Sysco Corporation (SYY)

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Sysco (SYY)

Q3 2011 Earnings Call

May 09, 2011 10:00 am ET

Executives

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

Neil Russell - Vice President of Investor Relations

Robert Kreidler - Chief Financial Officer and Executive Vice President

Analysts

Colin Guheen - Cowen and Company, LLC

Meredith Adler - Barclays Capital

John Heinbockel - Guggenheim Securities, LLC

Robert Cummins - Shields & Company

Mark Wiltamuth - Morgan Stanley

John Ivankoe - JP Morgan Chase & Co

Ajay Jain - Hapoalim Securities USA, Inc.

Andrew Wolf - BB&T Capital Markets

Jeffrey Hans

Presentation

Operator

Good day, everyone, and welcome to the Sysco Reports Third Quarter Fiscal 2011 Earnings Conference Call. As a reminder, today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Neil Russell. Please go ahead, sir.

Neil Russell

Thank you, Rochelle, and good morning, everyone. Thank you for joining us for Sysco's third 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 website at sysco.com. 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.

William DeLaney

Thank you, Neil, and good morning, everyone. This morning, Sysco reported third quarter sales of $9.8 billion, operating income of $427 million and EPS of $0.44 per share. Sales grew more than 9% over the prior year, due mainly to higher prices and increased case volume. Higher prices were driven by an increase in our product costs of just over 5% compared to last year. Gross margin trends also improved compared to the first half of the year.

Operating expenses increased year-over-year, due in large part to a $36 million charge related to the withdrawal of one of our operating companies from a multi-employer pension plan [MEPP], higher fuel prices and higher pension expense. Earnings per share on a GAAP basis increased nearly 5% compared to last year's third quarter. However, excluding the multi-employer pension charge and a one-time tax benefit that Chris will discuss in a few minutes, adjusted EPS increased nearly 10%.

Amidst a slow industry recovery, our associates did a very good job supporting our customers while producing record third quarter results for Sysco. These results reflect both improved execution by our operating companies in a modestly improving market environment. While the foodservice industry and overall economy continue to recover slowly, we and our customers have also been faced with the dual challenges of product inflation and rising fuel costs. While not yet appearing to a significantly dampened consumer demand, these unfavorable economic factors do create ripple effects throughout our business that may continue to create choppiness in our near term results.

With that said, I want to emphasize our commitment to successfully executing Sysco's long-term strategy. The majority of our resources and activities remain centered on optimizing our core business. Our recent results reflects steady progress on this front. Specifically, we've had success in improving our customer retention, and we have also increased contract sales this year in both our Broadline and SYGMA units.

One of the most critical aspects of optimizing our core business is successfully carrying out our Business Transformation Project. We have made good progress during the last few months, and we recently achieved a major milestone by going live at our pilot facility in Arkansas. Just reaching the point where we were comfortable going live was a huge accomplishment. However, we're even more pleased that the implementation was such a success. Implementations like this rarely, if ever, go off without a hitch, but the team was ready for the issues that did arise, and they worked quickly and effectively to find solutions.

So it's an appropriate time to pause for a moment and acknowledge all those on the team who have been working so diligently and effectively to ensure that this project is a success. We began this journey 2.5 years ago, and an extraordinary amount of work has gone into the project thus far. While there remains a great deal of work ahead of us, I'm very proud of the team's efforts and appreciative of their dedication.

Now that the pilot side is live, our plan is to take some time and evaluate the new system's performance. We will reassess our rollout plan in light of everything we learn, make necessary adjustments and then move forward with implementing the business transformation initiative at our first wave of operating companies.

In addition to optimizing our core business, we're also committed to looking for acquisition opportunities, both in and beyond the core. We're doing this mainly through building a pipeline of high-quality potential domestic acquisitions and also by looking at adjacencies in new geographies. We continue to make progress in this area, and Chris will update you on our recent transactions in a few moments.

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