Sysco Q3 2024 Earnings Call Transcript

Okay, good morning Alex, it's Kevin. That's a good question and a loaded question, so I'm going to try to unpack it to a couple of points. Just start with the headline, which is traffic to restaurants down year-over-year in the quarter, starting with that tough January start and sequentially improving throughout the quarter. It's important to note that traffic is what drives distributor case volume shipments, not the same-store sales that they post in their revenues. Traffic is the more important of metrics for us. Sysco did gain share in total versus the fruit away from home sector in aggregate in the quarter. But the volume was less than what we anticipated in the actions that we took in spoke about, and we're pleased that we delivered our profit expectations for the quarter in spite of those overall market conditions.

Now what we're seeing in the aggregate data tied to what your second part of your question was performance divergence by type of restaurant operator. It's more based on income strata than restaurant type. We have customers that serve restaurant highest white table cloth all the way down to QSR, our hardest hit sector right now, is QSR. You can look at our Sigma volumes. Our Sigma volumes were down roughly 3.5% for the quarter, which is an indication of that point. And those that are succeeding are those that either have a differentiated value prop and/or a great product offering and/or a digital app that's rewarding loyalty and great operators can be successful regardless of environmental conditions as evidenced by the quarter that we just posted an overall softer environment, but yet we were able to deliver our profit expectations and take share profitably during the quarter.

What we're specifically doing about is we're working hard to lower food costs to restaurants. So they can, in fact, lower menu prices. I do want to be clear about that. I believe restaurants need to lower menu prices. It starts with our negotiations with our suppliers. We need to work hard to create value by lowering cost inbound to Sysco and then share pass on those savings to our end consumers, and we're fully prepared to do that and to execute that with efficiency, number one. Number two, is we can provide Sysco brand offering at an even more extensive level. We did make progress in local case penetration with Sysco brand. And we think we can accelerate that. We're doing a new packaging overhaul. We're doing a brand tier brand hierarchy overhaul that work takes time, but we're bullish on Sysco brand, especially within the local segment.

And as I said in my prepared remarks, my last comment, I will toss to Kenny for any comments he'd like to make on April. We can provide our customers with value-added solutions with our specialty protein business, with our specialty produce business. We can do a lot of the back office cutting, preparing, staging our product delivered to the restaurant, which takes the labor out of the kitchen. Because while food costs have moderated, labor costs at restaurants have not moderated. And we're seeing upticks from our customers ordering what we call value-added services products, which tend to come at a higher margin for Sysco. So it's good for our P&L, but it really helps the restaurant take labor costs out of their model. So Kenny, I'll toss to you for any comment on April.

Sure. Thanks, Kevin. Hi Alex, this is Kenny. The growth rates from March is carrying into April. So if you take a step back, and bifurcate Q3 performance. As Kevin noted, January was negative growth, mostly driven by weather. February and March were positive with sequential improvement. So that growth from March is carrying into April. As Kevin mentioned in his prepared remarks, we have initiatives in place to improve volume and we have cost levers in place as well to further enhance profit margins. As a company, we are confident we can operate in any environment as we've proven in Q3 and this year as we had this inflation deflation to inflationary, which is what we're seeing at the spot moment. So overall, with the softer macro backdrop, we are still confident with our guidance.

Yeah Alex, good question. The primary focus is in local because it's where the end restaurant operator sees even more value from Sysco, where we can provide them with tremendous value for their menu at a great quality, and we are very focused on making continued progress there. National is trickier. It's more complicated. As you know, large, large restaurant chains negotiate directly with suppliers for proprietary products that are on their menu that are unique to them. And then we provided distribution cold storage tri-temperature truck delivery on time and in full service for them. So it's a little bit different model. we can make progress on national. It will be a slower going, and you won't see step change increases in penetration in national for the reasons that I just described.

With that said, we have a trained management function, which Kenny helps supervise we can provide options to those large national customers to really use to have choice. You have your vendor direct program that you can negotiate. This is a program Sysco can offer you that's comparable or better and we work to provide that penetration opportunities. So we can make progress on national. The bigger focus is on the local customer.

I think one thing to add on that piece is, as Kevin said, we will make further progress. I think it's important to call out that we are continuing to improve profitability by leveraging strategic sourcing on both Sysco private label and non-Sysco brands, which is one of the reasons Alex there has been [Indecipherable] leverage from sales to gross profit.

In Victoria, our Chief Merchant is going to talk about the Sysco brand evolution at our Investor Day on May 22. Let's -- Alex, thank you for the questions. Let's go to our next question please. Thank you.

Yeah John, I appreciate the question. Let's start with you. I did today for the first time, actually sized the prize from a headcount growth perspective in fiscal '24. To be crystal clear for everyone who's listening out to a net number. So there's, of course, churn that occurs within that population, and this is a net increase in our headcount by year-end of 400. We're on track to be able to hit that target. It's the start, John, what will be a continued forward progress on hiring. Today, I'm not going to disclosed the hiring target for fiscal '25. But again, that's something that we can talk about at our Investor Day, and we do intend to talk about at our Investor Day. For Q4 and frankly, for all of fiscal 2024, this is an investment as in below water investment. I mean the expense is greater than the revenue and profit that they're contributing but we are confident, and that will continue in Q4. It's an investment in Q4. They will positively impact our fiscal 2025 financial outcomes with a positive return on investment. And again, we'll talk more about the impact of that and how it contributes to our sales growth targets at our Investor Day.

Yes, it's a really good question. I'll unpack the first part second part. First part listen, we, in my respect, trust our customers, and I want to be clear, they are running their business to the best of their abilities. But what we are seeing, John, as we are, in fact, providing more value year-over-year to end restaurant operators, and we're not seeing that show up on menu prices. That's the main point. And I believe that menu prices need to come down for foot traffic to grow. And I believe restaurant operators are going to become more aware of that reality as time progresses because they're -- as you know, benefiting from those menu price increases at this point in time. To be fair to the restaurant operator, their overall operating costs have gone up. Their labor costs are up significantly over the last three years. And some of that menu price taking has been necessary to offset that wage increase, especially in a state like California. So you understand how dynamic that is and they're making the best choices for their individual business P&L. What we need to focus on at Sysco is what we can control. What we can control is the price we pay for the product that we purchase and the prices that we offer that product to our customers so that we can provide value to them, so they will choose Sysco and choose us at an increased rate over time because value does matter meaningfully in this environmental condition.

Which segues to the second part of your question, which is price elasticity. We've gotten much better at this over the last few years tied to our strategic pricing software. It is very robust. We know at the customer level elasticity at the item level and we price accordingly. John, what we're seeing just from some color perspective, and this will not shock you restaurant operators need for really sharp prices on their key commodities is intense right now. So tremendous focus, let's call it, their top 10 items, and we need to be right on price on those top 10 items. And it's intense out there right now, the need for restaurant operators to lower their costs for those highest volume SKUs. So we need to be sharp there. We need to be sharp and we need to be right on price on those items. That means relative to the market competitive. And what that means is there's a long tail of product. And the long-tail product is more inelastic, and we will never take advantage, but we have an opportunity to be a little higher in price, perhaps on some of those inelastic SKUs to fund sharper prices in the commodity space. And that's something that we're working on. That's something that we leverage our technology to deploy. But the thing that we need to get better at from a pricing perspective is the ability to react in the moment at that individual customer level. If we have a competitor in the account who wants to win business from our customer, we need to enable our sales reps to make timely decisions to respond in the moment and that's something we're working to improve upon, and I'm confident we can improve in that regard.

Thank you John.

Mark, I think it starts with the restaurant operator. The restaurant operator is looking for value right now because of their P&L, the labor cost point that I mentioned. So we're seeing increased activity of what I'll call price shopping. The goodness of digital penetration also creates an environment where it's easier for an end restaurant customer to be able to shop for price. So we moved our digital order placement from 35% to over 80% over the last couple of years. And that is an in aggregate terrific thing for Sysco. They buy more, they buy categories they've never shopped from before. We can provide them personalized offers. We can provide them personalized pricing. The competitors have ordering websites, too. And it's easier now for customer to be able to rate shop across distributors, and they need to because of their labor costs that I mentioned. So it's less activity from our competitive set. It's more customer driven. We've seen an increase in price shopping. I'm sure that's very clear very straightforward to you.

And then specifically, as I mentioned in the answer to John's question on commodities. So it's an aggressive market right now from a commodities perspective. If you're not right on price, you'll lose that business, and we need to be appropriately priced in that regard. And that's something given our purchasing scale, we at Sysco can drive the best possible purchasing cost, and we can be credible in relevant from a price perspective to our customers in that regard. You mentioned upfront monies [Phonetic] in your question. I want to be clear, there's upfront monies are not a bad thing. Upfront monies, if they enable you to secure a large customer win for a dedicated period of time with minimum volume guarantees. Our finance team underwrites every single one of those deals. I approved personally the bigger deals. Those are good deals. So I don't want you to infer that increase in upfront money is actually a bad thing. They tend to be a good thing. And we have not, to answer your question specifically, seeing an increase in that activity in the marketplace.

Mark, back to you if you have a follow-up.

Yes. So in terms of M&A, what we're doing at Sysco is a couple of things, right? So number one, we are focused very hard on the integration. By the way, the Edward Don integration is underway and the synergies are being realized on both from a go-to-market standpoint as well as from a back office purchase standpoint. So right now, our priority is to focus on integrating and realizing synergies that we have in our portfolio today. In terms of the backdrop and how we think about M&A and from a more of a macro standpoint, we have a robust pipeline. We have extremely robust ex right now. Given the lens of ROIC, we will keep a close eye out for accretive opportunities. But the flat moment, as I mentioned, we are focused on integrating and realizing synergies. As we expect these M&A opportunities that we have in our portfolio will be enterprise accretive from a multiple standpoint.

Thanks Mark.

Okay. I'll take the first part. This is Kenny. So just to clarify, there is no deceleration into April. The growth rate from March is carrying into April. So just to be very clear, we're not seeing a deceleration in the market right now. It's similar to the ex of velocity of Q3. And with that said, as Kevin mentioned, we do have action in place to stimulate volume growth further in subsequent periods. Kevin, back to you.

Yeah, and I think the second part of your question is outside of local, what else do you see going on. We've had a tremendous amount of success in our corporate national CMU business over the last few years, and we continue to win net new business profitably. In national sales, including new customer wins signed in the quarter, Q3, that began shipping at the end of Q4 and into fiscal 2025. And one other call out is our Sigma business, which I mentioned earlier, down $3.5 million in the most recent quarter. We're now lapping week 53 of a customer exit from a year ago. That was an unprofitable customer that wasn't willing to partner with Sysco to a fair an appropriate margin profile, and we exited that business we are now lapping that, which will positively impact Sigma's growth rates in Q4, and we've signed some net new profitable business in Sigma, which will contribute positively to Sigma in Q4 and into 2025 as well.

Sorry on Sigma, one piece to add is Sigma is down on a sales basis, however, year-to-date the profit margins are up 20% year-on-year. So we've done a nice job really focusing hard on supply chain productivity. And once volume comes in, as Kevin talked about, the new deals we are signing at inking that should flow nicely down to the bottom line.

Yeah, I don't think we're going to get into a specific commentary about Easter. There's movable holidays. Easter is one of them. I think it can move six weeks in any calendar year. Kenny's commentary was much more macro than that just one event -- it was in Q3. There was a notable step up from a very tough January into more positive February. February stepped up more positive into March, and we're seeing the trend of that improvement continue. And we have to take further actions in Q4 to drive a step up from Q3, and we're prepared to do that through the things that I talked about on today's call. We're confident -- we're focusing our sales reps on the new customer acquisitions in Q4 that we can improve our market share capture. And to be clear, we took profitable market share. We grew profitably versus the market in Q3, and we believe we can step up that performance in Q4, and we're focused on doing so.

Thank you.

Good morning. It's Kevin. I'll start. Yeah, Q3, from a volume and traffic to restaurant perspective was a softer macro than we had anticipated. It was negative for the industry, food away-from-home in total, volume of cases by the food distributor network in aggregate was negative in the quarter and that's not what we would have anticipated for the quarter. So the tone that you heard is tied to that fact based, the overall macro in Q3 was softer than we had anticipated. So that means we need to take share in order to be able to grow at the rate that we desire to grow at. And the good news is we can do that. We can do that by focusing on net new customer prospecting. We can do that by further penetrating our specialty businesses, which have a large opportunity to grow prospective market share. And we have teams really focused in that regard. I think we'll defer a comment on fiscal '25 until our May Investor Day. But we are confident in our ability to deliver against the guidance for the year. And for that, Kenny, I'll toss you to comment on Ed's question about the guidance range for the year and for the fourth quarter.

Hi it's Kenny. So based on our current expectation and with three quarters under our belt, we are more confident at the midpoint of our guidance range. And why is that? Three reasons. One is our confidence is guided by data. We partner with third parties, suppliers, institutions, and we have a lot of data. We have a lot of volume running through our shop each and every day. That's point number one. Number two, what gives me confidence in our guidance is the fact that we have a ton of dynamic levers in our P&L. As you can see in Q3, our GP grew faster than expenses and faster than sales, which means that you can leverage on both the GP line as well as the operating expense line. We talked about a lot of levers in the GP. You have strategic sourcing. You have Sysco brand penetrated within local, you have centralized pricing tool, you also have growth from our specialty business, which we saw this quarter. So GP leverage that we see. And then we're also very excited with the fact that we increased our structural SG&A cost takeout from $100 million to $120 million. And the good news is, as the market normalizes as volume materializes, that volume will flow down nicely and accretively down to the bottom line. And as these costs are structural and they will not be back in.

And just to add one, we try not to do three part answers. But as we think about where else can sources of value come from as we go from '24 to '25 there's more to be gained with supply chain productivity. We're not done. There's still gas in the tank on productivity improvement. We're really pleased with our performance in supply chain in March. It was the best performance in years, and we're seeing that carry into Q4, and that can and will carry into 2025. So supply chain productivity will continue to be a beneficial contribution going forward. And then local case growth. We can accelerate local case growth relative to our total company case growth and that's something we're very focused on for fiscal '25, and we'll talk about how we're going to do that at Investor Day.

Thank you Ed.

Yeah, Kelly, it's a good question. I appreciate the question. We tend not to get into conversations with our customers about the prices they should charge their end consumers. I was just making an observation on what we see in the data, just [Indecipherable] based traffic down for the quarter, cases shipped in aggregate by the food-away-from-home industry down year-over-year for the quarter and sales up at restaurants. So it's just pure math. The only way that those dynamics could be true at the same time is for menu prices to be up significantly on a year-over-year basis. And research indicates, we do a lot of consumer research that consumers are getting fatigued with the increases in menu prices. But it's not for us to tell our end customers what to do with how they run their business. What's on us is what we can control. We can provide them value. We can provide them value with Sysco brand. We can provide them value by smaller portion sizes. We can provide the value by doing value-added cut services to take labor out of their kitchen. And that's what we focus on. We tend to focus on what we can control and help be a solution-oriented company for our customers.

So the second part of your question about California, it's too soon to tell. I mean the largest passed we are not seeing a negative impact to our business in California to discretely and specifically answer that part of your question. I think what -- what I've read and what I'm sure you've read is new door count openings will be muted in the state versus historical 10-year average tied to concerns that -- these are more -- these are national chain operators. As you know, the law does not impact mom-and-pops. It's a national chain law. And you've seen those companies announce that they're going to reduce the number of new door openings. We're seeing plenty of growth in other states. The South, in particular, they're seeing lots of new door starts in the South and a lot of population moving from California, frankly, to other states and smart restaurant operators tend to follow the puck where it's going and focus their new door growth elsewhere. Kelly, back to you if you have a follow-up.

Yeah, I think the notable cause that I provided today is that QSR in our book of business is soft versus the others, and I point you to the Sigma data that we shared today to give that illustration we are not seeing meaningful trade down within concepts to lower cost proteins as an example. That's something actually we think is appropriate and should occur, and it's something that we can do and we can help our customers do that so that they can, in fact, provide value to the customer who's coming into that restaurant. And that's something our sales force, the largest in the industry, works with customers on. We work with them on portion size. We work with them, alternative proteins. We work with them to provide alternative Sysco brand cuttings, as I mentioned earlier, that can help them save money. So we're not seeing a trade down within restaurant concepts. It's more about that lower-income consumer being pinched right now, and that's showing up in the sales results.

Hey Jeff, it's Kenny. I'll take that one. So first thing is first, and you called it. We are very proud of our leadership team, taking proactive actions given the softer macro backdrop. And the good news is we have a lot of levers in our P&L. In particular, to your question around the $120 million of cost out, let me give a bit more color. As I mentioned, last quarter, it was roughly $100 million. That's increased by $20 million to the $120 million for FY '24. If you double click on the P&L, Jeff, if you look at GSV or corporate operating expense, that was $220 million for Q3, and that was down 6% year-on-year. If you look at it quarter-over-quarter between Q2 to Q3, it was down 8%. So the cost is coming out of the P&L. And you are correct. That does include most recent 500 elimination of positions, which is predominantly on the corporate side. So that is correct. We did not impact client facing roles in our US FS business.

In terms of outer [Phonetic] periods, what are some of the areas of opportunities. There's more room to go. As a company, we continue to have a pipeline of initiatives and savings. I'll give you a couple of examples, but just put color on it. last quarter, meaning Q3, we rolled out the full implementation of Canada Sure Service Center under [Indecipherable] and that has yielded accretive savings for our company. And if you think about just pure SG&A, yes, part of its head count, but we have a big bucket. That's what I call third-party indirect sourcing, and we are making good strides on that one as well, be vendor consolidation and rate reduction as well. So there's still a lot of room to go. As Kevin mentioned earlier, on the supply chain side. We saw a record level of productivity this quarter. With that said, we are not back in '19 levels yet, and we still have room to go on that front as well in terms of P&L accretion from a cost standpoint.

Yeah Jeff, this is Kevin, I'll add two things to that. Sales force, we're investing in our sales force. And we're investing in specialty, as Kenny said in his prepared remarks, within supply chain operations, we will flex our staffing to the volume. So if the volume declines, we flex staff accordingly. But we're not talking about things like furlough and drivers. I mean the business is robust and it's healthy. It's growing. It's nothing like what we were continuing back in COVID. It's more about, over time, flex it down. It's about part-time labor flex it down, and we're getting very good at flexing our supply chain labor to macro volume. And in fact, that's why March was as strong as it was.

I think your main point is the strong gets stronger when times are tougher. And yes, that is the case. And if you look at the time of COVID. We performed extremely well versus the industry at large, top and bottom line versus the industry during that period of time, and I think that would continue in a softer macro environment. I tend to focus more on the vectors of growth where we are meaningfully focused is in specialty. We have the most robust specialty offering by far in the industry coast-to-coast. It is unmatched by anyone in the industry. And our market share in specialty is well below our US broadline market share. So we have the product offering. We have the geographic coverage, the market share growth opportunity in specialty is substantial, and we're making investments in specialty to be able to bring that market share capture to life. The net 400 sales professionals that I talked about today includes increases in specialty protein and specialty produce sales experts we are going to talk in more detail about the opportunities in specialty at our Investor Day at the end of May.

Thank you Jeff.

That's correct. Your math is correct.

Center of plate is what drives the purchase ticket in any restaurant. So we're focused on is providing value, good, better, best options, alternative proteins, portion size, center plate is what drives any restaurants purchasing cost. And then commodities is the place that a customer will go to help save themselves money and they'll price shop distributor A versus B. So we need to be, as I said here today, right on price on commodities. And we can do so intelligently by leveraging our pricing tool, purchasing those commodities that rates that are industry leading. And it's a basket of goods they buy from us. And as John Heinbockel asked about it, managing the elasticity across that book and nobody is better positioned to be able to do that work than Sysco.

Thank you.