Welcome to Sysco's Fourth Quarter Fiscal Year 2026 Conference Call. We will begin today's presentation with opening remarks and introductions. I would like to turn the call over to Kevin Kim, Vice President of Investor Relations.
Please go ahead.
Good morning, everyone, and welcome to Sysco's Fourth Quarter Fiscal Year 2026 Earnings Call. On today's call, we have Kevin Hourican, our Chair of the Board and CEO; and Brandon Sewell, our Interim CFO. 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 June 28, 2025, 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 our company's -- 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 also 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.
At this time, I'd like to turn the call over to Kevin Hourican.
Kevin Hourican
Chair Of The Board And CEO
Good morning, everyone, and thank you for joining us today. I am pleased to report that Sysco delivered strong results in the fourth quarter of fiscal 2026, exceeding our expectations on the top and bottom line. Our results for the quarter beat our prior guidance for adjusted EPS and USFS volumes.
The outperformance included healthy case volume growth from both local and national customers in our USFS segment and continued strong volume growth in our International segment. Our strengthening top line trends, combined with solid supply chain productivity gains, helped to drive year-over-year profit growth across each of our 4 business segments. Additionally, as we mentioned last quarter, we have launched meaningful efficiency improvement efforts powered by AI technology modernization that helped enable solid growth across operating income, EPS and EBITDA.
We will speak more about these efficiency improvement efforts as we provide visibility today into our 2027 fiscal guidance. Most notable in our Q4 performance is that our business momentum accelerated on a 2-year stack basis. And as a result, we are confident to guide fiscal 2027 to 9% to 11% adjusted EPS growth.
Let's jump into our business results, starting on Slide 4. From a top line perspective, Sysco delivered over $22 billion of total revenue, a growth rate of 4.7%. These revenue results reflect positive case growth across our local, national and international business units.
From a bottom line perspective, we delivered adjusted earnings per share of $1.53, which was ahead of our previously communicated expectations. The quarter enabled Sysco to deliver $4.61 for the full year, above our full year guidance range. The beat performance for the year is a sign of the momentum in the business that we expect will carry into 2027.
As seen on Slides 7 and 8, we have clear positive momentum in our local business, where USFS local volumes for the quarter grew 2.6%, improving 130 basis points sequentially on a 2-year stacked basis. Each month of the quarter was stronger than the prior with June being the strongest month of the period on a 1- and 2-year basis. In our USFS segment, we grew local cases 0.5% in the first half of the year, and we grew local cases 2.9% in the second half of the year.
The meaningful performance step-up was driven by improved colleague retention, improved colleague productivity and targeted growth initiatives. Sysco Your Way and Perks 2.0, for example, delivered solid revenue growth. Most notably, our AI360 selling tool increases sales colleague confidence, productivity and job satisfaction.
The result is that we continue to post compelling new customer win rates, along with improved customer loss rates in the quarter, while posting solid improvement in penetration with existing customers. In fact, our penetration performance in the quarter was stronger than the overall industry, proving that the AI selling tools are positively impacting colleague productivity and selling effectiveness. All told, Sysco grew our independent customer business faster than the overall industry as we exited the fiscal year.
The sequential improvement we delivered in fiscal 2026 gives us strong confidence in our local business growth targets for fiscal 2027. Another proof point of our progress is evident in our Sysco Brand performance. In Q4, we delivered positive Sysco Brand mix in our local business with an increase of 30 basis points versus last year to 46.4%, driven by a focused plan of action.
We are strengthening our Sysco Brand value tier assortment. During Q4, our value tier item sales growth was 4x faster than our overall book of business, and this is not cannibalizing our existing business. These are net new cases being sold to existing Sysco customers.
These customers were previously buying these value-tire products from other competing distributors and not from Sysco. Getting those cases onto a Sysco truck increases our profitability. In addition to the assortment work, we are working to optimize Sysco Brand strategic pricing architecture, linking Sysco Brand pricing strategies with the ebbs and flows of national brand prices, similar to what you would experience at a retail store.
While this was always our strategic intent, AI tools are helping us execute this strategy more consistently. Lastly, AI360, as I mentioned earlier, is serving up Sysco Brand conversion opportunities to our sales colleagues. Our system prompts our sales colleagues to engage their customers if an opportunity exists to save a customer money through a brand conversion.
Overall, we made significant progress in Sysco Brand, and we expect mix penetration to be positive in fiscal 2027. Sysco Brand will contribute positively to our overall profitability in 2027. Turning the page to our national contract business.
During our fourth quarter, our national business delivered a step-up in performance and generated case volume growth of 2.6%. The positive result was driven by growth in our health care, travel and hospitality and foodservice management businesses, partially offset by industry-wide softness in national restaurants. For fiscal 2027, we expect to deliver positive case volume growth for national contract customers despite a macro foot traffic environment that remains challenged.
Foot traffic to restaurants remains down year-over-year, and Sysco is growing our business, taking share and delivering profitable growth year-over-year. We will remain focused throughout 2027 on growing our contract business in health care, travel and hospitality and foodservice management while optimizing our performance with large national chain restaurants. Moving to the middle of the P&L. Gross profit was up 3.7%, reflecting our organization-wide focus on strategic sourcing and momentum with Sysco Brand penetration rates.
Sysco's adjusted operating profit improved 4.1%, outpacing gross profit and reflecting contributions from continued productivity gains within our supply chain. Supply chain expenses grew at a slower rate than revenue and gross profits. Our warehouse and delivery operations achieved our productivity targets for the year, and we increased on-time delivery performance versus customer promise windows by 10 full points in the quarter.
Routing efficiency improvements have lowered our cost to serve and increased the service levels that we provide to our customers. I am thankful for the strong performance from our operations team. These hard-working colleagues and leaders are often the face of Sysco to many of our customers.
This year marked our third consecutive year of delivering meaningful reduction in miles driven and improved pieces per mile. As we upgrade our routing software in fiscal 2027, we anticipate continued positive contributions to our P&L from routing efficiency while simultaneously improving the customer experience, especially for Perks customers. As we mentioned during our Q3 earnings call, we kicked off efficiency improvement efforts that have benefited the fourth quarter and will carry into fiscal 2027.
The efficiency projects helped Sysco exceed our adjusted earnings per share guidance for the quarter and the year despite pausing our share repurchase program. During our guidance section today, we will talk to additional efficiency improvement activities that we are pursuing and how they will contribute to the fiscal 2027 profitability. These efforts include AI-driven business transformation.
Turning to our International segment. This quarter represents the 11th consecutive quarter of double-digit adjusted operating income growth and highlights the continued strength of Sysco's global footprint, a unique competitive advantage. Our international business delivered adjusted operating income growth of 15.7%, fueled by volume growth in every international geography with local cases growing 4.5%.
The continued local outperformance is being generated by expanded supply chain capacity, increased availability of Sysco branded merchandise, increased sales headcount and easier-to-use technology. Since 2022, our international team has delivered meaningful progress, and we have more than doubled adjusted operating income margins from approximately 2% in 2022 to over 4% in fiscal year 2026. There are no structural barriers that will prevent our International division from achieving the profitability profile of our U.S. business over time.
Our international leadership team is performing for today while transforming the business for a stronger future. I am thankful for the leadership and performance being delivered by our international team. Now that I have provided a high-level summary of the quarter, I would like to share an update on the status of the Restaurant Depot acquisition.
We are excited about the acquisition of Restaurant Depot and the bold new chapter of profitable growth it helps to unlock, a future that creates a combined company positioned to step up sales growth, be more profitable and return more value to shareholders than a stand-alone Sysco. Most importantly, we will increase our ability to help save restaurants money with a more efficient buying program and by expanding Restaurant Depot's low-cost format to 125-plus net new geographies over time. We will expand affordable options for restaurants by bringing the low-cost Restaurant Depot model to hundreds of additional communities, and we are committed to not raising prices in Restaurant Depot stores.
What makes Restaurant Depot great is their compelling value offering. We will do nothing to compromise that under Sysco's ownership. In fact, we think we can strengthen it by buying together and leveraging our combined supply chain to keep costs low.
Since our planned acquisition was announced on March 30, we have worked hard to communicate the strategic merits of the deal. I will not completely repeat those points today, but I would like to highlight the key themes on Slide 10. Our combined company will grow faster and will have more exposure to the most profitable segment of the business, local.
Local restaurants are performing better than national chains for a host of reasons and increasing our work focus on local customers is a net-net positive for the long term. EBITDA margins of the company are expected to expand by more than 140 basis points. We plan to deliver $250 million of cost synergies through strategic procurement efforts.
We will develop and launch revenue growth initiatives that are not included in the deal model. These efforts have the opportunity to exceed the value of the procurement efforts just mentioned. An example of these opportunities is leveraging Restaurant Depot stores to fulfill orders for Sysco delivery customers when the customer needs product immediately.
In many instances, the Restaurant Depot store is closer to our end customer. This multichannel concept would grow our collective sales in a cost-efficient manner. We also have an opportunity to leverage the strong assortments from the 2 businesses bidirectionally to expand our offerings to the customers.
Lastly, we will expand the Restaurant Depot format to harder-to-reach communities and eventually to Canada by leveraging Sysco's inbound supply chain capability. All told, these efforts enable day 1 EPS accretion, year 1 EPS accretion in the top quartile of M&A transactions and accelerating EPS accretion as our debt level is reduced and our excess free cash flow is utilized to reduce our share count and increase our dividend. We understand that reducing our debt level is a priority for investors.
It is a high priority for Sysco management as well. We are 100% confident in our ability to delever quickly by utilizing the compelling cash flow generation of core Sysco. We will improve Sysco's cash flow through the AI transformation efforts I mentioned previously.
And when combined with Restaurant Depot's strong cash flow, we can reduce the debt level quickly. Most importantly, the combined company will grow faster, be more profitable and return more value to shareholders than a stand-alone Sysco. These efforts are expected to accelerate Sysco's TSR into the mid-teens.
In regards to deal approval, as expected, we received a second request from the FTC during the quarter. Our initial expectations for the deal to close by the third quarter of fiscal 2027 remain unchanged. This deal expands affordable food options, creates jobs and is good for restaurant operators.
We are confident that the government review will conclude that the deal is positive for restaurants and for competition. Lastly, I would like to provide an update on the performance results from Restaurant Depot. We have been advised by Restaurant Depot leadership that in their most recently completed calendar quarter, their sales growth was approximately 4% and their operating margins were in line with expectations.
Through half of their calendar year, Restaurant Depot is delivering strong profit growth versus prior year and compelling overall financial performance. The Restaurant Depot business will substantially increase Sysco's profitability. It will also provide a natural hedge to a softer economy as the business benefits during economic downturns.
More importantly, our combined company can create customer engagement opportunities that will be unmatched in the industry, enabling us to grow our business profitably in the important local customer segment. We believe Sysco's strong finish to the year and the guidance for fiscal 2027 demonstrate a firm foundation from which Sysco will build our future together with Restaurant Depot. In my closing section today, I want to summarize the highlights of our fiscal 2027 guidance.
We expect the strong exit velocity of our business in Q4 of fiscal 2026 to carry into the coming fiscal year. Our positive momentum will continue in local case growth and Sysco Brand mix. Our International division will continue to post double-digit profit growth in 2027.
We expect to deliver revenue growth of 6% to 7% for the year. The revenue growth will be enabled by approximately 2.5% local case growth in our USFS segment. Through disciplined margin and expense management, we expect to deliver adjusted EPS growth of 9% to 11% in 2027.
To be very clear, the revenue and EPS figures just mentioned include the benefits of the 53rd week. Excluding the 53rd week, we expect Sysco's earnings growth to be at the top end of our long-term growth algorithm even with the suspension of share repurchases and the softer macro backdrop. When coupled with our industry-leading dividend, we anticipate a year of double-digit TSR in fiscal 2027.
To enable the earnings guidance just referenced, our team introduced an organization-wide efficiency improvement program driven by AI transformation. A summary of these efforts can be seen on Slide #11. We have identified AI growth and business efficiency improvement projects across sales, merchandising, supply chain and back office.
We expect the combined benefit of these efforts to deliver approximately $100 million of in-year savings in fiscal 2027, inclusive of the cost-out savings we shared on our Q3 earnings call. Brandon, our technology leadership team and I are leading this work across the company. The $100 million we have identified is just the start of the effort.
We expect to announce our multi-year operating margin expansion commitment from these efforts later this year. The opportunities are significant and exciting. We believe we can improve service to our customers, do our work more efficiently and reduce our structural operating expenses by leveraging best-in-class technology.
Sysco is leading our industry in these efforts, and this work will enable us to sustain and expand our industry-leading profitability. The combined impact of our core business momentum and the AI business transformation, we expect will deliver adjusted earnings per share growth of approximately 9% to 11% while improving service to our customers. With that, I would now like to turn the call over to Brandon to provide additional insights into our Q4 performance and guidance for fiscal 2027.
Brandon, over to you.
Thank you, Kevin, and good morning, everyone. At the highest level, I am encouraged that we were able to over-deliver on our previously communicated guidance for the quarter and the year. As Kevin outlined, our company specific initiatives drove tangible results across our business.
We expect this positive momentum to continue in FY '27, anchored on operational rigor, inclusive of our cost savings program. We have a high degree of confidence for delivering our FY '27 guidance across the P&L, cash flow and rewarding our shareholders with another year of dividend growth. As shown on Slide 13, our Q4 results included sales growth of 4.7%, continued volume growth in the USFS and International segments, strong margin management and adjusted EPS of $1.53.
As Kevin stated, this allowed us to exceed our annual EPS guidance, delivering $4.61 of adjusted EPS, even after pausing share repurchase for the year. Importantly, our largest and most profitable USFS segment continued to deliver balanced top line growth during the quarter while also growing adjusted operating income. Our financial results also included free cash flow growth of 16.3% for the year.
Q4 benefited from positive operating leverage for the enterprise with a 3.7% rate of growth in gross profit, outpacing a 3.6% rate of growth in adjusted operating expense, which included global pressure from the higher fuel prices. This performance also reflects continued positive volume growth across our important local customers and positive mix shifts from our Sysco Brand penetration rate. Performance in local continued to be driven by sales colleague retention, particularly among our newer and mid-tier associates, which helped to drive incremental improvements in productivity rates.
Additionally, volume trends included a step-up in growth from our national customers in the U.S. and continued volume growth in our International segment. Our supply chain continued to deliver productivity improvements and performed at an exceptional level, as Kevin highlighted. We expect further positive momentum and growth across local, national and international volumes in addition to progress in supply chain, driving compounding productivity gains in FY '27 and beyond.
Turning to International, as shown on Slide 15, the positive momentum over the past few years continued in Q4, with sales growth of 6.7%, including local case growth of 4.5%, gross profit growth of 7.3% and adjusted operating income growth of 15.7%. Our strategy drove results with this quarter, marking our 11th consecutive quarter of delivering double-digit improvements in adjusted operating income. During fiscal 2026, we rewarded our shareholders by paying out $1 billion in dividends and repurchasing $200 million in shares.
Now let's discuss our performance and the financial drivers for the quarter. Starting on Slide 13. Our enterprise sales grew 4.7%, driven by growth across all segments.
Total U.S. Foodservice volumes increased 2.5%, reflecting both local and national volume increases of 2.6%. Sysco produced $4.1 billion in gross profit, up 3.7%, partially offset by a 17-basis point decline in gross margin to 18.7%. Our teams continue to effectively manage product cost inflation across our category basket, delivering improved gross profit per case performance.
Gross margin performance was in line with our expectations for the quarter. However, there were 2 factors that affected year-over-year comparability. First is to call out that in our prior year 2025, we realized outsized single quarter benefits from our strategic sourcing initiatives.
The timing of those benefits was unique to that period and created a challenging comparison. The second factor was in Q4 of this year related to the increased cost of fuel across the business. Approximately 80% of our bulk fuel purchases are hedged over the next fiscal year.
During the quarter, elevated fuel costs impacted both food input costs and inbound transportation expenses. We've been very thoughtful about what portion of that increase we absorb in our business to keep our food affordable for customers. Our 2027 plan takes this backdrop into account.
And importantly, we are confident we can expand our gross profit margins in the coming year. During the quarter, inflation rates for the enterprise were approximately 2.8%, while inflation in our USBL business was approximately 1.3%. Overall, adjusted operating expenses were $3 billion for the quarter or 13.5% of sales, a 20-basis point decrease from the prior year, reflecting strong operating leverage within our business.
Results included cost-out efficiencies, partially offset by planned investments in the business across sales headcount, fleet and building expansions. This also included lapping of $11 million in incentive compensation from the prior year. Additionally, SYGMA results this quarter were solid, reflecting 3.1% sales growth and 11.1% operating income growth, driven by continued improvement in our supply chain operations.
Corporate adjusted expenses were down 9.8%, which included benefits from the previously discussed cost-out efforts implemented earlier in the year as well as lower insurance and other costs. Overall, adjusted operating income grew 4.1% to $1.1 billion and adjusted EBITDA grew 4.7% to $1.3 billion. Let's now turn to our balance sheet and cash flow.
Our investment-grade balance sheet remains robust and reflects a healthy financial profile. We ended the quarter at a 2.7x net debt leverage ratio. Turning to our cash flow.
Our free cash flow for the year was $2.1 billion, up 16%, highlighting strong quality of earnings and a disciplined CapEx strategy. Building on Kevin's commentary related to the merits of the Restaurant Depot transaction, I would like to provide an update on the deal financing strategy. In June, our finance team executed an additional $2 billion of interest rate hedges, further stepping up our cumulative hedge position related to debt financing.
Then in July, we filed our registration statement on Form S-4, which was subsequently declared effective by the SEC. In preparation for this transaction, we remain focused on preserving cash levels, improving our core Sysco working capital and remain committed to quickly delevering the balance sheet as illustrated on Slide 23, consistent with prior communications. We know how important debt reduction is to our investors, and it is important to our leadership team as well.
To that end, our team has already voted to add structural cost-out to our long-term equity performance program. That structural cost improvement will be leveraged to accelerate our debt reduction efforts and increase Sysco's overall profit margins. Kevin and I are excited about that work, and we are partnering with our technology leadership team to improve the efficiency of how we work.
These projects are tangible, real and meaningful contributors to our future growth and performance. Kevin and I consistently emphasize that these efforts not only reduce administrative costs and complexity but also improve the customer experience by enabling our teams to spend more time driving growth and engaging directly with customers. Now I would like to share with you our expectations for FY '27, as seen on Slide 24.
To be clear, all elements of our fiscal '27 guidance reflect the core Sysco business on a stand-alone basis and are inclusive of the 53rd week. During FY '27, we expect reported net sales growth of approximately 6% to 7% to approximately $90 billion. These assumptions include volume growth, inflation of approximately 1.5% to 2% and approximately 2% related to an extra week.
Specific to volumes, we expect to deliver year-over-year local case growth of approximately 2.5% in USFS, driven by continued productivity gains with sales professionals based on improving tenure. As Kevin mentioned, we are also announcing $100 million in-year cost-out, inclusive of the cost-out announced in Q3 as detailed on Slide 11. On a run rate basis, this represents cost-out of approximately $160 million.
This financial guidance assumes a macro and industry foot traffic environment similar to conditions of this past year. If conditions improve or should our cost-out savings efforts overdeliver, this would represent potential upside to our plan. All in, we currently expect full year 2027 adjusted EPS in the range of 9% to 11%, equating to adjusted EPS of approximately $5.02 to $5.12.
Within the context of the current environment, our outlook reflects the midpoint of the guidance range of approximately 10% growth, which is a significant step-up relative to each of the prior 2 years. To help with phasing for the year, we expect our cost-out benefits to build with the most significant impact occurring in the second half. From a year-over-year comparability perspective, Q1 of FY '27 is lapping an approximately 4% benefit from a favorable effective tax rate in the prior year.
All in, we are comfortable with an adjusted EPS range of $1.18 to $1.20 for Q1. For the year, we expect our USFS segment to deliver profit growth. We also expect our International segment to continue delivering double-digit profit growth for the year.
We remain on target for shareholder returns through approximately $1 billion in dividends. Specific to our dividend, our Board of Directors previously approved a $0.01 increase to our April dividend, which represents approximately 2% growth in our quarterly dividend on a go-forward basis to $0.55 per share. Recall that we previously suspended our annual share repurchase efforts as part of the announced JRD transaction.
We look forward to resuming share repurchase efforts after successfully reaching our previously shared deleverage targets. Now turning to a few other modeling items. For the full fiscal '27 year, we expect adjusted corporate expenses of approximately $900 million, adjusted interest expense of approximately $675 million, adjusted other expenses of approximately $50 million, a tax rate of approximately 23.7% to 24.2% and adjusted depreciation and amortization of approximately $850 million.
CapEx to remain at approximately 0.8% of sales or $720 million. Looking ahead, we are confident that our company-specific initiatives will continue to drive positive momentum into fiscal 2027. Combined with the advantages of our industry-leading scale and capabilities, we are well positioned to accelerate customer growth while delivering long-term value for our shareholders.
With that, I will turn the call back to Kevin for closing remarks.
Kevin Hourican
Chair Of The Board And CEO
Thank you, Brandon. I appreciate all that you were doing for Sysco, our shareholders and our customers. Q4 was a quarter displaying momentum and progress at Sysco.
We are confident in our continued progress in fiscal 2027 as we plan to deliver solid revenue growth and adjusted earnings per share growth at the high end of our long-term growth algorithm. We are proud of our Dividend Aristocrat status and 57-year track record of dividend increases. For fiscal year '27, we expect to deliver a double-digit TSR.
Our U.S. business is performing. Our International segment continues to exceed expectations. We are working diligently on the Restaurant Depot acquisition.
I would like to thank all Sysco colleagues for their dedication to our customers, the strong finish to our fiscal year and the compelling engagement that they are bringing to our customers. Confidence and momentum are building across the company, and I've never been more excited about the opportunities ahead for Sysco. With that operator, we're now ready for questions.
Kevin, I wanted to ask about the incremental cost savings related to the tech and AI initiatives. Slide 11 was helpful as you called out. Just as you look at those 6 areas of focus there, are all of these kind of equal contributors?
Does one area stand out as the largest contributor to that outlook? And I think there was a comment that this is really just the start of this initiative. So just curious, it sounds like it's early, but just what does the runway look like in future years?
Because the message that I'm hearing is that it can essentially replace the EPS impact of, kind of, losing the buyback impact of this year. So just curious what kind of that algorithm might look like in future years as you, kind of, incorporate these savings into the next couple of years?
Kevin Hourican
Chair Of The Board And CEO
Why don't I toss to Brandon to get started to set the context of the financial elements of what you just asked, what flows through to '27, our thoughts for the future. You asked about is it evenly distributed or some bigger hit topics. And so he'll cover a couple, and then he'll toss to me, and I'll do a wrap-up.
So Brandon, over to you, please.
Yes, perfect. Yes. I think for '27, I'll address first, I'll give a couple of examples.
From a timing perspective, that $100 million in the tech savings, it is net of investment. It will start towards the end of Q1, and it will be back half weighted as we implement the technology across those work streams that you see on that slide. I should also say it will be weighted towards USFS.
Maybe I'll share a couple of examples from my shop and then, Kevin, you can add anything you'd like that would contribute towards that $100 million. The first one I would share is tech to improve fill rates and inventory forecasting accuracy. It will benefit our working capital.
As a reminder to the team here, a day of working capital is worth a couple of hundred million. So we'll use those improvements to deleverage faster than we've previously shared, and that's a body of work we're really excited about. The second example I would share is related to our indirect space, not a space that generally gets a lot of attention, but we will use reverse auction tools to tackle that indirect expense, and it's significant.
We buy a lot of indirect and supplies and parts with our fleet and our warehouses, and that tech will allow us to work faster and really address more than we've been able to address historically. So those new capabilities are worth tens of millions and will ramp throughout FY '27. Kevin, any projects you want to add?
Kevin Hourican
Chair Of The Board And CEO
Yes, I will. Just before I go into projects, let me just take a giant step back. We've been hard at work at this subject for the past, let's call it, 100-plus days evaluating every part of our business.
And the mantra that I'm using as the leader of the company is better, faster, cheaper. Where can we improve the customer experience through improved technology, where can we do the work, we do faster, more agile, solve problems more quickly. And the last is do it more efficiently.
We can eliminate administrative tasks, allow our team to spend more time on sales activities, allow our team to spend more time with customers to grow the business. So better, faster, more efficient. Brandon gave some good examples on back office.
I'll give a couple of other examples. Routing, we're doing a massive effort on upgrading our routing software. To be very, very clear, it's our existing routing software provider upgrading to their latest version of their software.
It has capabilities that the current version we have does not have. We will be deploying that to all of our U.S. locations eventually internationally. But it's more than the software.
It's about changing how we do that work. It's about customer-centric routing capabilities, doing that work in a more agile manner, decreasing miles driven while simultaneously increasing our on time to the delivery promise to the customer. That's a perfect example of better and more efficient.
The routing opportunity is significant. Another one is tech for tech, leveraging coding improvement technologies, I won't say the name of vendor providers to do the technology work that we do better and more efficiently. We can either do more for the same or we can do the same amount of work we currently are doing for less spend.
Last example for me is in our contract bid business. We have many, many thousands of contracts. We can leverage AI technology to write better contracts, contracts that have a better profitability profile.
And then we can, more importantly, leverage technology to match the transactional actual performance of that customer against the contract to make sure that we're paying appropriately for the work that we're doing or getting paid appropriately for the work that we're doing. There can be some leakage in that sector over time if those contracts aren't being managed appropriately. So these are just examples.
I think we've given you enough color to say there's tangibleness, there's clarity. And to answer the first part of your question, this will build over time. So the $100 million is net of investment as it will flow directly to the bottom line in 2027.
Brandon quoted the run rate value is $160 million of the work we have already identified. We continue to find new sources of value. We will continue to revise and update the savings opportunities.
That number will go up over time, and that's something we can talk more about at upcoming investor opportunities. And yes, it more than covers the pausing of the share buyback. Thank you for the question, Kelly.
I have a follow-up and then a separate question. But just a follow-up on Kelly's question. I think your supply chain costs alone are probably 60% or so of your OpEx.
I mean that's like $7 billion. So the $100 million seems like it's, kind of, scratching the surface. Kevin, my question for you is, do you think that longer term, the opportunity here could be a catalyst to accelerate the algo?
Or is it more or less this is one of the levers that we continue to have to drive confidence in the algo? And then my real question is around the U.S. Broadline EBIT growth for '27. Obviously, coming off a little bit softer Q4.
Could you just maybe give us a little bit more color on the building blocks of the growth in '27 and the key drivers and how you think about the level of that growth?
Kevin Hourican
Chair Of The Board And CEO
This is Kevin. I'll start on the supply chain and what we see as the opportunity for the AI work to impact our algorithm. Brandon will cover the USFS question.
He can explain also in Q4, some of the why it was in his prepared remarks, but he can reinforce 2 things that were unique about Q4 and then more importantly, talk about why we're very confident USFS will grow profit year-over-year throughout 2027. But back to your first question in point, we have tangible specific concrete work we're going to do with AI to be better and more efficient in how we do the work. Routing is significant.
It is a huge opportunity for continued improvement. We just had a really good year in supply chain. Back to the year we just wrapped up was our strongest supply chain performance in a very long time.
It positively contributed to our P&L at large. We grew our supply chain expenses lower than we grew our revenue and our volume in cases. Therefore, it had a positive impact, and we believe that will accelerate in the coming quarters and years with the good work that we are doing.
And on this morning's call, we're not going to change our long-term algorithm. What the year ahead shows is that net of the 53rd week. So take that out, the guidance that we have provided today at the midpoint is at the very high end of our long-term algorithm.
How I would say it is the work we're going to do with AI, the compounding nature of the efficiency improvement will allow us to be at that high end of the algorithm that we've put out on an ongoing basis. And if there's an opportunity to beat it, as Brandon said, by doing even more work than we have got line of sight to today, we can talk about longer-term revisions to the algorithm over time in the future. So let's come back to your question on USFS and profitability.
Brandon, over to you.
Yes. Maybe I'll address first Q4, Ed, your question related to the margins and then let me give some commentary on FY '27 and how we're feeling specifically about USFS. There were a couple of items in Q4 on a year-over-year perspective that affected our margins.
The first was going back to FY '25, if we go to Q3, strategic sourcing was low and that value was pushed into FY '25, Q4. So the year-over-year lap for '26 Q4 was challenging because of that huge strategic sourcing number in FY '26 -- FY '25, Q4. The second item is fuel.
Remember, 80% of the fuel we purchase is hedged. With that, inbound freight costs due to fuel were elevated, and we don't hedge that inbound fuel. With the inbound, we monitored it during the quarter, and we made purposeful choices to absorb some of that cost.
So we'll continue to show discipline there and manage our costs and our profitability. I'd say the second point on fuel is on outbound. We've mentioned this before that we have fuel surcharges in place, and there is always a lag of 90 days with our contract customers that FY '26 Q4 cost then gets paid for in FY '27 Q1.
So that pressure will ease a bit as we head into FY '27. And then the second part of your question, how does all of that kind of lead into FY '27 USFS profitability? Well, I mentioned it will ease up a bit as we go into '27.
A couple of other things that will take place in '27. The $100 million in cost savings that I just talked about, and Kevin talked about will lean USFS. So that will help as we ramp those tech projects throughout the year.
The other component that we were really satisfied with in Q4 was our Sysco Brand. It was 30 basis points positive. That continues to grow and accelerate.
So that will be a bigger contributor now that it has turned positive. Obviously, we'll have a full year of local sales growth in FY '27. And then you talked about supply chain a little bit.
That's our core operations, and it performed really well in Q4. We've doubled our retention rates with our drivers and selectors since FY '24, but we feel that we have further opportunity to continue those OpEx improvements in FY '27. So overall for USFS, we expect to deliver strong profit growth, and we're optimistic about the year.
Kevin Hourican
Chair Of The Board And CEO
To put a bow around what Brandon just covered, it's the aggregate of those components that gives us the confidence to deliver profit growth in USFS and the exit velocity of June and the exit velocity of Q4 is where we need to be. There's no big step-up with the exception of the $100 million cost-out, which throttles throughout the year because these are projects that launch. The core business is performing.
And last but not least, tied to that, one of the projects that Brandon covered is improving our forecast accuracy in the inventory space. We have a dual mandate there of improving fill rate outbound to customers he quoted, it's $250 million of cash that we can improve by taking a day of inventory or working capital day of inventory improvement to the degree that we succeed on that project or exceed expectations, we will take all of that cash to plow towards delevering faster. That is our commitment.
The incremental cash flow that we generate will be targeted towards delevering faster ahead of schedule versus what we communicated on March 30 for the deal model. We understand how important delevering is to our investors. It's very important to Sysco.
I have a follow-up to Ed and then a real question. The follow-up is just on the USFS gross margins, the comment on inbound fuel. Is the right read that you're not passing it fully through pricing lower potentially to gain new customers?
Or is this more of a timing dynamic? And then my real question is on case growth. So U.S. local case growth, you're guiding to 2.5% for the year.
Any color on, like, what you're seeing quarter-to-date and how you're thinking about the cadence of growth? And then any more color on expectations on the national side?
Kevin Hourican
Chair Of The Board And CEO
It's Kevin. Let me just -- it can be confusing, fuel, what's hedged, what's not hedged. Brandon covered some key points.
Let me repeat some of the key points that he made. Outbound customers, we are substantially hedged for more than a year. We have a good program.
We have with key customers fuel surcharges that are in place that flex up and flex down based on cost economics. What he highlighted is one of the reasons for gross margin pressure in Q4 was inbound. For some of our suppliers, they manage the transportation, Lauren.
So it's built into the cost to us on the product, so it shows up in our margin rate. And we did see increased costs on inbound fuel for the fourth quarter. To be clear, we have modeled that for all of 2027.
So the guidance that we have put forward for '27 includes the "environmental conditions of Q4." So this is not something that should be a pressure point. It's built into our guidance for '27. Brandon's words were we make purposeful choices on the cost of our product to be priced competitively in the market.
So we didn't make an intentional decision to lower price to take share. It's we need to be competitive in the market on the price of our product to our outbound customers and fuel increases, that can apply some short-term pressure on the margin rate, something that we are confident we have a plan to address for 2027, as I said. So that's the answer on the inbound fuel.
We make purposeful choices on what we absorb and what our market competitive pricing outbound to customers needs to be. For local, we said approximately 2.5% growth through the year. That should be reasonably consistent throughout the year.
There's no quarter that has big step-up requirements. The exit velocity of Q4 was strong. We're off to a good start in July.
So quarter 1, period 1, off to a good start and pretty consistent steady growth throughout all of fiscal 2027. For national, we didn't quote a specific number. Here's what I would say for national, we'll continue to see strong growth in the national segment in health care, education, food service management.
We expect to see continued pressure with national restaurants given traffic declines to that segment and the overall pressure that national customers, restaurant customers specifically are experiencing. Net-net, when you put that all together, we will deliver volume growth in national throughout 2027.
Kevin, can you talk about the 2 biggest opportunities it looks like in local case growth, right, or the loss rate that you referenced, which still, I think, is above some of your peers. So the opportunity to bring that down and how fast you can do that? And then secondly, lines per account, right?
I think you're referencing penetration has picked up a little bit. Is that just sort of green shoots here? And what you think the opportunity is and how fast that can develop?
So those 2 areas.
Kevin Hourican
Chair Of The Board And CEO
New, loss, pen. So we're very pleased with our new customer win rate. We'd like to sustain that performance.
We don't need to see improvement there. We want to sustain new. It's performing at an exceptionally high level.
We want to keep that action in place. Loss rate, you're right. We've made meaningful improvement in loss over the past 12 months, and there's additional progress that can be made.
Brandon talks a lot about this. Our colleague retention improvement and the increased tenure of our existing colleagues is showing up with improved customer retention. So our loss rate improved year-over-year, and there's additional opportunity for that loss rate to continue to improve.
And the widening spread between new and loss will contribute to case growth. Penetration, if I look back to Q4, is actually where I was most pleased. We made substantial progress on penetration with existing customers.
AI360 people ask me all the time, Kevin, how are you measuring it? Is it real? Is it showing up in your P&L?
The improvement that we are driving in penetration is obviously tied to our colleague success and productivity, improved retention, improved productivity. But what AI360 is doing for that sales colleague, whether or not they're 1 year in job or 20 years in the job, is teeing up opportunities for existing customers to sell more products to that customer. It's identifying things that should be on the order that are not.
It's preapproving pricing for that incremental line, incremental case. It's identifying through data what should be able to be sold and it's prioritizing it into no more than 3 things to be done that day. We can track who of our colleagues are actioning against these opportunities.
We can track close rate by colleagues. Our sales leadership team is doing a phenomenally good job of coaching our colleagues based on this powerful information and data and knowing close-rate person A versus B. And John, that's showing up on solid improvement in penetration. The exit velocity of our Q4, we're taking share versus the industry, and our penetration performance in Q4 was stronger than the overall industry.
And these are trends we expect to continue into 2027, which is why Brandon and I have confidence to guide at the high end of our long-term algorithm. Brandon, anything to add?
Yes. Maybe just one thing just to nail down those themes across the tenure of the colleagues, the penetration improvement and then John, seeing similar results across our geographies. The one word I think of is consistency.
If I had to use that one word of Q4 local volume in terms of the month-to-month pattern that we're seeing even into P1, we're trending using that consistency into FY '27, which is really encouraging to us.
I know there's been attention in private label, and we're seeing that in results now at Sysco. And I wanted to just get, I guess, a little bit more color in terms of where you're seeing success and where you're seeing opportunity, whether some highest end in premium, I guess, the kind of core and classic or Reliance, which I think is kind of in terms of packer brands, maybe a newer initiative for you. And the opposite of private label versus maybe related but in a different way, is how your salespeople are selling some of Sysco's specialty businesses, particularly on the meat side, on the produce side, on DON cleaning supplies, what have you, different types of Asian products, the success that your broadline salespeople have had of integrating specialty into their broadline type accounts.
Kevin Hourican
Chair Of The Board And CEO
We're pleased with the progress that we've made in Sysco Brand, the positive 30 basis points on a year-over-year quarter-to-quarter perspective is a strong statement of the initiatives that we have deployed in Sysco Brand that will carry into 2027, which to repeat our guidance for '27, we expect for Sysco Brand to be positive throughout 2027. It started first with product. As I've mentioned previously, we had void in the Reliance to answer your question, product offering, which for others is the opening.
We have good, better, best. It's the good product offering that we have. We've started at the item level, where do we not have matches to packer label or to national brand where we can introduce those opening price point products or good products to our customers.
That is detailed work. It takes time to get the supplier relationships to audit their factories to ensure that the product is meeting our quality specifications. And that work has been underway now for over the past year, and we saw solid improvement in our value tier revenue growth.
In fact, I said on the earnings call, 4x growth of the overall book of business, and it is not cannibalizing better, best products. These are items that simply were not being bought. We can target specifically which customers are being propagated to for these offers, both through AI360 for the sales colleague and also on our website.
So it started with product. Topic 2 is pricing architecture. As I said on the call, we always have the intent for Sysco Brand to be a value for the customer, AKA save them money.
We have lots of items. They ebb and flow with the cost of product going up and down over time. And leveraging AI technology, we're doing a better job of ensuring that the price architecture to the customer shows consistent value to our customers over time.
That helps. That improves our sell-through performance. Last but not least, one of my favorite app capabilities within AI360 is something we call Swap & Save, which is if a customer from a sales rep has the opportunity to save the customer money, it prompts them in row 1 of AI360, introduce the savings opportunity to your customer today.
And this is new. It was launched within the past few months. It is having a tremendously positive impact and reaction from our sales colleagues.
Our colleagues make more money when they sell those cases. But putting it right in front of them, giving them confidence that it is a legitimate sub to that national brand product. If they want to learn more about it, they can click a video and learn about the product and learn about the item, et cetera.
Progress, and we expect for that progress to continue. Your question about our specialty business is a great one. We call that total team selling.
While I didn't have it in my prepared remarks, Total team selling continues to make progress at Sysco, and it's across our produce business, our protein business. And as you indicated, our equipment and supplies business, Asian foods businesses as well. We will expand our Asian food business to more geographies in 2027, giving us more of an opportunity for that cross-sell capability.
Total team selling continues to perform. There continues to be meaningful opportunity for us. We still have many, many thousands of customers who are buying just broadline.
And as we've shared before, as we add a specialty category to that account, that customers buy more, they have a much higher retention rate and a higher overall profitability. So total team selling continues to perform the company for the company and will be a growth vector for 2027.
So it sounds like some good progress on local case volumes. How are you thinking about local salesperson's headcount growth in fiscal '27? Any acceleration or deceleration relative to fiscal '26?
And then when you do see macro pressures like the ones that we're seeing persist, do you see much of a benefit from having a more balanced base bonus structure relative to your peers?
Kevin Hourican
Chair Of The Board And CEO
Brandon, do you want to start this question?
Yes. So from a hiring perspective, we had 450 in '24. We talked about 300 in '25.
And in '26, we did have growth across both of our main U.S. businesses. Those we've hired over the last 2 years have moved up the productivity curve. And retention remains high across all of those tenures.
Mark, we'll continue to hire salespeople for sure. We're at a point where we're balancing that with productivity. We're seeing significant productivity improvement.
So we want to strike the balance between those 2, but we will absolutely have better or more growth in FY '27 as well. And then from a macro perspective, we have -- we've included all of those pressures in our FY '27 guide. As an example, going back to fuel expenses, we modeled fuel expenses to be similar to what we saw in on-highway diesel prices from Q4.
When we look at the international space, they're under pressure as well due to the geographical nature of it, but we're moving forward. We just had our 11th quarter of consecutive double-digit OI growth, and we expect that to continue throughout FY '27. So we parked all of those components into our guide, and we feel like we'll have a robust year despite the macroeconomic pressures.
I don't know if you're willing to answer this, but just the questions that have come up as part of the FTC review process for Restaurant Depot, is that -- what's the nature of those? I guess, have those been largely as you expected at the outset here?
Kevin Hourican
Chair Of The Board And CEO
The questions are as we expected. And if I could just step back to the bigger picture. We have confidence that the deal will get approved.
We've said on today's prepared remarks by our Q3. The fact that the government will see when they review the case file is that these are independent customer channels that a customer is a cash-and-carry customer. They choose that channel, that is where they shop, and there is meaningfully ample competition within Cash & Carry.
You've got Costco, you've got Sam's Club, you have thousands of independent cash and carry operators. Two of our competitors operate cash and carry channels as well. So there's meaningfully ample competition in Cash & Carry.
The other customer is a customer who prefers delivery. They want white-glove service. They want a delivery to their restaurant.
They don't want to own their own van and have to take time out of their day to have to go over to a store to get their product. And obviously, there's ample competition in the delivery. There's very little overlap between the 2 customer channels today at this time, and that can be back tested looking at when Restaurant Depot opens a store, what happens.
That's point one. Point two is pricing. They're going to look at, will this deal negatively impact the end restaurant customer.
And I cannot be more clear on this topic. We at Sysco have no intention to raise prices at Restaurant Depot stores. As I said in my prepared remarks, we actually think we can improve affordability.
How we will do that is by bringing their model to 125 net new geographies that create many thousands of jobs. It brings the affordable low-cost leader to net new communities, and that's a positive for restaurants. And stores that are operating today, we have no intention of raising prices at those stores.
It would hurt the stores. It would decrease their competitiveness and the value that they're providing to their end customers who would have no economic incentive to do that. So we are answering all the government's questions.
It's a big deal, meaning the deal is a large transaction. They have to go through their data discovery, and we have confidence that the facts will result in the deal getting approved, as we said, by Q3. What we're most excited about is being able to buy product together sharing in that procurement efficiency to produce value for our end customers, bring their model to net new geographies and eventually up to Canada.
There isn't a strong top-performing cash and carry operator up north, and we really believe that going to Canada is a compelling opportunity for the long term. And last but not least, eventually, at the appropriate time, while today, they're separate channels, we have an opportunity to serve customers more effectively. And my favorite example is a delivery primary customer who runs out of something between deliveries and needs it urgently.
We at Sysco today have limited options to be able to support that customer's needs. Oftentimes, the Restaurant Depot store is going to be closer to that customer and our ability to leverage that store for rapid same-day delivery is something we're very excited about, and we know customers will benefit from. So thank you for the question.
Kevin Kim, over to you.
All right. Great. Thank you, everybody.
Thank you for joining our call today. Please reach out to the Investor Relations team if you have any follow-up questions. Thank you for your time.
Thank you, ladies and gentlemen. This brings us to the end of today's meeting. We appreciate your time and participation.
You may now disconnect.
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