Sysco Corp (SYY) — Q3 2025 Earnings Call Transcript

Good morning, everyone, and welcome to Sysco Corporation's third quarter fiscal year 2025 earnings call. On today's call, we have Kevin Hourican, our chair of the board and CEO, and Kenny Cheung, CFO. 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. For 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 June 29, 2024, 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. 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. During the discussion today, unless otherwise stated, all results are compared to the same period 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. If you have a follow-up question, we ask that you reenter the queue. At this time, I'd like to turn the call over to Kevin Hourican.

Good morning, everyone, and thank you for joining us today. Q3 was a difficult quarter for the industry, which began with wildfires in California, significantly impacting our important Southern California region, and included historic winter storms throughout the country in January and February. Besides these events, they had an approximately 150 basis points negative impact on sales trends for food distributors in the quarter. Poor traffic to restaurants during the quarter reflected these challenges. With January down 1.3%, February down 5.7%, and March down 2.3%. The quarter overall was down 3.1%, which represented a 150 basis points deceleration versus Q2's traffic level of down 1.6%. In addition to the effects of adverse weather in the quarter, consumer confidence has been shaken by the recent trade policy and tariff negotiations. As you are aware, the closely followed Michigan Consumer Confidence Survey recently highlighted that consumers are expressing one of the lowest levels of confidence in approximately 20 years. The decline in confidence levels gives us concern for the full year ahead. I will speak more about tariffs and their impact on the industry in a few moments. As a reminder, Kenny and I communicated on our Q2 call that we had anticipated nominal improvement in the business macro environment going from the first half into the second half of our fiscal year. Unfortunately, at this time, we have experienced the opposite macro effect, and Sysco Corporation's business performance for Q3 reflects the industry traffic deceleration. We are disappointed with the quarter but it is important to note two things. Sysco Corporation's USFS volume trends for the quarter trended in line with the industry traffic deceleration. More importantly, business performance in March strengthened over the course of the month. While it is unusual for us to comment about the first month of a quarter, given the uncertainties in the macro backdrop and given our softer than expected Q3, we felt it was important to highlight that our April performance was stronger than March. For the month of April, industry traffic adjusted for calendar shifts has trended slightly better than March. The Easter shift in the period complicates year-over-year comparisons. However, even when adjusting for the Easter calendar shift, April has produced stronger volume growth rates versus March and versus Q3. We are pleased to see the relatively stronger start to Q4 but we are cautiously planning for the remainder of 2025 given the aforementioned tariff uncertainties and consumer confidence data. Given that macro backdrop, I will now pivot to Sysco Corporation's results for the quarter where, as you can see on slide number four, we delivered sales results of $19.6 billion, up 1.1% on a reported basis, up 1.8% to last year when excluding the divestiture of Mexico. We delivered adjusted operating income of $773 million, down 3.3% to last year, and adjusted EPS of $0.96 flat to last year. We converted negative 3.1% foot traffic to restaurants into positive sales by winning new business and successfully passing through approximately 2.1% inflation for the quarter. Importantly, we are making solid progress on our $100 million profit improvement efforts that Kenny discussed last quarter, with a positive contribution in the period from our strategic sourcing and inbound logistics efficiency improvements. Those efforts will have an increased positive impact on Q4. Our international segment posted another compelling quarter with profit growth of double digits. This is the sixth consecutive quarter of double-digit profit growth from our international segment. Within USFS, our national sales business delivered flat volume growth for the quarter and sales growth of 2.3%. Both figures were below our expectations, driven by softness in the national restaurant sector. Within national sales, our non-commercial business continues to perform strongly in food service management, education, travel, and leisure. Our local business delivered negative 3.5% volume growth for the quarter. This was a step down versus our Q2 performance. But the step down was consistent with the traffic change to the industry on a quarter-over-quarter basis. Lastly, our Sigma segment delivered sales growth of 9.5% for the quarter driven by strong customer wins versus the prior year. The sales and volume growth in Sigma will begin to reduce in the coming quarters as we begin to lap large customer wins from last year. Sigma is having a very strong year, growing top line by 9% and bottom line by 17% year to date. We are disappointed with the overall financial performance in the quarter as we had expected a stronger macro backdrop. However, we remain 100% focused on accelerating our progress. We anticipate that we will increase our progress on these important initiatives in the coming quarters. That I have covered the general backdrop of the industry and Sysco Corporation's sales, volume, and profit performance, I would like to provide an update on specific initiatives we are driving to improve our performance results. First, I'd like to discuss the state of our sales consultant work. I am pleased to report that our 2025 hiring cohorts are progressing nicely up their productivity curve. Each of our hiring classes are on target to achieve their sales and volume targets. Importantly, I can also report today that our sales consultant retention has significantly improved versus the first half of the year. Elevated turnover was a headwind for Sysco Corporation in the first half of fiscal 2025 and we expect it will become a tailwind in 2026 as we lap those colleague departures and our new hires increase their productivity. Regarding colleague retention, we just completed our annual employment engagement survey and our sales colleague job satisfaction was up solidly year-over-year. Colleague engagement drives retention; colleague retention drives positive customer engagement. Given questions we have received on recent investor calls, I would like to explain the net effect of colleague turnover in a bit more detail so that you have clarity on what we are experiencing. During the first half of 2025, we experienced elevated colleague turnover that peaked in September. The negative impact of sales consultant departures is immediate as we need to reassign customer locations to other Sysco Corporation colleagues. During that customer realignment, select customer attrition occurs. As such, a departing colleague has an immediate negative headwind impact on our business and that headwind can persist for a full 12 months until you lap the customer departure. In contrast, the immediate impact of a departure a colleague hiring has the opposite time horizon. New colleague hiring has a slow and gradual positive impact as new colleagues start with a small book of business and grow that business over time as they expand their territory. The length of time to become productive for a new sales consultant is approximately 12 to 18 months on average. This can be quicker or slower depending upon the level of sales experience of the new hire. Putting it all together, as a result of these two factors, fiscal 2025 has experienced a net headwind from our colleague population. Given that we have stabilized our retention figures and that our new hires are performing, we expect the scales of this equation to dip from negative to positive as we enter fiscal 2026. The second topic I would like to highlight today is colleague compensation and performance management. Our sales consultants are embracing our compensation model. They are driving the right selling behaviors and they are on average making more money than the prior year. These actions are most notable in the winning of new business, where we have opened more new accounts in March than any prior period outside of the COVID snapback. We have work to do in order to improve customer retention, as industry churn across distributors is currently above its historical average. As a result, we have a company-wide effort on improving local customer retention to complement the success we are having with new account wins. The hyper-focus on service and retention will be a stronger positive vector in fiscal 2026 versus 2025. The third topic for today is our fulfillment capacity expansion. We previously spoke about opening a new facility in Allentown, PA earlier this year. That new distribution center is focused on winning new business in the population-dense northeast corridor. I recently visited our next new site just outside Tampa, which will support the growing Florida market. The new facility in Tampa will open this summer and will increase our ability to win net new business in the Florida region by expanding our storage and throughput capacity, especially to support the peak winter months. Internationally, we are on track to open new facilities in Sweden and Ireland in the summer. Each of these projects will support expanded storage and throughput capacity that we believe will enable us to profitably grow our business and target rich international geographies. Lastly, I would like to speak to our work to improve our pricing agility. At the CAGNY conference in February, Sysco Corporation introduced a new local sales initiative that is currently in pilot mode in select markets. As I said at CAGNY, we are pleased with our margin discipline and overall price competitiveness utilizing our current pricing system and architecture. With that said, it is a competitive marketplace and competition will occasionally offer our customers savings on select items. Today, our sales reps need to seek approval in order to match a given competitor price on a given item. The time delay of that approval process can sometimes result in a lost sale or even a lost customer. We're working to speed up this process and provide our frontline colleagues with decision-making authority leveraging our pricing tools. Our sales professionals will be able to respond to the customer in the moment, enabling incremental opportunities to potentially save a sale, all while maintaining strong margin discipline. This increased speed to action will improve case volume and customer retention. Most importantly, our underlying pricing will underpin the agility process. We will roll out the new model once the pilot results match our intended outcomes and as we prepare and train our colleagues, new and experienced, to sell in this model. As I wrap up the update on local sales, I want to congratulate our international team for another outstanding quarter. International local volume increased 4.5%. Even more impressively, adjusted operating income increased 17.4%. Particular strength was delivered from our Canada, Great Britain, and Ireland businesses. We expect the continuation of these strong results from our international segment in Q4 and into fiscal 2026. As I wrap up the business review section of my prepared remarks, I would like to make a few comments on some additional important topics. First off, I would like to address what we are seeing with tariffs and their potential impact on the food distributor landscape. It is important to note that Sysco Corporation purchases greater than 90% of our products within country in each country that we operate. Food is inherently local. Our sourcing teams greatly leverage local food suppliers. As a result, our tariff exposure is much less than most industries. For those products that we cannot source locally, such as avocados from Mexico, we are working efficiently to understand the impact of tariffs on our costs. At this time, produce from Mexico and Canada is exempt through USMCA. With that said, we recently learned that tomatoes will, in fact, be taxed and tariffed when imported. To manage these complexities, we have established a tariff management task force that meets daily. The focus of the task force work is the following: First, ensure we have products in stock and available for our customers. Second, defend against price increases from suppliers and do everything possible to minimize their impact on potential cost increases for our customers. Third, find alternative sources of product if and when a cost increase is excessive. Fourth, work with our customers to find menu alternatives and product choice alternatives that can reduce the potential negative cost increase impact. All told, Sysco Corporation is in a better position than anyone in the food service distribution space to manage this dynamic situation. Given our size, scale, and global procurement division, our global leadership gives us a strategic advantage to understand the supplier community in hundreds of countries, and we have the ability to leverage that knowledge and those relationships in our procurement efforts. As you have heard from other company CEOs, our main concern with tariffs is not product cost inflation. Our main concern is the negative impact that tariff noise and volatility is clearly having on end consumer confidence and sentiment. The Michigan Consumer Confidence Survey data I referenced earlier presents a clear reflection of that concern. We are hopeful that the economy doesn't dip into a recession. With that said, we are making preparations for a more challenging environment and we will be appropriately cautious in our outlook. To help offset softness that may be created by the macro economy, Kenny and our entire leadership team are focused on disciplined cost management and contingency planning. Sysco Corporation's industry-leading balance sheet is a major source of strength in times like these, as we are able to continue investing in our business when others will need to pull back. This can take the form of winning new customers, building inventory to support new business, and even pursuing M&A if we find the right target opportunity at the right price. Sysco Corporation is in a position of strength in times of greatest uncertainty. My last topic for today is the introduction of a pilot program at Sysco Corporation whereby we will open two cash and carry store locations within the Houston community. As you can see on Slide seven, the store concept is called Sysco to Go. We are interested in cash and carry for the following reasons: It is the fastest-growing part of the food away from home space. In a business where we have 0% market share today. Cash and carry customers are looking for value, convenience, and oftentimes the ability to pay cash. This is a customer segment that Sysco Corporation is not adequately serving today through our delivery model. By having the customer pick up the product themselves at our store location, we eliminate the most expensive part of the supply chain: final mile delivery. This cost elimination enables Sysco Corporation to offer our world-class products at lower prices than when we deliver to the restaurant. This enables us to meet the needs of the value-seeking customer more effectively. I want to be very clear: this is a two-store pilot. The future of the initiative will be determined by the outcomes we produce in these test locations. It is important to note that we are supported by Sysco Corporation's existing supply chain, leveraging our own product assortment. As a result, we have a strong command of the projected cost to run the stores. Leveraging our existing supply chain is a major strength of the format, given both stores are in close proximity to our Houston DC. We are excited to open the two stores in Houston soon and welcome value-seeking restaurant customers into this compelling shopping environment. I'll now turn it over to Kenny, who will provide a detailed review of Q3 performance and select fiscal year 2025 guidance commentary.

Thank you, Kevin, and good morning, everyone. I'm going to start with high-level thoughts on our performance, detail our Q3 financials, and then dive into full year 2025 guidance. To start, financial results this quarter included sales growth, with stable adjusted EPS performance. In the context of all of the challenging macro headlines over the past few months, growing sales as the industry leader or retaining best-in-class profit margins and rewarding our shareholders with our balanced capital allocation is noteworthy. However, this quarter missed expectations. As Kevin highlighted, the challenging macro and continuation of negative industry traffic directly impacted results. In this dynamic backdrop, we will remain agile in our management of the business as we also heighten our focus on the controllables. Our strong business fundamentals, industry-leading balance sheets, and strong cash flow generation are competitive advantages, especially in a challenging macro environment. As part of our balanced approach to capital allocation, we remain positioned to generate robust free cash flow that enables us both to invest in long-term growth while also rewarding our shareholders. Specific to this last point, we have repurchased $700 million in shares and paid out $752 million in dividends year-to-date, including repurchasing $400 million in shares this quarter. Further, we recently increased our planned quarterly cash dividend by three cents to fifty-four cents per share. This represents a 6% increase year-over-year and sets FY 2026 up to be a year of delivering dividend growth. Looking ahead, we expect our dividend to continue growing commensurate with our adjusted EPS growth. Now let's discuss our performance and financial drivers for the quarter. Starting on Slide eleven, for the third quarter, our enterprise sales grew 1.1% on an as-reported basis driven by US food service and Sigma. Excluding the impact of our now-divested Mexico business, sales grew 1.8%. With respect to volume, stable volumes across the enterprise included total US food service volume decreasing 2% and local volume decreasing 3.5% for the quarter. Our national business remains stable, highlighting the strength of the recession-resilient sectors which we operate, such as food service management, travel and leisure, and education. The local volume performance compares to down 1.9% in Q2 2025. The sequential deceleration was consistent with the industry traffic deceleration, but also included headwinds from the carryover impact of sales colleague turnover from earlier in the year. Going forward, we expect stronger contributions from nearest sales professionals that continue to work up the productivity curve and benefits from the stabilization of colleague retention that Kevin mentioned earlier. International segment results, excluding Mexico this quarter, demonstrated steady top momentum and double-digit operating income growth. This reflects continued momentum from successfully applying the Sysco Corporation playbook. The ongoing success is highlighted by local volumes growing 4.5% and broad-based operating income growth across our international portfolio. We produced $3.6 billion in gross profit, down 0.8%, with a gross margin of 18.3%, with improved gross profit per case performance. The decline in gross profit dollars for the quarter was primarily driven by negative volumes as well as mix. Volume was impacted by the macro and negative traffic, partially offset by continued growth in our more recession-resilient businesses. Second, mix remained pressured from the continued impact of our national business outpacing our local performance as well as negative mix from lower Sysco Corporation brand penetration rates. In addition, the industry's challenging traffic backdrop drove delays compared to our expected timelines, which resulted in fewer than expected strategic sourcing deals being finalized this quarter. That said, we remain confident around the overarching opportunity in our line of sight on benefits to Q4 from recently completed deals. Going forward, we expect improving gross margins driven by incremental benefits from strategic sourcing initiatives as part of our cost savings program and an improvement from mix. Product inflation came in at 2.1% for the total enterprise, consistent with our expectations. This is the average across all of our major product categories, with our teams regularly managing through pockets of fluctuation. Overall, adjusted operating expenses were $2.8 billion for the quarter, or 14.3% of sales, a 17 basis point improvement from the prior year. We continue to experience improved retention rates and productivity with our supply chain colleagues. This is resulting in strong NPS anchored by our highest service levels of the year for on-time deliveries, helping offset elevated supply chain labor rates and funding long-term growth consistent with our ROIC framework. This includes investment in higher growth areas of the business with fleet building, expansion, and sales headcount. Lower annual bonus incentives compensation in our USFS segment and global support center also impacted expenses for Q3. We remain disciplined with our corporate expenses, down 16.8% from the prior year on an adjusted basis, which also included accretive productivity cost-out along with efficiency work we deployed net by 24. These benefits are included in our $100 million cost savings program. Building off Kevin's point around tariffs, we are focused on leveraging our size and scale advantages by buying better to sell better. Our customer mix is a strategic advantage. We have efficient pass-through with national customers and spot pricing from our existing and growing local base. Our inventory turnover of approximately 14 times per year also enables us to work through inflation and deflation quickly relative to other industries. Overall, adjusted operating income was $773 million for the quarter, reflecting strong growth in our international segment and expense management in global support center offset by declines in our USFS segment. For the quarter, adjusted EBITDA of $969 million was down 0.8% versus the prior year. Let's now turn to our balance sheet and cash flow, a compelling competitive advantage. As I have explained before, our balance sheet affords us the financial tools and flexibility to make the right position both for the short and long term as we seek to grow our business while driving industry-leading returns on invested capital. Our balance sheet remains robust and reflects a healthy financial profile. This includes flexibility and optionality from approximately $4.4 billion in total liquidity, well above our minimum threshold. We ended the quarter at a 2.8 times net debt leverage ratio. Turning to our cash flow, we generated approximately $1.3 billion in operating cash flow and $954 million in free cash flow year-to-date. Free cash flow was driven by a strong quality of earnings and prudent management of working capital. This quarter marked our strongest conversion rate of the year. For the full year, we continue to expect strong conversion rates from adjusted EBITDA to operating cash flow at approximately 70% and free cash flow at approximately 50%. As noted earlier, our strong financial position enabled us to return approximately $649 million to shareholders this quarter. Now I would like to share with you our updated expectations for Q4 and FY 2025. Given the uncertain environment and general concerns regarding consumer confidence, we are lowering our full year guidance for FY 2025, as seen on slide seventeen. During FY 2025, we now expect reported net sales growth of approximately 3%, slightly down from the prior target of 4% to 5%. This is largely driven by lower than expected volume growth driven by the market. Our assumptions regarding inflation of approximately 2% and contributions from M&A remain unchanged. We now expect full year 2025 adjusted EPS growth of at least 1%. For Q4, this implies adjusted EPS to be at least flat. The revision to guidance reflects the current uncertain macro environment and its outside impact on the second half of the year, which historically is more profitable. This upcoming quarter also includes our planned strategic investments related to refreshing our fleet and building capacity coming online. This updated guidance assumes no further degradation of the restaurant traffic environment and a slight improvement to our volume performance. Importantly, we believe this guide is achievable based on our strong exit velocity for March and continued momentum into April. In Q4, including higher contributions from cost-out, we remain confident in delivering our run-rate cost savings target of approximately $100 million, which we expect to benefit Q4 and the first half of 2026, helping offset the current macro environment. We plan to remain focused on operational discipline, tightening the belts as necessary, and investing in long-term growth. So we remain targeted to reward our shareholders through the distribution of essentially all of our annual free cash flow, with over $1 billion in dividends and $1.25 billion in share repurchases. This assumes fourth quarter share repurchases of $550 million and dividends of $250 million. For the year, we expect to operate within our stated target of 2.5 times or 2.75 times net leverage ratio and maintain our investment-grade balance sheet. Now turning to a few other modeling items. For Q4, we expect a tax rate of approximately 24% and adjusted depreciation and amortization of approximately $200 million. Interest expense is now expected at approximately $170 million. Looking ahead and as we have proven over time, we will leverage our position as the market leader to drive disciplined growth as we remain focused on unlocking value that will reward our shareholders. With that, I'll turn the call back to Kevin for closing remarks.

Thank you, Kenny. Q3 did not live up to our expectations on the top or bottom line. The macro softness directly impacted our volume trends within the important local and national restaurant business sectors. Our trade down in volume during the quarter is directly linear with the widely communicated traffic decline experienced by the industry over the same period. With that said, we can see progress that we are making on our activities within our local business. Colleague retention has stabilized. Our new customer win rate is accelerating. As I mentioned, we are still working through the headwind of prior quarters' colleague resignations, but that impact will reduce in magnitude each quarter. As we head into fiscal 2026, the net effect of colleague retention and new colleague hiring will become a tailwind. Why? Our new hires are performing, and they are responding to the updated compensation model. They are opening new business. They are hitting their sales targets. Additionally, our new distribution centers will increase our ability to win profitable new business in important geographies both domestically and globally. The most compelling proof point to highlight the self-help progress we are making in our local business is the percentage of new business we are opening weekly. March was a very strong month for opening new business, and the progress has continued into April. Combined with our efforts in customer retention, through pricing agility and improved service levels from our supply chain, we are confident we can grow our customer account in 2026. From a business perspective, March local volume improved 270 basis points versus February. Local volume during the first weeks of April improved further versus March. We are pleased to see the stronger April, and we are cautiously planning our coming months to the tariff uncertainty. I'm confident Sysco Corporation will make progress on our improvement initiatives in the coming periods. The external environment and breakthroughs in the year to go and we are prepared to leverage our rock-solid balance sheet and fiscal responsibility as strength points as we navigate this volatile environment. I am confident in our ability to win versus the overall market, just like we successfully grew our business during the COVID disruptions. At times like these, our higher-than-industry profit margins and strong balance sheet cannot be overstated. We also expect our international division, which has been less impacted by the volatility, to continue to be a strong point for the company. Having the diversified business will be a strength point ahead. With that, operator, we're now ready for questions.

Thanks for the question. Good morning. A question on the local business. Could you talk about the sales headcount investments you've been making, where we are with that, and I guess any evidence these investments are really moving the needle? You provided a couple interesting tidbits on the acceleration in March and April, but any other pockets of your business where you can point out where you're seeing the initiatives deliver positive organic growth or clear market share gain, something that really gives you confidence that the drivers are in place and working as hoped?

Good morning, Alex. It's Kevin. Thank you for the question. I'll start with the first part of your question, which is sales consultant headcount. We expect to end the year at approximately 4% growth year-over-year at the conclusion of Q4. It's an estimate; it'll be at least 4% growth. That's the answer to that question. As it relates to signals of progress, as I said in my prepared remarks, we have several proof points that we can share. March was stronger than Q3 in total; April was stronger than Q3. The controllables are showing improvement, evidenced by the new customer win rate in March. We opened more new customers than at any point in time, other than the snapback recovery from COVID. Proof point number two is the quality and productivity of the training cohorts. We hire people in classes. Those classes graduate, and we track them every single month on their performance versus where we expect them to be. I can definitively communicate that our hiring cohorts are producing and growing their productivity at the rate we expect and anticipate. As I said in my prepared remarks, while that's not evident and visible in market share gains or volume growth that we're proud of year-to-date is the offset to these things, which was the increased colleague turnover that we experienced during the first half of the year. As I said in my prepared remarks, that peaked in September. It improved in Q2, but we're still carrying that headwind of the colleague separation because when they depart, there is some customer loss that goes along with that. We anticipate the scales of that equation, as I mentioned in the prepared remarks, to tip positive in Q1 of fiscal 2026. That would be lapping that increased separation.

Yeah. Hey, Alex. It's Kenny here. On a couple of things here. One piece is we are encouraged by seeing select geographies already hitting our growth expectations, driven by the sales consultant ads and improved retention, as well as the new comp model that we talked about. And then that's carrying into Q4 as well, so that's one proof point. Thanks for your question. The second thing I would say is that as you think about our book of business right now, most were higher in the back half of FY 2024 and the first half of FY 2025. With each passing month, our sales consultants become more productive, and we're seeing that with our cohorts that Kevin just referred to. The improvement is not binary; meaning each month, each day, each quarter, they are becoming more productive. And the interesting factor is that we will be experiencing a missing amount of folks entering that 12 to 18 months time frame now. Based on our own internal tracking data, there is a step-level function change up to the good, once we hit that. So, you'll see some of that in Q4, and that's the reason we expect Q4 local volume to improve versus Q3. The last thing I would say around your question about sales and account investment, I agree with Kevin that we will be around 4% in increase year-over-year. We are committed to growing our local sales professional headcount, and we will be disciplined about pacing that volume to expectations and market conditions. We'll be very deliberate on where we add.

Great. Good morning, and thanks so much for taking the questions. So I wanted to ask another one on local, more from an industry-wide perspective. How has the local restaurant industry backdrop held up relative to national restaurants? And then within that, are you seeing any regional challenges and how has that fluctuated over the past few months?

Good morning, Mark. It's Kevin. Thank you for the question. National restaurants had a really tough quarter—that's the headline, that's the punchline. It was soft, consistent with the local numbers that we obviously disclosed in the report. When you look at our national case volume number, you have to keep in mind that there are national restaurants in that mix, but it's offset by real strong strength in food service management, travel and entertainment; education has held up strong, and we have a very stable healthcare business. So national for us was stronger than local, if you unpack within national and look at this national restaurant, it was a tough tough quarter. Obviously, there are individual select names that are doing incredibly well; you know who they are, but in aggregate, it was a really tough quarter for national. It was exacerbated in February, going back to one of Alex's questions. We were seeing strength while we were adding headcount. Kenny hit that point very well. But the pain in Q3, the weather was everywhere. I happen to live in the south; we had four inches of snow in Houston. That never happens. It was really adverse weather in the mid-parts of the country, the temperate zone, and obviously the north had back-to-back weeks of really adverse weather. So the headwind was pretty much geographic throughout the United States. Interestingly, our international division, one of the reasons it's continuing to perform well is that we're not experiencing some of these headwinds from an external factor perspective. The tariff and tax thing is not negatively impacting our international division at this time, and it's one of the reasons, along with our strong business performance, that we're doing well in that regard.

Thanks so much. Goodbye.

Thank you, Mark.

Great. Thank you very much. I had one clarification on a comment you made earlier, then a question. The clarification is just on that local case growth—you said you're directionally similar to the industry in terms of easing. Just wondering if you think any of it is self-inflicted, and whether you see industry data that gives you confidence you're not underperforming peers. That was my clarification. Otherwise, the question is just on the fiscal twenty-five guidance. It feels like the past couple of quarters you were confident that even if the macro were to pressure the top line, you had levers to accelerate cost and efficiency savings to still hit that six to seven percent EPS growth. So it does look like you lowered the top line by one percent or so—one to two percent, actually—but you took down the EPS guidance by five percent plus. Just wondering how you see that playing out, whether there’s less low-hanging fruit or you just decide you don’t want to damage the long-term infrastructure for short-term earnings. Any thoughts on that between the top and bottom line? Thank you.

Very, very interesting questions. It's Kevin. I'll start, and Kenny will clean up as it relates to your appropriate question regarding the full-year guide. Back to local, we are confident that in Q3 our performance relative to the market was consistent. In fact, it's almost to the penny. If you track the traffic change from Q2 to Q3 to our local case growth performance from Q2 to Q3, we were consistent with the industry. We are confident we did not erode in our performance relative to the overall market. We are pleased with the start of Q4. As I said, April was stronger than March, and March was stronger than Q3. We're beginning to see some positive separation in our performance relative to the market as we begin Q4. It’s this timing thing that I'm talking about relative to colleague separation, the new cohorts, that are hitting their twelve-month anniversary date in Q4, as Kenny already communicated. Even more of them will have that twelve-month anniversary as we roll into fiscal 2026. We need to display separation in our performance versus the market in a positive way, and we are seeing the green shoots to progress, Jeff. We're going to talk about that more in August, obviously, as we provide guidance for fiscal 2026. As it relates to Q3, we understand through your question that one thing I would point to is the steepness of the drop-off in February was meaningfully unanticipated. I said in my prepared remarks that the traffic was down 5.7%. It went like a light switch. When that happens, it's really difficult to get that type of cost out of your system that fast, especially when March rebounded quite solidly versus February. We don't want to furlough drivers; we don’t want to cut costs that you end up having to reverse later. That is really painful. The other thing related to the adverse weather of that nature is it drives operating expenses up. Think about the number of facilities we had; snow removal at our large parking lots. When you're doing deliveries in that type of environment, a lot of those trucks are coming back half-full. Meaning, we load the truck for twenty stops, but it comes back three hours into the route. You have to put all that inventory back to stock. Some of that inventory has to be disposed of because it's perishable. So these things add cost. So, yes, it's a volume headwind when traffic drops like that, but it's also a cost headwind because of some of the examples that I just provided.

The other thing you pointed out is our updated guidance for the full year. I think the question behind your question is how confident you are in the number and any context there. I'll answer it with two points here. Just a recap: you're correct; the full year is 3% sales growth and then EPS at least 1% growth. The two reasons why we are confident: first, what Kevin just talked about, momentum; we have momentum. We continue to see it, not just from a market standpoint, but many of our self-help initiatives are also working. Secondly, we are seeing momentum in sales professionals as they become more productive, climbing up the productivity curve, as well as our expense productivity items in the $100 million program. All of that is on pace and on target. Therefore, momentum is present across the P&L.

And to add on your specific question around the math, your math is correct. Right now, you're seeing our expenses outside at 4% to 5%. The assumption is that there’s a spread between, obviously, the return. As we spoke about, as our sales consultants climb the productivity curve, as initiatives kick in, we should expect that spread to reduce. Meaning, you are correct; that is an opportunity for our company.

Yes. Hi. Good morning, everybody. Kevin, I wanted to just zero in on the salesforce and the opportunity that you see ahead of you. I mean, you talked about 4% growth in the sales force by the end of 2025. You've talked historically about adding about 450 people annually. So that growth, if you're still gonna achieve that in 2026, should be higher. If you do the math on this normalizing turnover and the sales force growth, it's not hard to look at local case volumes and see that there's a 300-500 basis point opportunity for you to improve that business. But my question is: is it that simple? Are there other issues preventing that math from working? The pricing tool has been something that's been talked about; I think maybe it's creating some friction. There's maybe some lag on the customer loss, right? If salespeople are leaving and in a year they come off non-competes, do you continue to have some issue there? I'm just curious as to how you see the magnitude of the self-help opportunity and the cadence of the benefit that you may get in 2026. Because I think where the stock is trading today, the market doesn't see that benefit coming. If you could provide some color there, I think it'd be helpful.

Ed, good morning. Thank you for the question. We need to prove it through our outcomes, and we understand that as the management team and as the leaders of this company, we need to prove it through our outcomes. What gives us confidence—and we're not gonna provide guidance for 2026 today because that's how I would need to answer your question—is the following factors. Some key messages I need to repeat because the math is indelibly clear. We need to retain the colleagues we have at a historically strong rate, and fiscal 2025 was a meaningful headwind in that regard. I want to reiterate, though, it was intentional. We needed to make changes to our comp model. It was structural; it was required; it was necessary, and it has been challenging. It's been difficult to work our way through that change. If we could go back in time, we would still make the change to the comp model that we made. We could have improved our execution of that change, obviously given some of the accelerated turnover, but the change to the comp model was necessary. That specific headwind of the increased turnover negatively impacted this year. Meanwhile, we can see in our current outcomes that we have stabilized retention. I’d like to do better than that. I want our retention to be better than it has ever been. We have a concerted effort across all elements of our organization to improve, to make it higher. That includes training and how we treat our new hires while they are out on the road doing their job. It’s their direct supervisors going on ride-alongs and helping them with skill development. Ed, net-net, I'm confident that the turnover challenge will be a net tailwind in 2026. I heard your point on rolling the twelve months of the noncompete; loud and clear. We understand that, and we have a plan to help offset that. Offsetting that headwind is the tailwind, and we were intentionally very clear today on how long it takes for our colleagues to be productive. It's on average 12 to 18 months, but Kenny was very clear. In this Q4, the Q4 we expect a lot of people are hitting that twelve-month mark obviously than we have in any prior quarter, and that will increase from here. I've used the metaphor of turning on water in a pipe. It has to go from one end to the other, but once it gets to the other end of the pipe, now the water keeps flowing. We are, just now in our Q4, getting to the first quarter where water is firmly flowing through that pipe in a consistent way. As it relates to the previously quoted headcount growth number of four to five hundred colleagues, we updated that to reflect the anticipated end result at around four percent. We are going to be very disciplined about that. We know that there are geographies that can absolutely take a significantly increased headcount; see Florida, for instance. We're about to open a brand new building in Florida; we will be hiring up in Florida to support that new building and to win meaningfully from a market share perspective in that state.

I'm confident in 2026 the sales force will be a tailwind, not a headwind. It is an absolute fact that it was a headwind in fiscal 2025. What else is going on in the second part of your question? There's a lot going on; it's a dynamic environment. The pricing environment and the needs of the end customer are clear. They are seeking value given the pressure on the restaurant's P&L. Their labor costs are up, and for many of them, their rent cost is up, and they've experienced 30% to 40% food inflation over the past five years. Customers are value seeking. We need to be thoughtful, and we need to be agile about how we meet the customer where they are. That's related to like the product offering we have, the pricing, and as I mentioned on the call today, the rollout of price agility. It's something we need to manage extremely well. That’s why I said in my prepared remarks, the change management and the training plan on how to put that tool out in the market is critical. We have to execute with excellence when we roll that program out to ensure that we can match pricing agility with margin rate discipline; that is why we haven't gone nationwide yet. We are working on that change management plan, that training plan. Pricing in the marketplace is one of the variables. You go beyond those two variables, and the industry is experiencing a bit higher rate of customer churn than what is normal. It's important to point out that of course the churn being felt across the board is not unique to Sysco Corporation. We are going to talk more in the future about improving the service level experience that we provide to our best customers and creating an end-to-end program that can help reduce customer churn. Those would be the top three areas: sales force productivity, pricing agility, and improving customer churn. Aggregate those three factors; we are confident that we can grow local volume and have an attractive P&L, and we'll talk more in August about our guidance for 2026.

Thanks, guys.

Thank you, Ed.

Great. Thanks for taking the question. I want to start with just clear Salesforce initiatives and the InMed comp changes to move to positive in fiscal 2026. I want to make sure I understand your expectations for when that could happen. You know, September was the peak of the increased turnover. Is the September timeframe the right way to think about it? Or really, is it possible that we could see that inflection in the first quarter? Sounded like that was possible given the improvements that you're seeing now. My real question is about your capital allocation. The dividend increase was the largest it's been in a few years. Maybe you can talk about why you're kind of leaning into the dividend increase so much after pretty modest increases for the last two years. And your approach to, I know we've had elevated share buybacks in 2025, but is that something you expect would continue beyond 2025?

Good morning, Jake. Thank you for the question. As it relates to the salesforce inflection, definitively it will inflect to positive in fiscal 2026. When we provide our guidance for 2026, we will provide more color on how you should think about the full year and how you should consider the first half versus the second half; that’s the most I can say today. The second point, though, from green shoots of progress in color: In April, we are seeing a stronger performance versus March, and we are seeing some separation of our performance versus the overall market from a positive share gain perspective. So it is not a light switch; it does not go from off to on. The separate part of my cough, forgive me, the separation impact is immediate as I mentioned in my prepared remarks. The improvement that comes from the new colleagues is gradual over time. Think about a slope of two curves when they intersect and how that then shows up as a net tailwind. It will be a net tailwind in fiscal 2026, and we are doing everything we can to improve the productivity of our new colleagues and as I mentioned, improve colleague retention. As I mentioned in answering Ed's question, I'm not satisfied with getting retention back to where it historically was; I'd like it to be even better. It historically has turned the headcount in our sales colleague population into an ongoing and permanent point of strength for the company. As it relates to the dividend, I'll just get started and then toss to Kenny. We are a dividend aristocrat; we've raised our dividend now 56 consecutive years in a row. There are very few companies that can say that. In my closing remarks, I mentioned there's no better company to work for and or from a balance sheet perspective to invest in than a company like Sysco Corporation in times like these. Our industry-leading income statement from profit as a percentage of sales and our rock-solid balance sheet affords us the opportunity to return value to shareholders even in challenging and difficult times. We raised our dividend even during the COVID period, which is a meaningful point of strength. So, Kenny, why don’t you answer the specifics of how we thought about the increase for next year?

Absolutely. So let's start just quickly covering capital allocation. We will first and foremost invest in our business, and anything accessed will be returned back to shareholders. Given where our cash and liquidity position sits, which is over $4 billion a quarter, we have the luxury to do both—invest in our business and reward our shareholders. To your exact question, speaking to rewarding the shareholders, as Kevin talked about, we're very proud of that we're raising our dividends by 6%. Again, as I said before, we expect dividend raises to be commensurate with future EPS growth for our business. You know, taking a giant step back, as CFO, I'm proud of the fact that we had the ability to maintain our $1.25 billion of share repurchase this year and raise the dividend by 6%, especially given the market backdrop historically impacting our profit profile. The reason is our strong investment grade balance sheet, solid business fundamentals, and the fact that we are confident in the business today and moving forward. So that’s the rationale of how Kevin and I thought about the dividend raise.

Thank you, Jake.

Hey, Kevin. Can you talk to this elevated churn across the industry? I think you sort of suggested maybe it's price-oriented. What do you think is driving that? You also suggested you have some ideas about how to eat into that. And then just when I think about the magnitude—maybe what is a good level of churn for the industry? What has it stepped up to? It seems like maybe it's stepped up, you know, a hundred basis points or more. But I'd be curious how that's changed.

Good morning, John. Thank you for the question. Yeah, churn has increased as an industry overall, and I'll say there are a couple of drivers behind it. Number one is customers are value-seeking, as I mentioned. Their labor costs are up; rent is up; food costs are up. They're seeking ways to help their profitability, and food cost is one of those mechanisms. Price visibility has increased, as you know, as more customers are placing their orders online. Net-net in aggregate, that's a good thing. More customers placing their orders online is good because they see more of our catalog; they are inspired to buy things they didn't buy before. We can prompt them to do swap and save to alternative products that help them save money. We can suggest items that they can buy that they're not buying. Conversion to online is good. With that said, the conversion to online increases price transparency, not just at Sysco Corporation, but across all distributors. More customers are enabled to seek value due to the online visibility to pricing. These are environmental conditions, and I'm confident that Sysco Corporation's size and scale can make us very competitive and successful in that environment. Our profit rate as a percentage of sales and our purchasing scale afford us to buy goods, which we call buy better to sell better and provide value to our customers in that price-visible online way. We can lean in with suppliers and do programs together with them to provide savings to customers to entice them to buy from Sysco Corporation. So that's point number one regarding churn. Point number two is supply chain resiliency. This goes back to COVID. Prior to COVID, the percentage of a customer's business that that customer gave to one distributor was higher than it is today. When product shortages occurred everywhere in the industry, customers couldn't get everything they needed from their primary distributor; they signed up a second, third, or even fourth distributor. As you know, there's always been backups in accounts, but what we see in the industry is a higher percentage of purchases happening with the 'backup' because customers don’t want to find themselves in a position where they can’t get what they need. We have done that with our supplier population. We buy more food in the food away from home space than anyone else. We have preferred partner suppliers, but we’ve had to add backups and sometimes tertiary suppliers to cover our needs when our primary supplier can't get us what we need. That too is part of the equation. As it relates to actionable forward-facing 2026 activities there’s a reasonably small percentage of our customer base that drives a significantly disproportionate portion of our profit pool, and we are going to lean in hard with those best customers. I will talk more about that at future investment engagement opportunities, a reboot and a focus on our best customer retention and best customer penetration, and we believe that will be another tailwind for our fiscal 2026. Thank you.

Thank you, John.