Sysco Earnings Call Insights: Inventory Opportunities and Gross Margins

On Monday, Sysco Corporation (NYSE:SYY) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Inventory Opportunities

Ryan Gilligan – BMO Capital Markets: This is actually Ryan Gilligan on for Karen. We want to ask you about the inventory opportunity in terms of reducing SKU counts in your categories and the progress you’ve made so far. Specifically in the categories that you’ve approached already, what has been the response from customers and what has been the impact on cost of goods?

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William J. DeLaney – President and CEO: I would say on the SKU opportunities, we have kind of a two-pronged approach right now. We, from an operational standpoint, have a lot of activity going on in our operating companies where basically is – what I would characterize as good, old-fashioned, inventory management where we see opportunities to reduce SKUs that are not critical to customers and which are slow-moving than we’re – we do have brought a lot of focus to that particular issue. So, we’ve actually made good progress on that side of things, and generally that’s been handled well with customers. And any time you have a situation where you’re reducing a SKU or taking away a SKU that sells often there will be some type of discussion with the salesperson and the customer but we are working through those and I feel pretty good about. As part of our lower costing products initiative we’ve talked about exploring category management and that’ll bring a much more integrated and smoother approach to how do we optimize our assortment throughout the enterprise and manage SKUs more effectively at the same time. So, that work has not yet begun in terms of being live, but we are doing a lot of development work on that front as well.

Ryan Gilligan – BMO Capital Markets: And can you talk about the cadence of sales trends throughout the quarter and into the second?

William J. DeLaney – President and CEO: I would characterize sales trends pretty much as I said in my prepared comments we certainly (re-elect) from you folks in terms of softening in the restaurant industry and we think we’ve seen some of that as the quarters gone along and that’s continued here somewhat in the early part of the second quarter. So, the good news for us and this is just something we always try to remind everybody restaurants are obviously a big part of that $225 billion market, but we have a lot of other business beyond the restaurant business with colleges, universities, healthcare, hotels basically any establishment where food is prepared and eaten away from home. So, we’ve made some good strides with some of those customers and that’s serving us well right now.

Ryan Gilligan – BMO Capital Markets: Sorry, last question just go back to the opportunity with reducing cost of goods. The estimate that you outlined at the analyst day could that possible be conservative or how are you guys thinking about that right now?

William J. DeLaney – President and CEO: It is not conservative until we beat it. So, I think at this point that’s our best guidance for you.

Gross Margins

John Heinbockel – Guggenheim: So, Bill, couple of things; one of the reasons gross margin had declined over the last 1 year or 1.5 had been some proactive price investments you guys have made. Where you stand on that and assuming that that’s moderating, is there a possibility here that gross margin turns positive sometime in ’13?

William J. DeLaney – President and CEO: Certainly also, John, we’re pleased that it sounds that the trends have improved but obviously they are still below last year and I think in this type of market where the inflation has moderated as we called out, we would expect to continue to see improvement in those trends. So we’re highly focused on that is although I can tell you, we’ve done a lot of work internally, John, outside of the big initiatives in terms of providing what we call more market relevant costing to our operating companies, through our purchasing organization here and I think as we continued to provide better more market oriented – market relevant transfer costing that gives the OpCos a better cost based to price offer. So, there’s a lot of different things going on there. So, I’m going to answer similar to the earlier question, we need to improve – continue to improve in that area and as we get closer to year-over-year being flat, I’ll be more optimistic about improving year-over-year.

John Heinbockel – Guggenheim: You also talked about the acquisition environment being very favorable. Now is that – I guess, it’s a combination of these two things, but in terms of quality of companies available versus the price that you’re having to pay, is one of those two much more favorable than the other?

William J. DeLaney – President and CEO: That’s interesting question. I’ll start and let our acquisition guy here probably clean it up here a little bit. I would say there is a couple of things going on right now. I think the environment is good. There’s a little bit I think of the year end phenomena going on with it, concerns about tax code and that kind of thing. So I think that has helped at least in this country. But I would also tell you that this interest rate phenomenon I think works both ways. So, for us, it helps the deals look more attractive obviously since their borrowing cost would be a lot less. But the sellers know that as well. So, I think for good value in terms of quality companies, you’re going to pay an appropriate multiple today and we’re willing to do that because we can see the benefits financially and otherwise. So, hopefully that’s responsive. I think it’s a better environment, but we are not stealing any companies right now. We’re talking about good companies pay reasonable value.

R. Chris Kreidler – EVP and CFO: I don’t really have anything to add. Bill kind of (tetch) The only thing I will amplify is we have seen substantial increase in inbound phone calls because of the potential for tax rate increases in the beginning of next year, so you’ve got a little bit of that to rush to get it done phenomenon, but we’re fortunate, we’re seeing a lot of good companies that haven’t been interested in talking before coming forward and wanting to have discussions and some of those will result in transactions soon and some may result in transactions later, but we’re happy to talk to everybody.

John Heinbockel – Guggenheim: Then last on ERP, so, Chris, you said none of the financial objectives have changed. I assume the costs and benefits you’d outlined for ’13, none of those have changed?

R. Chris Kreidler – EVP and CFO: That is correct.

John Heinbockel – Guggenheim: And then accelerating in ’14, how many OpCos do you think you have done by the end of fiscal ’13, and then what’s the capacity if you look at it per week, per month; however you want to look at it, the capacity the organization has to do those, and if you do accelerate it, what do you do to enable you to accelerate it?

R. Chris Kreidler – EVP and CFO: Well, John, first, I mean our guidance for the year was 5 to 15 companies, and we’re certainly comfortable with that guidance. If I were going to shade it on the pace that we’re at as long as things continue to go well, I think will be towards the higher end of that guidance, but we are very comfortable with that. As Bill said and I’ll repeat it, we are looking at now what it would take to accelerate that based upon starting to feel better about our deployment capabilities. I think it is premature to giving more guidance as to how fast we could go or how many we could do at a time until we finish that work.

A Closer Look: Sysco Earnings Cheat Sheet>>