Sysco Corp (SYY) — Q3 2020 Earnings Call Transcript

Good morning, everyone, and welcome to Sysco’s third quarter fiscal 2020 earnings call. On today’s call, we have Kevin Hourican, our President and Chief Executive Officer; and Joel Grade, our Chief Financial Officer. Before we begin, please note that statements made during this presentation that state the Company’s or management‘s intentions, beliefs, expectations or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act, and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the Company’s SEC filings. This includes, but is not limited to, risk factors contained in our Annual Report on Form 10-K for the year ended June 29, 2019, subsequent SEC filings, and in the news release issued earlier this morning. A copy of these materials can be found in the Investors section at sysco.com or via Sysco’s IR app. Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures are included at the end of the presentation slides and can also be found in the Investors section of our website. To ensure that we have sufficient time to answer all questions, we would like to ask each participant to limit their time today to one question and one follow-up. At this time, I’d like to turn the call over to our President and Chief Executive Officer, Kevin Hourican.

Thank you, Neil, and good morning, everyone. And we thank you for joining our third quarter fiscal 2020 earnings call. I hope that you and your families are staying safe and healthy during this time. As the business world manages through this rapidly changing operating environment, our first priority as leaders and as a company will be the health and wellbeing of our associates, our customers, and our shareholders. Our prepared remarks today will be longer than normal due to the amount of content that we want to share with you. During this morning’s call, I’ll spend time discussing Sysco’s rapid response to the COVID-19 crisis and how we are positioning the Company for long-term success. It is extraordinarily important that we as leaders manage simultaneously for the short-term and also for the long-term success of Sysco. My comments today will inform you on both of these time horizons. I’ll then turn it over to Joel, who’ll discuss Sysco’s third quarter results and provide further financial updates. Lastly, I’ll make a few closing remarks before we complete the Q&A section of the agenda. As I begin my remarks, let me assure you, we have the financial ability to weather this storm for as long as it takes. We entered the COVID-19 crisis with an extremely strong balance sheet, and we have taken important steps to further strengthen our cash position, helping to ensure our liquidity during the crisis and enabling our ability to emerge stronger than ever. In response to the current environment, we have identified four key areas of focus. First, we have taken swift action to further strengthen our overall liquidity. As I mentioned, we entered this crisis in a strong position and we have strengthened our liquidity to provide us with additional flexibility. We have built more than $6 billion of cash and available liquidity that allows for not only financial flexibility and survivability during this crisis, but will enable us to capitalize on an unprecedented competitive opportunity. I am confident that Sysco has the financial ability to invest in inventory and also service levels upon the return of customer demand to foodservice. There will be profitable market share gains to be had as this crisis unfolds, and Sysco will have the investment capability to profitably win new customers. Second, we are focused on stabilizing the business by removing costs from the system. Towards the end of March, our business declined significantly from the moment the shelter-in-place orders were issued. It is a good thing that we are practicing social distancing as a society. The shelter-in-place orders are helping to flatten the curve. With that said, social distancing orders have had a significant impact on the restaurant, hospitality, and education customer segments that we serve. As a result, we needed to quickly reduce our expenses in order to match the lower level of business volume. Our leadership team has taken swift action to reduce costs during this downturn. In the fourth quarter of fiscal 2020 alone, we have removed more than $500 million of expenses from the business, which includes the difficult decision to reduce our staffing levels by approximately 33% through temporary workforce furloughs and permanent reductions in force. Additionally, we have substantially reduced miles driven by rerouting our transportation fleet and implementing productivity improvements in our operating companies. We will leverage technology improvements to implement those structural changes without compromising service or quality. This is one example of how we will be a leaner, more agile, and stronger version of Sysco, post COVID-19. The benefits of these changes will begin to be realized in Q4 of fiscal 2020 and the permanent changes will deliver an annualized benefit of approximately $300 million. In the fourth quarter of fiscal 2020, the expense reductions, while significant, will be more than offset by the top-line sales volume decreases that we are experiencing. Additionally, we have reduced capital expenditures to only business-critical transformational projects. Physical projects like building expansions and fleet purchases have been put on hold. Our CapEx investments will focus on those things that will improve Sysco’s capabilities and will allow us to win market share in the future. By focusing on a narrower set of strategic initiatives, we will accelerate the pace of change at Sysco, and we will complete key projects more rapidly than previously planned. Examples of these efforts include improving the capability of our Shop platform, which is our customer ordering tool, increasing the effectiveness of our sales force selling tool, and implementing a pricing tool that will improve management of margin for the long term and increase the percentage of time that our sales force can spend on consultative selling versus administrative tasks. Combined, these capabilities will enable our sales team to visit more customers, inspire our customers to purchase more from Sysco, and simultaneously reduce friction in the purchasing environment. These investments in digital technology will allow us to improve the effectiveness of our sales force and increase their efficiency. As a more streamlined company, we will garner more business from our existing customers. An example of this improvement would be the development of a suggested order for our ongoing customers. These orders will include basic items they buy weekly, but we’ll also introduce customers to new items, popular trends, and even deals of the week. These offers will be personalized to the individual customer. The intersection between personalized, relevant offers and Sysco’s vast purchasing scale creates a capability that is unmatched in the marketplace. We will better leverage our scale advantages that we are now developing and we are now developing differentiating customer-centricity capabilities. Third, we are working diligently to leverage the upside that exists during this crisis by capturing new business opportunities and pivoting our support of current and new customers. Sysco serves a broad spectrum of the foodservice industry. Prior to the COVID-19 pandemic, roughly half of food consumption within the U.S. took place away-from-home, and the other half took place inside the home. COVID-19 has obviously tilted that balance and shifted more purchases to the retail grocery channel. As a result, we have pivoted our distribution model to include retail, grocer, and new supply chain partnerships, sectors that we essentially did not serve pre-COVID. We are working with some of the best retail companies in the world in an agile manner to meet the rapidly evolving needs of our customers and communities through both supply chain and labor service partnerships. Over the past several weeks, Sysco has shifted sales of products to regional and national retailers to help alleviate strain in the food supply chain due to a surge in demand at retail stores and shifts within the economy. A brief highlight of some of these wins. We are partnering with the government agencies across the global regions we service to provide much-needed food to communities in need. In the UK, we are shipping more than 200,000 meal kits per week on behalf of DEFRA, the UK’s version of the USDA. In the U.S., we are working with FEMA and the USDA to provide fresh food for those in need through outreach to food insecure communities, and as recently as May 1st, we submitted our bid to participate in the Coronavirus Food Assistance Program. We would like to thank the various government authorities for their support of these communities in need and also the farmers that we partner with in the food supply chain. Sysco has become a supplier of products to retail grocers. We have shipped hundreds of truckloads of protein, fresh product, and bulk consumables to select retail partners. We expect the majority of this work to be transitory in nature with the potential for select partnerships to have staying power. We have increased our level of support to our healthcare customers. Our healthcare segment sales have increased roughly 15% to 20% as we continue to arrange for deliveries of critical products, including PPE to hospitals, urgent care facilities, and long-term care facilities. We are delivering in a safe manner for our associates and those healthcare customers. We are proud to support these frontline healthcare workers and we salute their dedication to better health. On the logistics side, Sysco is now offering supply chain service contracts such as carrier services, cross-docking, and freight brokerage. Over 50 contracts have been signed with national and regional companies to provide third-party logistic services through the use of Sysco’s vast transportation fleet and logistics capabilities. And lastly, Sysco has entered into labor-sharing agreements with select retailers to provide temporary work opportunities for our furloughed Sysco associates. This action is providing work for our team members and enables Sysco to call them back as soon as volume returns. Our highly skilled labor is providing much needed assistance to retail. Furthermore, I’m pleased to announce that we have filled our important Chief Supply Chain Officer position from the last time we spoke. On April 6th, we welcomed Marie Robinson to Sysco. Marie brings decades of substantial logistics experience to our team from a diverse set of industries in which she has worked. She has managed complex apparel distribution networks, international supply chains, and has direct experience in the food sector. I have full confidence that she will work collaboratively with the rest of our leadership team and will be a tremendous addition to Sysco. Many of our longer-term strategic initiatives will be led by our supply chain department as we transform how Sysco goes to market. It is important to note that while the retail and logistics opportunities are significant and show our ability to quickly adapt to the rapidly evolving environment, these opportunities do not offset our volume declines in the food-away-from-home space. This good work shows our agility, to fight, if you will, within our culture, and we are proud to serve new partners during a downturn in our core business. The part of driving our upside efforts that I am most excited about is the work within our core business to help our restaurant customers be successful. Make no mistake, food-away-from-home is struggling right now with substantial volume decreases to prior year. At risk are the hundreds of thousands of small business customers we serve. At Sysco, we take our leadership position in the food distribution industry very seriously. And now, more than ever before, we are doing everything possible to help our customers. I am proud of the steps that we are taking to serve both new and existing restaurant customers during this difficult time. Sysco is delivering more products and solutions, including Sysco Knows Fresh, an expansive product assortment that includes fresh meats and seafood, produce, dairy, and refrigerated specialty items. We are 100% open for business across all lines of business, especially during these challenging times. We want our customers to know they can count on Sysco to help them succeed with innovative food and product offerings. We developed a COVID-19 selling bundle and leveraged our Shop platform to introduce it to all of our customers. We call it our Focus-15 COVID Package, which features a combination of cleaning products, takeout containers, paper goods, and PPE. These bundled solutions are quickly delivering critical goods that our customers need to maintain seamless business operations. By keeping our customers in stock with these essentials, we are helping enable their business to pivot to takeout and delivery and helping them keep their kitchens safe and clean. We remain in stock on these crucial products. We have been assisting thousands of customers with website development for takeout and delivery solutions throughout the outbreak of COVID-19. Many of our smaller partners do not have these capabilities in-house. Sysco’s helped provide tools, tips, and solutions to develop the digital platforms that drive customer engagement and increased traffic, while also helping provide ancillary services such as home delivery, menu design, to-go containers, and other considerations during this unique environment. We are offering training webinars and educational programs to help our customers navigate the CARES Act and supporting small businesses to help them retain their employees during this pandemic. In under 48 hours, we built a training webinar to help these small customers apply for loans and taught them what the funds are able to be used for in running their business. Our sales team actively invited our customers to join us for these important training sessions. It is a great example of how Sysco is delivering solutions, not just food-related products. Actions like this will ensure steadfast partnerships with our customers long into the future. In less than two weeks, we have helped thousands of restaurants create product marketplaces or grocerants or pop-up shops, lots of names for it, which includes transforming dining areas into pop-up shops where customers can shop for essential pantry items like eggs, condiments, bread, toilet paper, and paper towels. These additional product sales are not only helping communities, but they’re also helping the restaurant industry increase traffic and protect jobs. We are pleased to see that our volume to restaurant customers has been improving sequentially week-over-week since it hit the low mark at the end of March. At Sysco, we are helping our customers stay in business, run their business, and transform their business. We know that these activities will help us retain and win additional business from them well beyond the pandemic. In addition to helping our restaurant customers, Sysco has started rolling out direct-to-consumer sales in areas of business that we did not participate in pre-COVID. Our Buckhead Meat and FreshPoint companies have held several pop-up events which sell specialty meat and produce direct to consumers. Furthermore, through Sysco’s new websites onthefly.com within the U.S. and Sysco@HOME in Canada, consumers can purchase restaurant-quality steaks to be delivered direct to their home. We have started offering will-call opportunities from our physical locations through web-enabled ordering. If a customer prefers, they can purchase products directly from one of our operating companies and pick up the products themselves. And lastly, within the consumer space, we have partnered with third-party logistics services to offer pre-packaged meal boxes featuring a box of specialty produce delivered straight to the customer’s front door. We are learning a lot in these direct-to-consumer initial concepts and we are leveraging these learning opportunities to better serve our customers and keep the food supply chain running. Because, simply put, the food supply chain in this country does not work without Sysco. Finally, I would like to talk about what we’re doing as a leadership team to ensure Sysco’s success post-COVID-19. We refer to this work internally as our snapback planning. The snapback planning includes the following key items: Integrated supply chain planning with our customers and our key suppliers to ensure that inventory levels will match the business recovery. Our strong relationships with key suppliers will enable Sysco to stay in stock for our customers during the recovery period and also as we win net new customers. We are also accelerating key strategic initiatives. An example of this work is the transformation of our go-to-market sales structure. We are transforming our sales structure to be more focused, aligning the incentives of the sales force more closely with our business objectives and increasing the partnership of our sales teams across our multiple lines of business. Sysco stands ready as the distribution provider that has properly positioned for food-away-from-home, once the demand returns. We have a strong balance sheet that will allow us to invest when others will not have the same level of strength. When our customers begin to reopen their restaurants, Sysco will have more than enough liquidity to rapidly replenish its inventory to meet the rising demand, to ensure that deliveries are made on time and in full capacity, and to capitalize on the upside by winning new business. In fact, share opportunities are already emerging as SYGMA won a substantial piece of new business as the incumbent distributor confronted economic challenges. Currently, our sales team is doubling down on their customer focus. We are focused on a combination of both better serving our customers and prospecting new ones. We are 100% confident there will be profitable new customers to be served as the crisis creates new opportunities to gain profitable share. We are also confident that demand for food-away-from-home will return over time, and we stand ready to enable that return of demand as we continue to be our customers’ most valued business partner. Sysco will win in the marketplace through a combination of strong liquidity, agile business decisions, and value-added partnerships that fuel business relationships. We expect that the combination of winning more business from our existing customers through the trust and partnership we have cultivated during COVID-19, paired with the prospecting of net new customers, will increase Sysco’s market share within the 300-plus billion dollar food-away-from-home sector post-COVID. We believe that the capability improvements that we are accelerating during this crisis, coupled with the financial strains of our company will enable our success for the long term. Now, I’ll turn it over to Joel who would discuss our third quarter results along with additional financial details around our business environment.

Thank you, Kevin. Good morning, everyone. I’ll start with third quarter results for Sysco and results by segment, followed by an overview of current segment performance. I’ll then give an update on cash flow and capital spend for the quarter. Finally, I will go through the impact of COVID-19 on the P&L, working capital, and a detailed discussion about what we’re seeing in the business. Our total Sysco results for the third quarter include a sales decrease of 6.5% to $13.7 billion. Gross profit decreased 6.9% to $2.6 billion, and gross margin decreased 7 basis points. Throughout the last couple of weeks of the third quarter, we saw a significant decline in both volume and sales across all the business segments as a result of the COVID-19 pandemic. We will give further color on that in a few minutes. Adjusted operating expense increased 2.5% to $2.2 billion. It is important to note that while our aggressive cost reduction initiatives were implemented at the onset of the pandemic, there’s a timing delay for the removal of the expenses. We expect savings from the cost reduction measures to be realized in the fourth quarter and into fiscal 2021. Also of note, corporate expenses for the third quarter were impacted by several discrete items such as liability claims, expenses associated with the recent senior leadership change, and the pull-forward of certain investments as mentioned last quarter. Adjusted operating income decreased 39.2% to $377 million, and adjusted earnings per share decreased 43% to $0.45 for total Sysco. Within the U.S. Foodservice Operations segment, sales for the third quarter were $9.6 billion, which was a decrease of 5.1% versus the prior year period. Local case volume within U.S. Broadline operations decreased 4.1%, while total case volume decreased 5.2%. We did see growth in our sales of Sysco brand products in the third quarter, which increased 37 basis points to 47% of local U.S. cases and 81 basis points to 38% of total U.S. cases. However, gross profit decreased 5.7% to $1.9 billion for the quarter, and gross margin declined 11 basis points to 19.8%. Our adjusted operating expenses increased 1.4% to $1.3 billion, and adjusted operating income decreased 17.1% to $637 million. Our International Foodservice Operations were modestly impacted by changes in foreign exchange rates. On a constant currency basis, sales decreased 7.8%, gross profit decreased 10%, gross margin decreased 50 basis points, adjusted operating expenses decreased 0.5%, and adjusted operating income decreased 93.5%. Prior to the impact of the pandemic for the third quarter, the UK business remained stable. Our Sweden and Ireland businesses performed well, and our work around integration efforts in France is progressing. We remain convinced that Europe will be a platform for long-term growth for Sysco in the years ahead. Both Canada and Latin America improved performance for the third quarter as well, as a result of steady investments to support customer growth in both these geographies. In our SYGMA segment, we continued to see steady progress of profitability improvement as a result of the disciplined approach to profitable growth. Cash flow from operations was $1.1 billion for the first 39 weeks of fiscal 2020. Net CapEx for the first 39 weeks was $591 million or about 1.3% of sales. Free cash flow for the first 39 weeks of fiscal 2020 was $488 million, which was $511 million lower than the same period last year. The decline in free cash flow was principally the result of the COVID-19 pandemic as well as a combination of software accounts receivable, initially higher inventory from the steep volume decline, and the timing impacts of fleet additions, as we have discussed in prior quarters. I will now transition to the COVID-19 pandemic impact on the business, followed by details about liquidity, working capital, and capital allocation. The exit rate of the third quarter saw a significant decline in volume, sales, and gross profit across all of the business segments as a result of the pandemic. For total Sysco, our sales were down approximately 60% during the last two weeks of the quarter. In U.S. Foodservice Operations, sales were down approximately 60% as well, SYGMA was down approximately 50%, and International was down 70%. It should be noted that our sales decline may be higher when compared to our peer group as a result of our over-indexing in local and independent restaurant customers. However, we are glad to say that recent trends have shown about a 15 percentage-point increase from the end of March. We have seen a sequential weekly improvement that shows further momentum and upward trajectory. Combined with certain states opening in-restaurant dining, we expect additional improvement throughout the month of May. Our SYGMA business had less of an impact on sales and volume as quick-service restaurants experienced less of a downturn compared to other restaurant types. In addition, we recently won a new piece of business valued at more than $500 million, which is a good example of us taking share in the industry. We were able to onboard the customer within 7 days, which shows both our financial stability and supply chain expertise to provide fast, in-stock service. The impact of sales was steeper in Europe. Our business is down as countries have issued stay-at-home orders sooner and restaurant foot traffic decreased as a result. As Kevin mentioned earlier, we are diligently working to leverage the upside by capturing new business opportunities and pivoting our efforts to provide support to our communities that we serve. Those efforts have improved sales trends, particularly in the UK during the DEFRA program, which, similar to the U.S., has also seen a sales trajectory improvement over the past several weeks. In Canada, restaurant sales performed similarly to the U.S. as consumers are practicing isolation measures to protect the health and safety of one another. We are pursuing different avenues of revenue that we normally might not have tapped into, such as redirecting the significant amounts of inventory to retail outlets and supplying indigenous communities with critical food needs. This has contributed to the trend of improving sales most recently. As to our business in Latin America, the impact of COVID-19 has been most prominent in Mexico where volumes decreased rapidly. In Costa Rica, our cash and carry stores are helping supplement the decrease in sales from restaurants. However, Costa Rica has also allowed for the soft reopen of restaurants, which along with increased sales to retail and other supporting sales to the government has led to recent year-over-year increases in sales. Now that we have covered the COVID impact to volumes, I will move to commentary about expenses. As a reminder, roughly two-thirds of our operating expenses are variable, and we have been swift with our cost reduction initiatives. As Kevin mentioned earlier, the timing of those reductions, which total more than $500 million in the fourth quarter alone, will be more fully realized throughout the remainder of fiscal 2020 and into fiscal 2021. These expense reductions not only temporarily adjusted expenses for volume but also accelerated opportunities to make permanent structural reductions to our business. The permanent changes will deliver an annualized benefit of approximately $300 million. However, to be clear, the cost reductions will not fully cover the significant impact of the crisis. On that note, to summarize from a P&L perspective, as it relates to Q4, there will be negative operating income as a result of the crisis. However, based on recent improving trends and certain states reopening, we feel that Q4 is the operating income trough. Now, let’s talk about some of the liquidity impacts to the business from the COVID-19 pandemic. As it relates to working capital, we expect our collections to remain soft through the remainder of the fiscal year. However, we have done extensive modeling for various scenarios of impact, and our current collections are ahead of those expected cash flows. We feel good about the progress we’ve made, given the current situation. Nonetheless, we have booked an additional reserve to reflect estimated exposure subsequent to the third quarter of $153 million, which we classified as a certain item. On the accounts payable front, we’ve been continuously working to increase standard payment terms with our suppliers and are seeing good progress with that initiative. Our leadership position in the industry allows us to have these deeper and strategic partnerships as suppliers are willing to partner with us on extensions due to the size of our relationship and our financial strength. For inventories, we’ve taken appropriate steps to quickly flex our inventory levels to align with volume trends. While we have experienced some elevated levels of food spoilage, a combination of our transition to retail business and product donation has alleviated some of the impact. Our ample liquidity will allow us to adequately replenish inventory levels once consumer and customer demand returns. While we navigate this unique food environment, we continue to review our capital allocation priorities as we take decisive actions to manage our costs, capital spend, and working capital. I will now revisit our four priorities. As previously mentioned, we have chosen to substantially reduce capital expenditures to only urgent projects and those targeted investments to accelerate certain capabilities to make it easier for customers to do business with Sysco and to continue our focus on industry-leading service and safety. CapEx spend was in line with the prior year for the third quarter. But, we expect spend to be more than $200 million below fourth quarter fiscal 2019, as a result of these efforts. Regarding our dividend, we remain committed to return substantial value to our shareholders through our dividend payments. If needed, we would evaluate this approach each quarter moving forward. As it relates to M&A, we continue to reevaluate potential future opportunities but should not have a high priority on large complex deals in this environment, particularly any large international deals. As previously noted in March, we have temporarily paused our share repurchase program. And as it relates to debt, we recently completed a $4 billion debt offering. We intend to use the net proceeds from the offering to repay commercial paper borrowings, to repay outstanding senior notes due in October, and for other needs as warranted, including ensuring that our business is well-positioned for the return of demand to food-away-from-home. As part of our efforts to continue strengthening our liquidity position, another important update is that we are nearing completion of our efforts to address the EBITDA to interest expense ratio covenant in our revolving credit facility to help ensure our ongoing compliance with our debt covenant, even in circumstances where COVID-19 pandemic impacts continue beyond our current expectations. We anticipate completing these efforts and disclosing our resolution in the very near term. In addition, we are launching a $600 million sterling commercial paper offering in the UK to take action to support the liquidity needs of our European operations. Sysco’s strong balance sheet has afforded us the stability and flexibility to navigate this unprecedented and rapidly-changing business environment. More importantly, it provides confidence in our ability to achieve continued success and growth over the long term. As of May 5, 2020, we have more than $6 billion of cash and available liquidity. While we do not expect to immediately deploy the majority of the capital proceeds, we view it as prudent to ensure we have access to available liquidity given the near-term uncertainties. We have not asked and we do not intend to ask for government bailout money or government financial assistance. Sysco was in a strong financial position prior to the COVID-19 pandemic and will weather this storm to emerge an even stronger company.

Hey. Good morning, guys. Kevin, just quickly, looking at the International business and the performance in the quarter there. I appreciate some of the country-specific color. But, if we just kind of bundled everything up together, can you give us some perspective on where sales trends are performing relative to U.S. in recent weeks? And in light of material decline in profitability, can you remind us of how varied the cost structure is internationally versus U.S.?

Thank you for the question, Chris. I’ll address the first part and then hand it over to Joel to discuss the cost structure in Europe compared to the U.S. There are some differences, primarily because we own our assets and equipment in the United States while we lease some overseas. In terms of performance, Europe has been impacted more severely than other regions, partly because it experienced the downturn earlier and had steeper declines. As Joel mentioned, we were down about 60% at our lowest point, but we are seeing a global recovery week-over-week, with a 15% increase from the trough. However, Europe faced its declines sooner and has been recovering more slowly. A significant factor is that Europe has fewer drive-thrus compared to the U.S. The quick-service segment, which has been performing best, relies heavily on drive-thrus. In Europe, many small restaurants have temporarily closed and are not offering pickup or delivery as robustly as in the U.S. We believe that the European business will recover; it’s just a matter of timing. Some countries have strict social distancing measures, with Ireland being an example, as it had strong performance before COVID and currently has strict restrictions. The positive news is that we now have visibility into the reopening plans for each country. In Ireland, for instance, we expect to see restrictions easing in June, which should lead to improved business trends, indicating that the worst is behind us. Now, I'll let Joel address the expense side of your question.

Yes. Thanks, Kevin. Yes, Chris. I think the way to think about that, as Kevin mentioned in the beginning of his comments, that the expense structure in Europe is slightly different than we have throughout the rest of the organization in a sense that the assets that we have for most of the Company are owned, and much higher percentage of those in Europe is leased. And so, this idea of the ability to flex variable, obviously, as we’ve done across the remainder of the business, the European business has aggressively done that type of work at both from a headcount reduction as well as productivity. However, they do still have lease agreements. Again, work’s been done there to renegotiate the terms on some of those, and again, a lot of work there. But just to be clear, that expense structure is slightly different. And therefore, you’re going to see some of the increased impact there relative to here. The other thing I would remind you is that Europe has been a bit ahead of the curve in the U.S. in terms of the timing of when the stay-at-home requirements happened. And so, again, they’ve been a little bit further on and a little bit deeper into that than we are here.

Okay. That’s helpful. And then, Joel, on the write-down of about $153 million, a little over 100 or so of that is U.S. related. I know you can’t speak to what competition has done, but I guess I’m just curious that, call it, $107 million or so in the U.S. relative to your size, it is quite a bit different than let’s just say U.S. Foods whom has a notably higher write-down to-date. So, I guess, just how comfortable are you guys with respect to that $107 million domestically? And is there any additional color you can offer with respect to how you approach that?

Yes, thank you. I would like to highlight a few things. The $153 million represents our estimate of what we know has occurred between the end of the quarter and the earnings report. It's essentially a projection and not a complete reflection of future impacts, but it's our best current estimate. We do expect ongoing challenges in that area as we move into the fourth quarter. However, I want to emphasize some key points regarding our progress. First, we have made significant strides in our collection efforts and, as I mentioned earlier, we are ahead of schedule compared to our initial modeling. Second, we’ve improved our tools and have engaged our sales force substantially to enhance our collections, including introducing incentives for the sales team specific to collections. Despite the challenges we face, we feel positive about our proactive approach to collections. Lastly, we have supported certain customers with payment plans, deferrals, and shorter terms for new receivables to help them through their difficulties. While we are optimistic about the current situation, I want to clarify that we still have exposure to bad debt. Overall, our combination of efforts in collections so far has yielded positive results.

Okay. I’ll leave it there. Good luck in Q4, guys.

Thank you.

Hi. Good morning, guys. Thanks for taking my question. Thanks for all the color around business trends and kind of the trough, and the sequential acceleration. I was just hoping you could maybe unpack for us a bit, kind of chain versus independent trends. Clearly, the independents are probably going to get going a little bit slower than chains did. And potentially, are you seeing some independent closing slow the trajectory of that recovery? And then, additionally, does that last week of April benefit from an Easter compared to the point where that might look a little better?

Hi, Judah. It’s Kevin. I’ll start with the macro trends and then Joel can back cleanup on anything that I missed. We talked about geographic differences in the business in Chris’s question on this one. I think, you have a pretty good insight as to what’s happening in the business. So, as I mentioned, the quick-serve restaurants are doing better than all others because of the drive-thru capability. The fine dining and smaller restaurants are struggling the most. What we saw throughout the month of April, not just the week of Easter that you’re referencing, was sequential week-over-week improvements. Two things were happening. Those customers of ours that were in fact doing takeout and delivery are getting better at it. As we mentioned in my prepared remarks, we’ve helped them with their websites. We’ve helped them with creating social media posts. In fact, we started a campaign called #Take Out to Give Back just to create a momentum around help that small business operator, creating awareness. We’ve seen an increase in those restaurants that were up and running throughout the entire crisis sequentially week-over-week and they are ordering more from us as a result. What we’ve also seen is each week in April, more of our customers were getting back into business. So, for some of them, at the very beginning of this social distancing, temporarily closed shop. We’re seeing about a 10% week-over-week increase in the number of unique customers that we are serving. So, to be clear, we still have many customers that are currently closed, but we’re seeing a 10% increase week-over-week. So, yes, there’s some uniqueness with Easter. We can though normalize for that and we can go back in time to know when Easter fell on that week, and we have in fact normalized for that. And we’re seeing, as I said, sequential week-over-week improvement. And in the month of May, we will accelerate further, as many states in the U.S. are beginning to open up Texas, the state we are in, on Friday May 1st, opened up, and we can see already an impact that is positive due to that. Canada, similarly is kind of following a similar speed and pace, and our Latin American business is actually slightly ahead of the United States in its recovery. As we mentioned, already, Europe is lagging. It entered earlier and it’s lagging from a come out the other side piece. And Joel, anything to add there?

No, other than to reemphasize, there was a sequential improvement, Judah. It was not just kind of a point A to point B or the 15%. We actually had an incremental sequential improvement over the course of the month. Other than that, I don’t know.

Okay. And, Kevin, maybe you could help us a bit with the profitable growth on the other side of this, right? We hear you sign a large SYGMA customer. QSR is doing better. Maybe just some incremental color on how you win profitable accounts, clearly there’s some cost being pulled out of the business, but kind of maintaining the margin structure, and does meat inflation make you at all nervous on the another side of this as well?

So, we’ll take that question in two parts. I’ll have Joel comment upon inflation, but let me take the profitable new business wins. The reason I say the word profitable each time I say new business wins is we want to be very clear, we have no intentions of going out and trying to buy the business. We are seeing rational pricing in the marketplace by ourselves and others in the space, and we have no intentions of buying the business. What we’re referring to is our capabilities that we are bringing. I’ll remind everybody that we have roughly 30% of the share of wallet of our existing customers. The work that we’re doing to help them through this crisis, we help lobby for the CARES Act, we help teach them how to apply for the loans, we help teaching them how to set up websites for takeout and delivery, we help providing them with PPE that helps them stay in business. These things create long-term win-win partnerships for them and for us. We expect for an increase in share of wallet from existing customers. The shop enhancements that I referred to, and hopefully we’re going to have an Investor Day at some point in time later this year, we can show you the improvements that we’re making to the shop tool to increase the effectiveness of the suggested order that we provide those existing customers, again, we know will result in increased share of wallet. What I was referring to on the net new business opportunity, I’ll do the local level first. We are changing the compensation structure for our local sales associates to align the incentives of those associates more directly to winning new business profitably, we’re also changing the go-to-market structure of how we organize that work, who does what, who calls our new customers, who comes in and sells an additional product, like our premium meat business, like our seafood and fresh-cut produce business. So, it’s an entire end to end campaign visa vis-à-vis new customer prospecting and it’s being rolled out as we speak. So, it’s an opportunity, when others are perhaps struggling to deal with this crisis, perhaps having financial challenges that will hinder their ability to acquire the inventory that they need to bring back their business, we will have the inventory in place, we will have the ability to ship on time and in full, and we will have the largest sales force in the industry actively prospecting new customers. Joel, I’ll ask if you have anything to add for inflation.

No, just a quick note on the meat situation. We do expect some inflationary effects on beef due to increased demand and supply shortages stemming from plant closures. I want to emphasize that we have a significant supply of frozen inventories, which will help us in this period. We have also maintained our status as the preferred supplier, benefiting from a highly diversified supplier base. Access to products has always been a strong point for us during supply shortages. Regarding inflation in general, there are many factors in play as we move through April. Although we discussed one inflation number, predicting future inflation remains complex with various categories involved. We’re not planning to make specific forecasts right now. However, it is clear that some inflationary pressure is anticipated on the meat side.

Okay. Thanks and good luck.

Thanks.

Thank you.

Hi, everyone. Good morning. Thank you for the insights. My first question is about the fourth quarter, Joel, regarding your guidance on negative operating income. Could you clarify what sales declines you are expecting in that forecast? It seems that April may be down more than 50%. You mentioned $500 million in cost savings, but when I run the numbers, it doesn't seem like operating expenses will decrease by that amount. Is there also additional gross margin pressure that we should consider, or any impact on profit per case?

Yes, Ed, thank you for the question and good morning. I would approach this by saying that your estimate for April is likely on target. As we mentioned earlier, we expect to see gradual improvements throughout the quarter due to current trends and the states' gradual reopening of their economies. Regarding margins, I believe they are impacted by a few factors. One is the business mix; the chain, particularly in the quick-service restaurant space, has performed better than local businesses, which will influence our mix. Additionally, we previously discounted some products to reduce inventory, which does not reflect irrational competition but rather an effort to sell through stock. Therefore, you should anticipate some ongoing margin pressure, which may not be fully factored into your model.

And then, just on the OpEx, Joel. The $500 million, that’s gross number or net number?

Well, so, in other words, what I would suggest is that you should think about the trends you’re anticipating, based on volume movement. We’ve given you kind of a two-thirds variable and fixed, et cetera, et cetera. And then, we’ve actually taken $500 million of expense out. So, I don’t know how to say it other than just to run your expense model and add back by $500 million.

Okay. I have a follow-up regarding the variable cost component and how things are currently affecting customers, who are not very open to spending, allowing us to set aside many costs. This situation might look different when we reopen and customers return, but it seems that order sizes are about half of what they used to be. How should we approach the next few quarters as we reopen? What will the cost ramp look like in relation to the reopenings and the variable cost component, and how will this change in that context?

I want to reiterate that we believe our expectations for Q4 represent the lowest point. This is a significant detail to highlight. Additionally, our cost-reduction efforts have included not just cutting personnel and variable costs, but also implementing substantial productivity improvements. We've reduced nearly 90% of our overtime hours and adjusted our routing accordingly. Our metric of pieces per trip has only decreased slightly relative to the actual volume drop, indicating that we are dispatching significantly fewer trucks. We’ve optimized our fleet's routing to be both fast and flexible. To summarize, we anticipate potential capacity limitations and possibly lower-than-normal drops for restaurants. However, we will remain adaptable, focusing on maximizing productivity and profitability as we move forward.

Couple of questions as well. First one, just in terms of the independent restaurant outlook. I know you mentioned in your prepared remarks that perhaps your sales are a little lower than peers because you kind of over-indexed towards those customers. I’m just wondering, as you think about their recovery, they’re getting lots of questions in terms of survival of a lot of these independents. It’s been difficult to use history as a guide because we just don’t have a period of time that’s even close to something like this. But, any thoughts you might have in terms of the potential for a significant independent store closures, whether or not you can look at maybe current accounts that aren’t returning calls or how you think about sizing up the independent restaurant outlook over the next 6 to 12 months on the heels of the pandemic? And then, I had a follow-up.

Yes. Jeff, I’ll be pretty concise on this first question, because obviously, we can’t with precision predict the question that you’re asking. What we would say are a couple of key components from a color perspective. For the longest term, we expect for that local street independent customer business to normalize and return back to its pre-COVID levels. People like eating at local restaurants, the whole farm to table, organic, local, et cetera was a big trend pre-COVID, and we would anticipate over time that it will revert back to that type of business penetration. And it’s the most profitable segment and one where we have significant upside potential from a market share perspective. And our sales force is uniquely positioned to do well in that space for the reasons I said earlier. As it relates to the second half of calendar 2020, and what will be the first half of our fiscal 2020, we’ll say it this way. From an expense management perspective, we will be planning for and preparing for the worst, and we will be driving hard to make it be better than that potential outcome scenario. So, that’s about as clear as I can be at this point in time on that color.

Okay. I want to thank everyone for your questions. And I’m sorry that our prepared remarks took longer than they normally do and therefore we didn’t get to as many questions as we would have liked. But we thought it was really important for us to provide you with the details that we did. And I would like to close with a final few thoughts before we end the call. I’d like to summarize the significant amount of content that we covered with you this morning. As Joel reviewed, the financial impact of COVID-19 on our business is significant in the short-term. With that said, we want to be very clear that we are very confident in the long-term success of Sysco. We will continue to be the leader in this business and we will win new business through this crisis. We will profitably gain market share in the businesses we serve today and we will closely evaluate new business opportunities that have been identified during this crisis. To summarize the actions we’ve taken. We’ve improved our liquidity, we’ve reduced our operating expenses, we are driving our upside by leveraging new business opportunities in the short-term, and most importantly, we are using the COVID-19 crisis to transform our Company. It is Rahm Emanuel who is most often cited with the quote, Don’t Let a Good Crisis Go to Waste. We have taken those words to heart at Sysco. The crisis has galvanized our team to focus on a narrow set of strategic initiatives, and we are working in an agile and collaborative manner in a way that is better than at any time in our proud Company’s history. This leadership focus will enable us to implement transformational initiatives, like the ones I highlighted today in rapid manner. This includes improving our Shop tool, implementing a new go-to-market sales structure, and selling model, and developing and implementing a world class pricing tool to better manage top-line growth and margin management. Each of these initiatives will help us become a more agile, focused company. It will enable us to serve our customers more effectively, which will result in increased market share. When you combine what we will become as a company with the amazing work our sales team has done during this crisis to help our customers, we know we will be our customers’ most trusted business partner. That trust will help increase share of wallet with them and grow our top-line and bottom line. I would like to thank all of our Sysco associates for their tireless efforts and the leadership they’re displaying during this crisis. Our associates inspire me every day. That concludes today’s call. And we thank you for joining us.