

Well, Simeon, we chose our words carefully in this news release. Obviously we saw a bigger decline here in the third quarter than what we have seen in the latter part of the second quarter. And it's unclear at this point. We're certainly encouraged by some of what we're reading, some of what we're hearing, where people seem more optimistic. But at this point, I can't really tell you that we necessarily hit a bottom.

Got it. And then -- the distribution of your sale, the other business, I realize, is not big. But that business seems to be more sensitive to the economy. Is that fair? And I guess is that because of the nature of what it sells?

Are you referring to Sigma, or are you referring to the specialty companies?

I guess the specialty. Is it the produce and the meat?

Yeah. They're particularly sensitive to the economy particularly like guest supply, which deals mostly with the hotel business, was significantly off. And of course, what drives our meat companies is the high-end steakhouses, which we're seeing a decline there that's greater than the market in general.

Okay. And then a question on the expense side. And I think you also alluded to this in the comments. With expense dollar growth down 7% or so in the quarter. It does sound like you're starting to get up to sort of the feeling in terms of how much costs can be taken out, absent the variable changes in the business?

I'm not sure in the question here. What are --

I mean, how much more can the cost structure be lowered, without -- and I'm talking more about -- on a fixed side. If you take the variable stuff out of the equation? Meaning how much more flex can you go if the top-line environment weakens by another couple of hundred basis points?

Fortunately we're -- we're in the business that our expenses predominantly are in personnel. Driven pretty much by a case of productivity around moving the case in and out. So we've still got room to go. But to your point, we're not there yet. Not significantly there. But there is a point where that becomes a problem.

Yeah. I think one of the things we try to bring out in the comments this morning is we remain very, very focused on managing our expenses and our headcount and all that type of thing. With that said, when you get into a declining sales environment, creating operating leverage does become more challenging. So to Ken's point, there's some room there. But it's getting more difficult.

And then lastly, I guess along those lines about the environment, the acquisition criteria -- it doesn't change. But does -- do size differences become more manageable? Meaning, deals that are on smaller side that may not necessarily move the dial? But there are very contiguous distribution centers where you can leverage off the expense base a bit. Does that become more in play?

Yeah. I think I understand your question. We typically don't announce those, but in our world, they're called fold-ins. And the smaller distribution centers may be general broadliners, might be specific paper or something like that. Yeah, we're seeing more activity around that.

And do you think potential deals will be more tilted in that regard or it's hard to say?

Hard to say right now.

I think right now we're seeing more on the smaller side. Again, over time that could change.

Got it. Thanks.

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

Thanks for taking my question. I'd like to just start with a number you gave us last quarter. And I'm not sure if you gave it this quarter. And that is what happened to case volume?

I don't recall giving a case volume number last quarter. Did we do that?

No.

Not sure. Okay. What --

I thought you said it was down 4%.

No. I'm not sure -- I know our sales were down about 1% last quarter, Meredith. Then we go through our inflation methodology with you. So we had -- I don't remember the exact numbers now. I don't have them in front of me. But we don't disclose case volume actually.

Oh, okay. I'm just trying to distinguish between trading down, which is going to be visible in sales, as well as actual declines in volume. But we can move on. That's not really a big deal. I was wondering if you could just maybe talk about -- you obviously have had bad debt. Do you feel like there is some kind of a noticeable change in the number of restaurants that are out there? And then I guess the same question for distributors, I did hear from somebody about a couple of slightly larger distributors who went out of business recently. One in San Fran and one on the east coast. But I was just wondering what you guys are seeing.

In terms of the number of restaurant or number of distributors?

Both.

Distributors, it's a significant pickup. And the number that have gone out as of recent times. And we anticipate that to continue, Meredith.

Okay. And do you feel like -- I had also heard that there was some fragmentation of purchases that restaurants were chasing deals. And were willing to sort of go anywhere to get those deals. Are you seeing anything like that?

You know, I think that's anecdotal information. We're not feeling it if you're asking that question. Typically when there's people scrambling -- that kind of anecdotal information flows up. But I'm sure there's folks out there doing that. They've always been doing it.

I think on the restaurant side, Meredith, we talked for a while now that most people that follow this industry feel there's a fair amount of overcapacity in the industry. And we're seeing that, and certainly in closures and -- I don't know exactly that we have a number here for you. But we don't necessarily see that as a bad thing. In other words, I don't see that as an additional problem to what's going on in the market. It's more or less the market adjusting to the volume that's out there today. And as that connects with bad debt expense, some of our issues with bad debt expense are with people that are going out of business. Some aren't. And it just depends. So it's not a total correlation there as far as the bad debt and the restaurant closings go.

Okay then my final --

A lot of these folks are going through some type of restructuring.

Got it. Then my final question is about your own capacity. You have pretty efficient distribution centers. But if you got to the point where you couldn't cut costs more, would it ever make sense to close any facilities?

Well, at this point, we just recently closed one in Jamestown, New York. But it was more of really just a geographically hospitable -- we could look at that, but we're a long ways from looking at that.

We have very few facilities that don't provide a very good return on investment. I think you would see us continue to do what we're doing, which is manage headcount and manage productivity as best we can. Those facility are geographically -- for the most part, I'm talking about our broadline business. For the most part, those facilities are in market we need to be in to service customers.

Okay. Great. Thank you very much.

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

Thanks, good morning. Bill, you've had a few months maybe to take a step back and think about the business from a different perspective. I'm curious, after you've talked with more of your employees, more customers, more suppliers, what some of your primary takeaways have been and some of the top focal points you see as you look out into fiscal 2010?

Well, I'm -- I'm doing my Ronald Reagan impersonation here, Jay. Look, I would say similar to what you and I have talked about in the past. That even though we've got a transition going on here in terms of my role, the biggest thing we're really dealing with the company is more the market and what's happened here in the last six to nine months. So from that perspective, I don't think a lot has changed. Our primary focus continues staying as close as we can to our customers and working with those folks to, if not grow their business, at least help them stay competitive in their respective marketplaces. And along the way, to do the things that we were talking about already this morning, which is to manage our costs. Now, that's a long way of saying that, we're committed to slugging it out here in the near term.

And then over time, Ken alluded to in I had comments that there are things we're working on in our technology side to help us in other areas to improve our productivity and take some of the complexity out this business. So we're in the early stages of design there. That's potentially a big opportunity for us. We'll talk to you more about that as time goes along.

Then thirdly, as things hopefully stabilize here at some point over the next year or so, we're going to continue to look for opportunities to grow this business, whether it be through acquisitions, or primarily hopefully through acquisitions. And initially in our core business, we really do believe just like there's pressure on the restaurant side, that on the competitor's side that there will and there should be more opportunities. We're having discussions. That's picked up a little bit, as we mentioned in the comments this morning. It hasn't picked up dramatically. Quite honestly a lot of our conversations don't always lead to a result because not every transaction is one that we can get done. So kind of longer term, we would hope to be able to go through acquisitions and identify additional markets.

I'm curious if there had been any change in the impact of your business reviews, plus or minus, or just more of the same, or anything on that platform or general sales and marketing in general to drive more volume even though the market remains depressed.

Well, I'll let Ken start on that one.

Well, Jason, the business review is always evolving and improving, at least we hope so. We have concentrated more on the menu itself, on the profitability on the menu, when customers are struggling a bit. That becomes increasingly more important. So our focus is, and continues to be on the profitability of that individual unit's menu.

The other thing is we are consistent in explaining to people in the business reviews. When you get into an environment like we're in today, it just re-emphasizes or doubly emphasizes the importance of continuing to develop those relationships with the customers that we do have. So certainly lost business, and when we talk about lost business, that's basically, when you lose an account that a year ago you were selling. The business reviews are very, very impactful there. And we continue to very little lost business on the accounts that we review in an effective manner.

And any quick examples of how when you talk about technology transformation initiatives you have on the plate, how that will make it easier for your customers? Is there a user interface that maybe can be approached with, or better transparency on things? Is there any couple one or two items that you're thinking really stand out as opportunities to really penetrate your customers?

Yeah. Just generally the user interface both for our sales people as well as for the customers order direct would be a significant one. And then hopefully over time, providing better tools to the customers as well to help them manage their business, manage their purchasing, that type of thing.

Great. Thank you very much.

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

So Bill, it sounds like you have not yet seen what you can say is a bottoming in volumes or tonnage, that we may haven't hit the bottom yet? Is that -- you just can't tell?

I think, John, all we're saying is that we're not ready to make that call at this point. It's-- I think we need to see a little bit more here over the next two or three month. And-- and hear a little bit more about what's going on in some of the other parts of the economy. So I guess at some point we'll be able to look back and say when we saw it. Right now looking forward, it it's not clear.

Mine, when you look at your -- I mean, when you look at your -- when you looked at the restaurant business, it looked like January, February, were clearly better than December, then March slipped a little bit from January, February. Would that be consistent -- did you see something similar, or you're behaving a little differently than that?

I guess we're different. We didn't see that at all. We saw January, February, March all being off --

On a unit basis?

Yes.

Okay. Do you think you're gaining share maybe on a unit basis in this environment? Or is it hard to tell?

Yeah, I think hard to tell probably. At this point, the numbers are not that accurate in the shorter term. We historically certainly feel we gained share. We're-- I'm hesitating a little bit on the answer because I don't even know that that's the most critical thing right now. The market's down, we're off a little bit. And one of the things we have to do and it's -- it comes back to Meredith's question, is you got to have to be careful you don't gain too much share in this type of environment, because there's business that is potentially not the best from a credit standpoint. So our folks are doing a good job balancing, going after new business as well as, making sure that we don't take an undue risk.

You think that some of the cost cutting that you guys have done, has that contributed to any weakness in sales or you've been pretty careful to avoid that, the last couple of month?

John, we're very careful with that. And I can say emphatically that that's not the case.

Okay. It looks like we will go to some level of deflation at least temporarily. Should that have a positive impact on units and menu prices or probably not?

Well, first of all, we're not clear that we will go to deflation. We're seeing it in the dairy category right now.

Right.

We're seeing kind of break-even pricing in a lot of categories. But canned and dry frozen is still up. And you probably would have a better handle on that, John. But clearly, some of these manufacturers are not passing along the decreases for their own reasons. And so it's not clear. But what is clear is we are seeing moderating inflation.

To the second part of your question, I don't see deflation as a good thing. What we would continue to tell you is that, relatively low level of inflation, that 2% to 3%, has served us well over the years, and generally is pretty good for our customers.

Do you think disinflation -- you know, as we move down here because I guess my point is inflation dropped off in this quarter. We didn't see an improvement in unit volume. We eventually should see that. Is that going to be driven more by -- I guess more by the economy and less by disinflation.

Yeah. I think that's fair, John. These are not the normal times that we would go back and look at trends off of deflation and inflation. And I think whether it's the economy or people's perception of their future income stream, I think that probably is going to drive it more than anything else.

All right. Then finally, if you look at gross margin going forward, how do you think about investing in price, you know, passing along price decreases to your customers. And, what's going to be the primary driver going forward of gross? Is it going to be customer mix or the level of inflation?

Let's take the first part. Go ahead.

We normally pass, part of our pricing strategy is normal price declines we pass through --

Yeah --

If you're talking about margins as a way to gain business --

Yeah.

Then, frankly we haven't found that to be as powerful a tool as you might think.

Yeah.

It's a pretty slippery slope, John, as you well know. What we really try do is work with our customers where we can identify, let's say, some shared savings opportunities. Then we'll work with them there. But across the board, price reductions where we don't have cost savings to go with it has never been a good thing for SYSCO. And we don't think it's a good thing for the industry.

All right. Okay, thanks.

We'll take the next question from Greg Badishkanian with Citigroup.

Great. Thanks. Just on your initial comments that you haven't seen improvement in sales really, and you could see some pressure on operating profits in the fourth quarter. So I'm just wondering, is it going to be kind of the same pressure that we saw in the third quarter, or is it going to be a little bit less or maybe a little bit more as we go forward?

All of the above. Really, Greg, we don't know. What we're trying to tell you there is we're early in the quarter. We haven't seen the bottom as we said. At least we can't tell you that we've seen the bottom. And we're just trying to acknowledge that, when you get into this level of sales decline, if we were to get a little bit worse, it was more challenging to create any operating leverage. We've still got two months to go in this quarter. So, even if we were to give guidance, which we don't, it would be pretty difficult to predict.

That's helpful. And it's good to see that you're not chasing around accounts that might -- that might be distressed in terms of --

We're just trying to make good business decisions.

Absolutely. And obviously bad debt expense has risen third quarter. Would you expect that to kind of stabilize in the next few quarters, or does it just get worse as the environment and sort of the cash cushion that a lot of these restaurant, small, independent owners have sort of dwindles, you'll see it more and more on bankruptcy? How do you see that playing out?

I'm going to default to my lagging indicator assessment here that we've been using for several quarters. I think the bad debt for from now on could be with us for a good while.

Yeah. Okay. Great. Thank you very much.

(Operator Instructions). We'll go next to John Ivankoe with JPMorgan.

Thanks. I was wondering if you could shed some light on your gross margin in the third quarter. It looks like it's been lower than it has been for some time. Is there anything unusual there that I should focus on, whether it's customers demanding lower prices, what have you, or were there some one-time type of things in that? And continuing on with that, do you think it goes back to the -- the 80.9 type of level, 81 flat type of level where it looks to have been over the last eight or 10 quarters?

Yeah. We'll -- just looking at the quarter, you're right, we're off a little bit in margin. But it's -- I would say other than -- I think everyone's aware, we've got a fuel surcharge employed out there that's indexed now for our Street customers. And so we fell below the index early in the quarter. So we didn't have that in the margin this quarter. So that was certainly part of it. Clearly in the environment like this, you're competing very hard on the price line, every day. So there's always good price pressure. I would say the fuel surcharge would be the only tangible thing I can think of.

Is that worth 10 or 20 basis point, 30 basis points?

We'll give you some disclosure in the queue when we file that here in a day or two, that will quantify that to some extent. I don't have that with me right this morning. I don't believe it's 20 basis points, no.

Okay. And if I may, just in terms of the total number of restaurants that are out there, are you seeing an increase in the number of closures? I mean, are you seeing stability in the number of closures? In other words, are we seeing an accelerating rate of closures over the last six months? Or are we kind of in a steady state level in terms of what you see in the broad industry?

We don't have great data on that. I would say that we're seeing a slightly increasing level of closures. Again, as I said earlier, and I'm not trying to minimize it, that's not necessarily a bad thing for the industry. There's too many restaurants out there. We try to partner up with the folks that are committed to the industry. And-- and so the fact some people are falling by the wayside is unfortunate, but it's not a bad thing for the industry.

Understood and agreed. Thanks. That's it for me.

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

Thank you, good morning. Within the broad line, can you discuss a little bit the sales mix or the slowing in the sales by mix differentiating between independents and the other half of the business, which is small chains and institutional? I guess what I'm getting at is do the independents slow much faster than the rest of the frontline business?

We don't really give a lot of detail on that, Andy. But I think just generally, we would acknowledge that the territory sales are -- you can tell from the disclosures we do in terms of the MH search sales that the street sales are off a little bit more than the program sales.

Fair enough. Sort of where I was going to go with that. So at least for us outside the company, we could look to that statistic as I guess a coincident indicator?

A good proxy.

Okay. And on the gross margin, I know you have some -- a lot of your fuel at least at this quarter hedged at higher costs and the surcharge came off. Is that sort of what we were talking about? If that weren't the case, the gross margin would just be up by the -- would have been improved by what's not in the adverse hedge?

No. Let me be clear. What I was trying to say was in answer to the reasons why margins were off for the quarter, the one tangible thing we can look at is the fuel surcharge. There will be some additional disclosure in the Q. That's part of it. That's not all of it. I would attribute a lot of the rest of it just to competitive pressures.

Fair enough. I'm sorry -- yeah. I kind of misspoke a little. But there is -- it would have been improved by some amount. We'll read about it in your Q if you didn't have -- if you were just flat and not hedged.

Correct.

On --

Correct.

Lastly, on the bad debt accrual, what -- I missed this. Was there an event or two this there that really you had to catch up on with some bankruptcies? I hear it's going to be at a higher level than you've ever seen. Was there something that you had to catch up in there or events, big events that you think are going to continue? Or is it just generally looking across the business and getting more conservative about where thing are going?

Across the business. Across the business, Andy.

And that's it for me. Thank you.

We'll take the followup question from Meredith Adler with Barclays Capital.

Thanks. I actually have two questions. On the gross margin, would inflation or deflation in some categories like dairy have an impact on the gross margin?

Yeah, certainly.

Yes, they would.

In different ways. To be honest with you. And so Meredith, we're kind of in this awkward period where we've got inflation in some categories and deflation in some others. So it's hard to isolate all that for you. But generally inflation, you see your gross margin percentages. There's pressure on your gross margin percentages. Downward pressure. Whereas in deflation, receivables may go up a bit but pressure on deflation is on your cost side. Because your operating costs aren't necessarily going down.

Okay. Then a followup to Andy's question. I believe you put the fuel surcharge in gross margin, but the fuel expense goes in SG&A or do I have that wrong?

No, you have that exactly right. The surcharge is in margin and the expense is in delivery expense or SG&A. As you call it.

Then maybe you could comment on -- I know you've hedged your fuel, but just some idea of the fuel that you're buying spot. I'm trying to get a sense of what the environment looks like now. You said price is down year over year?

Yes. Oh, yes. Significantly. And we'll see that for a few more quarters --

We haven't seen a major increase in our net expense because even though we're hedged out there on a good part of our volume, at higher rates, the spot prices are down considerably from last year.

Okay. Great. And I guess my final question is about the that you raised, the $500 million, have you said anything about what you're going to do with the proceeds? I'm having trouble figuring out what you need the money for.

Well, I think our thoughts there were as we said in the comments there, Meredith, that generally you want to borrow money when you can borrow money. And from -- from liquidity standpoint, certainly, we're in pretty unusual times here from a business standpoint. We thought it was a good time to go out and create liquidity. And certainly the interest rates by any historical standard were attractive, as well. With that said, I would think you would expect us over time to spend the money as we always do. Invest in our business, hopefully we'll have acquisitions, that type of thing.

Great. Thank you very much.

And with no further questions in the queue, that concludes today's question-and-answer session. And also concludes today's conference. We thank everyone for their participation.