DBRS Changes Trend on Sysco to Negative

DBRS has today revised the trends on the long- and short-term ratings of Sysco Corporation (Sysco or the Company) and Sysco International, ULC (based on the guarantee from Sysco) to Negative from Stable. The rating action reflects DBRS’s concern that continued pressures on operating income as a result of prolonged weakness in consumer demand and high cost inflation, as well as the added costs associated with the Company’s delay in the implementation of its business transformation project, are causing Sysco’s credit risk profile to deteriorate to a level that may no longer be consistent with its current AA (low) and R-1 (middle) rating categories.

On September 8, 2011, DBRS confirmed Sysco’s ratings and Stable trend, but noted that a prolonged difficult economic environment may continue to pressure growth in profitability in the near term. DBRS stated that if the Company was to experience further softness in operating income, the ratings or trend could come under pressure.

For the six-month period ending December 31, 2011, Sysco displayed a 8.9% year-over-year boost to revenue which, was largely driven by price increases as overall case volume growth, excluding acquisitions, increased modestly by 2%. Operating margins, however, remained under pressure, largely due to higher food cost inflation and higher-than-expected operating expenses that continue to grow at a faster pace than sales. These operating expenses included higher salary and related costs, higher fuel expense, and additional costs related to the Company’s business transformation project. As such, EBITDA margins in the first half of F2012 declined to 5.5% versus 6% a year earlier, and lease-adjusted debt-to-EBITDAR increased to 1.36 times (x).

Going forward, DBRS believes that Sysco will have to display a level of growth in operating income that enables it to reestablish lease adjusted debt-to-EBITDAR in a range more acceptable for the current ratings within a reasonable time frame. This would likely require a greater rate of top-line growth from both pricing and volume, as well as continued focus on improving operational efficiencies, which includes a more effective execution of the Company’s business transformation project. Sysco will also need to display prudent financial management with regard to dividend payouts, share repurchases and debt-financed acquisitions.

A lack of significant recovery in operating income and limited improvement in key credit metrics (i.e., lease-adjusted debt-to-EBITDAR improving toward the 1.0x mark in the near term) may result in a downgrade in Sysco’s credit ratings by the end of the fiscal year.

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

The applicable methodology is Rating the Merchandising Industry, which can be found on our website under Methodologies.