Sysco Corporation (NYSE:SYY) Q3 2024 Earnings Call Transcript

Sysco Corporation (NYSE:SYY) Q3 2024 Earnings Call Transcript April 30, 2024

Sysco Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to Sysco’s Third Quarter Fiscal Year 2024 Conference Call. As a reminder, today’s call is being recorded. We will now 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: Good morning, everyone, and welcome to Sysco’s third 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 meaning 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.

A copy of these materials can be found in the Investors section at sysco.com. Non-GAAP financial measures are included in the 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 Investors 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. At this time, I’d like to turn the call over to Kevin Hourican.

Kevin Hourican: Before I begin our call today, I’d like to take a moment to acknowledge an extraordinary event that happened during our third quarter. As you may have seen, on Friday, March 1, a Sysco truck was involved in an accident on the Clark Memorial Bridge in Louisville, Kentucky. After the accident, a Sysco truck was hanging precariously over the Ohio River. A Sysco colleague was inside that truck, staring down at the river, not knowing if her truck would fall into the river before she was rescued. I bring this topic up to take a moment and recognize the Louisville Fire Department for their heroic efforts. I especially want to thank Bryce Carden, the firefighter that risked his life to rescue our colleague from her truck that day.

The heroes of the Louisville Fire Department acted with efficiency, skill, and courage to rescue a Sysco family member. We are thankful for their successful efforts and for all that first responders do every day to protect our communities. I want to be very clear, business results matter, but the fact that the Louisville Fire Department save the life of a member of our family deserves praise and applause. Now, on to matters of business results and outcomes. I’d like to start with restaurant foot traffic data. Much has been written over the past few weeks as select restaurant names and select food service suppliers have announced their performance results. As you have heard in those communications, and observed through credit card transaction data, foot traffic to restaurants is down year-over-year.

As we have previously indicated, January restaurant traffic came out of the gate with a slow start, down high-single-digits to prior year due to a host of factors. February and March foot traffic improved to down low-single-digits but still posted a headwind for distributor case volume growth. While the trend of the quarter was one of sequential improvement, we had expected a stronger recovery throughout the quarter. It is our belief that restaurant menu prices have impacted foot traffic and this is something that needs to be addressed more broadly by the industry. The industry needs to take actions to improve affordability for end consumers. At Sysco, we will be focused on helping our local restaurant customers by taking the following actions.

Securing the best possible costs from our suppliers in sharing in those savings with our end customers; introducing new and improved Sysco brand alternatives to save restaurants time and money; introducing menu alternatives that bring lower cost food options to restaurant operators, so that they can provide value offerings to their end consumers; and lastly, providing restaurant operators with even more ready now and pre-cut offerings to help them lower their labor costs. While food costs have moderated year-over-year, restaurants are still facing significantly elevated labor costs. So with restaurant foot traffic data as context, I will segue into Sysco’s specific business outcomes with a brief highlight of the quarter on Slide 5. We were able to convert negative foot traffic for the quarter into positive 2.7% enterprise sales growth with USFS volumes growing 2.9%.

Both of these figures were greater than the food-away-from-home industry, which declined year-over-year in case volumes. Sysco’s 2.9% case growth enabled a profitable market share increase for the quarter in the U.S. As I have stated previously, larger broadline players are winning in the market due to size and scale advantages, and Sysco’s specialty platform is delivering outsized growth versus the specialty channel. Our local case growth was 0.4% for the quarter stronger than the overall market; however, it is an area that must improve. We are focused on making the necessary progress. I’ll speak more to this topic in a moment. For the quarter, we increased adjusted operating income by 8.4% and adjusted EPS by 6.7%. Both figures were consistent with our expectations for the quarter and are well above the S&P 500 average profit growth for the quarter.

As we have said many times, we have levers we can pull in our P&L if and when volume is softer than expected. I am proud of our team for taking strong actions in the quarter to manage expenses and deliver strong gross profit margins. The agility and accountability of the leadership team enabled us to deliver our profit objectives for the quarter despite softer sales and case volumes. I’d like to pivot now to give you a brief update on our two biggest areas of focus, local case growth and overall expense management with supply chain productivity. Starting with local case growth, earlier this year, I highlighted four actions we are taking to improve our performance as seen on Slide 8. I cautioned at the time that these actions would take time to impact the business, but that we are confident in their impact.

First, sales force hiring. We plan to hire a net increase of approximately 400 sales professionals by the end of this year, and we are meaningfully on track to hit that hiring target. The quality of the new hires to-date has been strong and we are actively focused on skills development training for the new cohort. We believe this new sales staff will positively impact our 2025 growth trends. Second focus area, performance management. Our sales consultants have responded to the sales leadership coaching and have increased their visit frequency to Sysco customers. For the remainder of fiscal 2024, and entering fiscal 2025, we are increasing the focus of our sales staff on prospecting net new customers. In a slower traffic environment, we need to increase the number of customers that we service.

Third focus area, sales compensation. We are two quarters live with an updated compensation model and the feedback from our SEs has been positive. Our top performers are seeing their earnings grow and our extended team has ample opportunities to increase their earnings. Importantly, retention data for our SEs is at or above historical high water mark levels. Our updated compensation program better aligns the incentives of our sales teams with the P&L of Sysco. Fourth focus area, total team selling. When a Sysco customer buys from broadline plus one or more of our specialty businesses, Sysco wins and the customer wins too. Why? We remove one or more competitors from the account and we are able to get more cases on a Sysco truck. As a result, we can increase delivery frequency, increase sales colleague coverage, and invest in the customer from a buy more, save more perspective.

Sysco’s extensive produce, protein and now equipment and supplies specialty businesses are unmatched in the industry. We intend to better leverage this competitive differentiation in years to come, domestically and internationally. In summary, we are confident in our ability to profitably grow our local business and we are working on the right things to deliver that growth consistently. This work is a top priority and will receive the necessary focus and attention from our entire team. Let’s transition to our supply chain, and overall expense management at Sysco as seen on Slide number 9. I’m very pleased with the progress we are making on both fronts. Retention is greatly improving, especially within our driver population. This is resulting in better productivity, fewer accidents, reduced product shrink and improved customer service outcomes.

Labor productivity is improving within our warehouse and driver populations. Both departments delivered the highest productivity rates of the past few years in March. Lastly, our transportation metrics are improving as we have increased pieces per truck, optimized our routing metrics and improved on time arrival rates. All told, these supply chain improvements are helping us lower our cost to serve and increase our Net Promoter Scores. Even more impressive is the work we are doing in our global support center to reduce our SG&A expenses, as we delivered a year-over-year 5.5% reduction in SG&A in the quarter. We displayed strong discipline and management agility by leading through a softer than anticipated customer environment. We plan to stay very focused on expense management and gross profit delivery in the quarters and years to come.

It is important to note that while we are very focused on expense management, we continue to invest where it matters. Our supply chain capacity expansion projects remain on track and the investments and improvement in our customer facing technology tools continue to advance. International continues to be a bright spot for Sysco. I recently returned from a trip to Europe and I’m very pleased with the performance of our International business segment and leadership team. Our newly formed global operating model is having an impact. International top-line grew 4.5% and adjusted operating income grew 63.4% in the quarter. Both figures are better and higher than our U.S. business. As I have said, International will be a top and bottom line growth catalyst for years to come at Sysco.

More importantly, there are no structural impediments internationally that prevent Sysco from delivering higher EBIT as a percentage of sales in each international country. Greg Bertrand, our Global COO has identified many examples of best practices that are being shared across the globe to help each country accelerate profit improvement progress. The proof is in the strong profit improvement results that we are delivering. At Sysco, we take a long-term view in running our business, focused upon profitable and disciplined business returns. Despite the softer traffic start to calendar 2024, food-away-from-home is a growth industry as seen on Slide number 10, taking share from the grocery channel for 17 of the past 20 years. We believe that is a macro trend that will have staying power for years and decades to come.

Internationally, the food-away-from-home trend is following a similar pattern to the U.S. business. However, it is many years behind from a penetration percentage. This fact will be a tailwind as Europe follows the food-away-from-home percentage growth trajectory growing sales across all three dayparts. Food-away-from-home is a good business, a stable business, and Sysco has a diversified range of customer types that help us navigate individual segment choppiness, including a strong business in healthcare, hospitality, education and business and industry. As I wrap up my prepared remarks, I will echo something I have said previously. I’m very optimistic about the future of Sysco. We are confident in the strategic plan we are executing against and we have a strong leadership team.

Business plans are always materialized the exact way you draw them up on paper. This past quarter, volume was softer than we anticipated and planned. I am proud of our team for acting with agility and delivering strong bottom line growth for the period despite the slower restaurant traffic. Additionally, we are committed to making progress in local case growth and operations efficiency. These efforts will enable us to deliver solid financial outcomes. Before I turn it over to Kenny, I welcome you to join us in New York City on May 22 for our next Investor Day. We will go deeper into each component of our business strategy and Kenny will present a financial algorithm for Sysco to deliver against for the next three years. We look forward to seeing many of you in New York.

And with that said, Kenny, over to you.

Kenny Cheung: Thank you, Kevin, and good morning, everyone. Let’s start by building upon Kevin’s commentary regarding the quarter. This quarter delivered strong earnings growth in a dynamic volume environment as our teams took appropriate proactive steps and deliver adjusted operating income growth of 8.4%. After the soft January start, we delivered sequential volume improvements each month during the quarter. Our team is focused on improving local case volume growth with several factors that provide confidence in improving results for the remainder of FY2024 and into FY2025. Turning to margin management, continued execution across our operating levers resulted in improvements to both gross profit dollars and margins, and lower structural and variable operating costs.

This included continued progress with supply chain retention and productivity, ending the quarter with our highest monthly productivity rate for the year for both delivery partners and selectors. We are also excited today to announce that we are raising our cost out target for FY2024. We now expect to generate more than $120 million of cost out in FY2024 based on incremental actions during the third quarter. This is especially important to offset the softer than expected near-term consumer backdrop while continuing our investments for growth. In addition to these structural cost outs, our plan this year, also include executing on synergies from our acquisitions this year. For example, with the closing of the Edward Don transaction earlier in the fiscal year, we are already realizing early post acquisition synergies that are in line with our expectations with more to come.

In total, our actions resulted in positive leverage with gross profit growing at a faster rate than operating expenses for the sixth consecutive quarter as we delivered sequential improvement in cost per piece throughout the quarter. Despite the current macro environment, we are confident in our ability to efficiently flex operating expense, the volume performance, and achieve bottom line results. Our continued balanced and consistent approach with capital allocation priorities also resulted in $753 million returned back to shareholders via repurchases and dividends. Our Q3 profit performance combined disciplined use of our operational levers. We remain focused on the long-term along with more consistent and normalized demand in future periods.

As we navigate through transitory industry trends, our size and scale advantages and operating discipline deliver strong bottom line results this quarter, while we continue to gain market share. As the market normalizes, we will be able to use the power of our P&L to continue to deliver accretive results. As we look to finish the year strong, we remain focused on delivering our annual EPS guidance, while also executing on planned share repurchases and dividends in Q4. Now turning to a summary of our reported results for the quarter starting on Slide 13. For the third quarter, our enterprise sales grew 2.7%, driven by U.S. Foodservice growing 3.4% and International growing 4.5%, partially offset by SYGMA decreasing 3.5%. Enterprise inflation was 1.9%.

Additionally, U.S. broadline inflation was 1.2% and our International segment was up 4%. We expect this normal rate of inflation in line with historical averages going forward, which bodes well for the industry. The total U.S. Foodservice volume increased 2.9% and local volume increased 0.4%. Additionally, International local volumes were up over 4%, adding to our outside International growth. As previously outlined, we have plans in place to drive more positive, consistent local volume performance. Please note, volume reporting now includes Don following its first full quarter under Sysco’s leadership. Don positive impacted U.S. Foodservice volumes by 2.7% and local volumes by 1.6%. We deliver expansion in both GP dollars and margins as we produce $3.6 billion in gross profit, up 5.2%, and gross margin improved to 18.6%, an increase of 44 bps.

This improvement during the third quarter reflected our ability to effectively manage product cost fluctuations through tight margin management driven by incremental progress from our strategic sourcing efforts, disciplined and rational pricing, increased mix of specialty as well as improved penetration rates from Sysco brand products within local, which increased 3 bps to 46.5%. Sysco brand continues to offer superior customer value and we expect positive momentum going forward. Overall, adjusted operating expenses were $2.8 billion for the quarter, or 14.5% of sales. Expenses during the quarter included benefits from continued improvements with retention and productivity, Kevin mentioned earlier, in addition to our benefits from a variable labor planning tool and cost out commitments.

Based on incremental actions during Q3, we now expect to generate over $120 million of savings in FY2024. We recently reduced 500 rolls to reduce expenses and fund incremental headcount in higher growth areas like specialty. The residual savings were also used to offset a softer current macro backdrop, which is a proof point of the agility of our business and dynamic levers across the P&L. These Q3 actions position us well to enter FY2025 if we’re delivering incremental cost outs and operating leverage for future years. We continue to be encouraged with the progress of our International segment with adjusted operating income growing 63.4% for the third quarter. This is a continuation of the robust growth and positive momentum in this segment over the past three years.

Q3 adjusted operating income grew 8.4% to $799 million for the enterprise. For the quarter, adjusted EBITDA was $977 million, up 8.5%. Turning to the balance sheet on Slide 17. We ended the quarter at a 2.81x net debt leverage ratio and we are confident we will end the year within our target range. We ended the quarter with $11.6 billion in net debt and approximately $3.1 billion in total liquidity. Approximately 96% of our debt is fixed with the floating component offset our cash reserves. Our debt has well laddered and our strong investment grade credit rating is a competitive advantage for us. Turning to our cash flow on Slide 18. Year-to-date, we generated $1.4 billion in operating cash flow and $864 million in free cash flow. The decline in free cash flow year-to-date was driven by timing of working capital and the Easter calendar impact, along with a planned step up in cash taxes.

Our cash flow is driven by continued strong conversion rates from EBITDA to operating cash and free cash flow, and importantly, we remain on track to grow free cash flow for the full year FY2024. Our strong financial position enable us to return $753 million to shareholders this quarter via share repurchases and dividends. Turning to FY2024 guidance. We are reiterating adjusted EPS of $4.20 to $4.40, our guidance at the mid-point assumes approximately 7% EPS growth on a year-over-year basis. Factoring in the softer overall marketplace, we also expect to end the year with net sales to be approximately $79 billion. Additionally, we remain confident in delivering increased free cash flow by year-end off of a record performance last year. We also plan to remain diligent with operating discipline for the fiscal year and beyond.

For the year, we also remain on target to return over $2.25 billion back to shareholders. Looking ahead to the future fiscal years, we also wanted to highlight and anticipate a step up in our FY2025 tax rate due to the global minimum tax rate rule changes. More details will be shared in our Q4 earnings call. Furthermore, we want you to be aware that interest expense will step up from FY2024 to fund our capital allocation priorities while continuing to operate within our leverage ratio of 2.5x to 2.75x. Looking ahead to Q4 and beyond, our focus on high ROIC investments back into the business will be balanced and disciplined, supporting our industry-leading margin profile. This includes operational discipline with cost out delivery and margin management.

This is in addition to our strong investment grade weighted balance sheet. Our size and scale advantages are meaningful positions of strength for the long-term. We have successfully demonstrated our performance in a variety of operating environments in our company’s long history. That remains true today as we expect to win market share profitably and continue to generate cash with strong conversion rates, ultimately beating our plan to grow and reward our shareholders on the forward. Before I conclude the call, I echo Kevin’s invitation to join us for Sysco’s Investor Day on May 22. If you are interested in attending, please reach out to Kevin, Kim, and our Investor Relations team. Please note this meeting will also be webcast. We hope you can join either in-person or virtually.

Thank you for your time today. I’ll now pass the call back to Kevin.

Kevin Hourican: Thank you, Kenny. I’d like to turn to one more important matter before we move to our question-and-answer session this morning. As you may have seen, earlier today, we announced that Ed Shirley has stepped down as Sysco’s Chairman of the Board for personal health reasons. As a result of Ed’s decision, effective immediately, I will serve as Chair of the Board and Chief Executive Officer. I am honored by this appointment and I look forward to serving our shareholders, our customers, and our colleagues in this expanded responsibility. I want to thank the full Board for their continued support and guidance. More importantly, I’d like to take a moment to recognize and thank Ed Shirley for his tremendous impact on Sysco over his eight years of exceptional service on our Board.

When I joined the company in February of 2020, Ed was our Executive Chair. Ed and I spent countless hours together building what became our recipe for growth strategy and of course, navigating the early and significant impacts of COVID on the food-away-from-home sector. Ed’s wisdom, guidance, and substantial business experience were invaluable to me in those early innings at the company. Roughly a year later, Ed transitioned into the independent Chair of the Board leadership position. He continued to provide substantial and helpful feedback and guidance to me, the Board, and the entire management team from that leadership position. We are a better and more resilient company due to Ed’s impact and leadership. On behalf of the entire Board, I want to thank Ed for his friendship, his mentorship, and for his dedication to our company.

He will be greatly missed. With that, operator, we are now ready for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions]. And it appears we do have our first question from Alex Slagle with Jefferies.

Alex Slagle: All right. Thanks. Good morning. I guess maybe just start off digging a bit further on what you’re seeing in the industry and the demand environment and into early April if anything, just, I mean, it seems like a continuation of the soft traffic environment in restaurants, perhaps some more divergence between the operators that are finding ways to be successful highlighting value versus maybe caught a bit flatfooted. So interested in kind of your view and given such broad exposure, what you’ve seen, if any, divergence between chains and independence or full service, limited service, and maybe just a little bit on giving your strength in private label and all the offerings you have, what that means for Sysco’s opportunity to gain more share in this kind of environment.

Kevin Hourican: Okay. Good morning, Alex. It’s Kevin. That’s a good question and a loaded question. So I’m going to try to unpack it to a couple of points. Just start with the headline, which is traffic to restaurants down year-over-year in the quarter, starting with that tough January start and sequentially improving throughout the quarter. It’s important to note that traffic is what drives distributor case volume shipments, not the same-store sales that they post in their revenues; traffic is the more important of metrics for us. Sysco did gain share in total versus the food-away-from-home sector in aggregate in the quarter, but the volume was less than what we had anticipated. Therefore, the actions that we took and spoke about, and we’re pleased we delivered our profit expectations for the quarter in spite of those overall market conditions.

Now, what we’re seeing in the aggregate data tied to what your second part of your question was performance divergence by type of restaurant operator. It’s more based on income strata than restaurant type. We have customers that serve restaurant highest white tablecloth all the way down to QSR. Our hardest hit sector right now is QSR. You can look at our SYGMA volumes. Our SYGMA volumes were down roughly 3.5% for the quarter, which is an indication of that point. And those that are succeeding are those that either have a differentiated value prop and/or a great product offering and/or a digital app that’s rewarding loyalty, and great operators can be successful regardless of environmental conditions, as evidenced by the quarter that we just posted an overall softer environment, but yet, we were able to deliver our profit expectations and take share profitably during the quarter.

What we’re specifically doing about that is we’re working hard to lower food costs to restaurants, so they can in fact lower menu prices. I do want to be clear about that. I believe restaurants need to lower menu prices. It starts with our negotiations with our suppliers. We need to work hard to create value by lowering costs inbound to Sysco and then share pass on those savings to our end consumers. And we’re fully prepared to do that and to execute that with efficiency, number one. Number two, is we can provide Sysco brand offering at an even more extensive level. We did make progress in local case penetration with Sysco brand and we think we can accelerate that. We’re doing a new packaging overhaul. We’re doing a brand, tier brand hierarchy overhaul that work takes time, but we’re bullish on Sysco brand, especially within the local segment.

And as I said in my prepared remarks, my last comment I’ll toss to Kenny for any comments he’d like to make on April. We can provide our customers with value-added solutions, with our specialty protein business, with our specialty produce business. We can do a lot of the back office cutting, preparing, staging a product, delivered to the restaurant, which takes labor out of the kitchen. Because while food costs have moderated, labor costs at restaurants have not moderated. And we’re seeing upticks from our customers ordering what we call value-added services products, which tend to come at a higher margin for Sysco. So it’s good for our P&L, but it really helps the restaurant take labor costs out of their model. So Kenny, I’ll toss to you for any comment on April.

Kenny Cheung: Sure. Thanks, Kevin. Hi Alex, this is Kenny. The growth rate from March is carrying into April. So if you take a step back and bifurcate Q3 performance, as Kevin noted, January was negative growth, mostly driven by weather. February and March were positive with sequential improvement. So that growth rate from March is carrying into April. As Kevin mentioned in his prepared remarks, we have initiatives in place to improve volume and we have cost levers in place as well to further enhance profit margins. As a company, we are confident we can operate in any environment that’s proven in Q3 and this year, as we had disinflation, deflation to inflationary, which is what we’re seeing at a spot moments. Overall with software macro backdrop, we are still confident with our guidance.

Alex Slagle: Thanks. And then a follow-up on the private label. And you mentioned the opportunity in local, but it would seem like there’s still some opportunity on the national side. I know there’s some differences there, but I’m just kind of curious how you describe the opportunity in terms of maybe the magnitude or the timeframe of where maybe you could get some private label gains in that side of your business that could just move the needle.

Kevin Hourican: Yes, Alex, good question. The primary focus is in local because it’s where the end restaurant operator sees even more value from Sysco, where we can provide them tremendous value for their menu at great quality. And we are very focused on making continued progress there. National is trickier. It’s more complicated. As you know, large, large restaurant chains negotiate direct with suppliers for proprietary products that are on their menu that are unique to them. And then we provide a distribution, cold storage, tri temperature truck delivery on time and in full service for them. So it’s a little bit different model. We can make progress on national. It’ll be slower going and you won’t see step change increases in penetration in national for the reasons that I just described.

With that said, we have a change in management function which Kenny helps supervise. We can provide options to those large national customers to at least have choice. You have your vendor direct program that you can negotiate. This is a program Sysco can offer you that’s comparable or better, and we work to provide that penetration opportunity. So we can make progress on national. The bigger focus is on the local customer.

Kenny Cheung: I think one thing to add on that piece is, as Kevin said, we will make further progress. I think it’s important to call out that we are continuing to improve profitability by leveraging strategic sourcing on both Sysco private label and non-Sysco brands, which is one of the reasons why, Alex, you’re seeing a nice leverage from sales to gross profit.

Kevin Hourican: And Victoria, our Chief Merchant is going to talk more about the Sysco brand evolution at our Investor Day on May 22. Let’s — Alex, thank you for the questions. Let’s go to our next —

Alex Slagle: Thanks.

Kevin Hourican: Next questions. Thank you.

Operator: And we have our next question from John Heinbockel with Guggenheim Securities.

John Heinbockel: Kevin, start with the expansion of the sales force that looks like a 5% or so growth rate. How do you look at that as a catch up versus something that’s sustainable? And then your thought on what that — there’s this thought, right, that you take that and maybe multiply by 1.5% to get local case growth. I’m not sure if that still applies. But how do you think that works through the P&L? And I guess, you’d say it’s almost all going to be new accounts, not existing growth.

Kevin Hourican: Yes. John, I appreciate the question. Let’s start with — I did today for the first time actually size the price from a headcount growth perspective in fiscal 2024. To be crystal clear for everyone who’s listening, that’s a net number. So there’s of course, term that occurs within that population. And this is a net increase in our headcount by year-end of 400. We’re on track to be able to hit that target. It’s the start, John, of what will be a continued forward progress on hiring. Today, I’m not going to disclose the hiring target for fiscal 2025, but again, that’s something that we can talk about at our Investor Day. And we do intend to talk about at our Investor Day for Q4 and frankly, for all of fiscal 2024.

This is an investment, as in below water investment. I mean the expense greater than the revenue and profit that they’re contributing. But we are confident and that will continue in Q4. It’s an investment in Q4. It will positively impact our fiscal 2025 financial outcomes with a positive return on investment. And again, we’ll talk more about the impact of that and how it contributes to our sales growth targets at our Investor Day.

John Heinbockel: Okay. And maybe as a follow-up, you talked about affordability, maybe speak to your thoughts on elasticity and how do you work with. I know you talked about private brand and getting your costs down, but obviously, you can take your costs down. You have to get your customers to pass that through to their end customer, your confidence in that occurring. And then when you think about elasticity for your customers, how do you assess that, right? And what has to be done with affordability to move the needle?

Kevin Hourican: That’s a really good question. I’ll unpack the first part, second part. First part, listen, we admire, respect, trust our customers. And I want to be clear. They are running their business to the best of their abilities. But what we are seeing, John is, we are in fact providing more value year-over-year to end restaurant operators. And we’re not seeing that show up on menu prices. That’s the main point. And I believe that menu prices need to come down for traffic to grow. And I believe restaurant operators are going to become more aware of that reality as time progresses because they’re — as you know, benefiting from those menu price increases at this point in time. To be fair to the restaurant operator, their overall operating costs have gone up.

Their labor costs are up significantly over the last three years. And some of that menu price taking has been necessary to offset that wage increase, especially in a State like California. So you understand how dynamic that is. And they’re making the best choices for their individual business P&L. What we need to focus on at Sysco is what we can control. What we can control is the price we pay for the product we purchase and the prices that we offer that product to our customers, so that we can provide value to them, so they will choose Sysco and choose us at an increased rate over time, because value does matter meaningfully in this environmental condition. Which segues to the second part of your question, which is price elasticity, we’ve gotten much better at this over the last few years tied to our strategic pricing software.

It is very robust. We know at the customer level, elasticity at the item level, and we price accordingly. John, what we’re seeing just from some color perspective, and this will not shock you, restaurant operators need for really sharp prices on their key commodities is intense right now. So tremendous focus, let’s call it their top 10 items, and we need to be right on price on those top 10 items. And it’s intense out there right now. The need for restaurant operators to lower their costs for those highest volume SKUs. So we need to be sharp there. We need to be sharp and we need to be right on price on those items. That means relative to the market competitive. And what that means is there’s a long tail of product and the long tail product is more inelastic and we will never take advantage.

But we have an opportunity to be a little higher in price, perhaps on some of those inelastic SKUs to fund sharper prices in the commodity space. And that’s something that we’re working on. That’s something that we leverage our technology to deploy. The thing that we need to get better at from a pricing perspective is the ability to react in the moment at that individual customer level. If we have a competitor in the account who wants to win business from our customer, we need to enable our sales reps to make timely decisions to respond in the moment and that’s something we’re working to improve upon, and I’m confident we can improve in that regard.

Operator: And we now have our next question from Mark Carden with UBS.

Mark Carden: Good morning. Thanks so much for taking my questions. I want to start with one that’s building a bit on the last question. How has the broader distributor pricing backdrop been amid some of the industry headwinds? It’s placed in 3Q. Are you seeing competitors being much more aggressive with upfronts in this environment? There’s still the concern, obviously, about avoiding a race to the bottom. Just what do you think on that front?

Kevin Hourican: Mark, I think it starts with the restaurant operator. The restaurant operator is looking for value right now because of their P&L, the labor cost point that I mentioned. So we’re seeing increased activity of what I’ll call price shopping. The goodness of digital penetration also creates an environment where it’s easier for an end restaurant customer to be able to shop for price. So we’ve moved our digital order placement from 35% to over 80% over the last couple of years. And that is an in aggregate terrific thing for Sysco. They buy more, they buy categories, they’ve never shopped from before. We can provide them personalized offers. We can provide them personalized pricing. But competitors have ordering websites too.

And it’s easier now for a customer to be able to rate shop across distributors, and they need to because their labor costs that I mentioned. So it’s less activity from our competitive set, it’s more customer driven. We’ve seen an increase in front shopping. I’m sure that’s very clear and very straightforward to you. And it’s specifically, as I mentioned in the answer to John’s question on commodities. So it’s an aggressive market right now from a commodities perspective, if you’re not right on price, you’ll lose that business. And we need to be appropriately priced in that regard. And that’s something given our purchasing scale, we at Sysco can drive the best possible purchasing cost and we can be credible and relevant from a price perspective to our customers in that regard.