Sysco 2Q17 Earnings Call Notes

William DeLaney – Chief Executive Officer

Transition from deflation to inflation has been a little more rapid than normal

“When you have an inflationary period and where that overall inflation is in the 2% to 3% area, it’s usually at a level just for the customer in a particular restaurant were able to pass along. So generally a 2% rate is a kind of sweet spot for our customers and not a huge challenge for us; now we did point here earlier that the transition from deflation to inflation has been a little more rapid than normal, and there are certainly some categories where we are seeing more than 2% to 3% inflation. So that becomes a challenge both in terms of how we work with our customers and they work with their patrons, but I wouldn’t say we are seeing anything out there today that would be overly difficult for our customers to pass along.”

First opportunity to use new management tools in an inflationary environment

“And look, I think that’s a really key point, we continue to make it – we are going to be going through and we are in the midst of going through transition now in this environment and our revenue management tools, this will be the first time that we have really utilized those in an inflation environment.”

I wouldn’t get overly excited about a couple months of weak restaurant data

“So, I don’t know that I would get overly excited about one or two months of data, it’s somewhat mixed out there. Consumer confidence is positive for the most part our restaurant operators and customer feel good about the business not quite, maybe is feasibly good as they were a few months ago, but my experience tells me that these numbers move around and they are still very much on a range that as I said earlier it translates to go to the industry and that’s certainly good for us.”

United Foods FY 3Q17 Earnings Call Notes

Steve Spinner – Chairman & CEO

We continue to experience deflation

“We continue to experience deflation, which was negative 17 basis points excluding Haddon House during the quarter. Deflation in produce was around 2%. This was an improvement from the second quarter; however, reflects a headwind compared to the year ago period when we had inflation of 1.25%. The general lack of inflation also caused what we believe to be a short-term pressure on gross margin dollars”

Deflation has continued but it has moderated

” Although industry headwinds have not abated, we see some reasons for cautious optimism. Deflation has continued but is moderated.”

Sysco FY 3Q17 Earnings Call Notes

William J. DeLaney – Sysco Corp.

It would be good to see more traffic, but it’s good that people are positive

“I think the good news here is while there’s consumer confidence or some of the other feedback we get from surveys we do with restaurant operators that we participate in, it is positive. So, I think you always want to be in an environment where people are looking forward or feeling better about things. And I think that’s a good thing. So, if the economy can continue to at least move along even modestly and if that translates into our business, that will keep our customers positive and obviously that keeps the business in a good way. So, I think right now, we’ll take it. It would be good to see a little more traffic. But the fact that people are positive is very good.”

Sysco FY 2Q17 Earnings Call Notes

Bill Delaney

It’s a little slower out there right now

“I think it’s been hard to really discern a consistent pattern on trends. The numbers for this quarter are a little off the first quarter, but not that much. I think we saw some things around the holidays that we think probably impacted a little bit. And I think I’ve got this right, I think October was a little slower and then early November was good and it kind of leveled out again. So it’s kind of up and down by weeks. Some of it’s the way the calendar falls for us this year with the coming off the 53-week year, but I would just tell you it’s a little slower out there right now, but I can’t tell you that we saw anything that was necessarily tied to the elections”

Joel Grade

Lapping fuel costs

” So we talked earlier about the fact that, in this quarter, we actually start to lap some of those results. And that, in fact, did happen. The last few quarters, I think we’ve talked about a roughly $0.04 impact on fuel price. And so, again, what we always focus on internally is managing to a flat cost per case ex-fuel. And, once again, in this quarter, we’ve done that.”

Sysco 1Q17 Earnings Call Notes

Bill Delaney

The restaurant industry not currently experiencing the level of growth

However, the restaurant industry, which represents approximately 60% of the foodservice market, is not currently experiencing the level of growth we’ve seen in recent quarters. Restaurant traffic continues to show year-over-year declines and restaurant spend has decelerated as well. More specifically, recent data from both NPD and NavTrak show weakening overall sales trends. That said, we continue to execute our business plan and key initiatives very well. I’m pleased with our progress to date toward the achievement of our three-year financial goals, and I remain confident in our ability to accomplish our strategic objectives over the long-term.”

We’re seeing some slowness out there

“So if you go back to my comments, I mean basically we’re seeing some slowness out there – softening, I guess, is a better word – in terms of overall growth in the restaurant segment, and ours is off a little bit as well. So it just reinforces the importance of solidifying those customer relationships and getting penetration where there is that opportunity where customers are growing as well as continuing to stay really locked in on retaining our customers and identifying new opportunities as we go along, but I mean the 1.8% to 1.9% is largely the organic growth.”

Traffic has been down

“Well, I think the challenges are what I’d referenced. You’ve got several quarters in a row now where traffic is actually down, and while the spend is up, it’s not rising at the same rate it was rising. So there is clearly a softening out there. I mean whether it’s because of the election or relative pricing between grocery store and restaurants, I’ll let others kind of critique that. Look, I think there’s ebbs and flows in any cycles of economies, and I think we’re going through that right now”

Don’t see the deflation reversing

“So, I think right now they’re managing it pretty well and the deflation is helping them. At some point, I guess it could become more acute if we were to see the deflation reverse, but as I think as Joel pointed out, we don’t see that happening here, at least not in this calendar year.”

Sysco 4Q16 Earnings Call Notes

Sysco (SYY) William DeLaney on Q4 2016 Results

Sentiment for meals away from home seems to be trending downward

” These results were achieved in a market environment that is experiencing uneven trends and appears to have softened somewhere off-late, while consumer confidence in unemployment data points remain relatively favorable compared to a few years ago. The current sentiment for customer spending and meals away from home seems to be trending slightly downward.”

That said, restaurant operator expectations remain favorable

“Turning to specific restaurant industry data, overall sales trends weakened as reflected in current NPD and KNAPP-TRACK Traffic and spend data. That said, according to National Restaurant Association, restaurant operator expectations remain somewhat favorable.”

Merger agreement with US Foods terminated in late June

” our merger agreement with US Foods was terminated in late June, we regrouped as a management team very quickly, in July we put together the framework of a three-year plan and shared that with the investor group in September, along the way with our Board.”

Not sure what’s driving it but it just feels softer

“You know, we read a lot and try to learn as much as we can from folks that follow all the components of the industry. I just think it’s a little bit of a malaise. I just think it’s — you know, you’re going to have these cycles and sub-cycles in any point in time, and some of it, we’ve been going up against some stronger numbers a year ago, so there’s some math in it. But it just feels a little bit softer out there. I think people are being a little more cautious with their spend. Maybe the election, maybe — I’m not sure. So I guess I wouldn’t want to just conjecture here, but I don’t think it’s the Olympics, I don’t think it’s any one thing in particular. I just think it’s a little softer and it seems to be showing up in multiple places, so I don’t think it’s a certain type of customer per se or anything like that. I just think it’s one of these sub-cycles we’re going to go through and time will tell whether it’s a three- to six-month deal or longer.”

Don’t think the softening is necessarily related to over-storing

“You know, Mark, I think when you go back to 2009, 2010, clearly there was oversupply and overcapacity, and I think there’s been a pretty good correction since that time. I believe we’ve seen some modest reduction in restaurants — number of restaurants here over the last year or so. But nothing to the degree we saw for or five years ago. There may be a little bit of a modest correction, but I don’t think that’s an overriding issue, I think it’s somewhat self-correcting.”

Joel Grade

Deflationary trend likely to continue

“Now I’d like to close with some commentary on the outlook for fiscal 2017. The deflationary trend has been persistent over the last four quarters and will likely continue through the remainder of the calendar year, creating modest sales and gross profit headwind for the first half year. The restaurant environment appears to be softening and as a result, we anticipate modest case volume growth for the next quarter or two. Capital expenditures during 2017 are expected to be approximately 1% of sales, including Brakes.”

Thomas Bené

Just seeing some softening in terms of the slope of growth

Well, it’s not just what we’re seeing — I think it’s what we’re hearing from other folks that are speaking to their results, both in the operator side and some of our peers in the industry. So I think it’s just a little bit softer. I think the good news here: People are still relatively optimistic, both the consumer confidence in general and the restaurant operators. When you look at those indices and compare them over the last couple of years, generally, the outlook is favorable, but we’re just seeing some softening in terms of the slope of the growth, and specifically, we’re seeing it in traffic continuing to be flat, and check size up in some segments, flat in other segments. So it’s no one place, it’s a relative comment. We’re still seeing growth but it’s just not the same trajectory that we saw a couple quarters ago.

UNFI 3Q16 Earnings Call Notes

Steve Spinner

Three strategic acquisitions in the last several months

” over the last several months with the completion of three strategic acquisitions. As many of you know, we completed the acquisition of Global Organic and Nor-Cal in the third quarter and most recently in May, we completed the Haddon House transaction. ”

Michael Zechmeister

Expect contraction in center store

“I mean I think the base business is generally stable. We know over time as I said in my prepared remarks that I think that those are going to continue to be contraction in the center-store, nothing new there which is why we work so hard to build out the perimeter and related kind of fresh offerings.”

Private labeling impacting center of store

” think that in the center of the store, one of the biggest drivers certainly in the national side is private labeling in mass and conventional which is escalating at an extremely rapid pace. So certainly the larger national branded manufacturers in the natural channel, one of the biggest uphill battles they are facing is just the plethora of new private label natural brands that are finding their way into mass and drug and convenience and conventional. So certainly that’s a trend that I think we’ve all been fighting with for some while, but again if you look back overtime, private labels tends to have a very cyclical nature to it, a lot of it comes on and then it backs off, a lot of it comes on and then backs off.”

Retailers will contract their center of store over time

“I don’t think there is any doubt that retailers are — will overtime contract their center-store as perimeter and products that they can be differentiated in, become more important. And so we’ve adjusted our model with that and so I think what you’re seeing in our sales growth is kind of this window of time where we’ve built the infrastructure, we’ve started to have contraction around, becoming penetrated in those categories, but not enough to move the needle.”

UNFI FY 2Q16 Earnings Call Notes

United Natural Foods’ (UNFI) CEO Steve Spinner on Q2 2016

Over indexed to natural channel, where growth has moderated

“we are caught in this uneasy position, temporary uneasy position where we are over-indexed in the natural channel or under-indexed in conventional. We’re unbelievably excited about getting into this new channel of gourmet and ethnic. There are many gourmet and ethnic or specialty chains that have never been a channel at all for UNFI, so this is brand new. And another way to think about that is, while growth has moderated in the natural channel because the products have been around for so long, when you think about the gourmet and ethnic channel, the fastest-growing category within those stores is natural and organic.”

Under indexed in mass and drug channels

“we are way under-indexed in mass and there are tremendous opportunities for UNFI in mass and drug that we are taking a serious look at that three or four years ago we would’ve never looked at. And so because our distribution system is so robust, there are incredible opportunities for UNFI from a logistics perspective, from a redistribution perspective, from satisfying other conventional mass and drug distribution requirements that we are pretty excited about.”

We’re in a bit of a lull in the natural channel, but optimistic we’ll come out of that

And I would also tell you that being somewhat of an optimist, we’re at a little bit of a lull, as you know, within our natural channel but I feel fairly optimistic that we will also come out of that. It may take a couple years, but we will come out of that, too.”

What UNFI will look like in a couple of years

“it’s highly unlikely that we will ever carry Coke and Pepsi and Fritos, that’s just not what we do, we do want to build out the customer store. And so when you think about what UNFI will look like in a couple of years, it’s certainly conventional produce, organic produce. It’s every natural protein known. It’s rack deli, food-service, prepared foods. It’s center store, it’s frozen, it’s dairy, it’s gourmet and ethnic, it’s specialty, et cetera, et cetera. So what we want to be in a position to do is to solve a customer’s needs across all or some of their store.”

In a squeeze between capacity and volume for the moment

“the challenge for us right now is we are just in that squeeze between having the capacity and not having enough volume to push through it. But I think our building out the store is not only appropriate, but it’s going to get us to where we need to be.”

Suppliers promote where they’re getting growth

“this is a gross generalization, but suppliers generally promote where they are getting the growth. And so when you take the growth out of the channel you see a significant reduction in the amount of promotional activity. Promotional activity is a significant source of margin from UNFI, so if the suppliers divert the promotional activity to other channels, we’re going to feel the pain.”

Using price to attract new business is a recipe for disaster

” look, we’re not going to use price to attract new business because that’s a recipe for disaster, but we are going to be competitive where we have to. ”

United Natural Foods FY 1Q16 Earnings Call Notes

United Natural Foods’ (UNFI) CEO Steven Spinner on Q1 2016 Results

We’re operating in a rapidly evolving environment, with an increase in competition across every channel

“I believe we can all agree that we were — we are operating in a rapidly evolving environment. We all know that consumer preferences for healthier food option have been changing for the last several years. In fact, the acceleration that has taken place over the last 6 to 12 months has been spectacular and this is demonstrated by the significant and rather recent increase in the number of retail options for consumers to purchase natural organic products. As a result, we’ve seen an increase in competition across every retail channel and corresponding competition within wholesale distribution and supply chain. ”

There is no doubt that today we are mainstream

“Private label natural and organic products which we estimate at approximately 30% of the retail market is growing extremely quickly and center store is under pressure as consumers choose fresh and healthier option. Throughout the 90s and up until 2014, our industry was a niche. There is no doubt that today we are mainstream.”

M&A will play an accelerated role in consolidating manufacturers. Gross margins will continue to decline

“M&A will play an accelerated role in the consolidation of manufacturers and producers within natural, organic, and specialty. M&A will play an accelerated role in the consolidation of food retailers driven by cost reduction and differentiation. Gross margins will continue to decline as competition increases both at retail and wholesale, forcing a greater reliance on differentiation, efficiency, and scale.”

Acquisition pipeline strong

“The DPI would not have been on our list for a variety of reasons. But there are a ton of specialty, ethnic, gourmet, fresh, fresh across probably five or six or eight different channels. And so our pipeline is really strong. We got done making the Tony’s acquisition 16 months or so ago, we feel like we’re ready to do another one. We feel that the valuations for us are still realistic and so we — I’m extremely optimistic that we’re going to make some good progress there.”

Not seeing customers moving to self distribution

“On self distribution, I haven’t seen a lot of change in movement to self distribution. As a matter of fact we’ve had a great deal of success in moving some customers away from self distribution. I mean, if you take a look at the $785 million in contract expansion, a large percentage of those contracts have their self [ph] distribution option. And so, I think it’s something that we see as retailers having a tremendous confidence in the services that UNFI provides that they just can’t do themselves.”

There is increased competitive pressures across a wide berth. Our margin certainly isn’t going to go up

“I mean there is the increased competitive pressures across a pretty wide berth, right. So because so many more retailers carry the product, so the retailers themselves are competing with one another. On the supply chain side, many more wholesale distributors they’re direct et cetera, et cetera are carrying the product which is making it more competitive. And so, I think as you look at UNFI as I said earlier, our margin certainly isn’t going to go up as we renegotiate these contracts. So the challenge for us is to make the distribution system and the supply chain related to it more efficient.”

This is what happens when you go from niche to mainstream

“I think that because we’ve gone from a niche to something that’s very mainstream, I think the natural occurrence across whether it’s the retail level, or at the wholesale level, at the supply chain level it’s going to become more competitive whether it be for services or whether it be ultimately for the price of the consumer.”