The operator welcomes everyone to Sysco's Third Quarter Fiscal Year 2024 Conference Call and introduces Kevin Kim, Vice President of Investor Relations. Kevin Kim then introduces the speakers, Kevin Hourican (President and CEO) and Kenny Cheung (CFO). He reminds listeners that statements made during the call are forward-looking and may differ from actual results. He also mentions the availability of SEC filings and non-GAAP financial measures. He requests that participants limit their questions to one and one follow-up. Kevin Hourican then begins the presentation.

During the third quarter, a Sysco truck was involved in an accident on a bridge in Louisville, Kentucky. The Louisville Fire Department heroically rescued a Sysco colleague from the truck, and the company is grateful for their efforts. Moving on to business matters, restaurant foot traffic has been down year-over-year, with a slow start in January and some improvement in February and March. However, this still posed a challenge for distributor case volume growth, and the company had expected a stronger recovery throughout the quarter.

The paragraph discusses how restaurant menu prices have impacted foot traffic and the steps Sysco is taking to help their customers improve affordability. Despite a decline in the food-away-from-home industry, Sysco saw positive enterprise sales growth and case growth, leading to a profitable market share increase. The company also increased adjusted operating income and EPS for the quarter. They are focused on improving their local case growth and making progress in that area.

The company's profit growth for the quarter exceeded expectations and was above the S&P 500 average. The team took strong actions to manage expenses and deliver strong gross profit margins. The focus is now on local case growth and expense management. The company plans to hire 400 sales professionals and increase focus on prospecting new customers. The sales compensation model has received positive feedback.

In this paragraph, the speaker discusses the success and growth of Sysco's top performers and extended team, as well as the company's focus on total team selling. They also mention their confidence in their ability to grow their local business and their efforts to improve supply chain and expense management. The speaker highlights improvements in retention, productivity, and transportation metrics.

Sysco has made significant improvements in their supply chain, resulting in lower costs and higher customer satisfaction. They have also been successful in reducing their SG&A expenses and plan to continue managing expenses and investing in important areas. The International segment has been performing well and is expected to drive growth in both top and bottom line results. The company takes a long-term approach to business and prioritizes profitability and discipline.

The food-away-from-home trend is a growing industry, taking market share from the grocery channel for the past 20 years. This trend is also seen internationally, with Europe following a similar pattern but still behind in terms of penetration percentage. Sysco has a diverse range of customers and a strong leadership team, and despite softer traffic start to calendar 2024, they are confident in their strategic plan and committed to making progress in local case growth and operations efficiency. They will be hosting an Investor Day in New York City on May 22 to discuss their business strategy and financial goals for the next three years.

The quarter showed strong earnings growth despite a slow start in January. The team is focused on improving local case volume growth and has confidence in improving results for the remainder of FY2024 and into FY2025. Margins were managed well, with improvements in gross profit and lower operating costs. The company has raised their cost out target for FY2024 to over $120 million and plans to execute synergies from recent acquisitions. These actions resulted in positive leverage and sequential improvement in cost per piece throughout the quarter.

The company remains confident in their ability to manage expenses and achieve bottom line results despite the current macro environment. They have a balanced approach to capital allocation and have returned $753 million to shareholders through repurchases and dividends. The company's strong size and scale advantages, as well as operating discipline, have allowed them to gain market share and deliver strong bottom line results in the third quarter. Enterprise sales grew 2.7%, driven by growth in U.S. Foodservice and International segments. Inflation rates were in line with historical averages, which is positive for the industry. The company expects to see consistent local volume performance in the future, with the addition of Don positively impacting volumes in the U.S. Foodservice segment.

In the third quarter, the company saw an increase in gross profit and gross margin, driven by effective management of product costs and strategic sourcing efforts. Operating expenses were also reduced through retention and productivity improvements, as well as cost-cutting measures. The company expects to generate over $120 million in savings by FY2024 and has already taken actions to reduce expenses and fund growth areas. The International segment also showed strong growth, with adjusted operating income increasing by 63.4%. Overall, adjusted EBITDA for the quarter was $977 million, an 8.5% increase. The company's balance sheet remains strong.

The company ended the quarter with a 2.81x net debt leverage ratio and $11.6 billion in net debt. They have strong liquidity and a well-laddered debt structure. They generated $1.4 billion in operating cash flow and $864 million in free cash flow, with a planned increase in cash taxes. They returned $753 million to shareholders and are reiterating their adjusted EPS guidance for the year. They expect net sales to be approximately $79 billion and plan to return over $2.25 billion to shareholders. They also anticipate a higher tax rate in FY2025 due to global minimum tax rate changes.

The paragraph announces that interest expense will increase in FY2024 to fund capital allocation priorities, but the company will maintain its leverage ratio. The company plans to balance and discipline its investments, maintain its strong balance sheet, and continue to generate cash and grow profitably. The CEO invites investors to attend the company's Investor Day and announces that he will now serve as both Chair of the Board and CEO due to the previous Chair's resignation for health reasons.

The speaker thanks Ed Shirley for his impact and leadership during his eight years on the Board of Sysco. They worked together to develop a growth strategy and navigate the challenges of COVID. Ed's guidance and experience were invaluable, and he will be greatly missed. The speaker then opens up for questions and the first one asks about the demand environment in the industry and if there has been any change in early April, with some operators finding success while others struggle.

Kevin Hourican, CEO of Sysco, was asked about the impact of the pandemic on the company's performance and its opportunities for gaining market share. He noted that while total traffic to restaurants was down, Sysco did gain share in the food-away-from-home sector. However, the volume was less than expected, and the company's hardest hit sector was quick-service restaurants. Hourican also mentioned that the performance divergence was more based on income strata rather than restaurant type.

Sysco is succeeding due to its differentiated value prop, great product offering, and digital app that rewards loyalty. It is also working to lower food costs for restaurants and provide value-added solutions, such as specialty protein and produce, to help with labor costs. The company is also focusing on expanding its Sysco brand offerings and improving its packaging and brand hierarchy. Despite a softer environment, Sysco was able to meet profit expectations and gain share.

In paragraph 16, Kevin and Kenny discuss the positive impact of their initiatives on the company's P&L and labor costs. They mention that the growth rate from March is carrying into April and that the company is confident in their ability to operate in any environment. They also discuss the opportunity for growth in private label products, with a primary focus on local markets and a more complicated landscape for national chains.

The company is implementing a new distribution model to improve national penetration. The focus is on local customers, but progress is also being made with national customers. The company is also leveraging strategic sourcing to improve profitability. A Chief Merchant will discuss the Sysco brand evolution at an upcoming Investor Day. The sales force is expected to grow by 5%, but it is uncertain if this growth rate is sustainable. It is believed that this growth will mainly come from new accounts rather than existing growth.

The speaker responds to a question about the company's hiring targets and investments. They confirm a net increase of 400 employees by the end of fiscal 2024 and mention that they will discuss hiring targets for fiscal 2025 at an upcoming Investor Day. They also mention that the current investments will have a positive return on investment in fiscal 2025 and will contribute to sales growth targets. In response to a follow-up question about affordability and elasticity, the speaker expresses confidence in their customers' ability to pass on cost reductions and states that they trust and respect their customers' business decisions.

Sysco, a foodservice company, is providing more value to restaurant operators each year without increasing menu prices. However, they believe that menu prices need to come down for traffic to grow. Restaurant operators are facing higher operating costs, especially in terms of labor, and have had to increase menu prices to offset these costs. Sysco focuses on controlling the prices they pay for products and offering competitive prices to their customers. They have improved their pricing strategies through strategic pricing software and are aware of the intense need for restaurant operators to lower costs for their top 10 items. As a result, Sysco is working to provide sharp prices for these high volume items.

The speaker discusses the need for Sysco to be competitive with pricing in the market, especially for items with less elasticity. They mention using technology to improve pricing and the importance of being able to react quickly to competitors' pricing strategies. The questioner asks about the overall pricing environment for distributors, and the speaker notes that restaurant operators are looking for value and there is increased price shopping due to digital order placement.

Sysco has noticed changes in customer behavior, with customers buying more and exploring new categories. This has led to increased competition and the need for personalized offers and pricing. The company has also seen an increase in upfront monies, which are not necessarily a bad thing if they help secure large customer wins. As for M&A, Sysco is focused on consolidation and is keeping an eye out for opportunities in the market.

The company is currently focused on integrating and realizing synergies from recent acquisitions. They have a strong pipeline for potential future acquisitions but are prioritizing integration at the moment. There was no deceleration in April and the growth rate from March is carrying over. Non-local case growth has accelerated, potentially driven by builders, and there is no expected deceleration in the next couple of quarters.

The speaker clarifies that there is no slowdown in the market and that their sales are similar to the previous quarter. They have plans in place to increase volume growth in the future. The company has had success in their corporate national CMU business and has signed new profitable deals. They also mention that their SYGMA business has improved in terms of profitability and they have signed new deals that will positively impact their growth in the future. They do not provide specific commentary on the impact of Easter on their business.

Kenny and Kevin discussed the recent macro trends in the restaurant industry and their company's performance in Q3. They noted a notable step up in positive performance from January to March, and are confident that they can continue to improve their market share in Q4. However, there is still some uncertainty in the current backdrop and they have a wide range for their Q4 guidance. They are making adjustments to drive growth and are considering the impact on next year's performance.

The speaker discusses the company's performance in the third quarter, which was softer than expected. They plan to take action by focusing on gaining new customers and expanding their specialty businesses. They are confident in their ability to meet their guidance for the year. The CFO adds that they are more confident in the mid-point of their guidance range due to data and the company's ability to leverage their P&L. He also mentions various levers for growth and cost reduction.

The speaker, Kevin Hourican, shares some good news about the market normalizing and volume increasing, which will positively impact the bottom line. He also mentions the potential for further value to be gained from supply chain productivity and local case growth in the future. In response to a question about restaurant menu prices, Hourican notes that they do not discuss this with their customers, but he has observed a decrease in traffic and suggests that restaurants may need to lower their prices. He also mentions the impact of California's recent wage dynamics on the industry.

The paragraph discusses the impact of menu prices on the food-away-from-home industry and how Sysco is addressing this issue. It also mentions the potential effects of a new law in California on the company's business.

The speaker discusses the company's cost savings and how they were able to increase it by $20 million quickly after seeing sales decline. They mention that 500 roles were eliminated and there is no customer impact. The speaker also talks about the potential for future cost savings in the supply chain if sales continue to be challenging.

Kenny Cheung, a member of the company's leadership team, discusses the potential cost savings for the upcoming year if sales challenges continue. He mentions that the company has many levers in their P&L and has already implemented cost-saving measures, resulting in a $120 million reduction in expenses. He also mentions ongoing initiatives and opportunities for further cost savings, such as the implementation of a new service center in Canada and improvements in supply chain productivity.

The company is not yet back to 2019 levels and has room for improvement in terms of P&L accretion from a cost standpoint. They are investing in their salesforce and flexing their staffing to match volume. The company has a 17% market share and is focused on taking further share from the other 60% of the foodservice distribution industry. The company has performed well during COVID and is expected to continue to do so in a softer macro environment.

The company is focused on growth in the specialty sector, which has a strong product offering and geographic coverage. They plan to increase their market share in this area through investments and hiring new sales professionals. The impact of Edward Don on their organic case growth was a decrease of 1.2%. The company is also working on lowering menu prices, particularly for center plate items and commodities.

Sysco discusses their strategy for intelligent pricing by using their pricing tool to purchase industry-leading commodities. They also mention their ability to manage elasticity and their advantage in this area compared to others. The operator then concludes the question-and-answer session.

This summary was generated with AI and may contain some inaccuracies.