Sysco Earnings Call Insights: Guidance Details and Pricing Analysis
Sysco Corporation (NYSE:SYY) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.
Edward Kelly – Credit Suisse: Couple of things for you. I was just hoping maybe we could start with the guidance and the 2015 guidance not being valid. You haven’t really changed (indiscernible) from a business transformation standpoint, from a cost savings standpoint. So, it sounds like it’s, I guess, more sort of industry related. When you gave the guidance things weren’t great, right. So, I am just trying to figure out what the moving pieces are on the difference today. And maybe you could just sort of help us frame that?
William J. DeLaney – President and CEO: I’ll start; I’ll let Chris kind of get into little more specific way. Obviously, we’ve given that a lot of thought as well. So, if you go back to the way we presented it we had three buckets; we said A plus B equals C and with A, B a view of what we thought we could continue to grow the underlying business at steady state. The implied guidance there was 4%, 5% growth. And then we had the $550 million to $650 million in cost savings both on the operation side as well as product. With the goal being to get back to what Sysco’s historically have been, is been a company that’s been able to produce consistent earnings growth. I would say this to you, obviously, the markets have been difficult, but we’ve some execution challenges, as we‘ve acknowledged here today. I think the biggest thing I would say to you is the market and just the environment itself, I think it’s just proven to be a lot tougher than what we thought was going to be. We had baked in like I said 4% to 5% expectation that we will be able to continue to grow the business ex the transformational cost savings and that’s not the case. So, sure, there has been a lot of distractions and lot of change going on, but on the one hand its disappointing to pull the guidance back, on the other hand, I think it reinforces the direction we’re going in which is – we have to changes this business model because if we hadn’t gone down this road with business transformation in the broader sense, we probably looking at flat to very modest single-digit earnings growth. So, I don’t want put it all on the consumer or the economy, but clearly this market is tougher than what we anticipated at the time, we put the guidance though. I’ll let Chris give you his insights.
R. Chris Kreidler – EVP and CFO: The only thing I’ll add is unfortunately just math, which is as Bill said A plus B has to equal or should equal to C. We didn’t expect A to be stagnant or go backwards and so when you lose a year on three year guidance, it just mean your growth rates have to be that much higher and when I just do the math with everything we’ve got going on, we expect to do good things. We expect there to be improvement. But I don’t expect to see enough improvement to overcome that first year. So as I said, we don’t expect to achieve it in fiscal ’15…
Edward Kelly – Credit Suisse: When you say sort of lose a year, is that kind of how we should think about setting our expectations, I know you’re not giving a number, but is it more or less kind of like a year delayed is that how to think about it?
R. Chris Kreidler – EVP and CFO: Ed, I’m going to go with the comment you made, we’re not giving a number at this point. We’ve been added – doing long-term projections. There is still a tremendous amount of uncertainty in what’s going on out there right now. So, we’re not prepared at this moment to put a new set of guidance on the table. Look, what we said a number of years ago, I think it’s still true today, we’re trying to set this company up for a long-term sustainable growth of a certain level. We’ve never really said what that level is because we’ve got to get at least some way through this business transformation, what we’re capable of achieving. But the whole goal is to set us up for a long-term sustainable growth, not to hit a particular number, but to be able to grow a certain percentage or a certain amount every single year, regardless of what goes on to the market and what we’re doing. That’s where we’re trying to get to. So, we’re reassessing what we can achieve and by when and we’ll certainly come out and talk about that, probably at the next Investor Day.
William J. DeLaney – President and CEO: Ed, I would echo that. The only thing I would add to it is we’ve talked about ’13 being a year of transition. As I think about it, I think you need to look at ’14 as the year that we begin to turn this thing. So, while we – not give you specific guidance, I think we’re signaling to you that we expect to see better trends on the top line and the bottom line. We’ve got our challenges certainly on the gross margin line, we’ve got a lot of good things going on, we think our expense initiatives. So, we feel good about the direction. We think we’ll begin to turn it here this year. But to Chris’s point, we need a little more time deeper into the year to see how we start the year out, get further long on the technology deployment and the (indiscernible) we hope to come back with you – with a little better perspective here later in the year.
Edward Kelly – Credit Suisse: If I could just add one follow-up on that Bill. Thinking about gross profit for case, which I know is a metric you guys care a lot about. The best way we have to look at this right is to just look at volume growth versus gross profit dollar growth. This quarter we haven’t seen it at this level really kind of since we saw deflation. So, I was hoping you could just maybe talk about you mentioned competitive pressure in a marketplace, talk a little bit more about that; what’s going on from a pricing standpoint on year end of the business that you are bringing in and just how you get this improved next year?
William J. DeLaney – President and CEO: So, I am going to really combine the last two quarters, I think, so if you look at the third and fourth quarter they were more similar than they were different. Things kind of bottomed out in February I think in terms of the market from our perspective in the third quarter beginning to trend up a little bit in terms of March and April and we saw fair amount of softness in June in terms of restaurant numbers and that kind of thing. So, again, we are talking about very choppy market here, but the reality is we only grew our gross profit dollars 2%. So, while gross profit per case is an important metric, I would say to you what I look at the most is volume and the mix of that volume locally managed within that street and then corporate managed and then look at gross profit dollar growth and the reality is the first half of the year we grew it over 3% in the second half of the year only 2% or maybe even a tad less and then cost per case. So, all those go together, but those are three high level metrics I would continue to look at. And as you saw we gave you little more color on some of those – this particular earnings release. I would say, as we start out the new year there is tremendous emphasis within the Company on that top line and you can grow your gross profit dollars in lot of ways. So, right now we are very focused on the top line, we are focused on reenergizing our local and street sales growth while still maintaining pretty strong corporate managed – some of these high volume chain business. So, we need to keep the top line going in order to leverage the business. We need to drive our category management very effectively. We’re off to a good start, and so really – we’ve got some other things that we’re working on and we think over time, not so much this year, but in subsequent years going to help us, mitigate some of the margin pressure. We need to continue to look at the cost structure of the Company. So again, I think you’ll see gradual improvement this year and to Chris’ point and my point, I think will create foundation for that to become more consistent in the years to come.
John Heinbockel – Guggenheim Securities: Well, Bill, couple of things, with regard to pricing. So, it looks like things got a bit worse this quarter, was that do you find your investments more proactive or reactive? Then maybe talk a little bit about analytics and ROI, as I always hit you guys on price elasticity. Did not look like a good ROI this quarter, how can you manage that better, and maybe not make some price investments that are not productive, kind of a big question.
William J. DeLaney – President and CEO: So, John, we say ROI – you’re talking about the ROI as it relates to pricing, is that what you’re getting at?
John Heinbockel – Guggenheim Securities: So, when I think about you gave up 66 bps and what you got back forth, it does look like you got back what you’d like for?
William J. DeLaney – President and CEO: We didn’t. I mean, that’s very fair, we didn’t. Again, I would just repeat what I said a moment ago that has not escaped us. We thought we’re beginning to make some progress, but as the quarter unfolds, June in particular, we fell back there. So, the way we’re structured today, John, there is two ways to get at it. One is to continue to standardize and centralize more and more what we’re doing in terms of how we source the product, how we work through category management, how we transfer pricing within the Company to give our operating companies and our salespeople, as truer costs as we can and as competitive cost as we can to price off of over time, driving out these initial waves and category management will help us a great deal, so I just alluded to. There is some other things; we just need to do over time, very early days, very early exploratory work where we need to bring more consistency to how we price. Not take pricing, so think about this way. Little other half of our revenue stream is priced by our marketing associates, so they have a fair amount of latitude there. We want that because they are dealing with different customers at different points in time with different priorities, so we don’t want to overly (indiscernible) latitude, at the same time if you could see what we see, which I’m not going to let you see totally, there is a fair amount of volatility in that pricing that doesn’t need to be there. So I think, not so much this year, but over the next two to three years, we have an opportunity to standardize that with some things like scientific pricing, I’ll use that term for today, but there is other things as well. So, the idea would be to take some of the volatility out of the pricing and have more consistency, but still position that marketing associate to adapt to the needs of the customer locally. We don’t want to move away from that because that is our bread-and-butter that really is part of how we think we differentiate ourselves. But no doubt about it, tough quarter – tough couple of quarters, and we’re just going to have to dig ourselves out of it. And as I mentioned in my script, I think gradually you’ll see the trends improve and look at the bottom line, John, we need to do all of that and continue to grow the top line and take cost out of the business.
John Heinbockel – Guggenheim Securities: Do you think the MA pricing volatility is that more being reactionary or proactive? How good of visibility do you think they have into their competitors pricing?
William J. DeLaney – President and CEO: I don’t know that much about the latter, certainly, most of the accounts they call in are probably – there is probably two or three other competitors. So, they certainly have some sense of it depending on the items, obviously the more competitive items. I don’t know that it’s proactive or reactive. We are not getting out as not so much the volatility with the given MA, although there is some of that, what I am talking about is the volatility or the variability, makes the better word, between MAs between OpCos and similar items. And that just comes from having 7,000 different people pricing. So, we need to strike a better balance between that variability, but still being responsive to the needs of the individual customer. And we will, but it is going to take some time…
John Heinbockel – Guggenheim Securities: And then lastly on category management, do you think is one of the (thrust) you are going to be fewer SKUs you buying, giving more volume to certain vendors plus your costs going down and your ability to take pricing down along with that. Is that a key (thrust) or is that secondary?
William J. DeLaney – President and CEO: I wouldn’t say it is secondary, I’d say it is in tandem with a broader goal. There is different ways to go after this and different people call category management or define category management in different ways. We’ve taken a more deliberate what we think very thorough approach which starts with gaining insights from our customers, from our suppliers in terms of what the needs are in the market, what the trends are in the market and using that as an opportunity to not just eliminate SKUs but to create new SKUs as well. So, certainly there will be a SKU reduction aspect to it, but that should be more of a benefit as opposed to a targeted goal as we position our inventory to be more in sync with what the marketplace demands. And then as you go through that that should allow us to grow more effectively with our customers, bring more innovation to the work itself, address some of these trends more effectively that I mentioned in my prepared remarks. And certainly along the way when you are able to identify those supplier partners who want to make the commitment to go down that road with you, you are able to identify shared savings that are good for both us the supplier and the customer. So, it is all of the above, John. To do this just to save money for year or two is not enough. As we need to do it, don’t get me wrong as part of our cost savings initiatives, but we need to do in a way that we can grow the business over time as well.