Sysco Corporation (SYY) Earnings Call Transcript & Summary

Good morning. My name is Jeff Bernstein, and I am the restaurant and foodservice distribution analyst at Barclays. Thanks for joining us, day 2 at our Barclays Global Consumer Staples Conference, also known as our back-to-school conference. I am pleased to introduce our next presenting company, Sysco Corporation. With us this morning from Houston, Texas, we have Kevin Hourican, President and CEO; Aaron Alt, EVP and CFO; and Neil Russell, SVP, Corporate Affairs and Chief Communications Officer. I will lead a fireside chat this morning with Sysco management. By way of background, for those not familiar, Sysco is the global leader in selling, marketing and distributing food products to the restaurants I cover as well as many others. Globally, Sysco serves over 650,000 customer locations from over 340 distribution facilities, most recently generating over $51 billion in sales in the most recent fiscal year. And with the June fiscal year-end, Sysco completed fiscal '21 a couple of months ago, during what most would agree a very tumultuous period in the midst of a pandemic. With that said, under their not-so-new CEO, there's lots of excitement. And with that said, Kevin, Aaron and Neil, thanks very much for joining us.

I will kick it off with my first bigger-picture question. I know we only have 30 minutes here, I have no doubt we will fill the full 30 minutes, but I will dive right in. The first question in terms of just bigger picture, growth versus the industry. The expectation is for Sysco to grow at 1.2x the industry in the current fiscal '22, accelerating nicely sequentially to 1.5x the industry in fiscal '24. So just a few questions on that front. Just wondering how you think about the directional assumption for the industry as a benchmark. I know obviously excited that you're growing at a rate well above the industry, but how you think about the trajectory of the industry as a whole and whether the faster-than-expected industry recovery thus far has put pressure on that 1.2x in the current fiscal '22.

Good morning, Jeff, and good morning to everyone else. We appreciate you're all joining us. And I'll just take us back to May 20 when we introduced our Recipe for Growth. That strategy is about improving how we serve our customers, creating new capabilities. Those capabilities will increase our ability to increase share of wallet with our existing customers and acquire net new ones. And what Aaron said at that meeting was this is what our projection of the market will be and this is what Sysco performance will be, 1.2x. And then in the third year, 1.5x. And we actually did this from a latter perspective. We said if the industry performs better, we're going to perform better with and we're going to hold serve for that. We also said if the industry performed lower, that, that would actually have some pressure upon our sales results. So Jeff, the good news is the industry is absolutely recovering faster than Technomic had predicted and faster than what we had internally modeled. That's why we've raised our sales guidance for fiscal 2022. With only 1 month into the year, we raised guidance. That's the first time in my career I've ever done that, where I've raised guidance for a year only 1 month into a year. And the why is because the industry is doing better. The answer to your question is, yes, we are confident we can grow 1.2x the market despite the fact that the market is robust at this point in time. And the why is because the work we're doing is capability building and those capabilities are the things that our customers want. And we're proving right now that our company is capable of winning market share in a growing market. That was evident in our Q4 financial results.

Just curious, wondering the biggest driving factor of the future acceleration. It seems like you guys are fairly confident and quite detailed that the 1.2x goes to 1.35x next year. It goes to 1.5x in '24. Just wondering, again, the biggest driving factors that you think is going to drive that future acceleration and maybe where you expect the largest market share to come from.

Great question. I'll start, and then Aaron may want to add some financial color. It's hard to pick which of the initiatives is my favorite. That's like which of your children is your favorite kid, right? We have a 5-part strategy. And I'm just going to start at the headline, then I'll go into the specific initiatives. From a headline perspective, why we're most bullish is we say only Sysco can do all 5 of these things. There are select companies that have robust digital capabilities, but they lack boots on the ground, sales force who are experts in restaurants, calling on restaurants on a weekly basis. There are some companies that have a strong sales force, but they're going to lack the capability of investing in the digital tools and the supply chain technology that we are deploying. So we say only at Sysco can you do all 5 of these things to the degree that we will be doing them. And it's the holistic aggregate of them, Jeff, that gives me the most confidence in our ability to win. If you ask me if I were to pick a couple of my favorites, I'll just -- I'll say 3 of them. One is the pricing tool, which we are in the midst of deploying. Its outcome objective is to increase sales and market share while keeping margin rates flattish. I mean it is a sales growth initiative, not a margin rate expansion initiative. And that project is on track and moving forward. We're building something called the personalization engine, which is the ability at the customer level to provide them with unique offers specific to them to motivate them to buy product categories from Sysco they've not bought before. Think about the Starbucks app prompting you to come in, in the afternoon with a 50% off frappuccino offer. They're providing that offer to someone who only buys drip coffee in the morning. And they're providing that big discount because it's purely incremental and you know the margins on that product. So what Starbucks app does to motivate behavior, that's what we're building for our restaurant operators and owners to motivate their behavior to buy more from Sysco. The third and my last example would be what we're building from an omnichannel fulfillment capability perspective. It's hard to do that one concisely other than to say the outcome of that project will be to significantly expand the number of unique products that we make available to our customers. When we have the inventory today, Jeff, we just don't expose it to our customers. Right now, an individual customer mostly sees the inventory that's stocked in their closest physical warehouse. Which makes sense, right? That's the warehouse that delivers to them. But we could have 6,000 unique incremental SKUs that are a state away in another distribution center. We have the ability to efficiently, from a supply chain perspective and through technology, expose that incremental inventory so that a customer can order what we have, when they want it, from wherever we have it, and we will get it to them in a timely and cost-effective manner. That's a big deal. That project is meaningful. It's a very technology-driven initiative that takes time. We're in the business technology development phase right now, but we will be piloting that project in our fiscal 2022. So these are just 3 examples. These are fundamental capability builds. We're not talking about things that are easily replicatable by competition. And where the share will come from, I'd like to first talk about the customer segment. Most of these initiatives are targeted to the independent local customer, which, as you know, is our highest profit rate customer. And we are confident in our ability to increase both our customers covered and also our share of wallet with that sector. Who will come from is companies that aren't able to match these types of capabilities, and that could be big and small distributors out there. Aaron, toss to you for any financial commentary beyond what I've just shared.

Two facts and one observation. Good morning. The 2 facts are the personalization initiatives that Kevin called out, we expect to add more than $1 billion to our sales. That's an example of an investment we're making and the return we're going to get. The pricing, to get to right on price with the system we're installing, that's a further $750 million positive results from the investments we're making. Zooming out from that for a second, part of why the 1.2x to the 1.5x is just the timing of the return on all those investments. We're doing heavy investments upfront. We've been doing it now for a couple of quarters, that will continue for the next couple of quarters. And as all these pieces come together, as they integrate with each other, that's why we expect the returns to increase over the 3-year growth plan.

Understood. Next question, just on a topic that I'm sure people are getting tired of hearing, but the most recent Delta variant impact specific to your business. I think you mentioned in early August that to date you just haven't seen anything. I'm wondering whether there's any further comment you'd offer in terms of a noticeable impact, what you'd attribute to maybe Delta variant, whether for Sysco or whether you have any comment to make on just broader industry trends, maybe compare that to the initial pandemic. I'm assuming it's a much more modest impact, but still an impact nonetheless.

Yes, Jeff, thank you for the question. Here's the -- my main headline for Delta, we are not experiencing a sales change in our business performance tied to Delta. That's the Sysco headline. I can't speak specifically to what's happening at competitors. The data on market share doesn't come out yet for a couple of days for the most recent period. But we are confident that we are continuing to take market share. In our business performance, we are not experiencing a Delta headwind. With that said, I mean, we're not oblivious to this. We're not an ostrich with our head in the sand. The Delta is real, it is happening, it is in the environment, it is impacting our labor availability in select, isolated distribution centers. So the impact on Delta at Sysco currently is more about staffing health than it is about sales trend performance. And I can't speak to other competitors and I'm not going to, but that's what's happening at our company. We're monitoring the situation very, very closely. But at the very end of your question, you asked how does it compare to prior waves? It's nothing like prior waves is the main point. And the why is, at this time, governments have not put meaningful restrictions upon our customers. What's impacted our business in the prior waves of COVID is when meaningful restrictions are put on restaurants, when dining capacity is reduced to 50% or when dining capacity indoor is blocked to outdoor dining only. At this time, we do not have any of those things happening, with the exception of the vaccine passport, which I'm sure you've read about, in New York City and San Francisco. And at this time, we are not experiencing an impact to our sales results tied to those activities.

Understood, great to hear that.

The reason I said that this time 3 -- I'm sorry, Jeff, I should have said, the only reason I keep saying it this time, I can't predict what's going to happen next. I can't predict what will happen. I can't predict what governments will do. If I have optimism, it's that in both India and in the United Kingdom, the Delta surge did actually peak and then receded. The medical community actually used the scientific term it petered out in those 2 countries when they had actually expected it to keep getting worse and worse and worse. And I can't predict that, that's going to happen in our domestic U.S. largest business. I'm hopeful that this wave 4 will peak. And in fact, there are some indications that, that might be happening in the southern 1/3 of the United States, where you are, up in the Northeast. Obviously, with kids just going back to school this week, there could be activity. But right now, we're not experiencing an impact to our sales.

Right. And in terms of the customer base, there's been lots of talk, obviously, about distributors that focus on independents versus chains. And I know through the pandemic, I know at least the chains that report, it seemed like they were holding up quite well relative to independents. I'm just wondering how you think about that on the other side as we move ahead, whether one of those is more challenged than the other or seeing greater closures. Or perhaps if they're seeing closures, whether or not we should expect maybe a big bounce back or an uptick in growth in '22 and beyond as some of those closed restaurants reopen.

Jeff, good question. I mean the main headline is that the restaurant sector is just performing so much better than what had been expected and what had been modeled. That's the good news headline. We're seeing pressure still in foodservice management, travel, hospitality, business and industry. Those sectors of Sysco's business are still down pretty meaningfully versus '19 and, frankly, have recovery still to go. And Aaron guided that these sectors will actually be down versus '19 for all of fiscal 2022, but we do expect them to kind of steadily grow. The restaurant sector is performing so much stronger than what had been modeled, and that's why we raised our sales guidance for the year. And we're seeing health, Jeff, in both, national sales and local independent. And we've proven through our outcomes that we are winning market share with both. I often get asked that question, if you could choose just one, who are you going to grow with? Is it local or is it with national? I respectfully submit it's the wrong question to ask me. That would only be the question to ask if we had no other -- no space in our warehouses and you can only fit 1 more case through the building. That guns or butter choice is only required if you have finite capacity. We don't have finite capacity. Aaron and I have the ability to invest in buildings and in fleet and in inventory to grow profitably with our business, and we're doing those things and we are making the appropriate investments. And there are 2 different sales forces, that's the other thing that I just want to impress upon our investor population. We have a dedicated national sales team that's won over $2 billion worth of net new business since the beginning of the pandemic. And then we have 5,000 independent -- sales people who are at the local level serving independent customers. So they're not competing against each other. These are different resources. They're compensated differently. They've got different leadership teams guiding them. And right now, both teams are winning. We're winning at the independent level. If you ask me just like pure within the restaurant sector, you cover that space, you know it probably as well if not better than we do, for sure, bigger, more well-capitalized entities that have the ability to create a world-class app, they're getting stickiness. They're doing with their customers what we're going to do with our personalization engine. So whether or not it's Chipotle's app that's prompting you with a offer, loyalty points and the like, yes, companies that have the ability to invest in their capabilities during the COVID crisis either for delivery, takeout, I think the mobile app investments that were made by the best-in-breed operators will make a difference. They will have the opportunity to win. But we have confidence in the local mom-and-pop as well. I think both sectors are going to surprise us with how healthy they will be over the next period of time.

Put myself in your shoes, obviously, you have to think about your customers. On the flip side, you're obviously closely monitoring your competitors. Just wondering what it's like for the smaller distributors. I mean, obviously, you've talked about you have wherewithal to succeed in this environment, but I would think the small distributors are more challenged. Whether you're seeing closures or whether you're seeing a significant number of customers actually opting to go to larger players like yourself. Just trying to size up the competitive landscape in foodservice distribution.

It is undoubtedly true that the size and the strength and scale of Sysco is benefiting us right now. We have national sales customers that are bringing more of their business to us. So think about a QSR chain that they serve with multiple distributors. They have a couple of partners where we have 1/3 or 2/3 of the United States. We've got customers like that coming to us and saying, "Can you take on the entire country? We're concerned about a partner of ours." And we're being very thoughtful about evaluating those opportunities. We have to make sure the contract is correct, that the rates are prudent, that we've got the storage and throughput capacity to handle it. And the good news is we're meaningfully winning business. That's where the $2 billion of net new sales is coming from, is big, large national customers having confidence in Sysco. Point two is at the local level. For sure, we have new -- I've said it on our last call, we won more new independent local customer business in the last quarter than in any other quarter in the company's history. And that is in part coming from the fact that we're motivating our sales teams to do that work. That's also in part coming from customers having confidence that Sysco can ship on time and in full. To specifically answer your question about the why factor, Aaron covered this in prior calls, but I'll just repeat the point. We started investing in this business recovery 90 days before the recovery actually began. And so that was building inventory back into our pipeline. Prior to March, we had as much inventory in our warehouses as we did pre COVID. And we have the financial strength to be able to do that. That is a meaningful investment in inventory. Hundreds of millions of dollars of inventory being brought in, in advance of a customer order. We have the financial strength to do that. We declared that we would hire over 6,000 people in the first half of this calendar year. Again, those people are being hired before they were needed because you need to train them, you need to teach them how to do the work. And we succeeded in hiring that headcount. In fact, the business is so robust, we need to hire thousands more. So Jeff, we were more prepared than the industry at large. And because of that, we got a jump on the competition at the early part of this snapback. And then the truth is the snapback is so strong, it has challenged us. It has challenged our ability to ensure that we are profitably staffed. But I can say we are moving mountains to ensure that we can increase our staffing availability and product availability to continue to be able to take market share profitably over the next year.

Understood. Switching gears to the cost side. I wish there wasn't so much to talk about here. But first on the commodity inflation outlook, it seems like yourself and peers are talking about 10%-ish inflation near term. And you know many of our restaurants raised their guidance for calendar back half of '21. Just wondering in your view what you think is structural versus transitory. I think historically, distributors have said, "You know what, low single-digit type inflation, we could pass that on to customers." I'm just wondering whether the pandemic has changed how much pricing your customers can easily absorb. So the outlook for the inflation and the ability to pass it on to customers would be the topic there.

Sure. Happy to touch on, and thank you for the question. Well, look, the practical reality is during our Q4 results we called out that we had just under 10% inflation in the business in that quarter. And we guided that inflation was going to be with us for some time and that we certainly expected elevated levels of inflation in Q1, likely in Q2, but moderating thereafter in Q3 and Q4 as we looked at what we can see across the categories. The practical reality is that the inflation -- levels of inflation are different by both geography and category. Europe, for instance, isn't experiencing the same level of inflation as the U.S. market is, perhaps as yet, right? Similarly, some categories like produce are lower than other parts of the portfolio, some of the protein categories and disposables, for instance. We believe that the 3% to 4% inflation is a normalized level of inflation. That's the level the industry has generally operated around, and we expect that we will get back there over time. Right now, our forecast is that we will start moving down the inflation curve in the back half of our year. But in the meantime, it's going to be dynamic and we're going to have to respond. Now responding is passing that cost through for us, right? And we have the benefit of both contracts, which allow us to do that to preserve or increase our gross profit dollars per piece or per case, for instance. We also have the benefit of the new pricing system that Kevin was alluding to earlier. And some of the tools we're building are coming together to make this very large company much more agile in responding to the inflation. And so far, the good news is, is that our consumers -- our customers, rather, are accepting the price increases because they themselves are able to pass largely the cost on to their consumers. And our view is that consumers are tired of meeting at home and they're willing to pay a little bit more in restaurants to have the experience away from home to have a good meal.

Understood. And as alluded to earlier, we're facing commodity inflation, we've talked about labor inflation. Kevin, you mentioned the pricing system, which you gave us an update, I believe, last quarter that your new pricing system, I think, was in 25% of your regions. One, I was just hoping for an update in terms of where that percentage perhaps is now. And where do you think the platform is having the greatest impact?

Thanks, Jeff. Yes, we're on track and on progress with our pricing system installation. So by the end of September, we will be complete with 50% of our regions and markets. So we're making meaningful progress with the install of the new technology and tool. And we will be complete with the nationwide implementation by the end of this calendar year. So we remain on track. The biggest upside comes from sales growth. I mean Aaron mentioned the number earlier. It's over time a $700 million incremental sales lift tied to that system. Just to repeat what I've said previously on calls, this is a sales optimization through price optimization software at the customer item level introduced through our web platform. So that's a big change. Our pricing at Sysco for decades has been introduced to our customers manually through our sales force. And there's 2 problems with that. And we did it reasonably well, by the way. But there's 5,000 of them. There's variability amongst that population. And there's also a time lag. So if Aaron or our Chief Merchant makes the decision of, hey, we want to pass through this inflation, in the past, there was a time delay between that recommendation being provided to it actually happening in reality. With our pricing software, our Chief Merchant, Judy Sansone, or Aaron or myself could say, "Hey, we want to move the dial up or down," and it can be within 24 hours live in our operating environment. That's point one. So the speed with which we can move and the precision with which we can move is substantially better. From a outcomes perspective, essentially, think about the pricing software is understanding at the customer level what items matter most to them and what items are very elastic for them, meaning that the price is the driver of the purchase consideration. We will be sharp on price at the customer level for those items. But there are thousands of items that are inelastic for that customer. They tend to be things they buy infrequently. And we can make a nominal increase in price on those tail items, those thousands of SKUs, to fund the investments that we're going to make on the KPI, the known value item, to optimize our pricing margin rate to drive sales growth. And using retail-like capabilities like buy more, save more. So if they buy an incremental category from us that they've not bought before, they can get a discount on their entire portfolio of things that they are buying. That's what retailers do to put more in the basket. And we can do the exact same thing through buy more, save more events. In the markets that are live, we are experiencing those benefits, Jeff, right now. The pricing strategies are having the desired impact on raising sales, holding margin rates flattish, which is putting more gross profit dollars into the bank.

Got it. From a cost-saving standpoint, moving on to a different topic, I know you raised the objective to $750 million of cost-out structural savings. I think that was $350 million or more in the most recently completed fiscal '21. Just wondering maybe you could just highlight what you think the biggest buckets where that came from and whether the faster-than-expected recovery has maybe forced some reinvestment faster than originally anticipated from that cost saving perspective.

Sure. Thank you. Great question. What we called out was we accomplished more than $350 million of savings in fiscal '21. And then we raised our target, as part of Investor Day, to be $750 million or more, with the incremental cost savings coming largely over the course of fiscal '23 and fiscal '24. And that was a perfect choice to describe it that way because both as we were looking at the transformation and indeed as we're looking at the snapback and our realization that we are going to have to invest to be ahead of that curve on the snapback and make the necessary transformation investment, that we would be, to your point, deploying some of the dollars we're saving in the short term to help fund the transformation. And so we are doing just that over the course of our fiscal year '22. As far as the source of where the savings are coming from, I would put them in 3 big buckets. The first bucket is just changing how we operate. And you may have heard us refer to things like regionalization, where we've changed the management structure across our enterprise, both to make it more efficient, but to make it more customer-centric as well. And we're seeing great cost savings as a result of doing that in both our Broadline business and now increasingly across the portfolio in specialty as well. Part of that is changing the structure. Part of that is changing how the structure operates to make it more efficient. The second bucket I would call out is benefiting from our scale, right? And that is doing contract renegotiations. We're a large company. As we look around, as we peer in corners and in boxes, we find contracts that haven't been negotiated in a while, whether it's technology, in some cases, on our COGS base, et cetera, and we believe we have continued opportunity to help to improve our costs there as well. And lastly, the bucket I'd tell you is just making better choices as we push ahead. Kevin is leading a dramatic change in Sysco how we operate, what we do as we carry forward and ensuring that we're prioritizing our costs appropriately consistent with that transformation. Allowing other costs to fall away is a key part of what we're up to as well. If you add all those together across our SG&A base, across our COGS base, what we promised is $750 million of savings over the course of -- by the time we get to the end of fiscal '24.

Understood. And with our final 90 seconds, I'm just curious on the M&A front. I know a lot of investors and analysts ourselves are intrigued by the market share opportunity in terms of consolidation. Just wondering, whether in the U.S. or international, is there anything to share? I think, Kevin, you mentioned last quarter, there's still some tuck-in, maybe fold-in acquisitions to be had, but no real plans for substantial M&A. Just want to kind of get a handle on that. M&A still remains a part of the growth strategy, but I'm just trying to size up what you consider maybe tuck-in, fold-in versus substantial. Whether maybe Greco would be considered that tuck-in, fold-in. But any kind of broad thoughts on the U.S. or international on that M&A front.

Yes. The acquisitions that we will do in the future are going to be tied to our Recipe for Growth strategy, to either bring a capability to the company that we don't have or to help us fill in the geographic white space that we want to build. So Greco falls into, I wouldn't necessarily use the word tuck-in, I know that's an industry term, but that's more buying a Broadline distributor and then tucking them into what we have. We don't view Greco as a tuck-in. We view it as a specialty platform, and we will treat it as such. So we will operate Greco as a specialty platform. We have a fresh produce business called FreshPoint, that's specialty. We have a premium protein business, Buckhead and Newport. Think about our Greco platform as our third specialty business. And we acquired Greco because we wanted to jump start our company's capabilities on better serving the fast-growing and profitable Italian sector, having the right product at the right prices, sold with a sales force who is absolutely expert, access to key premium supplier inventory like [indiscernible] through Greco. And then we strongly desire to be able to take that platform and expand it to new geographies that Greco currently does not operate within. There is large white space opportunity. So it's an acquisition, and then it is a deployment of a platform. And that deployment of the platform will be both organic and inorganic within Italian. And we are bullish on our opportunities in that space. There are other ethnic cuisine segments that our assortment isn't optimal, and we will evaluate how we improve to serve those customer segments, both organically, inorganically. So Jeff, I'll call that a specialty play, and we are bullish on our opportunity as a company to grow in specialty. As it relates to bigger, more macro acquisitions, what I was saying on the last call is that there's nothing imminent on the surface from a large transformational, large acquisition. And nothing more to say at this time in that regard. I oftentimes get asked the question, so what about international? Are you thinking something bold in that regard? And I'll be consistent on what I've said in the past. In international, we need to improve our profit performance, and we are and we will. As Aaron said on our last call, international will be the largest year-over-year profit swing for Sysco, and we're on track to deliver against that plan. So I call that stabilize our base, improve the profitability, deploy Sysco capabilities in the international countries that we operate within. And when we've proven success through that format in that forum, we will contemplate additional acquisitions, but there's nothing on the surface at this point in time in that regard.

Understood. Well, with that said, it looks like we are out of time. I want to thank, again, Sysco management for joining us this morning. Kevin, Aaron and Neil, thank you very much. Otherwise, I hope everyone on the call has a great day. Enjoy the rest of our conference and stay safe. Thanks, everyone.

Thank you, Jeff.

Thank you.

Thank you, Jeff.