Sysco Corporation (SYY) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Jeff Bernstein, and I'm the restaurant and foodservice distribution analyst here at Barclays. I am pleased to introduce our next presenting company, Sysco Corporation. With us this afternoon, we have Kevin Hourican, President and CEO; and Joel Grade, CFO. Management would like to start our time today with some prepared remarks. And with whatever time remaining, I will lead a fireside chat. By way of background, for those not familiar, Sysco is the global leader in selling, marketing and distributing food products to restaurants and others. Globally, Sysco serves over 650,000 customer locations from 320-plus distribution facilities, generating well over $50 billion in annual sales this most recent year. With a June year-end, Sysco completed fiscal '20 a couple of months ago during what, most would agree, a tumultuous period in the midst of a pandemic. And with that said, under their new CEO, there's lots of excitement. And to share more of those details, I will turn it over to President and CEO, Kevin Hourican.

Okay. Great. Thank you, Jeff, appreciate your convening the group and hosting Sysco today. We're happy to be here to tell you about our company and what we are working on and also what's happening within the industry because I know many of you have questions about the state of things in our sector. So again, happy to be here. I hope everyone listening today is doing well personally and professionally, given all that what we are going through. And I look forward to the future where we can be physically in the same room once again. I know we all look forward to those days. So Rachel, if you could go to the next slide, please? So this slide begins to show the narrative of what's happening within the industry, what's happening with the space. You all know the story well of what happened at the beginning of the pandemic, where the supply chain was completely tilted off its axis with retail grocers unable to keep up with their surging demand and people in our space dealing with the opposite problem, which was perishable inventory and the need to find a home for it and the need to help our customers be successful during this unprecedented crisis in our industry. And we're happy today to talk about where we are from a trend perspective. The right-hand side is showing traffic over time. If I could go to the next slide, please, Rachel, talks in a little bit more clarity on what we are seeing specifically at Sysco. The good news is we are seeing consistent week-on-week sequential improvement. As we said, on August 11 on our earnings day, from April into May, from May into June, we were seeing consistent and healthy improvement. We had some stagnation in the month of July. The good news tied to that stagnation, however, is July was the month where COVID cases were absolutely surging certainly in our home country of the United States but around the globe as well. We never saw a period where we were slipping backward while those cases were surging. And in the month of August, we returned to healthy, consistent, sequential week-on-week improvement. And the most recent week we just closed was our strongest week since COVID began. And yes, I have said that before. I said it on August 11 and I said at the end of June, it keeps being true that as time progresses, we are posting our next best week, et cetera. So we're pleased with the rate of improvement. We, obviously, don't wish for this pandemic. We wish it were done. It's taking a long time for things to have some form of a return to normalcy. And we are seeing different levels of improvement in our various sectors of business. As Jeff covered, we are a global company. We serve all forms of food-away-from-home, and we will talk a bit about that as we go through. A couple of key points that I would want to make here. Neil, who's with us today, coined this phrase of food-at-home fatigue. It is very clear that as regulations allow and as it is safe to do so, consumers are ready to go back out to eat. And therefore, our customers, when regulations ease, when restrictions reduce, see an almost immediate increase in their business. And people ask me all the time, "What's the #1 indicator of the pace of the recovery in front of us?" It is just that simple. The ability for people safely to go out to the eat, specific to the restrictions that are in that community. I'll point out no different place other than New York City, a place many of you know extremely well. 2 weeks ago, Mayor de Blasio comes out and declares in-restaurant dining will not be approved until June of 2021. Obviously, that was a declaration that was not very well received by many. Just yesterday, Governor Cuomo, essentially overruled that guidance and has declared in-restaurant dining can begin in New York City starting September 30. We have checked. Governor Cuomo does have the legislative authority. His decision is what will rule the day. And that is a very important, meaningful thing because our business in Manhattan right now is very soft in comparison to the other book of business we have essentially everywhere else. That is one of the key points, major metropolitan dense urban settings are underperforming versus more rural areas or places where restrictions have been more sufficiently eased. So Manhattan, L.A., San Francisco, Seattle, Miami, those are actually the toughest cities from a restriction perspective, and we can directly see that in our results. On the flip of the coin, I'll just talk about Europe just for a moment. Europe, without a doubt, was a headwind fiscally for Sysco. In our Q4, as Jeff which said concluded on June 30, Europe entered the crisis earlier than we did in the United States. And they came out of the crisis from a restrictions perspective after we did in the United States. And that had a very significant impact on our business. I'm just going to check audio. Can you still hear me? Because I've got a strange thing coming up on my screen.

Perfect.

Okay. Great. If something happens on my screen, give me an indication, there might be a problem. Thank you for the feedback. So the Europe business, however, is now on a complete opposite space for Sysco. What was a headwind for us in Q4 versus the rest of our book of business is actually now a tailwind because Europe did a nice job actually of really bending the curve, tamping down the virus. And they are now actually in a position where their restrictions in Europe, France, in particular, are actually less than most places where we serve, and it's directly visible in our results. Our French business is actually the #1 performing business in our company not named SYGMA. And that's my last point. SYGMA, which is our QSR segment serving significant drive-through business, is actually running healthy increases to prior year on a consistent basis. So that just gives you the range of what we're seeing. And we are optimistic that we are going to continue to see improvement into the fall. And we are confident that this business will return to its pre-COVID health over time. The faster a vaccine can safely and with efficacy be produced, the better for all of us across all business sectors. Rachel, if you could please go to the next slide? A couple of more comments just about what we're seeing in the industry. On the macro side, I just said it, in-restaurant dining restrictions are the direct to drive towards our ability to continue provide growth with our customers, economic landscape, the election coming this fall in the United States. The biggest driver is going to, however, be that third bullet. The advancements in therapeutics and specifically a vaccine is being closely watched by all. And good news that is coming from the medical community, in aggregate, in that regard provides us some hope and optimism that at least in the first half of calendar 2021, we will provide more safety for regular citizens to be able to go out and eat in a public place. And that is obviously going to be something that's very beneficial. But not just for that. As you know, we support a large K-12 education business, we have a college education business and we have foodservice management that we support. And those sectors, in particular, have been slower to recover. And our travel industry, the hotel space, in particular, being the hardest hit, has been the slowest to recover. Therapeutics will help us make progress in that regard. On the right-hand side of the page, let's talk more importantly about what we can control. We can't control the macroeconomic environment. We can specifically control the things that we're doing at Sysco. And we're proud today to be able to share progress on some important initiatives. What we are most proud of is the work we are doing to be able to support our restaurant customers, most specifically, our independent restaurant customers. We've stepped forth with our sales force, which is the largest in the industry, to help them be effective in operating during these very difficult times. We've stated publicly and we'll state it again, the closure rate of Sysco-served restaurant customers is meaningfully better than the industry average closure rate. We've also stated that the work we've done to help our restaurant operators be successful, specifically with concepts like a marketplace, which is selling groceries inside their restaurant. Those that have chosen to participate in those activities are performing 20% better to last year than those that have not. It's meaningful. It's helping them make payroll, pay their rent, keep their business vibrant and alive as we work through this pandemic together. I'm going to talk about the other topics that are listed under Sysco on subsequent slides. So I'll save the narrative for those. However, the key point on the bottom of the page is the #1 takeaway that I would like you to have from our presentation today. While others in our space are fighting to survive, Sysco is not fighting to survive. With $8 billion of liquidity in our balance sheet, with the strongest financial flow-through model in our industry, we have the financial wherewithal not to make it through, we have the financial wherewithal to invest in capabilities that will differentiate Sysco in how we best serve our customers and differentiate ourselves from others in our competitive space so that we can take share, not just in the short term, but in the long term and from a permanency perspective. We are literally transforming our company during this crisis while others are hunkered down, trying to make their version of payroll. Next slide, please. So let's talk a little bit more about that. Back at the beginning of the crisis, on our May earnings call, we talked about the things we did immediately to help ensure the successful management of the company. These were the 4 things we talked about. We needed to take actions to ensure liquidity, which Joel has done, as I mentioned a moment ago, $8 billion of liquidity on our balance sheet. Number two, we needed to take meaningful cost out of the business, both variable and structural. And we've done that. We took over $500-plus million of variable cost out of the business in Q4. On a permanent and structural basis, we've taken out $350 million worth of expense for fiscal 2021. And those cost takeout numbers that I've just described will not impair our ability to grow the business. We are simply going to be a more efficient company. What that means also for your models as we do eventually get back to pre-COVID sales levels, and we will, we will be that much more profitable as a company. We also pivoted to drive new sources of revenue, most specifically in the retail grocery space. And as importantly, as I mentioned just a moment ago, we are creating initiatives, implementing those initiatives to transform what is already the industry leader to be the indisputable industry leader from now and far into the future. Next slide, please, Rachel. So let's talk a little bit more about that transformation. I'll slow down on this slide and spend a little bit more time here. We've described it with these 4 key transformation initiatives. The first one is to advance our digital platforms and digital capabilities. The goal is to improve sales and obviously, therefore, improve our volume. The how comes through 3 discrete activities that fall under this enhancing our digital capabilities. The first is to improve our customer-facing ordering tool, which we call Sysco Shop. Think about taking the most modern website in the retail direct-to-consumer world and taking those best practices and bringing them into our B2B world to make it easier for our customers to do business with Sysco, to inspire them to buy more from us and to suggest items to them, suggest menu creation to them in a way that inspires them to do more with us. Things like increasing and improving our search results to make it easier to find what they're looking for; things like other customers like you, are buying the following products from Sysco; things like, when we have a deal of the day, deal of the week or a promotional bundle to be able to push those in a digital way through the decision-maker at the restaurant, such that they click yes and buy more from Sysco. We are making rapid progress in the advancement of our Sysco Shop capabilities. And it's already beginning to have a positive impact. The second is our CRM tool, which is a tool that guides our industry-leading sales force. We are enhancing that tool to be more data-driven, to provide more insights to our sales associates on which customers to prospect and when they are there, what specifically would be keen things to be talking about that will drive increased share of wallet, a hard-punching, hard-hitting sales driving activity. Last but not least is our pricing tool. As we've mentioned before, we have purchased a pricing software, and we are in the process of finalizing the development of that tool as we speak. The pricing tool will allow us to use technology to improve what heretofore has been done manually, reasonably well, mind you, but manually at Sysco. We have more than 10,000 unique active items at any given location. There's inflation, there's competitive mix, there's inelastic and elastic SKUs. And this tool is able to manage all of that complexity to provide a fair and honest price to our customers. We know that the #1 reason why a customer actually does leave Sysco is because of lack of transparency on price or a perception of price not being fair. This pricing project will directly lean into that known challenge, address it head-on, help us improve our price transparency, help improve the sharpness of our price on the items that matter to help us win new business and retain business that we have. It also is a hard-hitting, hard-punching sales and profit growth initiative. Those 3 things are what I put together and what I call advancing our digital capabilities. The second, as I mentioned, we have the largest sales force in the industry, the best trained sales force in the industry. And we can make it even stronger than it was before. The 2 things that we are doing in this space are, one, we've recently enhanced our sales compensation to make it a structure that is better aligned with our company objectives so that our sales associate and the company objectives are the same, profitably grow the business, profitably grow the company. The second component is how we deploy our sales force to our customers. This is the second example where we are using data to be more scientific about the work that we do. We are now able to identify which customers are big prospect leads for us and specifically assign sales associates to call upon those customers. And if there's a sell-through opportunity of premium product, we're now able to deploy our specialists in protein, in produce and in seafood to those locations to increase share of wallet. And in order to support that, we are going to increase the number of specialists on our books here at Sysco. Last but not least but equally important, we are centralizing customer care for our largest and national accounts. In the past, a large customer who might be supported from 20 or 30 of our locations had to deal with multiple versions of Sysco in order to have their objectives met or situations resolved. We will centralize that and we are doing that as we speak, to make it easier to do business with Sysco and for us to actually identify challenges to resolve them network-wide instead of just at a discrete local location. It will improve our ability to serve and make it easier for people to do business with Sysco, which is a good thing for all. The third, which we recently just announced on August 11, which is the regionalization of our U.S. business. This particular project is twofold: one, it does take a pretty meaningful amount of cost out of the business; but two, more importantly, what it does is it enables the transformation of our company that I was just speaking about a moment ago. But specifically, what occurred is we've migrated from 76, what we call, operating companies to 31 regions. We call it fewer but bigger jobs. Those jobs are going to be led by the strongest of talent across all of Sysco. And the leaders in those roles will be better aligned to our centrally led strategy. We will be able to implement strategies in a more rapid manner, more consistently and provide better capabilities to our customers. So think leaner, more agile, more aligned and ability to score points on the things that we decide are the most important things to go do. It does not mean, however, we will become less local. The sales force that calls upon our customers is the same team that it was previously. The delivery driver that route into that customer's location is the same person as previous. And we absolutely have the ability to have quintessentially local product assortments. This is about being aligned to strategy and it's about having our best leaders in bigger jobs, so they can have a bigger impact. And we are really bullish on regionalization. Case in point, we regionalized our Canadian business about 2 years ago. And it's been very beneficial to our business and our leadership impact in that country. Last but not least is a structural cost-out review. Joel, our CFO, and I co-led this effort back at the very beginning of the crisis to challenge everything, turn over every rock, zero-based budget literally every aspect of our business to identify where can we identify waste and permanently remove it from the system or can we automate things that were previously being done by humans as an example and where can we make investments in capabilities that will have a meaningful return by taking work out of the system. All told, we're pleased with the progress we've made. As I mentioned earlier, we've taken $350 million of structural cost out and we have line of sight to be able to take out substantially more. It's important to know we will not take 100% of that incremental cost-out savings to the bank. We've identified new capabilities that we would want to deploy on the benefit of our customers. And we'll take portions of the savings that I've just described to invest in those net new capabilities that we will talk more about at an upcoming Investor Day. If I could have the next page, please, Rachel? So a lot has happened at Sysco since the beginning of this pandemic. Long-tenured folks at Sysco say this often, we've accomplished more in the last 6 month than in 6-plus years. And that is not hyperbole. It is a reflection of the pride that the organization has on how agile we have been during this crisis. We've treated it with tremendous sense of urgency to improve the company, and it was already the industry leader, to better serve our customers, take out structural costs and create capabilities to win. As you can see on the page, and this is not an all-encompassing list, but there are some important things on here. We've won over $1 billion of net new business. It is true that this business is in the QSR space, but that was on purpose. We, like you, can see that, that's where the growth is currently happening. We use this expression, when you skate to where the puck is going to be. And we can see that, that will be the growth vector here for a period of time. The business that we're winning is profitable, not just on current standards but on historic standards as well for contracts we would sign in the QSR space. And because the business overall has been tamped down, we do not have storage or throughput constraints preventing us from winning additional business. So you'll continue to see us be aggressive in that space to go out prospecting new customers to win new business at profit-appropriate margin rates. The second I already spoke about, which is the cost takeout. The third is we exited our fiscal 2020 on an operating income profitable rate. And we are pleased that we have been able to lower the amount of fixed cost to such that our breakeven level, which we've talked about this publicly previously, is now at about minus 30% of sales. We can be profitable at a roughly minus 30% to prior year. And our current sales trends have us well north of that figure, which obviously implies profit for fiscal 2021. We are very pleased with our positive cash flow. We had done internal modeling on what we would expect on bad debt collection and all of the things tied around inventory management. And we have been exceeding those forecasts each and every week since the beginning of the crisis, producing positive free cash flow. I haven't spoken about this next bullet yet on this call, which we are very proud of this figure. During this crisis, we have been able to improve, therefore, increase the service that we are providing to our customers, and they are telling us directly through our Net Promoter Score survey. We've seen a 900 basis point improvement in NPS with our local independent street customers. And anyone who knows anything about NPS knows that's a pay-forward lever. They will reward you with future business as you improve your statistical NPS in that significant of a manner. And it's because of the work that we are doing to help them be successful during this crisis, as noted by the next bullet, which was the conversion of over 16,000 of our customers to many grocery stores or as we call them, marketplaces. I've already covered the next bullet, which is our customers are succeeding at a rate higher than the industry and that we've completed, and I mean, literally, completed our regionalization efforts. Upon my arrival at Sysco, I met with the leadership team and we talked about the need to do this regionalization. And I can tell you that the original plan was to do this over several years. And we have literally completed it in less than 6 months. The transition, if you will, change management is in the done column. And now we're focused on being better, being bigger and serving our customers in a more superior way. We're very pleased to have that project in the done column. We've also implemented the new sales compensation program that I talked about earlier. And that's something that we will continue to refine as we identify things that we want to tweak to make it even more impactful and effectively will. And last but not least, we were proud back in the May and June time frame to do a branding campaign tied to helping consumers understand that it is safe to eat out at restaurants in a call to action of #takeouttogiveback. It had a positive impact on customer sentiment and consumer sentiment. And we are pleased that we at Sysco are able to do things like that in the midst of a crisis. Rachel, next page? And I believe that is it. That is a wrap-up. And I'm happy to now turn it over to Jeff here for questions.

Great. Thanks, Kevin, and welcome, Joel, to the microphone as well. Having hosted your foodservice peers and lots of investors over the past couple of days, I have a number of questions. But to start, Kevin, just listening to your prepared remarks, we got a lot of color on the sales side. I'm just wondering maybe about the popular topic being the taking cost out, which you alluded to, wondering maybe whether you or Joel could provide some examples of some of these buckets and give confidence that the reduction will not impede future growth, perhaps any color on the reduced breakeven that you talked about a little while ago.