Sysco FY 2Q16 Earnings Call Notes

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Sysco (SYY) William J. DeLaney on Q2 2016 Results

Drop in stocks bears watching, but restaurant spending trend remains reasonably positive

“the precipitous drop in multiple stock market indices bears watching as it relates to potential adverse ramifications for consumers and our customers. As far as the restaurant industry data is concerned, the overall trend remain reasonably positive amid sluggish consumer spending. According to the National Restaurant Association, December marked the 11th consecutive month of foodservice sales growth.”

Foodservice sales exceeded grocery store sales

“This closes out a strong year for the industry where foodservice sales exceeded grocery store sales throughout the year. That said, both NPD and NavTrak have shown some recent modest declines in traffic trends that we are closely monitoring.”

Saw an acceleration of product cost deflation

“With respect to product cost deflation, we saw an acceleration during the second quarter, driven by key center-of-the-plate categories such as meat, poultry and pork, as well as dairy. This trend has continued into the third quarter and we currently believe that deflation headwinds will persist for at least the remainder of the fiscal year.”

We thought we’d see less deflation as we got into the second half of the year, but it’s still there

“deflation impacts the P&L. I don’t know that there was a big sequential impact, a lot of variable around the sequential impact as the quarter progressed. What we’re saying is we saw a pickup from the first quarter to the second quarter, we’re seeing some similar trends here in January. And we kind of felt mathematically that would begin the wrap. We began to see this, if you recall, back in March and then the fourth quarter of last year when the inflation fell off. So we thought just from a wrapping perspective that we would see a little more – little less deflation as we got into the second half of the fiscal year. And I would say what we’re telling you today is it’s still there and we probably will expect to see it at least through the end of the quarter.”

There are some benefits to deflation, but it’s not a great environment because you end up with fewer dollars to pay expenses

“It affects you in different ways, obviously. On the positive side, generally when our costs go down, we are able to pass that along to our customers. And that’s good for them, especially as they are dealing with some of their labor challenges. Your percentages look better, so certainly it contributed to the gross margin expansion. But the reality is, it’s not a great environment because you end up with fewer dollars to pay your expenses with. So to Joel’s other point, when you have this level of deflation, it just reinforces the importance of managing our expenses very tightly.”

Customers can generally pass along some inflation to their consumer

“If you look at this business historically, our customers generally are able to pass along a couple of points of inflation to their consumers year-in and year-out, and they generally do.”

We did finally have winter hit us but nothing crazy

“It’s always hard for us to talk about good weather. December was relatively mild, so it might have helped a little bit. I would tell you (38:04) as far as this quarter goes, we finally had winter. We had it in the Mid-Atlantic area here a couple of weeks ago. So that’s hitting us a little bit our last week of January/first week of February. But so far nothing crazy on the weather side this quarter either.”

Labor cost is top of mind for our customers right now

“think Tom sees more customers than I do, but I see a few, and I think this labor cost thing is at the top of mind for them right now. I know it’s been the subject of some recent industry meetings.”

Our main message is that deflation is probably not going to get better

“I think all we’re signaling is we think it’s going to be with us at least a quarter or two longer, at least. And it was almost two points in the U.S. Broadline this past quarter. I don’t know that it’s going to get a whole lot worse than that. We’ll just have to see. But I think the real message, and let me be as clear as I can be, is that I think probably if I’d been talking to you, and I was six months ago, I would have thought by the fourth quarter we would’ve been back more to neutral, and that’s really not our assessment right now. But I’m not necessarily saying it’s going to get worse. I’m just saying that it’s probably not going to get a whole lot better for another quarter or two.”

Thomas L. Bené – President & Chief Operating Officer

Slowing in Southwest due to energy

“From a geographic perspective, we saw solid year-over-year improvement in both cases and gross margin across the U.S., with specific strength in the Mideast. Southeast, and the Pacific markets. This was somewhat offset by signs of growth slowing in our traditionally-strong Southwest market due to the impact of the downturn in the energy sector.”