Sysco Earnings Call Insights: The Rollout Schedule and ERP Implementation

Sysco Corporation (NYSE:SYY) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

The Rollout Schedule

John Heinbockel – Guggenheim Securities: Couple of things. Is there any update on either the rollout schedule, where you expect to be by fiscal year-end in terms of OpCo’s or the benefit because I think you said 25% of the ultimate benefit would be seen this year, is there any update on either one of those?

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William J. DeLaney – President and CEO: John, no, I don’t have an update for you this morning. What we were telling you I think in our prepared comments is we are in a somewhat of a delay here from what we originally anticipated in terms of rollouts and we are going to take the next few weeks to continue to assess the things we need to improve in terms of the functionality of the system, I think, over the next month or two we should have an update on the rollout timeline. As far as the 25% of the benefits, I want to just keep reminding everybody and I’ll let Chris speak to this because he is the one that’s really managing this very well. That is off of a overall targeted savings of $600 million give or take over a three-year period which incorporates not just a technology side of it, but some big initiatives we have going on which Chris referenced in detail here today on the SG&A side of the business as well as the product cost side of the business. So, I think we’re in a pretty good place there and I’ll let Chris provide some color for you.

R. Chris Kreidler – EVP and CFO: Yeah, John. With regards to the both parts of your question on the rollout plan I won’t add any color to what Bill said, other than the guidance that we have out there right now is 5 to 15 operating companies being converted this year. I think it’s fair to say we’re going to be at the lower end of that range. But as Bill said, we’re working through whatever revisions we might need to make to our plans right now, but that’s the current guidance. On the savings, again, as Bill said, it’s across all of our business transformation initiatives, I’ll kind of walk you through where we’ve made progress on many of the others and frankly we feel pretty good about where we are on our overall cost saving initiatives for this year as well as going forward.

John Heinbockel – Guggenheim Securities: So, just as a follow-up on I guess ERP, two things. The functionality challenges are coming primarily from where? Then, as you’ve rolled out the CRM component have you seen yet much of the benefit to how the sales people are doing their day to day job, whether it’s calling on more customers or anything like that or is that too early yet?

William J. DeLaney – President and CEO: I think we’re beginning to see benefits Sean in the CRM, but it is pretty early I mean we’ve – it is a huge rollout for us in multiple companies, but for us to be able to successfully implement some of the other initiatives in the SG&A side that we’ve undertaken we’re going to need to see impact of implementations of CRM. So, I think we’re in good place there, but that’s like a lot of things. It probably takes a good year to get it out and get people to use the system and to trust it and then to hold each other accountable for results. So, I’d say, still early, but we are very encouraged and very pleased with the system itself that we are using. As far as the functionality, let me do this. I went back and look to some things we’ve said you all in recent calls and I’d like to put in context and I think the first point I’ll leave with you is we are very confident in the direction we are going in here, we are confident that we are going to be able to resolve some of the challenges that we have right now. We are just not as confident in terms of the specifics of the near term time line. With that said, what we have talked about in the past is our concerns, issues with speed, performance, in particular, with the order entry system. We had some issues with reports early on and we spoke a little bit in the past about inventory management service levels those types of things. I would say to you where we are today with these recent roll outs we are pleased with the progress we’ve made on the order entry and the speed and the performance of that system. So, we’ve done well there. We are very pleased with, as I said earlier, with the ramp up of SPS and that group beginning to take on a broad array of support services even without the technology being as further – as far along as it will be at some point. So, we’re not waiting on the technology to begin to centralize the things that we believe can be centralized effectively. Our challenges today we’ve had some hardware blips to be honest with you. Around Thanksgiving time we ran into some issues there and it took us a while to resolve that. We’ve had an event or two here of late as well. So, we still got some things to work through on the hardware side, highly confident that we will be able to do that. And then on the – what I’ll call again the inventory management service level issues we’re still not clicking there at the level that we need to be. We came out of astute pretty well after the deployments themselves but the service levels aren’t where they need to be. We’ve run into some issues with connectivity and our system to our large customer systems and those are things that we’re working through today. Now, I’ll remind you that this deployment we did back in early November, was very important, for couple of reasons, when is the first time we deployed two companies, but second North Texas or essentially Dallas is by far in a way the largest OpCo we put on the system, and it’s one of our largest OpCo’s overall. So, these challenges we run into right now. Well, it is somewhat frustrating at times, not unexpected and we’re working through them with our customers and with our people and again really appreciate the patients of the customers and very, very appreciative of the efforts our people are putting forth.

John Heinbockel – Guggenheim Securities: One last thing, it looks like the level of pricing investments have moderated from where they were nine months ago, a year ago, is that likely to continue or does that go the other way given the macro and maybe resurgence in inflation? Do you think the pace of pricing investments, gets more intense on year end the next remainder of this year or do you – I think continue to moderate?

William J. DeLaney – President and CEO: Those are your words I don’t think I’ve used those words exactly. I will say, by a year and half, two years ago, we did talk a lot about strategic pricing initiatives and there were some things were doing in a category or two that we have pretty much cycled through. We’re pleased with what we’ve seen there in terms of growth. I think the relative improvement you’re seeing on the margin trends is a combination of two things. We are working very hard at it, trying to strike the right balance in terms of growth and being responsive to our customers. Secondly, is because the inflation has subsided, that takes a little pressure off the percentage change issue there. So, we’re continuing to try to grow the business aggressively, but be smart about it and we need to continue to improve on the margin side.

ERP Implementation

Edward Kelly – Credit Suisse: So if we could go back to just a quick follow-up on the ERP implementation, is there any impact on the cost that you expected to incur this year that 300 to 350 as well as on capital, because I know you talked about some hardware issues?

R. Chris Kreidler – EVP and CFO: The second one first, at this point we don’t really anticipate an increase in the cost of capital and if it is frankly, it is going to be minor. Hardware really doesn’t cost that much in the grand scheme of project like this, the capitalization of labor which typically occurs when you’re developing the system not when you’re implementing it. So, I don’t anticipate a significant increase in the capitalization. In terms of the overall costs to the extent that there is a delay here, just like what we talked about the last time, when we talked about the more significant delay, it’s not really in the current year. It just adds additional time down the road. So, while there may be some additional costs I don’t currently anticipate those being significant but any time you have a delay of course you’re adding more time to the end of the deployment cycle and you pick up additional cost for a longer period of time.

Edward Kelly – Credit Suisse: Then I’m just trying to frame sort of like the net cost of business transformation as well as the cost savings that you talked about this year, and I guess the way we think about it if there’s 3 to 350 in business transformation and let’s call it roughly $150 million in cost saves, you’re sort of at this $175 million level net for the full year which is lower year-over-year than last year, because you just had gross costs in those savings, are we thinking about that the correct way, so you’re…?

R. Chris Kreidler – EVP and CFO: You are generally correct. We gave you a lot of guidance at our Investor Day, which I’d encourage you to pull back up. There are couple of charts there that are pretty good that frankly if you listen to our calls we try to talk in the same language as those charts every time so you can keep up. But that’s how we outlined it. We had gross business transformation cost, we netted against that, some benefits from our shared services center to get to a net business transformation cost and then we also broke it down into cash cost. And cash is where we expected to pick up some benefit this year as we slowed down the implementation and start depreciation – slowed down the development and start depreciation.

Edward Kelly – Credit Suisse: Now, on the cost saving side, I know in the first quarter you were reluctant to really kind of give any color on where you stood. I don’t know if you could help us understand how much you’ve achieved today in the first half or how much of that is back half weighted just as kind of we think about the model here?

R. Chris Kreidler – EVP and CFO: We are going to be very cautious about giving quarter-by-quarter guidance because there is going to be a lot of timing elements to this to be real candid with you. But look I am not going to dodge the fact that this whole thing was a build up from one quarter to the next all the way through three years. So, we told you 25% in the first year, range around 50-ish in the second year and all of it by the third. So, you can see the ramp up through the year, it is a ramp up as well. So, of the 25% yeah more than half of it’s going to be in the latter half of the year.

Edward Kelly – Credit Suisse: Then, Bill, could you maybe talk about just general consumer and industry trends. So, maybe start with sort of volume growth what was the cadence to that volume growth throughout the quarter and then it sounds like things that weakened up so far in the current quarter from volume standpoint. I don’t want to put words in your mouth. So, if you could just help us understand what you were sort of referring to there?

William J. DeLaney – President and CEO: Yes, I would say to you that the volume trends have softened I think as we went through the second quarter, in particular on the street, we’re doing a really nice job with a large regional national change that — Kent Humphries and his group have brought in some great accounts there, we’ve been able to grow with some big existing customers. So that’s been a real positive for us. I would say on the street we have seen some softness and then when Hurricane Sandy came, that just exacerbated it and things picked up after that, but not to the level that we were at before. I’m not really putting that on the hurricane, no, I just think as you read all the things that come out in terms of economic confidence and you look at some things coming out of our industry in terms of the operators and just looking at lot of the things that you guys publish in terms of restaurant trends. I think you can say that things have softened out there and we’re dealing with it and bottom line is we’re continuing to find ways to stay closer to our customers, work even harder and retaining the business that we do have and going after new prospects that are good fits for Sysco. So I think it’s going to be soft here for a while, from everything I read and that just means that we need to work a little bit harder and continue to – as I mentioned in my comments, continue to aggressively go forward on some of the transformation initiatives and continue to develop the acquisition pipeline.

Edward Kelly – Credit Suisse: I just want to ask you one last question on gross profit dollar growth. Your gross profit dollar growth exceeded your case growth this quarter for the first time in a while, which is probably an encouraging sign. Could you may be dwell up what the drivers of that were and it might be something extra I mean SYGMA didn’t grow much and then how sustainable that is in the back half?

William J. DeLaney – President and CEO: To be candid, that’s not exactly a higher (Bob). We need to at least get to that and fortunately we did, so it is encouraging and I would attribute that to some modest improvement on our part in terms of managing growth and profitability we need to continue to improve it to be totally candid. So, it’s encouraging but a lot of room to go.

Edward Kelly – Credit Suisse: Can you keep that up in the back half so do you think?

William J. DeLaney – President and CEO: We’re planning too.

A Closer Look: Sysco Earnings Cheat Sheet>>