Sysco Corporation
Q3 2021 Earnings Call Transcript

Published: 4 May 2021

[Operator:]

Good morning, and welcome to Sysco's Third Quarter Fiscal 2021 Conference Call. As a reminder, today's call is being recorded. We will begin with opening remarks and introductions. I would like to turn the call over to Neil Russell, Senior Vice President of Corporate Affairs and Chief Communications Officer. Please go ahead.

[Neil Russell:]

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.

[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 4 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.

[Aaron Alt:]

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 5 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.

[Operator:]

. Our first question comes from Alex Slagle with Jefferies.

[Alex Slagle:]

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.

[Kevin Hourican:]

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 2 consecutive quarters of record levels of new customer prospecting. The why is pretty straightforward

[Aaron Alt:]

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.

[Operator:]

Your next question is from Edward Kelly with Wells Fargo.

[Edward Kelly:]

I wanted to ask you, Kevin, about post-COVID customer mix and overall volumes. Just kind of curious, how do you think -- you've won business on the independent side, you've won business on the contract side. How do we think about when the world normalizes how much higher your case volume will be than 2019? And what does the mix end up looking like? Is it possible with the independent wins you've seen that your independent mix could actually be higher? Is that too much to ask for? Just kind of curious as to how you're thinking about all that.

[Kevin Hourican:]

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

[Edward Kelly:]

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?

[Kevin Hourican:]

It's a great question in regards to the labor availability challenges that are being faced across the industry -- frankly, across all industries. You've read obviously about the restaurants themselves and how much they're struggling with filling their jobs. And then drivers, in particular, are in short supply nationwide, and frankly, in multiple countries within which we operate. Here's one meaningful point of difference between Sysco in, let's call it, the restaurant. Our jobs are excellent paying jobs. We do not have a wage challenge. We do not have a minimum wage challenge. Even if the nation went to a $15 minimum, we do not have pressure in that regard. Our driver jobs are excellent paying jobs, strong benefits, they're attractive positions. Our issue and what I spoke to you on the call today is creating awareness to those jobs. So we've had to do things in this quarter -- in the quarter we're in, Q3 and Q4, to increase advertising to create awareness. We've had to do some things, to create sign-on bonuses, retention bonuses, referral bonuses. So the incremental expenses that I was referring to were more of that ilk than structural permanent increases to the wage, which would dilute margin. So I view this as actually a little bit more of a transitory activity where we're needing to hire over 6,000 people in our second half of our fiscal year. And there are select pockets within the country that are really tight, and we're doing some things to create awareness of our jobs. So we're confident in our ability to improve our profit ratio in the future. We have a cost takeout program that is substantial. That will help offset any pressures we would see in wage. We've said previously that we've taken $350 million of permanent structural cost out of our business, and that's also something that Aaron will talk about in more detail on May 20.

[Operator:]

Your next question is from the line of Kelly Bania, BMO Capital.

[Kelly Bania:]

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.

[Aaron Alt:]

Great question. We are quite excited about our progress against our cost savings effort. Just to go back for a second, what we had targeted for fiscal '21 was $350 million of cost out through a combination of savings and COGS as well as in operating expense. We are ahead of our forecast in that respect, and we certainly expect to meet or beat our $350 million target for fiscal '21. I'm particularly excited this quarter because the savings are more visible than they have been in previous quarters. And at the sake of distracting us a bit, I thought, well, we might do some simple math on the call today just so I could illustrate the point of how we can see the savings having an impact on our P&L and kind of prove the point that they're real, they're there. And in particular, as sales go back up and we have the opportunity to have a cleaner view, it will be more obvious to everyone that we're out there. So bear with me a second, I'm going to actually walk you through some simple math. It starts like this. To go back a year, Q3 in fiscal '20, our adjusted OpEx was $2.187 billion, sorry for the decimal points there but we've given the levels we're talking about. This quarter, the comparison period, our sales were down 13.7%. So if for the sake of argument, we assumed that our costs were fully variable -- they're not, but if we did, OpEx should have been down about $300 million. But Joel guided you in the past that our cost structure is 1/3 fixed and 2/3 variable. So the variable cost would have been just under $200 million of that $300 million. And we should have suffered from stranded fixed costs of $100 million absolute cost savings actions. That would have put us at $1.98 billion, right, just to continue the simple math as we push ahead. Everyone's hopefully still with me. Our adjusted OpEx for this quarter, though, was $1.867 billion, down $320 million, meaning not only did we reduce the variable cost consistent with sales, but we also took out $120 million of fixed costs, which is the whole point of our cost-out effort, right, being able to go quarter-over-quarter before investments, right, be able to take the fixed cost out of the structure. And the nice thing about this quarter is sales are down, and we're able to show that. Now I should point out a couple of other things as well. The first is that we did get, call it, $40 million of good guys that are onetime or other benefits that weren't part of the cost-out structure. What you can't see is those good guys offset $40 million to $50 million of purposeful investments we made against the recovery against the transformation in OpEx for the quarter as well. We've always committed that we are going to invest against the business. We're going to use some of the savings to advance our agenda. That's what we've done. This quarter just gives us a good example of how we can show the math, showing that it works out. On Investor Day, I will have more to say about cost-out. And it will talk about, really, Kelly, to the point of your -- part of your question of where is the cost-out coming from, how it's coming from the way we've restructured and regionalized our business, how it's coming from a culture of frugality that Kevin is leading, how it's coming from prioritizing our investments and insisting on business cases as we push ahead, really core discipline that you would want and how it's helping us to offset some of the trends or headlines around employee cost or inflation, et cetera, as we carry forward. So thanks for the question, a long answer, but I hope that's helpful.

[Kelly Bania:]

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.

[Kevin Hourican:]

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 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 product 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 promos 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 reestablishment 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 5 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.

[Operator:]

Your next question comes from the line of John Heinbockel with Guggenheim.

[John Heinbockel:]

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?

[Kevin Hourican:]

Yes, John, thank you for the question. Probably still a little bit too soon to tell. There was definitely a distributor consolidation that took place during COVID. My goal for our company will be, yes, keep it. And I'm sure that will be the goal of all of those that were winners during this market share gain that we have experienced. I think what you're asking, and I'll just say it pretty bluntly, the biggest players in this space have been net winners since the beginning of this pandemic. And I've been asked point blank, the question is, Kevin, you're saying -- and 2 other big companies are saying you're winning share, how can that be true? How that can be true is if you have the market share of those 3 companies. Together combined, we're less than half of the total in the marketplace. So I think the thesis remains accurate that the strongest and biggest players are succeeding during this environment, and we have no intentions of giving back the market share that we've gained. Things that we're doing to retain those customers, the Sysco Shop tool is becoming much easier to use, suggested orders, easy reorder button. Other customers like you are buying the following things, work we're going to talk about on Investor Day on something we're calling personalization to improve the relevance of the offers that we provide our customers. They're specifically targeted towards increasing penetration with the customers that we currently serve. There's gold there in them hills, as we like to say. And so again, the biggest players have been successful, us being the largest in this space. We believe we can even further leverage our scale of our purchasing economies, our supply chain economies, and as we get better and smarter, on the promotional offers we provide to our customers. We intend to increase share of wallet and increase customer retention.

[John Heinbockel:]

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?

[Kevin Hourican:]

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?

[John Heinbockel:]

No, I was going to say the 10%, right, that you've picked up since '19, how are they behaving, right? Is there a ramp-up process where they're below average compared to more tenured accounts? Or because of COVID, if they come on and are actually -- your share is higher with those?

[Kevin Hourican:]

Yes. John, thank you for the question. Yes. It's what you said in the first half. They come on smaller. We win X number of lines and cases, and then we earn the right over time to increase it. So that industry historical fact pattern remains to be true. And again, we're plowing through that because we know we can, in fact, succeed in selling around the room. So if we win center of plate, we can sell around the plate. If we win with produce, we can then introduce center of plate. And we're confident we can do that. So the profit per case is fine. It's just the number of cases per unique stop are -- tend to be lower for a new customer win, as you indicated.

[Operator:]

Our next question comes from the line of John Glass with Morgan Stanley.

[John Glass:]

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?

[Kevin Hourican:]

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

[John Glass:]

Okay. I'm sorry, the second part of that was just on the pricing. You -- is it a sharpening of pricing given the new pricing tool? Or is that just a customer acquisition vehicle to create that transparency that maybe was the block?

[Kevin Hourican:]

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.

[Operator:]

Your next question comes from the line of Jeffrey Bernstein.

[Jeffrey Bernstein:]

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.

[Kevin Hourican:]

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 2 weeks, since I'm going to ask you to be patient with us at our Investor Day in 2 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.

[Jeffrey Bernstein:]

Got it. And then the follow-up. Aaron, you mentioned a couple of times, debt paydown, which I know over the past few quarters, people were questioning what you're going to do with your stockpile of cash. Just wondering how we should think about whether there's a goal or a time frame in terms of that debt paydown, what that implies for your cash usage. I know you talked about -- talking about cash priorities in a couple of weeks. But just directionally speaking, what are your thoughts on the time frame and the goal for the debt and whether that has any change to how you used to prioritize your cash usage?

[Aaron Alt:]

Sure. Well, as you look back over the last 9 months, what you can see is significant debt paydown in Q1, paydown in Q2. And indeed, we led with the fact that we have paid down debt in Q3 as well. As I look back over the crisis, we did exactly what we should have in the face of the unknown and increasing our balance sheet cash, add-in expense. And as we focus on the longer-term and the overall profitable profile of the business -- profitability profile of the business, given the strong cash that we generate, we have -- I'm not hiding in here by saying we have the opportunity to optimize our capital structure. I'll give you the details of that during Investor Day, but you can take from what we've done a pretty good signal on where we're going.

[Operator:]

Your next question comes from Lauren Silberman with Crédit Suisse.

[Lauren Silberman:]

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?

[Kevin Hourican:]

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 end -- 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.

[Lauren Silberman:]

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?

[Kevin Hourican:]

Well, I think we've shared the level of detail we can for purposes of this call. One of the things we're going to talk about at Investor Day is how we think about the individual components of our customer base. What I would have you take away is certainly with foodservice management still being slow, hospitality not having recovered, the strength -- where you can see the strength in the portfolio is in the independents coming back and in the chains that have been stronger over the course.

[Operator:]

Your next question is from Nicole Miller with Piper Sandler.

[Nicole Miller:]

I wanted to ask first about labor, like an internal reflection, if you would. It's very positive to hear how you're helping your team and then how they help the community on average. I'm curious if you could share a spectrum, meaning I'm sure there's still areas of challenges and offsetting clearly areas of successes. So when I think about labor, clearly, sales is just crushing it out in the field. And then we hear, for example, maybe on the other end of the spectrum, it's hard to get somebody to drive a truck overnight or something like that. But where does -- like the night shift to fill the truck before that truck pulls out, where does that fit in? Can you just kind of talk through the nuances of how all of this happens and where there's challenges? And I think you've clearly outlined the successes. So thank you, if you can fill that in.

[Kevin Hourican:]

Sure, Nicole. Thank you. It's Kevin. We have 3 major functions in our field. There's the sales function. We call them selectors. Those are the folks that work in the warehouse and then drivers. We're actually going to change the name of the driver piece to be more reflective of the work. We're actually going to start calling them delivery partners because they actually partner with our sales team to activate sales at the local level. But for now, sales consultants, selectors, drivers. Sales consultants, we're -- that team is just killing it out there right now, as we talked about earlier. We will be in a position of actually adding sales consultants in fiscal 2022 based on the investments we want to make in our team-based selling model. We've said publicly, and we'll talk about it more on May 20, we're going to add more specialists to be able to complement our existing broadline sales consultants. Warehouse selectors again, as I said a little bit earlier, we pay a very fair wage for those jobs. Those are excellent jobs. And we have a ton of hiring to do. I mentioned that we're going to hire over 6,000 people in total for our spring season. How I would describe our warehouse selectors is we're on track. We manage it day-to-day, week-to-week with hiring goals by site, by location. And we are green, meaning in a good position, green -- not red on our warehouse selector hiring. The more difficult job to fill at this point in time is our driver job. And it's not because of wage. As I said earlier, our wage for our driver role is terrific. It's about creating more awareness of those jobs. The overall macro impact on drivers is the age of the driver in this country is getting up there. People are retiring, and there's too few people going into that line of work. I would say I'm actually inspired by what United Airlines has done. They have the exact same problem with pilots, and they've just purchased and are going to in-source a pilot school. While I'm not announcing anything today on this call, what I would submit to all of you is Sysco is going to be very progressive and be the industry leader on creating a pipeline of drivers for our long-term success. And we're not going to let it get in the way of our growth.

[Aaron Alt:]

If I could add to that, just to go back to some of the core themes, which is, look, we have significant scale across the industry, and we have capabilities, whether it's with our -- in our buildings with our selectors, with the pipeline on the drivers, with the sales teams. We're an attractive employer in so many ways from a wage of benefit perspective. We don't have the issues that many do in the industry. We have great retention rates in the employees that we have. And as it relates to cost, we have the opportunity. We've already proven, that we can bring -- and we are bringing our costs down so that both we can improve the bottom line, but also we can invest where necessary. And in Q2 and Q3, you've heard us talk about the fact that we are investing in the recovery and investing against our team to be able to drive our successes in enterprise going forward.

[Nicole Miller:]

If I can just sneak in a second and last question, like more of an external reflection, a day in the life of a restaurant that you deliver to. I'm curious about fill rates and the predictive nature of the time window and how that's changing. So again, on average, it's amazing. This is where we do have a little bit more insight. When we look at restaurants, it obviously is mapping and correlating to what you've shared. But some are better off and some are lagging naturally. So if -- I'm tempted, and this is how I'm going to ask because it's probably wrong. I'm tempted to think, "Oh, suburban chain restaurants get everything they need, fill rate, at the window they want and maybe urban local restaurants don't." So again, can you just speak to the spectrum of how it is in the day in the life of a restaurant you deal with?

[Kevin Hourican:]

Cool, thanks for the question. I'll just break it down into 2 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 2 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.

[Operator:]

Your final question comes from the line of John Ivankoe with JPMorgan.

[John Ivankoe:]

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.

[Kevin Hourican:]

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.

[John Ivankoe:]

Yes. Well -- okay. Yes. I mean, certainly, I understand that and I didn't mean to screw up the transcript. So forgive me for that. And in terms of the independent restaurants that you have added, it's obviously up 10%. It's a huge number. I mean, do you think there's something different, and maybe I can anticipate your answer a little bit, that makes them much stickier in '21? I mean it used to be, "Hey, these are local accounts. They're not in contract. It's a street fight every day basically to maintain this business." Is it your sense? And are you seeing through your experience of some of your technology initiatives and what have you that are leading to a more predictably sticky consumer -- restaurant consumer than maybe you had at the beginning of your tenure or, I guess, more appropriately, than before your tenure?

[Kevin Hourican:]

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.

[John Ivankoe:]

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?

[Kevin Hourican:]

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 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. U.K. opened up outdoor dining 2 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 dividend 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.

[Operator:]

This concludes today's conference. You may now disconnect.