Sysco Corp (SYY) — Q3 2021 Earnings Call Transcript

Good morning, everyone, and welcome to Sysco's Third Quarter Fiscal 2021 Earnings Call. On today's call, we have Kevin Hourican, our President and Chief Executive Officer; and Aaron Alt, our Chief Financial Officer. Before we begin, please note that statements made during this presentation, which 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 27, 2020, 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. 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. As a reminder, we will be hosting Sysco's Investor Day on May 20. For today's call, Kevin will start by discussing Sysco's recent performance and will then provide an update on the business environment recovery. He will then turn it over to Aaron, who will discuss Sysco's third quarter financial results. Operator Instructions. At this time, I'd like to turn the call over to our President and Chief Executive Officer, Kevin Hourican.

Thank you, Neil. Good morning, everyone, and thank you for joining our call today. I hope that you and your families are staying safe and healthy. I would summarize our third quarter performance with four important points. First, our industry's COVID business recovery is here, and the pace of the recovery is accelerating, especially in our domestic U.S. business. Second, we are making excellent progress in our business transformation to better serve our customers and differentiate from our competition. Third, we are winning market share at the national and local customer level. Fourth, our financial results for the third quarter were strong in light of the market conditions, mostly due to improved sales and disciplined expense management. As we have previously communicated, we can see in our performance data that once restrictions placed upon our customers are eased, our business results quickly improve. We see tremendous pent-up demand in the food-away-from-home sector. Our data confirms that consumers are eager to eat at restaurants as soon as restrictions are reduced. Strong sales results and long wait times are common in restaurants operating within geographies that have limited restrictions. The third quarter can be aptly described as difficult at the beginning and robust at the end. Our January performance was negatively impacted by meaningfully tight restrictions on our customers during the winter COVID lockdown. In February, a substantial winter storm adversely affected our performance in our strongest domestic markets. In contrast, the March sales period exceeded our expectations and bodes well as a strong indicator for the business recovery within our sector. As a result, we exited the third quarter with promising sales trends. The improvement is most notable in the Southern third of the United States, where reduced restrictions and warmer weather are generating strong performance results. The results in reopened markets met, and then late in the quarter, surpassed 2019 levels in the important local independent restaurant sector. These results are a positive harbinger of things to come as the Northern regions begin to benefit from easing restrictions that are mostly still in place today. The independent restaurant sector exceeding 2019 sales levels in reopened markets is a positive outcome and a rebound timing that is faster than the industry had predicted. In Europe, however, restrictions remain firmly in place. Our European countries are experiencing restrictions even stronger than those experienced in the U.S. in April of 2020. Our sales results in Europe reflect those tight restrictions and remain down meaningfully compared to 2019 levels. We remain confident in our ability to succeed in the European markets and expect improvement to begin in the latter half of our fiscal fourth quarter. In addition to the softer European performance, our business in the travel, hospitality, and foodservice management sectors remains down. Our business penetration in Europe and in foodservice management pre-COVID is creating a lingering delay in the full recovery of our business results in comparison to select other distributors. We are confident that these sectors will recover, but their recovery will be at a slower pace than our core restaurant sector. As a result, when these geographies and segments more fully recover, it will add strength and sustainability to Sysco's recovery, giving us fuel to grow in quarters and years to come. All told, we delivered a sales decrease of 13.7% for the quarter. While sales were down compared to 2020, our results reflect an improvement over our second quarter decline of 23%, which is another clear signal that the industry is recovering. The most compelling outcome of the fiscal third quarter is that the local independent restaurant sector was performing well above our expectations as we exited the quarter, with many restaurant partners running sales increases compared to 2019. While our third quarter fiscal results were down compared to the prior year, I am pleased to report that we once again delivered a profitable quarter, delivering $437 million of adjusted EBITDA. Sysco was doing more than anyone in the foodservice distribution industry to ensure the success of restaurants and prepare for the return of foodservice demand, which can be seen in our overall market share growth throughout the quarter. Sysco gained overall market share versus the rest of the industry, reflecting the progress of our recent investments. Our sales teams are actively engaged with new customers and helping existing customers maximize their business during this recovery period. We continue to win business at the national and contract sales level. We have now posted over $1.8 billion of net new wins since the start of the pandemic with another strong quarter of new contracts signed. I've said on prior calls, the contracts we are writing are at historic profit margins. We are winning the new business due to our supply chain and our service capabilities. In addition to the national contract sales wins, we onboarded more new local customers than ever before during the third quarter. Fueled by our Restaurants Rising program and our new sales associate compensation model, our recent industry report confirmed that the number of local restaurants was down approximately 10% to 2019 levels due to permanent closures. The 10% closure is better than most experts had predicted for the industry. After posting the strongest quarter ever of new local customer wins at Sysco, you can see on Slide 6 that we are now serving 10% more local customers than we did in fiscal 2019. The fact that we have increased the number of customers that we serve during this pandemic bodes well for our future top line growth when the industry is fully recovered. Our increased customer count positions us well to take market share as the business returns to the food-away-from-home sector in our fiscal 2022 and beyond. As we discussed on our last call, we began making several strategic investments in preparation for the business recovery. These investments increased throughout the fiscal third quarter and will continue in our fourth quarter. We have focused our investments on our customers, our people, our inventory, our technology, and our community. These investments have helped position Sysco ahead of the curve for the return of foodservice demand. Our investments in our customers, including our Restaurants Rising campaign, make it easier for restaurants to succeed and strengthen their business for the future. During this uncertain business environment, we have made it easier for our customers to do business with Sysco by waiving delivery minimums on regularly scheduled delivery days. We are making investments in our people, including increasing our efforts to proactively staff in advance of the business recovery curve to ensure we have the right number of people in the right locations at the right time to be able to ship on time and in full to our customers. At Sysco, we expect to hire over 6,000 associates in the second half of our fiscal year. We have a full court press on hiring warehouse selectors and drivers. Throughout our industry, drivers are indeed in short supply, and hiring is a challenge. We are pulling every lever to ensure we meet our hiring targets. While this hiring investment will increase our operational expenses in the short term, over the long term, it will help ensure that Sysco is able to maximize our share gains during the business recovery. We are also making investments in inventory to properly position our warehouses to support customer demand. Currently, Sysco has inventory on hand and on order in a combined amount that is greater than our inventory position before the COVID crisis began. Our ability to ship product on time and in full during the upcoming period of volume recovery is a core element of what makes Sysco the strongest broadline distributor in the industry. Due to our strong balance sheet, we are uniquely positioned to be able to make investments in inventory to ensure we can accelerate growth faster than the overall recovery. We are seeing pressure and constraints in the supply chain as select suppliers struggle with meeting increased demand levels. This is known as the supply chain bullwhip effect as market conditions rebound. At Sysco, we have seen this constraint coming and have been partnering with our top suppliers for more than 90 days to pre-position inventory at our warehouses. We view this as an opportunity to grow our business and take additional market share. We are continuing our strategic investments in our technology to improve the customer experience. Our technology platform is being meaningfully improved so that we can better serve our customers. We're making it easier for our customers to order products through our Sysco Shop platform, and we are implementing a best-in-class pricing software. We will discuss both of these topics in detail at our Investor Day. Lastly, our corporate social responsibility initiatives in 2025 goals are progressing well. Our industry-leading CSR efforts are setting the standard for care and progress across three pillars: people, product, and planet. We are making great strides on this very important work, as evidenced by our recent announcement with Cargill, which is a critical partnership, along with the National Fish and Wildlife Foundation to improve sustainable grazing practices across 1 million acres of grassland. This effort helps to improve soil health, promote biodiversity and increase carbon storage and safeguard the livelihoods of ranchers and the communities in which we serve. This progress is also good for our business as our customers can buy Sysco product with confidence, knowing the environmental and social benefits we bring to their table. At Sysco, we are working to maximize our opportunity to recover faster than the industry. We have an opportunity to gain market share given our financial strength and our compelling business transformation. We are prepared to do more than any other food service distributor in the industry to ensure the success of our customers and our customers' success will generate business growth for Sysco. I would like to invite everyone to our May 20 Investor Day. At that important meeting, we will provide you with the details of our strategic growth plan and how that plan will deliver compelling financial results. Please plan to join us virtually on May 20, and we will provide you with the details and logistics. I want to give a heartfelt thanks to all of our Sysco associates who continue to help our customers grow and succeed in this challenging environment. I am proud of their dedication during this dynamic operating environment. I'll now turn the call over to Aaron Alt, who will discuss our third quarter results along with additional financial details. Aaron, over to you.

Thank you, Kevin, and good morning. Improving sales trends, a profitable quarter, and strong cash flow, those are our key headlines. Our fiscal third quarter presented us with the beginning of a restaurant recovery in the United States, countered by continued business disruption in the international and foodservice management parts of our portfolio. As a result, we balanced five financial priorities: tactical investments in inventory, team and equipment to get ahead of the business recovery; strategic investments in capabilities and technologies to advance the transformation; careful cost control to mitigate the impact of the COVID environment on our bottom line; purposeful reduction of our indebtedness; and of course, continued return of capital to shareholders through our dividend payments, totaling $689 million so far this fiscal year. As Kevin called out, we were delighted to see the improving sales trends and the progress on profit, and I will speak more on the income statement shortly. I would like to start today with an emphasis on the strong position we are in as we move up the recovery curve and how that strength is impacting our view of the cash flow and the balance sheet. Recall, at the end of the second quarter, we had $5.8 billion of cash. During the third quarter, we generated positive cash from operations of $543 million, offset by $83 million of net capital investment, leaving us with incremental positive free cash flow for the third quarter of $460 million. Working capital was a source of cash for us in the quarter even though we invested heavily in inventory. And as Kevin pointed out, we ended the third quarter with inventory on hand and inventory on order exceeding pre-COVID levels. And we benefited from a significant increase in payables at quarter end. We saw rising normal course receivables balances as our customers started purchasing more. But we also made excellent progress on obtaining timely payment from our customers on both pre-COVID and post-COVID bills. For the nine-month period, even in the face of COVID-19, Sysco generated an impressive $1.2 billion in free cash flow. This strong cash flow was approximately $300 million better than we had forecast earlier this year, driven by the combination of higher sales and profit, working capital benefit and lower CapEx than forecast back in the first quarter. All in, we ended the third quarter with $4.9 billion of cash on hand. We expect that the fourth quarter will bring continued progress on the EBITDA line. It is also expected to bring investments in working capital as we continue to invest in inventory and as the payables, which provided us with benefit in the third quarter, come due in the fourth quarter. As a result, we are forecasting flattish free cash flow for the fourth quarter, leaving us with free cash for the year of approximately $1.1 billion to $1.2 billion. Given our balance sheet, our strong cash generation, and our optimism for the business recovery, early in the third quarter, we announced that we were continuing the process of reducing our debt levels. We paid down $1.1 billion on that date funded by cash on hand, and you will see that change in leverage reflected in our third quarter financials. What you will not yet see in the financials is that, subsequent to the end of our third quarter, we repaid an additional GBP 200 million on the outstanding amount of the U.K. commercial paper program. And we will, later this week, pay off the remaining GBP 100 million balance on that program, which will bring our debt levels down by approximately $1.5 billion since the start of the third quarter and down by $2.3 billion since the start of this fiscal year. Stay tuned for a discussion of our capital allocation strategy at Investor Day. Okay. Let's turn to the income statement. Given the interest in the shape of the COVID-19 recovery curve, for the next couple of quarters, we will disclose sales comparisons against both fiscal 2019 and fiscal 2020. Third quarter sales were $11.8 billion, a decrease of 13.7% from the same quarter in fiscal 2020 and a 19.3% decrease from the same quarter in fiscal 2019, but with the important qualification that, in the last two weeks of the quarter, we began to lap the onset of the COVID-19 crisis. Indeed, looking at the monthly progression, measured against fiscal '19, our sales were down 23% and 14% in January, February, and March, reflecting the impact of COVID across the quarter. February would have been better but for the impact of the winter storm in the U.S. during the last week of February. We are also disclosing today on a one-time basis that our April sales were approximately $4.4 billion, up 102.1% from the prior year and improving to only down 8.8% from fiscal 2019. Our United States sales in the U.S. foodservice segment were down 5.3% versus fiscal 2019, and SYGMA was up 12% versus fiscal 2019, reflecting the increase in restaurant traffic and orders as the lockdowns eased in the U.S. We will continue to benefit as the U.S. reopening advances. In contrast, Europe, Canada, and Latin America regressed in the third quarter as a result of strict lockdowns that are now expected to continue in some cases until the end of May and as a result of slower progress in vaccination. The slower international recovery will continue to impact our fourth quarter results and may carry into early quarters of fiscal 2022, depending on vaccination progress by country. However, we see good news in the recent reopening taking place in the United Kingdom. Here are a couple of additional metrics. For the quarter, local case volume within U.S. Broadline operations decreased 9.7%, while total case volume within U.S. Broadline operations decreased 14.1%. Foreign exchange rates had a positive impact of 77 basis points on our sales results. As we move down the P&L, gross profit was $2.1 billion in the third quarter, decreasing 17.2% versus the same quarter in fiscal 2020. Most of the decline in gross profit was driven by lower volumes due to COVID. However, we did see modest gross margin dilution at the enterprise level of roughly 77 basis points versus the same period in fiscal 2020 as our rate came in just a touch shy of 18%. The primary reason for the gross margin dilution is business mix. Our sales and our generally higher margin European business were down, so lower gross margin at the enterprise. Along the same lines, our sales in our lower-margin SYGMA business were up, so lower gross margin at the enterprise. We also saw a modest margin dilution in each of the business segments with varying causes from product mix shift, the timing by market of the interplay between passing along inflation, and implementing our transformation initiatives. Adjusted operating expense decreased 14.7% to just under $1.9 billion, and we saw a modest improvement of operating expense leverage, even with lower sales to prior year. Our expense profile reflected the counterweights of good cost-out achievement, balanced against our investments for the recovery curve and our investments against the transformation agenda. As part of this, we targeted and achieved increased significant cost savings. We are on track to surpass our fiscal 2021 goal of $350 million of cost savings. We expect to drive continued cost savings opportunities to help fuel our future growth agenda, a topic I will discuss more at Investor Day in two weeks. Finally, at the enterprise level, adjusted operating income decreased 32% to $256 million. For the third quarter, our non-GAAP tax rate of 14.3% was favorably driven by the impact of stock option exercises. Adjusted earnings per share decreased 51.1% to $0.22 for the quarter. I'll say a few words on our third quarter results by business segment, starting with U.S. Foodservice Operations. Sales were $8 billion, which was a decrease of 12.8% versus the prior year period. In the rapidly evolving environment, the business again acquired a record number of new customers as our sales teams hit the streets, and we deployed digital tools. We also saw growth in our national accounts customer base. This business, our biggest business, is moving up the COVID recovery curve rapidly. Within the business, Sysco brand sales for the third quarter decreased 116 basis points to 37.3% of total U.S. cases, driven by customer and product mix shift. With respect to local U.S. case, the Sysco brand sales decreased 234 basis points to 44.5%, which was driven by product mix shift into prepackaged and takeaway-ready products. Regaining Sysco brand sales levels and the healthy margins that come with them will be a focus for fiscal '22 and beyond. Gross profit for U.S. foodservice decreased 13.7% to $1.6 billion for the quarter. The segment's adjusted operating expenses decreased 16.1% to $1.1 billion, and adjusted operating income decreased 8.3% to $525 million. Product cost inflation was 3.5% versus prior year, driven by deflationary categories in fiscal 2020. Moving to the SYGMA segment. For the third consecutive quarter, sales increased during the third fiscal quarter to $1.6 billion, a 15.9% increase over fiscal 2020 and a 3% increase over fiscal 2019, driven by the success of national regional quickservice restaurants servicing drive-thru traffic. While we are pleased with the team's efforts during COVID, SYGMA is our lowest-margin segment, and our team is carefully calibrating our efforts in that business, particularly as it relates to negotiating agreements with customers. As a result, starting during our fiscal fourth quarter, we will be taking an opportunity to transition away from a large existing regional customer. The financials of that relationship do not meet our preferred profile, and we will be focusing on freeing up capacity for more profitable customers. Going forward, we will continue to be diligent in our contract review and approval process across the enterprise. Gross profit increased 12.3% to $133 million for the quarter while gross margin was down 27 basis points compared to the prior year. Adjusted operating expenses increased 11.1% to $121 million, and adjusted operating income increased 24.1% to $13 million all at SYGMA. Moving to the international segment. As I mentioned earlier, our European, Canadian, and Latin American businesses continue to be impacted by COVID lockdowns. The International Foodservice Operations segment saw sales of $1.7 billion, a decrease of 31.3%, while gross profit decreased 35.1% and gross margin decreased 110 basis points. The gross margin decline was a result of country mix, customer mix, and product mix. For the international segment, adjusted operating expenses decreased 15.8%, leading to an adjusted operating loss of $92 million. We are confident that international will be a significant recovery opportunity for our company in fiscal 2022. Our other segment, which includes our Guest Worldwide business, remains in the COVID recovery starting blocks as hospitality occupancy rates remain low compared to prior year levels. While still in turnaround mode, the business improved its underlying profitability during the third quarter. Additionally, our Guest Worldwide business signed a substantial new customer contract during the quarter that will be very beneficial to the segment as the travel and hospitality sectors recover. That concludes my prepared remarks on the third quarter. We are not providing further guidance for the fourth quarter, other than to observe that we continue to monitor our operating environment carefully. While operational challenges remain for many of our customers, we are seeing excellent demand in our core business in the key markets in the center and the south. And we are seeing green shoots on the coast as markets reopen. Let's be clear. The upswing has begun, and we expect continued progress across the largest parts of our portfolio in the fourth fiscal quarter. Our team remains resolutely focused on driving our businesses, aggressively managing the business recovery, and building customer-centric capabilities to accelerate long-term growth. As we did in the third quarter, we will continue to deploy our balance sheet to invest in inventory, technology, and our people to stay ahead of the recovery curve while also reducing our indebtedness. During our Investor Day in two weeks, Kevin and the executive leadership team will offer more detailed perspective on the business, on our growth plans for fiscal 2022 and beyond, and provide further specifics on our transformation efforts. We will comment on our post-COVID capital allocation strategy, including the breadth and depth of our organic and inorganic investment plans, our plans for further debt reduction, and how we're thinking about continued shareholder returns. We look forward to seeing you participate in that virtual event. Thank you for your attention.

Question on the local case growth and the new customer wins. It continues to be remarkable. Just wondered if you could dive a little deeper behind the drivers, first, what you think the biggest driver was; and then two, specifically, if you could dimensionalize how you think the change in delivery minimums impacted the top line margins during the quarter, if that's a meaningful driver you want to keep around or something temporary that you see shifting back shortly.

Alex, thank you for the question. Just on the new customer prospecting, we're very proud of those results. As I said in my prepared remarks, largest single quarter ever in the history of the company from a new customer wins perspective. For those that are keeping score, I said the same thing in Q2. We actually just upped the performance that we posted in Q2. So we've got two consecutive quarters of record levels of new customer prospecting. The why is pretty straightforward: a, we made it a big priority for our sales force. We're a company that manages what we expect and we manage what we measure, and we have an impact on the things that we focus upon. The second is, as I've spoken pretty openly about, we removed a barrier in our prior compensation program that got in the way of prospecting. So we changed our sales consultant compensation late last summer. It took a quarter or two for that to really kick in and get the change management going and get to a level of understanding of the key components of that program. And we've made it now financially beneficial for our sales consultants to prospect because it's good for us, and it's now good for them equally. So two basic reasonably simple premises, which is we've made it a priority. We're tracking it. We're measuring it. We have goals specifically by sales consultant on new customer prospecting and the financial compensation rewards them for that activity. And it obviously rewards our company as we are able to win new business profitably and grow over time. As I said in my prepared remarks as well, it's less visible on our total top line because in many cities in this country, there are still significant restaurant restrictions. But those new customer wins are going to pay dividend and fruit for us as this recovery that we are now a part of begins to further accelerate in our Q4 and then into fiscal 2022. So we're really pleased with it. Second part of the question was about Restaurants Rising. Do we expect it to continue? And was it a big driver of the wins? I would say yes, that would be my point #3, which would be Restaurants Rising was a barrier that previously got in the way for a new customer coming over to Sysco. We had pretty strict and rigorous delivery days and minimums. And we've eliminated that barrier. Will that stay? We'll talk more about that on our May 20 Investor Day. I'm not ready this morning to make an announcement in that regard.

Alex, it's Aaron Alt. I'd add one thing to that as well. While we don't spend as much time on these calls talking about the other segments in our business, there is further goodness out there, which is whether it's in Europe and the U.K. in particular, that has gained large foodservice management contracts during the crisis, but the sales are not yet on display or indeed, in the Guest Worldwide business, where, again, they gained a large customer. Oftentimes, getting in the door is the hardest part. The good news is our teams have kicked open the doors, and as the recovery happens, we expect that to bring goodness to our results as well.

I wanted to ask you, Kevin, about the customer mix and overall volumes following COVID. I'm curious about how your case volume compares to 2019 once things normalize, considering you've gained business on both the independent and contract sides. What do you think the mix will look like? Is it possible that your independent business could actually be higher due to your recent wins? I'm just interested in your thoughts on this.

Yes, thank you for the question. I would say for fiscal '22, I would expect for our independent mix to be higher for a couple of factors: one, the number of wins that we're talking about; two, and we did say this in our prepared remarks, foodservice management, hospitality, travel are down still pretty significantly and have a slower recovery curve. So I think those two factors put side by side would indicate that the balance of our total would be shifting. One counterpoint to that is one of our strongest sectors, this is our SYGMA sector, we're running double-digit increases to prior year in SYGMA. And that is margin rate dilutive because of the fact that SYGMA's our least profitable rate business. So Aaron can talk more about that on May 20. He's prepared to talk about where we're headed as a company, Ed. So those are comments for fiscal 2022. If I look over the longer term, our expectation is each of the sectors that we play in will recover to pre-COVID levels. They’re each going to recover on a different curve, which we've tracked, and we've mapped. We're using the Technomic data to predict when that will occur. What we said from a point of optimism perspective is each of those businesses is actually ahead of schedule versus what Technomic had predicted, which is a positive harbinger of what's to come in fiscal 2022 and beyond. We expect to take share in each of those sectors. That's my best way of putting a kind of period at the end of the sentence. We have growth strategies in place for how to win in each of those sectors. So as each sector recovers and we take share, if you're asking me two years from now, three years from now, will we see a meaningfully different balance of sale by customer, I wouldn't suggest that. I would say each of the sectors will grow. And it's hard to predict three years from now what the precise balance of sale will be. But hopefully, post-Investor Day, there'll be more clarity to that.

And then just a quick follow-up on that. You did talk about investment in the recovery and about some pressure on drivers, warehouse workers. Can you just talk a little bit about that? How will that impact P&L? And does it have any impact on your ability to drive higher post-COVID EBIT margins when the dust settles?

It's a great question regarding the labor availability challenges facing the industry, and indeed, all industries. You've obviously heard about the struggles restaurants are having to fill positions, and drivers, in particular, are in short supply not only nationwide but also in several countries where we operate. One key difference for Sysco, especially in the restaurant sector, is that our jobs pay well. We do not face a wage challenge or a minimum wage issue. Even if the national minimum wage were to increase to $15, we wouldn't feel the pressure. Our driver positions offer competitive pay and strong benefits, making them attractive. The challenge I mentioned earlier is about raising awareness of these jobs. In the current quarter, Q3 and Q4, we've had to increase advertising efforts to create awareness. We've also introduced sign-on bonuses, retention bonuses, and referral bonuses. The additional costs I referred to are related to these initiatives rather than permanent wage increases that could impact margins. I see this as a temporary effort since we need to hire over 6,000 people in the second half of our fiscal year. While certain regions are experiencing tight labor conditions, we are working to promote our job offerings. We are confident in our ability to enhance our profit ratio in the future. We have a significant cost reduction program that will help mitigate any wage pressures. Previously, we reported that we have eliminated $350 million of permanent structural costs from our business, which Aaron will elaborate on during the May 20 update.

I was curious if you could go back to the $350 million in structural cost savings. I think there was a mention of being maybe set up to surpass that target. And was just curious if you could talk about where you're finding incremental savings or where you're feeling better about that, if there's any potential to increase that as you move forward.

Thank you for your question. We are very pleased with the progress we've made in our cost savings initiatives. To recap, our goal for fiscal 2021 was to achieve $350 million in cost reductions through various savings strategies and adjustments in cost of goods sold and operating expenses. We are currently ahead of our projections and are optimistic that we will meet or exceed that $350 million target for this fiscal year. This quarter, I'm particularly enthusiastic because the savings we've implemented are becoming more apparent than in previous quarters. To illustrate this, I’d like to share some straightforward calculations with you to demonstrate how these savings are positively affecting our profit and loss statements. Looking back to the third quarter of fiscal 2020, our adjusted operating expenses were $2.187 billion. During that period, our sales decreased by 13.7%. If we assume our costs were entirely variable—although they aren't—operating expenses would have been expected to drop by about $300 million. However, as Joel has indicated before, our cost structure consists of one-third fixed costs and two-thirds variable costs. Thus, the variable costs would account for under $200 million of that reduction, resulting in $100 million in fixed costs remaining unaddressed. This scenario would have placed our expenses at $1.98 billion. In contrast, our adjusted operating expenses for this quarter were $1.867 billion, reflecting a decrease of $320 million. This means that not only did we lower our variable costs in line with sales, but we also eliminated $120 million in fixed costs, which is the essence of our cost-saving strategy—achieving quarter-over-quarter reductions before making any new investments. It's encouraging to see that even with a decrease in sales, we can demonstrate this progress. Additionally, it’s worth noting that we received about $40 million in one-time benefits that were not part of the cost-cutting plan. However, these benefits were offset by $40 million to $50 million in investments we made to support our recovery and transformation efforts in operating expenses this quarter. We have always committed to investing in the business, utilizing some savings to further our strategic initiatives. The current quarter serves as a strong example of this approach. At our upcoming Investor Day, I will provide more information regarding our cost-saving efforts, including the sources of these savings, which stem from the restructuring and regionalization of our operations, a culture of frugality promoted by Kevin, and our focus on prioritizing investments while ensuring sound business cases as we move forward. These strategies are helping us deal with rising costs associated with employees and inflation. Thank you again for your question. I hope this detailed response has been useful.

Very helpful. I appreciate that detailed answer. Just also wanted to just ask if I can just about food inflation and maybe what you're seeing so far into your fourth quarter, if you're seeing those costs accelerate, just how do you feel about passing those on. I think you have some new tools and software to manage that. But maybe just update on what you're seeing there.

Kelly, thank you for the inflation question. It's definitely accelerating, but I would say that's more of a Q4 fiscal happening than it was a Q3 happening. We all read the paper every day. We're seeing what's happening not just in this industry but in every industry. Certainly, the economy is becoming more inflationary. Basic economics are at play here. We have significantly increasing demand, unfortunately, simultaneous with some supply challenges that are pretty well known out there in the food industry. So what is the impact of that? We are seeing sales increasing. We will most likely in our Q4 see a slightly dilutive impact on margin rate. And GP dollars, however, hopefully, would be in a growth mode, but that is to be determined on our ability to pass through this inflation to our customers. So here's what we're seeing, consumers, people who are actually going to the restaurants themselves, are showing a willingness to pay a higher ticket. I think you've heard other restaurant people that you personally cover talk about that. We are seeing restaurant partners being willing to increase their menu prices, and we're working with them. That's a part of what Sysco does. We consult with them, we teach them, we educate them on the impact of the inflation on the COGS that we are all experiencing. And we're providing suggestions on alternative products to offset the cost. And also, we're providing suggestions on where some price increases on the menu could take place. Important though and notable point, food-away-from-home right now is a very competitive on a price basis versus retail grocery. I think you all know that this time last year, retail grocers did a good job managing their business. And they essentially eliminated promotions because they didn't need them anymore, and they are running double-digit comps. So prices at the retail grocery have gone up on a year-over-year basis. Prices actually had gone down during the COVID crisis within the menu of a restaurant. And I think we're seeing some kind of re-establishment of cost. I heard someone on Squawk this morning actually say this term, reinflation, which is last year was deflationary, and we're actually now kind of getting back to where we would have been if 2020 wouldn't have been what it was. So let's call that a catch-up. Last point for me, and then I'll talk about what we're doing with our customers. I do expect for the supply-to-demand equation to normalize over time, meaning suppliers will be smart and they'll ramp up demand. And then therefore, some of this inflation pressure will decrease. I just don't know how long it's going to take. What we're doing is we're closely, closely managing this. I think you know we have many contracts that, if contracted, it's a percent of COGS or it's a fixed spread to COGS. And also, we have many contracts, local independent customers to be specific, where we do not have contracts. And Kelly, that's where today, it's mostly manual, done by our sales teams. And we're providing guidance on how to manage it, but it's manual. To your point, the Periscope system that we are deploying will help us greatly on these types of things. We will be much more scientific and specific on how we call specific choices by category on what we want to pass through and what we don't want to pass through, and then we can guarantee it is showing up in Sysco Shop in front of the customer. Unfortunately, as you know, we're still in the middle of that rollout. In fact, we're not in the middle. We're in the beginning part of that rollout. Since last quarter, we've expanded Periscope to five additional regions. And we're, in the second half of this calendar year, going to complete that rollout. So yes, Periscope will be a tremendous benefit to these types of environmental conditions in the future. It's exactly why we need the tool. Good question. Thank you for asking.

Kevin, one thing that COVID did right is drive existing account vendor consolidation. So what are you seeing in reopened markets? Is that sticking? Are restaurants going back to dealing with more vendors? How are they behaving? And then what are you seeing with sort of your existing account share gains?

Thank you for the question, John. It might still be a bit early to draw conclusions. We definitely saw some distributor consolidation during COVID. My goal for our company is to maintain that, and I'm sure others who gained market share will aim to do the same. To be straightforward, the largest players in this industry have emerged as clear winners since the pandemic began. I've been directly asked how it's possible for us and a couple of other large companies to be gaining market share. The answer lies in the combined market share of those three companies, which is still less than half of the total market. Thus, the notion holds that the strongest players are thriving in this environment, and we have no plans to relinquish the market share we've acquired. We're implementing measures to retain our customers, such as enhancing the usability of the Sysco Shop tool with features like suggested orders and an easy reorder button. We're also focusing on targeted personalization to improve the relevance of our offers. We believe there's significant opportunity in strengthening our relationships with our current customers. The largest players have been successful, and as the biggest in this sector, we are confident in our ability to further capitalize on our purchasing scale and supply chain efficiencies. As we enhance our promotional offers, our goal is to increase customer loyalty and share of wallet.

And secondly, do you have a good sense, the 10% increase in independent customers since '19, where they fall in terms of your average share with them? Is it sort of a ramp-up process? So they're below average? Or have they come on average or above-average in terms of your share?

Yes. Excuse me, that's right. But I apologize, John. I know who you are. I know you live in Staten Island. My apologies for the name slip. Independent new customer wins that we have, are you saying what is our share of them? And how does it compare to our normal book of business?

No, I was going to mention the 10% you've gained since '19. How are they performing? Is there a ramp-up where they're below average compared to more established accounts? Or because of COVID, do they come on and your share is actually higher with those?

Yes, thank you for the question. It's as you mentioned in the first half. They start smaller. We win a number of lines and cases, and then we earn the opportunity over time to increase it. This historical trend in the industry still holds true. We are working through this because we believe we can successfully expand our sales around the room. If we succeed in center of plate, we can sell other items. If we do well with produce, we can introduce center of plate options. We are confident in our ability to do that. The profit per case is healthy, but the number of cases per unique stop tends to be lower for new customer wins, as you pointed out.

I wanted to follow-up on the independent comment, Kevin, just a couple of ways. One is you talked about a strategy of going after new cuisine or individual cuisine types. How much evidence was that in this quarter in these new wins? Or was this just broader because the sales force has been refashioned? And similarly, on your pricing tool that you've talked about, I know you're not rolled out yet, but is the net result of that, that you're going to be sharper on pricing? Or is it not that it's simply a pricing transparency, and that just gets you more wins because of that?

Yes. John, great question. I love them both. The first one, which is the cuisine-based selling, what percent of our wins are coming from that. I would say the majority of our new customer prospecting activity is more: a, because we made it a priority; b, the compensation change; c, would be relevant offers to be provided to those customers. And I would put our cuisine-based selling into that third bucket. I view the cuisine-based selling upside opportunity to be just as much for existing customers. We serve thousands and thousands of Mexican restaurant customers, Asian customers, Italian customers. And what we're doing with our cuisine-based selling program is improving the category strategy to serve those customers, the marketing and merchandising, promotional strategy to serve those customers and then serving them up and teeing them up in a very clear, coherent, cogent, digestible manner, both in Sysco Shop and through our sales force. It's kind of a best of both digital and human capital. We're still in the early innings of that work, to be clear. And we're going to talk about that quite extensively on May 20, what that program looks like, how we will roll that program out. And we look forward to being able to share that with you on that day.

I apologize, but regarding the pricing, is this an adjustment to pricing due to the new pricing tool, or is it aimed at acquiring customers by offering transparency that may have previously been a barrier?

Yes, great. As it relates to our strategy, we've been reasonably clear on this one, which is the primary point of our pricing software is to be right on price at the item customer level, to be right on price, which means for KVIs, known value items, we need to be sharper on price. We actually need to lower our prices for those items, which will result in sales increases at a slightly lower margin rate, which flows through to GP dollars being put into the bank. Simultaneously, we have the opportunity on what we call the tail over our assortment or inelastic SKUs to nominally increase price to be able to offset the investments we're making on the KVIs. So how we've described it in aggregate is, for the most part, margin rate will be flat constant. And this is a sales gain growth opportunity for us as we are right on price, sharper on known value items. And we know that the number one reason why a customer leaves the distributor is because of trust in pricing and fairness in pricing. And we need to tackle that head on.

Great. Actually, just following up, kind of bringing your last discussion together in terms of profitability. We've heard a number of restaurants and some of your distribution peers talking about doing more with less when the sales do recover to prior full strength, presumably leading to upside to, I guess, prior operating or EBITDA margin, whatever you focus on. But wondering how you specifically think about that, especially as you talk about, in the near term, picking up more SYGMA chain business, which is lower margin. I know you talked about the pricing tools, which you're raising some, maybe lowering others. And I'm just wondering how you think about your operating or EBITDA margin in coming quarters and years post-COVID when sales presumably do get back to full strength, if not beyond. And then I had one follow-up.

Sure. Let me give you the broad answer of our aspiration, which is we expect to grow sales and to increase our profitability over time. Now the down click from that is, of course, we are in a transformation, and we are investing against the portfolio while also taking significant cost out of the business. And so I don't want you to take any one of the factors as far as investing in a SYGMA relationship as indicative of we have any intent other than to grow sales and grow our profitability over time. At our Investor Day in two weeks, since I'm going to ask you to be patient with us at our Investor Day in two weeks, we'll give you more visibility to our points of view on fiscal '22, which is approaching rapidly as well as the longer-term algorithm about how we think all these pieces come together.

Got it. And then for the follow-up, Aaron, you've mentioned debt paydown several times, and I know there has been some speculation over the past few quarters regarding your plans for the cash reserves. I’m curious about any goals or timelines for that debt paydown and what it means for your cash usage. I understand you plan to discuss cash priorities in a couple of weeks, but can you share your general thoughts on the timeframe and goals for the debt and whether that affects how you prioritize cash usage?

Over the past nine months, we have made considerable progress in reducing our debt, with significant paydowns in both the first and second quarters, and continued efforts in the third quarter as well. During the crisis, we took the necessary steps to strengthen our balance sheet by increasing our cash reserves, which added expenses. As we look towards the future and aim for sustainable profitability, the strong cash flow we generate presents us with an opportunity to optimize our capital structure. I will provide more specifics about this during Investor Day, but our actions thus far serve as a solid indication of our direction.

A little bit of a follow-up to John's question. The 10% more local customers' wallet share gains, and we're seeing improved broad industry same-store sales growth among restaurants. So can you help dimensionalize how much the new customers and wallet share gains are offsetting same-store sales declines amongst existing customers? And then just overall, what are you seeing with respect to recovery for chains versus independents?

Lauren, you were breaking up in the first half of your question a little bit. So I'm going to try to answer what I think was the spirit of your question, but I'll start with the ending, which is chains versus the local independents. The chain universe is covered pretty prolifically publicly, and I think you all know that data. Certainly, the fast food QSR space has been on fire. Anything with a chicken sandwich has been on fire. Our SYGMA sector reflects that double-digit increases to prior year from a sales perspective. The pleasant surprise in our Q3 and then it's accelerating in our Q4 is the strength of the local independent customer in the fully reopened markets, producing results that are above 2019. That exceeds our expectations. That exceeds Technomic's prediction by about 18 months, frankly. But there are still major geographies that are still closed. I just want to be clear about that. New York, Boston, Chicago, most of California is still confronted with major restrictions. Our European business is still dealing with major restrictions. So we're very optimistic about the health and strength of that local independent customer. It's our most profitable segment, as you well know. And when you combine just the general recovery curve of what independents are doing, coupled with our 10% increase in the number of doors that we serve, when an industry is down 10%, so we have a 20% delta, our number of unique doors versus the industry's overall performance. As we see more markets opening up, reducing restrictions, we have a strong tailwind here in front of us.

Okay. Great. Hopefully, you can hear me better. Just anything you're willing to share specific to April? I think you said U.S. Broadline is down a little over 5%. Local customers in the South running positive sales, together with the new customer wins. Can we assume local case volumes are running about flat at this point?

We've provided as much detail as we can for this call. At Investor Day, we'll discuss how we view the individual parts of our customer base. It's important to note that while foodservice management is still recovering slowly and hospitality has not bounced back yet, we are seeing strength in independent businesses returning and in certain chains that have performed better overall.

I wanted to start by discussing labor. It's encouraging to hear about how you're supporting your team and how they, in turn, contribute to the community. I'm interested in understanding the overall landscape, as I imagine there are areas where challenges still exist alongside notable successes. For instance, sales seem to be performing exceptionally well in the field, while on the flip side, it can be quite difficult to find someone willing to drive a truck at night. Where does the night shift fit into all of this? Could you elaborate on the complexities involved and where you see the challenges? You've clearly highlighted the successes, so I'd appreciate any additional insights.

Sure, Nicole. Thank you. It's Kevin. We have three main functions in our field: sales, warehouse selectors, and drivers. We're planning to rename the driver role to delivery partners to better reflect their collaboration with our sales team to boost local sales. Currently, we refer to our teams as sales consultants, selectors, and drivers. Our sales consultants are performing exceptionally well, and as we discussed earlier, we will be adding more sales consultants in fiscal 2022 due to our investments in team-based selling. We plan to introduce more specialists to support our current broadline sales consultants, and we've mentioned we will elaborate on this on May 20. Regarding our warehouse selectors, we offer competitive pay for these vital positions, and we're looking to hire over 6,000 individuals for the spring season. Our hiring for warehouse selectors is on track, and we closely monitor our goals for each site and location. Currently, we are in a good position with this hiring. However, filling our driver positions is more challenging, not due to pay, as our driver wages are excellent, but because we need to increase awareness of these jobs. The broader issue affecting drivers is that the average age in this profession is rising, with many retiring and not enough new entrants. I find inspiration in what United Airlines is doing to address their pilot shortages by establishing a pilot school. While I'm not announcing specific plans today, I want to emphasize that Sysco aims to take the lead in creating a sustainable pipeline of drivers for our long-term success, and we are committed to not letting this issue hinder our growth.

To elaborate on that, I want to revisit some key themes. We have a significant presence within the industry and possess strong capabilities, whether it's through our facilities, our selection processes, or our sales teams. We're recognized as an attractive employer, offering competitive wages and benefits, and we do not face the challenges that many others in the industry encounter. Our employee retention rates are high. Regarding costs, we have demonstrated our ability to reduce them, which not only enhances our bottom line but also allows for necessary investments. In the second and third quarters, we have highlighted our commitment to investing in recovery and supporting our team to achieve future success in our enterprise.

If I can ask one last question, I’d like to get your thoughts on the daily operations of a restaurant you deliver to. I'm interested in fill rates and how the expected delivery timeframes are evolving. Overall, it's impressive, and we have a good understanding of this. When we analyze the restaurants, it aligns well with what you've mentioned, but there are discrepancies—some are performing well while others are struggling. I'm inclined to think that suburban chain restaurants receive their orders with higher fill rates and on time, while urban independent restaurants may not. Can you elaborate on the differences in daily operations for the restaurants you work with?

Cool, thanks for the question. I'll just break it down into two parts. One is just the fill rates, as we call it, outbound to our customers, we're experiencing supplier fill rate challenges to Sysco, as are all distributors. We track it by supplier. We are very, very rigorous on our ability to improve those performance data. And for those that can't improve, we move volume from supplier A to supplier B in order to ensure that we can ship to our customers. And we are doing that aggressively right now. We partner with our suppliers. We give a joint business plan. We provide rolling forecasts. But if they can't meet our demand, we're going to find a supplier who can. The strength of Sysco is because of our size and our scale. We can do that work more effectively than anyone else in this space, which allows us to ship on time and in full to our customers. There are some specific unique products that are really challenging right now, chicken wings, shortening, to be specific, just to provide two examples. But we are doing an enormous amount of work to ensure that we can fill customers' orders. As it relates to on-time delivery, meaning the truck arriving within a window that our customers want, we're actually going to talk about exactly that topic on May 20. Marie Robinson, our Chief Supply Chain Officer, is doing a tremendous amount of work. We're excited about the progress that we are making to be more agile, more flexible and more customer-focused supply chain. We're bringing a mentality of customer-first to work our way back versus what's good for Sysco and fit them into our designed model. So more on that on May 20, and we're excited about talking with you about that. As it relates to metro versus suburban, yes, I don't think that you should draw a bright line there to say on-time rates or preferred windows are better suburban versus metro. What I would say is something I actually talked about a year ago when we put that project on pause because of COVID and now we're reinvigorating it. Small restaurants in an urban setting have really small backrooms. And they actually need more frequent delivery. And we're going to talk to you about that on May 20.

So I think, Kevin, in your prepared remarks, you made a comment about independent restaurants or local accounts that were actually outperforming chains in the markets that had reopened '21 versus '19. I guess, did I hear that correctly? And then I'll go from there.

Yes, John, I didn't mean it to come across that way. What I said was local independent restaurants in fully reopened markets are performing better than local independent restaurants in 2019. That, by itself, is a pretty powerful statement.

I understand, and I apologize for the confusion in the transcript. Regarding the independent restaurants you added, it's impressive to see a 10% increase. Do you think there's something that makes them more reliable in 2021? Previously, these were local accounts without contracts, making it challenging to retain their business. From your experience with some technology initiatives, are you observing a more consistently loyal restaurant consumer compared to the past?

It's a great question, and we're going to talk about precisely this topic on May 20. What we're going to unveil at that Investor Day is our strategy to increase retention, increase the stickiness of existing customers that we win and also how we will prospect new customers on an ongoing rate at the level that we currently are. It's an end comment on the independent local customer level, for sure. It always has been, it always will be. But the tools that we're bringing to the industry related to being right on price, having a promotional offer that's relevant and specific to that individual because we know more about them than anyone else because of the amount of data that we have and to provide a merchandising and marketing strategy that meets the needs of those each individual customers, we can do better on all of those things as a company. And we are doing better. And I respectfully and humbly submit, we'll be the best in the industry at doing that. And we look forward to talking to you more about it on the 20th.

That's great. And finally, a complete non sequitur. Europe, I don't think there were many, if any, questions on this call about that. Obviously, it's been a challenging market overall. It's been a challenging market for Sysco even before that in terms of integration and what have you. Do you have an opportunity with your balance sheet and the fact that you already have people and assets on the ground to make a bigger bet in Europe? And if there aren't necessarily consolidation opportunities that exist in the U.S. for you to buy distributors, might there be some significant opportunities to really change the landscape of your exposure in Europe and the U.K. and basically buy scale that otherwise you wouldn't be able to get at current prices?

John, thanks for the question. In our prepared remarks for Europe, we spoke of the fact that it is recovering slower, and it's not because of the health of restaurants. It's the restrictions. I can go country by country by country if we had time. But essentially, Europe has not yet reopened. We're looking at mid-May of the earliest as to when the restrictions will begin easing, with one exception. The U.K. opened up outdoor dining two weeks ago, and you need a reservation to get an outdoor dining appointment in the U.K. It's being so warmly received. So mid-May to late May is when most of the European countries are going to begin the process of easing restrictions. So it's still a struggle in Europe, but we do anticipate a recovery. There's certainly pent-up demand in Europe for eating at restaurants. And we're confident actually that our ability to succeed in Europe is increasing, not decreasing. Aaron talked about one. We have a very notable FSM win in the U.K. that we've signed during this pandemic. That will pay dividends in the future when that business begins to recover. We can talk about that more in the future. As it relates to M&A, we're not going to comment on any M&A activity unless there was activity to comment on. I would say our European strategy is more fix the things that were broken. France, we had some self-inflicted wounds. We have used this crisis to meaningfully stabilize our performance in France. And I would describe France as we're ready now for the reopening of restaurants to be able to win back lost business and to take a significantly expanded product range and go out and start winning business. In the U.K., our biggest opportunity is to win new independent local customers, and we're going to talk with you about that on May 20. Our new international leader, Tim Ørting, will go actually country by country, explaining our strategy to win in each country.