Sysco Corporation (SYY) Earnings Call Transcript & Summary

Is that Joel?

That's me.

All right. Glad you made it. Sorry for the technical issues. I seem to recall having similar issues recently myself. So it happens to the best of us.

Yes. Sorry, I apologize, Kelly. I don't know what happened there, but glad to be in finally.

No worries. No worries. We'll just dive right in here. So first and foremost, I do want to thank you, Joel and Neil and Rachel, all for joining us. We really do appreciate your participation at Farm to Market and hope that you -- all of you and your employees continue to stay safe and well. So with that, there is no shortage of topics to cover. And we never seem to have enough time to go through all this, but I'm happy to introduce Joel Grade, CFO of Sysco; Neil Russell, VP of Corporate Affairs; and Rachel Lee, Director of IR. So thanks, everyone, for joining us.

Thanks for having us, Kelly.

Thanks for having us, Kelly. It's great to be here. And again, certainly hope you and all yours and everyone on the phone's family is healthy and safe during all this craziness we're in right now. So again, thanks for having us. And again, apologize for the issues making us late today.

Not a problem. So we'll just dive right in. One of the things that I was hoping we could just unpack a little bit was just the progression of the sales improvement we've -- that Sysco has experienced. Just helping us kind of dive deeper in understanding what's driving that at a deeper level in terms of more takeout, more of your customers adding takeout, same-store sales, contributions from grocery, states opening up. Just how should we think about what you've seen so far?

Sure. Absolutely. So as we talked about in earnings, we've -- a couple of points, I would say, are really important. One, we made sequential incremental improvement over the course of the weeks, starting in our period [ 10 ], which is April. And so it wasn't like there was just sort of a onetime shot. And I think what -- the way we look at that is that at the time, the whole thing started, I think a lot of restaurants, in some cases, just put themselves on hold and shut down for a little bit and see how this is going to play out. And obviously, as we talked about in the call, we had what we believe is our volume trough at the end of March. Since that time, restaurants did start to realize, okay, the takeout and the delivery piece became much bigger, the curbside pickup. The idea that -- I think people, honestly, at some point, started just getting sick of being at home and cooking their own food and washing the dishes and all the other stuff that goes along with that. So I think there's just a generally sequential improvement for all those reasons, and you're throwing grocerants on top of that. I think so many of the things that we are actually participating in helping our customers get better and better at. And I think they just -- I think the combination of just increasing traffic and they're continually just getting used to their new world and building capabilities in the areas that we've talked about really helped. And that was all, of course, prior to really the economy starting to open back up again. So that's -- and we've seen some of that continued progression here in May, as we certainly anticipate and hope we would at the time we talked about in the earnings. So I would say, generally speaking, Kelly, it's really some of the things that, again, is related to just people a bit more consumer traffic and build. And at the same time, restaurants just getting better. And all the things again in all those areas that they've been opening up, I think, have been part of what's contributed to this. And of course, now what we're actually seeing is with some states opening up more and more. Even the patios, especially places that do have outdoor seating, we're seeing a lot of things where the outdoors and feeding places, again, tables are apart in a separate way and about 6 feet apart. And sanitization is obviously at an all-time high, but people are going out to eat. And I think that's encouraging.

One of the questions that we've been getting, I don't know if you can help us with this, but just trying to understand a little deeper Sysco's exposure to the various types of restaurants. So QSR, casual dining, fine dining, full service. How should we think about that, or even just relative to kind of industry where you're over or under indexed? Because it does seem like there's different levels of performance across the different types of restaurants in this environment.

Yes. No, I think that's right. I mean, I think just as a brief reminder, our overall percentage of restaurants is about 62%. And so I would call half of that. I'm going to go wide and then get a little narrow here. Half of that is really chain-type restaurants and half of that is independent. But I would say, part of what you've seen, and we talked about this a bit on the call, the over-indexing in our space is relative to even some of our other competitors. Again, we're certainly more heavily indexed on the, again, the local and independent. So obviously, that's, I think, part of why we saw some more immediate early impact. So part of the over-indexing, I think, is -- and that's obviously normally a good thing. Normally, when we -- in more normal times and times, we're certainly anticipating getting back to that concentration of business in those local and independent restaurants is ultimately a good thing. But certainly, in this case, it caused a little bit of a further drop. I think from the perspective of the just overall restaurants though, we -- again, obviously, our SYGMA segment has the largest concentration of the QSR-type restaurants, although we do have some of that in our Broadline as well. Again, in the spirit of the sort of 50-50 local independent and chain within our restaurant space, I think the -- we're pretty well mixed across the fine dining and casual dining. And again, we have a pretty wide variety of stuff. And I don't know that I'd say we're over-indexing any of those other than to say again we do service, obviously, a lot of independent restaurants. And so in generally speaking, the independents have been, again, the hardest hit. But again, we're certainly seeing some positive signs of improvement in that space. And again, they're really scratching flying in a lot of ways to come back. The QSR space has actually been certainly one of those areas that has been least or less impacted. Those businesses actually, frankly, are areas where we've seen certainly much less of a sales reduction and in the areas that they, in some cases, are getting closer and closer back to almost a flattish level in some cases. In addition, this is an area that, as we talked about on the call, we also actually won some additional business. It's an opportunity that we had to take some additional business more on the chain, QSR space from distributors that are actually were, again, struggling to service that in the right way. And we actually -- we've had some customer wins and opportunity to take share in that area. So I would just say, in general, Kelly, it's -- the independents clearly the ones that were hit the hardest, but again, are continuing to show good signs of recovery. That's going to take a little while, but certainly, our broad mix of customers that include some of the more chain types and QSR restaurants has obviously been helpful during these times. Certainly, obviously, the health care area as well where we've actually experienced some pretty significant growth.

So a couple of follow-ups there. So if I think about your mix, 62% restaurants and about half of that local independent, doesn't that come out to around 30% local independent, which is similar to peers? So I guess, I'm trying to understand how much you're over-indexed there? It sounds like it's pretty similar.

Yes. Again -- so again, classifications, at times, aren't always consistent in that way. I think just the way we think about it is more along the lines of we -- the peer -- some of the more independents -- again some of the stuff we talk about is chain, obviously falls into some of those categories are more local as well. So I don't know. I don't have right in front of me the ability to compare those things in that way. But I just certainly -- we believe our percentage of the local and independent is again over-indexed relative to many of our competitors.

Okay. And I guess the other follow-up is just what you talked about in terms of market share, and that seems to be a really big topic for investors. So wondering if we could dive in deeper there. And maybe just remind us, as you look back at '08, '09, what kind of market share you took, which obviously is a different environment, but how could this environment be either different or similar in terms of market share gains?

Well, I think it's a couple of things. One, I think the similarities, there are some similarities in the sense that, obviously, on an overall level, some of what we experienced coming out of that was that there was a bit of a shift in the marketplace as we saw some slower recovery of independents. And I think there's some element of that that is not necessarily untrue in this case. I think that we -- as we think about the ways that the industry is starting to come back and the way that we see the opportunity to take share gains, we are, first and foremost, going to be concentrating on servicing our core base of customers. And similar to what we did back in that time of '08, '09, that core, the independents, the locals that -- again, I think, ultimately, the ones that we've actually done a lot of work to help them in terms of setting up their grocerants, in terms of setting up their take-home and their takeout and curbside pickups and delivery and certainly focused on that. We're also going to focus on continuing to work on, what I'm going to call, net new prospecting. So in other words, using tools that we have that actually are going to enhance our ability to provide targeted leads both within the existing restaurants, in terms of adding share of wallet. We only ask in -- this 30% share of wallet that we have of the majority of our customers certainly gives us a large opportunity to continue to take share. And so this idea of both adding share with existing customers and prospecting new local independents during this time is certainly going to be, again, certainly a target-rich environment in cases, where again, many of our competitors, I believe, are continuing to struggle through this. And certainly, we come at this from a real position of strength. I would also say, as others continue to have some challenges, we also do see those opportunities to take share in other areas that are outside of the independent space. Again, the example of that would have been this $500 million of business we just took on recently. And so as the industry develops and the industry grows back, and again, we certainly feel very confident that it will, our ability to take share really does span across each of those areas in terms of focusing on the independents and adding opportunistic business where those opportunities might exist. And that's actually not that different than we saw after the time back in '08, '09 when I think, ultimately, there was a few -- a couple of years after that, where our growth over-indexed slightly more in some of the larger restaurants and larger chains that came back. We may see some of that for a little while now, as the independents continue to recover. But make no mistake, we will be very, again, aggressive in the right way about growing our -- taking the opportunity to take share during this time.

So I guess 2 follow-ups to that. So how do we think about the timing of that? Number one. And number two, when you think about those smaller regional distributors that maybe are struggling more, what do they do so well to have so much share in the beginning? I mean there's a lot of share by that group. And so what can you learn from the strength that they had? I mean, obviously, they don't have the scale that Sysco has, but they did have a lot of share. So what can you take from that as you move forward?

Sure. So a couple of points. First of all, your first question on the timing. Again, it's hard to know that. Obviously, with any degree of certainty, it's certainly going to depend on demand. I always joked that there's going to be a series of randomly distributed W recoveries that end up in some sort of a more flattish U. I do think we're going to have an almost a step, just kind of incremental steps coming back to this. And so again, it's hard to know. It's certainly not a V-shaped recovery, at least certainly not from our seat and stand, but I do see that happening in terms of the shape of the curve is part of your first question. And then turning to the second question, look, as we always said, I mean, number one, there's this extremely fragmented industry. We have 15,000 competitors in this space. And the reality of it is that it's not just the regional that -- what you're referring to there that are the ones obviously that takes share. Every restaurant has, call it, 4 to 6 distributors in it. And so many of those are things like specialty-type distributors that are specializing, whether it's meat or fish or produce or imports or paper supplies or supplies and equipments or any of those types of things. And again, generally, why are they in there initially is that there's a perceived either some view of the fact that they have expertise in those types of areas, or again, in some cases, obviously, these are oftentimes smaller family-owned distributors that don't necessarily have quarterly earnings to report and can be more flexible in terms of their pricing. But -- so again, lots of reasons why they're in there in the first place. What I would say to you though is that as we think about and refine how we go to market moving forward, the opportunity that we have and that we feel very strongly about is that how do we go to market in a way that utilizes fully the power of our network that we have. We have all those same capabilities. We have the wider range of specialty companies, again, in meat and seafood and produce. And having our go-to-market strategy even better incorporate their strengths that the sales teams in those companies as it relates to and connects with our companies in our Broadline business is one of the opportunities that we are working on significantly and looking to do work to accelerate here during this time. So that we do have the opportunity to take those incremental share gains. Those are just an example of that. But I think, again, it really does blow down to the fact that there's just usually fragmented space. And again, our capabilities continue to grow and accelerate in order to continue to grab those additional shares.

What should -- how should we think about the rationality of the industry as we move forward? Because it's been always competitive, but it's been very rational. It feels like for the last several years. And so is there any risk that this environment changes that as people are -- competitors are looking to kind of fill these gaps?

Yes. It's interesting, I mean. I would say a couple of things to that. First of all, we actually -- what we have not seen is a lot of, what I'll call, irrational behavior in the industry in terms of pricing. Certainly, one of the things that we've talked about on our -- even our earnings call last time and that, as we talked about our fourth quarter, we're experiencing some margin pressure in the sense that we -- especially early on in the fourth quarter as we're trying to move inventory, I mean, there -- and this is across the industry, there's some discounting that happened to move inventory. And there's some changes in mix that occurred. And so again, as you think about some of the modeling in the fourth quarter, as we've talked about it, I mean, there's an element of this, that there's a margin piece that I think people really should give some thought to in terms of how they think about that quarter. But it really hasn't been, what I'll call, this rationality of pricing. And I think a lot of that has to do with the fact that there is -- in the end, I mean, it is -- liquidity has certainly been a significant challenge for many distributors in this industry. And obviously, we've done -- taken a lot of steps to ensure that ours is going to be in an extremely strong place. But I don't think it's very -- part of what I think there's almost a guardrail around that is that people just simply can't afford, from a liquidity perspective, to be just dropping, making irrational pricing decisions. And I think that's where part of our strength comes into this. Our ability to actually navigate through in the event some of that does start to pop up. People can't do that forever and just have irrational pricing decisions because they're simply going to have the liquidity challenges that again we could weather in a much better way. So I don't know. Kelly, I think -- will there be isolated pockets to some of that? There might be. But that's not something, again, we've seen, we've experienced in this point. I really believe a lot of it has to do with the fact that again people just can't afford to take those kind of -- make those kind of decisions when their liquidity is in a difficult place.

That makes a lot of sense. I guess, one just bigger picture question. Prior to this crisis back in February, you were talking about -- or Sysco was talking about making investments to accelerate the performance of the company even prior to this. So -- and one of the things you talked about was being underrepresented in metro markets, which feels like maybe right now, it's a positive. It sounds like some of those are where things have been -- trends have been a little worse. I don't know. But I guess my question is how -- is a lot of that on the back burner now? Or how does the strategy change from what you were working on and developing prior to this crisis?

Sure. Yes. Actually, I don't think the strategy really changes. Again, the metro market, if you remember, was just 1 example. And you're right, there's some -- on one level, there's actually been a little bit of, during this crisis, some of the markets outside of the metro areas actually obviously have continued to perform better than some of those cities themselves. But I don't actually think the strategy itself changes. The strategy itself was really how do we accelerate the opportunities for us to continue to grow. And I think to accelerate our gains and share again in a profitable way. And I don't think those strategies have changed at all. And in fact, part of what we've actually done is used this crisis as an opportunity to continue to invest. And again, this is part of the strength that we have as an organization. We're planning not just for the current time or for the midterm but for the current, the mid and the long term at the same time. And I actually don't think the majority of our competitive set is actually doing that same thing. They're more focused on what do I need to do to just stay alive in this situation. We're doing actually all those 3 things. And I think part of this is it's given us the opportunity to actually make additional investments to accelerate things like our Shop platform. Again, this is something that, obviously, we've been working on for some time. We see as an important place in terms of how we transform ourselves into more digital organization and utilize technology to drive sales and growth opportunities. Part of what we talked about our capital spend, we actually had said that we're going to focus on mission-critical projects as well as those things that we targeted and focused projects we can accelerate, Shop is one of them. A second one would be the fact that our pricing model. One of the things that we've talked about from time to time is just a complexity level that we have in terms of how we price. And the fact that we have salespeople in all these are -- so many salespeople that have a large degree of the control over pricing. We made an investment in a tool called Periscope, that's a McKinsey project -- product, excuse me, that is designed to actually help pricing and provide a much more sophisticated mechanism of pricing. And that doesn't mean our salespeople won't have the ability to price, but it is something that they will have that is a much more, I guess, say, freedom within a framework. And again, in an industry that has not had a lot of sophisticated pricing tools, it's something that is a focus for us during this time to accelerate. And again, another opportunity we have that we believe will help us continue to grow. And so I think -- so the strategies, I think, that we've talked about beforehand, which really, again, the metro strategy is a part of, but we're really focused on how do we accelerate profitable growth are things that, again, in very specific ways, we've actually continued to accelerate during this crisis. And again, look forward to coming out of it stronger than ever. And again, just one more of those opportunities to continue to take share from the industry.

All right. Then maybe just to wrap it up in terms of expenses. So you talked about pulling out $500 million of your cost structure. Can you talk about just how you balance that with cutting costs and making sure those MAs and that sales forces engage and going after that market share?

Sure. Well, I think a couple of things. I mean, one, it's, I think, really important to point out that, clearly, what our cost opportunities were designed to do is really 2 things. One is to react very swiftly to the changing environment, and obviously, the decrease in volume. And not only that, to take the opportunity to make structural changes where it is appropriate to do so. But certainly, in no cases did we make changes that we're going to somehow get in the way of our ability to grow. So I think while we did have some opportunity to make some changes from a sales force perspective, these were again what I'll call an acceleration of a change that eventually we're going to do anyway, given the fact that we had, again, designing tools to be more productive from that area. But clearly, the costs that we've taken out, again, are things that are structural in nature as well as, again, a swift and decisive reaction to changing volumes. Certainly not in any way, shape or form, something that we believe would actually have resulted in what you're talking about. And in fact, again, the investments that we're making are enhancing the tools to actually allow them to be more productive, to allow them to be spending more time with consultative selling, to allow them to actually have the opportunity to come out of this and -- again and grow their business even more quickly. The other thing that we've also talked about is addressing our sales compensation model as part of the structural change. It's again, during a time when volumes were decreased so significantly and then obviously, people on commission were having the challenges in terms of the way they're being paid. It was the opportunity for us to actually continue to enhance our compensation program to even further align that. And so I think coming out of that on the other side will also be an area that, I think, we will very much positively enhance their experience. So I guess, Kelly, what I would say to that is, it was a very decisive and focused cost move to make sure we're reflecting volumes as well as making some, again, important structural changes. But nonetheless, it's certainly not something that would get in the way of ultimately motivating or providing great tools for our salespeople to be successful as we move forward. You still there? [Technical Difficulty]

Kelly, are you on mute?

Neil, so you could still hear me, right?

I can hear you, Joel. I cannot hear Kelly, but I know that the clock is showing 0. So it seems as if this may be the end of our session. Unfortunately, I think we've lost contact with Kelly. But thank you, everyone, for joining us. I appreciate it. We'll be moving on to our group meetings now.

Thanks, everybody. Appreciate it.

Thank you, everyone.