Sysco Corporation (SYY)

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Sysco (SYY)

Q2 2013 Earnings Call

February 04, 2013 10:00 am ET

Executives

Neil A. Russell - Vice President of Investor Relations

William J. DeLaney - Chief Executive Officer, President, Director, Chairman of Employee Benefits Committee, Member of Finance Committee and Member of Executive Committee

Robert C. Kreidler - Chief Financial Officer and Executive Vice President

Analysts

John Heinbockel - Guggenheim Securities, LLC, Research Division

Edward J. Kelly - Crédit Suisse AG, Research Division

Michael Kelter - Goldman Sachs Group Inc., Research Division

Mark Wiltamuth - Morgan Stanley, Research Division

Karen F. Short - BMO Capital Markets U.S.

Meredith Adler - Barclays Capital, Research Division

Ajay Jain - Cantor Fitzgerald & Co., Research Division

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Andrew P. Wolf - BB&T Capital Markets, Research Division

Presentation

Operator

Good morning, and welcome to Sysco's Second Quarter Fiscal 2013 Conference Call. As a reminder, today's call is being recorded. We will begin today's call with opening remarks and introductions. I would like to turn the call over to Neil Russell, Vice President of Investor Relations. Please go ahead.

Neil A. Russell

Thank you, operator, and good morning, everyone. Thank you for joining us for Sysco's Second Quarter 2013 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 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 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 30, 2012, and in the company's press release issued earlier this morning, a copy of which is contained in the Investors section of our website. Non-GAAP financial measures are included in our comments today and in the presentation slides. The reconciliation of these non-GAAP measures to the applicable GAAP measures are included at the end of the presentation, which can also be found in the Investors section of the website. All comments about earnings per share refer to diluted earnings per share unless otherwise noted. In addition, all references to case volume growth including total Broadline and SYGMA combined.

Lastly, we look forward to seeing everyone at the CAGNY Conference on February 19, where we will offer a business update presentation, as well as a dinner featuring Chef Robert Irvine.

At this time, I'd like to turn the call over to our President and Chief Executive Officer, Bill DeLaney.

William J. DeLaney

Thank you, Neil. Good morning, everyone. This morning, Sysco reported sales of $10.8 billion for the second quarter and net earnings of $221 million. Earnings per share was $0.38 and adjusted EPS, representing our underlying business performance, was $0.49 or 4.3% increase year-over-year.

During the quarter, solid case volume growth contributed the highest second quarter sales level in our history. This growth was driven by both acquisition and organic growth as we were particularly successful in growing with our large regional and national customers.

Adjusted operating income grew nearly 5% for the quarter. Gross margin trends improved for the third consecutive quarter but were lower than the prior year due in part to the change in customer mix I just noted. We were especially pleased with our expense control performance in the selling and administrative areas of our business, as we benefited from successful implementation of several strategic initiatives. However, managing our expenses on the operating side of the business was challenging, as fuel and payroll costs grew at a faster rate than our productivity improvements.

To date, in fiscal year 2013, we have completed 10 acquisitions representing approximately $775 million in annualized revenue and expanding our presence in the United States, Canada and Ireland. The acquisition environment remains favorable, and we continue to have a number of additional opportunities in the pipeline. Our core market potential approximates $235 billion and grew by about 1% in real terms in calendar year 2012. Based on preliminary industry data, we believe we grew our market share this past year at a rate consistent with our strong historical performance. However, consumer sentiment and restaurant traffic trends have softened of late due to ongoing economic pressures, reinforcing the need for Sysco to aggressively transform our business so that we remain well positioned to provide greater value to our customers and reduce our overall cost pressure.

Two critical components to deepening our customer relationships are more effectively marketing the Sysco brand and gaining greater insight into our customer's value and how we can most effectively address those needs. We are making good progress in both of these areas under the leadership of Bill Goetz, Senior Vice President of Marketing, who joined Sysco about a year ago. One development that we are very excited about is our recently announced marketing relationship with the Food Network, its highly rated show Restaurant: Impossible and its chef, Robert Irvine. This is a first for Sysco, and we believe it will enhance our brand, strengthen our relationships with existing customers and extend our reach to new customers. This multi-platform relationship will include TV commercials and show product integration, digital integration and personal appearances by Chef Irvine.

Turning to the technology appointment portion of our multi-year business transformation efforts, we are making progress at our operating companies in North Texas and West Texas, where we deployed our new ERP system in November. Particularly encouraging has been the improved functionality of the order entry system compared to earlier rollouts. In addition, our shared business service center, SBS, continues to ramp up to support a broader array of administrative functions in a centralized manner. We have encountered some challenges, however, in the recent rollouts and are in the process of proceeding to make additional changes to further enhance the functionality of the system. We are confident that we will be able to resolve these matters as we move forward, and we'll refine our deployment rollout schedule accordingly. At the same time, we continue to move forward with other aspects of transforming our business.

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