Sysco Corporation (SYY) Earnings Call Transcript & Summary

Hello, everyone, and thank you for joining our presentation today. I will highlight 2 topics during our time together. First, I'll summarize our Recipe for Growth strategy and how that strategy is helping Sysco better serve our customers; and second, I will review our progress since our CAGNY and Analyst Day presentations last year. I'll then turn it over to Neil to discuss our progress as the only foodservice distributor in the United States that has set a science-based target to address climate change, and then Aaron will discuss our financial results, including our approach to capital allocation. As we begin this year's presentation, I'd like to share a short video of how our purpose, connecting the world to share food and care for one another, happens every day here at Sysco. [Presentation]

That short video does a better job than I can of explaining through our customers' eyes what good looks like. The company that we are and the company we will more consistently be in our future, it comes to life through the voice of those customers. We are a foodie company, full of supply chain expertise as highlighted in that video. And of course, what you also see is a relentless focus on supporting our customers, sharing and caring like no other distributor, treating our customers like family. It matters, and it drives us each day. So let's quickly summarize Sysco. At Sysco, we are the backbone of the food-away-from-home industry. Last fiscal year, we served more than 650,000 customer locations through a network of 343 distribution facilities, employed by more than 58,000 associates globally, including nearly 7,000 sales consultants. Our market share success of this past year has led to the addition of even more customers who will help contribute to the long-term growth trajectory of Sysco. We are fully diversified, covering every corner of the food away from home market. Our customer mix by sales is driven 2/3 by restaurants, but also spans health care at 9%, education and government at 6% and travel and leisure at 5%, just to name a few. Our export business expands our reach, distributing food to more than 80 countries across the world. We are the most diversified food distributor, and we're the only international distributor at scale as that video just showed. Last year, we generated over $51 billion in total sales with industry-leading EBITDA margins. In the U.S., our largest region, we have approximately 17% share of a highly fragmented $300 billion market. That's up a full point of share from last year, reflecting our strong market share gains. On average, for our independent customers that we serve, we have roughly 30% share of wallet. Our Recipe for Growth strategy will enable us to increase the share of wallet. As importantly, we serve less than half of the independent restaurant locations in the U.S. Our new service delivery models in progress and specialty categories of merchandise will enable us to serve even more of those customers, 17%, 30% and 50%. Each of these figures have the opportunity to grow meaningfully in a large, fragmented industry. Size and scale matters in this industry, and we intend to leverage our scale to increase our share of the overall pie. Internationally, we have the #1 market share position in 3 of our major countries of operation. This includes Canada, Ireland and the U.K., which just happened to be the highlighted video countries that we just showed. Our Recipe for Growth is how we will improve. The technology improvements that we are delivering will enable us to accelerate our ability to win share of wallet from customers we serve today, increasing case penetration. As seen on this slide, Sysco is gaining share, and we are beginning to pull away from the industry. We believe that this performance reflects our strong supply chain and our strengthening capabilities to better serve our customers. Our recent Net Promoter Score performance reaffirms the priority that we place on building positive customer relationships and our strength versus the industry at large. We continue to outperform the competition. The next slide outlines our strategy here at Sysco. At the top of the page is our purpose, our mission and our identity. In the middle of the page is our overarching objective, grow meaningfully faster than the industry. At the bottom of the page is our growth wheel, a series of 5 specific business strategies that each fuel one another, creating a virtuous growth algorithm for our company. Only Sysco can deliver upon each of these 5 growth vectors. Importantly, each of the 5 fuels and feeds the next, and they create a compounding growth cycle, building on our competitive advantages. Each of them has the customer and our associates in the center, and each of them will help us differentiate versus our competition. As a result, we are committed to profitably growing our business faster than the industry. We are confident that the initiatives will enable Sysco to grow approximately 1.5x faster than the total market by the end of fiscal year 2024. Despite the macro environment, in choppy industry recovery over the past year, we have made strong progress in advancing our Recipe for Growth. And while we are far from perfect, I firmly believe Sysco today is a much stronger commercial organization than a year ago. A highlight of some of our key accomplishments. We grew our market share by 1 full point, and we will exceed our 1.2x the market growth target for this year. We successfully closed on 3 M&A transactions this fiscal year: Greco, The Coastal Companies and Paragon Foods. We implemented our pricing tool, critical in today's inflationary environment. We enhanced our digital capabilities to improve the shopping experience of our customers. We invested staffing and inventory levels to ensure Sysco's supply chain was able to fill industry demand today and also into the future recovery. We advanced our omnichannel fulfillment capabilities to support future assortment expansions and also to lower our last-mile delivery expenses. And lastly, we improved our selling processes, technology and associate training. The following video is an anthem for what we stand for and how we will intend to drive success for our customers. [Presentation]

That video does a great job capturing a slice of our exciting transformation as a company. As I mentioned in my intro, Sysco recently announced a science-based climate goal, a goal we will deliver upon by 2030. As the leader in our industry, we are proud to be the first and only foodservice distributor with a quantified climate goal. The work we're doing in this space is the right thing to do for our planet, and we believe it will help Sysco deliver value for our shareholders in coming years. Now let me turn it over to my partner, Neil.

Thank you, Kevin. Hello, everyone. We know environmental, social and governance issues are key components to achieving our objective of growing meaningfully faster than the industry. That's why I'm excited to talk to you today about the progress we've been making at Sysco to advance our corporate social responsibility, or CSR, efforts at Sysco. Let me start by sharing our CSR framework with you. As you can see on this page, our framework is organized into 3 pillars: people, products and planet. Under each area, we have identified 3 focus areas that are most important to the business and our stakeholder community. We have specific, measurable 2025 goals in each of the areas shown. To hold ourselves accountable and drive impact, we regularly report progress against these goals. As we continue to advance CSR, we have identified 3 areas to further accelerate our CSR work, global good, responsible products and climate change. Why these areas? We believe they present opportunities to differentiate ourselves in the marketplace and accelerate our growth. Not only will these areas help our associates and the communities we serve, they help our business. They also allow us to live our purpose, attract and retain top talent to the organization. But simply put, it's the right thing to do. In November, Sysco announced our science-based greenhouse gas reduction goal. We are the first U.S. foodservice distributor to join the Science Based Targets initiative in support of the Paris Agreement. We are committed to making real tangible progress to decarbonize. Let me offer you some specifics. First, we will reduce the emissions we generate through our own operations 27.5% over the next decade. To achieve this, we have added 2 bold commitments to transition to 100% renewable energy and electrify 35% of our U.S. Broadline fleet. These actionable goals supplement ongoing efficiency improvements we already have underway. Second, the vast majority of our emissions come from our value chain, primarily requirements to grow and process the foods we sell. We will work with our suppliers across Scope 3 to set their own ambitious reduction goals by 2026. As part of this work, we have taken the responsibility to help 2/3 of our supplier-based emissions to join us on this journey by setting their own targets. And we're off to a great start as nearly half of the targeted Scope 3 emissions related to suppliers have already committed to or set their own Science Based Targets. Our climate actions support our customers who have made similar commitments, prepare Sysco for the future and, most importantly, contribute to global efforts to decarbonize. I would like for you to take away 2 key points from our climate change commitment. Number one, our plan is real. We have a fleet plan in place for the electric trucks by location, by year. We also have incentives with local governments already secured. We have renewable energy commitments in place with more to come. Our target setting wasn't a wish and a hope for a future generation to solve. It follows nearly 2 years of hard work and specific design to ensure long-term success. And number two, it gives us an advantage. As you can see on the slide, Sysco sits in the middle of the value chain. Our customers are also setting similar targets. In order for them to have success, they have to work with suppliers, foodservice distributors who have also set similar goals, not just any goals, specific Science Based Target initiative goals that are reviewed and approved by SBTi, just like we are requiring of our suppliers. That takes a commitment that only a distributor with the quality of Sysco's balance sheet can afford. This is the direction our world is going out of necessity. We've taken the lead and know that other distributors will struggle to catch us. We have a strong track record to leverage on the journey ahead. As you've seen, we have a clear plan and public goals tied to CSR. These disclosures are rewarded with strong ESG ratings from third-party assessment providers. We've also raised capital based on our CSR performance with the issuance of our own sustainability bond in 2020, and we'll continue to review further similar opportunities as we press ahead. Research from the World Economic Forum suggests that companies who make progress in these important areas drive improved TSR over time compared to their peers. We are proud of how far we've come. To list just a few examples, over the past year, we have donated over 27 million meals to the communities in which we serve. Additionally, we have developed a strong relationship with Freightliner to develop an electric tractor that fits the needs of foodservice distribution and to incorporate these vehicles into our fleet planning moving forward. This partnership is supported with a strong fleet rollout and capital allocation plan that leverages available grants and incentives to offset Sysco's investment. Looking ahead, we have work to do over the next decade to further decarbonize our business and meet our other CSR commitments. Sysco is up for the challenge and well positioned to lead in this space. Thank you for your time. And now I'm going to turn it over to Aaron.

Thank you, Neil. I'm going to use my comments today to provide an update on the financial commitments from our Investor Day in May of 2021. Back in May, I commented that Sysco has a lot going on. And boy, what an interesting 9 months it has been since I made that statement. On top of building commercial capabilities for our Recipe for Growth and dealing with the COVID recovery, we've had to address the onset of rapid inflation that proved to be, well, not so transitory. The development of The Great Resignation with its shifting labor dynamics and, of course, the Delta variant and, subsequently, Omicron. While many things have changed since May, one particular thing stands true, there is opportunity everywhere we look at Sysco for shareholder value creation. We are doing what we said we would do at our Investor Day, even with the changing circumstances around us. Let's go a little deeper. In May, we highlighted 6 Investor Day commitments. First, we will grow 1.2x the industry in fiscal year '22, growing to 1.5x the industry in fiscal year '24. Second, we will be at least 30% more profitable in fiscal year '24 than in 2019. Third, our journey will be funded by $750 million of cost-out efforts from fiscal '21 through fiscal year '24. Fourth, we will ring-fence $2.6 billion of capital for potential investment in our Recipe for Growth. Fifth, we will maintain a strong balance sheet as evidenced by a strong investment-grade rating. And finally, sixth, shareholder return will remain very important to us. My remarks today will focus on these same topics as we self-score how are we doing against our commitments at Investor Day? First, growth. Kevin has already described our success in meeting our Investor Day commitment after only 2 quarters of fiscal year 2022. Our leadership team is locked and loaded for more. Through December, the industry was recovering faster than we had expected across almost every element of our business, and we have been tracking ahead of the industry. While Omicron has had an impact on volumes in December through February and created a speed bump, we are anticipating that, just as we saw earlier in the fiscal year, when volume recovery comes, it will be brisk, and we are already seeing the green shoots. We expect to end this year with record sales for our U.S. Foodservice segment with our other segments close behind in fiscal year '23. Now as we called out on our recent earnings call, we anticipate strong volume recovery in Q4 as we build back to fiscal '19 levels sometime in fiscal year '23. The primary unknown of this equation is when business and industry and, to some degree, travel will recover to pre-COVID levels. However, based on our own pre-existing customer wins and the strength in our business, as we've been playing to win over the long game, we expect to exceed our objective of 1.2x growth versus the market in fiscal year '22 and to achieve our objective of growing 1.5x faster than the market by the end of fiscal year '24. This will be enabled by the very capabilities that Kevin has highlighted as they come online and exceed our expectations and by our inorganic M&A efforts. So let's think about profitability. Gross profit per case is up versus fiscal '19, fiscal '20 and fiscal '21 for the enterprise and all of our operating segments. We've been able to actively manage the impact of product inflation during the recent inflationary periods while also acting on underlying profit opportunities. These efforts will continue, and we have further work to do even though we have already have the highest gross margin amongst large foodservice distributors. I should point out that inflation has exceeded the levels we anticipated back in May, with our margin percentage lower than expected. However, the lower rate is simply the product of the much higher sales driven by the impact of inflation. We are watching inflation rates carefully and believe that across the portfolio we are in a position to respond to changes to inflation. However, margin percentage rate will remain lower than historical levels because of the pass-through of inflation. During the first half of this year alone, transformation costs and snapback investments accounted for $198 million. As we highlighted on our most recent earnings call, in addition to these operating expenses, we experienced elevated productivity challenges resulting from new hires in our workforce and the priority we have placed on excellent customer service. As we outlined during our last earnings call, we remain confident these incremental expenses driven by labor costs are near-term challenges that will improve over time. Furthermore, while we have increased wages in select locations, those increases are not material and have the opportunity to be offset by productivity and cost-out improvements going forward. Both efforts are in part a result of the fact that we are meeting another Investor Day promise. We have not been idle on our cost-out efforts, and new projects are executed every quarter in service of our $750 million cost-out commitment. We are building on our work last year after generating over $350 million of savings in fiscal 2021. We're building on that momentum and expect to generate savings in fiscal 2022 from additional field reorganization efforts, new global support center efficiencies, incremental sourcing initiatives and shared services projects. We want to be clear that we have significant cost-out efforts underway during fiscal 2022, 2023 and 2024, even with the higher expense environment we're currently experiencing. Once the near-term impact of the labor environment on our cost structure and our snapback investments are behind us, the positive impact of our cost-out efforts will be more apparent with the bottom line performance. I want to emphasize that Sysco is playing the long game and is committed to meeting or beating our long-term guidance on the top and bottom line. This includes plans for fiscal year 2024 adjusted EPS growth of at least 30% over our record 2019 EPS of $3.55. Let's now turn to our last 3 Investor Day commitments, which are tied to our capital allocation strategy. Last year, we presented our updated capital allocation strategy focused on 3 elements: first, we will invest the resources necessary to achieve our growth aspiration. To grow, we must have the right assets. Our Investor Day commitment was to ring-fence $2.6 billion of capital in support of growth. Second, we will strive to maintain a strong balance sheet, maintain a strong investment-grade rating and target a net debt-to-EBITDA target ratio of 2.5x to 2.75x. Third, we will continue to pursue shareholder returns of capital as Sysco has done in the past. With respect to capital investing, our efforts have been executed in 3 areas: physical distribution network expansion for growth, fleet optimization for volume and advancing our ESG goals, and technology. In support of these efforts, Sysco has committed and is progressing with multiple greenfield distribution sites as well as the expansions of several existing locations to permit volume growth in support of our traditional and omnichannel distribution models. We are also adding capabilities and investing in our facility operations to drive greater automation and efficiencies. These are high-return projects for Sysco. Our fleet and technology investments are also extensive. As the second largest private fleet operator in the United States, we are now leveraging our scale to both improve our investment profile and to drive our CSR agenda, as Neil has already highlighted. Now I should note that the supply chain environment means that some of our efforts will have a longer lead time than originally anticipated. While it will not impact our growth, it will result in some of our originally planned capital we'll spend in fiscal year '22 moving to later in fiscal year '23. We have also continued to make progress against our Investor Day commitment to support our strong balance sheet with a targeted net debt to adjusted EBITDA leverage ratio of 2.5x to 2.75x. We have reduced indebtedness by over $3.4 billion in fiscal year '21 and also recently refinanced $1.25 billion of our existing COVID bonds to extend our maturities and lower our interest rates. Earlier this fiscal year, we were upgraded by S&P in recognition of our balance sheet progress. Due to the impact of Omicron on our short-term EBITDA, we now expect to hit this target during fiscal 2023. Finally, we committed at Investor Day that we would continue our efforts to return capital to shareholders. In May 2021, we raised our dividend for the 52nd year in a row. We remain committed to growing our dividend and value our status as a dividend aristocrat. At the same time, we also announced the Board authorization of a new $5 billion share repurchase. While we did not provide timing of when on share repurchase in May, we have subsequently recommenced our share repurchase program during our second quarter, buying back $416 million of shares on a stated fiscal year '22 commitment of up to $500 million of repurchase during the year. This was in addition to paying our quarterly dividend. While our track record goes back decades, over the last 7 years, cumulatively, we have returned nearly $13 billion of cash to shareholders. We will remain disciplined with our balanced approach to capital allocation and rewarding our shareholders. We believe in our transformational initiatives and in our progress since last year. Now let me turn it back to Kevin for closing remarks.

Thank you, Neil and Aaron. Let me conclude with a summary of a few key points that we believe makes Sysco a compelling investment. Sysco already is the industry leader from an EBITDA margin perspective. We run a very efficient company, from purchasing cost of goods sold to supply chain efficiency. We are now taking that robust foundation in creating a growth company. We have a tremendous growth opportunity at Sysco, generating substantial top line momentum and an acceleration of market share gains. We are focused on lowering our costs and continuing to transform Sysco, further solidifying our position as the industry leader. We believe that this work to make us more efficient and capable will create significant shareholder value. Our Recipe for Growth transformation is creating capabilities at Sysco that will help us profitably grow for the long term and further build on our competitive advantages. Sysco's strength of income statement and balance sheet have enabled us to continue advancing our strategy during a very difficult operating environment. We have also been able to reward our long-term shareholders with disciplined dividend growth and share repurchases. Lastly, we are committed to both our long-term financial outlook, which includes significant sales and EPS growth and returning value to shareholders along the way. There are bright days ahead for Sysco, and I'm very proud to be a part of the journey. Thank you for joining us today.