Sysco Conference Call Highlights

Sysco Corporation (NYSE: SYY) reported its first-quarter earnings on Monday. Shares of the company are relatively neutral for the day.

Below are some key highlights from its conference call.

• Sales grew more than 6% to $12.4 billion and adjusted net earnings increased 7.6% to $309 million.
• Adjusted EPS, excluding certain items, increased approximately 6% to $0.52 for the quarter, our strongest year-over-year growth in quite some time.
• We are pleased with the solid operating performance we delivered in our first fiscal quarter in the midst of ongoing challenging market conditions.
• While we were challenged with expense management in certain aspects of our business, we generated more than 2% case volume growth.
• With that said, we remain intently focused on enhancing every aspect of our business so that we are able to better support our customers, operate more efficiently, and compete more effectively.
• As I mentioned, benefits from our category-management initiative continue to gain momentum.
• We expect that all remaining categories will be launched into the market by the end of this fiscal year and that we will achieve our financial savings target.
• Turning to an update on our technology initiatives, during the quarter, we successfully executed a major software upgrade for the 12 operating companies using SAP.
• In addition, while we'll talk more about the proposed merger in a moment, we continue our merger integration planning and sequencing work with regards to technology.
• We expect initial post merger areas of focus will include the rollout of SAP financial modules for general ledger, accounts payable, and accounts receivable, as well as additional elements of the HR module.
• Expense increases were broad based and were primarily driven by increases in sales, delivery and incentive accruals.
• On the sales side, we've begun to hire MAs in targeted markets and expect these investments to contribute to sales growth over time.
• In the delivery area, driver turnover and shortages continue to drive higher wages and overtime expense.
• However, our single largest opportunity for improvement lies in more consistent execution across the organization.
• We are developing and implementing tools that will provide increased visibility to key performance metrics as well as improved best business practices. We believe these enhancements combined with our new functional structure will lead to improved customer service, greater operational efficiency, enhanced cost management and increased profitability.

Financial Performance and Growth:

• For the first quarter, sales were $12.4 billion or an increase of 6.2% compared to the prior year.
• Food cost inflation was 4.9%, driven mainly by inflation in the meat, dairy and seafood categories.
• Sales from acquisitions increased sales by 0.6%, however this was largely offset by the impact of changes in foreign exchange rates, which decreased sales by 0.5%.
• Case volume grew 2.3% during the quarter, including acquisition and approximately 2.2% excluding acquisition.
• Gross profit in the first quarter increased 6%, nearly at the same rate as sales growth.
• Gross margin declined four basis points to 17.59%, reflecting the positive impact from our category management initiative and improved margin trend over the last few quarters.
• Operating expenses increased $136 million.
• Operating expenses increased mainly due to a $67 million increase in payroll expense and a $41 million increase in certain item expenses.
• As a result of these year-over-year changes, free cash flow was negative $55 million for the first quarter.
• Turning to the pending US Foods merger, subsequent to the end of the quarter, we issued $5 billion in debt in six series over various periods from three to 30 years.
• We paid $59 million in September 2014 to settle the hedge against our 10-year note issuance.
• In addition, we paid $130 million in early October to settle the hedge against our 30-year debt issuance, which will be shown as a financing activity in our cash flow statement.
• The financial impact of the unwind of the hedges will be amortized into earnings over 10 years and 30 years respectively.

Outlook:

• First, with regard to our category management initiative over the balance of the year, we expect the year-over-year impact of these benefits in each of the first three quarters.
• Second, as we disclosed on last quarter's call, we continue to expect that corporate expenses will increase compared to the prior fiscal year.
• Due to the timing of these expenses quarter-to-quarter, we expect a more significant year-over-year impact in the second quarter.
• Third, we will recognize a $13 million write-off in the second quarter of unamortized debt cost related to the termination of the bridge facility, which occurred as we issued the new debt related to the transaction.
• This write-off will be recorded in interest expense and will be treated as a certain item when we report our results next quarter.
• Fourth, as a result of the issuance of the new debt and the unwind of the pre-issuance hedges; we will recognize approximately $14 million in additional interest expense per month beginning in the second quarter.