西斯柯 (SYY) 2008 Q4 法說會逐字稿

Good day, everyone and welcome to today's SYSCO Corporation fourth quarter and year end fiscal year 2008 earnings conference call. As a reminder, today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Mr. Neil Russell, Assistant Vice President Investor Relations.

Thank you, Patrick, and good morning, everyone. Thank you for joining us for SYSCO's fourth quarter and fiscal year 2008 conference call. On today's call, you'll hear from Rick Schnieders, our Chairman and Chief Executive Officer, Ken Spitler, our President and Chief Operating Officer, and Bill DeLaney, our Executive Vice President and Chief Financial Officer.

Before we begin, please note that statements made in the course of this presentation, that state the Company's or Management's intentions, hopes, beliefs, expectations or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ in a material manner. Additional information concerning factors that could cause actual results to differ in a material manner from those in the forward-looking statements is contained in the Company's SEC filings, including but not limited to risk factors contained in the Company's annual report on Form 10-K for the year ended June 30th, 2007 and in the Company's press release issued earlier this morning.

We will also discuss certain nonGAAP financial measures, you can find the reconciliation of those nonGAAP measures on our investor relations website at sysco.com. Please understand that all comparisons given during the call refer to changes between the fourth quarter of fiscal 2008, and the fourth quarter of fiscal 2007, or between full year fiscal 2008, and the full year fiscal 2007, unless otherwise noted. Also all comments about earnings per share refer to diluted earnings per share, unless otherwise noted. With that out of the way, I'll turn it over to our, Chairman, Chief Executive Officer, Rick Schnieders.

Thanks, Neil. Welcome and thank you for joining us this morning and thank you for your interest in SYSCO. Here are the headlines, 5.4% sales growth for the quarter and 7.1% sales growth for the year. What's important to note are the results coming from the operating companies, where they were able to leverage the 7% growth in sales to 3. -- 3 points of leverage to 10% operating income. And in total we leveraged to 13% EPS growth for fiscal '08, consistent with our long-term objectives. In addition, we returned 90% of our earnings to shareholders in the form of dividends and repurchases. Now I'd like turn it over to Ken for details on how all of this was achieved, and I'll be back for the Q&A.

Thanks, Rick, and good morning to everyone. As Rick just said, 2008 was a solid year. For the full year, sales grew $2.5 billion to $37.5 billion. Further, operating income grew 10% to $1.9 billion. Net earnings grew by more than $100 million to $1.1 billion. Earnings per share grew 13%. Return on total capital grew by one point to 21%. Return on equity exceeded 33%. And we returned over $1 billion to our shareholders in the forms of dividends and share repurchases. These results reflect the diligent efforts of our 50,000 associates to support our customers and improve productivity in all aspects of our business.

Physical 2008 certainly presented with us with obstacles to overcome, including ever-increasing fuel prices, persistent inflation and a challenging demand environment, each of which impacted our results. However, our relentless focus on supporting our customers and improving our operational capabilities resulted in strong earnings during this challenging time. Our sales growth in the fourth quarter was indicative of the overall market environment. In the midst of declining demand, we focused our efforts on stringent expense control, resulting in strong operating leverage. For the full year, SYSCO's sales growth of 7.1% continued to outpace the industry growth as we consistently gained market share. Unmistakably, operating leverage was a driving force of our success during the year.

We implemented several initiatives over time that have positioned SYSCO as the leader in the industry. They include programs such as activity-based pay, which aligns the compensation of certain associates with work completed rather than time on the job, to improve productivity and cost controls. Also, we continue to manage increased fuel costs by reducing the number of stops, increasing cases per truck, reducing idling time, and placing governors on portions of our fleet that prevent trucks from exceeding 60-mile per hour, which not only help save fuel but improves safety. We move forward with our centralized sourcing program in 2008, leveraging the power of the entire Corporation to reduce costs while streamlining our inventory. We also continued to manage miles, an ongoing process for SYSCO. We used our transportation management system to streamline inbound freight, while our XY routing process minimized miles driven on outbound shipments. Combined, these two initiatives helped reduce our cost, solidify our competitive position and importantly reduce negative environmental impact.

Food inflation, as measured by our internal measure of product cost inflation, has been consistent. Averaging about 6.2% for the fourth quarter, and 6% for the full year. The product categories of canned and dry and dairy have had the largest impacts for the year. The balance of inflation costs were spread across several categories, although we don't forecast inflation, we anticipate product costs to increase for the foreseeable future. As the -- as the industry leader, we will continue to invest back in our business to maintain and grow our competitive advantages.

We expanded the Broadline business by opening one additional facility in Knoxville, Tennessee during fiscal 2008, and expect to open another in East Texas in physical 2009. We are encouraged with the progress we had-- we made during fiscal 2008, and remain confident that the successful execution of our business plan will position us well to participate in the growth and success of our customers in the future. Looking back on the momentum the Company gained during physical 2007 and built upon in 2008, I am confident we have the right people and the right plan to deliver in fiscal 2009.

In summary, we had another solid year from an operational and financial standpoint. I'd like to thank the entire SYSCO team for their leadership and hard work. Now Bill will review some additional financial details for the fourth quarter and total year.

Thanks, Ken, and good morning, everyone. As Rick as Ken just said we're pleased with our financial results for 2008. Here are a few items regarding the fourth quarter and fiscal year 2008 financial results that I would like to briefly discuss. First, operating expenses for the quarter included a negative year-over-year comparison of approximately $8.4 million related to our investment in Company-owned life insurance, or COLI. Also during the quarter we incurred charges totaling $12.9 million related to multi-employee pension plans. Separately we had favorable comparisons of $2.7 million related to stock-based compensation and of $2.2 million related to Company-sponsored pension plan expense. For the quarter these items resulted in a net $16.4 million unfavorable impact on operating income growth. For the full year, we had an unfavorable comparison of $24.2 million for these same items. Clearly the ability of the Company to not only offset these cost pressures but continue to leverage sales growth is indicative of the high-level of execution taking place at our operating companies.

Notwithstanding the favor impact of the initiatives discussed by Ken, higher fuel prices negatively impacted SYSCO's operating expenses by $16 million during the fourth quarter and $34 million during the fiscal year. Approximately 75% of the $34 million increase in fuel expense for the year was recovered through incremental fuel surcharges. Looking forward, we expect that increases in fuel costs will negatively impact the year-over-year cost comparisons by approximately $60 million to $70 million for the first six months of fiscal 2009. We expect to recover approximately half of those additional fuel costs during the first six months of fiscal 2009 through increased fuel surcharges. These estimates include the impact of forward purchase contracts for approximately 30% of our fuel needs through the mid-point of the second quarter that we've already committed to, and assuming the remainder of our fuel needs are purchased at current spot-price levels.

Our cash flows and balance sheet remain strong in 2008 and are a competitive advantage for SYSCO. Going forward we expect capital spending in fiscal 2009 to be in the range of approximately $675 million to $725 million, primarily for land and facilities in our core business. We also continue to look for acquisitions in conjunction with our strategic business goals. And we expect to continue to return capital to our shareholders by repurchasing shares and growing the dividend commensurate with our earnings growth. As we begin fiscal 2009, we remain committed to the success of our customers. We are pleased with our overall performance for fiscal 2008, but realize significant challenges lie ahead. Today's difficult market environment demands that we further improve our productivity in all aspects of our business so that we remain well positioned to sustain profitable sales growth for the foreseeable future. And with that, operator, we'll now take questions.

Thank you. (operator instructions). We'll take our first question from Greg Badishkanian with Citigroup.

Great. Thanks, and really good job on the quarter, guys. Mike, I have two questions. First one is, your margins were greater than what I was, and I'm assuming the street modeled out. Just in term-- in order of magnitude, what were the drivers leading to only 4% operating expense growth this quarter in a inflationary environment?

Well, I'll start. There're probably a number of things, Greg, that took place and Ken alluded to a couple of them. But certainly the routing of our trucks, more efficient routing of our trucks, the fact that we're putting more cases on the trucks, we're getting more productivity in the warehouses. Frankly, we're getting more productivity throughout the organization. Our productivity in the total organization continues to improve. So broadly, it's just in good tight expense control, and an awareness that the operating companies in all levels of the business that that is a focus for us, and we've talked to everyone that has any influence at all that, that this is going to be the next 12 to 18 months, at least in our mind, that we have to be very, very sharp at the expense line.

Great. And do you feel that there's more opportunity over the coming quarters to continue to cut out expenses, or have you -- do you think you've kind of maximized those initiatives?

No, I think that we all recognize there are other opportunities for us to continue to get more efficient and more productive in the ways we work.

Okay. Good. Kind of looking at -- I think you had mentioned that sysco had gained share in the quarter, maybe just -- or at least in the full year. Can you talk a little bit about in the quarter maybe what you think the industry was growing at, and if you gained share in what types of customers? Was it -- were your customers growing faster? Were you gaining share of new customers, maybe talk a little about that.

Well I think we gained-- without having (inaudible) data right now, but I think we gained share in the fourth quarter at the same rate that we gained share throughout the year. And I would once again point to the success that we have had with the business review process. I think the company's continue to execute extremely well in the business reviews, and we had another good year of business reviews in 2008 and we're starting off 2009 on a similar trajectory. So if there were one thing that I would point to would certainly be, in terms of gaining share, would be the business review process.

Great. Thank you very much.

Thank you.

We'll take our next question from Meredith adler with Lehman Brothers.

Hi, this is actually Sean Roberts for Meredith. Good morning.

Hi, Sean.

I wanted to-- that last question-- so are you still seeing growth from new customers, the DMAs out in the field, are they still winning new business, or is it strictly just business reviews -- ?

Sean, we're having a little bit of a hard time hearing you, but we are, yes we are certainly picking up new customers. We've had a-- we had a good year of picking up new customers. Our-- at the same time our penetration continues to improve. But yeah, I think we're focused on new customers. Having said that, I would also say that today, and we've said this before, we're doing a better job in terms of qualifying new customers to make sure that they indeed fit our system and our strategy. So yeah, we're definitely picking up new customers, probably the biggest contributor in overall sales growth right now.

And then maybe drilling down a little bit on the gross margin line. I think we were a little bit surprised to see it I mean basically flat, we thought it might be down just given inflation and the way some of the math works on your contracted business where you have a fixed fee. Can you talk about what's going on there? It is really just about making sure you pass through the inflation? Or are there some productivity improvements within the gross margin line that are helping that stay flat?

Sean, this is Bill. There's always a lot going on in the gross margin line. And frankly that's why we try to steer people toward the operating margin line because there's so many things going on in a given quarter between customers and products and inflation. The one thing I will say to you here is the fuel surcharges that we alluded to in terms of the year and kind of our best guess going forward for the next six months, we did ramp that initiative up significantly in the fourth quarter, and the accounting for that is such that fuel expense hits the cost line or the expense line, and these fuel surcharges hit the revenue line. So that did help a little bit, more so in the fourth quarter than earlier in the year. But in addition to that, it's just -- what Rick just talked about, and what we speak about in the release and in the script that we just went through, which is, it's just manage it at the customer level as best as you can day in and day out so that you're responding to what the customer's needs are, but also trying to do what we need to do from a shareholder's perspective.

And just one quick follow-up on the inflation question. You mentioned a few different product categories where you experienced higher than I guess the average inflation. As we look out, we've been hearing that the protein, the center of the plate items, might be experiencing more inflation here I guess in the second half of the calendar year. Is there a different in the way that the center of the plate items are priced that might result in some differences in the way you're experiencing things on the gross margin line?

Well, I think first of all, we have not seen the protein, the center of the plate protein items, to be the Main contributors to inflation, at least in the most recent past. In fact, there are four categories that are contributing most of the inflation right now. Three of those related to vegetables and fruit, and the other one is dairy. So protein has not for a while been-- meat proteins have not been the biggest contributor to inflation. So it's a little bit hard to predict what's going to happen going forward. However, having -- having said that big contributor is sort on the grains and the vegetables and the fruits, those categories, those products mostly come to harvest starting about right now for the next couple or three months, so we think that based on what we know right now, the supplies are going to be pretty good.

So it -- I mean, frankly it's anybody's guess. This has been a very, very volatile market for the last couple of years. If the dollar continues to strengthen, I think that we will continue to see the oil prices come down, and we track commodities, corn and soy beans specifically against oil, and they are tailing down now also as the dollar has gotten stronger. So if anybody can predict all of those various components, frankly they're better than we are. It would be just a guess at this point, but we're operating as if we're going to have some inflation for the next while yet.

But Sean, to question your answer on the pricing side of it, commodity -- center of the plate is generally priced weekly or at the time of sale.

Great. Thank you.

We'll take our next question from John Heinbockel, Goldman Sachs.

Couple of things. Rick, can you talk to sales progression and did you see kind of a constant softening trend during the quarter, and has that continued in to the new year? Have we -- do we have any sense whether we've hit bottom yet or not?

John, that's another one of those sort of prognostications that's difficult to address. Obviously we're in difficult macroeconomic environment. We did see declining sequential sales growth through the fiscal year, not necessarily through the quarter. What we've been encouraged about is our ability to continue to-- by working with our customers to take share in this marketplace. And we're going to continue to focus on our ability to control costs and live by our commitment to leverage up our topline sales growth in to the operating line and into the EPS. So at this point I guess we would all hope that fuel at the pump is going to continue to come down. Obviously that's a contributor to the overall macroenvironment and to the restaurant business in general. And again, we're, we're going to manage the business as tough as we've been managing it for the last year going forward.

But if you-- I mean if you look at the last month or two, you would say -- you wouldn't necessarily be below that 5.4% for the quarter?

No.

Would that be a faulty assumption that you're running below that today?

No.

It would be faulty or it wouldn't be?

No, I'm sorry, it would not --

John, this is Bill, let me just jump in. We-- obviously we don't give a lot of forward-looking--

Right.

Commentary on sales growth. Were running about where we were running for the quarter. Only four or five weeks into the new quarter.

Okay. Secondly, if you look at MA growth in terms of positions, where did we end up in '08 in percent growth and where do you think we end up in '09?

We're flat for '08, but we increased our business review people.

So flat in terms of total number of positions?

MAs.

Okay. And what about '09 do you think?

I don't anticipate that we're going to grow them more -- probably about 2%. We're still adding business review people.

And let me -- John, let me be clear about that and make the distinction again that Ken is making. And that is that our marketing associate growth in '08 was flat, but we did add business review folks and business development folks.

Yes.

And so I just want to make that distinction.

Okay. And then finally, in terms of centralized purchasing. Where are we now in terms of number of categories and amount of volume impacted? Where do you think we go over the next 12 months?

John, we -- I think there were some comments made in the script that we continue to be very favorable toward our overall sourcing program that the total Company has really gotten behind it. So we're just continuing on as we have been. We're going to continue to add more categories. I don't even have a number today in terms of what we're going to add. But we feel good about that program, and we're going to continue to add products and categories throughout '09.

Because I think-- wasn't the last wave something like $4 billion or $5 billion of sales or no?

$4 billion or $5 billion, no.

The last wave would have got us to $3 billion.

Okay. And are we in to the next wave or no, we're still in the $3 billion wave?

We're in the next wave. Obviously now, now John, we do renewals on the earlier waves of products and we add new categories as well.

So the $3 billion is a cumulative number, John.

Yes.

Okay. All right. Thanks.

Thank you.

(OPERATOR INSTRUCTIONS). We'll go next to Andrew Wolf with BB&T Capital Markets.

Thank you, good morning.

Good morning.

You might have mentioned this, but was there any-- can you explain why this quarter there was no share buyback activity?

No, Andy, we didn't mention that. Thanks for bringing it up. We-- let me be as straightforward and as oblique as I can be here. But we-- as we got into the quarter, we were assessing a potential opportunity that we felt if it did develop further could be significant, and we so chose not to buy shares. Since that time, the opportunity has not developed and we'ave moved on. But -- so you will see us come back into the market here once our blackout period is lifted.

Okay. Thank you for explaining that. On to the-- this multi-employer pension liability that cost you a lot of money the last couple of quarters. In the Q for the third quarter there's some commentary suggesting, well it says you can't really estimate it at this time. Is there any update on that? Have you got a better feel for that that could turn out to be for the Company?

Are you talking about aggregate exposure or are you talking about specific commentary on any given one plan that we might be in. I don't have the Q in front of me.

Oh, I'm sorry. It's the multi-employer pension plan liability --

Right.

Where-- this quarter hit you by $22 million in the last couple of quarters.

It is for $22 million for the year, and about $13 million, I think for the quarter, right. And so that -- the quarter was a combination of a couple of different plans that we participate in, and -- yeah, and I think we have given disclosure in the past Ks and I guess Qs that theoretically there is an number out there in the $135 million to $140 million range, that not the most current number in the world. We do the best we can to get that data. So of that -- say it's $140 million we've effectively provided for about $20 million of it at this point.

Okay. So did that mean that could be an ongoing expense in the ballpark, or is that too hard to-- in the ballpark of what we've seen in the last couple quarters.

It's really hard to predict I'll give you a little commentary on this. When-- the $140 million number that I spoke to is that's our exposure, theoretically in all of our plans. What you've seen this year was one plan in particular that was in a little more critical situation where we had to address some funding and potential withdrawal liability issues. So that one has its own situation, if you will. And then we also had actually another situation where we decertified in a small union, and that created a need to put up a withdrawal liability provision. So it's kind of case-by-case, and where we have opportunities to decertify, and those aren't frequent, we tend to take advantage of them. So I can't give you a real clear answer in terms of the future, other than the bulk of this $22 million is one plan, it's a very unique situation, and we'll just have to play it quarter-by-quarter at this point.

Okay. Thank you for that, that helps me understand that too. Lastly, in the past I think you've given a sense of what the Company's-sponsored pensions -- what kind of change -- change to, or swing in earnings that might occur. This year you picked up a little bit on that in earnings, and perhaps stock compensation expense. Do you have a clarity on that you could speak to?

We've got developing clarity. And as you notice in the release, we basically just went ahead and put this stuff on a table, some of these items, which I can't call nonrecurring, but they're hard to predict. But the two that I think we can speak to somewhat today, and I think with more clarity when we file the K and even more so after the first quarter, are the two that you mentioned. So the pension helped us this year by about $9 million. This is a Company-sponsored pension. And the stock comp helped us, I think by $17 million or $18 million. Looking forward on the pension, that's going to go the other way. In '09 that's probably going to hurt us for somewheres around $20 million, give or take. We'll tighten that as we file the K, that's being largely driven just by what you would expect which is what's been going on in the financial markets and certainly our investments have participated in that.

And then on the stock comp, that's a little trickier but our best judgment today would be that that would be favorable next year by about $20 million. So the two would roughly offset-- my only caveat on the stock comp is a significant amount of that number is stock options which are -- they're approved by our Board of Directors and that won't happen until we get in to the fall, so that's -- that number is not really a firm number, but our best judgment today is that those two numbers will roughly offset in '09.

Great. Thanks a lot.

We'll take our next question from Neil Currie, UBS.

Yes, good morning, and thank you for answering my question. I just wanted to ask about the health of the independents out there. We've seen a number of bankruptcies out there amongst restaurants. And I was wondering what color you might be able to give? Obviously you're taking market share. But I imagine there are also some of your accounts that may be struggling due to the overall environment. I was wondering what you're seeing in terms of what-- an increase or decrease in those sort of trends?

I think it's definitely-- there's no question, we've said in a couple of different ways, I guess, that it's a very challenging environment out there. And of course everyone read about Bennigan's and Steak & Ale. But I would have to say too, and this is something we've said before, that generally our customer base tends to be a very high quality customer base. Our customers have been in business for a long time. We anticipate that they will weather this storm. And now having said that, I think it's definitely a challenging time for them. And again, the business reviews are where we go in and try to help them with their operational issues and their menus. And what we found most recently, over the past couple of quarters has been, is this difficult environment our customers are coming to us to ask for business reviews, to ask for more information, to ask them to help them get through this difficult time. So it is tough, but I think that our customers generally are doing well, and we're doing everything we can to help them in their business.

Great. I -- in terms of helping them in order to do that, do you think in the next sort of six months or so -- let's assume that inflation stays at these sorts of levels, do you think it may -- you've been very successful in being able to pass through fuel surcharges and inflated costs. Do you think your ability to do that will -- and hold on to the level of sales that you have and retain the health of your customer base, can continue and you can continue to push through those costs, or do you think that it may be get more difficult to do that?

I--- no I'm confident that we can continue to do that. I would say that over the last few months we've learned better how to communicate with our customers, even those that don't go through business reviews. So one of the key activities or the key things that a restaurant has to do today is make sure they keep up with their pricing -- their cost on their menu prices. And that's what we've been , I think, very good at. I think the customers in turn have responded well to the suggestions that we've made. So in the past we've had customers that haven't changed their menu pricing for seven or eight years, and in this environment that's absolutely deadly. So I think that our companies have done a terrific job in terms of helping with that particular item and others, but making sure that our -- our customers are keeping up with the menu

Thanks, and just finally, if I may. Has there been any change in your allowance for bad debts or any update on how that looks?

Nothing significant. I mean we're-- when you see the K you'll find the ratios for bad debt and write-offs are pretty comparable to what they've been running.

Okay. Thanks very much indeed.

Thank you.

We'll take our next question from Alec Patterson, RCM.

Yes, good morning. I just wanted to clarify, there wasn't any mention of M&A in the sales number, that correct, right?

That's correct.

That's right.

Okay. And I guess I'm just trying to back in to the traditional real growth number. It's slightly negative, that's just the way to put it?

That's correct, also.

Yes.

And part of the overall sales looks like the other segment is soft again, can you sort of speak to what's going on there, if anything?

Specialty companies?

You're talking about special?

Yes.

In Sigma or-- you talking about Sigma or the other?

Other.

I think that we've had a challenging year, particularly in the meat business with the high cost -- early on the high cost of -- of raw materials in beef, and pork to a certain extent, lesser in poultry. But I think that's been a tough business or us and for others. It's been a challenging year.

And predominantly the softness you see there is in the meat companies. Guest had a pretty good year and the produce companies had a pretty good year, but they've had kind of a perfect storm of bad circumstances.

Okay. Are you saying that it's a tough year because people are eating less of that product line or the inflation trend or -- not quite clear on that?

I think what's happened Alec in a lot of cases is we've seen trading down. So we think trading down from tenderloins down to flat iron steaks from strip steaks down to any number of things. I think there's been a lot of substituting going on. So although the pounds are not off as much as the dollars are, it's because of the shifting mix.

Got it. Okay that explains it. Thank you very much.

Thank you.

That concludes the question-and-answer session for today's conference. Mr. Schnieders, I would like to turn the conference back over to you for any closing remarks, sir.

Thank you. Once again I'd like to add my thanks to our 50,000 associates out there for an excellent year in a very challenging environment. And I know we can count on them again in fiscal '09. So thank you all for participating this morning. We appreciate your interest.

This concludes today's conference. We thank everyone for their participation. You may now disconnect your lines.