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Sysco Corporation (NYSE:SYY)

F2Q09 Earnings Call

February 2, 2009 10:00 am ET

Executives

Neal Russell – Vice President, Investor Relations

Richard Schnieders – Chief Executive Officer

Kenneth F. Spitler – President and Chief Operating Officer

William J. DeLaney –Chief Financial Officer

Larry G. Pulliam – Executive Vice President, Global Sourcing & Supply Chain

Analysts

Meredith Adler – Barclays Capital

Andrew Wolf – BB&T Capital Markets

John Heinbockel - Goldman Sachs

Greg Badishkanian – Citigroup

John Ivankoe – JP Morgan

Alec Patterson – RCM Capital Management

Operator

Welcome to today’s Sysco Corporation’s second 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. Neal Russell, Vice President Investor Relations.

Neal Russell

Good morning everyone. Thank you for joining us for Sysco’s second quarter 2009 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’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 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 second quarter of fiscal 2009 and the second quarter of fiscal 2008 unless otherwise noted. Also, all comments about earnings per share refer to diluted earnings per share unless otherwise noted.

Also you will notice a slight format change in the financial presentation portion of our press release issued earlier this morning. Although there are no substantial changes to the information displayed, we believe the format more closely aligns with our quarterly SEC filings and makes it easier to identify the relevant financial information.

With that out of the way, I’ll turn it over to our Chairman and Chief Executive Officer, Richard Schnieders.

Richard Schnieders

Let me comment on my retirement first of all and as disclosed on the announcement of January 20, I will retire in June from Sysco, stepping down as CEO at the end of March. Ken Spitler has been named Vice Chairman and Bill DeLaney will become CEO on March 31.

Beth and I look forward to this next phase of our lives, and particularly working on issues related to childhood hunger. I remain steadfast in support of Sysco and there is a great team in place. The Board is confident that Ken and Bill together will lead effectively and continue the tremendous record of success that Sysco has enjoyed over the years.

Now on to the financial highlights for the second quarter and the first six months of fiscal 2009. This morning Sysco reported second quarter sales of $9.1 billion, a 1% decrease compared to last year. And for the first six months of fiscal 2009 sales grew 2% to $19.0 billion. For the second quarter operating income was $422.0 million and operating income increased 2.5% to $927.0 million for the first half. And diluted earnings per share were $0.40 for the second quarter and $0.86 for the first six months of the year.

We are very pleased with the performance of the broad-line companies in a difficult environment and we remain confident about Sysco’s long-term position in this industry.

Ken and Bill will provide additional details of our second quarter and first half of 2009 results and I will be back to facilitate our Q&A session.

Kenneth F. Spitler

Overall, despite the difficult business environment, I am pleased with our ability to continue to support our customers while controlling expenses. For the second quarter operating income was $422.0 million and for the first six months of 2009 operating income was $927.0 million. Our 2% sales growth for the first half of 2009 was leveraged by 0.5% to 2.5% operating income growth.

Excluding the $54.0 million impact of COLI our 2% sales growth for the first half of 2009 was leveraged by 7 points to 9% operating income growth. Bill will provide more details on the overall financial performance and the implications of COLI in a few minutes.

Without question, the key to our success in this environment is to continue to improve operational efficiency and I am pleased with how our operations have responded thus far. Examples, our diesel gallon usage for the second quarter was down 7.3% compared to a mileage decrease of 6.2%.

For the first half of 2009, as compared to the first half of 2008, kilowatt hours are down nearly 11%. Cases per trip are up 1.6%, cases per man hour have improved 5.6% in the broad-line warehouses and sales per employee have increased 6.1%. In addition, sales per employee have increased approximately 20% compared to the end of 2005.

Inflation, as measured by our product cost increases, for the second quarter was 7%. Although still relatively high, this represents a sequential decrease of 1.3% from the first quarter.

We experienced this trend throughout the quarter and the decline in inflation has continued thus far in January. We expect to see inflation moderate over the long term as input costs continue to decrease. Clearly, the economic environment presents challenging circumstances for our customers. As such, we expect to experience a further decline in sales over the balance of the physical year.

We continue to manage headcount in a manner consistent with the sales environment throughout the entire organization and at the end of the second quarter we have approximately 48,000 associates, down approximately 4%, or over 2,000 associates across the organization year-over-year. We must continue to find ways to strengthen our core business and further enhance our supply chain capabilities.

Although I am pleased with our performance to date, we remain committed to continue improving as a company by looking for ways to gain additional efficiencies in this competitive business. As a result, we have begun to design an enterprise-wide platform to implement an integrated software system that will provide our operations with the necessary tools to make it easier for our customers to do business with us and to further enhance our productivity.

We expect to complete the design process by the end of this calendar year and for the entire project to take place over the course of several years. I am confident that this is an appropriate time to evaluate our technology platform and improve the efficiencies of our system.

I would like to thank our associates for their diligent work to support our customers and improve productivity in all aspects of our business. And with that, I will turn it over to Bill for discussion of our financial results for the quarter.

William J. DeLaney

There are a few items I would like to address regarding our second quarter and fiscal year-to-date results. As Rick mentioned, our operating income was $422.0 million for the quarter and $927.0 million for the first half of the year. Excluding the $31.0 million impact of COLI in the second quarter and $54.0 million impact of COLI for the first half of fiscal 2009, our operating income was $453.0 million for the quarter and $981.0 million for the first half. This resulted in an operating leverage of 7 points for the first half of fiscal 2009.

Diluted EPS for the first half of fiscal 2009 remained flat at $0.86. Excluding the $0.09 per share impact of COLI, diluted EPS increased 12% in the first half of fiscal 2009 over the first half of fiscal 2008. We believe this comparison, without the impact of unrealized losses resulting from high volatility experienced in the financial markets during the last several months better reflects the operating performance of the company.

Similar to the first quarter, COLI had the impact of increasing our effective tax rate, which during the second quarter was unusually high, at 40.4%, approximately 1.5% to 2% higher than our recent run rate.

As reflected in our cash flow statement, our provision for losses and receivables for the first two fiscal quarters increased $15.0 million year-over-year. W have consistently communicated that credit tends to be a lagging economic indicator for Sysco and we certainly are not immune to the challenges our customers are facing in this business environment.

However, as has always been the case at Sysco, we continue to have stringent credit policies limiting our exposure. This requires an important balance with supporting our customers, something we remain focused on.

Capital expenditures for the first half of fiscal 2009 were $180.0 million. In consideration of the current business environment we have Re-evaluated our capital expenditures and are lowering our projected full year capex from approximately $700.0 million to about $600.0 million and will continue to review our spending priorities.

Before I close I would like to add my comments on the succession plan as well. First, allow me to thank both Rick and Ken for the tremendous support they have shown me over the 20 years I have spent at Sysco. I am grateful for their support and excited about the opportunities that lie ahead.

I realize some of you may have questions about the CFO’s succession so let me just say that it is one of my top priorities and work has already begun to identify the best candidate for that position. Once we have identified the appropriate person we will inform you accordingly.

In closing, as Rick said in his quote this morning, these are difficult times, times that require us to focus in all aspects of our business. It will require us to do things differently than we have in the past, to execute better, and at times to makes difficult decisions. That said, we have a very strong balance sheet and cash flow. We are one of only 40 U.S. companies with a corporate issuer rating of double-A minus or better. We have a foundation of strength from which to build upon and we look forward to taking full advantage of the opportunities that present themselves to Sysco.

Before we go to the Q&A let me turn it back over to Rick.

Richard Schnieders

Thank everyone on the call for joining us today and for your support of Sysco over the years. This is my last earnings call and let me tell you, it has been a privilege to speak with you about this great company. I look forward to continuing to being an ambassador of Sysco in the future.

We will now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Meredith Adler – Barclays Capital.

Meredith Adler – Barclays Capital

You mentioned a little bit about credit but I would like to talk about it a little bit more and I know that when you gave guidance on the sales in the middle of December you did talk about some customers who were going out of business. Could you talk a little bit more about what kind of closures you are seeing and how you think that will play out for the remainder of your fiscal year?

Kenneth F. Spitler

We have had more closures than what we have traditionally have been seeing. What I can you is the restaurant industry is predicting a closure rate in the mid-teens. We are not seeing that quite yet but we are seeing more than normal.

Richard Schnieders

The mid-teens being 15,000 to 17,000 restaurants. Again, that’s a prediction. So it’s anybody’s guess at this point but it is challenging out there.

Meredith Adler – Barclays Capital

And do you think that your independent customers are better positioned or worse positioned within that?

Richard Schnieders

Better positioned than our competitors’ independents or better positioned than the chains?

Meredith Adler – Barclays Capital

Than the chains.

Richard Schnieders

I think it’s probably about equal. I think, depending on the operators, it’s going to be a challenging environment. Those that are strong and have a good business model, whether they’re independents or chains, will get through this tough period and be better as we come out the other end.

William J. DeLaney

I don’t want to minimize the credit issue, but in the context of closures, not every restaurant that closes is a credit problem. Sometimes people are just taking a hard look at the economy and making a business decision. So we are clearly working through more situations than we have in the past but it’s not quite as bad as the closure number.

Meredith Adler – Barclays Capital

And I noticed a very big decline in accounts payable. Is that a typo?

William J. DeLaney

No, it’s right. I guess on the positive side I think as business declines the way it did throughout the quarter and even more so in December, we’re pleased with the way we were able to manage the DSO and the inventory and receivables. On payables, a couple of things going on. Obviously as your business falls off, payables is more tied to recent purchases and that caught up on us. The holidays fell a little different, and quite frankly, we have got some work to do there in terms of tightening up some things on the payables side.

So it’s a combination of things but it’s not a typo. It’s an opportunity.

Meredith Adler – Barclays Capital

Because your inventory did not go down anywhere near as much. In fact, inventory was up.

William J. DeLaney

It didn’t go down but when you look at the DSO, when business falls off like this it’s very difficult to manage your inventory. To have relatively flat DSO, I think is pretty good when business is falling off.

Meredith Adler – Barclays Capital

This new technology, maybe you could explain how does it change your interaction with customers and does it actually allow you to manage those relationships with fewer people? Does it replace some of the customer-facing folks? What’s the benefit in doing this?

Kenneth F. Spitler

It’s an ERP system, first of all. And the answer to that question is we certainly wouldn’t be doing this if we didn’t expect a huge benefit to the organization in terms of really two things. One is expense reduction, more shared services on the revenue side enable us to approach our customer base perhaps with a different facing.

William J. DeLaney

If I could just add, this is something we didn’t just roll out of bed in December and say sales were off, we need to do something different. We have been looking at our business pretty hard in the context of the plateauing of growth in the industry. The growth has plateaued for the last four to five years so I would say over the last year and a half we have done a very exhaustive internal assessment of how we can, as Ken says, take some of the complexity out of this business for our customers that would presumably lead to a better opportunity for growth.

But also we are constantly asked about how can we continue to show areas of improvement and productivity and we think this is something that could facilitate that. So we are talking about it here today because we have begun some internal, what is called blueprinting or assessment work, we’ve got people working on it. We have purchased some software.

With that said, we are in the very early stages and it’s going to be one of those situations where, we will keep everyone up to date as we get through it, but as Ken pointed out, it’s going to be several months before we’re really through the blueprinting phase to get into a real granular discussion on cost and benefits and all those types of things.

Operator

Your next question comes from Andrew Wolf – BB&T Capital Markets.

Andrew Wolf – BB&T Capital Markets

Rick, we will miss you and congratulations on your strategies for really being forthright is seeing the slowdown in restaurants coming and positioning the company to perform as well as it is against such a headwind.

If things got worse during the quarter and you put out a release to that effect, and the government numbers that I track suggest that as well, as you were doing minus 8 for the whole quarter, how much worse is December versus the quarter number and how is the business looking in January?

Richard Schnieders

That minus 8 number, you’ve taken the inflation out?

Andrew Wolf – BB&T Capital Markets

I’m just calling that real. It may not be a pure volume number but it’s a proxy. You can use any number you want but I’m really trying to get to where is the trend today versus December, which was certainly worse than the quarter.

William J. DeLaney

To your question, we saw some very modest growth in the first part of the quarter and then it started to flatten out and then it did go negative on us in late November and December. So I am going to use nominal just because that’s what we report. And there is a little bit of a play going on between the way we calculate real and pieces but your point is fair, so I would say it fell off more so in December and it has continued to fall off a little further in January and hence Ken’s comments that we would expect to see sales for the last six months to be down year-over-year.

Andrew Wolf – BB&T Capital Markets

So a little worse in January but maybe not as steep a continuing decline. In terms of the rate of decline you think December was the worst?

William J. DeLaney

It’s fallen off some. It’s not a dramatic fall off in January. And really, we want to be a little careful here and try not to go into too many of these types of sayings or Sysco clichés, but this particular quarter, January is a relatively small percentage of the total sales, as is February, and March is disproportionately high compared to other quarters.

So we are continuing to see softness, it’s a little bit worse than what you saw for the quarter but March is really going to be the key when we look at our numbers for the quarter.

Richard Schnieders

And if you will permit us just a little bit of whining here, the weather, too, this year, late December and in January, and there’s no way to quantify this, but the weather has been worse than it’s been in the last several years and it’s certainly been broader. If you look at those winter storm systems that have gone across the Midwest all the way into the Northeast, it has been really brutal. And it continues on to a certain extent. So the weather itself has certainly been a contributor here in January.

Andrew Wolf – BB&T Capital Markets

On the 4% reduction so far in the headcount, versus let’s call it an 8% real, big volume decline, how much of that is variable and it’s just going to down in terms of maybe you need less sales people, less warehouse people, less drivers, and is just going to vary with the sales increase or decrease? And how much of that is more on the overhead side so that we can try to model the variable contribution rates or get a little more precise on that?

Richard Schnieders

I don’t know if we have a number in terms of the percentage of that that’s variable, but there is certainly a fairly large percentage. You can kind of do the math. By far most of the folks are out in the operating companies and most of the folks that are associates that are out there are associated with the movement of cases. So drivers and warehouse folks, it’s a variable expense directly related to the piece count.

Kenneth F. Spitler

Typically that’s the way we manage our business all the time and we don’t have big layoffs. By the time we make a decision to have a lay off and get it into place, it sometimes does more damage than it does good. We manage our business like this every month, really to the case count. How many cases are going across that dock is how we run the company every month. So as those cases decline so have our employees. So we haven’t had a call from here to say take your employee count down. Our operating companies do that as routine business.

Andrew Wolf – BB&T Capital Markets

So from those two answers I would think it’s more skewed to its variable costs and it can continue to vary either way.

Kenneth F. Spitler

I would say that’s right.

Operator

Your next question comes from John Heinbockel - Goldman Sachs.

John Heinbockel - Goldman Sachs

Can you talk about the dynamic, as your input costs come down, as inflation moderates, and your input costs come down, how does that get passed along to your customers and how elastic is demand? Is the price in driving demand, so as inflation comes down, do you think this time around demand will go up or maybe not this time?

Richard Schnieders

We have done a little bit of work on that. Again, I wouldn’t say that it’s real scientific but we have seen some correlation as the prices come down, the real volume picks up. Now we’ve never been in an environment like we’re in today but I think there is some elasticity. It’s almost like the question before, I don’t know what percentage that is, but there is some elasticity in terms of the rate of inflation declining.

John Heinbockel - Goldman Sachs

You get a reduction in your input costs, how quickly are you going to pass that along to your end customer? Obviously the delay would create a gross margin benefit.

Richard Schnieders

Again, these aren’t reductions. We’re talking about a slower rate of increase so on our contract business, generally that gets passed along within 30 days, and on our street business, if we’re managing well, which we have been for the better part of two years here, that can get passed along within a week.

John Heinbockel - Goldman Sachs

You really don’t think there are going to be any actual list price rollbacks?

Richard Schnieders

I don’t think we’re saying that. I think it’s mixed. We’re certainly seeing some pressure in certain intermediate categories and that type of thing. But the other thing we’re seeing is even though we’re hearing this and we’re feeling it, a lot of the manufacturers are not necessarily experiencing it in terms of how they trade with us. So to this point we’re seeing some diminishing rates of inflation, not as much as we have thought a few months ago, but there is deflation in some categories and when that happens we manage that pretty quickly as well.

But overall, we’re not seeing deflation at this point.

John Heinbockel - Goldman Sachs

If you take out COLI, so your SG&A was down 1.5% or better, is there a limit as to how well you can do on that, on that front, i.e. if sales were down 3% or 4% in nominal terms, do we hit a point of where you can’t avoid negative leverage? Or do you have a pretty long runway there?

Richard Schnieders

You do. I’m looking at Ken here because operationally really, as he said, is how this happens but just mathematically, and we’ve obviously had this question quite a bit over the last three to six months, is you get to flat sales growth in nominal terms and then to negative sales growth you clearly hit a point where the ability to leverage is very challenging. But deleveraging, we’ll have to see.

Fortunately we haven’t been in this situation before so clearly you do. It comes back to the question of the variable versus the overhead. You do get to a point where it’s more and more difficult to leverage but we’re going to have to continue to assess that and communicate that with you as we see it.

Kenneth F. Spitler

It’s very difficult to stay ahead of when it occurs fairly rapidly.

John Heinbockel - Goldman Sachs

I thought you would do a worse job this quarter because it happened rapidly during the quarter. In theory you should do better going forward because now you are prepared for it, or no?

Kenneth F. Spitler

I would hope so. I think we certainly have a different mindset today than we had a quarter ago.

John Heinbockel - Goldman Sachs

And you’re not seeing, as you cut headcount here, as you measure service levels to your customers, are you seeing any diminution in service?

Kenneth F. Spitler

Definitely not. We wouldn’t do that.

John Heinbockel - Goldman Sachs

There’s not a risk here that cutting back will exacerbate the sales weakness?

Kenneth F. Spitler

No, absolutely not.

John Heinbockel - Goldman Sachs

What’s the update on the IRS tax case?

William J. DeLaney

Not a lot of update. In recent weeks we had a couple of meetings with them in late fall and we have another one scheduled here in the next couple of weeks. We’re having good conversations but it’s still moving relatively slowly.

Operator

Your next question comes from Greg Badishkanian – Citigroup.

Greg Badishkanian – Citigroup

A question on food inflation. Assuming no change in the current cost of commodities, they stay constant at a dollar level where they’re at now, when would you expect inflation to be flat?

Larry G. Pulliam

There are so many different dynamics that affect the class of goods. For example, we have seen incredible increases in steel prices resulting in the tins for canned goods going up. I think by estimate it was over 180% increase in tin prices over the last 18 months. So that is a considerable factor in the inflationary factors for canned goods, which is a very large commodity for us. So it’s very difficult for us to kind of establish what we think is going to happen in the future.

I would say the other thing is, and I think Bill and Ken mentioned this, we have lots of different commodities and they fluctuate at different times of the year. Produce right now is high inflationary times, just because of the change of the seasons in the procurement areas. We have other categories that are not so.

So very hard to anticipate what it’s going to look like in the future and so our plan is to manage it, manage it best we can in terms of not letting it affect our costs and margins and earnings and our customers.

Greg Badishkanian – Citigroup

And as you look out at your real sales growth or if you want to look at nominal sales growth, how are you comparing relative to the industry right now? Your distribution competitors?

Kenneth F. Spitler

What we’re hearing from the industry is that we’re doing better than our competitors. It’s not factual. Some of the two biggest competitors we have, we don’t have visibility to their numbers. But based on the number of smaller distributors that are now interested in talking to us about folding in, I would say that we’re doing better than the general industry.

Greg Badishkanian – Citigroup

On that point, do you have any interest in making acquisitions at this point?

Kenneth F. Spitler

Yes, we do.

Greg Badishkanian – Citigroup

And also, just in terms of the price increases to your customers, passing on the food inflation, as you look at your smaller customers, street business, you look at your chains, any differences in terms of how they are in turn passing that on to their end user?

William J. DeLaney

I think there is probably a real variation in how that happens. We feel one of our responsibilities is to help our customers to understand what their costs are and what the pricing should be, so the business review process continues to be a very robust part of our go-to-market strategy and we are working daily with customers to help them understand what the appropriate price points should be on their menu. So that’s our responsibility, to help our customers, because we see the marketplace so broadly.

Operator

Your next question comes from John Ivankoe – JP Morgan.

John Ivankoe – JP Morgan

Can you discuss the $100.0 million reduction in capex a bit more specifically for 2009, what that was? Whether that was a deferral of 2009 capex to 2010 or whether 2010 could in fact be the same or even lower than 2009 given current business conditions.

William J. DeLaney

Let me start with 2010. I don’t think we’re in a position today to really talk about 2010. So 2009 is just a couple of things. One is what we said, which is in times like this you go through and you reprioritize everything you’re doing and there is some capex there that was probably a little more subjective, if you will, or elective, and we have just chosen to defer that.

In other situations we are a little behind on building in one particular market and then some of the original plan involved some land transactions that to this point haven’t come to fruition. So there’s not one thing, it’s just taking a hard look at the numbers, adjusting for the current environment in terms of piece growth and prioritizing things.

But with the work that Ken alluded to in terms of the technology platform, I don’t know that I would say that 2010 would fall off at all.

Kenneth F. Spitler

Typically we’re out ahead on the land and right now land prices are falling pretty good. We actually backed up on a couple of properties that we think we are going to be able to get significantly cheaper.

John Ivankoe – JP Morgan

If you could remind me where you are in your fuel purchases? Any hedges that may be out there relative to market and when the current diesel and fuel price environment may actually turn to be more of a positive for you?

William J. DeLaney

We’re filing our Q tomorrow and it will have very robust disclosure there for you. But essentially we are locked in through August, I think we’ve talked in terms of $134.0 million of fuel, which is about 75% of our usage through the end of the fiscal year in August. So we are locked in there.

The other thing I will say is you assume that the spot prices remain relatively where they are today, which is obviously not what we would have thought six months ago, even though that locked in price is higher than last year and higher than current market because of the stock prices falling so much and that other 25% or so that we’re purchasing, that may result in us not really seeing much of an increase at all in fuel expense.

So that’s our situation. We do have a forward or a couple of contracts. But overall, if you factor in the fuel surcharge, the fuel wasn’t really a meaningful effect on our results for the first half. And sitting here today, in the current environment, we don’t think it will be in the second half of the year.

Operator

Your next question is a follow-up from Meredith Adler – Barclays Capital.

Meredith Adler – Barclays Capital

You talked about the natural process of reducing the number of people at the operating companies as tonnage goes down. What about the marketing reps? Has there been any efforts to reduce the number of sales people?

Kenneth F. Spitler

It has been in relationship to the rest of the organization. We have reduced some of the numbers of marketing associates to tie in the conjunction with the fall off of sales about like we have in other areas because they are directly related to that sales number.

Meredith Adler – Barclays Capital

There was a one-time cost for exiting a pension plan but also you continue to have to add to your pension. Should we expect that you will continue to have higher pension expense for the remainder of this year?

William J. DeLaney

The one charge that we took this quarter was for a multi-employer plan where we had the opportunity to exit that plan and when you do that you have to true-up your liability exposure. So we did that. It was about a $10.0 million hit.

Coincidentally, if you look at the 26 weeks, we had a similar situation last year. So for 26 weeks, those are pretty much offsetting.

Pension expense for this year is essentially locked in and as we have disclosed, we would for the year to be up about $20.0 million in pension expense, but we would also expect our stock comp expense to be lower by approximately about the same amounts. So if you put those two together, it’s really not much of an impact for this fiscal year.

Looking forward, as you go into 2010, clearly with what’s been on in the marketplace and both in terms of the equity markets as well as how discount rates will be set and that type of thing, we would be looking at a very significant increase for next year. But that isn’t really valued until the end of this fiscal year and there may be other things that we’re looking at as well. But to be straight in answer to your question, I think like most companies, we would be looking at an increase next year.

Meredith Adler – Barclays Capital

Some percentage of your sales is to what I call institutional feeders, schools, hospitals. Are you seeing any slowdown in sales to those customers because I think people perceive that as being exceptionally stable.

Kenneth F. Spitler

In health care we are not seeing any decline. Depending on where the institutional feeder is, we are seeing some decline, but it’s not substantial. But health care is doing very well.

Operator

Your final question comes from Alec Patterson – RCM Capital Management.

Alec Patterson – RCM Capital Management

On the sales line, there wasn’t any M&A, and was there any foreign exchange impact?

William J. DeLaney

There was no M&A to speak of. Foreign exchange, there was. I don’t have that number right in front of me, but with our Canadian sales it did hurt us somewhat in the quarter. And I would also tell you it has helped us in other quarters, so not overly meaningful but it did hurt us a little bit.

Alec Patterson – RCM Capital Management

That’s around 10% of sales, Canada?

William J. DeLaney

Close enough, yeah.

Alec Patterson – RCM Capital Management

So 10% times the exchange rate, basically?

William J. DeLaney

Yes.

Alec Patterson – RCM Capital Management

The cases per man hour up 5.6% for the first half of the year, do I translate the so-to-speak real sales figure down a percentage as roughly what the case trends, or case changes, were for the quarter? Is that a fair comparable?

Kenneth F. Spitler

It’s fairly close but case count is worse than the sales number.

William J. DeLaney

It’s worse than a nominal sales number. It’s actually a little better than the 8% though, I think. Right?

Kenneth F. Spitler

Yes.

William J. DeLaney

One of the things that happens here is when things are moving around this rapidly, in inflation, sometimes you do get a gap in terms of internal calculations that we use because those are done throughout the quarter and then the pieces can vary a little bit.

Alec Patterson – RCM Capital Management

On the tax rate, backing out the COLI, I come out with a rough underlying number of 35%, 36%. Is that right?

William J. DeLaney

No. I wish it were. But I would say we would be in a 38% to 39% area without the COLI and a couple of other things. We also had an increase to our reserve in the first quarter for some adjustments we made filing a recent IRS audit. I would say the run rate is in that 38%, 39% area.

Alec Patterson – RCM Capital Management

On the cash flow area, you’re cutting back capex, you’re talking about looking at some potential deals out there, how should we think about share repurchase going forward?

William J. DeLaney

We’ve been very aggressive in recent months and as you will see, or have seen, in the funds flow, we have purchased a lot of shares so far. I would say at this point that I would expect to see that activity scale back over the remainder of this year pretty significantly. I think it’s something we have pretty much bought what we would normally buy for the year. We bought it at pretty attractive levels. And I think in this environment it’s prudent for us to keep our powder dry a little bit for these opportunities should they come along.

Operator

There are no further questions in the queue.

Richard Schnieders

Let me just say again, it’s been a pleasure working with everyone on the phone here today over the years. And I will just reiterate one thing I have said over the years and that this is a great industry and continues to be a great industry. Thank you for your continuing interest in this great company called Sysco.

Operator

This concludes today’s conference call.

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Source: Sysco Corporation F2Q09 (Qtr End 12/27/08) Earnings Call Transcript
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