DBRS Confirms Sysco Corporation at AA (low)

DBRS has today confirmed the long- and short-term ratings of Sysco Corporation (Sysco or the Company) and Sysco International, ULC (based on the guarantee from Sysco) at AA (low) and R-1 (middle). Sysco continues to generate highly stable operating results, and performed well in F2010 despite facing increasingly challenging market conditions. The Company benefits from its position as the leading food service distributor in North America, with consistent free cash flow generation and a strong balance sheet.

Sysco’s operating earnings and margins modestly improved over the past year, which is viewed as impressive given the weaker economic conditions in North America and product price deflation. Efficiency gains (including headcount reductions) and generally stable case volume growth were key contributors. These factors more than offset the impact of reduced discretionary consumer spending levels, particularly among its restaurant customers (which account for roughly 60% of annual sales). EBITDA, as calculated by DBRS, reached roughly $2.4 billion, which is a peak for Sysco. In addition, the Company’s core credit metrics were steady, including adjusted debt-to-EBITDA at roughly 1.1 times.

Over the near term, the trend of earnings growth is expected to continue, likely at a low-single-digit rate. Modest product price inflation, continuing efficiency gains, and slightly higher case volumes should benefit operating results. However, the economic environment remains challenging, and this is likely to limit material earnings improvement. Over the medium term, Sysco is expected to generate growth more in line with historical levels, notably as the full benefits of its Enterprise Resource Planning (ERP) system implementation are realized.

DBRS notes that Sysco is expected to continue to generate positive free cash flow over the near term, but at a lower level than in F2010. Higher capex, partly related to investments in the new ERP system, is largely responsible for this outlook. The Company has also resumed share repurchases, which were limited in F2010 due mainly to the cash requirements associated with its $952 million tax settlement with the I.R.S. The tax settlement led to much lower cash flow coverage (related to deferred taxes) over the past two fiscal years, but its impact was relatively neutral on a net free cash flow basis. Furthermore, Sysco is likely to actively pursue modest tuck-in acquisitions. The Company has the financial flexibility to manage such initiatives, given its large cash position and the expectation for free cash flow generation. However, an increase in debt that is not offset by a corresponding improvement in operating results could add pressure to the rating, given that credit metrics, particularly cash flow coverage, are at the low end of acceptability.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Food Retailers, which can be found on our website under Methodologies.