Q2 2011 Earnings Call
February 07, 2011 10:00 am ET
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Neil Russell - Vice President of Investor Relations
Robert Kreidler - Chief Financial Officer and Executive Vice President
Sean Kras - Barclays Capital
John Heinbockel - Guggenheim Securities, LLC
Ajay Jain - UBS
Joseph Parkhill - Morgan Stanley
John Ivankoe - JP Morgan Chase & Co
Gregory Badishkanian - Citigroup Inc
Andrew Wolf - BB&T Capital Markets
Good day, everyone, and welcome to the Sysco Reports Second Quarter Fiscal 2011 Earnings Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Neil Russell. Please go ahead, sir.
Thank you, Jennifer, and good morning, everyone. Thank you for joining us for Sysco's Second 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 on the course of this presentation that states 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 July 3, 2010, and in the company's press release issued earlier this morning.
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 President and Chief Executive Officer, Bill DeLaney.
Thank you, Neil, and good morning, everyone. This morning, Sysco reported second quarter sales of $9.4 billion, operating income of $437 million and EPS of $0.44 per share. Sales grew 5.8% over the prior year, while operating income decreased 5.5% and EPS was $0.01 lower than last year's second quarter. Volume growth was softer than what we experienced in the previous two quarters, and expense pressure increased in our selling and delivery areas. However, the primary factor in our producing lower earnings compared to the prior year was the decline in gross margins of just over 0.5%.
For the second consecutive quarter, we experienced double-digit rates of product cost increases in three categories: Meat, Seafood and Dairy, that comprised 1/3 of our total sales dollar mix. These are key product categories for many of our customers and absorbing steep and rapid price increases is difficult for them, especially at this early stage of what we all hope is a sustainable if somewhat uneven economic recovery. While we actually produce real volume growth in these categories, we are unable to increase our case growth enough to offset the fact that our product cost in these categories grew at a faster rate than our selling prices.
While not impacting our earnings as significantly as inflation pressures, the strategic pricing initiatives we discussed last quarter also contributed to gross margin erosion in the second quarter. We are, however, encouraged by the double digit year-over-year volume growth we are experiencing with the items included in these programs, and we remain confident that the long-term benefits of these initiatives will meet our expectations for profitable market share growth.
In assessing our performance for the quarter and for that matter, the first half of our fiscal year, we clearly struggled to achieve some of our key business objectives. Market conditions definitely contributed to our struggles. However, there is no doubt that we have opportunities to improve the execution of our business plan as we move into the second half of our fiscal year. Such improvement is a top priority for me and our entire leadership team.
Looking forward, I'm highly confident that Sysco is well positioned to grow our business profitably and at a faster rate than our $210 billion market gross over the longer term. We do believe that we are in the early stages of an economic recovery based upon our trends throughout calendar year 2010. However, as we saw on the second quarter, that recovery and to some extent, our financial results, may be somewhat choppy due to the economic challenges that consumers continue to face.
Our operating cash flow remains strong and our strategy, which we presented in detail at our Investor Meeting in early December, is sound. As you may recall, our strategy is customer centric in nature with the strong emphasis on operational excellence. Our associates throughout Sysco continue to provide dedicated support and excellent service to our customers. Our business review process is more targeted than ever, and the quality of these reviews improves each year. While fuel cost increases in the impact of nearly 5% inflation in our overall product portfolio created pressure on delivery and selling expenses, we did experience productivity improvements in our warehouse operations and administrative support functions in the second quarter. We're also encouraged by the current level of quality acquisition opportunities in the marketplace. In addition, we recently welcomed Paul Moskowitz to Sysco in the capacity of Senior Vice President, Human Resources. We're excited to have Paul join our team and look forward to his contributions and leadership as we further develop our human capital capabilities.