The paragraph is a transcript from Sysco's Second Quarter Fiscal Year 2025 Conference Call. The operator introduces the call and Kevin Kim, the Vice President of Investor Relations, welcomes participants. He introduces key speakers, Kevin Hourican, the CEO and Chair of the Board, and Kenny Cheung, the CFO. Kim notes that forward-looking statements are included and cautions that actual results may differ, referencing their SEC filings for further information. The discussion includes non-GAAP financial measures, with corresponding GAAP reconciliations available online. Participants are encouraged to limit their questions to allow sufficient time for everyone. The call is handed over to Kevin Hourican.

In the financial update, Kevin Hourican highlighted Sysco's improved performance and positive momentum, with year-over-year growth in revenue and profits, particularly in the U.S. Foodservice and International segments. Sysco's total revenue exceeded $20 billion, marking a 4.5% growth from the previous fiscal year, driven by U.S. Foodservice volume growth of 1.4% and moderate inflation of 2.1%. National volume grew by 4.3%, while the International segment showed impressive results with a 26.5% increase in adjusted operating income and 4.7% growth in local case volume. Despite a 0.9% decline in U.S. FS local case business, the company's leadership remains focused on achieving 2025 financial guidance.

The paragraph discusses Sysco's recent financial and operational performance. Internationally, Sysco is expanding its product range and sales force to grow local business. In the U.S., despite a 1.9% decrease in local case performance due to weather impacts and holiday shifts, progress is being made, with anticipated improvements in fiscal 2025. SYGMA sales grew by 10.6%. Restaurant traffic in the U.S. saw a slight improvement from the previous quarter, and industry inflation remains steady at 2%. Sysco's adjusted EPS grew by 4.5% to $0.93, driven by volume growth, margin management, and efficiency improvements, with these areas remaining a focus for the remainder of the year.

The company expects its strategic sourcing efforts and supply chain efficiencies to positively impact gross profit and margins in the second half of the year. Improvements in colleague retention and transportation route optimization are set to reduce costs and enhance delivery performance. In the international segment, the company achieved a 3.6% increase in top-line growth and a 26.5% rise in adjusted operating income, driven by operational improvements and strategic sourcing. Local case growth is up 4.7% year-over-year. The international success is supported by the Sysco Urawa sales program and enterprise technology deployment. The national sales business also showed strong performance, with a 4.3% increase in national volume, benefiting from the company's broad supply chain solutions, which appeal to large customers.

The paragraph discusses Sysco's efforts to enhance business growth through dedicated account teams and successful national sales strategies, leading to improved route density and procurement synergies. It highlights an expected improvement in local performance by the year's second half due to increased sales hiring, training, and a new sales compensation program that enhances new customer acquisition and sales consultant retention. Sysco anticipates that new customer wins and improved retention will continue to drive business success into the future, including fiscal 2026.

The paragraph outlines the company's progress toward its 2025 hiring goals and improvements in service offerings, leading to increased Net Promoter Scores and business growth. Enhanced distribution capacity and a strategic expansion of the Greco Italian platform into new geographies are highlighted as key achievements. The company's progress from Q1 to Q2 in financial results and strategic initiatives suggests continued growth, particularly in its Italian platform expansion. The outlook for the second half of fiscal 2025 and beyond is optimistic, with significant potential for further expansion.

The paragraph outlines Sysco's progress in key initiatives like sales hiring and customer acquisition, which are expected to boost performance in the second half of fiscal 2025. The company remains confident in its financial guidance, supported by strong national, international, and SYGMA segment performances. Sysco has made strides in supply chain, merchandising, and sales skills development. Acknowledgment is given to Sysco's employees and suppliers for their dedication. Kenny Cheung then discusses Q2 performance, highlighting improvements in sales, gross profit, and expense management, positioning the company for continued success in the latter half of the fiscal year.

In the paragraph, Sysco reports positive growth in its International segment for the second quarter, with sales, gross profit, and adjusted operating income all increasing significantly. The success is attributed to the company's size, scale, and recent mergers and acquisitions. Sysco also highlights the strength of its balance sheet and cash flow, announcing an increase in its share repurchase plan to $1.25 billion for the fiscal year, with potential for further growth depending on future M&A activity. As a committed dividend payer for over 25 years, Sysco plans to distribute $1 billion in dividends, targeting a total return of over $2.25 billion to shareholders in fiscal year 2025. The company aims to maintain financial flexibility to support growth and deliver strong returns on capital.

In the second quarter, enterprise sales grew by 4.5%, aligning with financial guidance. U.S. Foodservice, International, and SYGMA contributed to sales with 4.1%, 3.6%, and 10.6% growth respectively. The total U.S. Foodservice volume rose 1.4%, despite a 0.9% decline in local volume. Gross profit increased by 3.9% to $3.7 billion, with an 18.1% gross margin. The company plans to enhance strategic sourcing to improve profitability, aiming to leverage scale in North America, including their $6 billion Canadian business. Inflation management remained on target at 2.1%.

The company is effectively managing its corporate expenses, achieving a 1.3% reduction from the previous year due to efficiency improvements. Their target is to lower expenses to 1% of sales. Adjusted operating expenses for the quarter were $2.9 billion, equating to 14.2% of sales, with improvements in supply chain and corporate efficiencies. Workforce productivity and customer service metrics like outbound fill rates have both improved. They are strategically hiring sales professionals to ensure quality returns on investment, with anticipated financial contributions in the future. Adjusted operating income for the quarter was $783 million, with significant growth in the International segment and SYGMA, thanks to applying effective strategies. The quarter also saw a 4.4% increase in adjusted EBITDA, reaching $969 million.

The organization reports a strong financial position with a net debt leverage ratio of 2.76x, $11.8 billion in net debt, and $3.1 billion in liquidity. The quarter yielded $498 million in operating cash flow and $331 million in free cash flow, attributed to strategic inventory buys and working capital timing. They returned $444 million to shareholders this quarter. For FY 2025, they reaffirm their guidance, expecting 4% to 5% net sales growth driven by inflation, volume growth, and M&A. Adjusted EPS is anticipated to grow by 6% to 7%. The company foresees improvements from investments in sales and efficiencies through enhanced sourcing and logistics.

The paragraph discusses the company's strategies to achieve financial improvements in the second half of the year. These include organizational optimizations projected to save over $100 million annually, driving expense discipline, and adapting to industry and macroeconomic challenges. The company anticipates high single-digit growth in adjusted EPS across Q3 and Q4. It has divested its joint venture in Mexico, affecting international sales but improving international margins, without altering prior year figures. Growth comparisons will be provided with and without the Mexico business to aid clarity. Additionally, the company will continue rewarding shareholders with over $1 billion in dividends and $1.25 billion in share repurchases.

The paragraph discusses Sysco's financial outlook and confidence in their business strategy. They indicate flexibility in share repurchases depending on M&A activity and plan to maintain a net leverage target of 2.5x to 2.75x, keeping an investment-grade balance sheet. The adjusted tax rate for FY '25 is slightly reduced to 24.5%-25%, while depreciation and amortization remain at approximately $800 million. The leadership is confident in meeting FY '25 guidance and long-term objectives, focusing on unlocking shareholder value. The company is satisfied with national, international, and SYGMA results and is working on improving local business performance, which is reflected in increased customer acquisition and Net Promoter Scores. Overall, they are committed to growing profitably and returning value to shareholders.

The paragraph discusses the company's strategic approach to benefit shareholders, highlighting an increased share repurchase target as part of their disciplined strategy. The future appears promising as the company expands competitive advantages through scale and talent. In a subsequent Q&A, Mark Carden from UBS inquires about sales trends in January, considering challenges like Southern Winter storms and Los Angeles wildfires. Kevin Hourican expresses optimism for the second half of the fiscal year, citing strong performance in international, national, and SYGMA business segments, along with progress in local business initiatives such as new customer acquisition, net promoter score improvement, staff training, and distribution center capacity expansions.

The paragraph discusses the company's strategic approach to meeting financial goals despite challenges. It highlights January as typically a low-volume month for the industry, exacerbated by disruptions from California wildfires and a Southern storm impacting Houston. The company prides itself on quickly resuming operations to support customers. Weather and disruptions impacted January, but the overall industry improved from Q1 to Q2. Disruptions are less concerning in January as most Q3 outcomes occur in February and March. Investments in supply chain and compensation models have shown progress in select areas, and there is strong international momentum from year-end holidays continuing into January.

The paragraph discusses the performance of a U.S. Foodservice company, with a focus on their Q2 results compared to Q1. Despite organic volumes remaining relatively flat, the company is confident in their FY '25 guidance. Kevin Hourican explains that Q2 was as expected, despite challenges such as a significant hurricane affecting Florida and the Carolinas and an unfavorable calendar shift due to the holiday season impact. These factors, combined with strong volume growth in the previous year, contributed to the quarter being described as "choppy." Additionally, Lauren Silberman from Deutsche Bank inquires about $100 million in annualized savings to boost gross profit in the second half of the fiscal year, with Kenny expected to address this in more detail.

The paragraph discusses the company's confidence in improving performance for the remainder of the fiscal year. It highlights optimism in local case growth due to recent hiring of incremental sales professionals, who are becoming increasingly productive. The company is tracking a successful compensation model that incentivizes growth and profitability, leading to new customer acquisitions. As the year progresses, the company expects continued improvements driven by self-help strategies and favorable comparisons in the latter half of the year.

The paragraph discusses the company's financial outlook, focusing on a projected $100 million in annual savings that will contribute to higher earnings per share (EPS) growth in the second half of the year, compared to the first half's growth of approximately 3.5%. These savings are expected to boost both the gross profit and operating expense lines. The savings will come from strategic sourcing, supply chain efficiencies, and organizational optimization. The company anticipates these structural savings to continue into the first half of 2026, helping offset any macroeconomic challenges and allowing for business reinvestment. The anticipated benefits from these savings are included in the current financial guidance, supporting the company's goal of achieving high single-digit EPS growth in the latter half of the year. The paragraph ends with a shift to a question from John Heinbockel about the sales force.

The paragraph discusses the hiring and training strategy of sales cohorts, which occurs every six to eight weeks. Kevin Hourican explains that these cohorts are deployed into targeted growth geographies and tracked over time for performance. The company is satisfied with the progress of the 2024 hires and those within the current fiscal year, who are successfully onboarding new customers. While respecting non-compete agreements, the new salespeople are tasked with expanding their customer base by initially managing a small territory. The discussion also touches on a potential return to growth in local case numbers, with a query on whether it will happen by the end of this fiscal year or in fiscal 2026.

The paragraph discusses a company's growth expectations, highlighting that they anticipate a second wave of growth from new hires about 12 months after onboarding, once restrictive agreements expire. They expect to benefit from this in 2026. The company is pleased with their hiring outcomes, staff quality, and new customer performance, notably in Q2. They express confidence in showing quarter-over-quarter progress due to factors like new colleague hiring, service improvements, increased customer win rates, and expanded direct-to-consumer capacity. Jeffrey Bernstein from Barclays asks for clarification on assumed case growth for the year compared to an industry decline, and also inquires about the sales performance of Sysco Brand in the U.S.

In the paragraph, Kevin Hourican addresses concerns about Sysco's performance amid declining restaurant traffic, clarifying that the reported 2% decrease pertains to overall food traffic, not Sysco's results. He anticipates slight improvements in traffic in the late spring but emphasizes that Sysco's financial goals do not rely on these improvements. Instead, Sysco has self-help strategies in place, including $100 million in economic improvements, which are expected to drive EPS growth. Hourican further notes that while they could increase volume by lowering prices, Sysco prioritizes profitability over volume.

The paragraph emphasizes Sysco's commitment to discipline and consistency in increasing sales, focusing on expanding its sales team to show progress. The Sysco Brand is performing well, despite past challenges with supplier fill rates. The company attributes an increase in its brand's popularity to its ability to maintain stock during national suppliers' struggles. Sysco is confident in its long-term growth, continually introducing new products and collaborating with suppliers for innovation. The slight year-over-year decline in Sysco Brand sales is due to the improved fill rates of national brands. The company offers customers both Sysco Brand and national brand options, catering to their preferences.

The paragraph discusses the performance of Sysco's international operations, highlighting a 5% growth in local case volume, with Canada and Great Britain showing significant increases. The Sysco Brand is noted as a substantial and profitably growing entity, expected to stabilize in penetration rates as local performance improves. The impact of strategic sourcing on the Sysco brand and non-Sysco brand is mentioned as a factor for anticipated leverage in the second half of the year. The speaker, John Ivankoe from JPMorgan, then questions the underperformance of Sysco's local case volumes, noting a 1.9% decrease compared to the overall restaurant industry's 1.6% decline, and seeks clarification on opportunities or issues related to customer type, geography, account share, or new customer tracking.

In the paragraph, Kevin Hourican addresses a question about areas of underperformance nationally and locally. He notes that restaurant traffic was down 2% for the quarter but explains this was due to uncontrollable factors like a major hurricane and calendar shifts, which, when accounted for, show a strong Q2 compared to Q1. Hourican is optimistic about improving local performance in Q3 and Q4. He mentions that regions unaffected by adverse weather, where additional resources have been deployed, are showing strong performance.

The paragraph discusses Sysco's strategy to improve underperforming regions without a specific common issue, emphasizing their commitment to improvement. It mentions the successful transition to a new compensation program that has led to increased earnings for sales representatives through behavior changes. This new model, which also rewards margin-enhancing activities, is encouraging customer acquisition and team selling, thereby driving volume growth and benefiting both the company and its employees. Kenny Cheung highlights the positive correlation between increased headcount and market volume growth, reinforcing the effectiveness of the new compensation approach. Overall, the company is optimistic about future growth and success.

The paragraph discusses product cost inflation concerns, particularly in dairy and protein categories, due to supply challenges such as avian flu affecting poultry, especially eggs, leading to increased costs. Kevin Hourican from the company provides insight into their inflation forecast approach, highlighting close monitoring of various categories and expecting ongoing inflationary pressures in dairy and protein due to supply-demand imbalances.

The paragraph discusses the anticipated inflation trends in the food industry over the next 90 days to six months, particularly focusing on center plate items, which are expected to experience higher than normal inflation. However, there are offsets in the commodities sector due to increased product availability and competitive sourcing, leading to some price reductions. Overall inflation for Sysco is around 2.1%, with slight variations in the U.S. (2.7%) and Europe (2.9%). The company operates in a normalized inflation environment, benefiting from a diverse product range that reduces exposure to any single category. The current forecast excludes potential impacts from tariffs, which are unpredictable.

Edward Kelly from Wells Fargo questions Kevin Hourican about the sales force and local versus national case performance. Kevin explains that the recent changes to their sales compensation model are aimed at providing more incentives for top performers while holding lower performers accountable. The new compensation structure, implemented on July 1, rewards higher-performing sales colleagues and encourages others to improve by being more proactive in generating new business and selling higher-margin products. Kevin intends for these changes to align with the company's long-term goals.

In the paragraph, the speaker discusses how a subgroup of underperformers resistant to change left the company in Q1, causing turnover to rise. However, by Q2, retention stabilized as employees adapted to a new compensation program with uncapped earnings potential, benefiting Sysco's profit and loss. The program encourages desired sales behaviors, and new hires are expected to drive further growth. Kenny Cheung highlights that while the focus is on growth, the success of the Customer Managed Units (CMU) and national customer segments, which are growing profitably, is noteworthy, even though it slightly dilutes overall margin rates.

In the paragraph, the speaker discusses the benefits of having both national and local business operations, emphasizing that national business aids in covering fixed costs and promoting revenue growth. Kevin Hourican expresses satisfaction with their national, international, and SYGMA businesses, asserting that supply chain constraints are not hindering their local business. They are focusing on improving local operations while maintaining success in other sectors. Alex Slagle from Jefferies then inquires about prospects for international margins, noting the strong performance in recent years and questioning if this trend will continue to gradually improve.

In the paragraph, Kevin Hourican discusses the positive outlook for their international business, highlighting strong leadership and successful initiatives that are driving growth and market share gains despite challenging macroeconomic conditions. He emphasizes that international operations are expected to be a significant growth engine for the company, with no structural barriers hindering profit margins. Hourican indicates confidence in continuing top-line and bottom-line growth internationally without specifying exact EBIT percentages, suggesting more detailed financial targets may be shared in future investor discussions. Initiatives like Sysco Your Way and category expansion are part of their growth strategy.

The paragraph outlines the company's strategic efforts to enhance its international business operations. It mentions the expansion of sales teams and the adoption of technology to improve efficiency, as well as the growth of their supply chain and potential M&A activities in Ireland and Great Britain. The company has made similar moves in the United States, focusing on specialty businesses in produce and protein. Kenny Cheung notes the success of replicating the company's U.S. scale internationally, with significant growth metrics like a 27% increase in operating income. In terms of asset management, the company is focusing on capital redeployment in line with its ROIC goals, such as divesting a joint venture in Mexico to spur international growth. This approach includes sale-leaseback strategies for facilities to generate capital for new projects and more ROIC-accretive initiatives.

The paragraph discusses Sysco's recent financial strategies, highlighting their efforts to reallocate capital towards high-growth markets like Hawaii, characterized by rising rents. By divesting less profitable assets and utilizing sale leaseback proceeds, Sysco aims to drive growth, expand their online business, and add new locations both domestically and internationally. The company emphasizes the importance of continuously evaluating their portfolio for profitable growth and maximizing return on assets. Kevin Kim, speaking on behalf of Sysco's Investor Relations, invites further inquiries from interested parties before the conference call concludes.

This summary was generated with AI and may contain some inaccuracies.