Sysco Corporation (SYY) Earnings Call Transcript & Summary

Good morning, everyone. My name is Jeff Bernstein, and I'm the restaurant and foodservice distribution analyst at Barclays. I'm pleased to introduce our next presenting company, Sysco Corporation. With us this morning, we have Kevin Hourican to my immediate right, President and CEO; Kenny Cheung, CFO, sitting right next to him; and in the audience, we have Kevin Kim, Head of IR; and Joshua Long, Senior Director of IR. And obviously, we are thrilled to have Sysco and actually, I have Yum! here as well, and we've gotten those two in as consumer staples, but otherwise, our primary consumer discretionary conference is our Eat, Sleep, Play, Shop Conference, which includes many of our other restaurants and foodservice distributors. That's in our New York offices, once again the week post Thanksgiving. So December 2 through the 4 this year. We hope to see many of you there. But now back to Sysco. By way of background, Sysco is the global leader in selling, marketing and distributing food products to restaurants and others. Globally, Sysco services 730,000 customer locations from 340 distribution facilities, generating $81 billion in sales this most recent year with 60% plus going to restaurants. But to share more detail, I will turn it over to Kevin and Kenny to walk through some of their bigger picture slides, and then we will do some Q&A with the remaining time. But with that said, I want to turn it over first to Kevin Hourican.

Yes. Appreciate it. Okay. Good morning, everyone. It's a pleasure to be back with you all again. I have this obligatory slide. We all have seen it, so we move on from that. So great to be back in Boston, have an opportunity to talk about our business. My upfront 5 or 6 slides are some content that some of you have seen before, for some of you who might be new. I do have some new content at the end. So I'm going to move through these initial slides at pace. So I can get to that content and then turn it over to Kenny, who will walk us through the finance portion of the deck. So without further ado, this is a page that talks about who we are at Sysco. As you know, we are the #1 player in the food away-from-home distribution space, both here in our domestic home as well as in most of our international countries that we operate within. We did $81 billion in top line in the most recent year, and we like to say that size and scale has its advantages that we will bring to the marketplace on an increasing rate over time. We have #1 market share here in the United States as well as in multiple other countries, which I will get to in just a moment. We have a $9 billion specialty business, which is more than 3x the size of our second biggest or next biggest competitor within the specialty space. I will talk more about specialty in just a moment. We have a very diverse customer portfolio. Yes, we are all things restaurants. Roughly 2/3 of our business is restaurants, but 1/3 of our business is what we call recession-resistant categories like government, education, healthcare, foodservice and buildings like this as well as office complexes. We are #1 in essentially almost all of those businesses. We're #2 in the healthcare space. So let's talk more about food away from home. This is arguably our favorite chart. We have another one that shows the $370 billion total addressable market in just the United States. Most importantly, though, the market itself grows each and every year. And the [ Y ] is the chart that is shown here. The up to the right line is the food away from home of market share, the down to the right line is dollars spent at grocery. And this is a very persistent trend that has lasted for decades. Our consumers are time starved. And across all three dayparts, whether it's breakfast, lunch or dinner, more and more meals are chosen to be eaten out or ever presently brought to their home but purchased away from home. It is a strong trend, providing a good tailwind to our business, which, in addition to our ability to take share, which we have taken share each and every year for the past 5 years, results in a compelling CAGR. As you can see, 11% CAGR since our inception. We've grown our top line 54 out of the past 57 years, the '08, '09 financial crisis was 1. And then the 2 years at the beginning of COVID were the second and the third year. We are the #1 player on what we call national. We are #1 in local, and we are #1 in our specialty space. And we have an opportunity to take more share profitably. That's the most important word, taking share profitably in each and every one of those business segments. Now let's talk a little bit about our reporting segments. Our international business is doing incredibly well. We have a compelling opportunity to continue to grow our international business. We sized that as more than a $10 billion opportunity over time. We have a meaningful opportunity to grow our specialty business, which is produce and protein equipment and supplies and what we call the ethnic foods segment, which is mostly for us, Asian Foods and Italian Foods. We have a $10 billion growth opportunity within specialty. And last but not least, we do have opportunities in M&A. Those are tuck-in opportunities, those are specialty acquisitions. And as we think longer term, we can think about international opportunities, all at industry-leading profitability ratios. We have the, by far, highest operating income percentage in our space, and we intend to continue to be the most disciplined operator in the business. We run a compelling business model across the world. As you can see, 80% of our business is domestic, 20% of our business is international, and we are growing international faster, both top line and bottom line than our domestic core business. We've doubled the profitability percentage of our international business over the past 2 years alone, and there's no headroom, if you will, or glass ceiling for us to be able to not penetrate through when we think about the long-term profit growth potential of our international business. Why are we succeeding in the international. We are running what we call the Sysco play in each and every country that we go to. That means modern warehouses fueled by modern technology, a boots on the ground local sales force that's selling a broad product range, I order tonight, I can deliver tomorrow from that broad product range. When we replicate that playbook with the addition of Sysco brand private label cases being put on the truck, we win market share, we win so profitably, and we grow to become #1 in the countries that we compete with and around the world. As you can see, the circles are the total addressable market within each country. The green bar is our market share in 2019. The blue bar is our market share in the most recent year, and we have improved our market share in each and every country we compete within around the world and that will not slow down. In fact, we believe it will accelerate. So I went through those charts at pace to get to the next two slides, I'm going to slow down and have an opportunity to talk about some net new information on these slides. The headline on the slide says what we want you to hear today and it's the takeaway from today. We are inflecting positive in local in the spot moment. We are making meaningful progress in our local business. And if you leave this conference and remember only two things about the Sysco story. We have double-digit growth potential, and we're producing those results internationally, and we are meaningfully, meaningfully improving our local business right here right now. Today, we're encouraged by the progress that we are making within our local business. The bars on the chart show our Q3 into Q4, and you can see the 200 basis points of improvement that we have delivered. We are in our Q1 as we speak, and that momentum has continued. If I could unpack that a little bit more. Our U.S. Broadline business has inflected positive. We are positive in our local business, and we expect to be positive in our U.S. Broadline business in Q1, and that is a net new data point being introduced today. Our USFS business, which is a bigger business, which includes both broadline and specialty is coming up a little bit slower behind that because you may recall on our most recent earnings call, I talked about in our FreshPoint produce business, we actually exited one of the business lines within FreshPoint and that's a little bit of a drag on the business right now. So USFS is improving at a similar rate and will take just a little bit longer to get to positive. We'll talk more about that on our earnings call on Q1. So why are we succeeding and why are we now expecting to be positive in Q1 in our Broadline business? It starts and ends with our colleague population. We have absolutely stabilized our sales consultant workforce. Our retention is at all-time highs. We are confident in our ability to sustain that performance all through fiscal 2026. So the headwind that you know existed in our business last year, which was elevated turnover will not be repeated in 2026, hard stop. Second point, the hiring that we have been doing, and I'll cover that on the next slide, is beginning to pay dividend, provide dividends as more and more of our colleagues are graduating from first year into second year in their productivity and their yield increases. Those two things together, not repeating the turnover challenge from a year ago, increasing productivity of our new hires. Together, that is what we're referring to as colleague health and colleague productivity, and it is the reason we have inflected positive in our Broadline business, and it is the reason we are absolutely confident in our ability to deliver against the guidance that Kenny will talk about when he is here at the podium. Colleague Health. When we layer on top of colleague health compelling initiatives, which I'll cover in a moment, that is the icing on the cake that gives us the confidence to be able to win share and to be able to do so profitably. How do we know this to be true? We can see the widening of the gap between new customer wins and customer losses, providing the separation between new and lost that we need simultaneously while penetrating additional cases with existing customers. We call that new, lost and pen within our industry. We have successfully widened the gap between new and lost and we're increasing the penetration with existing customers through compelling growth initiatives. And as I said, we're on track to be positive in local, in U.S. broadline in Q1. So let's talk a little bit more about the actions that are giving us the confidence for the momentum that we are already delivering and the increased momentum we expect to be able to drive throughout fiscal 2026. Kenny talks about well-laddered investments across time horizons, long-term investments, midterm investments and right here in the now moment investments. The top left falls in a midterm type investment, increasing the -- our boots on the ground colleague workforce. As you can see on the chart, we've been growing our sales workforce approximately 4% for the past couple of years. That will continue into 2026. Approximately 4% head count growth. 100% dedicated to Street, essentially 100% focused on winning net new business so we can profitably grow. We are on track with that investment. The colleagues that we hired over the past 2 years are hitting their individual productivity targets, and we're pleased with the return on that investment. The top right is a longer-term horizon of investments. Kenny talks about 5- to 10-year out time horizons. And that's the building of net new physical supply chain capacity. Here in the United States, we have a new building within the past year in Allentown, PA. To be crystal clear, it's not about Allentown, it's about the population dense Northeast corridor and increasing our ability to store products needed by our customers to deliver on time and deliver in full. Just a month ago, we opened our next brand-new building in Tampa, Florida to support the growing Florida market to be able to win share profitably. We've communicated publicly approximately 10 buildings across the world, have been approved over the past couple of years all coming to life now, which creates the capacity for a broader assortment to support it -- new business in both national and in local, and we are pleased with the performance of these large supply chain investments. The bottom left is where we talk about specialty. I mentioned before, a $10 billion growth opportunity within our Specialty business. How do we apply that math? We have approximately 17% market share in total. In specialty, we have less than 10% share. Getting our business to our fair share of that business is a big opportunity, and we prove it with the how that is shown on the bottom left. When one of our broadline customers adds a single specialty business like FreshPoint to their purchasing, we have a 3x increase in the revenue from that customer. If they buy from specialty meat, which is our bucket, and Newport business, on top of FreshPoint, it's a 6x yield. So we are getting smarter, more strategic and better at bringing together our sales organizations to provide more from Sysco to meet their needs and to make it worth the while of the customer to do exactly that. We are -- we call this total team selling, and we're extremely pleased with the performance outcomes. On the bottom right, our growth initiatives that I talked about on our most recent earnings call. In the month of July, we rebooted our loyalty program, it is called Perks. It previously was more of a marketing program where you buy X, you get rewards of Y, and you can redeem them through purchases Z. That is good, it's valuable, but it is not as important as providing a hard-hitting service improvement experience for our absolute best customers. And I want to be crystal clear, these are for mom-and-pop local independent restaurants. This is not for national chains. These are our most important, most profitable local customers. We are going to provide them a step change improved level of service. It will not cost Sysco more money. This is about prioritization. They will get the window that they desire, delivery window. We will be on time at a higher rate. Their fill rate will be higher than the book of business average. If ever there's a challenge or a problem, it will be resolved on the spot immediately. It sounds easy, does hard. Think about the hotel that is your loyalty program or the airline you prefer. You're not paying for your ticket at a lower rate. You're getting a better level of service from that airline that you prefer. If you're one of their top customers, it's the same thing in our industry. It will make a difference. It will be measured through improved retention of these most important customers and increased penetration of cases sold to these top customers. We have piloted this program. It is having a compelling yield and we expanded it nationwide in July or I should have said rolled out Perks 2.0 nationwide in July. Last but not least for me, so I can hand the microphone over to Kenny is AI 360. It is a selling tool in the palm of our colleagues' hand. It's literally their smartphone. It is our CRM turbocharged with AI to improve that sales colleague's ability to sell. And we see a great customer visit, you sell an item you haven't sold before, win back a loss case and switch from a national brand to Sysco brand for something that will save the customer money with a great quality flavor profile. Salesforce 360 powered through our AI is enabling us the opportunity to do that at a better rate in the palm of their hand, prioritize [indiscernible] . As I'm in my truck ready to walk into a restaurant, it tells me what I can sell, how to sell it. And if I have any questions, I can talk into my phone, and I can get those questions answered on the spot. More on that later, but we rolled out this capability 2 weeks ago nationwide and the positive feedback from our colleagues has been outstanding. So with that, I'm going to stop. But again, the takeaways. We're extremely pleased and proud of our international business, and we are inflecting positive in local and the momentum that we are building in local is significant, and we are pleased with the progress that we are making. So Kenny come on up. I'll turn it over to you.

All right. Thanks, Kevin. So hello, everyone. It is great to be back in Boston with all of you today. Thank you for your continued interest and support to the Sysco Corporation. We are excited, as you heard from Kevin, about the quarter-to-date momentum that we're seeing in our business and the compounding improvements we expect going forward. So far, Kevin has talked about 3 exciting items. Number one, our leadership position in a growing attractive industry. Number two, our strong track record of delivering long-term success. And last but not least, the balance of initiatives that are driving near-term momentum while also setting our enterprise up for long-term success and growth. So today, during my presentation, I'll talk about how these items translates to our industry-leading financial performance across the P&L, the balance sheet and cash flow. So let's start with the key piece of information. As Kevin shared, our local case volume has improved further versus Q4 results. This gives us confidence, and I'll say it again, confidence in reiterating our Q1 and our FY 2026 guidance as we're on track to deliver top line of 3% to 5% sales growth and EPS growth of 1% to 3%. Excluding the impact of incentive compensation, adjusted EPS growth would be 5% to 7% for FY 2026. As seen on the slide in front of you, we have achieved performance in each of the past 5 years. This is across both top line and bottom line. And we are positioned to deliver another record year in FY 2026. So if we take a giant step back and look at the past few years, you can see that the CAGR of sales has been roughly 5% and the CAGR for EPS has been roughly 9%. And Sysco has proven to be a resilient company, able to grow across all various market conditions. This consistent performance also includes what we call positive operating leverage with gross profit growing faster than operating expenses. This attractive return profile also includes our #1 market leading position. And as Kevin mentioned, size and scale matters in this industry as it's -- for Sysco, it renders five things: number one, leading sales -- industry-leading sales; two, margins; third, free cash flow; fourth, ROIC industry-leading; and last but not least, the only investment-grade balance sheet in the industry. These industry metrics are a position of strength and illustrates our strong quality of earnings. As Kevin noted earlier, Sysco holds the position as the global market leader with a diverse portfolio of operations across the food away-from-home sector. Restaurants, as Kevin said, roughly 60% of our total revenue mix, and it grew 3% year-on-year in FY 2025. We're encouraged by the momentum of this channel, especially on the local case growth front, which is driven by self-help and growth initiatives. Looking beyond restaurants, as Kevin said, we are majority #1 in all the space that we play. We have travel and leisure, we have education, we have government. These areas are growing mid to high teens in the range. Healthcare business doing well as well, growing high single-digit range. We are encouraged to see that our growth being both accretive on the dollar standpoint and margin standpoint, accretive to historical levels with a multiyear contract in place. So it's locked in stream for the next few years at least and every year it renews. The mix is strategic if you think about it. As Kevin said, these are what we call recession-resilient segments, and they are sticky business as well. This is one of the reasons why on the chart that Kevin highlighted earlier, we have grown sales in 54 of the past 57 years. More specifically, as you think about our performance versus the average industry core peers, you can clearly see there is benefits and advantages across both the income statement and the balance sheet. Our competitive advantages, combined with operational rigor allows Sysco to have what I call meaningful spreads versus our average core peers. So let's first start with the income statement. If you look at the left side of the chart, and I'll guide [indiscernible] eyes with you, left piece of the chart, from a GP standpoint, Sysco last year generated 18.4% gross margins, that is 1.3x higher than the average core peer, really driven by our power of size and scale. Turning to adjusted operating margin line, we generated over 4% operating margin last year, and that is roughly 1.5x higher than the average core peer. And that's really driven by what I call Sysco-specific levers across gross profit such as strategic sourcing, leveraging total team selling to sell our specialty product, which has a higher margin attachment rate and also driving international growth, which also comes with a higher gross margin. But we don't stop there. We're also focused on the middle part of the P&L as well around operating expense levers. And this includes supply chain efficiencies across retention and labor productivity, structural cost out and also optimization of our corporate GSC SG&A costs, which was down 6% year-on-year in FY '25. These are meaningful, permanent structural advantages that shows up across our P&L. On the balance sheet side, we have industry-leading cash flow conversion. So as you think about EBITDA to operating cash flow, roughly 70% conversion, EBITDA to free cash flow, roughly 50% conversion. As you look at the chart in front of you, you can see that Sysco generates roughly $2 billion of free cash flow annually, and that is 2.5x higher than the average core peer. So as you think about the robust cash generation profile of our company, we have the luxury to invest in our business and reward our shareholders as well through share repurchase as well as the dividend, roughly current today, 3% yield, which is right between that 40% to 50% dividend payout ratio. And that's a key differentiator. We're the only ones that pay dividend in this industry. So as you think about the backdrop of capital allocation, all of what I just mentioned earlier is underpinned by a balanced and discipline capital allocation as we leverage the ROIC mindset to ensure capital deployed across various asset classes, which are well laddered to Kevin's point, yields optimal return. First, we will invest for growth. We will invest in our business. We generally plan for CapEx to be roughly 1% of sales. This consists both of growth CapEx and maintenance CapEx. For FY 2026, we will come in a touch below that 1% target as we plan to grow into our investments that we've made in the past few years and to ensure that we render returns on the invested capital portion of ROIC. Second, we remain committed on our investment-grade balance sheet, and we're comfortable operating within 2.5 to 2.75x net leverage ratio. Last but not least, excess cash. We are committed to rewarding our investors with a steady flow of share repurchase and dividends as we did in FY 2025. So here's my last page. I won't read the slides, but I'll tell it to you in my own words. We like our position. In fact, we love our position. We are the industry leader that sits in the industry that's attractive and growing. We have a balanced and diversified portfolio across geographies, channels and product mixes. We have multiple and multiple vectors of growth across our core business as well as M&A via local chain, specialty and international, and we also have a solid pipeline of growth initiatives that will further drive our earnings trajectory. Our industry-leading margins, balanced capital allocation as well as strong ROIC yield a TSR of 9% to 11% on the forward for our shareholders. We have a strong track record of providing dividend growth as well as share repurchases. So this allows us to have an investment-grade balance sheet and deliver value at the spot moment while playing the long game on the floor. So therefore, whether you are a value investor, a growth investor, an income investor, Sysco provides extremely compelling opportunity. So I will end with where I started, which is we are excited about our quarter-to-date performance, and we are very confident in Q1 as well as the full year 2026 guidance. We have the right leadership team in place to execute against this plan. We are focused on consistent delivery results, which will compound over time. This is a great time to be at Sysco. Our future is bright, and we are positioned to win. Thank you for your support. And with that, I'll turn it over to Jeff for some Q&A.

Great. Thank you very much. A very thorough presentation. With our remaining minutes here, there's obviously lots to dive into, but where you started and where you ended is probably an area that garners a lot of attention. So first question is just on the local case growth and the momentum you're seeing there. If you could just share more about the progress being made in this part of the business and your confidence in sustaining?

Yes, sure, Jeff. Appreciate the question. It's what we're most pleased to be able to talk about and report today is the progress that we're making. First, just context. The overall macro is getting nominally better. So from Q3 to Q4, macro traffic -- reminder, traffic to restaurants has been down for more than a year. So from Q3 to Q4, traffic improved. We've seen a continued improvement in foot traffic to restaurants overall. But Jeff, what we're really pleased with is our business performance is improving at a faster rate than that overall environment, most specifically with small mom-and-pop independent operators. In fact, oftentimes, it gets written that big national chains are doing better than local. That is not accurate, we are seeing actually our local business doing better than big national chains. Now to be honest, and fair, a big part of that is we're able to take share within that local space, and we are taking share. So we said today on main stage, we will be positive in our USBL local business in Q1, USFS, which includes our specialty businesses, we'll trail that a little bit because of the business exit that took place within FreshPoint, but we're pleased with our performance sans that business exit, and we're really pleased with the progress that we're making. If I answer the question of why are you making the incremental progress that you're making? As I said on stage, it starts and ends with our colleague population. Retention is solid, productivity is improving, the new hires that we have completed over the past 2 years are kind of finding their rhythm and really growing into their job. And when we layer on top of the initiatives, I want to be clear. The initiatives I discussed today, Perks 2.0, AI 360, they're not in the improvement that I just talked about. They literally just launched weeks ago and that would be icing on top of the cake. What we say internally to our team, we will make plan this year just because of the health of our colleague workforce, meaning that one topic is so important. It will help deliver our profitable growth. The initiatives that we're bullish on give us an opportunity to outperform, and we're really excited about what is to come at Sysco specifically within local.

Yes. Just to plus up on Kevin. We are very confident with our local performance. We will be positive for a total USFS for the year. As Kevin said, we will be positive for USBL for Q1. As I think about from my chair and from your chair as well, some of the proof points that we're seeing right now in terms of -- that yields us confidence. One is the cohorts are coming in right now. These are the highest that we've hired recently, 750 between 2024 and 2025. And then this year, we're hiring another 300 as you saw in Kevin's page. And these cohorts are climbing up the curve, and they are exactly where we want them to be right now in terms of productivity. So really good progress there. And because of that, we are seeing -- and as you know this, we are seeing a new customer ramp up every single month. Our -- as Kevin mentioned, the spread between new and loss has widened. So in Q4, it doubled versus the first 3 quarters, and now we're seeing that increase again. And that's the reason why every single month, we're adding net new customers to our portfolio. And I think you all know this, today's new customers is tomorrow's penetration. So we're seeing not only the spread between new and loss widened, we're also seeing penetration go up as well. And the third point I would say is that let's not forget about international. International is a growth engine for us and local business continues to do well. Last year, you may remember, we were mid-single digits for local case growth. And right now, we're in the same ZIP code as well. So good progress globally on local.

Great. My second question is on the fiscal '26 guidance, which for those not familiar, Sysco runs on a June 30 year-end. So we are in their first fiscal quarter, the final month, but we have 3 quarters to go. Just wondering if you could talk a little bit about your confidence in that guidance. And then maybe layering into it just because it's such a popular topic, the current state of the consumer and the local restaurant industry as a whole, kind of your thoughts on the health there.