Sysco Corporation (SYY) Earnings Call Transcript & Summary

Thanks for joining us right at here. I'm Brian Harbour. I cover the food distributors and restaurant space at Morgan Stanley. Also usual disclaimer. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So first of all, we have Sysco, Kenny Cheung, who's the CFO; Kevin Kim, Vice President of Investor Relations. Thank you guys for joining us here.

Maybe just a broader question to start, right? So obviously, your customers are businesses, but this is a consumer conference. You serve almost 20% of the U.S. Foodservice market, right? So you have a good vantage point there. How are you feeling about demand in your end markets? And as we think about '25, what cross currents do you think are kind of most relevant here?

Yes. Thanks, Brian, and good morning, everyone. It's great to be back again. Before I answer the question, I thought it would be prudent for me to kind of set the table a bit, pun intended, set the table of this year. Come on, it's early, right? My jokes are not landing just quite yet. But in terms of where does Sysco land in terms of our position within the ecosystem and the industry, right? So point #1 is, we are the market leader globally, #1. So in the most markets that we serve, we're actually #1. So for example, in Canada, we have 25% market share; in the U.S., 17% market share and then our specialty business, 9% market share. So what does this mean? Two things. Number one, we're the biggest. Scale and size matter in this industry. And #2, my favorite part is there's so much runway, right, only 17%, only 25% in Canada, the TAM for our industry globally is $400 billion, right? We have over $80 billion. So again, lots of tremendous runway. If you take a step back, our industry that we participate in is pretty resilient. If you look at the past 54 years, there have been two instances that we didn't grow. One during COVID and one during the financial crisis in '08. So the business is very resilient. And so we are the market leader in a growing pie. Now to your question, Brian, around the end market and the end consumer. Right now, we're seeing a few trends right now. We're seeing consumers index and gravitate towards value, affordability, convenience. And the good news is Sysco provides these three things for our customers, therefore, in turn, they provide to the end consumer at the end. And I'd like to use examples to prove the point, right? So value, affordability, convenience. So one example is Sysco brand, providing value, quality products for our customers. Therefore, they can in turn have optionality pass them through their customers. The second point is around our specialty business. Think about a P&L for a restaurant owner, the two biggest pain points that times are wages and lease renewals, right? So therefore, we can actually take knives out of their kitchen, precut the meat, precut the produce, right? That's one example. At the same time, we can actually dry age there beef as well. So therefore, they don't have to move into a new building to dry age for as part of their operations. So again, we do find that as a theme right now and we are part of a catalyst to enable a movement of restaurants serving their customers as well. The last thing I would say on here on that point is people tend to think restaurants is all we do. That's not true. 2/3 of our national customers are restaurants 1/3 is what we called noncommercial non-restaurants. Think about education, think about universities, healthcare, hospitals, senior living, entertainment industry and the like. So these are high-growth high margin, and we're doing very, very well here. In terms of the industry what we're seeing right now, we are seeing momentum. We're seeing sequential month-over-month momentum. So let's kind of bifurcate a little bit between the months. So if you think about Q1, the market was down, foot traffic wise, round numbers, 3.5% or so. If you bifurcate the months, July was down 5%, August was down 4%; and September was down 3%, okay, in terms of foot traffic down year-on-year. October more or less was similar to September, even though we had 2 months -- 2 weeks of hurricanes and storms in the early part of October and November, based on what we're seeing right now, seems to be better than October. So down probably 1% to 2% year-on-year. The takeaway here is that it's still negative year-on-year. And I would argue that foot traffic for Sysco, it is a proxy for industry health. However, if you look at the past 12 months, we've actually have a positive spread between our volume growth and foot traffic. So let's take last quarter. Last quarter, we were down 3.5% with industry. Sysco was up 2.7%. So we can grow in any environment. And the reason why is the following: one, biggest winning new customers, investing for growth; and second, back to my first point, only 70% market share, right? So we are winning new customers day in and day out. And those new customers become penetration opportunities down the road when the market bounces back up, right? So that's fantastic. And the last thing I would say is that though we can't control the market. Here at Sysco, we're truly focused on things that we can control like operations, efficiencies, gross profit management, corporate expense, which was down 14.5% year-on-year in Q1. And so if you wrap it all up, market is getting a bit better. We're a catalyst for change and we are making momentum across the P&L levers. Therefore, we are reiterating our FY 2025 guidance for both top line and EPS. So top line, just to remind everybody, 4% to 5% on the top line and EPS of 6% to 7% growth year-on-year.

Okay. Great. And if you care to comment, is there any specific kind of customer segment driving that? Is that improvement pretty common across customer segments? Or any color you'd add to those comments you just made.

Yes. It's pretty spread across all customer types that we're seeing. Obviously, the noncommercial segments were resilient by nature. So they don't flex much as high or low -- but it's really across the board. And that's the beauty of our business. We serve QSRs all the way up to fine dining, right? So we're seeing that across the board right now.

Okay. What -- I mean, more broadly, what do you think is overlooked in the Sysco story as you see it today?

Yes. I think I'll start off with the first point is I think there's three things here. If I think what's overlooked by the investor community. First is the fact that what I mentioned earlier, market leader, over $80 billion of top line, Fortune 50 and only 70% market share. You don't get this combination a lot, right? Literally, there's so much runway and white space across local, national, specialty, international. That's point number one. Point #2 is our current shares are trading, I would, I think, factually based historical multiple is lows right now, right? They're trading lows right now. And we are investing more than ever. So if you put them together, coupled with the fact that we have the leading industry ROIC, leading industry margins, leading industry cash flow conversion. This is a real proposition from an investor standpoint and especially around our TSR at 9% to 11% on the floor as part of our algo. And then last but not least, I would say, is just -- and we say this a lot, Brian, investment-grade balance sheet, right? We are the only one in our industry that has investment-grade balance sheet. And this allows us to provide value for our shareholders at the spot and play the long game looking forward. So this is really important for us. Our cash conversion generation power can allow us to do both the same as that time Kevin, anything else to add?

Yes. Just to add to that. From a compensation structure perspective, Brian, I think one of the things that's important is that when you're thinking about our short-term compensation program, our annual program. We do have a higher weighting this coming year in terms of our financials. So it's going from 60% to 70%. So that's, I think, a good alignment with how the shareholders think about driving shareholder value. And then secondly, in terms of what Kenny was talking about regarding our ROIC component, it's actually part of our compensation program now, right? So as you think about that long-term compensation, a good chunk is coming from that ROIC lens.

Okay. Got it. So obviously, in May, you put out sort of a new '25 to '27 algo, 4% to 6% sales growth, 1.5% to 3.5% case growth, 6% to 8% operating income and EPS growth, lower half of that EPS growth range this year. I mean, how would you characterize there's a few parts of this question. But I guess first, how would you sort of characterize the progress on those pieces?

Yes. Yes. The bumper headline uses, we remain confident in our financial algo presented in May. When we put out the algo, we listened to our investor community, right? Say your ratio? Do what you say you will do, right? So our targets are achievable and one that we can deliver on a consistent basis. We really believe in the power of compounding. Think about the TSR of 9% to 11% compounding, compounding. So again, achievable, while we can deliver on a consistent basis. I think the way that I would answer your question is 4% to 6% top line, let me kind of unpack that and talk about the components of how I feel, how we're progressing towards that number. So 4% to 6% roughly 2% is inflation, right? And we feel confident because we're seeing 2% right now. We've had entered a normalized inflationary environment. Obviously, certain commodities are up, down, depending on the macro. However, as a basket itself, 2%, we're seeing that right now. So check. M&A, 50 bps. That was part of the algo as well, Edward Don is broadly more than that this year for us, and we are continually looking at M&A. We have a nice pipeline in place whenever Kingdom build, but we'll be prudent with ROIC lens. So 50 bps right now, check already as well. So now you have 2.5% already, which leaves you with the volume number, 1.5% to 3.5%. The good news is half of our business is local customers, half of our business is national customers. For national customers, we are already at the 1.5% to 3.5%. Last quarter, it was more of a two hand of organic growth, excluding Don. So National customers is already there. We're growing profitably, and we're also growing, call it, the noncommercial sector as well. This is education, healthcare, entertainment and the like. So that's doing well. So which really leaves you with the local customer side, right? So local customers, we're not there yet. We have actions in place. We're very confident with our actions. The two biggest actions that we talked about on the earnings call is, one, SC hires. The majority of our hires on the books right now was higher than the back half of last year, and we believe, and we're already seeing some contribution in terms of dividends from that investment. We're seeing that already in some of the selective markets we're investing in. And the other piece is what Kevin just talked about around compensation. And we have updated and tweaked our compensation structure to align profit and growth and update and change our behaviors of SCs well. So those two are actually yielding dividends for us, and we expect the momentum to carry into the back half to have a step change in the back half. So therefore, I feel very confident with the algo and it's going well so far.

And in your -- so local and international, I think, are the pieces that are a little bit below your potential now, right? So you think that those will both get better in the second year.

Yes.

Okay. I mean part of it is also just operating leverage, right, in the second quarter and then more in the second half, right? What are what are the tougher parts of getting there? Can you just talk about your confidence in that as well?

Yes. We expect to improve our operating leverage throughout the year with the full year having operating leverage. So that's point #1. Number 2 is the question behind the question is, okay, so we didn't see it in Q1. How do you plan to get there essentially for the rest of the year? What is the glide path, essentially is the question behind the question. And so there's a few folds here. Number one, as we talked about in the last call, we have strategic sourcing that's underway. There's some timing in Q1, but that's going really well right now. Strategic sourcing, just to remind everybody, this is negotiating partnering with our suppliers, looking at new and existing categories. And given the fact that we are the biggest, we will see the biggest benefit from that standpoint. Also local case growth, there's a mix benefit as well on the GP side. And then with local case growth comes Sysco brand as well, which has a higher calories in terms of margins, too. And then in terms of our supply chain side, we are continuing to making a lot of progress on supply chain. The #1 driver of supply chain productivity is retention. Our retention for drivers and selectors are literally doubled year-on-year. And every single quarter, we are yielding productivity last quarter's roughly, call it, 3% to 4% productivity year-on-year. And the encouraging news is that we plan to achieve leverage this year, and our productivity is still not back in '19 levels yet. But there's still room to go. On the corporate expense side, really strong progress here. Last year, you may recall this, we had an action at the end of, call it, the back half of last year, nice carryover into this year. And we have a robust pipeline that we're executing upon right now. So we should continue to have corporate productivity as well. Therefore, that contributes to the step function of leverage for the...

And I mean not to be too short-term oriented, but based on your comments about November, it sounds like 2Q is kind of still as you expected on your call, right? Nothing's changed with that? Fair to say.

Yes. It's so consistent to what we said on. So we're still very confident in Q2 and the full year.

Okay. And Brian, just to take 1 giant step back as you think about the actions that we're -- we have in place right now, whether that be the first half of the year or really over the last couple of quarters. I think it's the right steps to make in terms of making sure that we're looking at the long-term lens of the business. So again, as you think about volumes returning in regards to traffic levels. As we think about the macro improving in the second half of the year, we feel like it puts us in a very, very good position, especially with our cost base to make sure that we continue to execute at the industry-leading margin rates that we do have. A couple of other data points to keep in mind in terms of the other areas of the business that are a little bit more -- help feed the pipeline of growth, all right? So as you think about Sysco Your Way, which is our restaurant dense program, that's already a $400 million business on an incremental basis, driving plenty of share of wallet with those customers that have signed up. Thinking about Sysco Perks, which is our loyalty program. We already have over 12,000 customers signed up. So those are some of the things that really have been driving a higher rate of growth that contribute to that financial algorithm, as Kenny was highlighting.

Maybe talk about the international side just a bit. I mean you've kind of talked about the Sysco playbook working there. And you have actually seen good profit growth despite more moderate sales growth, I would say. What's kind of working there? And maybe talk about demand in some of the key markets like you're big in Canada, U.K., France, for example, and those are markets that some people care about as well.

Yes. So I'm glad you asked the international question. Most of the time, I get -- my questions are around U.S. and by default, it is our biggest market. But international, is roughly 20% of our top line, and it is a growth engine for us, to your point that you just may now -- a few markets you just rattled off. I mean we are #1 in, for example, Canada, we're #1 in Great Britain, #1 in Ireland, Costa Rica that could go on, just to name a few. So we are the #1 in those markets, and that comes with great opportunity for us because when you're #1 in those markets, we have the ability to scale and the ability to detect with M&A as well. So that's -- you noticed that in most M&As that we do, we usually buy companies that are tacked on when we're #1 in Broadline, right? So think about already shop in Ireland. Think about Campbell's in the U.K. So again, #1 in those marketplace. In terms of what we're seeing in international, and let me just read off three numbers, which is pretty impressive. Yes, you're right. Top line, roughly 3% growth in last quarter. GP, gross profit, we grew 6%, and operating income grew 12%, right? So we doubled up every layer of the P&L. And so the question is, what's driving that despite the fact that sales is around 3%. There's a few things that's driving and I'm trying to unpack it from the different levels of the P&L. So in terms of from -- on the sales side, down to GP, the reason why you're seeing that nice leverage from 3 to 6 is a 2x. Number 1 is, traditionally, our international business is focused on our national customers. And as part of the playbook that you referenced, Brian, we're targeting really hard now on local customer growth and local customer growth. Last quarter was actually 3% to 4%. So that's point # 1, a better mix of business. Point #2 is also strategic sourcing. So back in the days, each market negotiates on their own. Now we have a European structure. So it's not just this region market going by themselves, it's looking at it from a Europe standpoint -- strategic source things looking at categories, similar playbook to what we did in the U.S. -- and which we are still doing in the U.S. That's point #2. And #3 is Sysco brand penetration. We're seeing -- because of local case growth, we're seeing Sysco brand penetration go up as well. So these are a few things that's driving, I would say, the GP leverage between sales and GP. And the other thing, which you'll see more of and is starting now is total team selling. So we -- total team selling the ability to have a Broadline, especially just walk in. So Kevin's Broadline, I'm specialists, right? He walks in and that he brings me with them myself produce. I sell ready shot. I sell Campbell specialty meat, right? And that's high margin calories for the P&L as well. So that's the fourth leg, and you will see more of that as the M&A that we acquired recently in the past 12 months to become more mature, and we're embedded within the business. That's that the GP line. On the on the [ CorpEx ] line and then supply chain line, similar to the U.S., we're tackling both SG&A and supply chain as well. On the SG&A side, you may remember this, I came in 1.5 years ago and one of the first things we did was sure service centers, right, and one in Costa Rica, our first one outside of the U.S. And I'm happy to say that's working really well. We're getting obviously savings. But more importantly, we're in we're getting great talent -- and Canada was actually the last one that we did. And Europe is excellent on the docket as well. So we're seeing that. That's part of the base cost, SG&A savings that you see. And then ultimately, on the supply chain side, same exact thing, working on digital, working on productivity measures to drive supply chain productivity as well. So that's the reason why you see that 6% down to 12%. So overall, we're extremely optimistic about our European market or Canadian market, our international market -- our latest international Americas market. And we're doing the right way, Brian. So I -- and I say this because if you think about profitability, we are being very deliberate on which business we take on, which when we walk away from, right, there's examples that I won't name the customer, but not profitable, we walked away from it, right? Another example is Mexico. Our JV, we recently decided to exit our JV in Mexico, and it didn't meet our hurdles for profit. It didn't meet our hurdles from an ROIC standpoint. So therefore, we are taking that dollar and redeploying that dollar to other growth markets in or international portfolio. So again, we're very proud of our team there. And the last thing I would say for international is, and I get this a lot is -- is there any impediments or any barriers for international margins to be at parity with the U.S. market? And there is none. And a good proof point, even though it's smaller, obviously, in size, is our Ireland business. Our online business has similar profile. We're #1 in the marketplace. We have total team selling. We have Sysco Your Way as Kevin just talked about. We have ready chefs in place with the specialty capability and their margins are 6% right now, right, which is twice international margins and it's literally on parity with our U.S. business. So there is no barriers, if you will, that we can be in the same margins in the U.S. If anything, some of the SG&A work and supply chain work and continue working GP will help enable that.

And I mean, you did do a deal there as well, right? So -- and I think some of these markets, as I understand, are less consolidated. So I mean, if we look a few years out, do you think that this is sort of a larger share of your -- if your -- if you see margin upside, is it a larger share of your overall business as we look a few years out?

Yes. The goal is to grow both, right, both the international and America. It's just like local, right? When we say local needs to grow faster, it doesn't mean you pause national for a lot faster. So -- the answer is to grow both. Right now, from a financial standpoint, obviously, it is dollar accretive, margin dilutive right now, right? It is that. However, I am confident with the actions that we're taking, replicating the playbook that margin gap will every single year will be less and less and less versus the U.S. So at some point, it should be both margin and dollar accretive. In terms of M&A, one last thing I'll turn up to you, Kevin -- is you mentioned M&A. Yes, we recently have Campbell's, which is a specialty meat business in our U.K. and then Ready Chef, which is especially produce business, and they're both going really well right now. And as part of M&A, I get this question some time too, is -- is everybody open for business for M&A and international or no? The answer is no. Not every market is open for business for M&A. And the reason why is as I mentioned earlier, there are certain markets like GB or Ireland or a Canada that they're #1 in the marketplace, and it's really prime to have specialty, which is mostly our tuck-in M&A strategy. But if you're like , for example, France, there's still -- these have some self-help. So we're being very deliberate and being very thoughtful on which market we actually have M&A in right now -- so -- but M&A is open for a selective few markets right now in international.

And so I think about that international business, I tend to think it's really about applying that global operating model and really applying some of those best practices investors would see that as synergies, right, as we think about all of the different segments of the business and it's applying some of the best practices that we have here in the U.S. and applying that to Europe and some of our other in international markets. And it's also the other way around, Brian, right? As we think about best practices, whether we're talking about Sysco brand, whether we're talking about local, whether we're talking about the investments and again, that long-term view. And just 1 good proof point for those in the audience. As you think about that local case performance and Sysco brand, the penetration rates here within that segment of the population in the U.S. is generally about 50%, all right? Again, coming in at higher margins. As we think about those penetration rates in other international markets, for example, in Canada, right, where we're a little bit earlier in terms of the Sysco brand story, about 40% penetration rates, right? As we think about Europe, it's about 36% in certain parts of Latin America, where we do have exposure, it's generally about 12%. So again, as you think about the long-term trajectory of the international business and it being certainly a growth vector as Kenny was talking about, there's certainly opportunity from both brand penetration perspective as well as the local side as you get those mix benefits going forward?

Okay. And do you still think you have a mid- to high single-digit sales target in this segment. Do you think that's achievable in the second half this year -- or do you think that there can be some improvement there?

Yes. We believe the current view is we believe that number will improve every quarter in terms sales standpoint. And here's the thing, our business and the beauty of it, and it's not just international, we have a lot of levers in the P&L. So if there was any adverse impact in the marketplace, we cannot offset from other lever standpoint. The beauty of our guidance is that we're not expecting -- we're not expecting a huge jump or step change in terms of industry traffic. We're just not. So if you had a proxy it, the majority of our improvement and the majority of -- the reason why we're confident in the year is because we're not hoping, praying that the market bounces back to plus 2% plus 5%. We are -- it's all within our -- mostly in our control.

Okay. Maybe just talk a little bit about capital spending and capital allocation. I mean how much capacity is there annually? Is there anything different on fleet technology like other things that we may not have sort of other pockets of capital spending we may not have talked about. And I guess what about the M&A side? Do you think that's sort of more on pause near term, given how much you've done recently? What do you lean into repurchase this year? I think, obviously, the Mexico, if do you sort of use that for the proceeds from that for repurchase.

Yes, yes. So a few things there. This is probably my favorite question because if you think about capital allocation, it's one thing we are very proud of here at Sysco. If you look back our track record, we've been very consistent and very thoughtful in how we've done this. Our capital allocation strategy remains unchanged, right? First and foremost, we invest in our business. And you mentioned CapEx, you're right. It's usually our fleet refreshes, digital, investment tech stack, new buildings that we're building right now. For example, we have 10 in place right now for a broad line of specialty business. And then usually, if you've had a proxy to spend, it's about 1% of sales every year. So we're spending every year more and more. The beauty of our investment profile, it's also well laddered as well because of our balance sheet. Many companies can't build 10 big buildings at the same exact time. And the reason why it's very simple. The payback isn't 1 month, the payback isn't 1 year, the payback is 5 to 7 years at times, right? So our investment dollars are definitely yielding dividends every single year again. We're playing the long game here. So that's point number one. Number 2 is the priority is maintaining our investment-grade balance sheet, operating within the 2.5x to 2.75x net leverage ratio. And obviously, it's math, right? If you increase your earnings and EBITDA, then by definition, get the lever up a little bit. Rest assured, we are prudent, strong, very prudent with our capital allocation. So we will lever up and ROIC with the lens in which we deploy capital. And if we can't find -- I view myself as asset manager. We can't find the right investment vehicle, if you will, we return that cash back to shareholders. That's how we think about -- which leads me to my third piece is returning, rewarding our shareholders. If you think -- if you go back the last 10, 11 years or so, 2015 to this year, roughly $20 billion back to shareholders between dividends as well as share repo. This year, we are committed to delivering -- rewarding back over $2 billion back to shareholders, $1 billion of dividends, $1 billion share repo. And to your point, Brian, if the M&A activity depending on mine activity, that number of repo could flex up depending on M&A activity. And as I mentioned earlier, on M&A, just the way that we think about it, we're not in the kingdom build. We know the value of assets. And for us, we get to a pretty rigorous model to ensure that this asset is right and is multiples accretive for enterprise. So that's how we kind of think about it.

Okay. Got it. I understand. Maybe just -- let me come back to a couple of questions on kind of the U.S. business, right? On the local side, can you just talk about the health of that customer? And I mean, what obviously hiring people is I think the key driver of acceleration that you've sort of talked about. But what do they care about the most, right? What do you think is sort of -- that's obviously a very competitive market. Everyone is trying to grow with that segment. What's kind of the hook from your perspective that gives you that confidence and improvement?

Yes. So hiring people, that's definitely one of the key correlation that we believe with hiring and growth as well. But let me double it a little bit in terms of what -- what does the customer care about when I think about why Sysco, maybe that's a question behind the question, why Sysco, right? So as you think about our assortment between Broadline and specialty, we have the greatest assortment in our industry. That's point #1. So when a local business wants to differentiate his or her menu, as you can imagine, it's not going to be based on Broadline, right? Those are commodity products, right? It's going to be based on specialty products. So we have the big deportment. And so that's point , the biggest basket because assortment, and we buy the most is we buy the most as well. So therefore, we can offer competitive pricing and the like. That's point # 1. Number 2 is the fact that just our reach as well. Think about these local customers. Some are just have 1 store front, 1 door. Some have 10, some have aspirations to be 10 to 100, and we have stories of that. And who better to partner with than the biggest player in the marketplace in that Sysco, right, not just in the U.S., but also international as well. And believe it or not, we have customers on both fronts. U.S. wants to go to international, international local wants to move into the U.S. business as well, and we can enable that too. And the third piece is, as part of local customers, it's a relationship business as well. And that's the reason why having the right talent, the right people, the right product, it is just so important, right? And the last thing I would say is for us, as table stakes is just pure operational excellence. On time, in full, deliver on time, the right products as well, and we are world-class from a NPS standpoint in that. So that's another reason why when you trust Sysco, you're trusting not just the brand itself, but everything that comes with well. So those are the four things I would say that local customers really care about. And I wouldn't say it's a hook. I think for us, it's just what we have to deliver day in and day out. That's part of our service and product offering.

Yes. The industry, when you look back over a long period of time, 20-plus years, Brian has been growing kind of in that 2%, 3% range as you think about the overall industry from a net sales perspective. So I think what we're seeing right now today in regards to negative traffic, the industry is actually reacting in the right way, right? So we hear a lot about burger wars, pizza wars, things like that, where restauranteurs are trying to drive value back into their doors. That's the right thing to do from an industry perspective. So as you think about all of those things, Kenny had brought up in regards to how can Sysco as a distributor partner with those concepts as appropriate, whether you are a local customer or whether you're a national customer, we are extremely well positioned as we think about our centralized capabilities as well as our local touch points.

Yes. And don't underestimate our scale to the point, right? A local customer could have 1 door in the Midwest, partnering with a local supplier now. But if he or she wants to go to the East Coast, West Coast, Northern Canada, that supplier can't do it anymore. So right now, despite the fact that we are seeing pressure on traffic, we are winning new business along the way. And that's the reason why.

In the specialty side of the business, you had also said you target high single-digit sales growth from that specifically. Is that -- will you -- do you think you'll hit that in '25? Is that sort of something that accelerates as you accelerate local? Or how would you measure yourself against that?

Yes. That business is performing well, In mean we are still confident hitting that number across the outgo years. And that number should accelerate, especially with the M&A coming on board or the M&A side of the house, most of the M&A that we do are specialty and as well as with the new SCs coming in and also the new compensation in place, that should also fuel that. And what I mean by that is one of the biggest change that we've done around our compensation structure is rewarding based on growth and profit. And as you know, with total team selling, you're selling both Broadline and specialty. And the conversion rate, by the way, is very high. I don't think we'll disclose this publicly, but it's actually very, very high versus just going in with potato let us onion Broadline products, right? So I would say with our SCs coming in, when local taking off and with the fact that our M&A assets maturing as well, that should ramp throughout the algo period.

Okay. So what's been driving some of the success with national accounts? I mean maybe it's just kind of your sales force doing well, but any like specific type of customer specific efforts that are driving that?

Yes. So as I mentioned, in our national accounts, so we're very proud of that team. And 2/3 is restaurants, 1/3 is what we call non-restaurants or noncommercial. And so on the restaurant side, I don't want to discount the side at all because this side, it's a hard business. It's day in, day out. The it's think about Cheesecake Factory, right? Day in and day out, huge footprint, right, lots of logistics involved behind it. And we are renewing contracts at nice economics as well, and we're providing a world-class service to, and we're helping our customers expand as well. That's really important. That's the name of the game. Helping your customer expand. There's 2 ways to grow. Penetration or new, right? There's two ways to grow here. And we love new customers. So we actually love the fact that -- the customers that we bring in are expanding too. So that's another win as well. We call it grow with the grower. So that's another part of it, too. The other piece is the 1/3. These are your health care, the movie theaters and the likes and their higher margins and their strategic wise are relatively more resilient than the other space, right? And so we're winning on both the restaurant side as well as the non-restaurant side. And I'm going to be very, very clear. We're winning with higher profit margins. It's really important that I say that because as you know, on the national side, the margins are thinner than the local customer side. So we are winning with that. And you're probably wondering, okay, so how do you expand margins on these? I'll give you a good example, Sysco brand, right? Think about obviously, in a national basket, there's proprietary SKUs, if you will. There's also other things that are not party SKUs that we're trying to partner and have trade deals with them. So overall, we're seeing that. So again, these are things where we have -- again, I won't go too much detail, but we work very, very hard on these contracts and have a win-win scenario where the more they grow, the more we grow as well.

Okay. Maybe we finish with our lightning round question. These are standard for everyone. We talked about some of this. But thinking about the demand backdrop for the year ahead versus recent trends, would you expect it to hold, accelerate, decelerate?

Yes. I would say improve/accelerate. Now one caveat is based on recent trends, we think it will be modestly uptick increase throughout the rest of the year, and that's what we're baking in our guidance.

Okay. Margins for the year ahead. up, down, neutral?

Up, margins up. And we expect both EPS and margin will be up for us the rest of the year. You are smiling because you like the answer or...

Sales are accelerating hope margins are going up, right? That's the goal. Capital allocation, just prioritize between CapEx, buybacks, dividends, debt pay down, any of these moved up or down in importance in your view.

Mostly unchanged. Investment business, reward our shareholders and rewarding our shareholders could flex up depending on M&A. So most of it is unchanged. And that's the beauty of crores. You'll get consistency and deliveries with our capital allocation.

Okay. I think that about brings us to the end -- thank you, guys. Appreciate it.

Thank you all.

Thanks so much.