Title

Presentation

Sysco Corporation misses on earnings expectations. Reported EPS is $0.96 EPS, expectations were $1.02.

Operator: Welcome to Sysco Corporation’s Third Quarter Finance Fiscal Year 2025 Conference Call. As a reminder, today’s call is being recorded. We will begin with opening remarks and introductions. I would like to now turn the call over to Kevin Kim, Vice President of Investor Relations. Please go ahead.

Kevin Kim: Good morning, everyone, and welcome to Sysco Corporation’s third quarter fiscal year 2025 earnings call. On today’s call, we have Kevin Hourican, our chair of the board and CEO, and Kenny Cheung, CFO. Before we begin, please note that statements made during this presentation that state the company’s or management’s intentions, beliefs, expectations, or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act, and actual results could differ in a material manner. For additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the company’s SEC filings. This includes, but is not limited to, risk factors contained in our annual report on Form 10-K for the year ended June 29, 2024, subsequent SEC filings, and in the news release issued earlier this morning.

A copy of these materials can be found in the Investors section at sysco.com. Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures is included at the end of the presentation slides and can also be found in the Investors section of our website. During the discussion today, unless otherwise stated, all results are compared to the same period in the prior year. To ensure we have sufficient time to answer all questions, we’d like to ask each participant to limit their time today to one question. If you have a follow-up question, we ask that you reenter the queue. At this time, I’d like to turn the call over to Kevin Hourican.

Kevin Hourican: Good morning, everyone, and thank you for joining us today. Q3 was a difficult quarter for the industry, that began with wildfires in California, which significantly impacted our important Southern California region, and included historic winter storms throughout the country in January and February. Besides these events as having an approximately 150 basis points negative impact on sales trends for food distributors in the quarter. Poor traffic to restaurants during the quarter reflected these challenges. With January down 1.3%, February down 5.7%, and March down 2.3%. The quarter overall was down 3.1% which represented a 150 basis points deceleration versus Q2’s traffic level of down 1.6%. In addition to the effects of adverse weather in the quarter, consumer confidence has been shaken by the recent trade policy and tariff negotiations.

As you are aware, closely followed Michigan Consumer Confidence Survey recently highlighted that consumers are expressing one of the lowest levels of confidence in approximately 20 years. The decline in confidence levels gives us concern for the full year ahead. Speak more about tariffs and their impact on the industry a few moments. As a reminder, Kenny and I communicated on our Q2 call that we had anticipated nominal improvement in the business macro environment going from the first half into the second half of our fiscal year. Unfortunately, at this time, we have experienced the opposite macro effect and Sysco Corporation’s business performance for Q3 reflects the industry traffic deceleration. We are disappointed with the quarter but it is important to note two things.

Sysco Corporation’s USFS volume trends for the quarter trended in line with the industry traffic deceleration. And more importantly, business performance in March strengthened over the course of the month. And while it is unusual for us to comment about the first month of a quarter, given the uncertainties in the macro backdrop and given our softer than expected Q3 we felt it was important to highlight our April performance was stronger than March. For the month of April, industry traffic adjusted for calendar shifts has trended slightly better than March. The Easter shift in the period complicates year over year comparisons However, even when adjusting for the Easter calendar shift, April has produced stronger volume growth rates versus March, and versus Q3.

We are pleased to see the relatively stronger start to where Q4 but we are cautiously planning our business for the remainder of 2025 given the aforementioned tariff uncertainties in consumer confidence data. Given that macro backdrop I will now pivot to Sysco Corporation’s results for the quarter where as you can see on slide number four, we delivered sales results of $19.6 billion up 1.1% on a reported basis up 1.8% to last year when excluding the divestiture of Mexico. We delivered adjusted operating income of $773 million down 3.3% to last year and adjusted EPS of $0.96 flat to last year. We converted negative 3.1% foot traffic to restaurants into positive sales by winning new business and successfully passing through approximately 2.1% inflation for the quarter.

Importantly, we are making solid progress on our $100 million profit improvement efforts that Kenny discussed last quarter. With a positive contribution in the period from our strategic sourcing and inbound logistics efficiency improvements. Those efforts will have an increased positive impact on our Q4. Our international segment posted another compelling quarter with profit growth of double digits This is the sixth consecutive quarter of double digit profit growth from our international segment. Within USFS, our national sales business delivered flat volume growth for the quarter and sales growth of 2.3%. Both figures were below our expectations. Driven by softness in the national restaurant sector. Within national sales, our non commercial business continues to perform with strength in food service management, education, travel and leisure.

Our local business delivered negative 3.5% volume growth for the quarter. This was a step down versus our Q2 performance. But the step down was consistent with the traffic change to the industry on a quarter over quarter basis. Lastly, our Sigma segment delivered sales growth of 9.5% for the quarter driven by strong customer wins versus prior year. The sales and volume growth in Sigma will begin to reduce in coming quarters as we begin to lap large customer wins within the last year. Sigma is having a very strong year growing top line 9% and bottom line 17% year to date. We are disappointed with the overall financial performance in the quarter as we had expected a stronger macro backdrop. With that said, important initiatives to improve our local business are beginning to deliver results.

It is unfortunate that our self help improvement is coming at the same time that the industry backdrop softened. However, we remain 100% focused on accelerating our progress. We anticipate that we will increase our progress on these important initiatives in the coming quarters. That I have covered the general backdrop of the industry, and Sysco Corporation’s sales, volume and profit performance, would like to provide an update on specific initiatives are driving to improve our performance results. First, I’d like to discuss the state of our sales consultant work I am pleased to report that our 2025 hiring cohorts are progressing nice up their productivity curve. Each of our hiring classes are on target to achieve their sales and volume targets.

Importantly, I can also report today that our sales consultant retention has significantly improved versus the first half of the year. Etsy turnover was a headwind for Sysco Corporation in the first half of fiscal 2025 and we expect it will become a tailwind in 2026. As we lap those colleague departures, and our new hires increase their productivity. Regarding colleague retention, we just completed our annual employment engagement survey and our sales colleague job satisfaction was up solidly year over year. Colleague engagement drives retention, colleague retention drives positive customer engagement. Given questions we have received on recent investor calls, would like to explain the net net impact of colleague turnover in a bit more detail that you have clarity on what we are experiencing.

During the first half of 2025, we experienced elevated colleague turnover that peaked in September. The negative impact of SC departures is immediate as we need to reassign customer locations to other Sysco Corporation colleagues. During that customer realignment, select customer attrition occurs. As such, departing colleague has an immediate negative headwind impact on our business and that headwind can persist for a full 12 months until you lap the customer departure. In contrast to the immediate impact of a departure a colleague hiring has the opposite time horizon. New colleague hiring has a slow and gradual positive impact on the New colleagues start with a small book of business and grow that business over time as they expand their territory.

The length of time to become productive for a new sales consultant is approximately 12 to 18 months. On average. As it can be quicker or slower depending upon the level of sales experience of the new hire. Putting it all together, as a result of these two factors, fiscal 2025 has experienced a net headwind from our colleague population. Given that we have stabilized our retention figures, and that our new hires are performing, we expect the scales of this equation to dip from negative to positive as we enter fiscal 2026. The second local topic I would like to highlight today is colleague compensation and performance management. Our sales consultants are embracing our compensation model. They are driving the right selling behaviors and they are on average making more money than prior year.

These actions are most notable in the winning of new business, where we have opened more new accounts in March than any prior period outside of COVID snapback. We have work to do in order to improve customer retention, as industry churn across distributors is currently above its historical average. As a result, have a company wide effort on improving local customer retention, to complement the success we are having with new account wins. The hyperfocus on service and retention will be a stronger positive vector in fiscal 2026 versus 2025. The third topic for today is our fulfillment capacity expansion. We We previously spoke to opening a new facility in Allentown, PA earlier this year. That new DC is focused on winning new business, in the population dense northeast corridor.

I recently visited our next new site just outside Tampa will support the growing Florida market. The new facility in Tampa will open this summer and will increase our ability to win net new business in the Florida region by expanding our storage and throughput capacity, especially to support the peak winter months. Internationally, are on track to open new facilities in Sweden and Ireland in the summer, Each of these projects will support expanded storage and throughput capacity capacity that we believe will enable us to profitably grow our business and target rich international geographies. Lastly, would like to speak to our work to improve our pricing agility. At the CAGNY conference in February, Sysco Corporation introduced a new local sales initiative that is currently in pilot mode in select As I said at CAGNY, are pleased with our margin discipline and overall price competitiveness utilizing our current pricing system and architecture.

With that said, it is a competitive marketplace. And competition will occasionally offer our customers savings on select items. Today our sales reps need to seek approval in order to match a given competitor price on a given item. The time delay of that approval process can sometimes result in a lost sale or even a lost customer. We’re working to speed up this process and provide our frontline colleagues with decision making authority leveraging our pricing tools. Our sales professionals will be able to respond to the customer in the spot moment enabling incremental opportunities to potentially save a sale, all while maintaining strong margin discipline. This increased speed to action will improve case volume and customer retention. Most importantly, our underlying pricing will be leveraged to underpin the agility process.

We will roll out the new model once the pilot results are matching our intended outcomes and as we prepare and train our colleagues new and experienced, to sell in this model. As I wrap up the update on local sales, I want to congratulate our international team for another outstanding quarter. International local volume increased 4.5% Even more impressively, adjusted operating income increased 17.4% Particular strength was delivered from our Canada, Great Britain and Ireland businesses. We expect the continuation of these strong results from our international segment in Q4 and into fiscal 2026. As I wrap up the business review section of my prepared remarks, I would like to make a few comments on some additional important topics. First off, I would like to address what we are seeing with tariffs.

And their potential impact on the food distributor landscape. It is important to note that Sysco Corporation purchases greater than 90% of our products within country in each country that we operate. Food is inherently local. And our sourcing teams greatly leverage local food suppliers. As a result, our tariff exposure is much less than most industries. For those products that we cannot source locally, like avocados from Mexico, we are working efficiently to understand the impact of tariffs on our costs. At this time produce from Mexico and Canada is exempt through USMCA. With that said, we recently learned that tomatoes will in fact be taxed and tariffed. When imported. To manage these complexities, we have stood up a tariff management task force that meets daily.

The focus of the task force work is the following, Number one, ensure we have products in stock and available for our customers. Number two, defend against price increases from suppliers and do everything possible possible to minimize their impact on potential cost increases for our customers. Number three, find alternative sources of product if and when a cost increase is excessive. Number four, work with our customers to find menu alternatives and product choice alternatives that can reduce the potential negative cost increase impact. All told, Sysco Corporation is in a better position than anyone in the food service distribution space to manage this dynamic situation. Given our size, scale, and global procurement division. Our global leadership gives us a strategic advantage to understand the supplier community in hundreds of countries.

Have the ability to leverage that knowledge and those relationships in our procurement efforts. As you have heard from other company CEOs, our main concern with tariffs is not product cost inflation, Our main concern is the negative impact that tariff noise and volatility is clearly having on end consumer confidence and sentiment. The Michigan Consumer Confidence Survey data I referenced earlier present a clear reflection of that concern. We are hopeful and that the economy doesn’t dip into a recession. With that said, we are making preparations for a more challenging environment and we will be appropriately cautious in our outlook. To help offset softness that may be created by the macro economy, Kenny and our entire leadership team are focused on disciplined cost management and contingency planning.

Sysco Corporation’s industry leading balance sheet is a major source of strength in times like these. As we are able to continue investing in our business when others will need to pull back. This can take the form of winning new customers, building inventory to support new business, and even pursuing M&A if we find the right target opportunity at the right price. Sysco Corporation is in a position of strength in times of greatest uncertainty. My last topic for today is the introduction of a pilot program at Sysco Corporation whereby we will open two cash and carry store locations within the Houston community. As you can see on Slide seven, the store concept is called Sysco to Go. We are interested in cash and carry for the following reasons.

It is the fastest growing part of the food away from home space. In a business where we have 0% market share today. Cash and Carry customers are looking for a, value, b, convenience, and c, oftentimes the ability to pay cash. This is a customer that Sysco Corporation is not adequately serving today through our delivery model. By having the customer pick up the product themselves, at our store location, we eliminate the most expensive part of the supply chain final mile delivery. That cost elimination enables Sysco Corporation to offer our world class products at lower prices than when we deliver to the restaurant. This enables us to meet the needs of the value seeking customer more effective. I wanna be very clear. Is a two store pilot. The future of the initiative will be determined by the outcomes we produce in these test locations.

It is important to note are supported from Sysco Corporation’s existing supply chain. Leveraging our own product assortment. As a result, we have a strong command of the projected cost to run the stores. Leveraging our existing supply chain is a major strength of the format given both stores are in close proximity to our Houston DC. We are excited to open the two stores in Houston soon, and welcome value seeking restaurant customers into this compelling shopping environment. I’ll now turn it over to Kenny will provide a detailed review of Q3 performance and select fiscal year 2025 guidance commentary. Kenny, over to you.

Kenny Cheung: Thank you, Kevin, and good morning, everyone. I’m gonna start with high level thoughts on our performance, detail our Q3 financials, and then dive into full year 2025 guidance. To start, financial results this quarter included sales growth, with stable adjusted EPS performance. It’s a context of all of the challenging macro headlines over the past few months growing sales as the industry leader or retaining best in class profit margins and rewarding our shareholders with our balanced capital allocation is noteworthy. However, this quarter missed expectations. Kevin highlighted, the challenging macro and continuation of negative industry traffic directly impacted results. In this dynamic backdrop, we will remain agile in our management of the business as we also heightened our focus on the controllables.

Our strong business fundamentals industry leading balance sheets, and strong cash flow generation are competitive advantages, especially in a challenging macro environment. As part of our balanced approach to capital allocation, we remain positioned to generate robust free cash flow that enables us both invest in long term growth while also rewarding our shareholders. Specific to this last point, we have repurchased $700 million in shares and paid out $752 million in dividends year to date including repurchasing $400 million in shares this quarter. Further, we recently increased our planned quarterly cash dividend by three cents fifty four cents per share. This represents a 6% increase year over year and sets FY 2026 up to year of delivering dividend growth.

Looking ahead, we expect our dividend to continue growing commensurate with our adjusted EPS growth. In Now let’s discuss our performance and financial driver for the quarter. Starting on Slide eleven. For the third quarter, our enterprise sales grew 1.1% on an as reported basis driven by US food service and Sigma. Excluding the impact of our now divested Mexico business, sales grew 1.8%. With respect to volume, stable volumes across the enterprise included total US food service volume, decreasing 2% and local volume decreasing 3.5% for Our national business remains stable, highlighting the strength of the recession resilient sectors which we operate such as food service management, travel and leisure, and education. The local volume performance compares to down 1.9% in Q2 2025.

The sequential deceleration was consistent with the industry traffic deceleration, but also included headwinds from the carryover impact of sales colleague, Turnover, from earlier in the year. Going forward, we expect stronger contributions from nearest sales professionals that continue to work up the productivity curve and benefits from the stabilization of colleague retention that Kevin mentioned earlier. International segment results excluding Mexico, this quarter demonstrated steady top momentum and double digit operating income growth. This reflects continued momentum from successfully applying the Sysco Corporation playbook The ongoing success is highlighted by local volumes growing 4.5% and broad based operating income growth across our international portfolio.

We produced $3.6 billion in gross profit down 0.8% and gross margin of 18.3% with improved gross profit per case performance. The decline in gross profit dollars for the quarter was primarily driven by negative volumes as well as mix. Volume was impacted by the macro and negative traffic partially offset by continued growth in our more recession resilient businesses. Second, mix remained pressured from the continued impact of our national business outpacing our local performance as well as negative mix from lower Sysco Corporation brand penetration rates. In addition, the industry challenging traffic backdrop drove delays as compared to our expected timelines which resulted in fewer than expected strategic sourcing deals being finalized this quarter.

That said, we we remain confident around the overarching opportunity in our line of sight on benefits to Q4 from recently completed deals. Going forward, we expect improving gross margins driven by incremental benefits from strategic sourcing initiatives as part of our cost savings program and an improvement from mix. Product inflation came in at 2.1% for the total enterprise, consistent with our expectations. This is the average across all of our major product categories with our teams regularly managing through pockets of fluctuation. Overall, adjusted operating expenses were $2.8 billion for the quarter or 14.3% of sales, a 17 basis point improvement from the prior year. We continue to experience improved retention rates and productivity with our supply chain colleagues.

This is resulting in strong NPS anchor by our highest service levels of the year for on time deliveries helping offset elevated supply chain labor rate and funding long term growth consistent with our ROIC framework. This includes investment in higher growth areas of the business with fleets building expansion and sales headcount. Lower annual bonus incentives compensation in our USFS segment and global support center also impacted expenses. For Q3. We remain disciplined with our corporate expenses, down 16.8% from the prior year on adjusted basis, which also included accretive productivity cost out along with efficiency work we deployed net by 24. These benefits are included in our $100 million cost savings program. Building off Kevin’s point around tariffs, we are focused on leveraging our size, and scale advantages by buying better, to sell better.

Our customer mix is a strategic advantage. We have efficient pass through with national customers and spot pricing from existing and growing local base. Our inventory turnover of approximately 14 times per year also enables us to work through inflation, deflation quickly relative to other industries. Overall, adjusted operating income was $773 million for the quarter reflecting strong growth our international segment and expense management and global support center offset by declines in our USFS segment. For the quarter, adjusted EBITDA of $969 million was down 0.8% versus the prior year. Let’s now turn to our balance sheet and cash flow, a compelling competitive advantage. As I have explained before, our balance sheet affords us the financial tools and flexibility to make the right position both for the short and long term as we seek to grow our business while driving industry leading returns on invested capital.

Our balance sheet remains robust and reflects a healthy financial profile. This includes flexibility and optionality from approximately $4.4 billion in total liquidity well above our minimum threshold. We ended the quarter at a 2.8 times net debt leverage ratio. Turning to our cash flow, we generated approximately $1.3 billion in operating cash flow and $954 million in free cash flow year to date. Free cash flow was driven by strong quality of earnings and prudent management of working capital. This quarter marked our strongest conversion rate of the year. For the full year, we continue to expect strong conversion rates from adjusted EBITDA to operating cash flow approximately 70% and free cash flow at approximately 50%. As noted earlier, our strong financial position enabled us to return approximately $649 million to shareholders this quarter.

Now I would like to share with you our updated expectations for Q4 and FY 2025. Given the uncertain environment, and general concerns regarding consumer confidence, we are lowering our full year guidance for FY 2025 as seen on slide seventeen. During FY 2025, we now expect reported net sales growth of approximately 3%. Slightly down from the prior target of 4 to 5%. This is largely driven by lower than expected volume growth driven by the market. Our assumptions inflation of approximately 2% and contributions from M&A remain unchanged. We now expect full year 2025 adjusted EPS growth of at least 1%. For Q4, this implies adjusted EPS to be at least flat. The revision to guidance reflects that the current uncertain macro environment and its outside impact the second half of the year, which historically is more profitable.

This upcoming quarter, also includes our planned strategic investments related to refreshing our fleet and building capacity coming online. This updated guidance assumes no further degradation of the restaurant trapping environment and a slight improvement to our volume performance. Importantly, we believe this guide is achievable based on our strong exit velocity for March, and continued momentum into April. And Q4 including higher contributions from cost out. We remain confident in delivering our run rate cost savings target of approximately $100 million which we expect to benefit Q4 in the first half of 2026 helping offset the current macro environment. Plan to remain focused on operational discipline tightening the belts as necessary and investing long term growth.

So We remain target to reward our shareholders through the distribution of essentially all of our annual free cash flow with over $1 billion in dividends and $1.25 billion in share repurchases. Assumes fourth quarter share repurchase of $550 million and dividends of $250 million. For the year, we expect to operate within our stated target of 2.5 times or 2.75 times net leverage ratio and maintain our investment grade balance sheet. Now turning to a few other modeling items. For Q4, we expect a tax rate of approximately 24% and adjusted depreciation and amortization of approximately $200 million Interest expense is now expected at approximately $170 million. Looking ahead and as we have proven over time, we will leverage our position as the market leader to drive disciplined growth as we remain focused on unlocking value that will reward our shareholders.

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

Kevin Hourican: Thank you, Kenny. Q3 did not live up to our expectations on the top or bottom line. The macro softness directly impacted our volume trends within the important local and national restaurant business sectors. Our trade down in volume during the quarter is directly linear with the widely communicated traffic decline experienced by the industry over the same period. With that said, we can see progress that we are making on our activities within our local business. Colleague retention has stabilized. New customer win rate is accelerating, As I mentioned, we are still working through the headwind of prior quarter’s colleague resignation but that impact will reduce in magnitude each quarter. As we head into fiscal 2026, the net net of colleague retention and new colleague hiring will become a tailwind Why?

Our new hires are performing. And they are responding to the updated compensation model. They are opening new business. They are hitting their sales targets. Additionally, our new distribution centers will increase our ability to win profitable new business. Important geographies both domestically and globally. The most compelling proof point to highlight the self help progress we are making in our local business is the percentage of new business we are opening weekly. March was a very strong month for opening new business, and the progress has continued into April. Combined with our efforts efforts and customer retention, through pricing agility and improved service levels from our supply chain, we are confident we can grow our customer account in 2026.

From a business perspective, March local volume improved 270 basis points versus February. And local volume during the first weeks of April improved further versus March. We are pleased to see the stronger April and we are cautiously planning our coming months to the tariff uncertainty. I’m confident Sysco Corporation will make progress our improvement initiatives in the coming periods. The external environment and breakthroughs in the year to go and we are prepared to margins, rock solid balance sheet and fiscal responsibility will be strength points as we navigate this volatile environment. I am confident in our ability to win versus the overall market Just like we successfully grew our business, during the COVID disruptions. At times like these, our higher than industry profit margins and strong balance sheet cannot be overstated.

We also expect our international division, which has been less impacted by the volatility to continue to be a strong point for the company. Having the diversified business, will be a strength point ahead. With that operator, we’re now ready for questions.

Operator: Again, that is star one if you like to ask a question. Our first question will come from Alex Slagle with Jefferies.

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

Kevin Hourican: Good morning, Alex. It’s Kevin. Thank you for the question. I’ll start with your first part of your question, which is sales consultant headcount. We expect to end the year at approximately 4% growth Approximately 4% growth year over year at the conclusion of Q4. It’s an estimate it’ll be at least 4% gross. That’s answer to that question. As it relates to signals of progress as I said in my prepared remarks, we have several proof points that we can share. March being stronger than Q3 in total, April being stronger than Q3, nose up, if you will, on the controllables. Evidenced by new customer win rate in the month of March, we opened more new customers at any point in time other than the snapback recovery from COVID.

Proof point number two, is the quality and productivity of the training cohorts. As you know, we hire people in classes. Those classes graduate, and we track them every single month on their performance versus where we expect them to be And I can definitively communicate that our hiring cohorts are producing growing their productivity at the rate we expect and anticipate, as I said in my prepared remarks, why that’s not evident and visible in market share gains slash volume growth that we’re proud of in year to date is the offset to these things, which was the increased colleague turnover that experienced during the first half of the year. As I said in my prepared remarks that peaked in September It improved in Q2, but we’re still carrying that headwind of the colleague separation because when they depart, there’s some customer loss that goes along with that.

We anticipate the scales of that equation, as I mentioned in the prepared remarks, to tip to positive Q1 of fiscal 2026 that would be lapping that increased separation. So Kenny anything to add?

Kenny Cheung: Yeah. Hey, Alex. It’s Kenny here. On a couple of things here. One piece is we are encouraged by seeing select geographies already hitting our growth expectations, driven by the SC ads improved retention, as well as the new comp model that we talked about. And then that’s carrying into Q4 as well. So that’s one proof point. Thanks for your question. The second thing I would say is that as you think about our book of besties right now, the ones that that are on our books, you know, literally, most were higher in the back half of FY 2024 and the first half of FY 2025. With each passing month, the SCs become more productive, and we’re seeing that with our cohorts that Kevin just referred to. The improvement is not binary, meaning each month, each day, each quarter, becoming more productive.

And the interesting factor is that we are we will be experiencing a missing amount of folks entering that 12 to 18 months time frame now. And based on our own internal tracking data, there is a step level function change up to the good, once we hit that. So you’ll see some of that in Q4, and that’s the reason why we do expect Q4 local volume to improve, versus, Q3. The last thing I would say around your question around sales and account investment, agree with Kevin, will be around over four four percent in increase year on year. We are committed on growing our local sales professional headcount, and we’ll be disciplined on pacing the volume to expectations and market conditions. We’ll be very deliberate on when and where we at. Thank you.

Operator: Thank you. Our next question will come from Mark Carden with UBS.

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

Kevin Hourican: Good morning, Mark. It’s Kevin. Thank you for the question. National Restaurants had a really tough quarter. That’s the headline. That’s the punchline. It was soft consistent with the local numbers that obviously we disclosed in report. When you look at our national case volume number, you have to keep in mind, yes, there are national restaurants in that mix. But it’s offset by real strong strength in food service management, travel and entertainment, Education has held up strong, and we have a very stable health care business. So national for us was stronger than local, if you unpack within national and look at this national restaurant, it was a tough tough quarter. National restaurants. Obviously, there are individual select names that are doing incredibly well.

You know who they are, but in aggregate, you know, really tough quarter. For National. And it was exacerbated in February kinda going back to one of Alex’s questions. You know, we’re seeing strength while we’re adding headcount. Kenny hit that point very, very well. But the pain in Q3 the weather was everywhere. You know, I happen to live in the south. We had four inches of snow in Houston. That never happens. Really adverse weather in the mid parts of the country, the temperate zone, and obviously the north had back to back to back weeks. Of really, you know, adverse weather. So the the headwind was pretty much geographic geographically throughout the United States. You know, interestingly, our international division, one of the reasons it’s continuing to perform, we’re not experiencing some of these you know, headwinds from an external factor perspective.

The tariff and tax thing is not negatively at this time impacting our international division, and it’s one of the reasons. Along with our strong business performance that we’re doing well in that regard.

Mark Carden: Thanks so much. Goodbye.

Kevin Hourican: Thank you, Mark.

Operator: Thank you. Our next question will come from Jeffrey Bernstein with Barclays.

Jeffrey Bernstein: Great. Thank you very much. I had one clarification on a comment you made earlier. Then a question. The clarification is just on that local case growth know you said you’re directionally similar to the industry in terms of easing. Just wondering you think any of it is self inflicted whether you see industry data gives you confidence you’re not underperforming peers. That was my clarification. Otherwise, the question is just on the fiscal twenty five guidance. Feel like the past couple of quarters, you were confident that even if the macro were to pressure the top line, you had levers to accelerate cost and efficiency savings to still hit that six to seven percent EPS growth. So does look like you lowered the top line by one percent or so.

One to two percent, actually, but you took down the EPS guidance by five percent plus Just wondering how you see that playing out, whether or not there’s less low hanging fruit or you just decide you don’t wanna damage the long term infrastructure for short term earnings. Any thoughts on that between top and bottom line? Thank you.

Kevin Hourican: Very, very questions. It’s Kevin. I’ll start, and Kenny will clean up as it relates to your appropriate question regarding the the full year your guide. Back to local, we are confident that in Q3 our performance relative to the market was consistent. In fact, it’s almost to the penny. If you track the traffic change from Q2 to Q3 to our local case growth performance Q2 to Q3. We were consistent with the industry. We are confident we did not erode in our performance relative to the overall market. We are pleased with the start of Q4. As I said, April was stronger than March. March was stronger than Q3. We’re beginning to see some positive separation in our performance relative to the market as we begin Q4. And it’s this timing thing that I’m talking about relative to colleagues separation, the new cohorts, that are hitting their twelve month anniversary date in Q4 as Kenny already communicated.

And even more of them will have that twelve month anniversary as we roll into fiscal 2026. Need to display separation in our performance versus the market in a positive way and we are seeing the green shoots to progress, Jeff. Are going to enable that outcome. We’ll talk about that more in August, obviously, as we provide guidance for fiscal 2026. As it relates to Q3, we understand to your question, one thing I would point to is this the steepness of the drop off in February was meaningfully unanticipated. I said in my prepared remarks, the traffic down 5.7%. It went it was like a light switch. When that happens, it’s really difficult to get that type of cost out of your system that fast especially when March rebounded quite solidly versus February.

We don’t wanna furlough drivers don’t wanna cut costs that you end up having to reverse later. That is really painful. The other thing relative to adverse weather of that nature is it drives operating expenses up. So think about the number of facilities we have snow removal at our large parking lots, then when you’re doing deliveries, in that type of environment, a lot of those trucks are coming back half full. Meaning, we load the truck for twenty stops. It comes back three hours into the route. And you have to put all that inventory back to stock. Some of that inventory has to be disposed because it’s perishable. So these things add cost. So, yes, it’s a volume headwind when traffic drops like that, but it’s also cost headwind because of some of the examples that I just provided.

So why don’t we transition from that into how we’re thinking about our guide for Q4, our general outlook in general and I’ll pass that to Kenny over to you Kenny.

Kenny Cheung: Yeah. Hey, Jeff. Thanks, Kevin. Just one comment on Q3 before we head into the full year. Guide and the confidence around that number. If you take a step back on Q3, did miss EPS consensus by six cents. Now if you unpack that, in simple fashion, roughly five cents is driven by volumes. As Kevin talked about in his prepared remarks, we assumed nominal improvement in foot traffic while foot traffic actually fell quarter over quarter by 150 bps. Right? So, again, that’s a nickel or eighty five percent of the miss, and the other fifteen percent, we’ll call it a penny, driven by timing shifts from strategic sourcing deals. Given the backdrop in which we operate in, the good news is we had deals closed between post quarter and today.

Therefore, that’s the vote of confidence for our $100 million impact, the end wise. $100 million impact in in Q4. In terms of the guidance, Jeff, you know, I think the question behind your question is how confident are you in the number and any any context there? So I’ll I’ll answer it you know, with two points here. Just a recap, you’re you’re correct. The full year is 3% sales growth and then, EPS at least 1% growth. The two reasons why we are confident first, what Kevin just talked about, momentum. We have momentum. We continue to see it. Not just the market standpoint, but a lot of our self help initiatives are working as well. Let alone, you know, the momentum market. Meaning, our sales professionals are are becoming more productive, climbing up to look at the productivity curve, as well as our expense productivity items in the $100 million all of that is on pace and on target.

Therefore, momentum is there across the p and l. And and and just double click more on this helps help. You know, we have begun realization of stages in Q3. It’s heavier weighted towards Q4. And, again, it goes back to leverage having our p and l. Retention is the gift that keeps on giving. We’re seeing retention in our SDs as well as inter sub play chain colleagues. Fun fact here, supply chain has the highest activity here today right now. So again, with all of these combined, we are very confident with our current guide. Kevin?

Kevin Hourican: Yeah. Just we don’t like to do three part answers, but this question is very, very important as we think about the full year guide that we updated today. We’re very pleased with the start of Q4 from a volume improvement perspective versus March. You may be asking, well, so then why know, the Q4 guide? We’re being very cautious is the point. Given the tariff uncertainty, the volatility in the market, the Michigan Consumer Confidence Survey results that I referenced, we’re being very cautious. We’re being thoughtful about the management of expenses management of the discipline of the p and l, We’re pleased with the self help activities that I referenced on today’s call. And therefore the prudence, if you will, of the guide that we put out for Q4. Thank you. Thanks, Jeff.

Operator: Thank you. We’ll move next to Edward Kelly with Wells Fargo.

Edward Kelly: Yes. Hi. Good morning, everybody. Kevin, I wanted to I wanted to just zero in on know, Salesforce and the opportunity that you see ahead of you. I mean, you talked about 4% growth in the sales force by the end of 2025. You’ve talked historically about, you know, adding about 450 people, you know, annually. So that growth, if if you’re still gonna achieve that in 2026, should be higher If you do the math you know, on this normalizing turnover and the sales force growth, you know, it’s not hard to look at local case volumes and say that there’s a three, five hundred basis point opportunity for you to improve that business. But my question is, is it that simple? Meaning, like, you know, are there other issues preventing that map from working?

The pricing tool has been something that’s been talked about that I think maybe is creating some friction There’s maybe some lag on the customer loss. Right? It salespeople are leaving. In a year, they come off noncompete, and do you continue to have some issue there? I’m just curious as to how you see the magnitude of the self help opportunity and the cadence of the benefit that you may get in 2026. Because I think where the stock is trading today, you know, the the stock is saying that that the market doesn’t see that benefit coming. So, you know, if you could give us know, some color there, I think it’d be helpful.

Kevin Hourican: Ed, good morning. Thank you for the question. Appreciate the question. We need to prove it through our outcomes and that is what we will do. And we understand that as management team and as the leaders of this company, we need to prove it through our outcomes. What gives us confidence and we’re not gonna provide guidance for 2026 today because that’s how I would need to answer your question, we have confidence is the following factors. And I just have to, you know, repeat some of the key messages because the math is indelibly clear. We need to retain the colleagues we have at a historically strong rate, and fiscal 2025 was a meaningful headwind in that regard. I want to reiterate, though, it was intentional. Needed to make a change to our comp model It was structural.

It was required. It was necessary, and it’s been challenging. And it’s been difficult to work our way through that change If we could go back in time, we would still make the change to the comp model that we made, We could have improved our execution of that change obviously, given some of the accelerated turnover, but the change to the comp model was necessary. So that specific headwind of the increased turnover negatively impacted this year. And we can see in our current outcomes we have absolutely stabilized retention. I’d like to do better than that. I’d like to have our retention be higher than it has ever been. We have a concerted effort across all elements of our organization to improve improve even further, not to stabilize it, but make it be at highest levels.

That’s who we hire. That’s how we train them. That’s how they’re treated when they’re out on the road doing their job. It’s their direct supervisor being in car with them going on ride alongs helping them from the skills development perspective. Ed, net net, I’m confident that the turnover challenge will be a net tailwind in 2026. I heard your point on rolling the twelve months of the noncompete Loud and clear, we understand that and we have a plan to help offset that. Offsetting that headwind is the tailwind, and we were intentionally very clear today on how long it takes for our colleagues to get productive. It’s on average twelve to eighteen months. Kenny was very clear that in this Q4, the Q4 we’re now in, have more people hitting that twelve month mark obviously, than we have in any prior quarter, and that will increase now from here.

I’ve used before the metaphor of turning on water in a pipe. It has to go from one end of the pipe to the other, but once it gets to the other end of the pipe, now the water keeps flowing. We are just now in our Q4 getting to the first quarter where water is now flowing through that pipe. In a consistent way. As it relates to the you know, previously, we’ve quoted a headcount growth number for, you know, four to five hundred colleagues. Today, we updated that to reflect that this year, we anticipate to end at approximately plus four. Be very disciplined about that. We know that there are geographies that can absolutely take significantly increased headcount. See Florida. We’re about to open a net new brand new building in Florida. We’ll be hiring up in Florida to support that new building.

And to win meaningfully from a share perspective. In that state. Excuse me, as an example only. So those are my thoughts on Salesforce. I am confident in 2026. Salesforce will be a tailwind, not a headwind. And it is absolutely fact that it was a headwind in fiscal 2025. What else is going on with the second part of your question? There’s a lot going on. It’s a dynamic environment. The pricing environment and the needs of the end customer are clear. They are seeking value given the pressure on the restaurant’s P and L. Their labor costs are up. For many of them, their rent cost is up, and they’ve experienced 30 to 40% food inflation over the past five years. So customers are value seeking. We need to be thoughtful and we need to be agile how we meet the customer where they are.

That’s related to like the product offering that we have the pricing that we have, and as I mentioned on the call today, the rollout of price agility It’s something we need to manage extremely well. That’s why I said in my prepared remarks, the change management and the training plan on how to put that tool out in the market is critical. We have to execute with excellence when we roll that program out. To ensure that we can match pricing agility, with margin rate discipline that is why we haven’t gone nationwide yet. We’re working on that change management plan, that training plan, pricing in the marketplace is one of the variables. You go beyond those two excuse me, variables, and the industry is experiencing a bit higher rate of customer churn than what is normal.

And that’s side to point two, which is the customer seeking value. This is not a unique point to Sysco Corporation. Just churn in aggregate at a higher level. We’re gonna talk more in the future about improving the service level experience that we provide to our best customers and end to end program that can help reduce customer churn. So those would be the top three. Salesforce productivity, pricing agility, and improving customer churn. Aggregate those three we’re confident that we can grow local volume have an attractive p and l, and we’ll talk more in August about guide for 2026. Kenny and and yes. Yeah. And add to your specific question around the math. Right? Your math is correct. Right now, you’re seeing our expenses outside count four to five percent.

So I think you’re question is there’s a spread between, obviously, the return. As we as Kevin spoke about, As our SCs climb the productivity curve, as initiatives kick in, we should expect that spread to reduce, and, you know, meaning sales growing closer in with our expense expense base, and that’s me. You are correct. That is an opportunity for our company.

Edward Kelly: Thanks, guys.

Kevin Hourican: Thank you, Ed.

Operator: Thank you. Our next question will come from Jake Bartlett with Truist.

Jake Bartlett: Great. Thanks for taking the question. I want to start with just a clear Salesforce initiatives and the InMed comp changes to to move to positive in fiscal 2026. I wanna make sure I understand, you know, your expectations for when that that could happen. You know, September was the was the peak of the of the increased turnover. Is is the September time frame the right way to think about it? Or or really, you know, is it is it possible that we could see that inflection in the first quarter? Sounded like like maybe that was possible, you know, given the given the improvements that you’re seeing now. And then my my real question is about is about your your capital allocation. The dividend increase was the largest it’s been in a in a few years.

And maybe if you can talk about why, you know, you’re you’re kind of leaning into the to the dividend increase you know, so much after pretty modest increases for the last two. And and your your kind of approach to I know we’ve had elevated share buybacks in in 2025, but, you know, is is that something that you expect would continue beyond 2025?

Kevin Hourican: Good morning, Jake. Thank you for the question. As it relates to the sales force inflection, definitively it will inflect to a positive in fiscal 2026. When we provide our guidance for 2026, we’ll provide more color how you should think about the full year and how you should think about the first half of the second half. That’s the most I can say today. The second point though from a green shoots of progress in color April, we are seeing a stronger performance versus March. And we are seeing some separation of our performance versus the overall market from a positive share gain perspective. So it is not a light switch. It does not go from off to on. The separate part of my cough, forgive me, The separation impact negative is immediate as I mentioned on my prepared remarks.

The improvement that comes from the new colleague is gradual over time. Think about a slope of two curves when they intersect intersect and how that then shows up as a net tailwind. It will be a net tailwind in fiscal 2026, and we are doing everything we can to improve the productivity of our new colleagues and as I mentioned, improve colleague retention. As I mentioned in answering of Ed’s question, I’m not satisfied with getting retention back to work historically was. Want it to be even better. It historically was to turn the head count in our sales colleague population into a ongoing and permanent point of strength for the company. As it relates to the dividend, I’ll just get started and then toss to Kenny. We we are dividend aristocrat.

We’ve raised our dividend now 56 consecutive years in a row. There are very few companies that can say that. In my closing remarks, I talked about there’s no better company to work for and or from a balance sheet perspective to invest in than a company like Sysco Corporation in times like these are industry leading income statement from a profit as a percent of sales and our rock solid balance sheet affords us the opportunity to return value to shareholders even in challenging and difficult times. We raised our dividend even during the COVID period, which is a meaningful point of strength. So, Kenny, why don’t you answer the Yeah. Specifics of how we thought about the increase for next year?

Kenny Cheung: Absolutely. So let’s start just quickly covering cap allocation. We’ll first and foremost invest our business and anything accessed will be returned back to shareholders. Given where our cash and liquidity position sits, which is over $4 billion a quarter, we have the luxury to do both. Invest in our business and reward our shareholders. So to your exact question, speaking to rewarding the shareholders, as Kevin talked about, we’re very proud of the that we’re raising our dividends 6%. Again, as I said before, we expect dividend raised be commensurate with future EPS growth for our business. You know, taking a giant step back, as CFO, I’m proud of the fact that we were able to maintain our $1.25 billion of share repo this year and raise dividend by 6%, especially given the market backdrop historically impacts our proper profile reason being, and this is your second question.

Right? How do we think through it? It’s because we have a strong investment grade balance sheet. Solid business fundamentals, and the fact that we are confident in the business today and on the forward. So that’s the rationale of how Cam and I thought about the dividend raise. Thank you.

Jake Bartlett: Thank you, Jake. Thanks.

Operator: Thank you. Our next question comes from John Heinbockel, Guggenheim.

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

Kevin Hourican: Good morning, John. Thank you for the question. Yeah. Churn has increased, you know, as an industry overall You know, I’ll say there’s a couple of drivers behind it. Number one is customers are value seeking as I mentioned their labor costs are up, rent is up, food costs are up. They’re seeking ways to help their profitability and food cost is one of those mechanisms. Price visibility has increased as you know as more customers are placing their orders online. Net net in aggregate, that’s a good thing. So more customers placing their orders online is a good thing because they see more of our catalog, They are inspired to buy things they didn’t buy before. We can prompt them to do swap and save, to alternative products that help them save money.

We can suggest items that they can buy that they’re not buying. Net net conversion to online is a good thing. With that said, the conversion to online increases price transparency, not just at Sysco Corporation, but across all distributors. So more customers are enabled to seek value by the online visibility to pricing. These are environmental conditions. John, I am confident given Sysco Corporation’s size and scale, can be very competitive and successful that environment. So our profit rate as a percent of sales and our purchasing scale afford Sysco Corporation to be to buy goods, we call it buy better to sell better and provide value to our customers in that price visible online way. We can lean in with suppliers and do programs together with them to provide savings to customers, to entice them to buy from Sysco Corporation.

So that’s point number one relative to the churn. Point number two is supply chain resiliency. This goes back to COVID. Prior to COVID, the percentage of a customer’s business that that customer gave to one distributor was higher than it is today. And when product shortages occurred everywhere in the industry, customers couldn’t get everything they needed from their primary distributor, they signed up a second, a third, a fourth. Distributor. As you know, there’s always been backups in account, but what we see in the industry is a higher percentage of purchases happening with quote unquote the backup because customers don’t wanna find themselves in a position where they can’t. Get what they need. Be clear, we’ve done that with our supplier population.

We buy more food in the food away from home space than anyone else. We have preferred partner suppliers but we’ve had to add backups and sometimes tertiary suppliers to cover our needs and when our primary supplier can’t get us what we need. So, John, that too is a part of the equation. As it relates to actionable forward facing 2026 activities There’s a reasonably small percentage of our customer base that drives a significantly disproportionate portion of our profit pool, and we are gonna lean in hard with those best customers And I’m gonna talk more about that at future investment engagement opportunities A reboot and a significant focus on our best customer retention and best customer penetration and we believe that will be another tailwind for our fiscal 2026.

Thank you.

John Heinbockel: Thank you, John.

Operator: Thank you. This does conclude the time we have for questions. Thank you for joining Sysco Corporation’s third quarter fiscal year 2025 conference call. You may now disconnect.