Good morning and welcome to Sysco’s Third Quarter Fiscal 2020 Conference Call. As a reminder, today’s conference is being recorded. We will begin with opening remarks and introductions. I would like to turn the call over to Neil Russell, Vice President of Corporate Affairs. You may begin.

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 enable 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…

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, our working capital 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…

Thank you. [Operator Instructions] Our first question comes from the line of Chris Mandeville with Jefferies. Your line is open.

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.?

Yes, sure. Thank you for the question, Chris. And I’ll take the first part and then I’ll toss it to Joel on the cost structure of Europe versus the U.S. It is a little bit different, mostly because in the United States we own our assets and equipment. We do some leasing overseas. But he’ll end with that. Europe, the business from a top-line perspective has been hit harder than other parts of the globe: A, it was hit earlier; and B, the declines themselves were steeper. So, as Joel said in his remarks, we’re about 60% down. We were at about 60% down at the trough. Good news is across the globe, we are recovering sequentially, week-over-week. As we mentioned, we’re up about 15% from where we were at the trough. But Europe started earlier, the declines were steeper and the recovery has been a little bit slower. And really, it comes down to one basic key concept; they have fewer drive-thrus in Europe than in the United States. So, I think about all the fast food chains in the United States and the drive-thru capability, the segment of our business that’s performing the best is quick-serve. Drive-thru in Europe, it’s more small restaurants. Many of them have closed temporarily and aren’t even doing the pickup and delivery that you’re seeing pretty robustly across the United States. So, we do anticipate the Europe business -- European business to come back. It’s a matter of when, not if, and it’s taking a little bit longer. And some of the social distance practices in select European countries have been quite strong. Ireland as an example was a business of ours performing quite well before COVID, and they’ve had some of the most strict restrictions. What is good is that we now have line of sight for each of those countries as to what their reopening plans look like. And even in Ireland in the month of June in particular, we’re going to begin to see easing of restrictions that will result in improved business trends, as I said, the trough being in the rear view mirror. So, I’ll toss to you on the expense side of the 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 the 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, 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. So, absolutely, thank you. A couple things I would point out on that. Number one is that the $153 million as an enterprise is essentially -- think about it as an estimate of what we should know now that happened between the end of the quarter and earnings, right? So, it is essentially an estimate of that amount. It is not intended to be fully reflective of all impacts that we would have going forward. But, it’s our best estimate of what we know today. We do anticipate seeing continued pressure in that space, and again, as things continue to evolve in the fourth quarter. But having said that there’s a couple key points I’d like to make in terms of what you’ve talked about in terms of the relative magnitude. Number one, we made some really solid progress in terms of our collection efforts. And frankly, as I mentioned in my prepared remarks, we’re actually ahead of schedule in terms of where we would have been in terms of the modeling. The second thing, as part of that, we’ve refined our tools and both from the collection that we do at the center and have engaged significantly our sales force to help with our collection efforts, even to the point where actually as we’ve thought about incentives for them during some of this time, the work that we’ve done is actually included an incentive for collection for our sales team. So, I would say, one of the things that we feel good about, even despite some of the challenges, is a very collective and aggressive effort in terms of collections. And then, the third point I’d make is that in terms of how we thought about that, it’s been a combination of things where for selected customers, we’ve supported them in the forms of payment plans, in the forms of deferrals and in the forms of them collecting new receivables on shorter terms, and so, again, doing the things that we can do to help support their business as they’re struggling through their own opportunities. So, just a couple of points there. But again, we feel good about that for now, but I don’t want that to be taken as the fact that yes, we’ve absorbed all of our exposure in the bad debt. But, the combination of that, a lot of good collection efforts is I think the result there.

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

Thanks.

Thank you.

Thank you. Our next question comes from the line of Judah Frommer with Credit Suisse. Your line is open.

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 a 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 creating 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 the 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 there 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 real quick on the meat piece. I mean, I think, look, we do expect to have some inflationary impact on beef due to some of the higher demand and supply shortages, as a result of the plant closures. I think the one thing I would just emphasize, as always, I mean, number one, we have -- we do have a substantial supply of frozen inventories that I think will continue to help carry the day there. We also, as always, have been the supplier of choice where we have access to a tremendously diversified supplier base. And so, again, access to products has always been something during any of these types of supply shortages. We’ve been the provider that’s been able to do that. And I think, just as a one time in general on inflation. Obviously, there’s a lot of moving parts in April, again, the inflation numbers, obviously we talked about one number, but there’s a lot of different categories. That’s a difficult thing to predict right now, in general. And so, we’re not really looking to do that based on the forward look, just with everything going on in April. But, I mean there is some view that there will be some inflationary pressure on the meat side, without a doubt.

Okay. Thanks and good luck.

Thanks.

Thank you.

Thank you. Our next question comes from the line of Edward Kelly with Wells Fargo. Your line is open.

Hi, guys. Good morning. Thanks for all the color. My first question is really around Q4, and Joel, your guidance on negative operating income. Can you just help us out -- what level of sales declines are you anticipating in that outlook? I mean, it looks like April’s probably down a bit more than 50% or so. You talk about $500 million in cost saves. I don’t know, you run the numbers through the model, and it doesn’t look like OpEx is going to be down by $500 million. And then, is there additional sort of like gross margin pressure in this that we need to think about or pressure on profit per case?

Yes. So, a couple of things, Ed. Thanks for the question and good morning. I think, yes, I think, the way I would think about this is the following. I mean, I think, your approach, your approximation of April is roughly correct. Again, I think, as we talked about, some level of gradual incremental improvements over the course of the quarter, I think would be what we are expecting, just given the trends that we’re seeing and obviously the states’ gradual reopening of their economies. From a margin perspective, I do think there’s -- our margins in this time are impacted, I guess, I’d think about really by a couple of things. One is the mix of the business. Obviously, as we’ve talked about, there’s a bit more of the chain, and particularly QSR space has been better off than the local. And so, that obviously will result in some level of mix shift. In general, there also for a time period in order to remove inventory, there was some level of discounting we had done in order to move some of that product. And so, that is not to suggest irrational competitive behavior; it’s simply to suggest movement of inventory. So, I think, you’ll continue to see some of that. So, I think there is a margin pressure that is likely to be continuing to impact that is probably one of the pieces that you’re missing out of your modeling there.

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. And then, the one follow-up I just had to all that is, how -- the variable cost component and how things -- customers are just not open, and you’re able to put a lot of costs on the sideline. It is probably different than it looks like when we reopen and customers are back, but everybody drop sizes are half of what they were maybe, right? How do we think about the next few quarters, as we reopen? And what the ramp in the costs sort of looks like against the reopenings and variable cost component, and how it changes in that environment?

Well, I’d say a couple of things to that, Ed. Number one, I want to reemphasize our point that we do believe while we get -- we try to be clear on what we expect for Q4. We do believe that’s the trough. Number one. I think that’s an important point to emphasize. The second thing I would emphasize and point out is that as part of the cost work, it’s not only been reduction of the heads and reduction of variable costs in that way, but the productivity improvements that we’ve made have also been significant. We’ve taken almost 90% of our overtime hours out. We’ve taken actually action to ensure that our routing is reflective of the fact that -- again, we have the metric called pieces per trip, that is only down a slight percentage from the actual volume decline, meaning that we’re sending out a lot less trucks. We’ve got a very fast and agile rerouting of our fleet in order to maximize and optimize our routing. And so, I think that’s another part that comes into play here, the way you’re talking about. So, I guess to put a bow on all that to summarize, yes, we’re going to anticipate there’s going to be some capacity restrictions or whatever things that restaurants, and there will likely be some lower than normal drops. But, as we’ve done now, we will be very flexible and agile in terms of ensuring we’re optimizing our productivity and the profitability of the business that we’re going to do.

Thank you. Our next question comes from the line of Jeffrey Bernstein with Barclays. Your line is open.

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.

Thank you. Due to the interest of time, that would be our last question. I would now like to turn the call back over to Kevin Hourican for closing remarks.

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 becoming 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 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.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. You may now disconnect.