Sysco Corporation (SYY) Earnings Call Transcript & Summary

Hi, everyone. It's Neil Russell with Sysco here. While we wish we were all together in sunny Florida for this presentation today, and we certainly wish we were hosting you for dinner tonight, we hope you enjoy our presentation today. And we look forward to seeing everyone in person next year at CAGNY. A quick reminder for you that our discussion contains non-GAAP measures. The reconciliation of these non-GAAP measures to the corresponding GAAP measures are included at the end of the presentation slides and can also be found in the Investors section of our website. We also invite you to review our risk factors contained in our annual report on Form 10-K for the year ended June 27, 2020, and in subsequent SEC filings. A copy of these materials can be found in the Investors section at sysco.com. Joining us for today's discussion are our President and CEO, Kevin Hourican; and our CFO, Aaron Alt. Before I turn things over to Kevin, I wanted to mention that 2020 was obviously a tumultuous year for our customers. At Sysco, we did more than anyone else to help the industry survive and succeed. For example, we were the first to offer educational webinars to our independent customers on how they can access the funds available to them via the PPP programs, and the only distributor to lobby on behalf of our customers for that support. Those efforts continue today with bipartisan efforts to move the RESTAURANTS Act forward, with additional grants to restaurants, allowing them to not only pay their employees but fund their operations by purchasing food and supplies from their distributor. We also rolled out comprehensive tool kits for restaurant operators to adjust their business and pivot towards advanced takeaway capabilities, improved outdoor dining options, menu adjustments clean dining room operations and transitioning more than 16,000 restaurant dining rooms to grocerants to sell needed food and supplies to their local communities. And speaking of supporting the community, Sysco provided more than 40 million meals during the pandemic to help fight hunger during a time of need. But we aren't stopping there. In fact, we never stopped at Sysco. Let me show you a video that embodies 2020 from our view. [Presentation]

As you can see, the industry leader is not only proud to support our customers during this time, but it's positioning itself for the pending business recovery and long-term success. With that, I'm going to turn it over to Kevin and Aaron, who will talk about what is next for Sysco. Kevin, over to you.

Hello, everyone. My name is Kevin Hourican, the President and CEO of Sysco. We're happy to be here today to talk with you about our performance and also where we're headed as a company. We would love to have the opportunity to host you all for dinner this evening like we do on any normal year, but obviously, COVID has other plans. We can't wait to be back together with you again live next year at CAGNY, showing you some of our great product and having you have the opportunity to talk to our world-renowned chefs. But let's talk about our business, and let's talk about where we are headed as the industry leader that we are. First and foremost is that we've delivered a profitable first half of our fiscal year despite a 23% decline in our top line results and even stiffer top line headwinds in our European operation. It is important to note that we are gaining market share during this crisis at both the national level and for our company overall, while we are embarking upon the boldest transformation in our company's history. And I'd love to tell you more about that transformation in just a moment. Let's start, however, with some of the facts on why Sysco and why you should have optimism about the future profitable growth of this company. First of all, some key statistics that are really important to know. Today, we have 16% share of what was pre COVID a $300 billion market. On average, for the independent customers that we serve, we have roughly 30% share of wallet. And of that very large independent restaurant population, we serve roughly 50% of those unique customers. Our opportunity to increase the number of restaurants we serve, increase the share of wallet of the customers that we do serve allows us to greatly increase our share of a $300 billion market, and we are boldly going down a transformation that will deliver on exactly that ambition. In the meantime, we are making investments in our business during this crisis to not just be able to work through the crisis, but more importantly, lean forward to serve the customers that we work with every day and prepare ourselves for a pending business recovery that we see before us. As you can see on the chart before you, from a customer perspective, back in December, we launched a program called Restaurants Rising, where we announced that we will waive all delivery minimums on regularly scheduled order delivery days. We've also not pulled back on delivery frequency, something we know most people in the industry currently are doing as volumes have come down. We are also partnering with our customers on payment plans to help them get through a very difficult time and ensure we can continue to ship them product. All of these things coupled together of not cutting frequency of delivery, waiving delivery minimums and partnering with our customers on payment plans, shows our customers that we are here for them when they need us the most. From a people perspective, I announced at our most recent quarterly call that right now, we are beginning the efforts to increase our staffing in advance of what we believe to be a pending business recovery to ensure we have the right people in the right locations at the right time, to be able to ship on time and in full to our customers as they begin to order more product from Sysco. That obviously feeds into a working capital need. We've said this from the beginning of this crisis, the most difficult part of the COVID challenge is in the recovery window when you need to build back inventory, build back staffing and you're not yet receiving the cash inflows from your customers in order to pay for those products and to support the payroll of the people. Due to our extraordinarily strong balance sheet with $8 billion of liquidity, Sysco is uniquely positioned to be able to make those investments with no qualms to support our customers so that we can accelerate from a growth perspective faster than the recovery. More importantly, we're investing in our technology. Our technology platform is being meaningfully improved so that we can better serve the customers that do business with Sysco. We're making it easier for them to order product from us through our Sysco Shop platform, and we are implementing an industry best practice pricing software that improves price transparency, improves our price competitiveness on the items that matter most and allows us to profitably grow our top line sales. We're enthusiastic about these investments we're making into technology, again, to better serve our customers and to differentiate from our competition. Restaurants Rising is something that I mentioned earlier. I could talk about it, but I'd really love to show you a video. So if you could please roll the video. [Presentation]

So as that video just showed, we're doing more to help small independent customers than any food service distributor in this industry. Hard stop. We're leaning forward, as I mentioned a moment ago, in their greatest time of needs. No order minimums is a big deal in this industry. And what we've heard from our customers is they know we have their back. We can ship them what they need, when they need it, and we're here for them. We've heard restaurant operators tell us exactly that. "I'm having a good week. I know Sysco can fill on time. I'm not having as good of a week. I don't have to worry about going to an alternative format to get what I need. I know I can count on Sysco." It's a big deal. I already mentioned payment plans, but I didn't talk about is we've improved our customer onboarding process. We are now accepting credit cards for new first-time customers, and we are onboarding new customers in less than 24 hours, which is a meaningful improvement to our prior efforts. We have the largest sales force in the industry. They're experts in restaurant operations. They're able to lean forward, help customers optimize their menus to focus on profitability at a time when restaurant operators need help in that regard. We can connect them to a delivery aggregator. We can help them improve their website to make it a clickable, orderable online menu. We can do things like help them with outdoor dining solutions, as you see the igloo in front of you. We're helping connect our customers to resources to purchase outdoor heaters, outdoor patios, to extend that selling season through these winter months. Last but not least, we made the important decision that despite a 24-plus percent sales decline, that we would not cut back on delivery frequency. Others in the industry are. It is a point of differentiation and shows the source of strength that comes from Sysco. So in closing, let me summarize with a few key points. First is that Sysco has delivered a profitable first half to our fiscal year despite the COVID headwinds. Second is we are managing this crisis carefully, but more importantly, we have the balance sheet strength to invest in our customers, to invest in inventory and invest in our staffing plans in advance of the business recovery. But most importantly, we are investing to transform our business, the most bold transformation in this company's history to make our great company a better, stronger and more capable Sysco coming out of this crisis. And I am confident that we will be able to accelerate our business recovery faster than the industry as a result of these important components. So with that, I'm pleased to introduce you today to Aaron Alt, our new CFO.

Thank you, Kevin. I'm excited to be here to talk about Sysco. I'm glad to be back in an industry that I love, and I'm particularly excited to be working with the leadership team you've built to help drive Sysco forward. Let's talk about Sysco. We have $8 billion of cash and available liquidity. We have the strongest balance sheet in the industry. That's supported by the fact that our adjusted EBITDA margin is 2x the industry average. There's no escaping the fact that Sysco has the size, the scale and the network, both domestically and internationally to accelerate profitable growth. That's important because at the same time, we're dealing with a global pandemic. We're also moving rapidly up the business recovery curve and investing for the future through our transformation. Now given my comments on our balance sheet, I often get the question, "What is your approach to capital allocation?" It's relatively simple. As we have been, going forward, we will continue to invest first in the business organically and through M&A. Throughout the crisis, we've maintained our dividend payments. And having gone out at the start of the crisis and obtained additional liquidity, as we move up the recovery curve, we will quickly move down the leverage curve, paying down debt as we go, allowing us, in the future, at the right time, to both return to share repurchase and return to increasing our dividend at the right time. I want to emphasize that returning value to our shareholders is important to us. As you can see on the slide in front of you, we've generated a TSR of 14% over the last 5 years. We've returned more than $11 billion to shareholders through dividends and share repurchases. We've continued to pay that dividend throughout the crisis, unlike many other companies. And all of that is supported by the fact that we are the only investment-grade foodservice distributor. Now the environment is important to us. As you would have heard on our earnings call, our international business has some challenges in front of it, given the lockdowns in particular countries. That will be a longer recovery period for us. However, we are seeing signs of light in our U.S. business, and we're excited about the opportunity. Assuming restrictions continue to ease, we're excited about the opportunity that consumers will quickly come back to the restaurants. There's no doubt the environment will continue to impact our results. We can't predict with any certainty where international or our domestic operations will be a week or month ahead. But what we can predict is the fact that our team is incredibly focused dealing with the pandemic, managing the recovery curve and aggressively going after the transformation. We're going to leverage that balance sheet I was talking about previously to make the short-term purposeful investments and the long-term capability investments necessary to be successful. You will have noticed that we called out during our recent earnings call that third quarter, indeed, the back half may be more challenging than originally expected. We are making the investments necessary for the long term. Don't focus on Q3. Don't focus on the back half. Focus on where we're taking this company as we push ahead. What I want you to take away is this, Sysco is well positioned for the pending business recovery. We believe in our strategy. We believe in our transformational initiatives. We will drive future value for our customers, our associates and our shareholders.

Thanks, Aaron. As we close out for today, we are excited to announce that our Investor Day will be held on May 20, 2021. It will be a virtual event, but we ask that you hold the date for now. At this event, we will feature the additional qualitative and quantitative information relative to our robust transformational agenda and the pending business recovery. More information to come. Thank you again for joining us today.