Sysco Corporation (SYY)

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Sysco (SYY)

Q2 2012 Earnings Call

February 06, 2012 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

Gregory R. Badishkanian - Citigroup Inc, Research Division

Meredith Adler - Barclays Capital, Research Division

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

Ajay Jain - Cantor Fitzgerald & Co., Research Division

Edward J. Kelly - Crédit Suisse AG, Research Division

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

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

Presentation

Operator

Good day, everyone, and welcome to the Sysco Corp. Fiscal Report Second Quarter Fiscal 2012 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Neil Russell. Please go ahead.

Neil A. Russell

Thank you, operator, and good morning, everyone. Thank you for joining us for Sysco's Second Quarter 2012 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 2, 2011, and in the company's press release issued earlier this morning.

On the call today, if you've joined us via webcast, you'll notice that we are once again augmenting our comments with a slide presentation. You can download a copy of the presentation by going to the Investors section of sysco.com. This presentation was also filed with the SEC on Form 8-K this morning.

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 and can also be found in the Investors section of our website. All comments about earnings per share refer to diluted earnings per share unless otherwise noted. In addition, all references to case volume growth include total Broadline and SYGMA combined.

Lastly, as many of you know, we will be hosting our Investor Day on May 17 in New York City. Additional information will be provided in the next couple of weeks.

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, and good morning, everyone. This morning, Sysco reported sales of $10.2 billion for the second quarter, a 9.2% increase. Net earnings for the quarter were $250 million, and EPS was $0.43. Excluding the year-over-year impact of gross business transformation expenses and COLI investment income, EPS was $0.46. On this basis, which we believe is more representative of the performance of our underlying business, EPS grew 2.2% for the quarter.

Overall market conditions remained soft for much of the second quarter but appeared to strengthen during the holiday season. Our case growth trends improved as the quarter progressed, as we aggressively supported our customers, protected our business, grew our share of wallet with existing customers and brought on new accounts. As a result, case volume growth during the second quarter was 2.8% excluding the impact of acquisitions and 3.6% including acquisitions.

Based on recent industry data, we believe we grew our market share by about half -- excuse me, by about 0.5 point during calendar year 2011 to approximately 17.5%. Food cost inflation remained at historically high levels and approximated 6.3% for the quarter. While slightly lower than the level we experienced in the first quarter, this type of inflationary environment is difficult for our customers and provides us with significant pricing challenges.

Although we are encouraged by our recent volume growth trends, earnings growth from our underlying business for the quarter fell short of our expectations as expenses grew at a faster rate than did gross profit dollars. Our leadership team is addressing the internal factors that limited our earnings growth, and we expect to see gradual improvement over the next few quarters.

In addition, we are currently developing several key strategic initiatives that will better position Sysco to profitably grow our market share in the years to come. One such initiative that is now in the early stage of implementation is our multiyear Business Transformation Project. Last April, we went live at our pilot facility in Arkansas. Following a successful weekend cutover, we subsequently experienced several system performance challenges, including the following: timely order entry processing; effective balancing of service and inventory levels, as well as efficient and user-friendly reports.

This past November, we implemented several enhancements, and Arkansas has subsequently seen improvement in all of these areas. We are now more comfortable with the system's performance and recently went live at our second pilot facility in Oklahoma. The key goal of this pilot is to ensure that the new system can support multiple operating companies.

Read the rest of this transcript for free on seekingalpha.com