Sysco 2Q17 Earnings Call Notes

William DeLaney – Chief Executive Officer

Transition from deflation to inflation has been a little more rapid than normal

“When you have an inflationary period and where that overall inflation is in the 2% to 3% area, it’s usually at a level just for the customer in a particular restaurant were able to pass along. So generally a 2% rate is a kind of sweet spot for our customers and not a huge challenge for us; now we did point here earlier that the transition from deflation to inflation has been a little more rapid than normal, and there are certainly some categories where we are seeing more than 2% to 3% inflation. So that becomes a challenge both in terms of how we work with our customers and they work with their patrons, but I wouldn’t say we are seeing anything out there today that would be overly difficult for our customers to pass along.”

First opportunity to use new management tools in an inflationary environment

“And look, I think that’s a really key point, we continue to make it – we are going to be going through and we are in the midst of going through transition now in this environment and our revenue management tools, this will be the first time that we have really utilized those in an inflation environment.”

I wouldn’t get overly excited about a couple months of weak restaurant data

“So, I don’t know that I would get overly excited about one or two months of data, it’s somewhat mixed out there. Consumer confidence is positive for the most part our restaurant operators and customer feel good about the business not quite, maybe is feasibly good as they were a few months ago, but my experience tells me that these numbers move around and they are still very much on a range that as I said earlier it translates to go to the industry and that’s certainly good for us.”

Sysco FY 3Q17 Earnings Call Notes

William J. DeLaney – Sysco Corp.

It would be good to see more traffic, but it’s good that people are positive

“I think the good news here is while there’s consumer confidence or some of the other feedback we get from surveys we do with restaurant operators that we participate in, it is positive. So, I think you always want to be in an environment where people are looking forward or feeling better about things. And I think that’s a good thing. So, if the economy can continue to at least move along even modestly and if that translates into our business, that will keep our customers positive and obviously that keeps the business in a good way. So, I think right now, we’ll take it. It would be good to see a little more traffic. But the fact that people are positive is very good.”

Sysco FY 2Q17 Earnings Call Notes

Bill Delaney

It’s a little slower out there right now

“I think it’s been hard to really discern a consistent pattern on trends. The numbers for this quarter are a little off the first quarter, but not that much. I think we saw some things around the holidays that we think probably impacted a little bit. And I think I’ve got this right, I think October was a little slower and then early November was good and it kind of leveled out again. So it’s kind of up and down by weeks. Some of it’s the way the calendar falls for us this year with the coming off the 53-week year, but I would just tell you it’s a little slower out there right now, but I can’t tell you that we saw anything that was necessarily tied to the elections”

Joel Grade

Lapping fuel costs

” So we talked earlier about the fact that, in this quarter, we actually start to lap some of those results. And that, in fact, did happen. The last few quarters, I think we’ve talked about a roughly $0.04 impact on fuel price. And so, again, what we always focus on internally is managing to a flat cost per case ex-fuel. And, once again, in this quarter, we’ve done that.”

Sysco 1Q17 Earnings Call Notes

Bill Delaney

The restaurant industry not currently experiencing the level of growth

However, the restaurant industry, which represents approximately 60% of the foodservice market, is not currently experiencing the level of growth we’ve seen in recent quarters. Restaurant traffic continues to show year-over-year declines and restaurant spend has decelerated as well. More specifically, recent data from both NPD and NavTrak show weakening overall sales trends. That said, we continue to execute our business plan and key initiatives very well. I’m pleased with our progress to date toward the achievement of our three-year financial goals, and I remain confident in our ability to accomplish our strategic objectives over the long-term.”

We’re seeing some slowness out there

“So if you go back to my comments, I mean basically we’re seeing some slowness out there – softening, I guess, is a better word – in terms of overall growth in the restaurant segment, and ours is off a little bit as well. So it just reinforces the importance of solidifying those customer relationships and getting penetration where there is that opportunity where customers are growing as well as continuing to stay really locked in on retaining our customers and identifying new opportunities as we go along, but I mean the 1.8% to 1.9% is largely the organic growth.”

Traffic has been down

“Well, I think the challenges are what I’d referenced. You’ve got several quarters in a row now where traffic is actually down, and while the spend is up, it’s not rising at the same rate it was rising. So there is clearly a softening out there. I mean whether it’s because of the election or relative pricing between grocery store and restaurants, I’ll let others kind of critique that. Look, I think there’s ebbs and flows in any cycles of economies, and I think we’re going through that right now”

Don’t see the deflation reversing

“So, I think right now they’re managing it pretty well and the deflation is helping them. At some point, I guess it could become more acute if we were to see the deflation reverse, but as I think as Joel pointed out, we don’t see that happening here, at least not in this calendar year.”

Sysco 4Q16 Earnings Call Notes

Sysco (SYY) William DeLaney on Q4 2016 Results

Sentiment for meals away from home seems to be trending downward

” These results were achieved in a market environment that is experiencing uneven trends and appears to have softened somewhere off-late, while consumer confidence in unemployment data points remain relatively favorable compared to a few years ago. The current sentiment for customer spending and meals away from home seems to be trending slightly downward.”

That said, restaurant operator expectations remain favorable

“Turning to specific restaurant industry data, overall sales trends weakened as reflected in current NPD and KNAPP-TRACK Traffic and spend data. That said, according to National Restaurant Association, restaurant operator expectations remain somewhat favorable.”

Merger agreement with US Foods terminated in late June

” our merger agreement with US Foods was terminated in late June, we regrouped as a management team very quickly, in July we put together the framework of a three-year plan and shared that with the investor group in September, along the way with our Board.”

Not sure what’s driving it but it just feels softer

“You know, we read a lot and try to learn as much as we can from folks that follow all the components of the industry. I just think it’s a little bit of a malaise. I just think it’s — you know, you’re going to have these cycles and sub-cycles in any point in time, and some of it, we’ve been going up against some stronger numbers a year ago, so there’s some math in it. But it just feels a little bit softer out there. I think people are being a little more cautious with their spend. Maybe the election, maybe — I’m not sure. So I guess I wouldn’t want to just conjecture here, but I don’t think it’s the Olympics, I don’t think it’s any one thing in particular. I just think it’s a little softer and it seems to be showing up in multiple places, so I don’t think it’s a certain type of customer per se or anything like that. I just think it’s one of these sub-cycles we’re going to go through and time will tell whether it’s a three- to six-month deal or longer.”

Don’t think the softening is necessarily related to over-storing

“You know, Mark, I think when you go back to 2009, 2010, clearly there was oversupply and overcapacity, and I think there’s been a pretty good correction since that time. I believe we’ve seen some modest reduction in restaurants — number of restaurants here over the last year or so. But nothing to the degree we saw for or five years ago. There may be a little bit of a modest correction, but I don’t think that’s an overriding issue, I think it’s somewhat self-correcting.”

Joel Grade

Deflationary trend likely to continue

“Now I’d like to close with some commentary on the outlook for fiscal 2017. The deflationary trend has been persistent over the last four quarters and will likely continue through the remainder of the calendar year, creating modest sales and gross profit headwind for the first half year. The restaurant environment appears to be softening and as a result, we anticipate modest case volume growth for the next quarter or two. Capital expenditures during 2017 are expected to be approximately 1% of sales, including Brakes.”

Thomas Bené

Just seeing some softening in terms of the slope of growth

Well, it’s not just what we’re seeing — I think it’s what we’re hearing from other folks that are speaking to their results, both in the operator side and some of our peers in the industry. So I think it’s just a little bit softer. I think the good news here: People are still relatively optimistic, both the consumer confidence in general and the restaurant operators. When you look at those indices and compare them over the last couple of years, generally, the outlook is favorable, but we’re just seeing some softening in terms of the slope of the growth, and specifically, we’re seeing it in traffic continuing to be flat, and check size up in some segments, flat in other segments. So it’s no one place, it’s a relative comment. We’re still seeing growth but it’s just not the same trajectory that we saw a couple quarters ago.

Sysco FY 3Q16 Earnings Call Notes

Sysco (SYY) William J. DeLaney on Q3 2016 Results

The overall sales trends remain mixed

“Turning to specific restaurant industry data, the overall sales trends remain mixed. According to the National Restaurant Association, restaurant sales have been uneven during the first three months of 2016 after steadily rising throughout 2015. Both NPD and KNAPP-TRACK have also shown recent traffic and sales declines”

There were some tailwinds this quarter

” I would say this particular quarter, we acknowledged it, there were some tailwinds. And I don’t like to talk about weather a lot. I think that the last two third quarters we’ve talked about weather. Two years ago we had a brutal winter at the beginning of the winter, and last year I think it was at the end of winter, and this year was a pretty mild winter. So I think that helped a little bit.”

Not sure when we’re going to see inflation

“I wish I could tell you when we were going to cross over between deflation and inflation as we were pretty cautious in our comments. So I think we said that we expect it to last at least another quarter, it could be longer than that based on what we’re seeing. And so I’m not really sure when to make that call.”

We may be seeing a little bit of a softening out there right now

” we may be seeing a little bit of a softening out there right now in terms of what we’re seeing in our business and the industry. So I think there’s the external aspect of that. ‘

Sysco FY 2Q16 Earnings Call Notes

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.”

Sysco FY 4Q15 Earnings Call Notes

$1B FCF on $49B in revenue

“For the year, we achieved record sales of $49 billion, an increase of 5%. We grew our adjusted operating income and earnings per share by 3% and 5%, respectively. We generated $1 billion in free cash flow. We earned a return on invested capital of 13% on an adjusted basis. We increased our dividend for the 46th time in our history and distributed nearly $700 million in dividends to our shareholders.”

Food Service Operators confidence has slipped somewhat in the summer months

“Moving to market and economic trends, as I speak to you today, the data is mixed. Consumer confidence and the outlook of food service operators are at historically high levels, but have slipped somewhat in the summer months. Fuel prices at the pump remain at historically attractive levels, which should support higher consumer spending moving forward. Restaurant spend is up, but traffic is generally flat.”

2-3% inflation is the best zone for us

“we have for years said and truly believe that the optimal range of inflation for our customers, and for us, is probably in the 2% to maybe 3% range. That’s a level that typically our customers can pass on and do pass on, and generally that’s a level that the consumer will accept. So, when we’re in those levels we’re able to have the best of both worlds, if you will, in terms of a little bit of a tailwind on inflation at the same time. It doesn’t hurt demand to any large extent. We very seldom find ourselves in that zone, and right now, we find ourselves in a zone where there’s little to no inflation”

Tough to raise price with costs in 5-6% inflation environment

“when we have inflation, let’s say higher than normal inflation like we saw, particularly in the first half of the year, that’s where it’s very difficult to – and at times not even appropriate – to raise your prices as fast as your costs are going up. And so, when you have an inflation environment of 5% or 6%, it’s highly unlikely that your gross margin is going to keep pace on a year-over-year basis there.”

Growing local cases is very very important

“Growing local cases is very, very important in this business. I don’t think I can say that enough.”

Sysco 3Q15 Earnings Call Notes

Weather wasn’t a major factor but it was a factor

“Overall, weather was not a major factor in our year-over-year comparisons for the quarter as we benefited from favorable comparisons in January and February, but were hampered by severe weather in the Northeast and Mideast in late February and most of March. This last point is important to note, because March provides a disproportionately large portion of our third quarter volume and was a relatively mild weather month last year. We experienced similar trends in April, but expect the year-over-year monthly impact of weather will dissipate as we move into May and June.”

US Foods merger news pending

“Regarding our pending merger with US Foods, the hearing related to the FTC’s motion for preliminary injunction begins tomorrow, May 5, and will last up to seven business days. If we receive a ruling in our favor, we will proceed to closing unless the decision is appealed. In the event of an unfavorable ruling, we would assess together with US Foods’ ownership whether to pursue the case further. We remain resolute in our belief that this transaction is pro-competitive, good for our customers and will accelerate Sysco’s business transformation.”

Food cost inflation declined

“Our sales growth rate was substantially lower than the 7% rate we saw during the first half of the fiscal year because of the rapid decline in food cost inflation and the impact of foreign exchange translation. Food cost inflation declined significantly from 6% in the second quarter to 3.7% in the third quarter.”

It’s a very competitive environment

“Obviously, as we’ve said for a while now, the market environment we are in, it’s difficult. It’s very competitive and it’s not unlike many other industries and we don’t expect that to change. So again, to kind of recap how we look at the world, we see modest medium to long-term growth in the industry. We expect to grow faster than that. To do that, we need to differentiate ourselves ongoingly with our customers and we need to take costs out of the system”

I didn’t whine about the weather this year

“I really didn’t talk a lot about the industry or the market because it’s hard to make that call right now. While I did talk about weather, I didn’t whine about weather this year. So I feel good about that. What we saw was this, and what I alluded to in my comments, we had – last year, if you go back and look at the weather, it was pretty harsh in December, January and the first three weeks in February and it was harsh in areas where typically you don’t see it: Charlotte, Dallas, Atlanta and other places. And so we had some favorable comparisons in late December, January and February. Unfortunately, January and February are not exactly big months for us.”

Softer than last year so far in March and April

“if you recall last year, there was a little bit of a cabin fever impact up north and I think people got out in March just because they needed to get out and then March was reasonably mild and so was April. And so, the camps and the clubs started to open up earlier. So we had good volume in March and April relative to the rest of the year last year and I think we’re seeing softer volume this year. What I’m trying to say to you is I think weather is impacting that. I just don’t know to what degree and I think I can make a better call on that after we see May and June here because we’ll be back to apples-to-apples.”

Restaurant operators still positive

“The sentiment of our restaurant operators is positive and it’s remained positive. So I think people are generally seeing – at least maintaining – they’re seeing good things and they’re hopeful that it’ll translate into better things. Probably the biggest positive out there right now, I would say, would be the lower fuel prices.”

start with asking what does the customer need

“with us, it always starts the way you posed the question, which is what’s important to the customer? What does the customer need? And we are doing a lot of work on the customer side through the marketing department, customer loyalty and issues to understand customer needs and then connecting that to the work that we are doing with our suppliers and category management and the data they provide us to better optimize our SKUs.”

This delay has probably hurt US Foods more than it’s hurt us

“I really can’t comment much on US Foods. I think it goes without saying that this process is taking longer than we would’ve liked. And it’s probably a little bit harder on them than it has been on us. So, early days, certainly they lost some sales people and I think their sales were hurt. I’m not close enough to it nor should I be in terms of what their margins are right now. And obviously, they pulled back here some on the integration planning over the last couple of months.’

Sysco FY 2Q15 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Acute inflationary pressures in meat and dairy

“We generated nearly 4% case volume growth during the quarter and effectively managed acute inflationary pressures in our meat and dairy categories.”

Positive traffic growth for mid and casual dining for first time since ’08

“NPD, which tracks restaurant trends, recently reported positive traffic growth in the mid-scale and casual dining sectors for the first time since 2008.”

Food cost inflation was 6%

“Food cost inflation was 6%, driven mainly by double-digit inflation in the meat and dairy categories.”

Some of the truck driver shortage may be because those workers went into the energy business

“over the last few years, several of our markets are very much energy driven or intensive. There is a lot of good jobs out there on the energy side. Some of those jobs are very competitive or more competitive in terms of lifestyle and wages to what we offer. And so in those markets where energy has been strong, we struggled to some extent”

A little insight into an ERP implementation

“And the other thing we are doing more of, which we spoke to here today, is taking some of the other applications, whether they’re financial or HR, maintenance that type of thing, even for the SA — even for the non-SAP OpCos bring those into SPS, accelerating network to where SPS is now, supporting in certain areas, not just the 12 OpCos that run SAP, but these are the functional support software packages as well.

So to summarize, I think it’s a combination that we’re continuing to enhance the support around and the software that the 12 OpCos are using as well as beginning to leverage SPS in a different way and as I said. So, A, we’re providing better services to the 12 OpCos today, but also when we do begin to redeploy again, those future conversions can go more, more smoothly. And then we’re still — we’re going to defer any further deployments until we understand the timing of the merger a little bit better.”