Sysco Q2 2024 Earnings Results & Report

Sysco EPS Results

• Actual EPS: $0.89
• Consensus EPS: $0.88
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: $0.80
• EPS Beat Rate: 5 of last 8 quarters

Sysco Revenue Results

• Actual Revenue: $19.29 billion
• Expected Revenue: $19.32 billion
• Beat/Miss: Missed by -$29.74 million
• YoY Revenue Growth: +3.70%

Sysco (NYSE:SYY) is a food distribution company headquartered in Houston, Texas. Founded in 1969, it supplies food and related products to customers in the foodservice and hospitality industries.

The company distributes fresh and frozen foods, meat, seafood, produce, dairy products, and pantry staples, as well as kitchen equipment, cleaning supplies, and other nonfood items. Its customers include restaurants, health care and educational facilities, lodging businesses, and other organizations that prepare and serve meals.

Sysco serves customers across the United States and in international markets, including Canada and parts of Europe. Its distribution and sales operations support customers with product selection, delivery, and services for their foodservice businesses.

Sysco Q2 2024 Earnings Call Transcript

Key Takeaways

• Sysco reported 3.7% sales growth and over 11% adjusted EPS growth in Q2, marking its 5th consecutive quarter of positive operating leverage and 11th straight quarter of double-digit EPS gains.
• Fiscal 2024 share buyback program was raised from $750 million to $1.25 billion, bringing total shareholder returns—including dividends—to more than $2.25 billion.
• Local case volume growth accelerated by 300 basis points sequentially to 2.9%, driven by enhanced sales execution, refined compensation, performance management, and total-team selling.
• Supply chain productivity improved via higher employee retention, better training, and disciplined staffing, reducing cost-to-serve and improving service levels.
• Full-year guidance was reaffirmed with mid-single-digit net sales growth and approximately 7% adjusted EPS growth at midpoint, assuming slightly positive second-half inflation.

Presentation

[Operator]

Welcome to Sysco's Second Quarter Fiscal Year 2024 Conference Call. As a reminder, today's call is being recorded. We will begin with opening remarks and introductions. I would now like to turn the call over to Kevin Kim, Vice President of Investor Relations. Please go ahead.

[Kevin Kim, VP of Investor Relations at Sysco]

Good morning, everyone, and welcome to Sysco's Second Quarter Fiscal Year 2024 Earnings Call. On today's call, we have Kevin Hourican, our President and Chief Executive Officer, and Kenny Cheung, our Chief Financial Officer. Before we begin, please note that statements made during this presentation that state the company's or management's intentions, beliefs, expectations, or predictions of the future are forward-looking statements within the meanings of the Private Securities Litigation Reform Act, and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the company's SEC filings. This includes, but is not limited to, risk factors contained in our annual report on Form 10-K for the year ended July 1, 2023, subsequent SEC filings, and in the news release issued earlier this morning.

[Kevin Kim, VP of Investor Relations at Sysco]

A copy of these materials can be found in the investor 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 be found in the investor section of our website. During the discussion today, unless otherwise stated, all results are compared to the same quarter in the prior year. To ensure we have sufficient time to answer all questions, we'd like to ask each participant to limit their time today to one question and one follow-up. Additionally, we want to make the audience aware of Sysco's participation at the CAGNY Investor Conference on February 20th and our Investor Day on May 22nd in New York. We hope you can join these events in person or virtually.

[Kevin Kim, VP of Investor Relations at Sysco]

At this time, I'd like to turn the call over to Kevin Hourican.

[Kevin Hourican, President and CEO at Sysco]

Thanks, Kevin, and good morning, everyone. Thank you for joining our call today. I am very pleased with Sysco's performance for the quarter. Our company is the market leader in a growing industry where size and scale matter. This past quarter, we demonstrated the important position of strength by delivering another quarter of double-digit earnings per share growth. Sysco delivered bottom-line growth through a combination of volume growth, disciplined margin management, and expense control. Our positive momentum from the first half of our fiscal year is expected to continue into the second half, and we remain confident in our full-year growth expectations for sales and EPS. This includes 2024 adjusted EPS growth of 7% at the midpoint of our guidance range.

[Kevin Hourican, President and CEO at Sysco]

Sysco has improved how we leverage our scale through the Recipe for Growth strategy, and we continue to deliver industry-leading profitability metrics, as well as leverage our industry-leading strong balance sheet. Our confidence in the year has enabled us to increase our capital allocation to shareholders for the year. We are announcing today an increase of our stock buyback target for fiscal year 2024. We now expect to buy back approximately $1.25 billion of our stock this year, up from our previously communicated $750 million. With the increased stock buyback and our industry-leading dividend yield, we will contribute more than $2.25 billion directly to our shareholders. Sysco's strong balance sheet and free cash flow enable us to make these types of shareholder-friendly decisions while providing ample liquidity to fund the long-term growth of our business.

[Kevin Hourican, President and CEO at Sysco]

We are, as we say, playing from a position of strength. Let's get started with a brief highlight of the quarter on slide number five. Beginning with the top line, we delivered sales growth of 3.7%, a sequential improvement from Q1, driven by a combination of positive case volume growth and positive product cost inflation. Importantly, this included a sequential improvement in local case volume growth quarter-over-quarter and year-over-year. We will share more on that later. Turning to the bottom line, we posted over 11% growth in adjusted EPS, generating strong operating leverage. This is the fifth consecutive quarter of positive operating leverage and the eleventh consecutive quarter of double-digit adjusted EPS growth. Kenny will provide more details in his financial section.

[Kevin Hourican, President and CEO at Sysco]

Today, I would like to update you on two topics I highlighted as priorities on our Q1 earnings call: local case volume and supply chain productivity. During the quarter, we sequentially increased our case volume performance, growing our U.S. foodservice segment 3.4% and delivering local case volume growth of 2.9%. We grew our market share profitably through our improvement efforts. Notably, this growth comes with the industry-leading profit margin rates you can expect from Sysco. The rate of volume growth does not include the benefit of Edward Don, which closed in late November, and we remain solidly on track to deliver our growth ambition versus the market this year. Importantly, the initiatives we outlined to drive local case performance earlier this year began to bear fruit this past quarter. We are focused on improving sales execution.

[Kevin Hourican, President and CEO at Sysco]

Our efforts are centered around properly serving our local customers and improving our local sales growth. A reminder of our local sales focus areas for fiscal 2024. First, we started adding incremental sales headcount in the second quarter and expect to continue hiring in the second half of fiscal year 2024 and in the coming years. The incremental headcount is targeted to optimize territory sizes and enhance sales consultant effectiveness, demonstrating focused actions to deliver higher returns. The benefits from increasing our local sales force will accrue over time as new colleagues complete their training, move up the productivity curve, and settle into their territories. As previously indicated, we continue to expect to see the vast majority of the positive impact from our fiscal year 2024 hires impact fiscal year 2025 performance.

[Kevin Hourican, President and CEO at Sysco]

Second, we recently refined our compensation model to further motivate our sales consultants on win-win-win behaviors for Sysco, our customers, and our sales force. We can already see the impact of the compensation change, and we expect the impact of these recent changes to grow over time. We will continue to optimize our compensation program over time to ensure we are properly rewarding and motivating our sales team. Third, our focus on performance management continues, with a hyper-focus on customer visit frequency and sales consultant visit quality. These efforts are improving outcomes of our sales visits and can be closely tracked in our CRM tool. Leveraging technology to maximize the effectiveness of each customer visit remains a top priority, and I am pleased with the impact of our sales leadership team in the past quarter. Lastly, Total Team Selling continues to gain traction.

[Kevin Hourican, President and CEO at Sysco]

Our sales teams across Broadline and specialty are working more collaboratively, and we are leveraging our data to maximize the time allocation of our selling specialists in produce, protein, and ethnic cuisine segments like Italian. All told, these interconnected actions increased our local case performance from Q1 to Q2 by 300 basis points. Importantly, the exit velocity of the quarter was even stronger as our performance improved each month of the quarter. We are confident in our ability to continue to grow local sales while maintaining the positive momentum we have displayed in national sales. Next, I would like to provide an update on the progress we've been making within our supply chain. We continue to improve the performance of our supply chain by focusing on operational excellence.

[Kevin Hourican, President and CEO at Sysco]

Chart 9 displays our year-over-year operating profit improvement, driven by positive operating leverage, with gross profits growing at a faster rate than operating expenses. Our supply chain employees continue to move up the productivity curve due to improved colleague training and significantly improved levels of retention, especially within the driver position. With improved retention comes improved outputs across the supply chain, lower hiring expenses, lower training expenses, improved productivity, lower levels of product shrink, improved safety metrics, and improved service levels to our customers. Each of these elements positively impact our P&L, and the improvement drops straight to the bottom line. We are extremely focused on continuing to improve colleague retention and productivity within our supply chain. Lastly, we continue to improve the rigor and discipline in our colleague staffing efforts.

[Kevin Hourican, President and CEO at Sysco]

This includes better matching our hours worked to the volume of cases shipped and the difficult work of flexing down our staffing during lower volume periods. We will continue to refine our engineered labor standards that drive our staffing models, and we will increase the agility with which we match our staffing to our volume. Our Q2 results display a continuation of quarter-over-quarter progress in productivity gains, and we remain disciplined and focused on continuing that rate of improvement. These efforts will benefit the P&L in fiscal 2024 and will carry into 2025 and beyond. We are bullish on our ability to continue to lower our cost to serve while simultaneously improving customer service levels.

[Kevin Hourican, President and CEO at Sysco]

As I lift up from these two topics, improving sales effectiveness and improving our supply chain productivity, I would also like to communicate that we remain on track with our Recipe for Growth business transformation. Our digital efforts continue to advance. Our merchant teams continue to improve our product assortment, especially in Sysco Brand. We are excited about the integration with Edward Don and how we can profitably grow our equipment and supplies business. We remain very pleased with the performance of our Greco Italian platform, and I am proud of our international business leaders for the compelling performance produced year to date from our international segment. At our Investor Day in May, we will dive deeper into each of our Recipe for Growth pillars. Food service distribution is a space where size and scale matters.

[Kevin Hourican, President and CEO at Sysco]

Logistics scale, cold storage scale in both warehousing and transportation, technology scale, and salesforce expertise and scale. We believe that no one is better positioned than Sysco to leverage global scale advantages in order to better serve customers and profitably grow the business. I am very pleased that fiscal 2024 is off to a strong start, as we are profitably growing our market share and continuing a track record of delivering compelling top and bottom line growth. For the remainder of fiscal 2024, we remain hyper-focused on the execution elements I highlighted today, as well as advancing our Recipe for Growth strategy. We are confident that these efforts will enable Sysco to deliver our financial plan. I'll now turn it over to Kenny, who will provide a more detailed review of our financial performance. Kenny, over to you.

[Kenny Cheung, EVP and CFO at Sysco]

Thank you, Kevin, and good morning, everyone. I'm going to build upon Kevin's commentary with a couple points. First, we have positive momentum as Q2 marks another milestone with record top-line and bottom-line performance. Q2 results included sales and volume growth, along with strong cost of goods sold performance, resulting in adjusted gross profit dollar growth and margin expansion. Positive operating leverage was also driven by gross profit growing at a faster rate than operating expenses, demonstrating our disciplined margin management, which rendered adjusted EPS growth of over 11%. Second, we are excited about our first half performance and confident in our positive momentum for the remainder of the year. Therefore, we are increasing our share repurchases expectations from $750 million to $1.25 billion for FY 2024 versus the prior guidance.

[Kenny Cheung, EVP and CFO at Sysco]

This will increase expected total shareholder returns, including dividends and share repurchases, to approximately $2.25 billion for FY 2024. This is in addition to our continued reinvestment into the business, including M&A, such as the addition of BIX and Edward Don earlier this year. Capital allocation is a competitive advantage for Sysco, as the strength of our balance sheet and free cash flow generation allows us to invest for growth and reward our shareholders at the same time. Now, turning to a summary of our reported results for the quarter, starting on slide 13. For the second quarter, our enterprise sales grew 3.7%, with U.S. food service growing 3.2%, international growing 9.6%, and SYGMA decreasing 1%, driven by planned exit of customers that did not meet our disciplined profit thresholds.

[Kenny Cheung, EVP and CFO at Sysco]

This planned exit, along with strong supply chain productivity improvement, helped more than double our SYGMA profits this quarter. Another prime example of our ROIC focus in action. Enterprise inflation was 1.1%. Additionally, US broadline inflation was slightly positive, and our international segment was up 6.6%, all aligned with our expectations. Total US food service volume increased 3.4%, and local volume was up 2.9%, a 300 basis points sequential improvement from Q1. Please note, volume reporting includes slight benefits from the acquisition of BIX Produce, while volume reporting does not include our Edward Don or specialty meats business based on their unique product attributes. We produced $3.5 billion in gross profit, up 4.9%. Adjusted gross margin improved to 18.2%, an increase of 21 basis points.

[Kenny Cheung, EVP and CFO at Sysco]

Our gross profit dollar and margin percentage improvement reflected our ability to effectively manage product cost fluctuation, driven by incremental progress from our strategic sourcing efforts and disciplined pricing. Penetration rates of Sysco Brand products increased 22 basis points to 46.9% in U.S. local and was essentially flat at 36.8% in U.S. Broadline. Overall, adjusted operating expenses were $2.8 billion for the quarter, or 14.4% of sales, as we achieved another quarter of positive operating leverage. The strong management of expenses during the quarter was due to the positive impact of the variable labor planning tool and supply chain efficiencies that Kevin mentioned, and benefits from our previously announced $100 million of cost out commitments.

[Kenny Cheung, EVP and CFO at Sysco]

We are on track to achieve this commitment for FY 2024, and the planning process for delivering incremental costs for future periods has already begun. Additionally, with the successful closure of our BIX and Edward Don acquisition, we are on pace to realize both top and bottom-line synergies. Adjusted operating income growth of 7.6% in USFS, coupled with outsized profit contributions from our international and SYGMA segments, contributed to bottom-line performance. Positive momentum continued in our international segment, with adjusted operating income growing 30.1% during the quarter. Our international results are a continuation of the robust growth and positive momentum in this segment over the past three years. The Recipe for Growth playbook is yielding dividends in the U.S. and internationally.

[Kenny Cheung, EVP and CFO at Sysco]

In total, Q2 adjusted operating income was $745 million, up 9.2%, and adjusted EBITDA was $927 million, up 11.6%. Turning to the balance sheet, which remains strong, we ended the quarter at 2.75x net debt leverage ratio. This is in line with our target range of 2.5x-2.75x net debt leverage ratio. Our planned increase to the share repurchase program is already in action with an accelerated share repurchase program that was executed in early January. We ended the quarter with $11.2 billion in net debt. That is well laddered and over $3.4 billion in total liquidity. Approximately 96% of our debt is fixed, with the floating component offset by our cash reserves.

[Kenny Cheung, EVP and CFO at Sysco]

Our strong investment-grade credit rating is a competitive advantage, as evidenced by our team successfully issuing approximately $1 billion of new debt in November. We are committed to our capital allocation strategy, as seen on slide 19, which includes a balanced approach with three elements. First, investing in the business for profitable and consistent growth. Second, maintaining our investment-grade credit rating. And third, returning cash to shareholders through dividends and share repurchases. Turning to our first half cash flow, we generated $856 million in operating cash flow and $527 million in free cash flow, growing 70% and 141%, respectively. This growth includes continued strong conversion rates from EBITDA to operating cash and free cash flow, and we remain on track to grow free cash flow for full year FY 2024.

[Kenny Cheung, EVP and CFO at Sysco]

Our strong financial position enabled us to return $353 million to shareholders via share repurchases and dividends this quarter. Looking forward to fiscal year 2024 guidance, we are reiterating net sales growth of mid-single digits to approximately $80 billion. Adjusted EPS is expected to grow to $4.20-$4.40. This represents a 7% growth at the midpoint. Additionally, we expect positive operating leverage, with gross profit growing at a faster rate than OpEx for the year. We continue to expect slightly positive rates of industry volume growth and inflation. This includes Sysco's U.S. broadline remaining inflationary in the second half of the fiscal year. Our planned top line also includes benefits from M&A activity, consistent with previous disclosures, for an average annual contribution of 50-100 basis points of growth.

[Kenny Cheung, EVP and CFO at Sysco]

We will continue to opportunistically evaluate accretive acquisitions, but the remainder of FY 2024 will focus on integration efforts, capturing synergies for accretive acquisitions like Don, and returning excess cash back to shareholders through share repurchases and dividends. For the second half and over the long term, we expect to win market share profitably and consistently. Our efforts will also focus on strong cash generation with conversion rates, ultimately feeding our plans to grow and reward our shareholders. Thank you for your time today. With that, operator, we are now ready for questions.

[Operator]

At this time, if you would like to ask a question, please press star one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star one to ask a question. We will pause for a moment to allow questions to queue. Our first question comes from Jeff Bernstein with Barclays. Please go ahead.

[Jeff Bernstein, Equity Research Analyst at Barclays]

Great. Thank you very much. I have one question and then one follow-up. The question on the, the U.S. local case volume, the 2.9%. Nice return to growth on a one-year basis, and like you said, a sequential acceleration on a two-year basis. Just wondering if you could talk about your level of confidence in, sustaining that accelerating growth, maybe prioritize the most important drivers of that momentum. I think you mentioned that momentum actually built each month of the fiscal second quarter and therefore strong exit rates. I'm just wondering if you could provide some context, especially as some are talking about maybe a, slowdown that, has been seen across much of the industry in January. Any thoughts there would be great. Thank you.

[Kevin Hourican, President and CEO at Sysco]

Morning, Jeff. Thank you for the question. This is Kevin. We're confident in our ability to continue to improve in local sales. As you just said, the 2.9 is an average, weighted average, obviously, across the three months, and sequentially, the quarter improved each and every one of those months. So we are confident in our ability to continue to make progress in local case volume growth and at the historic profitability metrics that Sysco, industry leading, will continue to produce. So it's profitable local case growth. The biggest drivers, I'd say the performance management on the sales consultant side is the most immediate lever.

[Kevin Hourican, President and CEO at Sysco]

The compensation change would be the second most impactful measure, and Total Team Selling, followed up by the increased SC headcount, would be the third and the fourth of the four things I said on the call, if I ranked them from an impact perspective. As it relates to the second half of your question on January, there has been a slowdown in January. I would describe it more as a blip, a bump in the road, if you will. There's a couple factors driving the January. Week one of January had a calendar unfavorability tied to a holiday and where it fell. Historically cold weather. I hate the W word.

[Kevin Hourican, President and CEO at Sysco]

I never use the W word, but there was some extraordinary weather in January, which made it awfully difficult to make deliveries to customers in large swaths of the United States. That's backed up by the credit card data, you know, from the major banks that, you know, consumption at food away from home was down in January. Jeff, I'm not overly concerned about that. You know, it's the lowest volume month of the year. If there's gonna be a blip or a bump, you'd want it to be in that month. So goes March, so goes the quarter. And we've got levers that we can pull on the year to go, and I'll toss to Kenny for any additional comment in that regard.

[Kenny Cheung, EVP and CFO at Sysco]

Hey, Jeff, good morning. On January, I agree with Kevin, you know, what we're seeing right now. While volume has been slightly impacted, you know, we have the ability to flex labor and mitigate the impact of lower volume with our labor planning tool that we talked about, and that is in conjunction with the disciplined engineering labor standards that we've implemented. However, weather also impacts over overtime, productivity, customer returns, delivery costs, which we will mitigate throughout the fiscal year with levers in our P&L.

[Kenny Cheung, EVP and CFO at Sysco]

Therefore, the full year guidance remains intact. In terms, you know, Kevin talked a bit about local in the US. One comment is local international. You know, as we know, international is roughly 20% of our business, and, you know, we've replicated some of the RFG, Recipe for Growth, playbook there, and we are seeing nice growth from our Canadian business and our European business, which is both up roughly 8%, and it's really driven by new customers, penetration, and customer retention.

[Kenny Cheung, EVP and CFO at Sysco]

We are excited, and we continue to invest and capture growth with pace and discipline.

[Jeff Bernstein, Equity Research Analyst at Barclays]

Got it. And just my follow-up on the fiscal 2024 guidance, I know from a very high level, you reiterated the mid-single-digit top line and the 5%-10% EPS growth. I think you called out 7% at the midpoint. Wondering if you could share anything that might have surprised you on the positive or negative side in the first half of the year, especially because I think you said 7% at the midpoint. You've also talked about, the first half of the year, double digits, 11 consecutive quarters of double-digit EPS growth. So what potential incremental challenges are you seeing in the second half, especially as you've got an incremental $500 million dollar bump in share purchase to come?

[Jeff Bernstein, Equity Research Analyst at Barclays]

Just wondering your thoughts on the back half of the year EPS growth relative to the recent momentum you've had. Thank you.

[Kenny Cheung, EVP and CFO at Sysco]

Okay. So let me unpack the questions. Well, what surprised me, and, you know, what are some takeaways from the first half of the year? I think, you know, the biggest thing is Sysco has proven we can manage the business under various different environments. If you remember, Q1 was slightly deflationary in the U.S., Q2 was slightly positive in the U.S., and in both quarters in the first half, we delivered operating margins expansion of, you know, of roughly 26 basis points, and also GP margin dollar expansion and GP margin expansion of 28 basis points. So again, I think first half was a really good proof point that, under any circumstance, Sysco has the levers on the P&L to drive positive and consistent growth and being able to drive quality of earnings from the cash flow side.

[Kenny Cheung, EVP and CFO at Sysco]

So that's about more around the first half. In terms of the full-year guidance, let me just provide a bit more color. We do expect overall this year, you know, lower overall market volume growth versus 2023. However, continued market share gains from our company, and profitable growth at Sysco. Inflation, as I mentioned on the last earnings call, Q2 came in slightly positive, aligned with our expectations. In the back half, we remain consistent to what we said on both the first earnings call that we had at the end of last year and the previous one 90 days ago. We expect the back half to be slightly positive on inflation. We still have two quarters to go, but I believe that Q2's slight positive on inflation provides us comfort around our original assumptions.

[Kenny Cheung, EVP and CFO at Sysco]

In terms of the, on the expense side of the house, disciplined expense management, our team has already directed an effort to reduce the structural expense by $100 million. We are on pace, and we've begun building an additional pipeline for future periods. In terms of working your way down to the P&L, on the tax rate side, 24.5%, no change. There's a slight step up on interest expense of roughly $20 million, attached to the $500 million of additional share repurchases. If you net these two impact together, so Jeff, I think your question is, what is the accretion on EPS? There is, there is a net accretion of roughly $0.005 or so if you net the interest expense increase, coupled with the retirement of the shares.

[Kenny Cheung, EVP and CFO at Sysco]

That is the $0.005 impact that you can expect for the fiscal year. With that said, with all the intraworking variables, we are reiterating and reconfirming our full year guide of $4.20-$4.40 with a midpoint of 7% growth versus last year.

[Jeff Bernstein, Equity Research Analyst at Barclays]

Thank you.

[Operator]

The next question comes from Mark Carden with UBS. Please go ahead.

[Mark Carden, Executive Director, Equity Research - Hardlines, Broadlines, Grocery Retail, and Food Distribution at UBS]

Good morning. Thanks so much for taking the questions. I wanted to dig into your salesforce additions to date. I know you said it's gonna be a bit of a ramp, but how is the initial progress going relative to your expectations? And then how are the competitor hires are they having much of an impact on your ability to really find enough high-quality salespeople? Thanks.

[Kenny Cheung, EVP and CFO at Sysco]

Good morning, Mark. We're really pleased with the progress that we're making, and those efforts began in Q2. I want to be clear about this. So, you know, in the early innings, we haven't quoted publicly the exact number of people we're hiring, but it's a significant number. We are not having a challenge with hiring and filling, you know, our classes. They are roster classes that we fill, and we put them through a very, very robust industry-leading training program. As it relates to competitive forces and the impact on our ability to hire, we're not having challenges filling the positions. That's my answer. You know, we don't just go to a competitor, if you will. That is a source of talent. We also go to restaurants. We go to culinary schools.

[Kenny Cheung, EVP and CFO at Sysco]

We're looking for people that are foodie-centric, who are good at selling, have a passion for this industry. We can train them on our tools, we can train them on our selling systems and processes, and we can train them to skill them up to be what they are, which is the best in the industry, and that's from our Net Promoter Score. So we're not having a difficult time filling our classes. We're really pleased with the first cohorts. We are on track to be able to hit the targeted hiring rate. And as I said before, that positively impacts 2025 from a growth perspective. Mark, back to you if you have any follow-up.

[Mark Carden, Executive Director, Equity Research - Hardlines, Broadlines, Grocery Retail, and Food Distribution at UBS]

Great. Then, my follow-up is gonna be related to M&A. You guys closed on Edward Don about two months ago. How has that early integration gone relative to your expectations? Then in December, you guys announced a small acquisition with Ready Chef in Ireland. Was that one simply a situation where the economics were just too good to pass up? Or does it signal a shift in strategy that you guys might be more open to international bolt-on or even larger-scale M&A there?

[Kevin Hourican, President and CEO at Sysco]

Mark, appreciate the question. Let me just start with Edward Don, which is, you know, the significant transaction that we've done this fiscal year. Want to be really clear on the numbers that we quoted today. So one month of, you know, sales and profit are in the numbers that we described, but from a volume perspective, because I know that's a question some may have, we have not included Edward Don volume in our case growth figures at this time. So the growth in cases of 3-4 in total and 2.9 in local is pure Sysco, not including Don. I just wanna be really clear about that.

[Kevin Hourican, President and CEO at Sysco]

As it relates to the early innings, I was just up in Chicago last week, had a great day with Steve Don and his leadership team and our leaders, talking about the synergy capabilities between the two companies. We can purchase better together, buying product at a better and more affordable cost. We can target joint customers more effectively, so we have large national sales restaurant customers or hospitality customers of Sysco that aren't currently customers of Don and vice versa. Don has some really big customers that Sysco is not the food service distributor, so we can sell together in a joint proposition.

[Kevin Hourican, President and CEO at Sysco]

Then there's this huge opportunity, longer term, to take that equipment and sales product category and have it shoppable on Sysco's digital platforms, deliverable on either a Don truck or perhaps someday to a local small mom-and-pop customer on a Sysco truck. We're really excited, not just about the $1.3 billion in profitable top line we acquired through Don. We're very excited about how we can grow that business meaningfully for years to come, and I know Steve Don and his team are equally as excited. As it relates to the Ready Chef in Ireland, just keep in context, it's, you know, a much smaller country. So, you know, the size of that acquisition is actually, you know, compelling for the country that it's in. And what it was, was a FreshPoint-like entity.

[Kevin Hourican, President and CEO at Sysco]

So to be crystal clear, in Ireland, we did not have a fresh-cut, bespoke produce business, and purchasing Ready Chef gives us what I'll call, from our U.S. perspective, that FreshPoint capability. We're running the Sysco play. That's the headline. It's not a change in strategy. Our strategy is, in each of the major countries that we compete within, we will run the Sysco play, which is to be the leader in Broadline and to bolt on specialty capabilities over time, so we can sell around the room for the customers that we serve and do so profitably. So we're excited about that acquisition in Ireland. Our leadership team in Ireland is top-notch, and I am very confident in their ability to profitably grow the business, better serve customers, and increase penetration with existing customers within Ireland.

[Mark Carden, Executive Director, Equity Research - Hardlines, Broadlines, Grocery Retail, and Food Distribution at UBS]

Makes sense. Thanks so much. Good luck, guys.

[Kevin Hourican, President and CEO at Sysco]

Thank you.

[Operator]

The next question comes from John Heinbockel with Guggenheim Securities.

[John Heinbockel, Senior Managing Director and Equity Research Analyst - Food Retailers and Consumables Retail/Distribution at Guggenheim Securities]

Kevin, can you talk about visit frequency and quality of visit, right? How do you think about KPIs on each of those. And when you think about how that will move the sales needle, you know, what are you looking. You know, are you looking for a certain amount of year-over-year growth in frequency? How do you quantify quality?

[Kevin Hourican, President and CEO at Sysco]

John, great question. For the quarter that we just completed, this is the biggest reason for our improvement from what was, you know, flat in Q1 to up 2.9 in Q2, is from what I call performance management, visit, which is visit frequency, visit quality. The comp change clearly helped, but it was early innings, and that will have a bigger impact in year to go, and then the incremental SC will impact 2025. We've not gone public with the numbers, the targets, John, but we have a very specific target of the number of visits that need to happen per week per SC, and we can track it. We can track it through this CRM, and we were not where we needed to be.

[Kevin Hourican, President and CEO at Sysco]

COVID, you know, had a disruption in a lot of things in life, and one of them was, you know, SCs were doing more of that work from a home office than we would have liked. We kind of ripped that Band-Aid off, and made it really clear on what our expectations are of visit frequency. That's the will side of the job. We'll get out there, pound the street, be in front of our customers. This is a relationships business. We're being in front of the customer every week matters, and we have moved the needle meaningfully in the last quarter on the number of visits being completed per week for our SCs. The point two, though, that you brought up, is that's only worthwhile if it's a quality visit. So how do we measure quality?

[Kevin Hourican, President and CEO at Sysco]

We have visits with a purpose, and in our CRM tool, it will prompt our SCs with jobs to be done that day, introduce a Sysco Brand case, win back a case that was lost over the last X period of time, sell a category you've not sold before. Those are just three examples of jobs to be done. The CRM data rich understands what's being purchased, what should be purchased, and it essentially prompts the SCs with things to sell. And then how do I measure quality? I measure quality by close rate against those jobs to be done, and we can track it. We have a scorecard that ranks every one of our salespeople from top to bottom, and then we do performance managing against the quality side of the visit.

[Kevin Hourican, President and CEO at Sysco]

Recognize the top performers, coach the movable middle, and hold accountable those that aren't getting the job done and everything in between. John, back to you for any follow-up.

[John Heinbockel, Senior Managing Director and Equity Research Analyst - Food Retailers and Consumables Retail/Distribution at Guggenheim Securities]

The follow-up would be, right? So, you know, you've talked about growing GP dollars above SG&A. So if you take the US, right, the delta was 200 basis points this quarter. I mean, what's your thought as to the right general level? And, you know, lately, it was gross margin driven, right? Gross profit driven, as opposed to SG&A. Have we now shifted back, right, to an environment where it's more SG&A driven than gross profit?

[Kenny Cheung, EVP and CFO at Sysco]

So, here's my how we think about it. It's both, right? It is the gross profit line and the operating income line. If you look at Q2, you can see that our top line growth was 4%. If you just do the math, the cost of goods, if you will, between sales and gross profit was up 3%. So you had that nice leverage driven by strategic sourcing, our partnership with suppliers, driven by, you know, mix of business, growth of specialty, local brand, Sysco penetration. And as a result, GP actually grew 5%, so we had a nice leverage between sales and GP. Now, to your point on SG&A, we're working extremely hard driving productivity out.

[Kenny Cheung, EVP and CFO at Sysco]

The good news is, is the $100 million of cost out that we talked about at the beginning of the year, that is being seen through the P&L, and we're working through a pipeline that's gonna render success for us in the outer period. And that is, and you can see GP growing, call it 5%, and then, net earnings growing close to double-digit, versus prior years. So you're getting the leverage, John, on both the cost of goods line and the OPEX line, and we have initiatives pegged to both sides of the house.

[Kevin Hourican, President and CEO at Sysco]

Thank you. Thanks, John.

[Operator]

The next question comes from Edward Kelly with Wells Fargo.

[Edward Kelly, Managing Director, Equity Research - Staples Retail and Food Service at Wells Fargo]

Hi, guys. Good morning. Nice quarter. I wanted to just follow up on the case volume growth. I mean, the Q2 result was clearly an inflection around, you know, what's, you know, like, the last quarter and last couple of quarters. Can you, you know, maybe just help us understand how we should be thinking about the back half of the year from here? You know, so you talked about, you know, January off to a slower start. I don't think the industry growth is all that spectacular, you know, at the moment. I'm just trying to make sure that we're in the right place from an expectation standpoint, just given how strong Q2 was. And then just a clarification on Edward Don. I know it's not in the case volume numbers currently.

[Edward Kelly, Managing Director, Equity Research - Staples Retail and Food Service at Wells Fargo]

Does that mean it will not be going forward as well?

[Kevin Hourican, President and CEO at Sysco]

Yeah, Ed, good question. You know, thank you. We're confident in our ability to profitably grow the local business, and not kind of, you know, regress back to the mean on where we were in Q1. That's the, one of the main messages from today's call. We've built momentum, local performance, very strong. Exit velocity was strong. Unfortunately, the industry has hit a speed bump. You know, I talked about the W word, which I hate talking about. There's also a two-year stack thing going on in January, where, because of very, very strong growth a year ago, tied to the prior year being Omicron, there's a two-year stack phenomenon on January that normalizes itself by mid-February, which we'll get through. And as you know, March is the most important month.

[Kevin Hourican, President and CEO at Sysco]

We're not gonna quote a number on today's call, vis-a-vis what you should expect from a local case volume growth, other than what we are seeing and what we predict is built into the guidance for the year, and we're confident in our ability to deliver the midpoint of the guide that we put out, you know, today. Kenny, toss to you for any additional comment.

[Kenny Cheung, EVP and CFO at Sysco]

Yes. On local growth, as Kevin said, our assumptions are baked into the guidance. You know, we are always focused on profitable growth. That's really important for our company. And you can see that's the reason why that the cash conversion and operating leverage was so strong in Q2. In terms of Edward Don, so in our volume number, just to clarify, Bix is in our volume number year over year, it's immaterial. From a Don side, it is in our total sales number, just not in the volume number, given the different product attributes.

[Edward Kelly, Managing Director, Equity Research - Staples Retail and Food Service at Wells Fargo]

Right. And that, that's gonna be the case going forward? And, I'm just curious as to why Edward Don is not included in volume.

[Kevin Hourican, President and CEO at Sysco]

Let me just. This is Kevin. You know, we don't include SSMG in our volume because the business is measured through pounds, and just getting to a common denominator is difficult. The way Don measures their business is today not the same as how we measure the business, cases versus pallets versus eachs, and we wanna make sure that we get that right before we include it in our metrics. And that's something that we're working on, Ed, as a part of our integration planning.

[Edward Kelly, Managing Director, Equity Research - Staples Retail and Food Service at Wells Fargo]

Great. Thank you.

[Kevin Hourican, President and CEO at Sysco]

Thank you, Ed. Have a good day.

[Operator]

The next question comes from Joshua Long with Stephens.

[Joshua Long, Managing Director, Research Analyst at Stephens Inc.]

Great. Thank you for taking the question. I was curious if you could further contextualize the strength of the local case growth in terms of the opportunity to further penetrate kind of existing consumers, and then also execute against, you know, new customer wins, which I know has been, you know, a target and a goal, over the last couple of calls that we've talked about.

[Kevin Hourican, President and CEO at Sysco]

Yeah, Josh, thanks. On the existing customers, I'll bridge back. I didn't talk a lot today on the prepared remarks about our Recipe for Growth. I was trying to really keep it narrow and focused on drive local case performance through selling effectiveness and supply chain. We're really pleased with our Recipe for Growth strategy and the impact of our growth programs, you know, on our business. And I point you to Sysco Your Way and Perks as two very, very important programs that are increasing penetration with existing customers. They're continuing to do well. At our Investor Day in May, we're gonna talk about the longer-term plans for those two growth programs. And then the third is our Total Team Selling effort, which is we over index in Broadline.

[Kevin Hourican, President and CEO at Sysco]

We have a meaningful share in Broadline, and our share is below the industry average in specialty. That's why we are as focused on produce and protein and the ethnic cuisines as we are. We're moving the needle with existing customers on Total Team Selling. As I've mentioned before, what that program is, is each account has a sales consultant generalist, who's the relationship manager, who's there every week, but they're not gonna be an expert in specialty cut bespoke protein. They're not gonna be an expert in specialty organic produce, as an example.

[Kevin Hourican, President and CEO at Sysco]

And we're doing a better job of identifying which customers have the propensity to buy those categories, linking up that specialist with the sales consultant generalist, and doing a joint visit, and then compensating them in such a way that they win together when those cases are added to a Sysco truck, regardless if that's a FreshPoint truck or a Sysco broadline truck. And we're moving the needle with existing customers as measured by penetration, and we're pleased with our performance in that regard. But the lifeblood, we call it the oxygen of the business, is constantly bringing in new customers. You need that oxygen to breathe, and we're very focused on new. We're very focused on making that a priority of the sales force. It's embedded within our updated compensation model as a priority.

[Kevin Hourican, President and CEO at Sysco]

If they win new business that's profitable and sufficiently large to make it worth our while to be going to those customers, there's a minimum, you know, threshold, they get rewarded as a sales force. And that works hard. Prospecting is hard work. We need to make it a priority. We need to manage it, and I'm really pleased with the progress that's been made this last quarter on increasing the portion of our business that's new business won.

[Joshua Long, Managing Director, Research Analyst at Stephens Inc.]

Great. Thank you for that. Then, Kevin, in your prepared comments, you mentioned just the overall improvement in supply chain. Seems like things are perhaps continuing to get back to normal. Your results highlight that. Could you talk about the overall health of the supply chain, just broadly as an industry and kind of where some of the pushes and pulls are now that we're a little bit further removed from some of the disruptions that occurred over the last couple years?

[Kevin Hourican, President and CEO at Sysco]

Yeah, thank you for the follow-up. We're really pleased with our progress of improvement in supply chain. Retention is up. Overall market, as you just indicated, fewer people are leaving their jobs. There are fewer jobs that are open, so therefore, just general staffing health in the industry is better. And then specifically at Sysco, we're fully staffed. It doesn't mean we don't have a job opening in a specific site today, but in aggregate, across our network, we are fully staffed. That brings down, as Kenny said, our hiring costs, our training costs. Shrink improves, damages improve, accidents on the road improve. Everything about the ecosystem improves when we have a more tenured population. We're really pleased with that. The productivity levers that we have are moving up and to the right as a result of that.

[Kevin Hourican, President and CEO at Sysco]

Oftentimes, I get asked the question, "What inning are we in?" I think we're up to inning seven now on supply chain, kind of recovering, to pre-COVID, which means we still have some gas in the tank. And I wanna be clear, when we get to inning nine, the game's not over. What happens in inning nine is then we introduce new technology, we introduce productivity improvement programs, et cetera. We can get beyond, meaning better than 2019 levels of productivity, but I'd say we're in inning seven. We still have room to improve, and we're focused on delivering.

[Kenny Cheung, EVP and CFO at Sysco]

One point for me is, as I mentioned earlier, we have the labor planning tool, and we're really matching, being fairly agile here on the expense side, matching labor with volume. Making sure that's with the backdrop of the Sysco work standards that I talked about earlier in my question in January. The Driver Academy, our training programs, our engineering labor standards are keep getting better and stronger. We improve processes through leveraging, as Kevin said, technology. The next wave of productivity improvement is to better have discipline to the standard of work that we're doing. So still room for improvement, but we are pleased with the improvement we made in supply chain, and that's factored into the 2024 guidance.

[Joshua Long, Managing Director, Research Analyst at Stephens Inc.]

Thank you.

[Operator]

The next question comes from Kendall Toscano with Bank of America.

[Kendall Toscano, VP, Equity Research at Bank of America]

Hi, thanks for taking my question. So I was wondering if, as you saw a pretty significant rebound in your local customer business in the second quarter, just kind of what the implications are on gross margin performance, given that the local customers are a higher margin customer segment. And then, I guess, as you enter the back half, as my follow-up, how you would expect the local customer growth to look versus the total company?

[Kenny Cheung, EVP and CFO at Sysco]

Yeah. So I can start. So you are correct. The local customer does come with an attachment rate with a higher GP dollars per case, and there is a margin accretion as well with the local customer. And we are seeing that flow through the P&L, and that's one of the reasons why you're seeing a nice mix between your leverage on GP as well as the leverage down to EBITDA and net earnings. With that said, though, I think we shouldn't overlook the CMU success that we've had in our business. We are also seeing margin expansion. We are also seeing cost of goods leverage across the portfolio for our CMU business. Again, one may think it's just restaurant, but it's not.

[Kenny Cheung, EVP and CFO at Sysco]

There's other specialty growth segments that we're winning in the marketplace that's driving accretion on the margin side. When we talk about strategic sourcing, it is not just for local customer, it is the size and scale of Sysco, and that benefit scales across both our local, our local customers and CMU. We are renewing, we are winning, businesses at a higher margin clip, at the current moment, so.

[Kevin Hourican, President and CEO at Sysco]

Just to plus up the last point that Kenny made, I've, I've tried to be very clear about this point over the last several quarters. Our success in national sales, and we are clearly succeeding in national sales, growing new customer wins and the profitability of that business, as Kenny just said, there's nothing about the growth in national that hinders our ability to grow local. We do not have supply chain capacity constraints. We do not have hiring constraints. And what I said on the last call is we wanna keep the play running and working in national, and we wanna make meaningful progress in local, and we displayed that this past quarter with a 300 basis points improvement, and our intention is to continue to make improvement in local.

[Kendall Toscano, VP, Equity Research at Bank of America]

Great. Thanks, guys.

[Kevin Hourican, President and CEO at Sysco]

Thank you, Kendall.

[Kenny Cheung, EVP and CFO at Sysco]

Thanks, Kendall.

[Operator]

The next question comes from John Ivankoe with JPMorgan.

[John Ivankoe, Managing Director, Equity Research Analyst at JPMorgan]

Hi, thank you. The question is on inflation, and I'm wondering, you know, what kind of indicators you are looking at, you know, to sustain, you know, inflation, you know, through the, you know, the back half of 2024. I mean, some, you know, PPI food, for example, metrics might, you know, suggest, you know, a little bit more deflation than what you're talking about. Just kind of the first question. And secondly, you know, there's been at least some chatter, you know, some grocery stores actually sequentially lowering their pricing as their own commodity, you know, costs have been easing.

[John Ivankoe, Managing Director, Equity Research Analyst at JPMorgan]

Have you seen anywhere in the marketplace, in terms of your competitors, maybe not on the nationals, but on the local or regionals, of, you know, of different operators that are lowering their price per case to their customers of, you know, something that could potentially be influencing the market over time? Thank you.

[Kenny Cheung, EVP and CFO at Sysco]

Hey, John, it's Kenny, I'll start. So on the topic of inflation, you are correct. We are informed by data. We actually have a treasure trove of data. We partner directly with suppliers, third party, you know, strategic partners, institutions, and the like. And so we have a rich data set of our own as well, given how much volume goes through our supply chain each and every day across various segments and industries. So we're all that's modeling in right now. Number two, we watch our basket very closely. Now, I've talked about this in the past, but if you think about our commodity basket, we have 12 main commodities, and we don't really over-index on any one in particular. No one commodity is more than 15%. So each and every day, we're managing inflation and deflation, right?

[Kenny Cheung, EVP and CFO at Sysco]

For example, you could have beef, for example, which is growing close to double digit, but you can have another commodity that's in a different state. Sysco has historically, and today, managed deflation, inflation, day in and day out. The third point is, as I mentioned earlier, Q1, deflation in the U.S., Q2, slightly positive inflation. On both quarters, we were able to effectively drive positive, consistent, and operating leverage to our P&L.

[Kevin Hourican, President and CEO at Sysco]

It's Kevin. I'll just add, you asked about prices to the consumer. In the local business, in particular, it's a very efficient market, John. So as our COGS come down, yes, the way it works is we then are able to pass through value to our customers. So unlike a retail store, we're, you know, publishing prices in a circular and putting signs on a shelf. You know, for us, it's a dynamic business. The book gets priced weekly, as do our competitors. And as prices come down, it's an efficient market, and that gets passed through to customers. As Kenny said, though, we can maintain profitability ratios on the way up. We can maintain profitability ratios on the way down.

[Kevin Hourican, President and CEO at Sysco]

That's the value of our pricing tool, that we are leveraging extensively to make sure that we are, where we need to be. You know, as it relates to just general confidence in the year-to-go inflation figures, we've got a lot of data at Sysco. We have global data. We have access to, a large amount, as Kenny said, across the 12+ categories. Some are moving up, some are moving down. The one that's gonna be the biggest tailwind in the year to go is produce. Produce was substantially deflationary in Q2 because of wild markets the year before, due to major flooding in California. Produce is gonna return to more normal, like, low levels of inflation, 1%-2%, versus down substantially in Q2.

[Kevin Hourican, President and CEO at Sysco]

So that's one of the bigger drivers of, you know, giving confidence in the year to go. And we said muted inflation. But, you know, certainly muted inflation is up from where we were in the first half of the year.

[John Ivankoe, Managing Director and Equity Research Analyst at JPMorgan]

Very helpful color. Thank you.

[Kevin Hourican, President and CEO at Sysco]

Thanks, John.

[Operator]

The next question comes from Alex Slagle with Jefferies.

[Alex Slagle, SVP, Equity Research Analyst - Restaurant Industry at Jefferies]

Hey, thanks. Good morning. I just want to see if you could provide any color on the broader growth rates and health of the various categories you participate in, if there's certain specialty categories that are growing particularly well or, or certain customer types and industries that the growth has either tailed off or accelerated lately.

[Kevin Hourican, President and CEO at Sysco]

Alex, it's Kevin. I'll start, and then if Kenny has anything to add, he can jump in. Let me first just talk about like, where is the business growing, where is success happening? And then I'll flip back to the customer. If it's okay, I'm gonna actually answer it in reverse. Right now, Broadline is winning, and what I mean by that is distributors. So Broadline distributors are winning. People ask us all the time, "Kevin, how can it be true that, you know, you plus the other big two are all saying you're taking share?" Well, the answer is scale matters in this industry. Size and scale matter. Our purchasing scale, our delivery scale, our technology scale, and, and frankly, all three of the big three are growing faster than the market.

[Kevin Hourican, President and CEO at Sysco]

Our growth for the quarter was +3.4, and the overall market was very nominal growth. So we meaningfully outgrew versus the market, and my suspicion will be, as will the other, you know, big players in this space. So what does that mean? It means the growth is coming from smaller, regional distributors and specialty distributors. Point 2, for the Sysco-specific thesis is our specialty business is meaningfully performing. So we're winning in Broadline in total versus the 60+% of the business that's not done through the big three. That's a very clear point that should be understood. 60% of the business does not happen from the big three, where the big players are winning meaningfully in Broadline versus that 60%. And then within specialty, Sysco's specialty is outperforming versus specialty.

[Kevin Hourican, President and CEO at Sysco]

So that's, that's kind of the thesis or the story of, you know, why we're outperforming versus the market. As it relates to the customer side, we're seeing no discernible moves, trade up, trade down, trade left, trade right. The best operators are winning. People who have, you know, interesting concepts or interesting culinary trends, are winning, but we're not seeing trade up or trade down. Sans the January blip that I mentioned, it was a robust food away from home market in Q2, and then specifically, December was a robust month as consumers were frequenting food away from home establishments.

[Alex Slagle, SVP, Equity Research Analyst - Restaurant Industry at Jefferies]

Thank you.

[Kevin Hourican, President and CEO at Sysco]

Thank you.

[Operator]

The next question comes from Jake Bartlett with Truist Securities.

[Jake Bartlett, Senior Equity Research Analyst at Truist Securities]

Great, thank you. Thank you for taking the question. You know, mine was on the chain business and, you know, the growth there has been strong, and maybe you can just confirm my math that, you know, case growth among the chain business accelerated in the second quarter. Maybe kind of what you're doing to drive that acceleration. And then if you can maybe provide an update on the relative profitability. I know the gap between independents and chains has narrowed. If you can give us just maybe a better sense as to how much that's narrowed at this point.

[Kevin Hourican, President and CEO at Sysco]

Okay, yeah, so I'll start, and I'll toss to Kenny for any additional comment he may have. When it's our CMU business, it's half our business, and we're winning, you know, meaningfully in that space. And yes, we did accelerate in Q2 versus Q1, and we have confidence in our ability to continue to be very successful in CMU. When people hear chain, they think national restaurants. I wanna be very clear, that is just one portion of that business. Travel and hospitality is in that space, healthcare is in that space, education is in that space, and we've had notable and meaningful wins in each of those non-national restaurant sectors. In fact, our focus is in non-national restaurant sectors. The low profit portion of CMU is the national chain restaurant space, mostly in the QSR space. That's the lowest profit business.

[Kevin Hourican, President and CEO at Sysco]

We're really focused on, within national sales, which customer types can we create a win-win contract relationship with our customers, where we can help them achieve their objectives, we can do it at a cost to serve that meets their objectives, and they're willing and wants to partner with Sysco on things that are profitable and helpful for Sysco, like, for example, Sysco Brand penetration. With local customers, we have more than 50% of our cases on that truck that are Sysco Brand, and one of the reasons why the profit profile is lower in national is a lower penetration of Sysco Brand. So we're looking for partners who wanna grow together, who wanna win together, and our national sales team's been doing a really good job in that regard, and we expect that momentum to continue. Kenny, additional comments you'd like to make?

[Kenny Cheung, EVP and CFO at Sysco]

Yes, I'll say a few things here. So, if you, you know, if you think about chain business, right, I'll say ROIC is the lens, how we look at all businesses, including chain. You know, on the CMU side, as Kevin mentioned, we did accelerate. You are correct, your math is correct, but we accelerated profitably. That's a really important point here. Many of the things that we're doing across technology, strategic sourcing, all of our initiatives, does impact both the local and the CMU side. So it is scaling, and I know we say this all the time, scale and size really matters in our industry. So that's really important. I sometimes will say this, you know, we will think a compensation plan ties only local.

[Kenny Cheung, EVP and CFO at Sysco]

We have many, many things that scales across both local and CMU, driving profitability for both sides of the house. That's my first point. The second point is, again, ROIC cuts both ways. You know, in SYGMA, which is mostly the bigger customers, they were down on volume year-over-year. However, given supply chain efficiencies and productivity that we're driving and pruning the customer side of the house, we were able to double, more than double the business on profit, 140% increase there. So that gives you a little bit of color on how we think about productivity as well as, you know, some of the other side of ROIC.

[Jake Bartlett, Senior Equity Research Analyst at Truist Securities]

Great. And I just had a quick follow-up on the comments on the local business or in the independent side. Kevin, you mentioned that it was, you know, the industry was robust. You know, are you seeing generally positive traffic in your at your local customers? I'm wondering whether just local traffic, you know, has improved, you know, in this latest quarter versus the prior quarters.

[Kevin Hourican, President and CEO at Sysco]

Yeah, independent traffic, especially in December, was robust. That's my most concise way of describing it. Really healthy, strong. I'd say it was strong across food away from home, but independents in particular, very strong in December.

[Jake Bartlett, Senior Equity Research Analyst at Truist Securities]

Great. I appreciate it. Thank you.

[Kevin Hourican, President and CEO at Sysco]

Thank you.

[Kenny Cheung, EVP and CFO at Sysco]

Thank you.

[Operator]

The next question comes from Brian Harbour with Morgan Stanley.

[Brian Harbour, Executive Director, Equity Analyst - Restaurants and Food Distribution at Morgan Stanley]

Thanks. Yeah, good morning, guys. You've discussed this, but maybe I'll ask it a slightly different way. On operating leverage, you know, you expect it for the full year. Do you expect a little bit less in the second half, maybe as a consequence of, you know, ramping up hiring? Or, you know, are some of the cost outs sort of an offset to that? How do you think about that in the second half versus the first half?

[Kenny Cheung, EVP and CFO at Sysco]

Yeah. So, you are correct in terms of the second half dynamic, and let me explain what that means. So in the first half of fiscal year 2023, if you recall, we had snapback and excess overtime in the first half of last year. But also recall, throughout the back half of last year, fiscal year 2023, those costs subsided. It became zero towards the back half. Also, supply chain productivity, turnover, retention, labor standards, all of those things that we're driving the value that we're seeing today, that started really towards the back half of last year. So said differently, Brian, we are lapping a more challenging comparison from a comp standpoint.

[Kenny Cheung, EVP and CFO at Sysco]

With that said, we are also investing in our business, and our strive is, you know, operating leverage here, for the full year.

[Brian Harbour, Executive Director, Equity Analyst - Restaurants and Food Distribution at Morgan Stanley]

Okay, thanks. Yeah, makes sense. Maybe just on international, I know that's, you know, not as big for you, but it is pretty material, right? I think we've seen sort of some varying performance in international markets, just based on, like, what some of the restaurant companies have said. Could you comment on, you know, how you see that in the second half? Also, kind of how you see the inflationary trend over the next couple of quarters in that business?

[Kevin Hourican, President and CEO at Sysco]

Yes, this is Kevin. I'll start, Brian. I appreciate the question on international. I'll talk about just what we're seeing in international, and Kenny can address the inflation part of the question at the end. Yeah, the headline here is we're very pleased with international performance. Rewind tape, I've been here 4+ years now. COVID had a very negative impact on international. The shutdowns were earlier, they were deeper, they were longer, they were more punitive, and it was a rough go, especially in Europe. We're out of that now. We are clear of that, and we are very pleased with our performance. International is a tailwind for Sysco from a growth perspective and from a profitability improvement contribution perspective. I'll just call out three examples from a color commentary to give it some texture.

[Kevin Hourican, President and CEO at Sysco]

Canada is doing incredibly well. Local performance in Canada, greater than 6% case growth. Local performance Canada, greater than 6% case growth, and that's our largest international business. Why is that happening? We're deploying the Sysco play in an even greater way, bringing advanced digital tools to the country, bringing the Recipe for Growth to the country, and leveraging an extremely talented team north of the border. So Canada doing extremely well. Great Britain, our second largest international country. We've always had a very good, robust, and mature CMU business, and we were under-penetrated in local.

[Kevin Hourican, President and CEO at Sysco]

We are meaningfully focused on winning local, from a leadership perspective in country, and we are revamping our supply chain and our systems capabilities in Great Britain to be able to better serve local customers in that country, and we're moving them up the profitability curve as a result of increasing penetration with locals. And last but not least, let me talk about France. France has been a problem child, for my, tenure at Sysco, mostly self-inflicted. I have been very transparent about that over time, and we have turned the corner in France, upward, onward, and better. We're off to a really good start in the first half of the year in France. We have a strong leadership team in place in France, and they're really beginning to, like I've said a second ago, run the Sysco play.

[Kevin Hourican, President and CEO at Sysco]

We've deployed strategic sourcing, AKA PGM, which is our strategic sourcing capability. We're working on introducing Sysco brand product in France, and we're working to increase the product range available. And each of those things is working, and France is contributing positively this year to our P&L in a way that is beneficial to the overall company. So those are just some color commentary points, and I'd toss to Kenny for any comments on inflation.

[Kenny Cheung, EVP and CFO at Sysco]

Yes. Hey, Brian. So, if you think about the earlier in the year, the inflation for international was roughly over 10%, and this very quarter that we just had was roughly 6.5%. So we are seeing inflation subsiding a bit throughout the quarter. With that said, though, we are excited given the one global operating model that we're offering right now, and that is driving dividends. It extends our size, extends our scale, leverages capabilities, tools, and best practices. So as Kevin talked about, a lot of that playbook under the one umbrella of a global operating model is really creating dividends. So yes, while inflation is pressured, we are seeing the offsets through sourcing, local case growth, technology play, overall one, one global operating model.

[Kenny Cheung, EVP and CFO at Sysco]

We are still very optimistic and bullish about the international market as a growth engine for us. As you can see in Q2, we were up 10% on top line and 30% on operating income.

[Operator]

This does conclude today's question and answer session and today's program. Thank you for your participation. You may disconnect at any time.

Participants

Executives

• Kevin Kim, VP of Investor Relations
• Kevin Hourican, President and CEO
• Kenny Cheung, EVP and CFO

Analysts

• Jeff Bernstein, Equity Research Analyst at Barclays
• Mark Carden, Executive Director, Equity Research - Hardlines, Broadlines, Grocery Retail, and Food Distribution at UBS
• John Heinbockel, Senior Managing Director and Equity Research Analyst - Food Retailers and Consumables Retail/Distribution at Guggenheim Securities
• Edward Kelly, Managing Director, Equity Research - Staples Retail and Food Service at Wells Fargo
• Joshua Long, Managing Director, Research Analyst at Stephens Inc.
• Kendall Toscano, VP, Equity Research at Bank of America
• John Ivankoe, Managing Director, Equity Research Analyst at JPMorgan
• John Ivankoe, Managing Director and Equity Research Analyst at JPMorgan
• Alex Slagle, SVP, Equity Research Analyst - Restaurant Industry at Jefferies
• Jake Bartlett, Senior Equity Research Analyst at Truist Securities
• Brian Harbour, Executive Director, Equity Analyst - Restaurants and Food Distribution at Morgan Stanley