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Text: A copy of these materials can be found in the Investors section at sysco.com.
To ensure that we have sufficient time to answer all questions, we'd like to ask each participant to limit their time today to one question and one follow-up.
I hope that you and your families are staying safe and healthy.
I will provide an update on our business transformation and I'll share some highlights of our preparation for the pending business environment recovery.
As we have discussed during prior calls, Sysco has taken swift and decisive action throughout the pandemic to help our customers succeed during a time of disruption.
We have carefully managed our associate productivity, inventory productivity, and business investments.
To that end, we initiated a bold business transformation to strategically transform our company for long-term success.
I am pleased to confirm that our business transformation remains on track and we are confident that the strategic initiatives will enable profitable future growth and will differentiate Sysco from our competitors.
The COVID environment has placed substantial restrictions upon the customers we serve in the food-away-from-home sector and has disrupted our marketplace.
In light of those realities, we are pleased with the financial results that we delivered in the first half of fiscal 2021, and for the second quarter, we performed generally in line with our expectations adjusted for the environment.
While our second quarter financial results were down compared to prior year, we delivered a profitable quarter despite 23% decline in our top line sales and funded investments to enable our transformation.
Our customers experienced increasingly restrictive conditions on their operations during the second quarter, which were most notable in December when restaurant traffic and sales declined.
Additionally, our international segment has been hard hit due to tougher restrictions in the countries in which we operate.
At Sysco, we are not taking the restrictions on customers as a gravity issue.
We are doing more than ever before to help our customers navigate this challenging environment.
I am pleased to report that during the second quarter Sysco gained overall market share versus the rest of the industry, reflecting the early progress of our transformation and the success we're having in winning new business, We continue to win meaningful business in the national account space and signed an incremental $200 million of net new business in the quarter, which totals more than $1.5 billion of net new contracted business since the start of the pandemic.
Additionally, throughout the second quarter, we began making investments in preparation for the business recovery that we believe will begin in calendar year 2021.
Those investments will increase in the third fiscal quarter and Aaron will speak more to this in a moment.
Examples of investments during the second quarter include investments in our customers, in our people, in our working capital, and in our technology.
I'd like to highlight some examples of each of these purposeful choices.
Investments in our customers, including our new Restaurants Rising campaign, which makes it easier for restaurants to succeed and strengthen their business for the future.
Most notably, we announced in November that we are eliminating minimum delivery requirements for regularly scheduled delivery days, which provides operators significant flexibility in managing their business and makes it easier to order what they need when they need it.
In addition, we are not eliminating delivery service days during the second wave of COVID, a practice we know select competition is currently doing.
We see the light at the end of the tunnel and as such, we are prioritizing customer service.
A little incremental expense right now is a small price to pay for customer loyalty and partnership.
Our sales consultants are leveraging the restaurants rising program to retain current customers and help Sysco attract and serve new ones.
In addition to the no order minimums commitment, Sysco's sales consultants are assisting their customers with setting up touchless menus, optimizing delivery and takeout operations, and helping with marketing programs to create awareness of our customers' operations, just to name a few of our value-added services.
I'm proud to report that our Net Promoter Score increased by more than 1,000 basis points in the quarter due in large part to the connections with our customers generated by the Restaurants Rising program.
The NPS increase was our largest quarterly increase in our company's history.
Importantly, as you can see on page seven in our slides, the incremental closure rate of Sysco's customers is 50% below the industry average.
And lastly, we onboarded more new local customers in Q2 than in any single quarter in the last five years.
In addition to investing in our customers, we are making investments in our people.
We are intentionally retaining drivers despite the volume decline in December to ensure we have them available for our pending volume recovery.
Drivers are in short supply across the country and while this investment will drive some incremental transportation expense in the short term, over the long term, it will help ensure that Sysco is able to maximize our share gains during the upcoming business recovery.
As you know, we made changes to our sales organization and sales compensation during the summer.
Our associate retention has improved compared to historical retention rates and our improved retention will help with sales productivity metrics in the future.
We are beginning to make investments in working capital to position the right products in the right locations in preparation for the upcoming business recovery.
Sysco has the broadest inventory assortment in the industry.
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.
We have the financial strength and capacity to invest in products and in inventory, while other foodservice distributors may struggle with sufficient cash flow to make similar investments in the coming quarters.
We are also offering payment plans in partnership with our customers to ensure their continuity.
Lastly, we are making strategic investments in our technology to improve the customer experience.
This includes our Sysco Shop technology, our new pricing software and improvements we are making in our supply chain systems.
Sysco's ability to invest in our customers, our people, our inventory and our technology while delivering a profitable quarter during this pandemic is a testament to the strength of our balance sheet and our leadership team.
I'd like to turn now to providing an update on our business transformation.
First, as we have shared previously, we are focused on advancing our customer-facing digital tools to improve the customers' experience with Sysco and drive incremental sales.
Priority number one is improving our mobile ordering platform Sysco Shop.
Notably, we are now onboarding new customers in less than 24 hours, a step change improvement.
The number of customer orders placed through Sysco Shop continues to meaningfully increase throughout the quarter.
Additionally, our new pricing software is now live in our first test region.
We are learning a lot through this regional pilot and we remain on track to roll out the pricing system across the country.
The goal of this effort is to improve pricing transparency with our customers and drive incremental sales in gross profit growth by optimizing prices at the customer item level.
Additionally, by automating customer level pricing, we will free up time for our valued sales consultants to spend with customers on value-added activities, such as menu design, Sysco brand penetration, and other drivers of sales and margin.
Second, we are improving our go-to-market selling strategy by transforming our sales process.
Through our sales transformation, we have an improved more customer-centric organizational structure.
Our sales transformation is progressing well and the team-based selling approach is gaining traction.
We have created and built new specialist selling positions.
We have implemented a sales quarterback position that helps guide the collective sales teams across a given geography.
As I mentioned on our last call, we have launched our first cuisine segment go-to-market selling strategy and we are seeing initial signs of success with that customer segment through incremental market share gains.
We will roll out this program to additional cuisine segments in calendar 2021.
Lastly, Sysco completed the regionalization of our field leadership structure at the start of our second quarter.
I am pleased to report that our new regional presidents are in place and are finding quick wins to improve our business.
The average tenure of our market and regional leaders is over 20 years and these experienced and talented leaders are highly capable of driving top performance within Sysco.
Examples of quick wins include optimizing our inventory assortment across multiple physical sites and optimizing the servicing of key customers by ensuring the most efficient physical location services each customer location.
To be a great company, you need to have a world-class leadership team.
I am pleased that during the quarter, we made important progress in strengthening our leadership team.
Aaron Alt joined Sysco as our Chief Financial Officer.
Aaron is a proven finance leader with over 20 years of experience in foodservice and retail leadership positions.
He has a track record of transformation and value creation at large organizations in multiple industries.
Additionally, Tom Peck has joined Sysco as Chief Information and Digital Officer.
Tom has experience leading enterprise information technology strategy, services, operations risk, and cybersecurity for large global enterprises.
In his most recent role, he worked great global B2B distributor in the electronics industry, experience that is directly applicable to the transformational journey at Sysco.
Additionally, Tim Orting has officially started his position leading our International division.
Tim will be based in our London offices and will be responsible for driving profitable growth and operational excellence across our international geographies.
With Tim joining Sysco, I was able to reduce the number of my direct reports by four, which allows me to focus more of my time and energy on managing the strategy development and execution of the company.
Joel Grade has begun his new role leading business development and is actively engaged in identifying new sources of growth for Sysco.
I am pleased to say that the transition of Sysco's leadership team is now complete.
We have a strong management team that balances Sysco and foodservice industry expertise with best-in-class experience from other industries.
Our new leaders join a talented and experienced Sysco leadership team.
Greg Bertrand, the leader of our U.S. business has over 35 years of industry experience and 30 years specific with Sysco.
Greg's expertise and steady hand in running our largest business during the COVID disruption has been invaluable.
I appreciate his leadership and the strong impact he has on our results.
Great leadership teams work as a team on a common agenda.
Our transformation strategy has galvanized this leadership team around a common purpose, and I am honored to work with them to set the standard for foodservice distribution for many years to come.
I report to you today with strong confidence that a pending business recovery sits before us.
As vaccine administration mixed progress across the globe, the restrictions currently placed upon our customers will begin to ease.
We can see in our performance data that once those restrictions ease, consumers are ready and willing to eat away from home.
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 foodservice distributor in the industry to ensure the success of our customers.
And our customer success will generate business growth for Sysco.
Our industry-leading sales force has been inspired by the Restaurants Rising campaign to support our customers at levels higher than any point in our proud history.
Our warehouse and delivery associates are the best in the business, working hard every day to ensure we ship to our customers what they want when they need it.
I am proud of their dedication during this challenging operating time.
At Sysco, our customers are an inspiration to us and we will show them just as much determination and how we serve them.
I am really excited to be at Sysco.
Before I joined Sysco, what I could see from the outside was a company with global scale, a strong competitive position and great profitability and liquidity for the industry.
Now that I'm on the inside, I see all of that in addition to a driven leadership team relentlessly focused on being ready for the business recovery and then driving a customer and capability-led transformation.
In short, I see many opportunities in front of us to create shareholder value.
I will start today with second quarter results for the enterprise and our business segments, followed by an update on cash flow.
Second quarter sales were $11.6 billion, a decrease of 23.1% from the prior year, but flat to the prior quarter.
Sales had been trending ahead of Q1 through October and November as restrictions eased, but new lockdown restrictions during December reversed the earlier progress, particularly in the International segment.
There are a couple of additional metrics.
For the quarter, local case volume within U.S. Broadline operations decreased 19.7% while total case volume within U.S. Broadline operations decreased 23.7%.
We do know that there is keen interest in the continued impact of COVID.
The answer varies by region.
Europe went into lockdown in December and is expected to remain in varying degrees of lockdown for a significant portion of the second half.
However, since the week after the holidays, we have been seeing signs of life from volume improvements in our U.S. FS business and SYGMA continues to grow.
This battle will be fought week by week, region by region for the next couple of quarters until the vaccination is widespread and the business recovery takes hold.
The only commitment we can make is that we will be ready and more competitive than ever.
As we move down the P&L, gross profit decreased 25.8% to $2.1 billion in the second quarter.
Most of the decline in gross profit was driven by lower volumes due to COVID.
However, we did see a modest gross margin dilution at the enterprise level of roughly 67 basis points as our rate came in at 18.2%.
A couple of thoughts on that.
First, we typically see a seasonal decline in gross margin sequentially from the first quarter through the second quarter as we did this year.
Second, our largest segment US Foodservice and its partner segment SYGMA, each had a flat gross margin rate versus the same pre-COVID, quarter which is frankly remarkable given these market dynamics.
Given the growth of our national accounts business at SYGMA, which is lower margin, we did see business mix shift, which accounted for the vast majority of the margin rate change.
Our enterprise margin was also impacted by the International and other businesses as both showed gross margin decline in the quarter for reasons which are being addressed.
Our expense profile changed over the course of our second quarter as adjusted operating expense decreased 15.3% to $1.9 billion.
This expense profile reflects a deleverage of our cost structure as sales remained down 23%.
These results arise from some purposeful choices.
First, and on the positive side of the equation, we targeted and achieved increased productivity in key areas such as our warehouse network.
We also maintained our key transportation efficiency metrics despite significant swings in case volume.
Second, we continue to make excellent progress against our $350 million of cost savings initiatives in fiscal 2021.
I can see the savings in the detailed income statement, and we continue to identify and pursue more opportunities.
Third, but on the other side of the equation, we have made the purposeful choice to leverage our financial strength to prepare for the business recovery before it happens.
As previously announced, we changed our sales consultant compensation to include both the fixed and variable component to drive retention and focus on key operational metrics.
We can see that change working in our market wins.
Additionally, we brought back hundreds of associates in the second quarter in support of our business model.
In the third quarter, and indeed in the back half, we anticipate we will hire thousands of additional sales consultants, new business developers, culinary experts and operations associates in anticipation of the pending business recovery.
We plan to be ahead of the recovery curve, not catching up and we have the financial resources to do just that.
Finally, as Kevin mentioned, we continue to make purposeful investments in our capability builds in support of our transformation, pricing, customer experience, sales, vendor management and personalization.
While we expect significant returns on these efforts in future quarters, the investment dollars are offsetting part of our savings in the second quarter and will do so in the back half.
When combined with the impact of slower openings in our International segment, we expect our third quarter results to be more challenging than originally anticipated.
However, as volume returns and grows, whether due to market recovery or our purposeful investments, we expect to move up the sales curve more rapidly than others and expect over the next several quarters the impact of the cost savings efforts separated from the ongoing investments will be more visible.
Finally, at the enterprise level, adjusted operating income decreased 63% to $234 million.
For the second quarter, our non-GAAP tax rate of 16.8% was favorably driven by the impact of stock option exercises.
Adjusted earnings per share decreased 80% to $0.17 for the quarter.
Now let's turn to our second quarter results by business segment, starting with the U.S. Foodservice operations.
Sales were $8 billion, which was a decrease of 23.9% versus the prior-year period.
Notwithstanding the difficult environment, the business 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.
Within the business, Sysco brand sales for the second quarter decreased 165 basis points to 36.5% for total U.S. cases, driven by the customer and product mix shift.
With respect to local US cases, Sysco brand sales decreased 455 basis points to 42%, which was driven by product mix shift in the pre-packaged and takeaway ready products.
Gross profit decreased 24% to $1.6 billion for the quarter, while as I called out earlier, gross margin was flat for the quarter at 19.7% as the business very successfully managed through the puts and takes of the COVID environment and addressed headwinds such as aged inventory for customers like cruise lines and product mix shift out of higher margin categories like PP&E.
The segment's adjusted operating expenses decreased 18.9% to $1.1 billion and adjusted operating income decreased 33% to $472 million.
Moving on to the SYGMA segment.
Sales increased 4% to $1.5 billion compared to the prior-year period, driven by the success of national and regional quick service restaurant servicing drive-through traffic.
This is the second consecutive quarter of sales growth in this segment.
We continue to see new business wins in the SYGMA segment and are pleased by the overall improvement.
Gross profit increased 4.1% to $129 million for the quarter and gross margin was flat to the prior-year.
Adjusted operating expenses increased 4%, $118 million and adjusted operating income increased 5% to $11 million.
Moving to the International segment, our European, Canadian and Latin American businesses have been substantially impacted by recent shutdowns, which are more aggressive than lockdowns in the U.S. The International Foodservice operation segment saw sales of $2 billion, a decrease of 32% while gross profit decreased 36.2% and gross margin decreased 128 basis points.
The gross margin decline was a result of adverse market mix, customer mix, product mix and aged inventory.
For the International segment, adjusted operating expenses decreased 16% and adjusted operating income decreased 175% for an operating loss of $55 million.
Our Other segment, which includes our Guest Worldwide business, remains challenged as hospitality occupancy rates remain low compared to prior year levels.
However, the business is in better shape than many of its competitors and has achieved a number of recent customer wins, including being named the preferred distributor for Renaissance Hotels, JW Marriott, and Westin Hotels via a new contract with Avendra in both the U.S. and Canada, and being given access to all Marriott properties in North America, Central America and the Caribbean.
While still in turnaround mode in a difficult hospitality environment, the business improved its underlying profitability during the second quarter.
Cash flow from operations was $937 million for the first half of fiscal 2021.
Free cash flow was $788 million year-to-date, which is in line with our previously noted guidance.
Net capex for the first half of fiscal 2021 was $148 million, which was $235 million lower than last year as the company carefully assessed its capital investment choices in the face of COVID.
Sysco remains financially strong from a balance sheet perspective.
At quarter end, we had balance sheet cash of $5.8 billion, plus access to $2 billion of available borrowing capacity for a total of $7.8 billion.
Our cash and available liquidity ensures us the stability and flexibility to make decisions that are in the best interest of the company.
We continue to monitor our operating environment carefully.
And as we assess reopening timelines and investment needs consistent with the transformation, we will be updating our views of our levels of cash and capital structure opportunities in future calls.
Although this is a tough operating environment for our customers, which will impact our results for the next quarter or two, Sysco remains resolutely focused on managing its businesses aggressively preparing for the business recovery and building customer-centric capabilities to accelerate long-term growth.
We believe our strategy and our transformational initiatives will drive future value for our associates, shareholders and customers.

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qtrly sales decreased 23.1% to $11.6 billion.
compname reports q2 adjusted earnings per share of $0.17.
q2 adjusted earnings per share $0.17.

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