Sysco Corp (SYY) — Q2 2024 Earnings Call Transcript

Good morning everyone and welcome to Sysco's second quarter fiscal year 2024 earnings call. On today's call, we have Kevin Hourican, our President and Chief Executive Officer; and Kenny Cheung, 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 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 July 1st, 2023, subsequent SEC filings, and the news release issued earlier this morning. A copy of these materials can be found in the Investors section at sysco.com. Non-GAAP financial measures are included in our comments today and 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. During the discussion today, unless otherwise stated, all results are compared to the same quarter in the prior year. To ensure 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. Additionally, we want to make the audience aware of Sysco's participation at the CAGNY Investor Conference on February 20th and our Investor Day on May 22nd in New York. We hope you can join these events in person or virtually. At this time, I'd like to turn the call over to Kevin Hourican.

Thanks, Kevin and good morning everyone. Thank you for joining our call today. I'm very pleased with Sysco's performance for the quarter. Our company is the market leader in a growing industry where size and scale matter. This past quarter, we demonstrated that important position of strength by delivering another quarter of double-digit earnings per share growth. Sysco delivered bottom-line growth through a combination of volume growth, disciplined margin management, and expense control. Our positive momentum from the first half of our fiscal year is expected to continue into the second half, and we remain confident in our full year growth expectations for sales and EPS. This includes 2024 adjusted EPS growth of 7% at the midpoint of our guidance range. Sysco has improved how we leverage our scale through the Recipe for Growth strategy and we continue to deliver industry-leading profitability metrics as well as leverage our industry-leading strong balance sheet. Our confidence in the year has enabled us to increase our capital allocation to shareholders for the year. We are announcing today an increase of our stock buyback target for fiscal year 2024. We now expect to buy back approximately $1.25 billion of our stock this year, up from our previously communicated $750 million. With the increased stock buyback and our industry-leading dividend yield, we will contribute more than $2.25 billion directly to our shareholders. Sysco's strong balance sheet and free cash flow enable us to make these types of shareholder-friendly decisions while providing ample liquidity to fund the long-term growth of our business. We are, as we say, playing from a position of strength. So let's get started with a brief highlight of the quarter on Slide number 5. Beginning with the top line, we delivered sales growth of 3.7%, a sequential improvement from Q1, driven by a combination of positive case volume growth and positive product cost inflation. Importantly, this included a sequential improvement in local case volume growth quarter-over-quarter and year-over-year. We will share more on that later. Turning to the bottom line, we posted over 11% growth in adjusted EPS, generating strong operating leverage. This is the fifth consecutive quarter of positive operating leverage and the 11th consecutive quarter of double-digit adjusted EPS growth. Kenny will provide more details in his financial section. Today, I would like to update you on two topics I highlighted as priorities on our Q1 earnings call: Local case volume and supply chain productivity. During the quarter, we sequentially increased our case volume performance, growing our US foodservice segment 3.4% and delivering local case volume growth of 2.9%. We grew our market share profitably through our improvement efforts. Notably, this growth comes with the industry-leading profit margin rates you can expect from Sysco. The rate of volume growth does not include the benefit of Edward Don, which closed in late November, and we remain solidly on track to deliver our growth ambition versus the market this year. Importantly, the initiatives we outlined to drive local case performance earlier this year began to bear fruit this past quarter. We are focused on improving sales execution. Our efforts are centered around properly serving our local customers and improving our local sales growth. As a reminder of our local sales focus areas for fiscal 2024, first, we started adding incremental sales headcount in the second quarter and expect to continue hiring in the second half of fiscal year 2024 and in the coming years. The incremental headcount is targeted to optimize territory sizes and enhance sales consultant effectiveness, demonstrating focused actions to deliver higher returns. The benefits from increasing our local salesforce will accrue over time as new colleagues complete their training, move up the productivity curve, and settle into their territories. As previously indicated, we continue to expect to see the vast majority of the positive impact from our fiscal year 2024 hires impact fiscal year 2025 performance. Second, we recently refined our compensation model to further motivate our sales consultants on winning behaviors for Sysco, our customers, and our salesforce. We can already see the impact of the compensation change, and we expect the impact of these recent changes to grow over time. We will continue to optimize our compensation program over time to ensure we are properly rewarding and motivating our sales team. Third, our focus on performance management continues with a hyper-focus on customer visit frequency and sales consultant visit quality. These efforts are improving outcomes of our sales visits and can be closely tracked in our CRM tool. Leveraging technology to maximize the effectiveness of each customer visit remains a top priority, and I am pleased with the impact of our sales leadership team in the past quarter. Lastly, total team selling continues to gain traction. Our sales teams across broadline and specialty are working more collaboratively, and we are leveraging our data to maximize the time allocation of our selling specialists in produce, protein, and ethnic cuisine segments like Italian. All told, these interconnected actions increased our local case performance from Q1 to Q2 by 300 basis points. Importantly, the exit velocity of the quarter was even stronger as our performance improved each month of the quarter. We are confident in our ability to continue to grow local sales while maintaining the positive momentum we have displayed in national sales. Next, I would like to provide an update on the progress we've been making within our supply chain. We continue to improve the performance of our supply chain by focusing on operational excellence. Our year-over-year operating profit improvement is driven by positive operating leverage, with gross profits growing at a faster rate than operating expenses. Our supply chain employees continue to move up the productivity curve due to improved colleague training and significantly improved levels of retention, especially within the driver position. With improved retention comes improved outputs across the supply chain, lowering hiring expenses, lower training expenses, improved productivity, lower levels of product shrink, improved safety metrics, and improved service levels to our customers. Each of these elements positively impacts our P&L and the improvement drops straight to the bottom line. We are extremely focused on continuing to improve colleague retention and productivity within our supply chain. Lastly, we continue to improve the rigor and discipline in our colleague staffing efforts. This includes better matching our hours worked to the volume of cases shipped and the difficult task of flexing down our staffing during lower volume periods. We will continue to refine our engineered labor standards that drive our staffing models, and we will increase the agility with which we match our staffing to our volume. Our Q2 results display a continuation of quarter-over-quarter progress in productivity gains, and we remain disciplined and focused on continuing that rate of improvement. These efforts will benefit the P&L in fiscal 2024 and will carry into 2025 and beyond. We are bullish on our ability to continue to lower our cost to serve while simultaneously improving customer service levels. As I lift up from these two topics, improving sales effectiveness and improving our supply chain productivity, I would also like to communicate that we remain on track with our Recipe for Growth business transformation. Our digital efforts continue to advance. Our merchant teams continue to improve our product assortment, especially in Sysco brand. We are excited about the integration with Edward Don and how we can profitably grow our equipment and supplies business. We remain very pleased with the performance of our Greco Italian platform, and I am proud of our international business leaders for the compelling performance produced year-to-date from our International segment. At our Investor Day in May, we will dive deeper into each of our Recipe for Growth pillars. Foodservice distribution is a space where size and scale matters, logistics scale, cold storage scale, both warehousing and transportation, technology scale, and sales force expertise and scale. We believe that no one is better positioned than Sysco to leverage global scale advantages in order to better serve customers and profitably grow the business. I am very pleased that fiscal 2024 is off to a strong start, as we are profitably growing our market share and continuing a track record of delivering compelling top and bottom-line growth. For the remainder of fiscal 2024, we remain hyper-focused on the execution elements I highlighted today as well as advancing our Recipe for Growth strategy. We are confident that these efforts will enable Sysco to deliver our financial plan. I'll now turn it over to Kenny, who will provide a more detailed review of our financial performance.

Thank you, Kevin and good morning everyone. I'm going to build upon Kevin's commentary with a couple of points. First, we have positive momentum as Q2 marked another milestone with record top-line and bottom-line performance. Future results included sales and volume growth, along with strong cost of goods sold performance, resulting in adjusted gross profit dollar growth and margin expansion. Positive operating leverage was also driven by gross profit growing at a faster rate than operating expenses, demonstrating our disciplined margin management, which rendered adjusted EPS growth of over 11%. Second, we are excited about our first half performance and confidence in our positive momentum for the remainder of the year. Therefore, we are increasing our share repurchase expectations from $750 million to $1.25 billion for FY 2024 versus the prior guidance. This will increase expected total shareholder returns, including dividends and share repurchases, to approximately $2.25 billion for FY 2024. This is in addition to our continued reinvestment into the business, including M&A, such as the addition of BIX and Edward Don earlier this year. Capital allocation is a competitive advantage for Sysco as the strength of our balance sheet and free cash flow generation allow us to invest for growth and reward our shareholders at the same time. Now, turning to a summary of our reported results for the quarter, starting on Slide 13. For the second quarter, our enterprise sales grew 3.7%, with US foodservice growing 3.2%, international growing 9.6%, SYGMA decreasing 1%, driven by a planned exit of customers that did not meet our disciplined profit thresholds. This planned exit along with strong supply chain productivity improvement helped more than double our SYGMA profits this quarter, another prime example of our ROIC focus in action. Enterprise inflation was 1.1%. Additionally, US broadline inflation was slightly positive, and our international segment was up 6.6%, all aligned with our expectations. Total US foodservice volume increased 3.4%, and local volume was up 2.9%, a 300 basis points sequential improvement from Q1. Please note, volume reporting includes slight benefits from the acquisition of BIX Produce. Our volume reporting does not include our Edward Don or Specialty Meat business based on their unique product attributes. We produced $3.5 billion in gross profit, up 4.9%. Adjusted gross margin improved to 18.2%, an increase of 21 basis points. Our gross profit dollar and margin percentage improvement reflected our ability to effectively manage product cost fluctuations driven by incremental progress from our strategic sourcing efforts and disciplined pricing. Penetration rates of Sysco brand products increased 22 basis points to 46.9% in US local and were essentially flat at 36.8% in US broadline. Overall, adjusted operating expenses were $2.8 billion for the quarter or 14.4% of sales as we achieved another quarter of positive operating leverage. The strong management of expenses during the quarter was due to the positive impact of the variable labor planning tool and supply chain efficiencies that Kevin mentioned, and benefits from our previously announced $100 million of cost-out commitments. We are on track to achieve this commitment for FY 2024, and the planning process for delivering incremental costs for future periods has already begun. Additionally, with the successful closure of our BIX and Edward Don acquisitions, we are on pace to realize both top and bottom line synergies. Adjusted operating income growth of 7.6% in USFS, coupled with outsized profit contributions from our international and SYGMA segments, contributed to bottom line performance. Positive momentum continued in our International segment, with adjusted operating income growing 30.1% during the quarter. Our international results are a continuation of the robust growth and positive momentum in this segment over the past three years. The Recipe for Growth playbook is yielding dividends in the US and internationally. In total, Q2 adjusted operating income was $745 million, up 9.2%, and adjusted EBITDA was $927 million, up 11.6%. Turning to the balance sheet, which remains strong. We ended the quarter at a 2.75 times net debt leverage ratio. This is in line with our target range of 2.5 to 2.75 times net debt leverage ratio. Our planned increase to the share repurchase program is already in action with an accelerated share repurchase program that was executed in early January. We ended the quarter with $11.2 billion in net debt that is well laddered and over $3.4 billion in total liquidity. Approximately 96% of our debt is fixed with the floating component offset by our cash reserves. Our strong investment-grade credit rating is a competitive advantage as evidenced by our team successfully issuing approximately $1 billion of new debt in November. We are committed to our capital allocation strategy as seen on Slide 19, which includes a balanced approach with three elements: First, investing in the business for profitable and consistent growth; second, maintaining our investment-grade credit rating; and third, returning cash to shareholders through dividends and share repurchases. Turning to our first half cash flow. We generated $856 million in operating cash flow and $527 million in free cash flow, growing 70% and 141%, respectively. This growth includes continued strong conversion rates from EBITDA to operating cash and free cash flow, and we remain on track to grow free cash flow for the full year FY 2024. Our strong financial position enabled us to return $353 million to shareholders via share repurchases and dividends this quarter. Looking forward to fiscal year 2024 guidance, we are reiterating net sales growth of mid-single digits to approximately $80 billion. Adjusted EPS is expected to grow to $4.20 to $4.40. This represents a 7% growth at the midpoint. Additionally, we expect positive operating leverage with gross profit growing at a faster rate than OpEx for the year. We continue to expect slightly positive rates of industry volume growth and inflation. This includes Sysco's US broadline remaining inflationary in the second half of the fiscal year. Our planned top line also includes benefits from M&A activity consistent with previous disclosures for an average annual contribution of 50 to 100 basis points of growth. We will continue to opportunistically evaluate accretive acquisitions, but the remainder of FY 2024 will focus on integration efforts, capturing synergies for accretive acquisitions like Don and returning excess cash back to shareholders through share repurchases and dividends. For the second half and over the long term, we expect to win market share, profitably and consistently. Our efforts will also focus on strong cash generation with conversion rates ultimately feeding our plans to grow and reward our shareholders. Thank you for your time today. With that, operator, we are now ready for questions.

Great. Thank you very much. I had one question and then one follow-up. The question on the US local case volume, the 2.9%. It's nice return to growth on a one-year basis and like you said, a sequential acceleration on a two-year basis. Just wondering if you could talk about your level of confidence in sustaining that accelerating growth, maybe prioritize the most important drivers of that momentum. I think you mentioned that momentum actually built each month of the fiscal second quarter, and therefore, a strong exit rate. So I'm just wondering if you could provide some context, especially as someone was talking about maybe a slowdown that has been seen across much of the industry in January. Any thoughts there would be great. Thank you.

Good morning, Jeff. Thank you for the question. This is Kevin. We're confident in our ability to continue to improve in local sales. As you just said, the 2.9 is an average—weighted average, obviously, across the three months. And sequentially, the quarter improved each and every one of those months. So we are confident in our ability to continue to make progress in local case volume growth and at the historic profitability metrics that Sysco delivers. So it's profitable local case growth. The biggest drivers, I'd say, are performance management on the sales consultant side, which is the most immediate lever. The compensation change would be the second most impactful measure and total team selling follows up by the increased sales headcount, which are the third and fourth of the four things I mentioned on the call, if I ranked them by impact perspective. As it relates to the second half of your question on January, there has been a slowdown in January. I would describe it more as a blip, a bump in the road, if you will. There are a couple of factors driving the January results. Week one of January had calendar unfavorability tied to a holiday and where it fell and historically cold weather. I dislike the winter word, but there was some extraordinary weather in January that made it very difficult to make deliveries to customers in large swaths of the United States. That's backed up by the credit card data from the major banks that showed consumption for food-away-from-home was down in January. Jeff, I'm not overly concerned about that. It's the lowest volume month of the year, so if there's going to be a blip or a bump, you'd want it to be in that month. So, goes March, so goes the quarter. And we've got levers that we can pull on the year to go, and I will toss to Kenny for any additional comments in that regard.

Hey Jeff, good morning. On January, I agree with Kevin. What we're seeing right now is while volume has been slightly impacted, we have the ability to flex labor and mitigate the impact of lower volume with our labor planning tool that we've talked about. That is in conjunction with the disciplined engineering labor standards we have implemented. However, weather also impacts productivity, customer returns, and delivery costs over time, which we will mitigate throughout the fiscal year with levers in our P&L. Therefore, the full year guidance remains intact. In terms—Kevin talked a bit about local in the US, one comment is local international. As we know, international is roughly 20% of our business. We've replicated some of the Recipe for Growth playbook there, and we are seeing nice growth from our Canadian and European business, which is both up roughly 80%, driven by new customers, penetration, and customer retention. So, we are excited, and we continue to invest to capture growth with pace and discipline.

Got it. And just my follow-up on the fiscal 2024 guidance. I know from a very high level, you reiterated the mid-single-digit top line and the 5% to 10% EPS growth, I think you called out 7% at the midpoint. I'm wondering if you could share anything that might have surprised you on the positive or negative side in the first half of the year, especially since I think you said 7% at the midpoint. You've also mentioned in the first half of the year, double-digit and 11 consecutive quarters of double-digit EPS growth. So what potential incremental challenges are you seeing in the second half, especially as you've got an incremental $500 million bump in share repurchase to come. So, I'm just wondering your thoughts on the back half of the year EPS growth relative to the recent momentum you've had. Thank you.

Okay. So, let me unpack the two questions: what surprised me and what are some takeaways in the first half of the year. I think the biggest thing is Sysco has proven we can manage the business under various different environments. If you remember, Q1 was slightly deflationary in the US. Q2 was slightly positive in the US. In both quarters in the first half, we delivered operating margin expansion of roughly 26 basis points and also GM margin dollar expansion and GM margin expansion of 28 basis points. So, again, I think the first half was a really good proof point that under any circumstance, Sysco has the levers on the P&L to drive positive and consistent growth and being able to drive quality of earnings on the cash flow side. So, that's what I would take away from the first half. In terms of the full year guidance, let me just provide a bit more color. We do expect overall this year, lower overall market volume growth versus 2023. However, we expect continued market share gains from our company—profitable growth at Sysco. Inflation, as I mentioned on the last earnings call, Q2 came in slightly positive, aligned with our expectations. In the back half, we still remain consistent with what we said on both the first earnings call at the end of last year and the previous 90 days ago. We expect the back half to be slightly positive on inflation. We still have two quarters to go, but I believe that Q2's slight positive inflation gives us comfort around our original assumptions. In terms of—the expense side of the house, disciplined expense management, our team has already directed an effort to reduce the structural expense by $100 million. We are on pace, and we've begun building a pipeline for future periods. In terms of working your way down to the P&L on the tax rate side, it's 24.5%, no change. There's a slight step up on interest expense of roughly $20 million attached to the $500 million of additional share repurchase. If you net that impact together, so Jeff, I think your question is about the accretion on EPS. There is a net accretion of roughly $0.05 or so net of the interest expense increase coupled with the retirement of the shares. So, that is the $0.05 impact that you can expect for the fiscal year. With that said, with all the intra-working variables, we are reiterating and reconfirming our full year guide of $4.20 to $4.40 with the midpoint of 7% growth versus last year.

Thank you.

Good morning. Thanks so much for taking the question. So I wanted to dig into your sales force additions to date. I know you said it's going to be a bit of a ramp, but how is the initial progress going relative to your expectations? And then how are competitor hires impacting your ability to really find enough high-quality salespeople? Thanks.

Good morning, Mark. We're really pleased with the progress that we're making. Those efforts began in Q2, I want to be clear about this. So, we are in the early innings. We haven't quoted publicly the exact number of people we're hiring, but it's a significant number. We are not having a challenge with hiring and filling our classes. They are roster classes that we fill, and we put them through a very, very robust industry-leading training program. As it relates to competitive forces and the impact on our ability to hire, we're not having challenges filling the positions. That's my answer. We don't just go to a competitor, if you will. That is a source of talent. We also go to restaurants, we go to culinary schools. We're looking for people that are food-centric, that are good at selling, and have a passion for this industry. We can train them on our tools, we can train them on our selling systems and process, and we can train them to scale them up to be what they are, which is the best in the industry, as reflected in our Net Promoter Score. So, we're not having a difficult time filling our classes. We're really pleased with the first cohorts. We are on track to be able to hit the targeted hiring rate. And as I said before, that positively impacts 2025 from a growth perspective. Mark, back to you if you have any follow-up.

Great. And then my follow-up is going to be related to M&A. You guys closed on Edward Don about two months ago. How is that early integration gone relative to your expectations? And then in December, you announced a small acquisition with Ready Chef in Ireland. Was that one just a situation where the economics were too good to pass up? Or does it signal a shift in strategy that you might be more open to international bolt-on or even larger-scale M&A there?

Hey, Mark, I appreciate the question. Let me just start with Edward Don, which is the significant transaction that we've done this fiscal year. I want to be really clear on the numbers that we quoted today. So one month of sales and profit are in the numbers that we described, but from a volume perspective because I know that's a question some may have, we have not included Edward Don volume in our case growth figures at this time. So the growth in cases of 3.4 in total and 2.9 in local is pure Sysco, not including Don. I just want to be very clear about that. As it relates to the early innings, I was just in Chicago last week. We had a great day with Steve Don and his leadership team, along with our leaders, talking about the synergy capabilities between the two companies. We can purchase better together, buying products at a better and more affordable cost. We can target joint customers more effectively. So we have large national sales, restaurant customers of Sysco that aren't currently Sysco customers and vice versa. Don has some really big customers that Sysco isn't the food service distributor for, so we can sell together in a joint proposition. And then there's this huge opportunity longer term to take that equipment and sales product category and have it shoppable on Sysco's digital platforms, deliverable on either a Don truck or perhaps someday to a local small mom-and-pop customer on a Sysco truck. We're really excited, not just about the $1.3 billion in profitable top line we acquired through Don, we're eager about how we can grow that business meaningfully for years to come. And I know Steve Don and his team are equally excited. As it relates to Ready Chef in Ireland, just keep in context, it's a much smaller country, so the size of that acquisition is actually compelling for the country that it's in. What it was, was a fresh point-like entity. So to be crystal clear, in Ireland, we did not have a fresh cut bespoke produce business, and purchasing Ready Chef gives us that from a perspective of what we see from our US experience, that FreshPoint capability. We're running the Sysco play. That's the headline. It's not a change in strategy; our strategy is in each of the major countries that we compete within, we will run the Sysco play, which is to be the leader in broadline into bolt-on specialty capabilities over time, so we can sell around the room for the customers we serve and do so profitably. So, we're excited about that acquisition in Ireland. Our leadership team in Ireland is top-notch, and I am very confident in their ability to profitably grow the business, better serve customers, and increase penetration with existing customers within Ireland.

Makes sense. Thanks so much. Good luck guys.

Thank you.

So Kevin, can you talk about visit frequency and quality of visit, right? Those two—how you think about KPIs on each of those? And when you think about how that will move the sales needle, what are you looking for? Are you looking for a certain amount of year-over-year growth in frequency, how do you quantify quality?

John, great question. For the quarter that we just completed, this is the biggest reason for our improvement from what was flat in Q1 to up 2.9 in Q2: performance management, which includes visit frequency and visit quality. The compensation change poorly helped, but it was early innings, and that will have a bigger impact in a year to go; and the incremental sales consultants will impact 2025. We've not gone public with the numbers, the targets, John, but we have a very specific target of the number of visits that need to happen per week per sales consultant, and we can track it. We track it through our CRM tool. We were not where we needed to be. COVID had a disruption in many aspects of our business, and one of them was sales consultants doing more of that work from a home office than we would have liked. We really made clear our expectations for visit frequency. That's the wheel-side of the job—get out there, pound the street, and be in front of our customers. This is a relationship business. Being in front of the customer every week matters, and we've meaningfully moved the needle in the last quarter on the number of visits being completed per week for our sales engineers. Point two, though, is that it's only worthwhile if it's a quality visit. So, how do we measure quality? We have visits with purpose. In our CRM tool, it prompts our sales engineers with jobs to be done that day, introduce the Sysco brand case, win back a case that was lost over the last X period, and sell a category you've not sold before. Those are just three examples of jobs to be done. The CRM data-rich tool understands what’s being purchased and what should be purchased. I measure quality by close rate against those jobs to be done, and we can track it. We have a scorecard that ranks every one of our salespeople from top to bottom, and then we do performance management against the quality side of the visit. Recognize the top performers, coach the middle, and hold accountable those who aren't getting the job done and everything in between. John, back to you for any follow-up.

The follow-up would be, right, so you talked about growing GP dollars above SG&A. So, if you take the US, right, the delta was 200 basis points this quarter. I mean what's your thought as to the right general level? And lately, it was gross margin-driven, right, gross profit-driven as opposed to SG&A. We've now shifted back, right, to an environment where it's more SG&A-driven than gross profit.

So here's how we think about it. It's both, right? It is the gross profit line and the operating income line. If you look at Q2, you can see that our top-line growth was 4%. If you just do the math, the cost of goods sold, if you will, between sales and gross profit was up 3%. So, you had nice leverage driven by strategic sourcing and our partnership with suppliers, driven by a mix of business, the growth in specialty, and local brand penetration. As a result, GP actually grew 5%. So, we had a nice leverage between sales and GP. Now for us on SG&A, we're working extremely hard at driving productivity out. The good news is that the $100 million cost-out commitment we talked about at the beginning of the year is being seen through the P&L, and we're working through a pipeline that will yield success for us in future periods. You can see GP growing, let's say, 5%, and then net earnings growing close to double-digit for the previous year. So, you're getting leverage, John, on both the cost-of-goods line and the OpEx line, and we have initiatives that touch both sides of the house.

Thank you.

Thank you, John.

Hi, guys. Good morning. Nice quarter. I wanted to just follow-up on the case line growth. The Q2 result was clearly an inflection from the last quarter and the last couple of quarters. Can you maybe just help us understand how we should be thinking about the back half of the year from here? So, you talked about January off to a slower start. I don't think industry growth is all that spectacular at the moment. I'm just trying to make sure that we're in the right place from an expectation standpoint, just given how strong Q2 was? And then just a clarification on Edward Don, I know it's not in the case volume numbers currently. Does that mean it will not be going forward as well?

Yes, Ed, good question. Thank you. We're confident in our ability to profitably grow the local business and not regress back to the mean on where we were in Q1. That's one of the main messages from today's call. We've built momentum in local performance, very strong. Exit velocity was strong. Unfortunately, the industry has had a speed bump, as I mentioned, with the winter weather. There's also a two-year stack thing going on in January, as very strong growth occurred a year ago tied to the prior year being Omicron. There's a two-year stack phenomenon in January that normalizes itself by mid-February, which we'll get through. March is the most important month. But we're not going to quote a number on today's call regarding what you should expect from local case volume growth other than what we're seeing and what we predict is built into the guidance for the year. We're confident in our ability to deliver the midpoint of the guidance that we outlined today. Kenny can touch on for any additional comments.

Yes. On local growth, as Kevin stated, our assumptions are baked into the guidance. We are always focused on profitable growth. That's really important for our company. The reason why the cash conversion and net leverage was so strong in Q2 is due to this focus. In terms of Edward Don, in our volume number, just to clarify, BIX is included in our volume year-over-year, but it's immaterial. From the Don side, it is in our total number, just not in the volume number given the different product attributes.

And that's going to be the case going forward. And I'm just curious as to why Edward Don was not included in volume?

I mean—this is Kevin. We don't include Edward Don in our volumes because the business is measured through pounds. Getting to a common denominator is difficult. The way Don measures their business is not the same as how we measure our business through cases versus pallets versus each. We want to ensure that we get that right before we include it in our metrics, and that's something we are working on as part of our integration planning.

Okay. Thank you.

Thank you, Ed. Have a good day.

Great. Thank you for taking my question. Was curious if you could further contextualize the strength of the local case growth in terms of the opportunity to further penetrate kind of existing consumers and then also execute against new customer wins, which I know has been a target and a goal over the last couple of calls that we've talked about.

Yes. Josh, thanks. On the existing customers, I'll bridge back. I didn't talk a lot today in my prepared remarks about our Recipe for Growth. I tried to really keep it narrow and focused on driving local case performance through selling effectiveness and supply chain. We're really pleased with our Recipe for Growth strategy and the impact of our growth programs on our business. I would point you to Sysco Your Way and Perks as two very important programs that are increasing penetration with existing customers. They're continuing to perform well, and at our Investor Day in May, we'll talk about the longer-term plans for those two growth programs. Our total team selling effort also focuses on broadline where we over-index. We have meaningful share in broadline, but our share is below the industry average in specialty. That's why we are as focused on produce, protein, and the ethnic cuisines as we are. We're moving the needle with existing customers on total team selling. As I mentioned before, what that program is that each account has a sales consultant generalist who is the relationship manager and is there every week, but is not going to be an expert in specialty or protein. We're doing a better job of identifying which customers have the propensity to buy those categories, linking up that specialist with the sales consultant generalist for joint visits, and compensating them in a way that they win together when those cases are added to a Sysco truck, regardless if that's a FreshPoint truck or a Sysco broadline truck. We're making progress with existing customers on penetration. The lifeblood, we call it the oxygen of the business, is constantly bringing in new customers. You need that oxygen to breathe. We're very focused on new and making that a priority for the sales force. It's embedded within our updated compensation model as a priority. If they win new business that's profitable and sufficiently large to make it worth our while to pursue those customers, there's a minimum threshold that they are rewarded for. That works hard; prospecting is hard work. We need to make it a priority, and I’m really pleased with the progress that has been made this last quarter on increasing the portion of our business that is new customer wins.

Great. Thank you for that. And then Kevin, in your prepared comments, you mentioned just the overall improvement in the supply chain. It seems like things are perhaps continuing to get back to normal. Your results highlight that. Could you talk about the overall health of the supply chain just broadly as an industry and kind of where some of the pushes and pulls are now that we're a little further removed from some of the disruptions that occurred over the last couple of years?

Thank you for the follow-up. We're really pleased with our progress of improvement in supply chain. Retention is up overall, as you just indicated, with fewer people leaving their jobs and fewer open positions. Therefore, just general staffing health in the industry is better. Specifically at Sysco, we're fully staffed. That does not mean we don't have a job opening in a specific site today. In aggregate across our network, we are fully staffed. That brings down, as Kenny said, our hiring costs, our training costs, improves shrinkage, damages, and accidents on the road. Everything about the ecosystem improves when we have a more tenured population. We're really pleased with that. The productivity levers that we have are moving up into the right as a result of that. Oftentimes, I get asked the question, what inning are we in? I think we're up to inning seven now on the supply chain recovering to pre-COVID levels. This means we still have some room to improve. I want to be clear that when we reach inning nine, the game is not over. What happens in inning nine is that we introduce new technology and productivity improvement programs, etc. We can get beyond, meaning better than 2019 levels of productivity. But I'd say, we're in inning seven, and we still have room to improve and we're focused on delivering.

Yeah. One point for me is, as I mentioned earlier, we have the labor planning tool, and we're really matching—being very agile here on the expense side, matching labor with volume and ensuring that's with the backdrop of the Sysco work standards that I talked about earlier in my question in January, the driver academy, our training programs, and our engineering labor standards keep getting better and stronger. We improve processes through leveraging, as Kevin said, technology. The next wave of productivity improvement is better discipline through the standard work that we're doing. So there's still room for improvement, but we are pleased with the improvement we've made in the supply chain, and that's factored into our fiscal 2024 guidance.

Thank you.

Hi. Thanks for taking my question. So, I was wondering if, as you saw a pretty significant rebound in your local customer business in the second quarter, just what the implications are on gross margin performance given that the local customers are a higher-margin customer segment. And then, I guess, as you enter the back half, as my follow-up, how you would expect the local customer growth to look versus the total company?

Yeah. So I can start. So you are correct. The local customer does come with an attachment rate with a higher GP dollars per case, and there was a margin accretion with the local customer, and we are seeing that flow through the P&L, which is one of the reasons why you're seeing a nice mix between leverage on GP as well as the leverage down to EBITDA and net earnings. With that said, though, I think we shouldn't overlook the CMU success that we've had in our business. We're also seeing margin expansion. We are also seeing cost of goods leverage across the portfolio of our CMU business. Again, one might think it's just restaurant, but it's not. There're other specialty growth segments that we're winning in the marketplace, driving accretion on the margin side. When we talk about strategic sourcing, it is not just for a local customer. It's the size and scale of Sysco that benefits skills across both our local customers and CMU. We are renewing, we are winning businesses at a higher-margin clip at the current moment.

Great. Thanks, guys.

Thanks, Kendall.

Thanks, Kendall.

Hi. Thank you. The question is on inflation. I'm wondering what kind of indicators you were looking at to sustain inflation through the back half of 2024. I mean some PPI food, for example, metrics might suggest a little bit more deflation than what you're talking about. As a second question, there’s been at least some chatter that some grocery stores are sequentially lowering their pricing as their own commodity costs have eased. I mean have you seen anywhere in the marketplace in terms of your competitors, maybe among the nationals, but on the local or regionals of different operators that are lowering their price per case to their customers—a trend that could potentially be influencing the market over time? Thank you.

Hey John, it's Kenny. I'll start. So, on inflation, you are correct. We are informed by data. We actually have a terrific tool of data. We partnered directly with suppliers and third-party strategic partners, institutions, and the like. So, we have a rich data set of our own as well, given how much volume goes through our supply chain each and every day across various segments and industries. We're all that modeling in right now. Number two, we watch our basket very closely. Now, I've talked about this in the past, but if you think about our commodity basket, we have 12 main commodities, and we don't really over-index on anyone in particular; no one comes out more than 15%. Thus, we manage inflation and deflation every day, as well. For example, you could have beef, which is growing close to double-digit, but you could have another commodity that's in a different space. Sysco has historically and today managed deflation, inflation day in and day out. The third point, as I mentioned earlier, Q1 deflation in the US; Q2 slightly positive inflation. In both quarters, we were able to effectively drive positive, consistent operating leverage to our P&L.

It's Kevin, I'll just add. You asked about prices to the consumer in the local business, in particular. It's a very efficient market, John. So, as our COGS decrease, yes, the way it works is we can then pass through value to our customers. For us, it's a dynamic business. The book gets priced weekly, as do our competitors. As prices come down, it's an efficient market, and that gets passed through to customers. As Kenny stated, though, we maintained profitability ratios on the way up. We can maintain profitability ratios on the way down; that's the value of our pricing tool that we are leveraging extensively to make sure that we are where we need to be. Regarding general confidence in the year-to-go inflation figures, we've got a lot of data at Sysco; we have global data. We have access to a large amount, as Kenny mentioned, across the 12-plus categories. Some categories are moving up, and others are moving down. The one that's going to be the biggest tailwind in the year to go is Produce. Produce was substantially deflationary in Q2 because of wild markets the previous year due to major flooding in California. Produce is going to return to more normal levels of low inflation, between 1% to 2%, versus down substantially in Q2. So that's one of the bigger drivers of providing confidence in the year to go. We said muted inflation, but certainly, muted inflation is up from where we were in the first half of the year.

Very helpful color. Thank you.

Thanks, John.

Hey, thanks. Good morning. I just want to see if you could provide any color on the broader growth rates and health of the various categories you participate in. Are there certain specialty categories that are growing particularly well or certain customer types in the industry if the growth has either carried off or accelerated lately?

Alex, it's Kevin. I'll start and then if Kenny has anything to add, he can jump in. Let me first just talk about where the business is growing, where success is happening, and then I'll flip back to the customer. But it's okay; I'm actually going to answer it in reverse. Right now, broadline is winning. Distributors—broadranging distributors are winning. People ask us all the time, Kevin, how can it be true that you and the other big two are saying you're taking share? The answer is scale matters in this industry. Size and scale matter—our purchasing scale, our delivery scale, our technology scale and frankly, all three of the big three are growing faster than the market. Our growth for the quarter was plus 3.4, and the market growth was nominal. We meaningfully outgrew versus the market, and my suspicion is well the big players in the space. What this means is the growth is coming from smaller regional distributors and specialty distributors. Point two for the Sysco-specific thesis is that our specialty business is meaningfully performing well. We're winning in broadline in total versus the 60-plus percent of the business where the big players are winning meaningfully in broadline versus that 60%. And within specialty, Sysco's specialty is outperforming versus specialty. So that's kind of the thesis or the story of why we're outperforming versus the market. Regarding the customer side, we're seeing no discernible moves trade up, trade down, trade left, trade right. The best operators are winning. People who have interesting concepts or culinary trends are winning, but we're not seeing trades up or down. Since the January blip that I mentioned, it has been a robust food-away-from-home market in Q2. Specifically, December was a robust month as consumers frequented food-away-from-home establishments.

Thank you.

Great. Thank you. Thank you for taking the question. Mine was on the chain business, and the growth there has been strong. Maybe if you can just confirm my math on that case growth among the chain business accelerated in the second quarter, and maybe share what you're doing to drive that acceleration? Additionally, if you can provide an update on the relative profitability, I know the gap between independents and chains has narrowed, but could you indicate how much that's narrowed at this point?

Okay. So I'll start, and I'll toss in any additional comments Kenny may have. Our CMU business, it's half of our business. We're meaningfully winning in that space. Yes, we did accelerate in Q2 versus Q1, and we have confidence in our ability to continue to be very successful in CMU. When people hear chain, they think national restaurants. I want to be very clear that this is just one portion of that business. Travel and hospitality are also in that space. Healthcare is in that space, education is in that space, and we've had notable and meaningful wins in each of those non-national restaurant sectors. In fact, our focus is on non-national restaurant sectors. The low-profit portion of CMU is the national chain restaurant space, primarily in the QSR space. That's the lowest profit business. We are really focused on building win-win contract relationships with customers where we can help them achieve their objectives. We can do it at a cost to serve that meets their objectives, and they are willing to partner with Sysco on things that are profitable and helpful for Sysco. For example, Sysco brand penetration. With local customers, we have more than 50% of our cases on that truck that are Sysco brand. One of the reasons why the profit profile is lower for national is the penetration of Sysco brand. We're looking for partners who want to grow together who want to win together. Our national sales team has been doing a really good job in that regard, and we expect that momentum to continue. Kenny, any additional comments you'd like to make?

Yes. Thank you. I would say a few things here. If you think about the chain business, right, ROIC is a lens through which we view all businesses, including chain. On the CMU side, as Kevin mentioned, we did accelerate and you are correct; the math is correct, but we accelerated profitably. That's a really important point here. Many of the things we're doing across technology, strategic sourcing—all of our initiatives impact both the local and the CMU side. We have many, many things that scale across both local and CMU driving possibilities for both sides. That's my first point. The second point is, again, ROIC cuts both ways. In SYGMA, which is mostly the bigger customers, they were down on volume year-on-year. However, given the supply chain efficiencies and productivity that we're driving, pruning the customer side of the house, we were able to double—more than double the business on profit, a 140% increase there. That gives you a little bit of color on how we think about productivity as well as some of the other side of ROIC.

Great. And I just had a quick follow-up on the comments regarding the local business on the independent side. Kevin, you mentioned that the industry was robust. Are you seeing generally positive traffic at your local customers? I'm wondering whether local traffic has improved in this latest quarter versus the prior quarters?

Yeah. Independent traffic, especially in December, was robust. That's my most concise way of describing it. Really healthy and strong. I'd tell you that we were strong across food away from home, but independents, in particular, were very strong in December.

Great. I appreciate it. Thank you.

Thank you.

Thank you.

Thanks. Yeah, good morning guys. You've discussed this, but maybe I'll ask it in a slightly different way. On operating leverage, you expect it for the full year. Do you expect a little bit less in the second half, maybe as a consequence of ramping up hiring? Or are some of the cost out sort of an offset to that? How do you think about that in the second half versus the first half?

You are right about the dynamics in the second half, and I'll clarify that. In the first half of fiscal year 2023, we experienced a recovery and some unusual costs from the previous year. However, during the latter half of last year, those costs decreased significantly and became non-existent. Factors like supply chain productivity, employee turnover, retention, and labor standards are all contributing to the value we’re observing now, which really began in the latter half of last year. In other words, Brian, we are facing a tougher comparison from a sales perspective. Nevertheless, we are continuing to invest in our business and we expect to achieve operating leverage for the entire year.

Thanks, Brian.

Hi, guys. Good morning. Nice quarter. I wanted to just follow up on the case line growth. The Q2 result was clearly an inflection around what's the last quarter and the last couple of quarters. Can you maybe just help us understand how we should be thinking about the back half of the year from here? So you talked about January off to a slower start. I don't think industry growth is all that spectacular at the moment. I'm just trying to make sure that we're in the right place from an expectation standpoint, just given how strong Q2 was? And then just a clarification on Edward Don, I know it's not in the case volume numbers currently. Does that mean it will not be going forward as well?

Yes, Ed, good question. Thank you. We're confident in our ability to profitably grow the local business and not regress back to the mean on where we were in Q1. That's one of the main messages from today's call. We've built momentum in local performance, very strong. The exit velocity was strong. Unfortunately, the industry as I did a speed bump, as I mentioned, with the weather in January. There's also a two-year stack phenomenon going on in January where the very strong growth a year ago tied to the prior year being Omicron. There's a two-year stack phenomenon for January that normalizes itself by mid-February, which we'll get through. As you know, March is the most important month. But we're not going to quote a number on today's call regarding what you should expect from local case volume growth other than what we continue to see, and what we predict is built into the guidance for the year, and we remain confident in our ability to deliver the midpoint of the guidance that we outlined today. Kenny can touch for any additional comments.

Yes. On local growth, as Kevin stated, our assumptions are baked into the guidance. We are always focused on profitable growth. That's really important for our company. You can see that's the reason why cash conversion and net leverage was so strong in Q2. In terms of Edward Don, in our volume number, just to clarify, BIX is in our volume year-over-year; it's immaterial. From the Don side, it is in our total number, just not in the volume number, given the different product attributes.

And that's going to be the case going forward. And I'm just curious as to why Edward Don does not included in volume?

I mean—this is Kevin. We don't include Edward Don in our volumes because the business is measured through pounds. Getting to a common denominator is difficult. The way Don measures their business is not the same as how we measure our business through cases versus pallets versus each. We want to ensure that we get that right before we include it in our metrics, and that's something we are working on as part of our integration planning.

Okay. Thank you.

Thank you, Ed. Have a good day.