Sysco Corp (SYY) — Q1 2020 Earnings Call Transcript

Good morning, everyone. And welcome to Sysco's first quarter fiscal 2020 earnings call. Joining me in Houston today are Tom Bené, our Chairman, President and Chief Executive Officer, and Joel Grade, our Chief Financial Officer. Before we begin, please note that statements made during this presentation that state the company's or management's intentions, beliefs, expectations or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act, and actual results could differ in a material manner. Additional information about factors that could cause the results to differ from those in the forward-looking statements is contained in the company's SEC filings. This includes, but is not limited to, risk factors contained in our Annual Report on Form 10-K for the year ended June 29, 2019, subsequent SEC filings, and in the news release issued earlier this morning. A copy of these materials can be found in the Investors section at sysco.com or via Sysco's IR app. Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures is included at the end of the presentation slides and can also be found in the Investors section of our Website. To ensure that we have sufficient time to answer all questions, we'd like to ask each participant to limit their time today to one question and one follow-up. At this time, I'd like to turn the call over to our Chairman, President and Chief Executive Officer, Tom Bené.

Thanks, Neil, and good morning, everyone. Thank you for joining us. This morning, we announced financial results for the first quarter of fiscal year 2020, which reflect continued momentum in transforming our business and improved year-over-year performance. Our overall results were largely in line with our expectations. From a top line perspective, we generated sales of $15.3 billion, a 0.6% increase compared to the same period last year. As we discussed during Q4 fiscal 2019, we saw top line softness and difficult comparatives during that quarter, which we said would also carry into the first quarter of fiscal 2020. We did, in fact, see that continued softness at the beginning of the quarter, but as expected, we saw sequential improvement throughout the quarter and therefore feel confident about the future trajectory based on the exit rate of the quarter. There were several things that contributed to our volume and sales growth rate for the quarter, including the continued growth of our local customers at a faster rate than our national customers, in part driven by the transition of certain large national customers both in U.S. Broadline and SYGMA during the past year. Secondly, the divestiture of Iowa Premium, our beef processing facility, that was sold in the fourth quarter of fiscal 2019. This divestiture had an impact in the quarter of $114 million, and the negative impact of foreign exchange rates, which amounted to an additional $100 million for the quarter. Gross profit for the quarter grew 1.4% to $2.9 billion. And gross margin expanded 15 basis points, driven by continued shift in our customer mix as we grew local cases at a faster pace than total case growth. And we continued growth and penetration of our Sysco brand portfolio across the various business units. Turning to cost. Adjusted operating expenses decreased 0.5% to $2.2 billion, driven by strong expense management during the quarter, including greater operational efficiencies and benefits from our transformation initiatives, such as the regionalization work in Canada and our finance transformation. As a result, for total Sysco, we delivered solid adjusted operating income growth of 7.3%, which led to adjusted earnings per share growth of 8.6%. Looking at the broader economic and industry trends in the U.S., GDP growth was 1.9% during the third quarter, and unemployment remains at an all-time low. Consumer spending, the main engine of growth, rose a healthy 2.9% but it was down from 4.6% in the spring, all signs that the economy is doing well despite some broader global concerns. While some other economic indicators have recently been softer than expected, we haven't seen a meaningful impact on restaurant industry trends and therefore continue to feel good about what we're seeing in the food away from home market. During the quarter, according to Black Box Intelligence, restaurant same-store sales rose slightly, driven by average guest check increases. Although traffic in the food service industry continues to be mixed, it appears that market conditions are modestly favorable for food service operators in the United States. Turning to international markets. Traffic and sales in the UK and Ireland continue to be soft as uncertainties around Brexit affect food service operators as well as other economic activity. However, these trends are relatively stable compared to conditions in the prior quarter. In Canada, GDP and consumer spending are stable and unemployment continues to decline, which is reflected in positive broader restaurant industry performance. In France, GDP growth is expected to continue, household spending has picked up, and employment is trending down, boosted by labor market reforms. I would like to now transition to our first quarter results by business segment, beginning with U.S. Foodservice operations. We were pleased with our top-line results and strong expense management in the U.S. Foodservice operations segment in Q1. Specifically, sales for the first quarter were $10.7 billion, an increase of 2.5%; gross profit grew 2.6%; adjusted operating expenses grew only 0.4%; and adjusted operating income increased 6.1%. Local case volume was solid within U.S. Broadline operations, growing 1.5% and has now grown for 22 consecutive quarters. As previously mentioned, this performance reflects solid growth at local restaurant customers, especially as we cycled one of our largest growth quarters last year, which was partially offset by the loss of some less profitable traditional bid-type business, such as local schools. Total case volume within U.S. Broadline operations grew 0.5%, reflecting our ongoing disciplined approach in managing our national account business. We expect to continue to see the impact of certain customer transitions in U.S. Foodservice operations into the second quarter as well. Gross profit grew by 2.6%, driven by higher inflation, the positive mix of local cases to total cases, continued growth in Sysco brand, up 36 basis points, and continued category management efforts. Food cost inflation was 2.9% in U.S. Broadline, driven primarily by the meat, produce, dairy, and poultry categories. From an expense perspective, adjusted operating expense for the quarter grew only 0.4%, driven by strong expense management throughout the business, including the impact of some of the transformational initiatives mentioned earlier, which drove down costs during the quarter. This was partially offset by higher labor and operational costs. Similar to the larger discussion we had in the second half of fiscal 2019, our labor costs were slightly higher due to our decision to retain driver and warehouse personnel in a tight labor market. And while we do see some signs of improvement in the overall labor market, we will continue to evaluate if this practice is the right one for our business over the next couple of quarters. Moving to International Foodservice operations, we had mixed results for the quarter. Our international results were impacted by changes in foreign exchange, and Joel will provide more details on that to you in just a few minutes. However, on a constant currency basis, sales increased 3%, gross profit increased 2.1%, adjusted operating expenses increased 1.3%, and adjusted operating income increased 6.2%. Canada and Latin America had improved performance for the quarter, driven by a combination of positive business environments driving the top line with positive synergies coming from programs such as the regionalization effort in Canada. In Europe, performance in our UK business remained stable, although uncertainties around Brexit certainly remained in the market. However, challenges with our operational and supply chain integration in France continue to negatively impact our overall performance there, and most likely will continue through the remainder of our fiscal year. The relatively soft gross profit performance was offset somewhat by solid expense management throughout our international segment, as we continue to see benefits from the various integrations and other expense management initiatives that improved operating income growth for the quarter. Moving on to SYGMA, as mentioned previously, we remain disciplined and focused on improving overall profitability of our portfolio of customers in this segment, which included gross margin expansion of 73 basis points as we saw total gross profit reduce by roughly 3%. In addition, strong expense management and the closure of a distribution location drove adjusted operating expenses down 8.8% versus the same period last year, resulting in significantly improved operating performance. We continue to feel very good about the progress we're making within this segment and look forward to continuing to improve our operating performance throughout the year. In summary, we feel good about the trajectory of our business for fiscal 2020. We continue to increase profitability through growth at local customers, our disciplined approach in managing our national customer portfolio, managing our expenses, and making progress in the various initiatives we have discussed to transform our business. As we look ahead, we are excited to celebrate our 50th anniversary this fiscal year. For half a century, our company has been at the forefront of the food service distribution industry, passionate about our customers, dedicated to service, and committed to being socially responsible. Our team is enthusiastic about the changes we're making in our business model to ensure we remain the market leader and fulfill our vision to be our customers' most valued and trusted business partner for the next 50 years. And finally, I'd like to thank our dedicated associates across the company for all their efforts to make Sysco the distributor of choice for so many customers. They are truly all in. Now, I'll turn the call over to Joel Grade, our Chief Financial Officer.

Thank you, Tom. Good morning, everyone. As Tom mentioned, sales for the first quarter increased 0.6% despite a number of factors, including a difficult comparison versus the same period last year, our disciplined approach in managing SYGMA and national accounts within our U.S. Foodservice segment, the divestiture of Iowa Premium and the negative impact of foreign exchange rates in our International segment. Local case volume within U.S. Broadline operations grew 1.5% for the first quarter, of which 1.4% was organic. While total case volume within the US Broadline operations grew 0.5%, of which 0.4% was organic. Gross profit increased 1.4% versus the same period last year and gross margin increased 15 basis points. We saw growth in our sales of Sysco brand products, which increased 20 basis points to 47.7% of local U.S. cases and 36 basis points to 38.8% of total U.S. cases in the first quarter. We are pleased with our strong expense management for the quarter. Our transformation initiatives continue to generate benefits to the business as adjusted operating expenses decreased 0.5% compared to the same period last year, and slightly ahead of our expectations. As a result, the gap between gross profit dollar growth and adjusted operating expense growth was 190 basis points, and adjusted operating income grew 7.3% compared to the same period last year. It is also important to note that our adjusted operating expenses grew only 0.4% within the U.S. Foodservice segment despite a challenging operating environment. Although we have seen strong expense reductions throughout the quarter, we continue to invest in areas of our business that will help facilitate future growth. For example, our technology spend was higher versus the same period last year as we continue to make advancements in areas that help us streamline workflow, while better supporting our customers and helping to support better growth. During the first quarter in the U.S. Foodservice segment, we saw a 220 basis point gap between gross profit dollar growth and adjusted operating expense growth, which translated into strong adjusted operating leverage for the quarter. As Tom mentioned earlier, our results in the International segment were impacted by foreign exchange rates. In that segment, sales decreased 0.3% on a reported basis and increased 3% on a constant currency basis. Gross profit decreased 1.7% on a reported basis and increased 2.1% on a constant currency basis. Adjusted operating expenses decreased 2.7% on a reported basis and increased 1.3% on a constant currency basis. Adjusted operating income increased 3.8% on a reported basis, but increased 6.2% on a constant currency basis. As it relates to taxes, our effective tax rate in the first quarter was 22% compared to 20% in the prior year period. While higher than per year, this rate was lower than our guidance of 24%, primarily due to tax benefits from share-based compensation. Our adjusted earnings per share grew 8.6% to $0.98 per share, which is an increase of $0.08 compared to the same period last year. Cash flow from operations for the period was $172 million for the quarter, which was $100 million lower compared to the same period last year. Free cash flow was $1 million, which was $170 million lower compared to the same period last year. Net capital expenditures totaled $171 million for the first quarter of fiscal 2020, which was $70 million higher compared to the prior year period. The decline in free cash flow was due in part to an increase in working capital in the first quarter this year, driven primarily by an increase in receivables. Additionally, we saw planned higher capital spending due to the timing of investments in the prior year period. However, we continue to expect strong cash flow for the full fiscal year 2020. In July of 2019, we adopted the new lease accounting standard that changes the way we recognize operating leases by including the related right of use assets and lease liabilities on our consolidated balance sheet as of fiscal 2020. The changes are also reflected in the consolidated results of operations and consolidated statement of cash flows. However, there's only minimal net impact. We remain focused on delivering long-term results for our shareholders through a strong and consistent approach to our capital allocation priorities, which are as follows: investing in the business, consistently growing our dividend, participating in M&A and maintaining a balanced approach to share buybacks and paying down debt. We typically review our dividend growth rate each November and expect to once again increase our dividend later this month. We also have previously committed to a modestly higher rate of share repurchases than in the prior year. In summary, we had a solid first quarter that reflects the sustained momentum of our work to transform our business, as fundamentals of the industry and our business remained strong, as we continued to deliver steady local case growth, good gross profit dollar growth, and strong expense management. These results give us confidence that we remain on the right path to enhancing the customer experience and delivering a high level of execution in all areas of our business, as we continue our progress toward achieving our three-year plan objectives. Operator, we're now ready for Q&A.

Good morning. And nice quarter on slower overall case growth, and that's really kind of what I want to ask you about, Tom and Joel. I was just hoping could you provide just a little bit more detail on your outlook for the case growth in U.S. business? And you've talked about an improved cadence throughout the quarter. Can you give us any color on the exit rate? You mentioned that you still expect some impact from customer losses in the second quarter. I'm kind of curious as to how we should think about case growth here. And then just overall, as we think about the momentum of the business, what's an acceptable level case growth that you're thinking about as you progress through the year? And other than easing comparisons, can you maybe help us out with what helps to drive that?

Regarding case growth, we observed some softness earlier due to comparisons with a strong prior year and specific challenges in segments like national accounts and micro chains. However, as we entered the first quarter, our local independent customers showed solid performance and continued to grow. Finishing the quarter with 1.5% local case growth is on the lower end of our expectations, and we believe future growth will align more closely with our historical performance, typically in the 2% to 2.5% range. There are also timing factors at play, particularly with transitions involving significant customers that occurred in the latter half of last fiscal year, which contributed to the softness we experienced in total cases in the first quarter and is expected to continue into the second quarter. We aim to gain market share within the independent sector, and even at current growth rates, we are nearly at par with market developments, positioning ourselves favorably for continued share gain. It's important to note that the recent case volumes have not been significantly impacted by any M&A activities, but we anticipate some contributions from our recent acquisitions as we move forward. This should provide clarity on our current outlook and anticipated trends.

And just a quick follow up so on the competitive environment. Has anything changed really on that front? You have, over the last couple quarters, highlighted a little bit more competitive intensity in the micro chain. So I'm just curious as to what you're seeing there?

Yes, I don’t think we’ve observed any significant changes from what we previously discussed. I mentioned at the end of last quarter that we might not be as competitive in certain areas. The key point we want to emphasize again today is that issue was on us, and we have increased our efforts to ensure we’re not losing business due to a lack of competitiveness. It remains a competitive landscape, but we aren't noticing any heightened activity compared to what we previously mentioned.

This is Blake on for Chris. Just wondering on the upcoming quarter, can you talk about any other details on the timing of case growth in terms of year-over-year comparisons we should be aware of, or holiday timing, just anything like that.

Blake, not really, I mean, there's nothing major there. As we called out that some of this national account business that we're cycling still will still be there in Q2. So I think that you should expect that based on the comments we made. But nothing else that's unique or different other than what I just mentioned.

And then my follow up is on some of the capital spending. I know you mentioned free cash flow impact from working capital and in CapEx. On the CapEx side, I think you mentioned some project timing. Can you just talk a little bit more about what was going on with that investment? And then maybe, can you give us the cadence of the free cash flow throughout the year? Any commentary about that would be helpful.

There were a few things to note regarding CapEx. Last year's cash flow was somewhat atypical because in the first quarter we had just come off an accelerated CapEx in the previous fiscal year's fourth quarter due to U.S. tax reform. This tax reform allowed us to expedite some spending in that quarter, particularly for fleet purchases, resulting in an unusually low CapEx in the first quarter of last year. In comparing year-over-year, this year's spending appears more normalized compared to our usual first quarter fleet purchases. This discrepancy involves some timing, specifically related to the fourth quarter and the tax reform impact from the prior year. Typically, our first quarter shows seasonality with lower cash flow. Last year's numbers were an anomaly compared to our historical performance in Q1. Although there are timing and capital spending factors, we view these as short-term and not indicative of unusual cash flow patterns, despite last year’s stronger numbers. If you analyze our cash flow trends from recent years, you'll gain a clearer understanding of what to expect moving forward. Cash flow tends to ramp up significantly in the latter part of our fiscal year. Nonetheless, I’m confident in our ability to maintain strong cash flow, despite the current timing issues.

So Tom, when you think about share gains, maybe parse that out between new accounts that you're taking over as opposed to existing account market share. So I think existing account market share is probably pretty static? Or is that not right? And then what are you seeing with regard to drop size? I assume that's getting a little bit larger.

As we consider share, you're correct that it comes from two sources: acquiring new business and maintaining our current business. This involves retaining our existing customers and increasing our penetration within those accounts. Both aspects are important. I wouldn’t assume that new business opportunities are limited; given our market position, there are numerous prospects available to us. We define new business as not having engaged with a customer for approximately a year, which means there are businesses that regularly cycle. Therefore, new business remains a significant growth opportunity for us. Regarding penetration, we're highly focused on it, as selling more to existing customers is the most efficient way to grow. We have tools in place to help our sales team identify potential opportunities within those customers, whether it's products they previously purchased but aren't currently buying, or offerings suited to their needs that they might consider in the future. So, it’s a balanced approach between acquiring new customers, retaining current ones, and deepening our engagements with them. Improving our penetration tends to increase our drop size, although I wouldn’t say we’ve seen a significant rise in that size; however, we are generally satisfied with our current drop sizes and continually seek ways to enhance them as we improve our penetration overall.

For Joel, the adjusted corporate expense, excluding transformation, seemed a bit high. It increased by 4%. What factors contributed to that, and is this the new run rate as we consider the rest of the year? Are we looking at a range of 3% to 4%, or $235 million to $240 million per quarter? Is that our expected run rate?

I would describe that there are a couple of points to consider. As we reflect on the transformation work, it's evident that some results are tied to additional investments in our corporate spending, which sometimes originates from our field organization. What you're observing is largely a shift in geography. The net effect here is actually positive when we analyze our SG&A. So, that's how I would characterize the majority of this situation. From that viewpoint, it seems like a reasonable perspective. However, I would emphasize the importance of viewing this in a more holistic context regarding our overall G&A spending. We have made considerable progress in this area when considered as a whole.

And John, I might just add a point that Joel made in his earlier comments around technology. So like a technology investment, it's going to show up in that corporate expense line. But there are other offsets, as you mentioned some of the transformative work that we're doing. So we're going to invest where we need to. And an area like technology continues to be a big focus for us, so just to give you a little more context behind it.

One of the areas that was more impressive to us was certainly the gap in gross profit dollars and OpEx in the U.S. business. Can you talk a little bit about balancing the pullback on OpEx, and making sure that you're funding the business in the right way to grow the top-line and margins going forward, and the opportunity to further reduce OpEx as you move into the back half of this year or next year?

I'll take a start at this, and I'll let Joel chime in. Judah, thanks for the question. I think, look, the gap is important. We've talked about it a lot. And it continues to be something we focus on. Because when, if we're in a quarter where the volume may not be exactly where we all like it to be, we are very conscious of making sure that our expenses fit and flow accordingly. Having said that, I would say that, as we just talked about with technology as a great example, we're going to continue to make investments in the things that are going to drive and support this business. And you should absolutely expect that from us. The types of things that we're getting the expense leverage on are the things we've been talking about. We've had some administrative costs focus areas here last year that we're still getting some benefit from. We've had this smart spending initiative, which is around just making sure that we're removing some non-value added expenses in parts of our business where possible. We talked about the regionalization effort in Canada, and that's had some impact. And then we've had things like the finance transformation that's been a journey here, but we're still kind of benefiting from that work that's going on. So I would say think about it as, we're going to continue to stay focused on cost, and we do believe there are additional opportunities there. But those areas of opportunity are not the areas that would, in any way, reduce or slow down our focus on both transforming the business and accelerating our growth and driving the share gains that we've been talking. Joel, if there's anything you want to add?

I believe it's well put. Regarding your question about whether there's more to come, I would say that, based on what Tom mentioned, there are definitely further benefits to be gained from initiatives that are not directly value-added or transformative. We've started to see some of these benefits, particularly in the second half of last year, and we are committed to discovering additional opportunities. You should anticipate ongoing advantages throughout the year from this effort. However, I want to emphasize Tom's point that these initiatives will not hinder our investments aimed at growth. It's essential to repeat that message.

And just to follow up on that. Historically, M&A is an important piece of both top line growth and I would say also, driving margin as you're able to strip costs that have acquired businesses. With what you've seen out of the regulatory bodies and kind of review of M&A over the last couple of years, largely on the larger size. But how does that affect your process going forward in terms of assessing deals and deal flow?

I believe one of the points you've made is that our historical mergers and acquisitions have primarily concentrated on smaller tuck-in deals. This focus continues. While we are aware of larger strategic opportunities, most of our efforts remain in the smaller tuck-in space. So, I can't honestly say that this focus has significantly influenced our perspective. We are attentive to developments in the market, but generally, the J. Kings deal we announced last quarter is another example of an opportunity that aligns well with our existing portfolio. Overall, we are optimistic about our M&A pipeline and the opportunities that lie ahead. Even though we monitor larger deals, it hasn't had a substantial impact on our overall M&A strategy.

I just wanted to touch on gross margin, and see if you could maybe quantify what the impact of inflation was on the gross margin improvement, and then what the outlook for inflation would be for the rest of the year, and then as we think about modeling gross margin? Any other puts and takes just to keep in mind in 2Q and the rest of the year? Thanks.

Sure, Marisa. This is Joel, I'll take that one. In terms of quantifying the specific impact of inflation, I don't think we'll do that. However, the takeaway is that we consider the 2% to 3% range to be optimal for our industry, allowing us to pass those costs along, and generally, our customers are able to do the same over the long term. So, we find ourselves in a good position. It's always influenced by the categories experiencing inflation, but we do not see it as a particular problem or issue at this point. My view is that we expect a modest level of inflation in the next few quarters, but nothing significant to highlight other than we feel positive about our situation regarding inflation.

Marisa, regarding our outlook, I want to emphasize that while we strive to remain competitive in the current market, significant increases in gross margins may not be realistic. However, you shouldn't be overly concerned about those figures either. We've discussed this over the past few quarters and feel confident about our current gross margin standing relative to our peers. Therefore, we believe we are in a strong position now, likely at the upper limits of where we can expect to be in the future.

If I could follow up with another modeling question regarding SYGMA, should we consider the first quarter sales performance as indicative of what we can expect moving forward, given the business rationalization? If that’s the case, when do we begin to cycle that?

I believe Q1 was likely stronger than Q4. As we mentioned last year, we are experiencing some significant customer transitions. Therefore, for the next few quarters, you should anticipate similar figures. There is a combination of transition customers and performance from existing ones. On the SYGMA side, in many cases, when we have a customer, we hold the majority of their business within a specific region. Consequently, their performance will influence ours. The larger numbers you're seeing are primarily driven by the transitions we've discussed.

Two questions, one on the topic of chain versus independents. And you mentioned the ongoing transition of presumably some of the chain accounts. So I'm just wondering how you would characterize maybe the health of each of the sub-segments being chain and independent. And importantly, maybe some changes in sequential trends for either in terms of top line performance, again recognizing that you're pruning some of the chain larger business. But just how you think about change in independents in terms of their performance of late?

So as we mentioned earlier to some of the comments and you guys have access to the same kind of information. I think in general, the numbers you're seeing for us, have more to do with transitions than softness within certain customer types. I think we continue to feel good about the Independent growth potential out there, whether it's existing customers or our opportunity to gain new business as we were talking earlier. I think as it relates to some of the larger national type customers we have there are segments of the market that are growing faster than others. Think about QSR is doing well, you see some of the casual dining maybe having a little harder time, but I think generally speaking, we feel like the environment is pretty good for the restaurant operators. And so I think we would say that the numbers you may see us talk about or reflected here will be more about decisions we made, or customers have made in doing business with Sysco. So right now, I'd say we feel pretty good about that environment, in that market.

And then just following up on the M&A discussion, I know you've often quoted that there's tons of room for growth for you guys, with only a 16% share in the US. And I think you mentioned you expected it to be a modest uptick for you guys, but still not huge M&A numbers expected. With that said the comment around the regulators in terms of seemingly being increasingly involved and scrutinizing. I'm just wondering, more so than just for yourselves. But do you think that changes the landscape of M&A and consolidation for the broader Foodservice industry?

Yes, I don't know that we think about it that way. And again I think at Tom's point, I mean, look our M&A as we talked about, we anticipate between 0.5% and 1% of our total sales in any given year. And obviously that moves around a bit, given by quarter given what we may or may not have or lap. Again we feel certainly good about our pipeline of deals. Certainly feel good about the companies we brought on over the last couple of years. And I think, I don't know, I think from an overall industry perspective, I just think there is plenty of room for consolidation, continues and again I think that will continue to happen. And I think you certainly should expect that from the broader industry and from ourselves as well. I think it's interesting to see how some of those things all play out. And what the regulators are interested in, in this math. But I would just, as I said earlier in the call, I don't believe what’s happening there as we have really significant impact on how we think about M&A.

And just lastly a clarification on what you said earlier about inflation. It looks like now, like I said, you're approaching 3% which is maybe the upper end of your two to three sweet spot. But has been kind of upticking the past number of quarters. I'm just wondering whether you would expect it to lag of that 2% to 3% range to the upside. And if it did, which commodity have you seen some more significant signs of inflation, whether it's protein, dairy or produce or otherwise.

Yes, I mean as I think and again Tom can chime in here. I think our view would be that we still stay within that range for the most part again. Obviously, we've had some issues in terms of pork and some of the other pork-related commodities that are on the higher end of that. Obviously, there have been some of the challenges that are well documented. Obviously, produce has been certainly on the higher end of that range. A little of that's certainly is oftentimes the category of that that moves around a fair bit. So I would just say, generally speaking, I mean you're right. We're on the bit of a higher end of the range that we consider kind of the optimal place. But outside of that, I don't know if there's anything that we would see that would drive significantly. We get questions fairly often on the question on pork, just in general. But again, our pork certainly, a fairly small percentage of our overall business and not something that people are seeing, that our folks are seeing something that we should be overly concerned about over the near future.

Jeffrey, the only thing I would add is that, as Joel pointed out, the center of plate items have the most potential to make a significant impact for everyone since they play such a crucial role in the operator's menu and have faced challenges in passing along costs. We need to stay focused on those key center plate categories like meat, poultry, seafood, and obviously pork, which is included in the meat segment. Additionally, as Joel noted, we must keep a close eye on produce. There were some fluctuations last year, and we need to see how that develops. Dairy prices have also been on the higher end. Overall, we feel optimistic about the current situation and hope that these prices stabilize within this range. If there are any concerns, they would mainly relate to the center plate and produce items.

On the acquisition side, you mentioned expecting more acquisitions. You announced a $155 million acquisition towards the end of this quarter, which you just reported. Considering that, that's about 25 basis points, slightly below your projected range. First, are there any additional acquisitions we could factor in at this point that would contribute to that 25 basis points? Secondly, in relation to this, the next two largest distributors in the industry are currently in the early stages of significant acquisitions. How do you view the market as a buyer looking for targets in terms of availability and valuations?

Well, a couple of things. First of all, as it relates to other acquisitions, obviously again the only thing I can reiterate there, obviously, I think will be reported anything specifically is that we continue to feel good about the pipeline that we have in front of us. And certainly, so again reiterating just our overall guidance around the sort of 0.5% to 1% in any given year, it’s again moves around by quarter some. But all I guess I can say there is, without being able to go into specifics, it's again we certainly feel decent. We feel we're in a good place with our pipeline and obviously there's something we can talk about. We will certainly do that. I guess just in general, I mean the sort of the view of the large, again, certainly, I don't want to speak for other competitors in the space. I guess the only thing I would say there though just in terms of context. You obviously the density of our network in this certainly are in the United States is, I would say, significantly higher than the others in our space. And so the ability for them to take on additional geographies or additional areas that you consider white space for them is obviously a bit different than the way we would look at some of those things. And so outside of the deals that we've done in Hawaii are recently and obviously outside of our core markets in North America. But in our North American business, again the density of our network it puts us probably a little bit in a different place in terms of how we look at some of those deals and then are probably our two largest competitors. So I think just from that contextual perspective would be the way I would think about that. We certainly again have again lots of opportunities in front of us and we'll certainly continue to be aggressive in that space. But probably the best context I can give you there at this time.

And then I just wanted to either circle back or just ask directly about this African swine fever in China and other parts of Asia that you hear different views on that from kind of semi-catastrophic to sort of probably not that great. How is Sysco sort of viewing this? I mean, I'm not asking you to make a prediction. But what kind of contingencies are you thinking about, what kind of scenarios you're looking at, and so on, if you have any? Thanks.

Andy it's Tom. Look, I think it's something that's, it's out there. It's something that we are starting to stay very close to. We think over the next six months that there could be some impacts in that area that especially if you think about other markets may be beginning more import of that because of their needs. I think if you think about the pork segment, there are various components of that, some that are more important and our bigger part of the sales and others. And so I think we're staying close to try to understand what impact might exist in some of those different areas. So I think there are two, probably two things you should just think about. I mean, it's been out there for a while, we haven't seen major impacts yet, but we believe there could still be some. And the way we think about that is, we work closely with our restaurant operators and certainly with our suppliers. We're not going to be in a position where we're not going to have availability. That's not going to be the issue, it's really a matter of do the prices in some areas get to the point where customers start to transition those menu items or think differently about those menu items. And I think that's the work we're always doing with our customers to stay abreast of the impacts that might be happening on these certain product categories. And try to proactively work with them so that they are not in a situation where it dramatically affects their ability to drive profitable growth in their own businesses. So I'd just say, we're very close to these kind of things. We have lots of resources that are involved both with our supplier partners and here. And right now, I think we're saying our sense would be, over the next six months, we'll probably see some increased impacts here, while we are proactively trying to manage that both in the company with our customers.

And I would say just even in terms of just sourcing availability of product, as well as substitutes. So I think that's one of the things that we've certainly been very active in working with customers and managers navigate through those things in the past and certainly we are moving forward.

Tom and Joel, I wanted to just go back to the independents. And I was wondering if you could or the local case growth and wondering if you could unpack that 1.4%. Just help us understand kind of what types of trends you're seeing underneath the types of restaurants, regional trends, open new customer openings. And regarding the improved exit rate, can you elaborate on that. Is that just comparisons, or is that internal or external factors? And then the last part is, I think you had been targeting closer to a 3%. And so, I'm curious is that still on the table or should we be thinking about a 2% to 2.5% kind of going forward for that segment? Thank you.

So a couple of things, as we talked about earlier on the 1.4%, part of what we talked about is, we feel very good about the growth within the independent restaurants segment and including in that would be this more of the regional or micro kind of change we've talked about as well. We did talk about we do see this from time-to-time. We talked about the impact from what we think about is almost local bid business. So we talked about local schools as an example. There is some of that that falls into these local numbers. It's not national business, because it's literally local school-type agreements or some kind of local governmental things that fall into that as well. So I think what we see is and why we feel good and confident is that the restaurant side of it is strong, and we're seeing good growth there. And so I think that piece you should rest assured that we feel good about the work we're doing. And I think it's a combination of, as we talked about, us making sure we're remaining competitive in that space. But also there are some, as I mentioned, also some tools that we're providing our selling organization that help them to understand where they can improve their overall penetration within those customers. So I think it's a good balance of both new business opportunities that exist and that we're able to pick up, as well as the penetration within those existing customers. As far as the 3% number versus where we are today and maybe with 2.5%, I talked about earlier. I think we just have to continue to think about the fact that we're going to see improved growth in this segment given the fact that we have things like this local bid business in there. I can't sit here today and say that we still deliver the 3% overall for the whole time frame. But we still feel like that 2.5% to 3% is not an unreasonable number for us. So we are cycling two of our biggest quarters in Q4 and Q1 from prior year, as we've talked. And so I think we'll get some benefit from that maybe going forward, but that really wasn't part of the sequential improvement, I talked about as we exited Q1. I mentioned that we are observing some settling in the labor market, which has been very tight over the past couple of years and continues to be so. However, our associate retention numbers indicate that we are experiencing improved retention. This gives us a sense of stability in our labor market, particularly among our front-line operating associates, warehouse staff, and drivers. We have also focused on not transitioning some of our business during softer seasons, as this would require ramping up again when the new season arrives. We need to be careful in this regard; we prefer to retain our strong associates and invest in them during slower periods to avoid a situation where we scramble for labor and face extensive training costs when it's time to ramp back up. This practice incurs several expenses, especially in training and development. That's the essence of what I was referring to. We will keep evaluating our current model, which we believe is beneficial, but we are aware that the slower parts of the year might have some impact, and we aim to understand the advantages and drawbacks of our approach.

The Canadian regionalization was mentioned a couple of times, and it sounds like, at least in that market it's having some effect that at least in terms of delivering more profitability. And it looks like as well some more case volume as well. Are there any lessons to be learned from that project, as it relates to the United States? In other words, is that lagging the United States in terms of implementation of that structure, or might the United States to be able to learn something as to what is happening in Canada?

So the Canadian regionalization is something we have talked about a few times. And it's an effort that we started about 15 months ago and we were implementing it throughout last fiscal year. So we're getting some continued benefit as we move into this fiscal. And I would say that it's a little different than the U.S., because just the sheer geography and types of facilities we had there. We had regular size operating companies like you'd expect to see in the U.S. and we had some smaller operating companies, significantly smaller than we have in the U.S. And in the case of Canada, we had a similar management structure at every one of those facilities. And so we just felt like there was an opportunity to better structure ourselves up there from a cost perspective to take out some of that additional expense associated with some of those smaller facilities. There are certainly been learnings there that we do believe over time might have some applicability to the US, but it is a little bit different setup than what we have in the U.S. and that drives some difference in the way we have opted to think about it going forward. But we feel good about the lessons we're learning and we've had many, and I would say it's still work-in-progress, but we're feeling good about the effort and time will show whether or not there are some similar opportunities here in the US.

And this wasn't really apparent in the results, maybe a little bit just in terms of the overall inflation numbers. But there was some very unusual pricing behavior this quarter that happened because of the beef processing plant fire that happened where a number of different state cuts actually in the spot market spiked up considerably. Did you see anything unusual happen within your P&L that happened because of this kind of intra-week volatility, specifically on the beef side or is your company just big enough that, that would have been noise?

Well, John, first of all, I mean, because of the way we go to market with the supplier partners, and our agreements, those things for us are probably a little bit of noise more than anything else, but not big impacts for sure. And that's one of the things as we've talked, I think over the years that their own should feel really good about is, the long-standing relationships, the way we've built our relationships with our suppliers are not short-term, they are longer term in nature, and that helps us I think dramatically as we go in and out of these types of events. It's unfortunate when they happen, and it's difficult for our suppliers. But we're generally able to manage through those pretty seamlessly.

Just a quick question on the calendar for the second quarter. The period between Thanksgiving and Christmas has shortened. I think last time we went through something like this, Starbucks was impacted. I mean, I think it's really pent-up demand for restaurants. Did it impact you at all or should we expect any weakness associated with that?

Bob, I don't think, you know from where we're sitting today, we don't necessarily believe so. It's a fair question and something we're certainly have to go do a little more work on. But we don't, at this point, see any historical impact or feel like that's going to be a problem.

And then second, you guys seemed really confident with the acquisition pipeline. Just curious what you've seen on the seller expectation price point, point of view? I mean, arguably two big competitors are now out of the market for some period of time. I'm wondering if seller expectations have accordingly modified.

Bob, it's Joel. I wouldn't say we've experienced a significant impact from sellers. We have frequently been asked about the high price of the U.S. Foods SGA deal. Did that affect expectations? Generally, I would say no. Each deal is unique, and we haven't encountered many situations that are not specific to the deal where we would claim there is an inflated view of expectations or the opposite. Historically, we have maintained a fairly normalized perspective on what we expect our M&A multiples to be. Discussions we have with people today tend to align with that range. Outside of a few very deal-specific situations that can arise from time to time, I wouldn't say anything is affecting the expectations, whether upwards or downwards, or the potential timing of deals today.