Sysco Corporation (SYY)

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Sysco Corporation (SYY)

F2Q10 Earnings Call

February 2, 2010 10:00 am ET


Neil Russell – Vice President Investor Relations

William DeLaney – Chief Executive Officer

Kenneth Spitler – Vice Chairman, President, Chief Operating Officer

Chris Kreidler – Chief Financial Officer


John Heinbockel – Goldman Sachs

John Ivankoe – J.P. Morgan

Mark Wiltamuth – Morgan Stanley

Ajay Jain – Hapoalim Securities

Meredith Adler – Barclays Capital

Andrew Wolf – BB&T Capital Markets

Gregory Badishkanian – Citi



Welcome to the Sysco second quarter fiscal 2010 earnings call. As a reminder this call is being recorded. At the time for opening remarks and introductions I’d like to turn it over to Neil Russell, Vice President Investor Relations.

Neil Russell

Good morning everyone. Thank you for joining us for Sysco’s second quarter fiscal 2010 conference call. On today’s call you will hear from Bill DeLaney, our Chief Executive Officer, Ken Spitler, our Vice Chairman, President and Chief Operating Officer and Chris Kreidler, our Chief Financial Officer.

Before we begin, please note that statements 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 27, 2009 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 2010 and second quarter of fiscal 2009 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 the call over to our Chief Executive Officer, Bill DeLaney.

William DeLaney

Thank you Neil and good morning everyone. On the second quarter of fiscal 2010 Sysco reported net earnings of $268 million and earnings per share of $0.45 which is up 12.5% compared to the prior year.

Sales trends improved throughout the quarter with the year over year rated decline swelling to only 3%, a result largely driven by deflation. Notwithstanding the challenging economic conditions, operating margin improved due in part to the favorable impact of COLI as well as excellent cost control throughout the organization. Ken will discuss this in more detail in a few minutes.

Despite these challenging times, we remain steadfast in our commitment to helping our customers achieve their objectives. We are executing well and reinvesting in our business. Challenges have historically provided opportunities for Sysco to further differentiate ourselves in the marketplace because our customers increasingly look to us for support and business solutions. As the industry leader, we have an unsurpassed ability to leverage our size and scale to benefit our customers.

Our financial results for the quarter reflect the disciplined operational execution and excellent customer service to operating companies each and every day. While encouraged by our financial and operating performance today, we remain committed to continuous improvement and consistently look for opportunities to gain additional efficiencies in this competitive industry.

For example, our business transformation project remains on tract with the objectives discussed at our investor day in December. We expect the improvements driven by this multi-year project will allow us to grow sales, reduce operating costs and more effectively utilize data in our decision making.

Now, I’ll turn things over to Ken so he can provide further detail on this and other operational improvements and how we performed in the second quarter.

Kenneth Spitler

I’d like to start by thanking our operating companies for their hard work during the quarter. These results reflect their dedication to our customers and to helping our business succeed in challenging times.

Our sales during the quarter were impacted by deflation of 3.5% which is measured as the estimated change in the cost of products we buy. Deflation from dairy and beef products had the largest impact with the balance spread across several categories. On a year over year basis, deflation pressures appear to be moderating from the highs we saw earlier in the quarter.

Our operating margin improved to 5.2% in the second quarter. While COLI contributed to this improvement we also significantly reduced payroll expenses and improved productivity in all aspects of our business.

We have continued to manage head count in a manner consistent with the sales environment throughout the entire organization. Our head count is down 4% year over year and 10% over two years as we improve productivity throughout the company.

Operationally, we continue to focus on productivity which is evident in many of our key operating metrics on a year over year basis, but the progress of our operating companies have made is even more clear on a two year basis.

For example, in our U.S. Broadline companies, our diesel gallon usage is about flat with last year’s second quarter but is down more than 10% compared to the second quarter of 2008. Cases per trip increased 3% year over year and 4% versus two years ago.

Warehouse cases per man hour improved 8% year over year and 15% versus two years ago and we improved our error frequency per cases shipped from an error rate of one out of 1,229 in the second quarter of 2008 to an error rate of one out of 1,799 this quarter.

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