Sysco Corp (SYY) — Q4 2025 Earnings Call Transcript

Good morning, everyone, and welcome to Sysco's Fourth Quarter Fiscal Year 2025 Earnings Call. On today's call, we have Kevin Hourican, our Chair of the Board and CEO; and Kenny Cheung, our 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. 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 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. 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. We appreciate you joining our call this morning. Today, we will recap our fourth quarter performance, highlight our full year 2025 outcomes, provide an update on key initiatives that will drive our momentum in the new fiscal year. And finally, Kenny will share our view on our guidance for fiscal year 2026. Let's get started with the highlight of our fourth quarter financial outcomes. We are pleased to report that our fourth quarter adjusted results exceeded our expectations. Traffic to restaurants improved throughout the quarter and Sysco-specific initiatives delivered improved financial outcomes, top to bottom. The progress accelerated throughout the quarter and has continued into July for Sysco. All considered, Q4 was a relatively steady quarter from the perspective of restaurant foot traffic. On a monthly basis, April traffic trends for the industry were down 1.5%, May was down 1%, and June was down approximately 0.9%. The quarter overall was down 1.1%, which represented approximately 190 basis points of improvement versus Q3's traffic level of down 3%. It is good to see the industry stabilizing after a rocky start to the calendar year. I'll now pivot to Sysco's results for the quarter. As you can see on Slide 4, we delivered sales results of $21.1 billion, up 2.8% on a reported basis and up 3.7% to last year when excluding the divestiture of our Mexican business. We delivered adjusted operating income of $1.1 billion, up 1.1% to last year and adjusted EPS growth of $1.48, up 6.5% relative to last year. Importantly, we made solid progress on our $100 million profit improvement target with a strong contribution in Q4 from our strategic sourcing efforts. Our International segment posted another compelling quarter with 3.6% top line growth on a reported basis and up 8.3% to last year when excluding the divestiture of Mexico. International posted strong local case growth of plus 4% in the quarter. Adjusted operating income increased 20.1%, representing the seventh consecutive quarter of double-digit profit growth. Strength was delivered from across all international geographies with notable strong performances from Canada, Great Britain, Ireland, and Latin America. We expect a continuation of strong international financial performance in fiscal 2026. Within USFS, our national sales business delivered 1.3% volume growth for the quarter. Unpacking those results further, our noncommercial national business continues to perform at a very high level with strengthened foodservice management, education, and travel & leisure. Most importantly, gross profit within national sales grew almost 3 times faster than volume due to the excellent efforts by the team to improve profitability of the national business. The strong profit improvement was delivered through customer optimization and the creation of win-win provisions in our contracts that motivate customers to partner with Sysco to optimize efficiency. Our SYGMA segment delivered sales growth of 5.9% for the quarter, driven by strong customer wins versus prior year. For the year, SYGMA grew top line 8.3% and bottom line 12.5%. It was a record year for our SYGMA business from a top and a bottom line perspective. It is important to note that the SYGMA top line growth rates will begin to moderate in the coming year as we begin to lap large customer wins earned in 2025. On the local side of our business, we delivered negative 1.5% case volume within our U.S. Foodservice segment during the quarter. As shown on Slide 8, this was a meaningful 200 basis point step-up versus our Q3 outcomes. U.S. Foodservice volume reporting included impact from exiting a business within FreshPoint that did not meet our profit thresholds, which negatively impacted our total local performance by over 50 basis points. When excluding this intentional business exit, our USFS local business performed at a negative 1% rate, again, a meaningful step-up versus Q3 and a strong improvement relative to our full year results. More importantly, as I mentioned, we had a strong exit velocity in the quarter, with June performance being the highlight of the quarter. It is important to call out that the positive momentum has carried into July as Sysco-specific initiatives to improve our local performance are taking root. I'll discuss these efforts in more detail in a moment. Now that we have reviewed our business results for the quarter, I'd like to discuss the key initiatives that are going to drive our performance and local case volume growth for fiscal 2026. Let's start with our International segment. We are very pleased with our international business and have strong confidence that the compelling top and bottom line results will continue into fiscal 2026. We are advancing selling initiatives like Sysco Your Way across the globe. Additionally, we have improved our customer and colleague-facing technology in the international segment, making it easier to do business with Sysco. We are adding incremental local sales resources in key international geographies primarily metro areas like Toronto, Dublin, and London, to drive new customer wins and improve customer engagement. Lastly, our international supply chain capacity expansion efforts continue with our newest facility outside of London on track to open later this calendar year. Our national sales business continues to perform well with exceptionally high customer retention rates and continued new wins on the selling circuit. We expect Sysco's national sales growth in 2026 will be driven by our foodservice management sector, travel and leisure, and increases in our healthcare business. To further unlock growth, we are allocating our national sales resources to the highest potential segments of the business and are making technology investments to deepen our connectivity with our largest customers. Lastly, total team selling is beginning to gain traction amongst our largest customers with an increasing percentage of national customers purchasing from at least one of our specialty platforms. Lastly, I'd like to discuss our improvement efforts and strategic growth drivers for our local business. Let me start by saying that we are very confident that we will deliver profitable local volume growth in 2026 within every country we operate, especially in the United States. We have addressed the key challenge of 2025 head-on, and we have growth activation initiatives launching this summer. First off, I want to start by discussing our sales calling population. We have fully stabilized our sales colleague retention and are now fully focused on improving sales colleague training, productivity, and effectiveness. The stabilized colleague retention is important because it will drive significantly improved customer retention in 2026. As we enter 2026, we will be lapping last year's excessive colleague turnover and will replace that condition with strong in-year retention. A headwind in 2025 will be converted into a tailwind in 2026. We are seeing the beginning positive impact of this equation in our July results. That positive impact will grow throughout 2026. As I mentioned a moment ago, now that we have stabilized retention, our leadership focus turns to driving improved productivity of the sales force, through training and upscaling of our sales colleagues. Additionally, our initial cohorts of sales consultant hires from calendar 2024 are beginning to eclipse their 12- to 18-month anniversary with Sysco. As Kenny has said many times, this time horizon is important as it is when the productivity of a sales consultant significantly improves as each quarter progresses, an increased number of our sales consultants will eclipse their 12- to 18-month mark, increasing their positive impact on Sysco's results. As sales colleague tenure improves, our results improve. Lower turnover in 2026 means higher customer retention and higher retention means more productive colleagues. These two factors will be powerful drivers of improved outcomes for Sysco in 2026. To complement the strength and productivity of our sales professionals and further improve our business results, we are launching select growth initiatives this summer and fall. First up is a rewiring of our Perks customer loyalty program. Perks will evolve from a marketing and rewards platform into a hard-hitting exceptional customer service program targeting our most important customers. So why is clear. These customers buy the most, buy the most often, and they deserve the absolute best from Sysco. We have trained our operations, inventory, merchandising, and sales teams on the key tenets of Perks 2.0, and we are ready to launch this summer. The program will improve customer retention and will improve penetration of business with existing customers. Next up is an AI-empowered sales tool to help improve the productivity of our sales colleagues. As you know, we leverage a CRM platform to guide the work of our sales teams. Our technology teams have been hard at work to supercharge our CRM capabilities by leveraging AI to help our sales consultants succeed. The enhanced capabilities will reside in the palm of the colleague's hand on their smartphone. The features of the tool will help our team to drive increased levels of selling effectiveness, increased close rates on sales suggestions, and deliver higher rates of customer satisfaction. To say that we are excited about this capability would be an understatement. Our newer sales colleagues will benefit the most from the powerful capabilities of our AI-powered CRM. Last up is price agility. As we have previously communicated, we are piloting improvements to our pricing architecture that improves sales colleague engagement with customers by providing the sales force the ability to be more agile in responding to pricing requests. Our sales representatives will be enabled to make decisions in a moment, leveraging the science of our pricing software. In July, we are expanding our pilot to additional geographies to learn more about the change management process required for a national rollout. As I wrap up my prepared remarks, we are pleased with our strong performance in Q4 and the progress that we are making in local volume. Most importantly, we are excited about the exit velocity of the quarter and that the momentum has carried into July. We are confident that improved sales consultant retention, increased sales consultant tenure, and the three growth programs I just covered will drive profitable and positive case growth for Sysco in fiscal 2026. We expect that positive local case growth will, in turn, support our financial targets. With that, I'd now like to turn the call over to Kenny. Kenny, over to you.

Thank you, Kevin, and good morning, everyone. I plan to start with high-level thoughts on our performance, detail our financials and then introduce our full year 2026 guidance. As we outlined before, business plans don't always materialize the exact way you draw them up on paper. This year was no different. However, our teams remain both nimble and focused as we leverage our leadership position within the industry to successfully apply the Sysco playbook. The operational rigor of our organization provides us a high degree of confidence for delivering our 2026 guidance across the P&L and our capital allocation commitments. To start, our financial results this quarter included sales growth of 2.8% and adjusted EPS growth of 6.5%, representing strong year-over-year performance and noteworthy sequential improvements compared to the prior quarter. This sequential acceleration is visible across sales, including both national and local volume performance, but also across gross margins, adjusted operating income, and adjusted EPS. This is an important proof point as we enter FY '26. Q4 adjusted EPS growth included benefits from our disciplined strategic sourcing efforts, aiding in the delivery of 3.9% growth in gross profit translating to 19 basis points of gross margin expansion. These results include an increase in both dollars and rate of performance and reflect structural improvements that we expect to carry into the next fiscal year. Our investments in sales headcount and capacity expansion continued this quarter alongside benefits from ongoing efforts to optimize costs and prudent tax planning. This ultimately rendered outsized profit growth with adjusted EPS growth of 6.5%, accounting for the strongest rate of growth for the year. During fiscal 2025, we remain committed to rewarding our shareholders by repurchasing $1.3 billion in shares and paying out $1 billion in dividends. Now let's discuss our performance and financial drivers for the quarter, starting on Slide 12. For the fourth quarter, our enterprise sales grew 2.8% on an as-reported basis, driven by U.S. Foodservice, International, and SYGMA. Excluding the impact of our divested Mexico business, sales grew 3.7%. Volumes across the enterprise sequentially improve with total U.S. Foodservice volumes decreasing 0.3% and local volume decreasing 1.5% in the quarter. This represents a 200 basis points improvement in local case performance and a 170 basis points improvement in total Foodservice on a sequential basis quarter-over-quarter. The sequential improvement was consistent with the industry traffic for the quarter, but importantly, our performance accelerated in the quarter with a strong June exit rate. We're seeing stronger contributions from newer sales professionals as they worked up the productivity curve and the benefits from the stabilization of colleague retention. These factors directly contributed to an acceleration in new account growth for the quarter. We expect an acceleration in sales productivity to continue in FY '26. These sequential volume improvements also benefited our USFS segment results. Top and bottom line results for the quarter represent a sequential improvement, and we expect our investment actions in 2025 to deliver financial tailwinds for 2026 and beyond. International segment results included continued top line momentum and double-digit operating income growth. This was across all markets and marked our seventh consecutive quarter of double-digit operating income growth, adding to our impressive multiyear track record. These results reflect ongoing success as we apply the Sysco playbook to generate local volume growth of 4% and broad-based operating income growth across our international portfolio. Sysco produced $4 billion in gross profit, up 3.9%, and gross margins of 18.9% with improved gross profit per case performance. This notable margin improvement includes a mentality of continued improvement with cost savings driven by our strategic sourcing initiatives. Inflation rates in USPL were approximately 2.4%. International inflation was slightly higher for the quarter at 3.4%. Overall, adjusted operating expenses were $2.9 billion for the quarter or 13.7% of sales, a 28 basis points increase from the prior year. The increase was driven by planned investments in higher growth areas of the business with fleet, building expansion, and sales headcount. Corporate adjusted expenses were up 9.8% from the prior year, driven by insurance, investments, and other costs, partially offset by accretive productivity cost out. For the full year, corporate adjusted expense was down 6%, reflecting solid progress on our existing cost savings program. Overall, adjusted operating income grew to $1.1 billion for the quarter, reflecting continued strong growth in our International segment, SYGMA, and more stable results in our USFS segment. For the quarter, adjusted EBITDA of $1.3 billion was up 1.8% versus the prior year. Fourth quarter results also include a noncash goodwill impairment charge of $92 million related to our guests worldwide business as reflected in our other segments. Let's now turn to the balance sheet and cash flow. Our balance sheet remains robust and reflects a healthy financial profile. This includes flexibility and optionality from approximately $3.8 billion in total liquidity, well above our minimum threshold. We ended the year at a 2.85x net debt leverage ratio with plans to return to our target ratio in FY '26. Turning to our cash flow. We generated approximately $2.5 billion in operating cash flow and $1.8 billion in free cash flow. Free cash flow compared to the prior year was impacted by higher cash taxes, interest and working capital timing. Now I would like to share with you our expectations for FY '26 as seen on Slide 22. During FY '26, we expect reported net sales growth of approximately 3% to 5% to approximately $84 billion to $85 billion. These assumptions include inflation of approximately 2%, which we are seeing now, volume growth, and contributions from M&A. We expect full year 2026 adjusted EPS of $4.50 to $4.60 representing growth of 1% to 3%, which includes an approximate $100 million of headwind from lapping lower incentive compensation in FY '25, an impact of roughly $0.16 per share. With FY '25 behind us, we wanted to provide full visibility to the carryover impact from incentive comp for the year and by quarter as outlined on Slide 23. This impacts year-over-year comparability for expenses. Our compensation structure rewards for business performance. As such, this carryover impact reflects challenges this past year in 2025. Importantly, our incentive comp structure is focused on core business drivers and aligned with the long-term interest of our shareholders. Excluding this impact, our outlook reflects adjusted EPS growth of approximately 5% to 7% with the midpoint in line with our long-term growth algorithm. To help with phasing for Q1, we expect to grow our adjusted EPS consistent with the annual growth rate of 1% to 3%, driven by part of carryover benefit from strategic sourcing to gross margins and the impact from lapping incentive compensation. Q1 and Q2 sales growth rates will be impacted by the divestiture of our Mexico joint venture in December 2024. We plan to provide additional modeling updates as the year progresses. This financial guidance assumes improvements to be driven by our Sysco-specific initiatives with industry foot traffic and macro environment similar to current conditions. It also includes carryover impact related to sourcing benefits from our $100 million cost savings program. As mentioned on prior calls, this muscle memory is built across the organization, leveraging a stronger operating model that positions us to grow share profitably. We remain on target for shareholder returns through approximately $1 billion in dividends and approximately $1 billion in share repurchases planned for FY '26. This is all based on our current expectation and economic conditions and could flex based on M&A activity for the year. Specific to our dividend, our expected payout for FY '26 equates to a 6% year-over-year increase on a per share basis, highlighting our commitment to our standing as a dividend aristocrat. In terms of leverage, we expect to end the year within our stated target of 2.5x to 2.75x net leverage ratio and maintain our investment-grade balance sheet. Now turning to a few other modeling items. For FY '26, we expect a tax rate of approximately 23.5% to 24%, and adjusted depreciation and amortization of approximately $870 million. Interest expense is now expected to be approximately $700 million, while other expense is expected to be approximately $45 million. The elevated DNA levels will be driven by continued capacity expansion such as the expansion outside of London this coming year, as Kevin highlighted. Capital expenditures are expected to be approximately $700 million representing less than 1% of sales. This includes growth and maintenance capital expenditures and an eye towards optimizing spend levels across the enterprise as the organization further sharpens our collective efforts around driving ROIC. Looking ahead, we like our position, and we remain focused on leveraging our position as the industry leader to support the growth of our customer while also continuing to unlock value for our shareholders. With that, I will turn the call back to Kevin for closing remarks.

Thank you, Kenny. We are pleased with the strong performance in Q4 and more importantly, the strong exit velocity of the quarter. Our leadership team placed tremendous focus on improving our local business, strengthening our gross profit through strategic sourcing, and tightly managing our expenses through productivity improvement. The team stepped up and delivered a beat performance versus what we expected 90 days ago, and I'm proud of their efforts. As we look toward 2026, we expect to build upon the Q4 momentum and deliver improved financial results for Sysco and our investors. Our top line results will strengthen based on the sequential improvement of our local business throughout 2026. The improvement starts and ends with our colleague population. We have stabilized colleague retention. As a result, our customer loss rate will improve greatly in '26 versus '25. Stabilizing colleague retention will also enable us to improve colleague productivity in 2026. We will measure our improvement through the continued expansion of our gap between new customer wins and reducing customer losses. The spread between new customer wins and customer losses improved greatly in our Q4. In fact, the gap between new and loss doubled in Q4 versus the year-to-date results in Q1 through Q3. We see the positive spread between new and loss expanding further in 2026 through the growth initiatives that I covered on today's call. Our future is bright at Sysco, and we are excited for the year ahead. We head into this next fiscal year with positive momentum, and we are well positioned for continued improvements. We plan to leverage our competitive advantages as the industry leader. This includes strong diversification across our diverse customer types, our wide product assortment, and our geographic diversity as the only global player in the food away-from-home landscape. Food away from home is a good business. It takes share from the grocery channel every year. As I've said before, the pie is getting bigger, and Sysco intends to take a bigger slice of that expanding pie. We are confident shareholders are positioned to benefit from our industry-leading dividend, compelling ROIC, intentional share buybacks, and improving financial results. Q4 displays the beginning of improving our local business and the momentum will accelerate throughout 2026. I am thankful for our leadership team and our entire 75,000 colleague population for the strong efforts in 2025. The team leaned into some stiff challenges in the macro and at Sysco specifically. The hard work of the past year is poised to have a positive impact in 2026. With that, operator, we're now ready for questions.

My focus was on the growth momentum in the local case area, and you can see the improvement in the fourth quarter compared to the third. This aligns roughly with industry traffic trends. You mentioned an uptick in June and July. The key question is whether you are gaining market share during those months. Are you noticing the acceleration you anticipated, which should come from the sales force becoming more effective? I’m trying to understand the shift you’re observing and its effect on your market share gains.

Jake, it's Kevin. Thanks for the question. Yes, we're really pleased with Q4's progress versus Q3, but more importantly, that exit velocity. So it's in the data that we shared. June versus May was flat from an industry traffic perspective. Our performance in June was considerably better than May, which obviously conveys progress that we're making, and that progress has continued into July. It's important to note the drivers, yes, traffic improvement helped, and we're pleased that the industry overall is seeing some strength relative to the tough start to the year. It's the colleague retention piece that is the most notable. We stabilized our colleague retention in Q4 and that will have a meaningful positive impact as we enter 2026 because the 2025 story is about customer loss that occurred tied to colleague separation or colleague departure. And we're not going to be lapping those losses until we're in Q1. That's the point. So the strength of that headwind of '25 being replaced by a tailwind in '26 will be evident as we enter our Q1. So we wouldn't have expected that positive impact to be in Q4 because these are losses that have already occurred, and you carry that loss into year at month 13. So we've stabilized retention. That is an important key point. As Kenny said many times, the new hires from the past year to 1.5 years are hitting their month 12, month 13, month 14, where their contribution positively significantly increases. An important data point I put in my prepared remarks, I just want to make sure it came through clearly. The gap between new and lost in Q4 was double the gap that we experienced in Q1 through Q3. And again, that strength will be visible and evident in fiscal 2026 as that loss rate comes down significantly. And when I add on top of that, the three growth initiatives that I referenced on today's call that launched this summer and into early fall, we have significant confidence in our ability to deliver positive and profitable local case growth to take share, and that gives us the confidence in the guide that we put out there. It starts and ends with the colleague population stability, which we have achieved and the tools that we are providing to our colleagues that help them increase their productivity. I'll toss to Kenny, if he wants to add anything.

Sure. I agree with Kevin. Three things for me. The first is we are encouraged by the fact that we continue to see select geographies already hitting our growth expectations, driven by SC additions and improved retention, as Kevin just mentioned, and that's carrying over into Q1 2026. That's point #1. Point #2 is Kevin talked about this. The 12 to 18 months is really important for us as the SC jumps on their productivity curve. And we're also seeing our retention playbook work across experienced SCs as well, right? So you have a year or 2, it goes your 3, 3 to 4, 4 to 5 years as well, and that helps on the overall sales pool, which actually drives our new customer count. This past quarter, we opened more new accounts than any other period this year. And Jake, as you know, new accounts are tomorrow's penetration opportunities. And then last but not least, we're seeing our service levels go up as well. Fill rates are up, on-time delivery is up as well, and this is the leading indicator to our future business generation.

Just following on the top line trends. I'm encouraged to see the improvement in recent months. I'm just wondering what do you attribute in terms of the broader industry that gives you confidence in sustaining the momentum over the next 12 months? And then just to clarify, within Sysco's expectations, again, not looking at the industry, but specific to your momentum. Just wondering if you could share any color in terms of local case volume growth within the 3% to 5% sales. I think you mentioned positive and maybe thoughts on M&A, whether for yourself or perhaps related to headlines that we've seen recently about consolidation among some of your larger peers. Just hoping to get a little bit more perspective on that.

Okay. Jeff, I'll start with broad industries. Foot traffic to restaurants down approximately 1% in the quarter, certainly better than Q3. We believe Q3 was a bit of an anomaly. That's when the external news was quite negative. Consumer confidence dropped conversations about tariffs and the impact on consumer confidence that was happening. In our Q3 calendar Q1, the industry took a pretty significant step back. It's good to see in the most recent quarter, an improvement against that. We think the anomaly was actually the start to the year and what we just saw as an industry in our Q4 is more reflective of the operating environment. And Kenny said it in his prepared remarks, we're expecting the current conditions to continue for 2026, read down slight traffic to the industry overall for this next fiscal year. And the growth that we will deliver will come from taking share. We're confident in our ability to do that. As I mentioned a few moments ago, we're not going to repeat the customer loss rate that we experienced in 2025. We will be lapping those customer losses. We've been doing great with new customer wins over the past three quarters. I've shared that pretty openly on earnings call. So we will sustain our new customer win rate, we will significantly improve our customer loss rate and when we layer on top of that, the Perks 2.0 program I mentioned which is going to significantly improve the service experience that our top customers will benefit from. That's going to drive penetration improvement that will drive improved customer retention as well. The AI 360 capability, which is our name internally for the AI-empowered CRM is going to be meaningfully helpful. I'll talk more about that, I'm sure, as a part of this call. And we put all those things together, we are confident even in a flat to down overall macro that we can grow local that we will grow it profitably, and that will occur in fiscal 2026. So Kenny, I toss to you for additional comments about the guide.

Yes, absolutely. In terms of foot traffic, Kevin is correct. It's important to put things into perspective. Foot traffic serves as a good overall indicator for Sysco, but considering our business, two-thirds comes from restaurants, while one-third is from more stable sectors like education, health care, and travel. Within the restaurant category, our customers range from quick-service to casual and fine dining. Additionally, 20% of our business comes from the international segment, which we believe provides a strategic balance, enhancing the stability of our overall operations. Regarding the guidance of 3% to 5%, let me clarify that. The top-line figure of 3% to 5% equates to $84 billion to $85 billion. It's worth mentioning that there's a year-on-year impact due to the divestiture of Mexico, which accounts for about 50 basis points. If we separate volume and inflation, we expect inflation to be around 2%, and currently, we are operating close to that level. In this quarter, our U.S. performance was at 2.4% while international was around 3.4%, with the majority of the difference driven by foreign exchange. So, to sum it up, we're currently operating at 2%, which is promising for the industry. For volume and mergers and acquisitions, combined, you could expect 2% to 3% growth, which aligns with the 3% to 5% guidance.

Okay. And then the third part of your question, which was the speculation on industry news. We're not going to speculate on M&A rumors in the industry for Sysco. We're focused on driving profitable growth within our strategic capabilities. What we are very pleased with is that Q4 was better than the entire year. June was better than Q4. July, that momentum has continued. As we progress into 2026, we'll be lapping an accelerated or elevated loss rate last year that will not be repeated. When we layer on top of that condition, the growth initiatives that I just referenced, we have strong confidence in our ability to take share, profitably grow the business and deliver upon the guidance that was just communicated by Kenny and we're positioned, therefore, to have compounding improvement to the overall financial health of the company. So we have confidence in our ability to succeed in the marketplace.

All right. A question on International. Just given the recent strength in this business, do you expect the year-over-year growth momentum we've seen to moderate a bit as you lap this growth? Maybe you can just kind of call out some of the specific drivers that give you the visibility for that growth to continue as we roll through the year?

Alex, this is Kevin. We expect the success in our International segment to continue in 2026, not to moderate or slow down. The health is coming from all geographies coming in the top, the middle and on the bottom of the P&L, and I'll just highlight a few of the examples. The success we're having on the top line, which is volume strength, especially in local, we're driving a 4-plus percent case growth in local. We expect for that level of performance to continue into 2026 for the following reasons. We're adding sales resource headcount into the street sales side of the business, the local side of the business in major metros. So Toronto has an opportunity to see increased headcount, boots on the ground boots on the street, increasing our ability to serve local restaurant customers. We're doing that play in Dublin. We're doing that play in London. We are doing that play in Stockholm. When we do that in international, we're increasing our physical presence on the ground, and we are seeing market share capture coming from that. We've improved our website in each of those countries. We've improved our ability to have relevant pricing in each of those countries. And each of those three vectors is driving volume capture. Examples like Sysco Your Way are enabling that success. In the middle of the P&L, we've launched strategic sourcing in every country. And we did that first in the United States. We've carried that playbook to each international geography. Food is inherently purchased locally but that capability of strategic sourcing exists, and that opportunity exists in every country, and we're expanding our profit margins because of that excellent work done by our merchandising and buying teams. And on the bottom line, deploying enterprise technology, improved warehouse technology, improved routing technology, improved back-end software to increase efficiency in businesses that were more manual than Sysco is used to and accustomed to has driven significant bottom line growth, seventh consecutive quarter of double-digit profit growth. So Alex, we're really bullish on International, and this is just within the countries that we compete with in today. Our opportunities are bright in international, and we are very bullish on our long-term future internationally. Kenny, anything to add?

Yes. So Alex, as we think about the margin profile of this business, there's nothing structural that impedes our ability to achieve the same profit levels in the U.S. There's a lot of upside here. Just think back a few years ago, the margin of the business was roughly 2%. Since then, we've doubled the margins to 4% now. So that trend will continue. And the last thing I would say is that it's a place that we will continue to invest for growth as part of our working capital strategy and the capital application strategy. The two recent acquisitions, Ready Chef and Campbell's sitting in Ireland and GB, they're doing really well off their great start and ahead of our own deal model from both a commercial go-to-market standpoint as well as a cost synergy standpoint.

Kevin, I wanted to focus on the relationship between sales force growth and local case growth. Based on your comments, it seems that local case growth is positive now. How do you plan to grow the sales force in relation to your original goal? In your opinion, what would be the ideal growth rate for local case growth if the efforts are proving successful?

John, thanks for the question. I'll start with our expectations of colleague growth for fiscal 2026. We anticipate adding approximately 4% incremental sales professional headcount in fiscal 2026. As we look back on fiscal 2025, one of the reasons the headcount investments that we have already made are not showing up in the outcomes of the year just completed is the excess or excessive colleague turnover that we had, which resulted in an increased customer loss ratio, which was masking the incremental benefit that was coming from the new hires. It's incredibly important to note that we track every single new hire in a cohort or a class that they join with. We're able to model where should they be from a productivity perspective in month 3, month 6, month 9, month 12 every one of the hiring classes that we have done, those colleagues are hitting those productivity targets. Kenny has said many times, month 13 matters. It's when they break through to begin to be productive, and eclipsing month 18 matters even more because there's a turbocharge of their productivity between month 12 and month 18. For fiscal '26 it's very important to do the understanding of the math of increased headcount each and every quarter is hitting that incredibly pivotal 12- to 18-month period, and we're not going to be repeating the customer loss rate. Therefore, we will inflect to positive case growth in fiscal 2026 from local and profitable case growth, to boot. So Kenny, any additional comments you'd like to make about guidance for '26?

Yes. So if you think about the head count, just put things in numbers context. So in 2024, we hired 450 and in 2025, we hired 300. And then Kevin said, 4% increase in 2026. If you add that all together, the CAGR of the growth rate of sales headcount is roughly mid-single digits. On the forward, we do believe we will render a return from this investment. That's point #1. Number two, I think we talked about an analogy before, the faucet is turning on right now. On the floor from a longer stability standpoint, we do expect headcount growth to be in line with volume growth, therefore, driving positive leverage in our P&L.

I was wondering if we could go back to the price agility initiative and what are the financial implications of that initiative? I believe it's intended to drive growth, but is there any sort of trade-off between margin and case growth? And you mentioned maybe the desire to learn more about the change management required to support a broader rollout. Wondering if you can elaborate on that. And is it in your plan for this fiscal year that, that does broadly roll out to more regions? Or does this remain kind of a pilot and regional test?

Thank you for your question, Kelly. I'm glad to address it. The financial goals are to increase volume while doing so profitably by maintaining our margin percentage, not lowering it to boost volume. Our aim is to empower our sales team to respond effectively to customer needs in real time. They possess an understanding of the emotional aspects that influence customer decisions better than any system could. If a customer indicates potential competition for a better price, we want our sales team to respond immediately. The change management I'm discussing involves enabling our sales representatives to "sell around the room." This means they can meet the customer's pricing request while also showcasing other advantages, such as our superior produce offerings, and setting up future collaboration with colleagues. This empowerment is crucial for their development and the effectiveness of our sales strategy. Kenny emphasizes that our sales colleagues will be compensated for making smart choices; investing in price should be counterbalanced by other revenue opportunities. We will implement this approach responsibly and wait until our team is adequately prepared to succeed. I want to clarify that we do not expect significant growth from this program in fiscal 2026, meaning we are not risking our targets if we do not implement it nationwide right now. We plan to roll it out at a pace that matches our team's skill development. In contrast, the other initiatives I mentioned are moving ahead without delay. For instance, Perks 2.0 has been a successful rewards program that is shifting to provide our best customers with a distinctly improved service compared to our average customers. Think of it like a loyalty program from a preferred hotel or airline that offers enhanced benefits to top-tier customers, such as priority boarding or first-class service during disruptions. We know what aspects are vital to our customers, and those participating in the Perks program will enjoy significantly upgraded service. There’s no need to test this as we will launch it nationwide this summer, which we believe will positively impact customer retention and market penetration. We have already accounted for this in our forecasts and are confident in its effectiveness. Additionally, I'm thrilled to introduce our AI CRM, which is a crucial development. Our sales team will have access to comprehensive tools on their smartphones to understand customer needs and make preapproved pricing offers. If they want additional information about a product they aren't familiar with, they can seek input from an AI model that provides helpful selling suggestions. We will roll out AI 360 across the country, and feedback from both experienced and newer colleagues has been overwhelmingly positive. We are particularly excited about how it supports newer team members by enhancing their product knowledge and selling skills, leading to greater productivity overall.

That's very helpful. Kevin, just to follow up with the Perks 2.0, can you size up what that looks like it's as successful as you hope in fiscal 2026 and maybe in the years to come, what is the potential there as you focus on that penetration?

Yes. So for us, it's an enabler of delivering the guidance that we just provided. So on today's call, I'm not going to parse out its contribution, but it's meaningful. It is absolutely meaningful. Think about Pareto, a percentage of your customer is driving a disproportionate percentage of your sales and profit, that's exactly who these customers are and the customer doesn't get to opt in. We get to choose. We are specifically choosing. It's an invite-only into the program club and our sales colleagues have the opportunity to actually motivate customers who are right on the cusp, hey, with an extra $1,000 a week, I can get you into this program. So we are bullish about this, Kelly. We will share more, let's say it this way, at upcoming investor events about this program and the expected impact we intend for it to have.

Kelly, this is Kenny. To summarize, the main factor driving our year-over-year growth in local case growth for 2026 will be the stability and retention of our sales team. This is why Kevin and I feel confident about our growth projections, as we see the positive impact already. The three points Kevin mentioned are additional factors that will support us this year and in the future.

Kevin, I wanted to ask you just a brief follow-up on all this local stuff. So customer losses are improving. Is there any concern about like the sales force turnover that you've seen over the last year, those noncompetes rolling off and potentially impacting the momentum that's coming back into the business? And then, Kenny, just one for you. I'm curious as to how you're thinking about cost per case growth in the U.S. If you look at this past quarter, it looks like dollars are up about 5% on flat cases, right? So call it 5% cost per case growth. What's the driver of that? And then how does that look in '26? Is there an opportunity to bring that lower next year?

Thank you for the question. I understood completely your question about the sales rep who departed 12 months ago when they hit on 13 and their noncompete agreement expires, is there an echo or a ripple effect from the prior year? The facts are the vast majority of the customer lost customer departure occurs almost immediately. And the way is the following, let's say, Kenny has been calling on an account for 10 years. Kenny departs while he, Kenny, is not able to call upon that customer, what happens is that we, Sysco, assign a new sales rep to that account. And then right then in there, that immediate moment is where the disruption occurs that customer then has to make a choice. Do I want to work with the new colleague, Hey, maybe I should look around, and the looking around is what causes an alternative distributor to tend to get into the account. So the vast majority of the loss happens immediately. There's the possible impact of the ripple 13 months later. What we can see in our data, though, is that not repeating the initial loss is a far greater positive impact on the avoidance of that negative than the ripple. And obviously, through the service improvement that we're making, Kenny mentioned this, our fill rates are improving. Our on-time delivery is improving, our sales colleagues' capabilities are improving through training, skill development, and the tools that I just mentioned. Ed, we're confident that the ripple effect, the echo is more than offset by the goodness of the programs that I just referenced and the stability of the sales force at Sysco, and therefore, the confidence in the guide in the year ahead. I'll toss to Kenny for the comments that he'd like to make about the cost question that you asked. Kenny, over to you?

Yes, Ed, it's Kenny. I want to address the cost per case from both the COGS perspective and base cost perspective since they differ at Dynamics. You're correct that volume was relatively flat around USFS. However, our GP increased by 4%. This growth is a result of our efforts in strategic sourcing, which has positively impacted the P&L. This is why you're observing favorable leverage between volume and sales, as well as sales and GP. The increased costs you mentioned are primarily influenced by two factors, mostly on the base cost side related to SG&A. The first factor is our investment in strategic plans, which are intentional investments expected to generate positive returns within 12 to 18 months from initiation. As local case volumes grow in our business, the cost per unit will be directly related to corresponding revenue, leading to improved leverage in the P&L. The second significant contributor to the cost increase is our strategic investment in capacity. We currently have 10 new facilities going live globally, seven of which are in the U.S. These include locations like Allentown, Tampa, East Wisconsin, LA, and Las Vegas, among others. The costs associated with these facilities, primarily depreciation, will impact the P&L. However, as our initiatives progress and we remain confident in local case growth, we anticipate these costs will be offset by increased volume in the P&L. Overall, we expect stronger leverage in the P&L moving forward.

Not just in foodservice distribution, but at least what I hear many industries broadly are considering consolidation at this point, whether it's AI investments or automation investments or maybe some concern or uncertainty related to tariffs. I mean, it does, again, seem that we're more prime for consolidation and deconsolidation across a lot of industries. So the question that I would ask you is how does Sysco you kind of view that within foodservice distribution. Obviously, not making a specific comment, but just generally in terms of the opportunity to consolidate and how might the company and where might the company be able to take advantage of some opportunities to further drive efficiency and consolidation both globally, but more specifically and importantly, at least for me, within the U.S.

John, it's Kevin. Thank you for the question. Let me start with the AI impact on our business and the part of your question that's tied to that. And then secondarily, I'll talk about just more macro, bigger chessboard strategy. On the AI side, we got to bifurcate it in the front of house, back of house or front-end selling, back-office management. AI absolutely is and will increase our efficiency in the back office side of the business. Kenny manages that for the company. We've centralized that activity. We offshored that activity. Now we're automating that activity, and AI can help turbocharge those efforts. Our merchandising division answers a tremendous number of questions from both customers and from our own sales colleagues, like the amount of volume that flows through that pipe would stagger you. We can use AI to answer intelligently, accurately, many, many, many of those questions, which can make us more efficient. So we think about the back end, attack the cost, attack the cost, attack the cost. And we've done a good job of taking out structural costs at our company over the past years. Simultaneously, taking that cost out to invest for growth, see Tampa that we just grand opened last week and the other examples that Kenny gave around the world. So to be relentlessly zealot-like focused on taking structural costs out to invest in growth is the more macro strategy. On the sales force side, this is where I will delineate. We don't view it as a reduction in the future selling occupation in any way, shape, or form. This is a relationship-based business. And John, I know you know that. This is a relationship business. We want the technology to increase even further that sales colleagues' relationship with that customer, help do the administrative stuff. Again, the number of questions that our colleagues answer about does this product have gluten? Is this allergen-free? What's the country of origin? Will or will I not be able to substitute this for something else? If we're out of stock. What substitutions would you recommend if this is out of stock? These are questions that are happening all throughout the day, every day, hundreds of questions they're facing every day. To enable that sales colleague to answer those types of questions proactively, more efficiently reduces substantially their administrative burden and then guess what they get to do at that time. They get to sell. They get to look around the kitchen and see product that's not on the Sysco truck to talk about introducing our capabilities, introducing our specialty capabilities, go prospect net new customers because you have more time on your hands. So we will grow our sales force, as we mentioned on this call, 4% approximately this coming year. And we believe AI is going to turbocharge that effectiveness. As it relates to your question about consolidation in the industry, here's what we would say. We know that size and scale matter in this industry, purchasing scale, supply chain scale, the trucking last mile delivery, as you've heard me say before, is the most expensive part of what we do. So therefore, being efficient in that manner is important. And we will continue to survey our landscape for M&A opportunities, tuck-ins, specialty purchases because we have tremendous white space existing still in specialty. I know you didn't ask about international, but we have compelling opportunities international. And we will be very strategic and thoughtful about our approach in the U.S. And obviously, we can't comment, as I said earlier, about any other company's strategies and actions.

You guys called out improving industry traffic throughout the period, still not all the way back, I'm curious, are you seeing any uptick in promotional activity or upfront to the distributor level? And then related, are independent restaurants showing much in the way of incremental stress? Do you see any risk of closure ticking up there? Are they weathering it quite well?

Thank you for your question, Mark. I'll begin and then let Kenny add any further insights. Starting with the restaurant operators, we are noticing that those restaurants offering strong value to their customers are the ones that are succeeding. This trend spans fine dining, fast casual, and quick service restaurants, where providing good value in terms of quantity of food for the price, effective promotional programs, or overall perceived quality compared to competitors is critical. Those that are struggling are not aligned with their customers in this regard. Our role is to deliver value to restaurant operators from fine dining to quick service, with a strong emphasis on enhancing strategic sourcing to reduce costs. This allows us to share in the value creation, helping our customers become successful and profitable. We had a robust gross profit performance in the recently concluded quarter, enabling us to invest in our customers from a pricing standpoint. As Kenny mentioned earlier, the positive outcomes from Q4 will continue to benefit us into fiscal 2026. This reflects our view on the end restaurant consumer and what Sysco is doing to address their needs. Kenny, I’ll pass it over to you for any additional comments on Mark's question.

Yes. In terms of restaurant closures, from our standpoint, there's always churn in the marketplace. But one thing from our side is bad debt, right? When you think about closures, you think about bad debt. The majority of our bad debt is current, with bad debt as a percent of sales is less than 0.1%. We have automation tools in place to manage that one and no material risk to our company in terms of restaurant closures.

Relations team here at Sysco. Have a great day. Thank you.