Sysco Corporation

Good morning, everyone, and welcome to Sysco's second quarter fiscal year 2025 earnings call. On today's call, we have Kevin Hourican, our Chair of the Board and Chief Executive Officer; and Kenny Cheung, our Chief Financial Officer.

Before we begin, please note that statements made during this presentation that state the Company's or management's intentions, beliefs, expectations or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act, and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the Company's SEC filings.

This includes, but is not limited to, risk factors contained in our annual report on Form 10-K for the year ended June 29, 2024, subsequent SEC filings 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 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 to one question.

If you have a follow-up question, we ask that you re-enter 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. Our financial results this quarter delivered improved performance and positive momentum with stronger top- and bottom-line year-over-year growth rates as it compared to our first quarter.

Sysco is delivering value over the short term with disciplined P&L management and remains well positioned to advance our business strategy while delivering upon our financial commitments presented at our recent Investor Day. Importantly, we expect the positive momentum from our Q1 into Q2 to accelerate in the second half of the year as we benefit from sales and operations improvement initiatives, investments in our business, and the potential for stronger foot traffic to restaurants as we begin to lap last year's negative 4% in late spring.

Our leadership team is 100% focused upon executing with excellence with a strong plan in place to deliver our full year 2025 guidance. Turning to Sysco's performance during the quarter on Slide number 5.

I'm pleased to report that Sysco delivered over $20 billion of total revenue. a growth of 4.5% versus fiscal 2024 and a sequential improvement from Q1 growth rates.

The revenue growth was driven by U.S. Foodservice volume growth of 1.4% and moderate inflation of 2.1%.

From a volume perspective, we generated 4.3% national volume growth, 3% volume growth in our International segment and a decline of 0.9% in our U.S. FS local case business.

Our national sales business continues to perform at an exceptionally high level with strong customer retention, and we continue to onboard high-quality net new national business. Our International segment posted very compelling results with adjusted operating income up 26.5%.

The strong profit growth was generated in part by local case growth of plus 4.7% year-over-year. We continue to advance the Sysco playbook in our international geographies, expanding our assortments, introducing Sysco-branded products and increasing boots on the street sales head count to win new local business.

I will discuss our International business in more detail in a few moments. In the U.S.

FS business, we are making solid progress on our top priorities across our multiple business units. Local case performance this quarter, excluding the impact of our DON business, was down 1.9%.

It was a choppy quarter with hurricane impacts at the beginning of the quarter and holiday shifts that negatively impacted the end of the quarter. The year-over-year comparison was also impacted by strong growth rates from the prior year.

Specific to our local business, we are seeing progress in our internal measures of success, and we remain confident that our efforts will help deliver improvements in the second half of fiscal 2025. More on this in a few moments.

Lastly, our top line growth included strong contributions from SYGMA where sales were up 10.6%. Now that we have summarized Sysco's top line performance, let's briefly discuss the external market.

Food traffic to restaurants in the U.S. was down approximately 2% for the second quarter, which represents a moderate improvement from Q1.

We expect to see continued improvement in traffic trends as we head into the second half of the year. Inflation for the industry has maintained at approximately 2%, which is within the normal range when we look at cost of goods sold inflation over the course of decades.

From a bottom-line perspective, Sysco delivered adjusted EPS of $0.93, a growth rate of 4.5% versus prior year, consistent with our expectations. The EPS growth was driven in part by the aforementioned volume growth, disciplined margin management and an organization-wide focus around efficiency improvement.

Margin management will remain a point of strength for the full year. As we stated on our Q1 call, we anticipate that our strategic sourcing efforts will pick up momentum as the year progresses.

As a result, we expect the positive momentum in gross profit from Q1 to Q2 to step up in the second half of the year as we have a direct line of sight to the actions that will deliver our full year margin performance. On the expense side of the ledger, we anticipate continued improvements in our supply chain efficiency, driven by improving colleague retention statistics and improved transportation route optimization.

These routing efforts will reduce miles driven, lowering our cost, while simultaneously improving our ability to deliver on time and in full to our customers, a win-win. Now I'd like to provide a brief update on our main business units, starting with international, where we grew our top line 3.6% for the quarter, and we grew adjusted operating income by an impressive 26.5%.

Our strong profit growth is being driven by continued operational improvements increased procurement synergies and a strong customer mix. Local case growth in our International segment is up 4.7% year-over-year.

Adding to our international success is a strong strategic sourcing program that is expanding globally and the successful growth of our Sysco Urawa local sales program. Lastly, we are deploying enterprise technology that is improving efficiency.

In short, our International segment is running the Sysco playbook. It's working, and we expect the positive momentum with international to continue into the second half of the year.

Our national sales business continues to deliver compelling top and bottom-line results. For the quarter, national volume was up 4.3%, as our supply chain solutions domestically and internationally resonate with our largest customers.

Sysco has the assortment breadth supply chain footprint and technology solutions to be a one-stop shop for large customers. We make it easy to do business with Sysco with dedicated account teams that help enable customer growth, support their business expansion and oftentimes support the customers' international expansion.

The success we are having in national sales is flowing through from top to the bottom-line as these customers help improve our route density, cover our fixed costs, increase our procurement synergies with key suppliers. We expect our national sales business to continue to deliver strong results due to high customer retention and continued new customer wins.

Lastly, I'd like to provide an update on our local business. As I mentioned a few moments ago, we expect an improvement in our local performance in the second half of the year.

We are making progress with our sales team hiring and training, and our sales compensation program is motivating the right behaviors. We see clear signs of progress on important drivers of the business.

As an example, our new customer win rate has ramped up significantly over the last quarter. The increased new customer win rate is attributed to our new compensation program and the increased sales professional head count we are onboarding.

New customers typically start by providing a portion of their business to Sysco. And as we work to, what we call sell around the room and penetrate additional product categories with these newer customers, the positive contribution from them will grow over time.

The new customers we are winning today are going to be the strong, mature penetration customers of tomorrow. We expect our customer win rate progress to carry into our second half and into fiscal 2026.

A second proof point is the progress that we are making with sales colleague headcount. Our sales consultant retention has substantially improved from Q1 to Q2 as the change management associated with our new compensation model has taken root and colleagues are experiencing the benefits of the new program.

Additionally, we are making solid progress against our 2025 hiring goals with quality hires from the industry. Another proof point within our local segment is the improvement that we are making with our service proposition.

Over the past quarter, we improved our service offering to our customers with increased customer-facing fill rates and improved on-time delivery performance. Our supply chain continues to make strong progress month-over-month, and that is evidenced by our Net Promoter Score, which improved solidly on a quarter-over-quarter and year-over-year basis.

We expect continued improvement in service levels in our second half of fiscal 2025. Historically, NPS improvement has a strong correlation to business growth in future quarters.

The sales and volume growth comes from increased customer retention and by winning new lines from existing customers. Lastly, we increased our distribution capacity over the past quarter with new and expanded facilities to support our business.

I am most bullish on our Italian platform expansion. Over the past six months, we have entered new geographies with our Greco Italian platform, and we will continue to expand to new geographies in the coming calendar year.

The winning formula is clear, have the right Italian products at the right price sold by colleagues at our full-time Italian cuisine experts. Our success has been replicated in each new Greco market we have entered.

I expect compelling results from the Italian platform in the second half of fiscal 2025 and for years to come as we advance our Greco expansion efforts. We have substantial white space to be filled in the coming years.

As I wrap up my comments this morning, I will summarize with the following. We made progress from Q1 to Q2 in top- and bottom-line results.

We delivered upon our financial expectations for the quarter and we have posted progress on important strategic initiatives. The progress on key initiatives like sales professional hiring and increasing our new customer win rate will fuel our improvement in the second half of fiscal 2025.

When combined with the very compelling business performance, we are already delivering from national sales business, our International segment and our SYGMA segment, we have the confidence to reiterate our full year financial guidance. I am pleased with the progress that we are making in our supply chain from a service and cost perspective and our merchandising ranks from a gross margin management perspective and with our sales team from a skills development perspective.

The combination of the progress across the three vectors will build over time. I want to personally thank Sysco's 76,000 plus colleagues and our entire leadership team for their continued focus in energy.

We have the best team in the industry, and I'm proud to work with them every day serving Sysco's global customers. I also want to thank our supplier partners who have helped Sysco improve service levels to our customers over the past quarter.

I'll now turn it over to Kenny, who will provide a detailed review of Q2 performance and select fiscal year 2025 guidance commentary. Kenny, over to you.

Thank you, Kevin, and good morning, everyone. As Kevin highlighted, our results for the quarter were driven by improvements across the core financial drivers.

Sales, gross profit and operating expense. Our success in Q2 was broad-based across business segments in our product portfolio.

We generated positive operating leverage and sequential improvements to gross profit, while continued operating expense management rendered adjusted operating margin expansion. Here at Sysco, we have levers across our P&L and our actions are driving structural improvements to the business.

We believe the table is set for continued improvement in the second half of our fiscal year. For example, this was on full display in our International segment this quarter.

The positive momentum over the past few years continued into Q2 with sales growth of 4%, gross profit growth of 7% and adjusted operating income growth of 26.5%. The Sysco playbook is delivering across all geographies, driven primarily by our size and scale advantages in these markets along with M&A contributions from the recent specialty additions to the portfolio, which are performing well.

We expect our positive momentum in International to step up further in the second half of the year. In addition to improved P&L results this quarter, I would be remiss if I did not highlight the compelling competitive advantage that our strong balance sheet and robust cash flow generation provides.

On that note, I am pleased to announce the upsizing of our share repurchase plan. For this fiscal year, we now expect to buy back $1.25 billion of shares, up from our prior plan of $1 billion.

The full year amount has the potential to flex up further depending on M&A activity for the remainder of the year. Further, we take both our role as a dividend aristocrat and our track record of dividend growth seriously as we are one of only four consumer staples company that have grown dividends for the past 25-plus years.

This year, we expect to distribute to shareholders $1 billion in dividend payments. In total, we are now on target to return over $2.25 billion to shareholders through share repurchase and dividends in FY '25.

Our balance sheet affords us the financial tools and flexibility to make the right decisions, both for the short term and long term, as we seek to grow our business while driving industry-leading returns on invested capital and generating a double-digit TSR for our investors. Now turning to a summary of our reported results for the quarter, starting on Slide 14.

For the second quarter, our enterprise sales grew 4.5%, in line with our guidance in the financial algorithm we shared during Investor Day. Our sales results were driven by U.S.

Foodservice growing 4.1%, International growing 3.6% and SYGMA growing 10.6%. With respect to volume, total U.S.

Foodservice volume increased 1.4% and local volume decreased 0.9%. DON positively impacted U.S.

Foodservice volumes by 1.6% and local volumes by 1%. National volume growth in the quarter also included margin expansion.

Local results were lapping the highest rates of growth in the prior year as well as headwinds from weather disruptions and unfavorable holiday timing impact on a year-over-year basis this year. We produced $3.7 billion in gross profit, up 3.9% and gross margin of 18.1%.

On a dollar basis, we are encouraged by the expanding gross profit dollar per case trend and continued opportunities around our strategic sourcing efforts. Looking to the second half, we expect to execute on secured actions to expand the depth and breadth of our strategic sourcing to buy better, to sell better.

This includes working with existing suppliers, looking for incremental win-win opportunities, often adding items to existing contracts and scoping out work with new suppliers. Additionally, continual improvements in sourcing will come, allowing us to lever the scale of our North America presence, which includes our $6 billion Canadian business.

As I mentioned earlier, strategic sourcing is one example of structural improvements we expect to enhance gross profit in the second half of our fiscal year. Our gross profit dollar growth reflected our ability to continue to effectively manage product inflation, which 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 pocket of fluctuations. We are doing an excellent job managing our corporate expenses with continued progress year-over-year.

We have been extremely disciplined and reduced corporate expenses by 1.3% from the prior year on an adjusted basis, driven by efficiency work that we deployed in FY '24 and incremental actions during the quarter. We are making continued progress with our financial algorithm target of lowering corporate expenses to 1% of sales.

Overall, adjusted operating expenses were $2.9 billion for the quarter or 14.2% of sales, a 13 basis point improvement from the prior year, reflecting supply chain and corporate expense efficiencies. Our supply chain operations remain fully staffed.

We continue to improve colleague retention year-over-year, and we are building on productivity gains with piece per labor hour improvements compared to the prior year. Our outbound fill rates to our customers also improved during the quarter, which will help drive increased NPS and sales in the coming quarters.

Turning to fuel expenses. We remained disciplined around the pacing of our sales professional hires, and we'll continue to focus on the quality of return on investments of our new hires as a continued decline of the productivity curve.

These deliberate investments are well levered with this year's hires expected to start driving financial contributions next year and thereafter. Overall, adjusted operating income was $783 million for the quarter.

Positive momentum continued in our International segment with adjusted operating income growing 26.5% during the quarter. Our teams are successfully applying the Sysco playbook to drive continued growth and margin expansion.

Adjusted operating income growth also benefited from SYGMA contributing 11.8% profit growth as our focus on operational excellence resulted in improved profits from higher productivity alongside growth of new customers. For the quarter, adjusted EBITDA increased to $969 million or up 4.4%.

Our balance sheet remains robust and reflects the organization's healthy financial profile. We ended the quarter at a 2.76x net debt leverage ratio.

We ended the quarter with $11.8 billion in net debt and approximately $3.1 billion in total liquidity, which is substantially above our minimum threshold. Turning to our cash flow, we generated approximately $498 million in operating cash flow and $331 million in free cash flow for the first half with the year-over-year variance driven by timing related to working capital which also includes the opportunistic purchase of inventory with solid economics.

For the full year, we continue to expect strong conversion rates from adjusted EBITDA, operating cash flow at approximately 70% and free cash flow at approximately 50%. Our strong financial position enabled us to return approximately $444 million to shareholders this quarter.

We remain confident in growing both top line and bottom-line results in FY '25, in line with our financial algorithm. Importantly, we are reiterating our 2025 guidance metrics as seen on Slide 20.

During FY '25, we expect net sales growth of 4% to 5%. Net sales growth includes continued inflation of approximately 2%, positive volume growth of low single digits and contributions from M&A during the year.

All in, we are guiding to adjusted EPS growth of 6% to 7% in line with our financial algorithm range. We continue to believe the second half will improve from investments in the sales professionals and other growth initiatives.

Additionally, we expect margin benefits as we leverage our unique scale advantages to expand strategic sourcing efforts to include a wider basket of categories, more efficiently harness our global buying power and improve inbound freight logistics to minimize touch points across our networks. Combined with recent actions around our organizational optimization at our GSE we expect over $100 million of annualized savings to benefit gross profit dollars and operating expenses starting in the second half.

This figure highlights our ability to be disciplined with expenses and offset macro industry environment headwinds in the first half and fund business investments this year. This is consistent with our focus on driving continual business improvements, and we plan to explore additional actions going forward.

In addition to these self-help initiatives, which we expect to drive the majority of our second half lift, we continue to expect a stronger macro and modest industry traffic improvements. All in, we expect a stronger rate of adjusted EPS growth in the second half of the year, growing at a positive high single-digit growth rate with similar rates of growth across Q3 and Q4.

Consistent with our ROIC focus, we divested our joint venture in Mexico in mid-December. This is expected to impact international sales by approximately $500 million on an annualized basis and be immaterial from a profit standpoint.

From a modeling perspective, international top line results will be negatively impacted from an as-reported perspective for the next year as Mexico will be out of the number starting next quarter, but accretive to international margins. We do not plan to recast prior year numbers.

However, we do plan to provide additional context to aid in modeling this segment until we lap its sale at the end of this calendar year. In the upcoming quarters, we will provide growth comparisons with and without Mexico in an effort to add clarity around operating trends and enhance year-over-year comparability.

Further, we plan to continue our practice rewarding our shareholders through the distribution of essentially all of our annual free cash flow with over $1 billion in dividends. And as outlined earlier, $1.25 billion in share repurchases.

This is another signal of continued confidence in our business. Specific to share repurchase, we note that this figure can flex up depending on M&A activity.

For the year, we expect to operate within our stated target of 2.5x to 2.75x net leverage and maintain our investment-grade balance sheet. The adjusted tax rate for FY '25 is now expected to range from 24.5% to 25%, slightly lower than our initial view.

Adjusted depreciation and amortization remains unchanged at approximately $800 million for the year. In closing, I'm confident in our FY '25 guidance and our ability to deliver on our long-term financial algorithm with levers across the business.

We believe we are taking the right steps for long-term benefit of the business and unlocking value that we reward our shareholders. I look forward to our progress ahead as Sysco is positioned to win.

With that, I will turn the call back to Kevin for closing remarks.

Thank you, Kenny. I appreciate all you are doing for Sysco.

The disciplined leadership that you and your team display are a real strength for our company. Before we turn it over to questions, I want to reiterate the following key points.

We are extremely pleased with our national sales, international and SYGMA business results. We believe these businesses are positioned to continue delivering compelling performance in the quarters and years to come.

Our local business is in the midst of a business improvement phase. We have the right actions in place, and we are showing clear signs of progress by increasing our new customer win rate and improving Net Promoter Scores.

That improvement trend has given us the confidence to reiterate our full year guidance and to equally iterate our overarching financial algorithm. Our solid balance sheet affords us the opportunity to return value to our shareholders while we are profitably growing our business.

The announcement today of raising our share repurchase target for the year is just one example of the discipline we will deploy to ensure that our shareholders benefit along our journey. More to come as we have additional announcements in the future.

Our future is bright as we expand our competitive moats, leveraging our size, our scale and our talented people. With that, operator, we're now ready for questions.

So, you talked about some expected tailwinds in the second half of the fiscal year. How have January sales trended to date, just especially when considering some of the headwinds like the Southern Winter storms and Los Angeles Area wildfires?

And then would you expect this to have an outsized impact on either your local or national businesses in 3Q?

Mark, it's good to hear from you. It's Kevin.

Just let me start with tailwinds and reasons for confidence in the second half. I'll briefly talk about January, turn Kenny for additional thoughts.

Why we have confidence in our second half is the following. As I said in our prepared remarks, the businesses that are doing extremely well, international, national and SYGMA have clear momentum, building momentum.

We expect for continued extremely strong performance from each of those three business segments. Within our local business, as I talked about on the call, we have internal lines of measurement that are clearly showing progress, new customer win rate, NPS improvement the colleague hiring and training that we're doing, which will result in forward-facing increased momentum again on that new customer win rate and then DC capacity expansions that occurred over the last six months that there was buildings enabled increased throughput, increased customer ability to serve, et cetera, et cetera.

So, when we put all that together, we have a clear path towards delivering the outcomes that we expect to deliver will then allow us to deliver the financial guidance that we have put forward. Specific to January, just one reminder, January is the lowest volume month of the year, and that's the case for the entire industry.

Every year, you're absolutely right with the California wildfires had an impact on Southern California. The even bigger topic is the Southern storm that impacted a large portion of the United States.

We live and work in Houston, and it was quite the event in Houston this last week. We're working through it.

Our goal is to serve our customers doing those periods of time. We're proud of is we're the first distributor to be out on the road delivering to customers, getting them back on their feet, working through that progress with our customers as they reopen and grow their business.

As it relates to does it impact national or local more impacts them equally. So, we're not concerned about that, Jenny -- excuse me, Kenny, any additional comments on January.

Sure. Taking a step back, overall, in terms of industry foot traffic in terms of what we're seeing in Q2 improved from Q1.

Q1 was down 4% and Q2 was down 2%. But that said, as Kevin mentioned, January was a bit choppy with weather and other disruptions.

And one thing to note, if we had to choose a month to have uncontrollable disruptions, it would be January given the majority of our Q3 OI and EPS lands in February and March. Now we are encouraged by the fact that in select geographies, we've already seen nice progress made based on our investments in SC additions as well as our new comp model.

And then one thing that kind of called out, most of our comments are usually U.S.-based, but for international, strong momentum there. We saw a strong push on Christmas, holiday year-end on both local and national volume and that momentum is carrying into January.

So, the bottom-line is, we are confident we can operate in any environment as proven in prior periods, which supports our confidence in our FY '25 guide.

So, I wanted to follow up on the prior one related to the U.S. Foodservice case growth.

Organic volumes fairly flat quarter-over-quarter. Industry traffic, I think, improved almost 200 basis points quarter-over-quarter.

So can you help us understand what you're seeing in terms of underlying dynamics and any market share dynamics during the quarter? And then, Kenny, I think you mentioned $100 million in annualized savings to help GP dollars in the back half.

Just can you expand a bit on some of the drivers of that?

Lauren, it's Kevin. I'll start.

I'll talk about Q2 versus Q1, and Kenny will add on to that and then he'll directly address your $100 million question. It's an important and good one.

for us to be very clear on the drivers there. Q2 performed as we expected.

That's the punch line, and that's the headline. It was a choppy quarter.

That's the word I used in my prepared remarks. The beginning of the quarter had a substantial hurricane impacting our Florida market and up into the Carolinas, which you know all about.

And then the exit of that quarter was significantly impacted by holiday shift, which impacted the entire industry. So, you've read about that through all of the retail names that are out there, but one last week between Christmas -- excuse me, Thanksgiving and Christmas, that does have an impact to the restaurant industry and an unfavorable calendar shift as it relates to that.

And then the ball around that is we had a very strong volume growth in Q2 last year. So, we're lapping strong numbers from a year ago, but that's because of that calendar component that I just we talked about the prior year was very favorable from a calendar perspective.

So, when we put all that together, and I know it's choppy, and there's a lot to be normalized there. When you normalize for those things, you do is solid versus Q1 from an underlying performance perspective.

And the more important point is we have the direct line of sight towards why it will be even stronger in the year to go. The direct line of sight towards the hiring we're doing the new customer win rate, which is building momentum, the Net Promoter Score momentum that we're driving, which will forward view add to customer retention and increased penetration.

So, we put all that together, we do have confidence in our ability to improve local and the success that we're driving in the other three segments is notable and repeatable. Kenny, your comments to that and then turn it over to you.

Yes. So let me add on to Kevin's comments on the confidence in local.

We do expect to see improved sequential performance of local case growth in the second half of the fiscal year. So, let's be clear about that.

And why is that? If you look at the underlying themes of our business, most of our incremental sales professionals were higher at the end of FY '24 and beginning of this year.

So, with each month, these sales professionals are more productive, therefore, attributing more on the sales side. The comp model is working very well.

We're tracking it very closely and it does two things just to remind everybody. incentivizes for growth and to grow profitably, and we're seeing both right now through our new customer acquisition count that Kevin referenced in his prepared remarks.

And then last but not least, as we approach the second half of the year. Kevin talked about this for the Q2, most of our lift is driven by self-help and we will be lapping a more favorable comp in the second half of the year, which yields our confidence that we talked about in the prepared remarks.

And Lauren, in terms of the $100 million annualized savings, as you heard as part of our guide, we are expecting a second half of the year step up on EPS growth. So, to put it to some real numbers, the first half is roughly, call it, 3.5% EPS.

Growth and the back half will be a high single-digit growth rate. And I'll go slow on this part.

One of the key drivers is that we have line of sight to $100 million of annualized savings to benefit both the gross profit line and the operating expense line. So to your second part of the question, what are some of the details and examples that we can talk about.

So, there's a few buckets. The first bucket is strategic sourcing.

The second bucket is supply chain efficiencies, i.e., inbound logistics that we spoke about prior. And then last but not least, organizational optimization, which has been implemented recently already.

So that's been done for the quarter. So, the good news is we are starting to see savings from this month, meeting in January, and we will continue to execute on the other actions, which we have a strong line of sight to by the end of this quarter.

We expect these savings to obviously materialize this year. But because they're structural, they will also continue into the first half of 2026 as well.

These savings highlight our ability to be disciplined with expenses and offset any macro or industry environment headwinds from the first half and allows us to reinvest in the business as well. Now we're not stopping here.

We plan to explore additional actions going forward. These benefits are already in the current guide, and it's another proof point that our ability to grow EPS by high single digits in the second half of the year.

Again, the indexing of the benefit we gear towards GP. I hope that's helpful.

Kevin, I have a sort of multipart on the sales force. So just remind us, I think you've got cohorts coming out of training every six to eight weeks or something like that.

Do you -- is it -- when I think about the number of people that are going to come off a noncompete -- so how do you think about that? And then I think you guys seated these salespeople with five accounts, and they have to double that over six months.

So. when I try to think about all of this cadence-wise, right?

And when you return to positive territory on local case growth, and I recognize you're down whatever, 1% to 2% today, is that possible toward the end of this fiscal year or is that really a fiscal '26 dynamic?

John, thank you for the question. I'll start with your cohorts in the cadence.

We track it in exactly the way that you're describing. So, we hire in waves, we train in waves.

We deploy them out to geographies, as Kenny has said many times, targeted geographies. There are growth geographies.

There are market share capture opportunities. We have Italian platform expansion opportunities and the like.

So, we're being very surgical about where we deploy. Each cohort is tracked longitudinally over time to how they're performing and where they need to be performing.

The headline without disclosing confidential internal information is each of the cohorts is where we need them to be on their maturity curve. We're pleased with the performance from the 2024 hiring, as Kenny said, which was mostly Q4.

And we're pleased with the initial performance of the hires that we have done this fiscal year. They are onboarding new customers.

That's the primary go-get for the new hires. We give them a small little territory, as you quoted, and now they got to be out on the street knocking on doors, and we're pleased with their performance.

You're right, for competitive buyers. There's a non-solicit window, and we honor that.

We are extremely respectful of that. So, to the point you're making, roughly, on average, 12 months after they onboard, there's a second wave of growth that can come from those new hires as those restrictive agreements expire, and we anticipate benefit in 2026 for that behalf.

So, the headline is we are pleased with the hiring. We're pleased with the quality of the staff we've onboarded and we're pleased with the trajectory of their new customer performance.

I see in my prepared remarks, notable increase in our new customer performance in Q2. As it relates to when to return to positive growth, here's what I can say today.

We are confident in our ability to show and display progress quarter-over-quarter, and we anticipate that we will show you numerically that progress on a quarter-over-quarter basis due to the reasons that we said in answering Lauren and Mark's question that I'd prefer not to repeat because we're the length of the call and the number of questions that we anticipate. But it's a combination of the colleague hiring, the improvement in service we're delivering, the progress we're making on the new customer win rate and the expansion of our D2C capacity.

You put all that together, we're confident in displaying numerically progress as this year progresses on a quarter-over-quarter basis.

Great. Just one clarification on your last comment and then a question.

Just the assumed continued improvement that you're talking about. Can you share any color in terms of the case growth that you're assuming for the back half of the year, relative to, I guess, I think you said the industry was most recently down 2%, I'm just wondering what your assumption is for your business versus perhaps the industry in the back half of the year?

And then separately, just wondering if you can comment on the Sysco Brand sales. I know, as a percentage of total sales, it seems like the U.S.

broadline and the logo both have been easing. Just wondering your confidence in your ability to accelerate that mix it would seem like compelling offering and a challenged macro where the consumers are looking to -- or the restaurant customers are looking to save.

So just wondering your thoughts on those Sysco-branded sales?

Yes, certainly, Jeff. Let me just clarify the minus 2% that you mentioned there, that was food traffic to restaurants in Q2.

That wasn't a Sysco performance number. So, the minus two is for traffic.

We're expecting moderate aka slight improvement in that as we enter our second half, mostly in that spring -- late spring time frame, as I mentioned in my prepared remarks, we were going to be lapping it down 4% input traffic. We don't anticipate that the industry will experience a minus 3% or minus 4% on top of what last year is minus 3%, minus 4% from a traffic perspective.

So, there'll be some natural gravity-based improvement tied to foot traffic. With that said, Kenny says this all the time, we don't need for that to occur in order to deliver our numbers.

We are prepared to have the ability to deliver our financial algorithm despite economic external conditions. We have plenty of self-help activities in place that can move the needle for Sysco.

So, the traffic improvement in the macro is reasonably immaterial to the overall year-to-go performance. It's the $100 million of economic improvement that Kenny talked about.

That's actually the primary driver of first half EPS growth versus second half EPS growth. That's a meaningful and big deal.

And as he said, direct line of sight with most of those actions or many of those actions already completed, and that will have wrap value into next year. So again, it's progress in local over time, and I have to emphasize this work profitably.

We could easily move the needle from a volume perspective if we wanted to by being irrational on price. And we're just simply not going to do that.

We are going to be disciplined. We are going to be consistent.

We're going to run the Sysco play on the street. And the primary way we need to show the progress is by incremental sales headcount, which we talked a lot about, and we are where we need to be in that forward-facing progress.

So, we need to show it to you in the outcomes, and we're going to do that as this year progresses. To the second part of your question, which was Sysco Brand.

Sysco Brand is performing as we expected it would for the quarter, and we do not have concerns with Sysco Brand. It's fortress for us.

It is an incredible program. You know the stats, 46% of our cases in the local sector have a Sysco Brand on the truck and we're pleased with our performance.

The primary causal is national suppliers really struggled during the past couple of years during that period of time when supplier inbound fill rate to us was declining, Sysco Brand, we were doing a really good job of being in stock on the Sysco branded product, and there was some shift towards Sysco Brand, and there's a little bit of a return to the mean in that regard. With that said, we are confident over the longer time horizon that we can and will grow Sysco Brand.

We're constantly introducing new items. We're constantly partnering with the supplier community to bring innovation forward through Sysco Brand.

And as you said, when consumers are looking for value and customers are looking for value, Sysco Brand is a great alternative. So again, the main cause for the year-over-year decline is the natural impact of suppliers of national branded products, improving their fill rate, which net-net for the industry is a good thing.

We know select customers really want national brand, and we're in stock on those products, we obviously give that customer choice. So, Jeff, that's the answer to the second part of your question.

Jeff. Just one thing to add on the local piece of it.

Kevin and I usually speak a lot about U.S., but international is doing really well on local case growth. For the quarter, local case growth for international grew 5%.

And every market and our international business grew local cases were there wasn't just one region or one area. So, a big example, Canada, our biggest market grew 5%, GB second biggest market and international grew 8%.

And the Sysco Brand, Kevin's right. But one thing to put things in perspective.

It is still at over $22 billion business, and it's still growing profitably as well with strong penetration across our business and we do expect penetration rates to start to stabilize as we improve our local performance on the forward. And I think one thing to note as well is it's important to call out that as we talked about the $100 million, especially around strategic sourcing, that impacts fiscal brand and also non-Sysco brand as well, which is one of the reasons why we're expecting leverage in the second half of the year.

I hope you saw these numbers are more or less apples-to-apples, but certainly correct me if I'm wrong. Earlier in the call, you talked about Sysco local case volumes that were down 1.9% excluding DON.

And in your presentation that the overall restaurant industry was down 1.6%. So, I just did want to get kind of a sense of that underperformance, maybe real pockets of opportunity that you may see that might be based on customer type, maybe there's a specific geography that's really been lagging for you that we're not aware of, if it's a share per account issue or if new customers have been entering the industry that perhaps you've just been having a tracking.

So, are there really any major pockets of underperformance that you see nationally or even locally that you can kind of come and say, "Hey, we fix these couple of things and then we go from underperformance to outperformance?”

Appreciate the question. Yes, the traffic to restaurants down 2% is what we quoted in our prepared remarks.

For the quarter. And again, there's three months in the quarter, but for the three months in its entirety traffic down to, you're right, on the local number, DON down 1.9%.

Again, when you strip out all the noise, and I don't like talking about the noise, but I'm going to -- because you asked the question, it's a choppy quarter. A major hurricane that impacts the beginning end of the quarter, a huge calendar shift that occurs at the end of the quarter vis-a-vis the holidays, net-net, you put that all together, we can do that math and strip out those variables and say our Q2 was actually strong versus Q1.

I know externally when you look at the numbers and you don't have all the internal details, it looks like the deceleration and it was not a deceleration in local Q2 to Q1. It's a solid performance.

It performed in line with what we expected. The more important is we are confident we will step up that local performance as we head into Q3 and as we head into Q4.

Now to the second part of your question, specific region, that's actually what gives us the confidence, where we are not seeing meaningful year-over-year weather, Kenny talked about this vis-à-vis January, we're doing well in January. We're stepping up in January versus Q2 in those geographies that haven't been impacted by the wildfires or the weather.

Where we have deployed the incremental head count surgically, we are seeing those regions be very successful from performance perspective. And we're a large company, John, as you know.

And of course, we have select-regions that are underperforming versus our company average, we're very clear on what is happening in those geographies and what we need to do to improve. But there's no common theme with those geographies.

There's no unique thing happening from a competitive dynamic perspective or an industry perspective, a large company with lots of regions, you always have a bottom x percent that you're working to improve, and we're deeply committed to doing that. So, net-net in aggregate, we are confident in our year to go.

I've talked a lot about the comp program today, but the compensation program change that caused a lot of disruption at Sysco in Q1. That change disruption is now behind us.

Our sales reps are benefiting from the new comp program. They are making more than they were making previously because they are changing their behaviors and doing the things we want them to be doing out on the sales cycle, which will benefit Sysco and clearly will benefit our colleagues as well.

So, we anticipate that will gain momentum as the year progresses along with the incremental hiring that we've been doing along the way. Kenny, anything to add to that?

Yes. So just a couple of things to add.

We are seeing a strong correlation between headcount adds and also volume growth at the market. So, it's working -- and this will provide some color on Kevin's last comment around the comp model.

We're seeing total new customer acquisition count go up. Again, I think Kevin said it.

Today's new customers are tomorrow's penetration opportunities for us. That's great.

And remember, the comp model also rewards for margin-accretive activities. So total team selling, a great one for us.

It's really leveraging our broad line scale and specialty assortment. We're seeing that continue to increase as well this quarter.

So overall, the comp model's working for us. It's a win-win for our colleagues as well as for our company.

Mine was on the product cost inflation, reiteration of the 2%. I want to dig in and just see how maybe conservative that might be.

We're seeing food PPI inflation really spike in the last couple of months. It seems to have a pretty good correlation with U.S.

product cost inflation. So, I think I'd expect maybe a little bit of an increase there.

So, the question is, do you expect that? And maybe there's some offsets in international or maybe SYGMA?

That's the kind of forward question. Also, in the quarter itself, if you could just help us with what the inflation was by segment for the product costs, that would be helpful.

It's Kevin. I'll start with comments about how we're viewing inflation.

We have a lot of data as a global company. We have 13 attribute groups or 13 categories that we closely monitor and we blend them together to come forward with our inflation forecast.

It's usually more accurate in the next 90 days than it is when you're looking further out than that because dynamic conditions can change variables. But where we're seeing increased inflation from a COGS perspective is mostly in the dairy and protein categories, avian flu.

Flu influenza for birds is having a negative impact on supply, which is, therefore, increasing costs, specifically eggs, which has been very much in the media as of late, and we don't anticipate that pressure easing in the near term. We expect for that to continue.

We expect for dairy and then specifically eggs to be inflationary because of AI, avian influenza. When we look at the protein categories, again, it's the same root cause.

It's about a shortfall of product availability versus true demand, which tends to drive up prices. We all know supply and demand equation.

And we don't anticipate in the main protein categories that's changing either. So, we would anticipate center plate inflation to be higher than normal over the next 90 days to six months.

Where we're seeing offsets, which is what brings the total book down is in the commodities space, and that's increased product availability that's things we do to lower price through competitive sourcing and when we can lower price inbound to Sysco, we can pass on and share that value with our end consumers. So mostly in commodities, we're actually seeing and some of them deflation on a year-over-year basis.

And it's the entire book of business that put to that forecast too. It's -- I'd say if it's going to miss versus our forecast, it probably misses on the higher end, but that's not something that we're forecasting as of today.

Kenny, anything to add to the inflation question?

Yes. So, I would just say right now, we're operating in a normalized inflationary environment.

So, to your question, Jake, in terms of what we're seeing by segment, for the total company, it's roughly 2.1%. For U.S.

business, it's pretty consistent, right? U.S.

business, U.S. operations 2.7 and then our European business is roughly 2.9.

So, to Kevin's point, if we were to miss, there will be some upside given the fact that we are currently trending slightly higher, driven by the center-of-plate dynamics that Kevin talked about. I think the other point that is important to note for Sysco is, we have a diverse set of product categories.

And the good news is we don't over-index or exposed to any single category from a basket standpoint. So long story short, we are operating a normalized inflation environment, which bodes well for the industry.

And it's one plus, I'm sorry for the three-part answer. Everything we're talking about is excluding the potential impact of tariffs.

We can't anticipate exactly what will occur. Nobody knows exactly what will occur.

The quote that we put out for the 2% excludes any impact of tariffs.

Kevin, I wanted to ask you about sales force and local case performance. You mentioned from a sales force perspective, could you just maybe take a step back and talk a little bit about where things stand today?

I think you said the sales comp issues behind you, what does that mean? And then stepping back, big picture, the growth of your -- growth -- the gap between local case growth and national case growth is pretty large right now.

Is that okay longer term for you to achieve the multiyear goals that you want to achieve?

Ed, I'll start with your question about sales force and the comp and the change that has occurred there and then Kenny, I'll ask you to answer the question on the algorithm that we put out back at our Investor Day and how local and national contribute that work. So, what I meant by the comment of the impact of the comp changes behind us, let me just take a giant step back and say the comp change we made was the change we made because we wanted to listening to our sales colleagues, listening to our customers, looking at our P&L, putting all that together.

Our best sales colleagues wanted a commission structure or a comp structure that provided them more upside to their outcomes. That's what our best people want.

And then on the lower performer side, we had too many people that were living off their base pay and not doing the behaviors that we needed and frankly, not their book of business. And so therefore, the change we put forward on July 1 rewarded the top performers at a higher rate, and it held accountable the folks that weren't performing to change their behavior, step up their performance, be out on the street, opening new business, penetrating further categories.

As Kenny said, selling more margin-rich products because they get rewarded for that in the comp model. So, what happened in July is there was a subgroup of our population that didn't like to change.

Those people were almost exclusively our underperformers, and we had some exits from the Company back in Q1 that created a bit of a disruption during that period of time. How do I measure that, Ed, I think that's your question?

Colleague retention, that's how we measure it. So, we saw an increase in our turnover in Q1.

In Q2, here's the headline. Our retention has completely stabilized.

We are back to healthy levels and run rate levels of retention and our colleagues are making more money in the new comp program than they were making previously, which is exactly what we want. We want for them to be driving the behaviors that are good for the Sysco P&L.

It's an uncapped earnings potential program where the more they sell, the more they earn, and that's exactly, again, what our best performers wanted. And that is a topic that will have legs.

It will have momentum that builds over time because see the second point, which is we're onboarding a healthy number of new colleagues who will be able to win new business and grow our business and succeed from themselves from a comp program tied to how we reward them for opening new business. So, the Q2 headline retention was solid in our colleague population, and we expect for that to continue in the go forward.

Kenny, I pass to you for the second part of its question?

Yes. The answer is for us is quite simple.

We have to grow both, right? But the answer is to grow both.

And just -- but I don't want to dismiss the success of CMU. CMU, our national customers business is doing really well.

We are winning in the space, and we're winning profitably as well. That's really important.

And I do understand with CMU and national customers growing faster, it just dilute the margin rates, I understand that. And with that said, the reason why you need both is because of the fact that our national business provides route density for us, right, really skills and covers our fixed costs in the local business since the truck is going there anyway, taxed on with additional case on the route itself and also the higher-margin business.

So, when Kevin and I worked with our management team day in and day out, it's not just simply, let's grow local, it's how can we grow the entire portfolio and elevate us to drive margin expansion and top line growth from both sides of the house for us.

That’s a plus at the end of Kenny's point there. We are extremely pleased with our national business and our international business and our SYGMA business, extremely pleased.

We expect for and desire for those businesses to continue to perform at that level and I want to eliminate what may be a concern. And there are no supply chain constraints that are impacting negatively local because of the success we're having with national.

We're not running out of slots in the warehouse. We don't have issues with hiring colleagues in the supply chain.

Our trucks have capacity to support growth. What we need to see and what we're going to see is improvement in local.

So, we need to continue to drive that significant and visible success in the three business sectors that are killing it and we'll continue to do so, and we expect and we will show progress in local -- in the go forward.

I wanted to ask more about the international margin opportunity? Just you finished up '24, well above where you were in the years leading up to the pandemic and then a really good start here in the first half of '25.

So just trying to think about what we should look for, for the margin? Is it a gradual grind higher here?

Or do you think there's some point where you see a flattening out or maybe more of an inflection. Just kind of thinking about the cadence of initiatives rolling out and the degree that there are OpEx investments near term are anything else to think about on that?

And I did have one follow-up on the adjusted earnings, whether there's that sale leaseback gain in there and if you have any comment on the magnitude?

Okay, Alex. Thank you for the question.

It's Kevin. I'll start with international.

The headline, we are extremely pleased with our international business, leadership team, the business progress that's being made, the initiatives that we are driving that is helping deliver that business progress. It's certainly not coming from the macro economy in these countries.

We are winning because we're taking share we're taking share profitably, and we're growing our business. So just shout out to our international leadership team for the great job that they are doing.

And you're right that the EBIT as a percent of sales today within our international segment is lower than the total company book of business. which, therefore, is what gives us the direct confidence that we're not slowing down in international anytime soon.

International will be the growth engine within the Company for years to come tied to our ability to grow the top line. And as importantly or even more importantly, improve the EBIT as a percent of sales.

There are no structural barriers in any of the international countries that we compete in that puts a false ceiling on our profit rate. So, I'm not going to quote a percentage of EBIT to sales by a certain timeframe.

That's more fodder for an Investor Day type conversation. But there's no wall coming anytime soon, we expect outsized top and bottom-line growth from international -- the programs, Sysco Your Way expansion.

We're expanding our category assortment. We're introducing Sysco Brand.

We're putting more sales boots on the ground headcount. We are putting in technology to make the business more efficient.

We're expanding our supply chain in most of, if not all, of our international countries from a new buildings perspective. And there's the opportunity for M&A activity in both Ireland and GB within the past calendar year, we've built it on specialty capabilities, one in produce, one in protein.

Guess what, that's exactly what we've done in the United States. And we have tremendous white space within those bolt-on specialty businesses in the countries that we currently operate within.

And just really proud of our international business and the great work that they're doing. Kenny, I'll talk to you for any additional comments and then Alex’s second question.

Yes, sure. The only comment I would add on international is, we've been able to replicate our size scale from U.S.

to international. And the good news is not one market, every market is sitting in Europe, for example, in all international segment was up double digit in OI.

Three numbers, top line 4%, GPV 7%, and then lastly, OI up 27%. So, it is working for basically across all markets, not just one market.

Alex, to your question about sale leaseback. And let me walk through how Kevin and I and the team think through this one, right?

How -- what's our view point? So consistent with our ROIC focus, we continue to look for opportunities to redeploy capital through buying and selling both on the business side and the asset side.

So, as an example, on the business side, we divested our JV in Mexico, and we were able to redeploy that capital to fuel international growth, and we're seeing it. It's working, ROIC accretive, check.

This same concept applies to assets, i.e., for example, facilities that we own. These actions help provide capital to fund new facility projects and higher more ROIC-accretive areas.

So, I'll give you a good example. The more recent transactions that we've done, we were able to reallocate capital to a high-growth market, a market that has rising, for example, rents for us like Hawaii, for example, and we were able to take that and buy that asset down and redeploy the capital from a less accretive asset.

Again, that's all part of asset management and trying to drive growth from an ROA standpoint. The other thing I would say is that the proceeds from the sale leaseback also enabled us to expand as well as to add more locations supporting our online business, our rectal platform that Kevin talked about as well as our new facility in the U.S.

and international as well. So, the way I want to fund this one up is, overall, Sysco is a growth company sitting in a growth vector.

We want to continuously and proactively to look at our portfolio, and we do the -- great companies do this, by the way, every single day, our portfolio, and to ensure that we are positioned ourselves from a footprint standpoint to have for a profitable growth and maximize our return on assets.

Great. Thank you all.

This is Kevin Kim. If you have any questions for the Investor Relations team, please feel free to reach out to myself as well as any members of the Sysco Investor Relations team.

Thank you for the time.