Sysco Corporation (SYY) Earnings Call Transcript & Summary

Hi. This is Brandon Fletcher. I want to welcome everybody to this next session of the Bernstein Strategic Decisions Conference. We're happy today to have Sysco. And we are going to have a little bit of a disclosure statement and a couple of things we may hear from the leadership to give them this open opportunity. We're fortunate today to have both Kevin and Joel on, so we can go in through some of the strategy components as well as get an update on the financials and how things are going in these incredibly crazy times. And then we're going to do, as usual, a set of core questions and then some questions that I can see in Pigeonhole. [Operator Instructions] And then when we're done, remember, there's a Procensus poll to give us a kind of live feedback on the session and where we're headed and what we're doing. Again, fascinating conversation. We don't cover Sysco. The number of times it comes up in a conversation is essentially daily during this entire crisis, and so we couldn't be more happy to hear how these things are going and how they're managing in all of this bizarre chaos to do some of the most critical work that's necessary to keep everybody healthy and fed. So with that, I will turn it over to Kevin to give us a little bit of context.

Okay. Good morning, everyone. And thank you, Brandon, for the introduction. And I would agree with that sentiment. We are in one of the essential business sectors with foodservice delivery. And I also think our global presence gives us some insights into what's happening with this crisis around the world, and Joel and I will both be happy to talk about that, both in our prepared remarks and I'm sure there'll be questions about that. But yes, the virus has impacted different parts of our business at a different level, and it's definitely impacted different geographies across the globe in a different level. And just playing, Brandon, off of your point on this vantage that we have that we can see a lot of different business sectors given the fact that we serve every element of the food-away-from-home sector. But Rachel, if you want to flip the slide, and we'll jump into today's update. And I wish we all could be in the same room and see each other, that would mean we were in a more normal environment. But I'm happy to have the opportunity to be able to virtually tell you a little bit about what's happening at Sysco, and more importantly, what we're doing as a leadership team to take care of our health of our associates, to maximize the business opportunities that are available to us, and most importantly, ensure our financial strength both during and after the crisis. And this first bullet on the page, like most CEOs, I would like to publicly acknowledge and thank our frontline associates who are working every single day to keep this business running, to keep food in this country flowing to the places where it needs to be. And despite the fact that our business is down year-over-year pretty significantly due to this crisis, we are still making millions of deliveries. And the people that do that work are on the front lines, and they are doing essential work. And they've been coming to work every day, and yes, they're wearing masks and wearing gloves and we're providing them with all of that PPE. But it's still -- it relies upon them to be there, to be present and to be healthy. And we're so thankful for the hard work that they put forward in helping our customers be successful. Our second point is the most important point of the day, which is that we, at Sysco, have the financial ability to weather this storm, and it is a storm. It's a storm unlike any we've ever seen before, but we have the financial strength to weather it. And we will emerge a stronger company. I hope that at the end of the presentation, and certainly at the end of the Q&A, be in unanimous agreement that Sysco will be a stronger company post COVID because of the investments that we're making and how we're spending our time and how we're narrowing our focus on really key priorities, and that's my next bullet. We've identified 4 crucial priorities to help advance the capabilities of our company. We've kind of narrowed the field, cleared some other things off the plate, so our leadership team and our associates can really focus and make meaningful progress against these things, such that as we exit the crisis, we're a more capable company than we were before. And we were a very capable company before COVID. Rachel, if you could go to the next slide, that would be great. So here's what these 4 things are. I've said job 1 is to ensure the financial liquidity of the company. And there is no job 2 if job 1 has not done well. We can definitively articulate that the strength of this company is robust, and we have the financial liquidity to be successful for the long term. I'll cover a brief number of things about that, and Joel will reiterate those points during his prepared remarks. I'd like to tell you about how we're stabilizing the business. That's code for taking costs out during a period of business disruption. The third is we do, in fact, have select things we can do during this crisis to drive business, new sources of revenue. We've highlighted a few of them during our Q3 earnings call. I'll reiterate a couple of those points and also share some new data, this most recent information tied to good work we're doing to help our restaurant customers be successful. And last but not least, and I would arguably submit second only to the financial liquidity, is what are we doing now to ensure our success for the future. And I would respectfully submit that we are unique in one thing, and that's we, as a company and we as a leadership team, are simultaneously focused on all 4 of these things. Where those that are less strong than we are in bullet number one, you've got to be as a team focused on number one. Because we've got number one in the "done" column. We are now able to focus on two, three and four equally. And others that are weaker than we are, don't have the strength that we have, aren't going to be able to be looking further out on the horizon, aren't going to be able to be making some strategic moves to position their company to be as successful as we are going to be post this crisis. I will enumerate and make clear what those things are as we go through this presentation. Rachel, next slide, please. So in regards to the strengthening the liquidity, I won't spend too much time on this slide because Joel has components here -- of this in his presentation as well. But first and foremost, we have $7 billion of available liquidity. That is a robust number. It is more than we need. We have it to create flexibility. That's the second bullet on the page. We don't need it. We have it for flexibility, so making investments in our business to grow the business. If there were a business opportunity, perhaps it's a small M&A opportunity or it's not even an M&A, it's -- we need to invest in order to win new business, and by invest, I mean bring on inventory and bring on staff to be able to take on business that becomes available because of this crisis, we have the investment wherewithal and the financial flexibility to be able to do those types of things. And the last bullet is essentially a nod towards that. There will be competitive opportunities. That's code for, yes, there may be some M&A opportunities. We will only do them if the valuations are appropriately reflecting the times that we are in. But what we've already seen and we announced publicly on our Q3 call, others are going to falter. And we don't wish ill on any business, I've mentioned that time and time again. This is not about us hoping for others to struggle, we don't. But there are struggles out there. These are unprecedented times. There is a pinch on financial liquidity, for sure, of weaker entities. And there are going to be companies that don't make it. And the $500 million annual win that we announced on our Q3 call was one of those opportunities. We actually had an opportunity to buy the company involved. We decided not to and then it ended up being -- that was pre-COVID, by the way, it ended up being that they hit a wall during this crisis. And essentially, we were able to jump over them and go straight to the customers and bring that business onboard. Joel said this well, and I'm just going to borrow his line, "We brought on that business in less than 7 days." It's a reflection of the size, scale, prowess and capability of this company that an annualized $500 million business, we brought it on in 7 days. The point of that is the customer didn't miss a beat. Their restaurants were getting deliveries in a timely manner, the restaurants were in stock and it was invisible to their customers. There are no other company -- there is no other company in this industry that could have pulled that off in that amount of time as seamlessly as we did. And those are the types of things that I'm talking about when I say competitive opportunities. If we could go to the next slide, please, Rachel. So as I said, this moniker at the top of stabilize our business is code for take costs out. And as our business dropped, as COVID essentially shut down the world economy, it had a dramatic impact on sectors that we operate within. Our hotel segment has been the hardest hit. Hospitality, in general, is obviously something that is down significantly as airline travel and hotel stays have significantly declined. Our foodservice management segment has also been significantly impacted due to the fact that schools being closed around the globe and concert venues and sporting facilities and such like operations are currently dark. And obviously, the restaurants that we serve, if they are open for business, are open for business at a limited capacity. I'll come back to the improvement in trend that we're seeing, and we are seeing some quality improvements in trend in just a moment. But this is back to that time frame in March when it was almost overnight that the business decline occurred. And we needed to get cost out and we needed to get cost out fast, both temporary, permanent, structural. On the temporary side, we are talking about things like warehouse associate furloughs. We don't like to do those things. We care for our associates and we care for our colleagues, but the reality is we needed to furlough a pretty substantial percentage of our people. We did so with empathy and with care, and we did so quickly. But we also did things like rerouting our trucks. We took 1 delivery day per week out of the system so we could spread the work more evenly across the remaining days. Truck route optimization using software that we have to ensure we did that in the most efficient manner to reduce the number of miles that we've driven, and we acted quickly. So we took substantial variable cost to match the reduction in variable business. But we also took this opportunity to make some permanent and structural changes, things like permanent RIF, reduction in force, of associates in our corporate offices, permanent reductions in force out in our field infrastructure. And that's across the globe. And we've spoken about 2 numbers that are important here. We've been able to take $500 million out of the system in just Q4, that's a combination of fixed and variable. And then a completely different number from a full annual basis, we've taken about $300 million of costs out on a permanent structural manner. Those are 2 different numbers, $500 million for Q4, which is both fixed and variable; and roughly $300 million worth of expense out on a permanent basis on an annual basis. And Joel will talk more about that or we can answer questions about that during Q&A. I mentioned the second point already, which is narrowing our critical focus since in a moment I'm going to talk about what they are. I will elaborate later. But the reality on that particular component is by narrowing our focus, we were able to reduce the amount of it dollars being spent because we postponed and delayed some projects. And the same with capital investments. In our capital investment space, we've been able to focus just on those projects that are mission-critical, just on those projects that are going to grow top line, grow sales. And we've delayed other components of capital expense to later like building expansions, roof repairs and things of that nature, new fleet that we are be able to bring on, trucks is what I mean by that. These are things that we can delay and we have. So if we could go to the next page, please. On this next page, creating new sources of revenue. We're really proud of this work. Our largest sales force in the industry has been incredibly nimble. And they are an agile, nimble, customer-focused and it is the largest sales force in the industry, and we are incredibly proud of what they are doing to help our customers be successful. That's our purpose, that's our mission. Our purpose is to help our customers be successful, and we've done more than anyone in the industry to do that. I'm going to show you some slides in a minute of what some of these things are. But this first one, which is helping them, the customer, pivot to a new selling model is the one that we're most proud of. I'll share a concept in a minute and the impact that it has had on those that we've served. But just to highlight things that we've done to be able to help these customers, many of them didn't have a website to be able to do delivery. We provided them the technological capability to stand up a website if they didn't have one. Many of them did not have a delivery partner. We connected them to preferred delivery partners. Most of them didn't have sufficient supplies to do take out or delivery. We provide all of those supplies. Most of them didn't have the cleaning supplies to be able to keep their kitchen sanitized during this environment, we've not had any disruption in the source of product to our customers for cleaning, for paper products or the delivery takeout containers and the like. We helped them narrow their menus to a narrower, more cultivated, curated assortment so they can be profitable on a more narrow menu and then be in stock on those key items throughout this crisis. We even helped them with things like their staffing model. You've got to think differently about the number of people that are working when you're only in a takeout and delivery environment, including, of course, providing them with PPE, masks, gloves and the like for those associates of theirs that are bringing the food to the customer's car in a drive-through setting. I'm going to come back to that topic in more detail, but we're really proud of the work that we have done. Our job is to make those customers be successful, keep their head above water, allow them to make payroll by staying in business, so that just that they stay in business. Up to and including, we hosted hundreds of webinars to teach those small business customers how to apply for their CARES loan, the PPP program so that they can, in fact, have the financial wherewithal to fight through this crisis. We actually taught them how to apply for the loans, what the loans could be used for, et cetera, et cetera, et cetera. We've also been delivering more products and solutions not just to the core customers we serve, but to additional net new customers. We've been very successful across the globe of working with government agencies to bring food from farmers direct to those that are in the greatest needs. Most notable in the U.K., there's a program called Defra, which is the U.K.'s version of the USDA where we're delivering more than 200,000 packages per week directly to consumers' homes in communities that are of the greatest need, vulnerable population. And that program was stood up in less than 2 weeks in partnership with one of our competitors in the U.K. Essentially, we're doing half the work and our competitor is doing half the work, getting much needed product to those in need. Here in the United States, we have multiple programs with multiple states, state of Florida, most notably, in a similar fashion, in a similar manner to what's happening in the U.K. Our goal: get product from farmers, from growers, from producers to those that are in the greatest need. And we've done it -- I can't keep tracking the number because it keeps going up. But my latest tally, I believe, is 25 million meals have been delivered by Sysco to those in need. I'll repeat that data: we have delivered 25 million meals to those in need as a part of our philanthropic efforts of product donation, and we're incredibly proud of that work. In addition, and lastly, you all know what happened to retail grocers when this pandemic hit. The supply chain broke. If you think about the pre-COVID world, roughly half of the business was happening away from the home, roughly half of the business was happening in the home through retail grocers and there was a massive tilt in that supply chain when this crisis hit. And the retail grocers, through no fault of their own, simply could not keep up. We were able to step in, along with others, and provide trucking services, warehouse associate services. We became their source of supply for those key retailers. It was a small opportunity for us pre-COVID, and it was a reasonably compelling opportunity during the crisis up to and including things like it allowed us to avoid having to throw fresh produce into the dumpster. What a tragedy that would have been if food can't get to those in need and we're disposing of food because our demand dropped the way that it did. So we formed partnerships with dozens of retail grocers, and we're pleased with those relationships. We can talk later and perhaps during Q&A about the longevity of some of those relationships. So Rachel, if we can go to the next slide. I alluded to this already in my remarks on the prior page, but this is where it comes to life. Our sales force, again, the largest sales force in the industry, has helped our customers. More than 16,000 of those customers convert their restaurant into a mini marketplace. This picture on the screen on the right-hand side, that's not a grocery store, that's not Whole Foods. That's a restaurant that we, with the restaurant operator, converted that restaurant into a mini grocery store. So what has happened is in 16,000 locations, and they don't all look like this, we have restaurant operators that are doing takeout and delivery and they're selling product out of their restaurant that wasn't open for in-restaurant dining. We're selling paper products, cleaning products, proteins, produce, dry goods and the like. And you can see the different forms that have occurred on the pie chart. But here's some fun statistics. Here's some fun data. Let's baseline this that for those restaurants that have not chosen to participate, on average, down, let's say, approximately 50%. That's a baseline number. For those that have chosen to participate in this program with just one format with just one part of the product equation, i.e., produce or protein or dry goods. Their decrease to last year is 20% better, 20% better, than those who have not chosen to participate. For those that have gone all in, like the picture that you can see here, those restaurants have a sales decline that is in the single digits. And I'll repeat that the national average without this type of work is in the minus 50% range. That is staggering, and it is a display of what we at Sysco can do to help our customers be successful, as I mentioned, help them make payroll, help them keep their head above water, keep them in business through this crisis. And yes, of course, we're using the data that I just described to go convince more customers of ours to get in the game because, as we all know, this recovery of Phase 1, Phase 2, Phase 3, in-restaurant dining is going to be limited for a significant amount of time. So therefore, concept like this actually can exist even after the beginning of easing of restrictions, and I know you all understand what I'm saying. So Rachel, if you could please go to the next page, that would be great. As I mentioned, we have the good fortune because of our financial strength to not just be focused upon managing the crisis, but we have the good fortune of being able to look further out on the horizon and to be focusing on how we win in a post COVID environment. This first bullet is a basic of running a good company. But again, we have the time to be able to do it because we're not putting out fires. Myself and our Chief Merchant and our Chief Supply Chain Officer have conducted top-to-top meetings with each of our top suppliers, doing what we call joint business planning. We've shared our forecast with them of the recovery curve. They've shared their recovery curve estimates and forecast with us. We've said the following: we're going to place inventory bets to be ahead of the recovery so that we're not chasing consumer demand. One of the worst things we could do is if our customers begin reopening and we're not able to satisfy them with having product in stock across our wide spectrum of assortment. And we are open for business within every line of business. That is essential, and it will stay that way. So in partnership with our key suppliers, we can ensure that our distribution centers stay in stock, so we can ensure as customers recover and the pace of that recovery increases that we are with our customers and ahead of our customers in that regard. The second one is the increasing speed of our business transformation. We had a strategic plan pre-COVID that had many important things. We have focused on 4 of them specifically, and I'm going to highlight each of them in just a moment. And we are going to complete these 4 key initiatives in roughly 1/3 of the time that we had originally planned to complete them so that as we exit COVID, we are a new and improved version of ourselves, a stronger version of ourselves and a more agile version of ourselves. And the punchline of that would be, of course, the acceleration of those key strategic initiatives. So Rachel, if we can go to the next slide, please. I'd like to highlight the first one, which is our Shop tool. You've heard me talk about this on our earnings call, Shop, and it's highlighted on the left in a mobile phone format, is the means by which our customers interact with Sysco and place orders with us. It's also the same tool, the same name of a tool that our sales associates use to sell to our customers. Shop is a good tool. We're going to make it a great tool. So what we've done recently with Shop is we've improved the search function capability so that relevant and compelling results come back in the search component, which is used heavily by both our sales associates and by our customers. We've increased "other customers like you have bought the following" relevant, compelling offers that drive increased basket, which increases our share of wallet. We are highlighting for both the customer and for our sales associates missed opportunities, think about deals of the week, promotional opportunities, things of that nature. And essentially, in aggregate, providing a reason to buy, inspiring the customer to buy. In this format, we can do things like streaming video. We can show them menus being prepared. We can show them meals being prepared by one of our top chefs. It is an incredible forum by which to highlight our capabilities. Most recently, we've improved our customer onboarding experience through the Shop platform, decreasing the amount of time it takes for us to onboard a new customer by more than 90%. And I'll repeat that: we've decreased the amount of time it takes for us to onboard a new customer by more than 90%. And why is that important? It's important because this summer, during this crisis, we are doing more new customer prospecting than at any other time in our company's history. We've essentially told our sales force blitz the market and go win new customers, and this tool is helping us win them in 90% faster time than before. The second example on this list is the pricing system. At Sysco, we have historically priced our product portfolio mostly manually. Now we do it reasonably well, but we do it in a distributed manner across thousands of people and we do it manually. With manual comes 2 things, some latency, i.e., it takes us time to pass through inflation as an example. If a COGS change were to occur, it takes some time for it to flow through the system. And it's also just a sheer matter of the human brain can't understand all of the different components in price between COGS changes, the elasticity of the item, the competitive density in the trade area on and on and on. And pricing software can do all of those things. And by implementing a system of this nature, we can simultaneously increase sales by being right on price for those items that are highly visible and also to "take margin," that's what retailers would call it, on items that are inelastic. We can see nominal improvement mean increase in price on inelastic items and across thousands of items that creates some compelling margin expansion. So we anticipate our pricing system to do both of those things: help us accelerate growth and also increase margins. I do want to be clear that of our Q4 initiatives, this one will take a little bit longer than the others. We will be piloting it this fall with an implementation of the software in the calendar 2021. These software projects are complicated and we need to pilot it, we need to test it, we need to make sure it's working as designed and we will then roll it out. Just important to note, this is the same software that I used at my prior employer across 1,000 pricing zones at that company to maximize sales and optimize margin, and I'm confident that it will be successful at Sysco. Last but not least on this slide is we are revising and changing our go-to-market sales strategy for our largest in the industry sales force. I'll provide a couple of highlights and examples of what this looks like in the future versus the past. In the past, we had more generalist sales associates. In the future, we will have more specialist sales associates. We will still have generalists that call in our customers. We call them MAs, marketing associates. They will call in our customers, they will help prospect new customers, but they will have the ability to call from the bullpen, if you will, a meat specialist, a produce specialist, et cetera, to help be able to increase our share of wallet and sell through premium product that in the past we've struggled to penetrate. It's a combination, if you will, of those 2 sales associates that create a winning formula. That MA will have a local relationship in the community with the restaurant and the experts in protein and the experts in produce will be called in by that team to be able to sell more to that customer. It's an example. Managing all of that, pardon the sports analogies, will be a quarterback, a coach/quarterback of that team that's deploying these resources within a community, within a trade area to maximize the net effect. And that is new. We've not had that role before. We've not had a person who owns a large -- think about Miracle Mile in Chicago. There's a place called City Center in Houston. I can go on and on and on, I don't know where you are today. Each of your communities, there is a dense portion of your community that's a restaurant row. Think about us, Sysco, having a quarterback that's in charge of that restaurant row determining what's our best go-to-market strategy to win every restaurant on that row and to further penetrate the Sysco portfolio of product for those customers that we already serve. It will drive incremental sales and it also is a more efficient, meaning less expensive selling model than we had before. Rachel, if you could go to the next page, please. The punchline and wrap up from my section is the headline at the top of the page, that Sysco stands ready as the industry leader as these business conditions in our environment improve, we will capitalize upon it. And I want to be really clear about that point. Business conditions are improving. They're improving week over week. The worst is behind us. The trough was back at the end of March/early beginning of April. We're seeing sequential week-over-week improvement. In this most recent week was the biggest week-over-week increase that we have seen since the COVID crisis began. And as more and more states begin easing their restrictions, as states go from Phase 1 to Phase 2, Phase 2 to Phase 3 and some of the European countries that entered earlier and are exiting slower than the United States also begin easing restrictions, we are going to see an acceleration in the improvement in our business. The worst is behind us. Sysco is positioned to win in this environment for all of the reasons that I just described. We've helped 16,000 restaurant customers keep their head above water and find a good fight during this crisis. Think about the trust we will have created with those customers through this crisis and ask yourself the question: do you think they're going to give more of their business to Sysco in the future than the past? And I think we all know the answer to that is yes. While our sales associate is also going to the customer that is a prospect, educating them and all the things we're doing for the restaurant that's 0.5 mile down the road and say, you need to get on this Sysco bus because we have capabilities that no one else has. New customer prospecting at the highest level in our customers' history, the opportunity to increase share of wallet with the customers that we currently serve. Couple that with the strongest balance sheet in the industry, couple that with the ability of Sysco to invest in inventory that will drives service levels, we will have the product availability as this recovery continues to accelerate. We will drive growth through the increase in new customers that I just described and the further penetration opportunity, what we call share of wallet with our current customers. And when you combine these things with the 3 examples that I gave you on the prior page of how we are becoming a more effective Sysco through our Shop platform, the introduction of our pricing tool and a completely revamped selling strategy, we're confident that we can grow our market share. We are confident that we can be even stronger as a company as this crisis eventually abates. And with that, I'm going to turn it over to Joel who's going to walk us through a finance update.

Thank you, Kevin. Good morning, everyone. I'd like to start with a brief review of the quarterly results. So Rachel, if you could please flip to that slide. As you can see, for overall Sysco, our sales decreased 6.5% for the quarter with, again, a bit of deleverage on our margins with gross margin percentages declining about 7 basis points. But as a reminder, prior to COVID, which now seems like a really long time ago, we've been experiencing some of the strongest local growth we had experienced in the last 10 years with local sales growing in excess of 5%, though we were having some gross margin softness. As Kevin mentioned and as we've talked about before, throughout the last couple of weeks of the third quarter, we did see a significant decline in volumes and sales across all business segments as a result of the COVID-19 pandemic. We acted swiftly and decisively to take out costs, both from the perspective of adjusting variable cost to reflect our decreased volumes, and in addition, to take more structural reductions. The timing of these impacts -- of these reductions began to be realized in Q4. And in addition, our corporate expenses did reflect some items such as increased liability reserves, accelerated investments in initiatives that we've talked about earlier and leadership transition costs. But -- and so as such, we did experience some significant deleverage in Q3 as it relates to our operating income and EPS results. Next slide, please, Rachel. And as a result of the crisis, there's a few key themes that have emerged that I'd like to spend some time talking to you about today. First, and some of these are things you've heard from Kevin, but just to reiterate the perspective, it's clear that our sales volume hit the trough during the couple of weeks right around the end of the quarter. Our exit rate from the quarter was around 60% down across our enterprise, with that same rate holding true for our U.S. foodservice business, with SYGMA being down a little bit less at around 50% down as we exited the quarter; our International business down a little more than 70%, primarily due to our European business where the lockdown started earlier than they did here in North America. Now since then, as Kevin pointed out, we've continued to see sequential week improvement -- week-by-week improvement across our business. I would think about this, in April, much of the beginning of this recovery was due to restaurants starting to work through their new realities and accelerating their delivery, their takeout, their pickup, their grocerant businesses, as we call it. And as Kevin mentioned, so many of those are the things that we've been helping our customers work through. I would say also in April, we started to see that stay-at-home fatigue kick in with more and more people sick of cooking for themselves, washing their own dishes, et cetera. But as the calendar turned into May, we started to see communities, states and countries reopening. And our trends continued to improve, which is, even while there's still a mixed bag of places in various stages of opening, but as this continues to happen, we anticipate continued improvement in our trends. As another note regarding the impact of the downturn, the customers in our business most impacted were the independent restaurants, along with the hospitality and the education space, while QSR has been significantly less impacted. And in fact, in some cases, recent times has actually shown growth. In addition, our health care and government businesses have been areas we've continually seen growth in. But while all that's happened, it certainly has caused a shift in the mix of our business and created some pressure on our gross margins, which I'll cover a little bit later on. Another key business impact to spend a moment on is our operating expenses. As I mentioned earlier, at the onset of the crisis, we acted swiftly to accelerate cost reduction, both in terms of variable adjustments and permanent cost takeout. As a reminder, our cost structure is around 70-30 variable versus fixed. And in the fourth quarter alone, the combination of those efforts around temporary and permanent resulted in over $500 million of cost savings with the permanent part of the reduction annualizing at a rate of around $300 million. So some big numbers. These changes, both in our field and corporate expense structure, were areas we believe were important structural elements that we took advantage of the crisis to accelerate. But to be clear, these are not changes that we would believe would impact our ability to grow moving forward. Receivables also continues to be a key impact as we indicated in earnings. We do expect our collections to remain soft for the remainder of this fiscal year. However, we've done extensive modeling for various scenarios of impact. And our current collection rate continues to exceed our projections. These efforts have been a strong collaboration between our centralized functions in our field sales organization where the centralized functions used enhanced technologies to be very specific around the accounts and collection strategies. And we've incentivized our sales organization to be our arms and legs in the field. Nonetheless, as a reminder, we booked an additional reserve of $153 million in Q3, which we classified as a certain item, to reflect our best estimate at the time of the exposure subsequent to the third quarter. So to be clear, we do anticipate some additional reserve impact in Q4. Finally, from a liquidity standpoint, we've taken significant actions to impact our liquidity during these unprecedented times. Combination of our accessing the debt markets, drawing from our revolver, controlling capital spend, the collection efforts I talked about, increasing our supplier terms, working with our supplier partners, aggressively managing inventories and suspending our share repurchase are all examples of this work. I'll cover a few of these items in more detail in a few minutes. But all these actions are designed to provide financial flexibility for us to be able to make the decisions that are right for our business and our company to support business recovery and emerge stronger than ever from the crisis. Next slide, please, Rachel. You'll see on this slide the sequential improvements I indicated at the previous points, and I'd point out this has continued to improve since the last time you saw it. At the earnings call, we'd indicated our improvement through April was around 15 percentage points and that we expected our improvement to continue. And you'll see here that, in fact, that's happened as communities and countries continue to reopen. The amount now is actually a 22 percentage point improvement, again, with still a high degree of variability with what's actually opened up. And it should be noted, as Kevin also pointed out, that the last week here was the largest step-up in improvement we've seen. And we continue to expect some of those positive trends headed in the right direction as continue -- things continue to slowly but surely reopen. Next slide, Rachel. I've added this slide as a brief reminder. In the midst of this uncertainty, a few key points about our company. First and foremost, we operate in a very large industry that's in excess of $300 billion in size. So when people talk about temporary shrinking the overall pie, the reality of it is this is still a large, robust industry that presents plenty of opportunity for us and plenty of opportunities for us to not only increase share of wallet with customers but to add market share, as we talked about earlier. A second point is about our company that we've had sales improvement in 49 of the 50 years of our company's history with the only exception being our fiscal 2010, which came on the heels of the Great Recession. But again, as a reminder, this is a balanced, long-term company with a strong history of sales growth. And we and our industry will come through this stronger than ever over the long term. Next slide, please. As a brief reminder, from a cash flow perspective, while our cash flows are down materially year-over-year, it did remain positive as of the end of the third quarter. And our overall cash and liquidity remained ahead of schedule relative to our extensive modeling projections. Next slide, please. At this point, I'd like to just take a moment to remind you of our capital allocation priorities. These should look very familiar to you as, overall, they haven't changed. The long-term focus on our priorities that start with investing in our business, that continue to focus on growth in our dividend over time, on focusing on strategic M&A opportunities and a balanced view of paying down debt and opportunistic share repurchases. Those capital allocation priorities over the longer-term of this company have not changed, and we remain committed to those. They are an important part of our overall strategy. But there is a few temporary impacts I would like to call out to ensure that you have the proper perspective on them. First, regarding capital expenditures. As I mentioned in earnings, we have chosen substantially reduced CapEx to only those urgent projects and those targeted investments to accelerate certain capabilities like Shop, like pricing tools. Again, this is evidence of that financial flexibility we have that we can actually continue to make these investments even during these times that we're cutting back. As a reminder, our CapEx was in line with prior year through our third quarter, but we do expect to spend less, be about more than $200 million below our Q4 2019 as a result of these efforts. We will continue to evaluate our spend levels as our business volumes continue to improve. The second is that we have suspended our share repurchase program temporarily and will continue to do so aligned with the restrictions related to the recently negotiated amendment to our only debt covenant. We do remain committed to share repurchase over time to offset option dilution and opportunistic share repurchase, and we'll resume these as appropriate and as business conditions permit. Finally, as it relates to our dividend. I can't reiterate more, we remain committed over the long term to growing our dividend as we have for the past 50 years. I'd also like to remind you that when we significantly increased our dividend last year as a sign of the confidence that we have and feel about our company and our future, we reminded you that future increases would likely be more in line with increases in earnings. And so while our recent covenant amendment does place a restriction on dividend growth, to be clear, it doesn't place a restriction on our ability to pay our dividend. And it's also clear that it was not -- have been our intention to grow our dividend this year due to the extraordinary impact of the COVID-19 crisis. So to be clear, while we're continuing to evaluate our dividend on a quarterly basis as liquidity dictates, our plan -- our priority is to continue to pay our dividend and to do so at existing levels not reflective of the decrease of earnings we experienced. I think this is an important perspective. Our dividend is a sign of strength of our company, a sign of confidence in our future, and even during these times, is obviously a very important part of our story. Next slide, please, Rachel. Just a brief update on the credit facility itself. I talked on the last slide about the amendment to our credit facility. I wanted to give you a brief update regarding that. We only have one covenant, and that covenant actually is a 4x EBITDA-to-interest covenants related to our revolver. So what we've done is negotiated an amendment, we recently had an 8-K on this, to actually move this to more of a minimum liquidity threshold over a 5-quarter time period; and for 4 quarters going back to the EBITDA-to-interest covenant, but starting at 2x and gradually increasing this. This should remove this as an impact or certainly is a better part of the next couple of years. In addition to that, we negotiated a 364 credit facility (sic) [ 364-day credit facility ] that continues to give us financial flexibility. The point I would continue to make here is the ability for us to make decisions for the business in terms of investments, in terms of the level of cost reductions, dividends, et cetera. And to be clear, we don't intend to use this revolver, this facility that we've negotiated, but it's certainly an additional flexibility. And to one other point that came out, actually happened yesterday, we actually made a decision to pay down $500 million of our revolver. It continues to be a sign of the improvement in our business of the confidence that we have moving forward and the fact that we continue to have, again, sufficient needs from a liquidity perspective, sufficient capacity from a liquidity perspective now and heading well into the future.

Joel, I was just going to cut you, guys. We've got about 20 questions or so and they've got a hard stop for transition about 5 minutes. Could we do a couple of those real quick just because there's a ton of investor interest on a handful of those as long as we're close to where you needed this to be, Joel.

We did. Is there one more -- if there's a chance I could make one more point?

Sure. Of course, of course.

Yes. I'd like to -- if we go to the next slide, I'd just like to make a clarification on a point that we made from the perspective of modeling. We called out last quarter that we would actually have negative operating income for the fourth quarter of 2020. We also talked about the fact that we clarified -- again, the way to think about the $500 million of operating expense reductions. I want to be clear on something from a margin perspective. Our fourth quarter shift in customer mix and from pricing to avoid spoilage, again, moving inventory to ensure that we didn't spoil, would drive gross margin decrease. And that would be in the range of around 150 to 200 basis points. So again, I wanted to make that clear as people think about their modeling to call that out in addition to the topics that we talked about earlier. So Brandon, I'll stop now and turn that over and open it up to questions.

Great. Thank you. And we'll do this pretty rapid fire just because I think there's a lot of interest. But I'll start a hard clock at 3 minutes, so I don't get in trouble, and let's go through them. A quick couple of ideas. Kevin, could you give us an example of where you're finding these additional revenue streams that you think will endure beyond the pandemic that maybe is a larger shift? My thought was PPE and your kind of chemical and services business may grow substantially 2 or 3x. Maybe you're on mute, Kevin. Kevin, I think you're on mute, but -- there you go. Thank you, sir.

Yes. I'm good now. Sorry. Thank you for the mute call-out. You nailed actually the two that are going to be the most compelling for this next, at least, year. Now we've had ample source of supply for PPE equipment, gloves, masks, cleaning supplies and the like. We don't see that going away anytime soon this summer. Restaurants, even when they're providing in-restaurant dining, are going to need all of that product so -- and we've actually been selling that product to others that needed to. We had a large order that went to BJ's, the retailer. We're actually -- companies, headquarters that are bringing people back to their headquarters, we're going to build a welcome back kit that has hand sanitizers, gloves, masks. We'll do it for our own headquarters, and that's where the idea came from. We have thousands of people that work in our headquarters and we have our sales force actually now calling many major employers across the country to be able to provide that service. Our Guest Worldwide business, which is a $1 billion business that we own that provides hotel amenities, they have pivoted to producing hand sanitizer in small, medium and large formats and we're actually seeing significant uptick in demand of that product. And essentially, as fast as we can produce it, we can sell it. So those are clear business opportunities. I would say, on the retail-specific opportunities, I've said it this way before and I'll say it for last and then I'll pause. I know you have other questions. We're not going to become a supplier for Walmart. Walmart is big, robust. They have a world-class supply chain. But we can and will be able to support smaller players. I don't want to name a company because I just said they're small and less capable than Walmart. But small regional grocers who don't have the purchasing prowess or supply chain expertise. We actually have the purchasing scale in food that Walmart has, and we can actually provide our benefit of COGS to those smaller players to allow them to compete more effectively. And we see some of those opportunities having staying power.

If -- as restaurants move to curbside more permanently, if you just made a guess, is that margin mix at the same volume better for you or worse for you if they're doing more curbside?

I think all of us would like for customers to be able to come back into the restaurant dining room, and have curbside to be an additive thing to that versus a replacement of. Certainly, Phase 1, it's not net beneficial because 75% of a restaurant dining room capacity is not able to be used. I would say as far as the product itself, the mix is favorable to us because the profit that we make on containers and the supplies that go along with takeout and delivery is healthy -- healthier, actually, than our average book of business. But the top line is depressed. So if we were in a world where the restaurant dining were as good as it were before and we're doing takeout, then that's a net accretive. But with the volume down, the volume decrease is more impactful than the margin beneficial impact. Hopefully, that was clear.

Last one. Independents' risk of bankruptcy, if you had to pick a number, 10% at risk, 15% bankruptcy? What would you guys think?

Yes. I prefer not to quote a percentage. And I think some of the percentages that have been quoted publicly are meaningfully too high. I won't name sources, but I think you know where they came from. We think those were Draconian estimates. If I may, I actually think some of those Draconian estimates were said to try to get government support for that industry, which we're supportive of, by the way. We want the government meaningfully to be able to step in and support those local restaurant customers. We will see an increased bankruptcy rate, that will happen. We've modeled for that in our bad debt. Joel's team is all over it like white on rice. But I would respectfully submit this: a year from now, 18 months from now, 2 years from now, there's tremendous churn already in small restaurant operators. There may be thousands that go out of business -- there will be actually. But I submit they'll be like phoenix from the ashes. A year from now, 18 months from now, there'll be many, many more that are getting back into the business. I submit they're going to get their debt off their books and then restart their business.

Brilliant. Thank you so much. I appreciate it. I know you guys have to run to the next thing, but thanks for all the time, and we'll follow up with any other questions. Answer Procensus polls, everybody. See you next time. Cheers.

Thank you.

Thank you.