Fitch Ratings has affirmed the ratings for
The Rating Outlook has been revised to Stable from Negative.
The Outlook revision to Stable reflects Fitch's increased confidence that Sysco is well-positioned to experience share gains and grow at above industry rates. The Outlook stabilization also reflects the company's strong competitive position, buoyed by actions taken during the past two plus years to improve supply chain and sales capabilities that results in expectations for FY 2023 (
Fitch expects Sysco will demonstrate consistent capital allocation priorities by investing in the business, including bolt-on M&A and returning value to shareholders while maintain leverage within its stated net leverage target of 2.5x to 2.75x. This roughly equates to Fitch's leverage (lease-adjusted debt to EBITDAR) of 3.0x to 3.25x. Fitch projects leverage of around 3.2x in FY 2023, compared to about 3.3x in FY 2022.
Key Rating Drivers
Initiatives Driving Share Gains: Sysco's on-going strategic investments and initiatives during the past few years across the supply chain and salesforce are driving meaningful improvements in its competitive position relative to peers. According to the company, Sysco grew at around 1.3x the U.S. market in FY 2022 and is targeting to grow at 1.35x in FY 2023 and 1.5x in FY 2024.
Initiatives include new pricing software, enhanced restaurant service model, improved supply chain flexibility, team-based selling and upgraded digital platform combined with operational efficiencies. Additional efforts in the early stages that should help support further share gains supporting top-line growth and improved profitability over the next couple of years include: an omni-channel fulfilment system,
Managing Supply Chain/Inflationary Pressures: Costs pressures around commodity inflation including 15% in the
With the on-going business recovery from the pandemic and benefit from strategic initiatives,
However, given growing global macroeconomic pressures and uncertainty from unprecedented inflation, tightening monetary policies and evolving consumer spending patterns, lower EBITDA growth relative to Fitch's forecast remains a risk.
Consistent Capital Allocation Priorities: Fitch expects Sysco will demonstrate consistent capital allocation priorities by investing in the business, M&A and returning value to shareholders through increasing dividends and share repurchases while maintain long-term leverage within its stated net leverage target of is 2.5x to 2.75x, which roughly equates to Fitch's leverage of 3.0x to 3.25x assuming cash levels of around
Sysco's core acquisition strategy has generally targeted smaller bolt-on transactions of distributors focused on higher margin specialty produce or geographically oriented distribution that better fills a stretched area or new white space opportunities. During FY 2022, Sysco closed on four bolt-on acquisitions totaling
Low-3.0x Leverage Expected: Leverage was around 3.3x at FY 2022 compared to 5.1x in FY 2021 and 5.9x in FY 2020 and 2.8x in FY 2019. The improvement was driven by around
Leading Market Position: Sysco is the largest
Sysco's operating strategy targets increasing wallet share by balancing price and focusing on a broad range of one-stop services to drive growth in higher-margin local cases including a focus on increasing Sysco-branded product penetration. Sysco's wallet share with existing customers is around 30%, which the company expects to increase over time due to share gains supported by improved capabilities through its service model, supply chain and broad-based sales initiatives like
Parent Subsidiary Linkage: Fitch's analysis includes a strong parent/weak subsidiary approach between Sysco and its subsidiary,
Derivation Summary
Sysco's 'BBB' rating reflects the company's large scale, good market position, and diverse customer base with broad geographical distribution of an extensive line of food and non-food items including Sysco-branded products with an estimated 17% share of the
Based on Fitch's assessment of Sysco's financial flexibility, the agency assigns the higher of two short-term options (F2) for the current rating profile. Any material weakening in financial flexibility, financial structure or operating environment conditions could lead to the assignment of the lower of the two short-term rating options for the current long-term profile.
In comparison to its main competitors,
Other 'BBB' rated peers within the consumer and restaurant space include
Darden's rating reflects its moderate financial leverage sustained below 3x on a Fitch adjusted basis, good FCF, diversified portfolio of casual restaurant brands, and proven ability to outperform the broader casual dining segment which has been experiencing traffic declines due to increased competition from the rapidly growing fast-casual restaurant segment.
Altria's rating reflects its position as the industry leader in the
Key Assumptions
Fitch's Key Assumptions Within the Agency's Rating Case for the Issuer:
Fitch projects Sysco's fiscal 2023 net sales could increase by approximately 12%, approaching
Sales growth could be around the low-single digits in fiscal 2024 to around
Fitch projects Sysco's fiscal 2023 EBITDA could be approximately
However, given growing global macroeconomic pressures and uncertainty from unprecedented inflation, tightening monetary policies and evolving consumer spending patterns, lower EBITDA growth relative to Fitch's forecast remains a risk.
Fitch projects EBITDA around
FCF could be around
Leverage around 3.2x in fiscal 2023 due to EBITDA growth and modestly higher debt levels with leverage remaining in the low 3x over the forecast period. This compares with 3.3x in fiscal 2022 and 5.1x in fiscal 2021.
Share repurchases are projected around
Annual bolt-on M&A is assumed over the forecast period.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating upgrade to 'BBB+' is not anticipated in the intermediate term given Sysco's current financial policy target of net leverage of 2.5x to 2.75x, which roughly equates to Fitch's leverage (lease-adjusted debt to EBITDAR) calculation of 3.0x to 3.25x. Developments that may lead to a positive rating action include:
Sustained sales growth of at least 2%-3% with improving margins that results in EBITDA growth in the low to mid-single digits and ample FCF generation characterized by FCF margins sustained around 1% that supports leverage sustained around 2.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Leverage sustained above 3.3x due to weaker than expected operating performance, a more aggressive financial strategy related to M&A and/or shareholder initiatives.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Strong Liquidity Position: As of the first quarter fiscal 2023, Sysco's cash balance was
Sysco's liquidity position also includes
Additionally, the new facility includes a covenant requiring Sysco to maintain a ratio of consolidated EBITDA to consolidated interest expense of 3x. During the first quarter of FY 2023, Sysco upsized the CP program to
Upcoming long-term maturities are very manageable with
Issuer Profile
Sysco is the largest global distributor of food and related products to the foodservice or food-away-from-home industry. Sysco's primary operations are located in
Summary of Financial Adjustments
Fair value of debt adjusted to reflect debt amount payable on maturity, stock-based compensation, restructuring related charges, acquisition related intangible amortization expenses and other one-time items.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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