Sysco Corporation (SYY)

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Sysco Corporation (SYY)

F1Q2011 Earnings Call Transcript

November 8, 2010 10:00 am ET

Executives

Neil Russell – VP, IR

Bill DeLaney – President & CEO

Chris Kreidler – EVP & CFO

Analysts

Ajay Jain – Hapoalim Securities

Meredith Adler – Barclays Capital

Mark Wiltamuth – Morgan Stanley

Jeff Hans – Citigroup

Andrew Wolf – BB&T Capital Markets

John Ivankoe – JPMorgan

Bob Summers – Susquehanna

John Heinbockel – Guggenheim

Bob Cummins – Wellington Shields

Presentation

Operator

Good day, everyone. Welcome to the Sysco’s first quarter fiscal 2011 earnings results 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 Neil Russell. Please go ahead, sir.

Neil Russell

Thank you, operator, and good morning, everyone. Thank you for joining us for Sysco’s first quarter 2011 conference call. On today’s call you will hear from Bill DeLaney, our President and Chief Executive Officer and Chris Kreidler, our 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 July 3, 2010 and in the company’s press release issued earlier this morning.

On the call today we will discuss certain non-GAAP financial measures. You can find the reconciliation of these non-GAAP measures to the applicable GAAP measures on our Investor Relations Web site at sysco.com. Also, all comments about earnings per share refer to diluted earnings per share unless otherwise noted.

Lastly, we would like to remind that our Investor Day is scheduled for December 2. If you haven’t already registered, please do so prior to November 22.

With that out of the way, I’ll turn the call over to our President and Chief Executive Officer, Bill DeLaney.

Bill DeLaney

Thanks Neil, and good morning, everyone. This morning Sysco reported net earnings of $299 million for the first quarter of fiscal 2011. Our sales in the first quarter increased 7.4%, driven mainly by increased case volume and estimated food cost inflation of 3.3%.

Case volume was higher across all regions in our Broadline and SYGMA segments and the year-over-year increased represented the strongest improvement since the second quarter of fiscal 2007.

While the pace of the macroeconomic recovery remains sluggish and restaurant traffic patterns continue to be under pressure, recent data suggests the industry is slowly recovering. Sysco’s gradual but consistent improvement in case volume confirms this trend and we believe we are continuing to grow our market share.

We are pleased with our sales growth for the quarter and I should also note that we achieved record first quarter operating income. Nevertheless operating income growth over the prior year was less than our sales increase as improved expense management was more than offset by a 46 basis point decline in gross margin percent.

Several factors contributed to the decline in gross margins. Approximately 10 points of the margin decline related to a change in business mix. While both our Broadline and SYGMA businesses grew this quarter, SYGMA grew at a faster rate and since SYGMA operates a lower margin business, this mix shift impacted total margins.

We do not view this as a negative outcome. As a matter of fact, we see a great deal of opportunity on the contract side of the business, both from the Broadline and SYGMA segments. The key is to strike an appropriate balance between street and contract sales growth over time.

The remainder of the gross margin decline was split about evenly between two drivers. The first is a set of ongoing strategic pricing initiatives designed to drive volume increases in targeted categories.

While these initiatives are putting near-term pressure on our margins, we are starting to see double-digit volume increases where these programs have been effectively implemented. We expect this specific pressure on gross margins will persist in the near-term, but we also believe these initiatives will result in profitable market share gains over time.

The last component of the gross margin decline relates to the significant raise of inflation in the meat, dairy and sea food categories which together approached 10%. While we typically are able to pass through modest levels of price inflation on a timely basis, it is more difficult in the short-term to pass through double digit price increases to our customers without negatively impacting their business.

Our ongoing productivity initiatives helped to mitigate a portion of the gross margin pressure with U.S. Broadline warehouse cases per man hour and cases per trip increasing compared to last year’s first quarter. In addition, total sales per employee also increased year-over-year.

All that said, while operating performance in the first quarter is acceptable, it’s not up to our standards. We recently held our annual senior leadership meeting at which the importance of profitable sales growth was thoroughly discussed. Our management team understands that we must find ways to grow our earnings faster than sales during these challenging times.

Turning to our multi-year business transformation initiative for a moment, the project remains on track. We are preparing to begin the last of our four cycles of testing prior to go live with our pilot facility early next year.

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