SYY
#Thank you, Bill, and good morning, everyone
As Bill mentioned, our associates are executing at a high level as we continue to deliver on the key strategic levers of our three-year plan: delivering accelerated case growth through a focus on local customers, growing gross profit dollars, and managing overall expenses
This morning, I'd like to discuss our segment results with a focus on U.S
Foodservice Operations and International Foodservice Operations
I will also highlight some of the key strategic initiatives of our U.S
business that are helping us to differentiate Sysco in the marketplace
Starting with our quarterly results for U.S
Foodservice Operations, sales grew 2.2% and gross profit had growth of 4%, while adjusted operating expenses grew 2.3%, resulting in adjusted operating income growth of 7%
Overall, our U.S
Foodservice segment had a strong quarter
We experienced strong growth in our local business as we accelerated case growth to 3.5%, which was partially offset by declines in case volume for our multi-unit business, resulting in 1.8% total case growth
Importantly, as we strive to deliver disciplined, profitable growth as a part of our three-year plan, our continued focus on providing value to our local customers through innovative product offerings and value-added services, along with improved e-commerce capabilities, has enabled our growth with these customers for the 12th quarter in a row
Looking at gross profit growth for U.S
Foodservice Operations, we delivered growth of 4% and gross margin expansion of 35 basis points as we continue to manage the deflationary environment well
As you all know, the industry has been in a deflationary environment for an unprecedented six consecutive quarters, and that trend is finally beginning to shift toward inflation
Meat prices are abating, and dairy and produce prices have begun to rise
Based on those changes, we are anticipating overall modest inflation in the fourth quarter
Our strategy around accelerating growth with local customers is working
Over the last several quarters, we've improved the capabilities of our sales force through investments made in training, technology, and targeted resources
And as a result, our marketing associates are spending more time selling and focusing on delivering benefits to our customers versus spending time on non-value-added activities
In addition, our insights-based approach to understanding and meeting our customers' needs continues to guide our efforts
As an example, one of the insights we've received from customers was around providing healthier product options
In response, we created a good-to-grow promotion during the third quarter that highlighted the large variety of fresh and healthy produce options available to our customers
Furthermore, we brought innovative products to market through our Cutting Edge Solutions program
This program introduces new product ideas to customers, which can help them reduce labor costs and/or improve the quality of their menu offering
These are just a few of the programs that have translated into improving loyalty scores for Sysco this past year
We are committed to delivering value to our customers while also providing a more consistent experience of doing business with us
From a cost perspective within U.S
Foodservice Operations, our expense management was solid as we limited growth to 2.3% on an adjusted basis for the quarter
Broadline, cost per case improved by approximately $0.02 compared to the prior year
And on a fuel price-neutral basis, cost per case improved by $0.01, ahead of our three-year plan objective
In our supply chain area, we are seeing positive momentum from our productivity initiatives and ongoing process improvements which are driving efficiencies
One example is our slotting initiative that's helping our warehouses to build pallets faster and more accurately
In the area of delivery, we are seeing progress in improved routing and delivery metrics through the leverage of enhanced technology
While there's still a lot more work to be done, we are seeing improved operating expense trends, and we are focused on continuing this performance throughout the balance of the fiscal year
Additionally, we are continuing to thoughtfully manage our administrative expenses through a more consistent approach that is improving our overall efficiency while maintaining service level to our customers
Looking at the overall performance for U.S
Foodservice Operations, I'm very pleased with our level of execution, which enables us to deliver solid operating income growth and improved operating margins by 34 basis points
Moving to International Foodservice Operations, sales were up $1.3 billion and adjusted operating income increased $6.6 million, both driven largely by our recent acquisition of the Brakes Group
During the quarter, Brakes performed well amidst a challenging environment in the U.K
and is continuing to make progress in their supply chain transformational efforts
Growth in France remains steady, and Sweden continues to produce favorable results
Additionally, we continue to see opportunities for growth across our European business
Lastly, although we are in the early days of integrating our Ireland businesses, things are progressing well, and we expect to achieve modest benefits from that integration
Looking to Canada, we are pleased with our performance despite the continued softness in Alberta which has been driven primarily by the energy market decline
Our Canadian business overall is leveraging the many learnings and successes of our U.S
-focused initiatives and is now implementing many of them
For example, we've introduced the category management and revenue management processes, and we are offering multi-channel ordering via online and telephony, as we provide our customers the ability to choose how they order from Sysco
These initiatives are a few examples of how we are enhancing our customers' experience, as we support the growth of our local business
In addition, we are effectively managing costs by streamlining administrative expenses to improve productivity
As a result, we expect the Canadian business to continue to deliver improving positive performance
Turning to Latin America, we are excited about new facilities in both Costa Rica and Panama
Specifically in Costa Rica, we have opened 180,000-square foot, state-of-the-art facility with a test kitchen and training facilities
This new space will enable new products and full product lines to be available to our customers, and we're excited about the accelerated growth potential those offerings will deliver
In summary, our customer and operational strategies are firmly aligned around improving our customers' experience, engaging our associates at the highest level to improve execution, and delivering our financial objectives as a part of our three-year plan
Now, I'd like to turn the call over to <UNK> <UNK> for further details
Hey, good morning, <UNK>
Thanks for the question
So, let's start with – I think we feel really good about the work we've continued to do in this segment
And if you think about where we said we'd be on our three-year plan, we're right where we've said we would be, which is around 2.5% local case growth
So, obviously, good quarter this quarter
And what I would say is I think over the three-year time, our goal was to continue to gain share in this space, and I feel like we continue to make progress there
But I think what I'd attribute it to is continued just execution of our strategy
If you think about these customers, we've been very focused on them
I think our value proposition is resonating with them
And I think based on that, we're seeing more and more customers support Sysco and partner with us
If you think about new business growth, we're also seeing some new business growth in this space
But overall, I would say it's really just more consistent continuation of the work we've been doing, and I think we're seeing the recognition of that effort with these customers
Okay, I'll start and then I'll toss it to <UNK> for some of the further discussion around the deflation and inflation
So, I think gross margin percentage, yes, it probably slowed a little bit versus where we've been, but I think still very strong
And I think you are starting to see a little bit of impact of that starting to move from deflation to inflation that could be impacting that
But just as a reminder, the areas we continue to talk about regarding gross margin improvement are the category management effort we've had for a few years now, continued improvement in Sysco Brands
So, you saw again additional growth in Sysco Brand with our local customers
Obviously, that shift of mix to higher local case growth versus corporate multi-unit is going to impact that as well
And then, obviously, now revenue management is kind of part of the way we operate day in and day out
So, I think those are all key drivers, what continues even as we start to see a little bit of slowing of the deflationary environment start to happen
Why don't I toss it to <UNK>? He can talk a little bit about some of the categories that are starting to shift a bit
You heard me talk a little bit about it and then maybe just idea of gross margin dollars versus just gross margin percent
Good morning, <UNK>
So, I assume when you say capacity, you're just talking about overall warehouse capacity?
And so, I would say we are fine in that regard
You heard me talk kind of over the quarters about different efforts we're talking where we may have some capacity constraints to get more capacity out of our facilities and more throughput, and a lot of those initiatives in our supply chain area have been working very well
So, we're going to continue to focus on those where we have challenges
But we think we feel very comfortable at this point about our ability to not only handle our existing customers but continue to grow this business within our current footprint
Well, you heard me talk over the first couple quarters about some of the challenges we've had in the SYGMA business
And some of that had to do with some of the operational aspects of the business specific to certain customers, and also the deflationary environment we've seen
So, I think as you start to see some of that deflation slowing as we talk, there's some benefit we're seeing there
And we continue to focus on improving our operational effectiveness
I'd say that those are probably the two biggest drivers of the kind of shift in our performance, although I would say while we feel better about the quarter, we still feel like we have a lot of opportunity in the SYGMA side of the business
This is Tom
Yeah, I'd say, <UNK>, that we're – again, we're talking about mild numbers at this point, and as <UNK> said earlier, this industry historically, I think, operates pretty well at these kind of lower inflation levels
So, we're not seeing anything that would concern us right now about our ability to pass along those prices
I mean, in the category like produce, when you get some of the weather issues they had in California earlier this year, you'll get some spikes in certain areas that have to be kind of managed closely
But generally speaking, we feel fine about how it's affecting the business right now
Chris, I think the only thing I'd really add was more – and some of that caution might have also been around the corporate multi-unit because at the time, we had been slowing in that area
We obviously rely heavily on how each of those concepts themselves perform
And so, I think that's always something that we are thoughtful about as we go into any quarter
So, I don't think there's much else to add to what Bill said
I think we feel really good about where we're at, and I feel like we've got good momentum which is important going forward
Hey, <UNK>, good morning
So, look, I think – let me say a couple things
One, I'd say, we definitely feel like we are improving our level of penetration with our customers, which is selling more to our existing customers
To give you a number on what percentage, I think that's probably a bit of a stretch and
But I think we feel like we are continuing to further penetrate and gain our share of wallet with those customers
And we obviously are growing new customers and adding customers to the portfolio as well
So, I think we have a good balance of both of those working, and I think we feel really comfortable with where that's at
As far as where that's coming from, it comes from a lot of different places
It's hard to, again, peg, is it just in the specialty area? I think we continue to perform well in the specialty areas
But I also would say that the broadline business is really doing very well
And a lot of what you see is the sheer size of our broadline business especially in the U.S
That's where a lot of the growth is going to come from, is from more within our existing customers and certainly picking up some new business from other broadline competitors
Yeah, I don't think I have really that much to add
I think Bill answered that pretty well
The only thing I'd go back to, we've said earlier around the local, is we feel like we're very focused on improving our share wallet with our existing customers, and we're seeing good momentum there
And then, sure, we're always looking at new business opportunities in that space
But I would say it's not anything unique or different this quarter than what we've been doing
I think we just feel like we've got good momentum, and we're continuing to execute our plan accordingly
<UNK> J
<UNK> - Credit Suisse Securities (USA) LLC Okay
And then, just one quick follow-up
And we're kind of beating a dead horse a little bit here, but it's probably worth it
As you think about inflation and deflation and your goal to drive gross profit dollar growth, a couple hundred basis points faster than SG&A, you would rather have an inflationary backdrop than a deflationary backdrop in order to achieve that, number one
And then, number two, sounds like you'd encourage us to really think more about, as we analyze you as a company, more about how you're achieving that gap and how you're growing gross profit dollars over really what your gross margin is doing in any given quarter
I think the only thing I'd add – this is Tom – is that the minimum wage changes you might see around that Bill referenced that certainly impacted some of our customers, don't really impact us much because we're generally well above the minimum wage with all of our employees
I think the only thing I'd add is just keep in mind, I mean, we are still in a deflationary point with meat
And again, a couple of the other categories
Again, we talk about dairy, produce, some of those, to <UNK>'s point earlier, tend to be more volatile in general
So, again, I still think we're certainly in a decent place there
And again, certainly a modest inflation level is something we feel good about in this industry
Yeah, just keep in mind, I think everyone knows this because you're probably ahead of me on your modeling, but Brakes is a higher gross profit, higher expense business
So, when you get into a quarter where you have this seasonality, which is even more pronounced than our seasonality, that's going to accentuate that even more
But that's really why we break it out the way we do
We're actually quite pleased with how we manage the expenses from the core business, if you will, to Brakes to the corporate office
So, I would say right now, we're feeling good about the expenses
We need to keep growing the gross profit, keep that spread, to <UNK>'s point
But that is totally consistent with what we talk about
We talk about that and the customer mix, and we talk about profitable
In this business, what we mean with profitable is to keep that spread there
So, overall, we feel fine on the expenses
This is Tom
You might have to help a little bit with – so, you talk about gross profit per case which we don't really talk about
Are you talking about gross margin and the slowing of the gross margin percent improvement?
I don't really see anything unique or different from what we've been talking about
I think it's obviously the mix of our business continues to drive some of the change
That's certainly, as we talked about, on the gross margin percentage also lapping
We're year-over-year now lapping growth rate upon growth rate from a gross margin percentage perspective
But I guess the last thing I'd say is we feel very good about our 4% gross profit growth in the U.S
, and I think relative to the overall case growth that we're seeing, which was slightly below 2% for that same gross profit growth
So, I think we feel very good about where we're at
<UNK>, if you have anything to add (01:02:13)
So, I'd say, just back on the market share
So, we obviously are very focused on continuing to grow our share across the business
I think, as you know, there are lots of competitors out there
So, to isolate in one area or another is really hard to do, given we compete with so many different types of folks, literally market by market
So, I would just say that we continue to be focused on delivering the right value proposition for those customers, which includes all the things that I've been talking about
So, I won't reiterate all of those
One, in particular, that you did ask about was where we're at on the technology rollout, and we continue to feel really positive about that
We're now seeing across our local customers around 25% of those customers ordering via our online applications
So, we feel really good about the progress we're making, and we continue to feel like that's going to be an area that we'll continue to see growth
But we also – I want to remind everyone that our approach and our strategy around this is to do this in a way that supports whatever our customers are looking for, meaning giving them choice
Whether that's through online or that's through the marketing associate or through some other way of ordering with us
But we feel great about the progress we continue to make and think it's a combination of all those things that are helping us continue to gain momentum
I guess, let me start with – we don't communicate the actual numbers on our corporately managed growth
But you know roughly from our prior conversations, we're around 50/50 on our local versus CMU business
And so, we talked about our local and U.S
Broadline being up 3.5%, and our total of 1.8%
So, you can surmise from there
I missed kind of the second part of that, I think it had to do with the inflation-deflation
So, I don't think – I mean, we've talked about, it remains highly competitive out there
I don't think that the inflation or deflationary environment necessarily affects or changes that competitive nature and who we're competing with
We all deal with some of those impacts as an industry
And obviously, all of us have our way of dealing with those
