Neil A. Russell II – Vice President-Investor Relations
William J. DeLaney – Chief Executive Officer
Wayne R. Shurts – Executive Vice President and Chief Technology Officer
R. Chris Kreidler – Executive Vice President and Chief Financial Officer
Sysco Corporation (SYY) 2014 CAGNY Conference Call February 18, 2014 2:45 PM ET
Let's get everyone take their seats, move on to the next presentation here. We are pleased to welcome back Sysco to the CAGNY Conference. Sysco is the global leader in food service distribution, deals last year reached $44 billion. The company recently announced the acquisition of US Foods, the second largest distributor in the U.S.
So here to speak from the company this afternoon are; President and CEO, Bill DeLaney; CFO, Chris Kreidler; and Chief Technology Officer, Wayne Shurts. I would like to introduce also Neil Russell, the Vice President of Investor Relations for a brief introduction to kick off the presentation. Neil?
Neil A. Russell II
Thank you, Chris. Good afternoon everyone. It’s our pleasure to be back at CAGNY again this year. We certainly appreciate the partnership we have had with the organization over the past several years. I have got two things I need to do here real quick, the first of which is to refer to you our forward-looking and risk statements, they are on the side here on the room of course, they are in our SEC filings and for those of you listening on the web there on in the PDF file that you can see on the webcast as well.
The second of which is to introduce our three speakers, as Chris just mentioned we have three with us today; Bill DeLaney our President and CEO. Bill will offer some perspective on the market, Sysco’s strategic focus and how the proposed merger with US Foods fits within that context.
Wayne Shurts is our Chief Technology Officer. He will speak after Bill to provide an update on our business transformation technology including recent enhancements and rollouts and Chris Kreidler is our Chief Financial Officer; Chris will provide a financial update on our business transformation work and also an update for you on the merger integration planning process that’s underway.
So with that, I will go ahead and introduce Bill DeLaney, our President and CEO.
William J. DeLaney
Thanks Neil and Chris, good afternoon everybody. It’s a real privilege for us to be back here again this year. We have been here several years now and we do have a lot going on and in the interest of that, I am going to move through our presentations, so we get others speakers up here on a timely basis as well.
Sysco as you heard is the leader foodservice industry for those you have maybe a little new to us, foodservice industry is generally defined as distribution to foodservice operators where the meal is either eaten away from home or prepared away from home, so that’s our specialty. We market over 400,000 products to roughly 400,000 customers and we are approaching 50,000 employees today.
The other thing we are going to touch on is, that you heard is our pending merger with US Foods. We are very excited about that. We are particularly excited about what these two companies can do together and the new Sysco post close in terms of creating a deeper and stronger value proposition for our customers and a long way how we can operate more efficiently as we do that.
Our business as you heard, we do about $45 billion in sales, we operate primarily in the United States, Canada and Ireland, We also is an export company, by in large the Broadline business as we call it generates about little over 80% of our revenue stream and probably over 90% of our profitability.
And so by Broadline what I mean is that is, it’s just what it sounds like. So operating companies are basically can sell a full spectrum of products to their customers and as you can see from this map, we complement the Broadline operations with specialty companies which are geared more towards say specialty produced, specialty needs, imports, that type of thing and we also have a company, we specializes specifically on the limited menu QSR side of the business and that’s a national platform as well.
One thing you will notice on this map, it reinforces I think a key part, the people knew our business, we benefit from understanding. Our business is largely local. So we sell local customers, we also sell regional and national, but what you can see from the dots on the map that those are primarily Broadline companies. In the United States alone, we have 70 Broadline companies that are fully staffed, President, Senior Management team full sales force, warehouse delivery and that is totally because the decision makers for the majority of the revenue stream that runs through those operating companies are within 100 to 150 miles of those facilities.
So the key continues to be to stay close to our customers within our customers and be in a position to be number one after take care their needs on a daily and weekly basis. With that said, we are going through a lot of change in Sysco and what make sense is, we are looking to standardize our value proposition for our customers as well to reduce some of the variability in our performance and in terms what our customers see from a service standpoint.
This reflects some updated data that Technomics has provided us recently. So we are fortunate to work in a very large space, little over $250 billion market, about $230 billion of that is in the United States and we have about 17% share if you looked at us over time you would see that we pretty consistently are growing that share, really since our formation back in 1969, we went public in 1970.
So we are looking to continue to grow our market share to grow profitably and doing in a way that we can create additional traction for our customers over time.
Five foundation points of our strategy in terms of how we go to market are predicated on partnership, productivity, products and services allowed to that, expanding our capabilities as well as our people.
So in the partnership side what we are really talking about there is strengthening those relationships both with our customers and our suppliers and we do that everyday by enhancing the service to those customers and as I said earlier trying to better understand what their needs are so that we can invest and improving our capabilities in those areas.
To do that, you have to be operationally excellent and that’s the strength of Sysco.
So certainly improving productivity across all aspects of what we do. Historically, you would tend to think that more in warehousing, delivery, that’s still is an area of opportunity for us, but we’ve also invested significantly over the last two to three years initiatives that will also be more productive in these selling and general administrative area of our company as well.
So customer centric approach, we’ve very strong operational excellence foundation to support that. So in fact we do have the ability to invest in the business. Along with that, historically as we go forward, the need for innovation to allow us to better differentiate ourselves in a very competitive market place that we find ourselves today in which we expect to continue to find ourselves in.
So that differentiation can take place along product, technology, supply chain capabilities and those are all some big areas that we have several initiatives going on today and frankly areas that we’ve been able to build capabilities over the last several of years which has allowed us to grow and to grow profitably.
Certainly, expansion in terms of both of our product categories, our geography and just our capabilities in general, so our focus today and has been and continues to be on our core market, which generally as I said is in North America food service, but along the way we certainly are looking for ways to find adjacent opportunities that would be beneficial to our customers as well as geographic opportunities that we think we can bring some value to and many as since we support our customers there as well.
No company can take on the challenges and the goals that Sysco has taken out without investing in their people. We’ve done a very nice job over the last few years bringing in several talented executives at the senior level and I’d say over the last five or 10 years, a very good job in certain areas of the company; technology, supply chain come to mind in particular bringing folks in who have expertise and capabilities that we need as well.
With that said, we have opportunity, in fact we are making good progress now and building out development programs for all of our people whether they’ve been in Sysco two or three years or whether they’ve been there 20 or 25 years. We are going through a lot of change. Those of you who follow us know that, so we need the capabilities and the experiences the folks from the outside who are new to Sysco bring to us, but we also need to leverage the experience of our 20 and 25 year leaders, which we have many and which I will eye on day-in and day-out to run our businesses and oversee our markets and to lead our regions.
So it’s a good mix of talent and certainly a key area of emphasis for us as we go forward. So those are the foundations, the building blocks that you’ll offer our strategy. What are we really focused on? I think what you’d expect us to be focused on growth, but growth in a profitable way and optimizing our margin management as we do that and continue to leverage our balance sheet, optimize our asset management, generate good cash flow.
The only way to sustain growth over the amount of time the Sysco has done the business and the only way to sustain growth as we go forward for several years is to create enhanced differentiation at the customer level. So that can take a form in terms of basic things like the quality of our sales force, the MAs that they are dealing with each and everyday, the capabilities of the driver, service levels, more and more of the business reviews that we do with our customers, culinary ideas that we share through our executive chefs, menu planning, all those types of things are just examples of how over the years, we’ve enhanced our portfolio of products and services to deepen that relationship. And frankly it’s an area that we need to continue to invest in as the competitive market continues to be more and more competitive frankly.
Again those of you who follow us know that there is a lot of margin pressure in our industry today, in our business, we’ve got several things going on to mitigate that margin pressure. I’ll talk about some of those initiatives in a moment; category management, revenue management and certainly a lot of cost initiatives.
So for us to continue to grow and for us to continue to bring value both to our customers and shareholders, we need to do that in a profitable way and we need to always improve our productivity in every part of our business and certainly cash flow is the ultimate test of how well we are doing that.
I mentioned expanding our capabilities; this is a slide that we may have used last year, we built on it a little bit, but I just want to take a moment, it’s a good way of looking back if you talk about the core for example. We define the core a lot differently today than I would have five years ago or certainly 10 or 15 years ago.
Sysco basically started when this industry started in the 60s, early 70s and we were primarily a distributor of grocery and frozen items. Over the years, we’ve expanded our product capabilities much more in the Center of the Plate, fresh and frozen. We created the sigma company, we’ve bought specialty produce companies, we’ve acquired specialty meat companies, import companies, even hotel and amenity company, all in the interest of creating greater traction and bringing greater value to our customer base and we’ll continue to do that.
Along the way, we’ve moved from the United States as I said into Canada. We have good presence in Canada, we are the number one player there as well as in Ireland and we certainly have aspirations in the right way to grow beyond that as market dictates and as our customers ask us to go into other geographic markets.
Mentioned the initiatives, we have a lot going on in the company today. Certainly as I talked about the marketplace, it is a large market, $250 billion just in the states alone I mentioned the States alone, I mentioned $230 billion. The reality is the growth has been flat here in recent years, we saw that coming. So we see growth going forward, but we see it in a moderate level and in order for us to continue to excel and for us to add value, we need to do things differently to some extent and we need to do more a lot better.
So these are just some of the things we’ve going on starting with, building up our marketing department with a particular emphasis on the customer size. We always have pretty good product marketing, but on the customer side, we are getting better at listening, we are getting better at going out and getting good objective views and insights from our customer base both directly through our marketing folks as well as working with our supplier partners with category management.
That all translates as I noted a moment ago into creating value for that customer. So of those 400,000 plus customers, they are all different. They have some worries [ph], but they are all looking for something different from Sysco. So our challenge is, one, Sysco is to present ourselves in a manner that’s unique to what that customers’ needs are and we do that in many, many ways through our sales force, through our product offerings, through our value added services, both the current ones we have and even some things that we are just developing now through Sysco ventures, but we are working on largely technology-based business solutions to help our customers run their business better.
Productivity enhancements, as I have mentioned, you can’t grow your business, you can’t invest in your customers’ business, if we don’t continue to improve our productivity and we’ve been successful in doing that and so we have significant initiatives going on, we are about halfway through our three year initiative right now.
We are looking to take about $300 million of cost out of our operations throughout the entire part of our business, so operations, selling and general administrative and we are on track to do that. We are having some good success there.
Category management might be the biggest thing we are going on inside the company. Today, we are about a year and a half, almost two years into that and that is all about optimizing our assortment of products and skews across our enterprise based upon customer insights working closely with our suppliers in a way that provides both innovative ideas for our customers that also reduces the redundancy of skews.
So we see this an opportunity to grow our business, strengthen our relationships with both our suppliers and our customers and take cost out of the system as we do that and we are having good success with that initiative as well.
As I mentioned we will talk and Chris will talk in detail about integration planning that we have underway now over the last month as it relates to the US Foods merger. That's largely about being prepared to go forward on day one. Day one is everything, that's a very important day, Chris will take you through that and certainly bringing more clarity to how we do enhance our value proposition as a combined company and the new Sysco and addressing the organizational opportunities that we’ll have along the way.
Under grading all of that is the technology platform, Wayne is going to speak to you today and bring up to-date where we are on our ERP, working with our safety and other third-party suppliers.
So we need and end-to-end platform to run this business more efficiently, more effectively as we see opportunities to do things better and faster, we have plenty of data and we need to get to that data faster and make decisions faster after that, but we see opportunities to maybe pull back and some things are not working as well, the system will help us do that as well, and will also help us continue to expand the business through acquisition.
So we’ve had some challenges along way there, but we are in a very good place there today and I think you will be encouraged after hearing Wayne’s presentation.
All right, let’s talk about US here for just a second and really what I’d say bringing together the best of both, what does that really mean? What do I want to leave with you today? I would say this to you, if you were to sit down with a senior team of US Foods, what they would talk to you about is becoming a great American food company. What I would talk to you about for Sysco is our vision which we want to be our customers, all of our customers most valued and trusted business partner.
Those visions, they are aspirational, both companies are well on their way to achieving them and they are very complementary. The only way to speed that up and do it even more effectively at least the best way is to bring these companies together and to do it in a way where we optimize the complementary strengths of both companies.
So what we see their post close is an opportunity to take what both companies do very well whether it’s product development, customer facing technology as it relates to ordering product whether it’s the traditional order in front of the sales person, online, mobile perhaps, developing our people more effectively, bringing new people into the organization. These are all opportunities to enhance our value proposition in the combined company in a way that neither company could do as well on their own or certainly not as fast.
And how do you pay for that? You pay for that through synergies, you pay for that through generally more and more cash flow and to do that we need to become more efficient. So we also see opportunities there as we merge these organizations and as we put together the respective supply chains to bring a lot of value added in terms of how we run the business both from an efficiency and productivity standpoint but also from a cost management standpoint.
So big picture what we see is brining the best of both of these companies together in a manner that will allow us to serve our customers better and do it more efficiently. And if there is two things I would ask to you to take away today at least from my presentation that would be that.
One another way of looking at this opportunity from a Sysco perspective, I showed you that we’re earlier sustainable growth, operating margin, asset optimization, free cash flow, I actually talked about and Chris is going to go in a more detail there, we would not be able to do a transaction like this if in fact we weren’t in a position to be confident that we can continue to throw off a lot of cash, if we hadn’t been discipline over the years in terms of what acquisitions we went after and which’s one we did and what we paid for. So we are able to keep some capacity on our balance sheet.
So I think that’s a unique opportunity, but frankly only Sysco in this industry would have been able to take advantage of as it relates to U.S. Just a few of the boxes that we’ve checked here bring a little more specificity to it. Both companies are doing a lot of work and customer insights as I mentioned both through their product work, with CATMAN as well as directly through their marketing departments and through our sales forces.
Multiple channels, something that as we go forward in this industry we need to be more flexible, more nimble, we need to get to a point where our customers can order product however they want it, whether that’s directly with a sales person, whether it’s online middle of night, whether it’s over the phone. At some point in time, cash and carry that type of thing, U.S. actually has a small presence in the cash and carry world right now and we look forward to learning about that. And so, it will help us to fill out channels in terms of being a company that can support all the needs of our customers in whatever where they want to purchase product from our company.
Just a little insight here I think we had a strategy to do, we’ve certainly done a nice job under Chris’s leadership and others in terms of fold-in acquisitions. We struggled to do regional acquisitions and so obviously this deal gives us an opportunity to move into some markets that we don’t have a stronger presence in as we would like to and where we think we can bring value to the customer base in those markets. And as I’ve already mentioned on the operating margin side, it’s critical that we do everything we can to mitigate some of the margin pressures to better segmentation with our customers and by running our business better through some of the shared efficiencies that we expect to realize through this deal.
So from a strategic standpoint as we talked about this internally, as we worked through this with our Board over the last few months, this is the circle we’ve actually worked from and as you can see, the only box that is unchecked is international which I think speaks for itself. So we feel very good about the fit and for the strategic rationale for the deal.
All right, in summary as it relates to the deal, customers, this is really about enhancing the value proposition for our customers. That’s what gets us excited about the opportunity. I believe that’s what got the owners of US Foods excited about the opportunity, and yes there is synergies involved and we need to realize those to pay for the deal and to continue invest in the business, but the big opportunity here is to provide a better and deeper value proposition for all of our customers as we go forward.
I think if we do that or as we do that, we will definitely raise the bar for our industry and I think the industry has always looked for Sysco to continue to raise that bar. That will be good for everyone including our customers and our suppliers and all of us who work in the industry.
I mentioned suppliers, we see big opportunity here. We’re already working closely with many of our suppliers today and our CATMAN work significant opportunity here to strengthen those relationships and to make them more strategic as we go forward, so no-brainer from employee standpoint. There is a lot of excitement inside Sysco today and this is a tremendous opportunity for our folks to learn and to develop their careers in a way they would never have the opportunity without a deal of this size and magnitude, and clearly there is a lot of shareholder value in this deal as I said both from the synergy opportunities, but also by providing stronger foundation for Sysco to grow from for years to come.
So before I hand it off to Wayne here, I just want to kind of leave you with some higher level takeaways that are broader than the deal, essentially, we are actually where we are at today. As I mentioned, we are very, very fortunate to participate in a large market, $250 billion plus market and we see growth in that market, but that growth will be modest and we need to continue to get better executing our business plans to grow and to grow in the right way and grow in a way that’s good for our customers and good for our suppliers.
More current, if you will, market conditions have been difficult, that challenges have been difficult over the last few years. Weather aside and certainly some of the issues where I think many of you have come from as it relates to weather of challenges here in the recent weeks. The weather will ultimately pass, but we expect that the conditions will remain challenging with, but we think that we can learn from talking to some of our supplier partners and working with customers and just keeping up to see with the restaurants in general. We do see optimism out there at the consumer level, we see optimism at the food service operator level. So we would expect to see some gradual pickup in the business here as the calendar year progresses.
Took you through the initiatives, we remain highly focused on improving our execution in all facets of our business both in terms of how we sell our products and bring our products to market as well as how we execute operationally and I think what you’ve heard today and what you’ve heard from me and others over the last two or three years, it’s a great industry. I’ve been in it 25 years and there is a lot of things we do really, really well and a lot of things our customers value.
At the same time, there are things that historically we’ve done that are not as valuable to our customers anymore and as we saw, we are driving out significant transformational change in our company across the entire gamut of our functional expertise and in our businesses. And the whole goal there is to solidify our relationships with customers to grow the number of those relationships and to execute more and more efficiently in everything that we do.
And I would say the US Foods merger opportunity is one that we are very excited about. We see huge complementary strengths that we can leverage and we look forward to the close and that we expect to take several months and Chris will take you through that here in a few moments.
And at this point what I would like to do is bring Wayne up. Wayne joined us about a year and a half ago as Executive Vice President and Chief Technology Officer and he is going to give you an update on what’s been going on in the technology area of Sysco, in particular SAP platform and I look forward to him sharing his thoughts and what he saw when he came into Sysco and how we’ve been able to advance the ball from there. Thank you.
Wayne R. Shurts
Thanks Bill and good afternoon everyone. As Bill mentioned, our technology platform is foundational to our agenda and the initiatives we are doing at Sysco. So this afternoon, I want to bring you up to speed on where we are with our largest most important technology initiative, which is our ERP system and its roll-out.
So we will talk about where we were a year ago at this time, the progress that we’ve made in the last year and then we’ll spend some time talking about where we go from here in terms of our ERP rollout for the rest of the calendar year and we’ll touch briefly on a technology view of how we are thinking about the Sysco US Foods integration.
So a year ago, we had five of our 73 US broadline operating companies live on our ERP solution and on most days, the system performed well, it was capturing orders, shipping product and invoicing customers. In October of 2012, two weeks after I joined Sysco, we went live in two operating companies, our Dallas operating company and West Texas operating company and that go live more than doubled the amount of volume that the ERP system had on it currently at that point in time.
Dallas was also our first operating company that had a predominance of national accounts business in their portfolio and post this October 2012 go live, we began to experience some intermittent stability performance and functionality issues. So these issues caused us to pause our full operating company rollout, so that we can take time to address those issues, but while we paused, we accelerated the deployment of certain modules and functions which allowed us to still make progress towards our n state while we were going through the pause.
This approach to do certain modules and functions while we were in the pause allowed us to make progress standardizing, centralizing and technology enabling our business processes for the US broadline. So first area, we made great progress on with CRM Customer Relationship Management, we completed the rollout of salesforce.com to all of our US broadline companies.
ERP maintenance which is a FAP maintenance module that allows us to properly and cost effectively maintain our large fleet of trucks, we implemented and completely rolled out all the US broadline.
In finance, we completed the centralization of the general ledger for all of the operating companies, I mean HR and this portion of HR is where we really centralize the back-office support for recruiting and hiring, we’ve completed the rollout of 53 of the operating companies and plan to be fully rolled out at the beginning of fiscal year 2015 and in shared business services we completed several process and performance improvement programs that supported ERP and all of the functions deployment.
So during the pause, we made good progress, accelerating certain modules and functions, but we are also primarily focused on fixing those issues that we found post the Dallas and West Texas go live and we are focusing on those to fix those not just for the next set of deployments, but really for the long time, so we could really scale our ERP solution for all the US broadline. So I’ll take a few minutes to talk about the work we did and the results that we’ve seen.
As I said, on most days, the ERP system worked well, but the Dallas volume did stress the system and we experienced some intermittent stability issues and when we had those stability issues when things went bumped in the night, it also took us a little bit longer to recover, because the full end-to-end system, the interfaces between parts of the system were not hardened, they didn’t have a lot of the smart of the restore and restart capabilities that we needed.
So from February to October of this past year, we went out and rebuilt the infrastructure that the SAP system was running on. We hardened those interfaces, we built in the smarts, automated them, built in a lot of the restoring and restart capabilities and we saw a good result. Our night operation incidence were greatly reduced from a count of six to one, major incidents outages were reduced three to one and our ability went something went bumped in the night to recover quickly and served the business improved greatly.
Post Dallas, we also experienced some slow system performance and response times and this was especially problematic for our marketing associates, our sales reps who used the system to take orders and often are taking those orders in front of customers. Also we noticed that at peak times, the system was running very close to capacity. So we studied this issue and dug in and we found that chief culprit to this was the way that we were handling pricing in the system.
It was really a two-pronged problem. The pricing routine every time we needed to do pricing itself was efficient and took a lot of resource to do, that was the first part of the problem. The second part of the problem was, we clubbed that pricing routine way more often than we needed to.
So we revote and tune the pricing routine, we tuned the marketing associate ordering application and we tuned other systems jobs literally taking run-times from hours into minutes and the results, we significantly improved our system speed and response time and we significantly reduced the load on the system in peak and average times which gives us the ability to add more capacity and volume.
Functionality; some will say our system can never have enough functionality, but coming out of Dallas, it was apparent that we needed to add functionality in two key areas. Replenishment, which is the active purchasing inventory for our warehouses and restocking those warehouses that has a direct correlation to our customer service levels, and the second area was in National Accounts. I mentioned Dallas had a predominance of National Accounts. We needed an additional functionality around National Accounts, the catalogue functionality that they needed as well as the reporting back to the customers.
So we simplified and improved the replenishment systems and processes, we’ve pulled together a National Accounts SWAT Team that looked at all of the missing functionality gaps that our National Accounts needed and then we delivered multiple ERP releases with over 1,800 enhancements in this time that really closed those gaps.
We also looked at how we trained our operating company folks and improved the training both in content design and in timing. We moved more of the training closer to go live with refreshing folk’s mind and we were happy with the results, our customer service levels rebounded in all of the operating companies in the system, our merchandisers as the folks who do replenishment, their satisfaction increased, marketing associates enjoy the new speed of the system and talking to our customers we close the gap on much of our National Account issues and their satisfaction increase.
So during the pause, we did three major releases aimed at fixing the issues that I just mentioned, and we measured each one of those releases. We had a specific metrics that were designed to measure performance, response time, functionality. So that we could really know what the changes we were making were giving us the stability, performance, scalability and functionality improvements that we were looking for.
And after looking at those metrics and convinced that we had, we restarted our operating company rollout. This past November we went live in our Idaho operating company and just 12 weeks later we went live in both our Vegas and Arizona operating companies. These three go lives went very well. They’ve been our smoothest to-date, and the system performed extremely well. It’s important to note that the volume of those three operating companies was more than Dallas and West Texas. So when we put that added volume on, the system performed as we expected it to and with that confidence we will head to New Orleans and Denver in April to roll-out there as well.
So we’ve accomplished much in the last year. And is the work over? No. Is there more to do? Certainly yes. But we are in a dramatically better place today than we were a year ago. So where do we go from here? We’ll continue to mature the ERP system this calendar year. In the first half of the year, we’ll implement a major performance enhancement again targeted at pricing and we expect that to have a dramatic increase on our performance and our ability to scale. We will continue to rollout to more operating companies, again we will have a steady diet of functional enhancements. In the second half of this calendar year, we will do a SAP version upgrade. So again the work – where there is more work enhancements in maturing of ERP system to do but we feel very good about where we are.
Moving on to integration planning with US Foods. In the near-term, we envisioned building an interim unifying platform that will basically join up the legacy systems of both companies. A lot of this focus will be on harmonizing the master data across the two legacy environments most importantly customer, item and vendor. It will also give us the ability to get data out and report. And this interim unifying platform will serve as the connective tissue if you will between those systems that will enable us to deliver a consistent pricing, service and reporting to our customers. And we believe this is a very viable way to operate the business as we migrate towards our targeted end state.
And that targeted end state is envisioned to be Sysco’s ERP solution that we just talked through and when we feel confident about and we will continue to mature and perfect it and we’ll also leverage US Foods well regarded customer facing online mobile solution. The strategy here is real simple, both companies have made major efforts and major investments in the past few years, Sysco on the back-end with our ERP system, US Foods on the front-end with our customer facing application. I know the strategy here is to bring to those together for – I think a really powerful benefit for our customers.
So, thank you for your time and I will pass it onto our Chief Financial Officer, Chris Kreidler.
R. Chris Kreidler
Afternoon. So Wayne gave you a good update of where we are on our business transformation as far as the technology platform is concerned, thought I’d start off by covering the other aspects of the business transformation. So as a reminder for those of you that have covered us, enjoy three elements of our business transformation, the journey we’ve been on here for the last few years; one is the technology platform that’s the one you see over there on the right hand side of the slide and that’s where we are spending all the money, and then the other two is where we are trying to accrue or accumulate cost savings.
So the left hand box there lower product costs by $250 million to $300 million, that middle box reducing our cost structure by $300 million to $350 million. I’ll give you an update here where we stand on all of those but we expect to achieve $550 million to $650 million annually of cost savings through these initiatives and the box in the upper right hand side a reminder we expect to spend $300 million to $350 million achieving those results, primarily spending against our business – the technology platform portion of our business transformation.
Now we’ve said that we’d ramp-up these savings over three years. Fiscal 2013 being the first of those three years, we said we’ve achieved about 25% of the savings, fiscal 2014 year we’re halfway through now. We said we’ve achieved 50% to 70% of those savings and we get all of them by fiscal 2015. So last year, we talked about our progress today, so after the first year which was fiscal 2013 this would have been our June 30 ending basically the first full year we were ahead of our plan. We were in good shape. You can see the orange box is what we expected to achieve in the first year. We started filling up the blue box if you will. So we were ahead of our plan, we are feeling pretty good.
As we look at our 18 month progress, we are still in good shape. We are still ahead of our plan, we should fill up that blue box and over achieve for the second year of our business transformation, the benefits part or the benefits realization part of that plan.
And we’ve accomplished a lot and I don’t want to be repetitive to some of the stuff that Bill and Wayne have actually already talked about, but on the reduced cost structure some of the things he’s talked about the strategic sales initiatives, the rollout of the CRM, some of the accelerated rollout of the SAP modules for maintenance and HR, the centralization of the general ledger for finance, those types of things we’re able to get ahead off and start achieving some cost savings there, restructuring our benefits plan and our retirement plans as painful as that was, we were able to get that done fairly early in the process and we restructured the IT organization function as well.
Got more work to do on the operation side. You can see what today we’ve got score cards that need to go out to help us share best practices in our warehouse in around delivery and accelerate the routing and fleet optimization programs that we put into place as well.
On lower product costs, we spent the first year as we said we would building the teams and their processes to start going down the path of the category management with a lot of progress but you don’t see that kind of progress in the numbers because you are building the teams and their processes. We rolled out the pilot, we rolled out wave one and substantially rolled out at this point. We learned a lot from both. We’ll rollout the second wave on the second half of this year, and then we’ll start to have some real progress we believe in our category management initiative by the end of this fiscal year.
We are almost certainly going to exceed our second year target. We just have to fill up the rest of the blue box with more and likely over achieve that and we remain confident that we’ll achieve the third year as well given that we are pretty far ahead of where we expected to be at this point in time. So let me switch gears now and go from business transformation, the things that we’ve been doing on around strategic initiatives to the US Foods merger.
As Bill mentioned, this is a great transaction for our customers. Our industry is rapidly evolving, changing constantly and very quickly these days and it’s fiercely competitive. We talk about this pretty much every single quarter and this transaction is going to make us a lot more efficient. It’s going to allow us to be able to offer our customers more innovation, value-added products, better business solutions and enhanced technology, a lot of things that will be value added to our customers and although while we are going to be taking a significant amount of costs out of this system.
It’s great for our customers and it’s also we believe great for our shareholders. So let me remind you first of the transaction structure around the financials. So the transaction was valued when we announced it at approximately $8.2 billion and you’ll see – some of you have seen this slide before, we’ll pay an equity, approximately $3 billion of that, holders or the owners of US Foods will get about 87 million shares of stock, roughly 13% and they will each get one board on Sysco’s Board of Directors.
We’ll pay about $0.5 billion in cash and then we’ll assume or refinance all of the debt, which at the time was about $4.7 billion. When we announced the deal, it was at roughly the same trading multiple that Sysco was trading at the time, represented about 10 times their last 12 months EBITDA as they had reported it which was about $826 million.
Now we’ve begun the process already of thinking about the financing of this transaction, we’ve expanded our credit facility from $1 billion to $1.5 billion as step number one, and we’ve already done some interest rate hedging on about $2 billion of the permanent financing that will come over the next few months and look for the right opportunities to access the market to put in the rest of the financing structure.
As I said, while the deal will be beneficial to our customers, it’s also going to be beneficial to our shareholders. We believe it will be accretive in the first year when you exclude the transaction costs. We believe there is at least $600 million of synergies. I will spend a few minutes on those here in a second. We think that number is realistic and we think it’s attainable.
We will get those synergies over three to four years. It’s going to take a little bit of time to do at the right way and a way that doesn’t impact our customers negatively, and we’ll spend some money to get those synergies as you typically do. We’ve estimated about $700 million to $800 million of cost to achieve those annual synergies. Those will be spread out over about three years. There will be some additional capital costs. We think that we’ve got those within the budgets of the two companies already, but we are doing that work now to see how much additional capital will need to be spent to achieve some of these synergies as well.
Now, we’ve initially broken the synergies down into five areas and I’ll talk about them here on the next slide as well; distribution network, general and administrative costs, cost of goods sold, warehouse and distribution productivity and selling and field productivity.
Now the current estimates of $600 million that we have put out there, at least $600 million we feel good about, it was done both top-down and bottom-up, but it was generally built upon what we’ll call public information, the knowledge that we had at the time we were doing the due diligence.
The team that’s been built which I’ll talk about here in a second to conduct the integration planning, now has people from both companies involved. We’ve got data from both companies to the extent that it’s allowed and we are working to build into the bottom-up and the top-down again, both to verify all the numbers and hopefully to find some additional synergies in areas that we knew we are there, but we couldn’t actually make educated guesses on during the due diligence process.
So let’s go into a little more detail on these five areas of cost synergies, some of the things that we will expect to look at, we will expect to get some savings. I’ll start in the upper left there, the distribution network. So we know we’re going to have the opportunity to rationalize the network, the footprint of all of our buildings. We also know we have the opportunity to consolidate delivery routes to make our routing more efficient.
Go down counter clockwise under selling and field productivity, we are going to be able to leverage one sales model, theirs is not exactly the same as ours and we’ll going to be able to take the best to both of those and leverage one sales model.
Also we will be able to combine the e-commerce and social media work that both companies having been moving forward on, we will be able to combine that into one and make it a more powerful for our customers. Continuing to move around, warehouse and distribution productivity, we’ve got best practices in some of our warehouses, they do some great things in some of their warehouses, we are going to be able to share those best practices and get the best of both as we do that.
Technology driven efficiencies; we’ve been at this game for a long time, we have spend money towards necessary to get more efficiencies in our warehouses. We think we are going to be able to take some of that knowledge and appliance to some of the warehouses for US Foods, don’t get me wrong, they do some great things in their warehouses as well and then we know we’re going to have an opportunity with inbound freight.
Continuing around cost of goods sold, we’ve got two category management projects going on. We’ve been doing one day, they’ve been doing one, we’re going to again be able to merge those and get the best of both and leverage our combined spend for additional savings.
And then of course with the top general administrative, we know we’re going to have some overlaps and duplicative resources and we will find the right way to work it down those two duplicative resources overtime and get the savings.
So while we are not yet ready to talk about how much cost synergy we’re going to find in each of these buckets, we are confident that those are substantial amount in each of the buckets and we will come back with more information as we get more information from our additional processes from integration planning here over the next few weeks and months.
So what are the next steps in the process. First, internally, we have announced and we built-out now the integration planning team and now actually show you a visual representation of that during the second, it’s fully staffed with key employees from both companies. We’ve enlisted the help of McKinsey. They’ve got a small army of people in our offices, they have vast experience during the types of the large complex merger integration, they have been very helpful to us already and again I believe with their help and with the dedication from all the teams we’re going to have a successful integration.
Externally, the regulatory review process has begun. We have said, it will take six to nine months that is the FTC that’s conducting the review. We expect the collaborative process with the FTC, it’s not going to go fast, but they will be collaborative along the way.
Now as an update we did here just a couple of hours ago, from the FTC as expected we’ve gotten there second request for information, the normal part of the process something we were expecting and we will now go about telling the second request for information.
We’re confident as the FTC wants more and more about our industry and how it operates, they are going to see what we already see. It’s a fiercely competitive industry and this transaction, even after the transaction the customers are going to have a tremendous amount of choice out there in terms of who they do business with.
So, let’s spend a minute talking about the integration planning team and it kind of looks like odd chart, we don’t really call it bad, it’s more of an architecture for how are managing the process of integration. This looks complex and the integration process is complex, but we are feeling more and more confident about how we’re going to manage this process through the new three months.
So at the top of this process is steering committee. Bill DeLaney chairs it and its executives from both companies, they are there to make some of the key decisions about how we’re going to put these two companies together, how we are going to define the aspects of we go to market and some of the processes that are completely different, how we are going to come up with the right process for the both companies.
My role is right beneath there as I take over the integration and leadership role and then there is a integration management office that's been constructed next which is again executives from both companies working together to plan all aspects of the merger, help us understand where the synergies are and actually be responsible for tracking those synergies as we go forward.
You see four vertical orange track there and we call those tracks, these are the four tracks that we have defined everything we are doing in; so merchandising, product marketing, sales, operations and then corporate functions. We have leaders that are overseeing, very senior leaders from both companies that are overseeing the work that's going on in these tracks and then underneath each track we have business teams which are subparts of each of these tracks.
We have over 20 business teams, again fully staffed with people that are going to work on three goals for each team; one, preparing us on day one. So the day we close preparing us to put these two companies together, so that we don’t drop any balls and we can service our customers with even better service than before.
Secondly is, identifying the synergies and understanding how we are going to go after those synergies and then third, with designing organizations and processes that’s necessary into the future. So that's what everybody is focused on, on each of these business teams and they are getting support from those green teams at the bottom is the cross functional teams that are there to support everything that all the business teams are doing. It's a large number of people involved, it's a lot of planning work to be done so that we can hit the ground running.
So stepping back, Bill shared this slide with you about our key strategic areas of focus, sustainable profitable growth, operating margins, asset optimization, generation of free cash flow, all of our strategic initiatives including this merger with US Foods are targeted towards achieving these and as I shared with you last year when we execute well, we can return tremendous upside opportunity to our shareholders.
Now this is not an updated slide, it’s exactly the slide that I shared last year. It showed how much cash we expected to deliver over the next five years, how we would spend an estimated amount of that cash, reinvesting into the business on capital and acquisitions, how we would distribute some of it to our shareholders through dividend as well as share repurchases and then how much cash would be left over for strategic opportunities. We thought it would be about $3 billion but then we also showed the leverage capability of this company because of the strength of our cash and the strength of our balance sheet.
We presented this slide to illustrate our ability and our willingness to use our balance sheet for the right strategic opportunity. We’ve now done that or at least
during the process of doing that through this merger, but as we update this chart and we will as we grow that left hand blue bar and show what we now believe our cash generation capability will be over the next five years with US Foods as part of the Sysco family.
We will adjust all these other boxes, we will see an additional amount of remaining cash and we’ll see tremendous leverage capability, all at that point out that we still have a rock solid balance sheet to act on the next strategic opportunity when we see it and when we are prepared for it. So this is the part of the evolution of Sysco.
So in summary I think it’s understatement for those of us inside the company that we live in challenging and interesting times. It’s very exciting around the company right now in its very fast paced. We are very encouraged by the progress we are making on our initiatives. It’s a tough industry right now. We are controlling the step that we can control. We feel very good about the work we are doing on those initiatives.
The proposed merger has everybody very excited and it’s going present even better and greater opportunities for our customers, our employees and the rest of our stakeholders and we are very well positioned for the future with the management team that Bill has built up over the last few years, the cash flow generation capability that we continue to improve over the last few years and the technological progress we’ve made certainly over the last year which has made us much more confident as we go forward and our ability to continue to reinvest in our business and our business strategies. Thank you very much for you time.
So I'm going to help manage the Q&A process. We still got a few minutes left. As the microphones are making their way around here, maybe we can just go ahead and start with one topic that I know, is certainly on everyone’s mind and Chris was just standing on some of the speakers want to start with some perspective on the review process with the FTC from the management’s point of view.
William J. DeLaney
Yes, I think it would be good appreciate the opportunity to do that. Can you hear me okay. So as Chris mentioned we did get our second request today, totally anticipated as we’ve said since we announced the deal back in early December, we expect to work through this over the next several months with the FTC, we expect that to be a very cooperative, collaborative experience and we are optimistic about closing the deal within that timeframe.
I think what I would add today given the audience, there has been articles and the press and that type of thing in terms of concerns about pricing, concerns about number one and number two and I think as we have the opportunities to sit down and discuss this with the FTC and discuss it on going with our customers and some of you, I think you’ll see the conversation turn and I think the key points I would leave with you there one of which I mentioned in my presentation this business that we are in, it’s like Tip O'Neill used to talk about with politics, it is highly locally and that’s why we organized the way we are in it, that’s our history and the customers, the majority of our business, we support locally.
And the key point there is those customers today have a lot of choices in the terms of who they buy products from and they’re going to have a lot of choices after this deal closes in terms of who they buy product from. Technomics will tell you that many food-service operators today buy from up to 12 different suppliers. I would tell you from my experience, it’s not unusual for customers to buy from two or three broadliners and a couple of three more especially companies as well.
And then the world we live in today, they have options request stores and cash and carry and certainly the online Amazon model is percolating out there as well. So we really believe that not only we have will to provide enhanced services and capabilities and help our customers to run their businesses better and that we need to get more efficient to be able to do, but we totally believe there are customers who will continue to have a lot of choices going forward.
For the business, it is local and we do service some very large customers, nationals some large regional. I would tell you that we have great relationships with those folks, they tend to reward that business by market or by region sometimes by business segment and they will often work especially with distributors as well.
So we will have good dialogs with them going forward and I think we’ll be able to make the case to those customers and to the FTC that this merger is in their best interest.
I would also add that those larger customers are very sophisticated customers. They have strong purchasing groups and from a pricing perspective they tend to negotiate the bulk of their volume directly with suppliers. So pricing would be less of an issue in that front. So I again appreciate the opportunity to have chance to give you our perspective and that’s we entered into this process.
Okay. I know there is a microphone is in the front.
Thank you. Your comments about the merger clearly are true, because your business seems to be more competitive now than it was let’s say 10 years ago. Can you maybe tell us a few of the factors of why that would be because 10 years ago, you talked about all the reasons why the business was so attractive at that time?
William J. DeLaney
Yes, I would say the biggest reason is just the growth trajectory for the industry. So if you go back 10 years or 15 years, the industry was growing real 4%, 5% maybe 6% and I’ve worked in two different markets, I’ve probably shared this with this group in the past and I’ve worked in the State of New York and I worked in the Carolina.
So upstate, New York was good experience where we’re at today which is basically, it’s very competitive, there is not a lot of growth and to grow you need to take cases from the other guy, that’s good for our customers, but it just put pressure on margins and so I would say that the competitive landscape has been exacerbated just by the challenges of growth that we’re having in the industry into that.
So away from home consumption, is going to probably continue to be flat at the total share maybe even decline further, so for the next 10 years may be not still not as good even with the merger. Is that right?
William J. DeLaney
Well, we believe like we talked about the market, so let’s take the U.S. market about $230 billion, there is going to be some ups and downs and we’re I mean one of those trough periods right now we think, but we see growth, we just don’t see the level of growth there that we saw 10 years, 12 years ago, but our model is based around one point give or take a real growth and put some pricing on that and if we can continue to take share the right way, we grow 4% to 6%.
So we definitely see opportunities for growth, but we have to be much more targeted in how we got at that opportunity today.
Could you give us an update on how you analyzed the overlap in the potential customer base or the existing customer base and how much you expect you might have to give up when the deal is done?
William J. DeLaney
Yes, I’ll start and I’ll let Chris add comments to that. So as you can appreciate when you have the two leaders in the industry and public type deal like this, there is not a lot of information, detailed sense of information you have accessed to, but, and we certainly know each other very well.
So we have a sense for what the overlap is generally and what we just we ran different miles and scenarios and our ability to retain that business through the transition period and I would also tell you that we’re quite confident that even if there is some disruption, we expect some as we go through the transition periods post close.
With the things that we’re going to bring to the business is a combined entity we would certainly hope to earn a lot of that business back over time. So, there is overlap, but perhaps not quite as much as you might think in terms of day in and day out of customer interaction.
R. Chris Kreidler
Yes, unfortunately, the only thing I can add is not going to be helpful, we’ve got the great education about what we can and cannot share with each other during the pending integration planning process and that’s information frankly we won’t even had access to go after closing. So, we’ve done various surveys, we’ve got a field for it as Bill said, but we can’t compare that type of information, the watchword for this is, we are and we’ll remain the fierce competitors in the market till the date of deal closes and there is certain things we can do in the way of planning together, but we can’t share a lot of data. So unfortunately we’re not going to be able to provide a lot of insight on that one till we get to the end.
William J. DeLaney
Certainly one of the keys is the relationship that our marketing associates US calls TMs, but our sales associates have with their customers and then we are very focused on doing everything we can to retain all of our current sales force as we go through this transition period.
One more Neil?
Neil A. Russell II
I think maybe you have time for just one more just one out there. No.
We can move to the breakout session and so thank again to Sysco and thanks for your presentation.
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