Operator:

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

Kevin Hourican:

Good morning, everyone, and thank you for joining us today. During our call this morning, we will cover the following key topics. Food away from home volume trends, including foot traffic to restaurants, Sysco's performance for the quarter and the year relative to the overall market, and status updates on key topics of interest, including inflation, local case growth, supply chain productivity, and finally, Kenny will cover the financial details of our Q4 2024 as well as provide our fiscal 2025 guidance. Let's get started with key highlights of the business on Slide number 5. I'm pleased to report that Sysco delivered $79 billion of top-line revenue for the year, a growth of 3.3% versus fiscal 2023. The revenue growth was driven by USFS volume growth of 3.1% and USFS inflation of 0.5%. Sysco profitably took market share in fiscal 2024. I will speak more to this in a moment. Importantly, we delivered adjusted earnings per share of $1.39 for the quarter and $4.31 for the year. The full year performance was $0.01 higher than the midpoint of the guidance that we provided at the beginning of fiscal 2024. Kenny calls this our say-do ratio. And I'm pleased that we delivered above the midpoint of our initial guide for the year, despite a softer economic environment in the second half of the fiscal year. During our Q4, our team once again displayed agility and accountability, enabling a strong financial performance despite negative year-over-year foot traffic to restaurants. As I said in my intro, I would like to start by providing an update on the health of the food away from home industry. Traffic to restaurants was down approximately 3% year-over-year for the quarter. This is consistent with what you have heard from many restaurant names over the past couple of days and weeks. Sysco was successfully able to grow our volume 3.5% for the quarter, despite the decline in year-over-year foot traffic. We did this by taking market share versus the overall market. In fact, for the full year, we grew our business more than 1.75 times the market. That performance was above our stated goal for the year of 1.5 times market growth. Sysco's performance versus the market is calibrated via multiple external sources and the performances versus the total industry overall. The strong 1.75 times growth was a result of several important factors, as seen on Slides 6 and 7. The largest distributors in the industry are taking share versus the overall foodservice market. Sysco specifically is winning with our specialty platforms, including FreshPoint and our specialty meat businesses, as well as our recent acquisitions like Greco and Edward Don. The combination of our industry-leading broadline business with our expanding specialty portfolio is winning in the marketplace. Lastly, our national sales business is winning versus the total market, with notable wins in the foodservice management space and hospitality. We are pleased with our overall performance versus the total market. And with that said, we are not satisfied with our growth in the important local segment. As we covered at our Investor Day, we are confident that we can improve our local case performance in fiscal 2025. I'll speak more to those plans in a moment. For the fourth quarter, Sysco delivered the following performance. Continued and compelling profitable case growth within national accounts. Local case growth of positive 0.7% to last year. Importantly, our local cases in international grew 5% for the period. SYGMA cases grew 5% from Q3 to Q4, with a June exit velocity of positive year-over-year growth. This is a reversal of recent negative volume trends within SYGMA, as we have last week 52 of a customer exit and we have signed new profitable business that had start ship dates during our fourth quarter. We expect SYGMA to be a volume and profit growth business in fiscal 2025. Sysco has a well-balanced business with strong market share in the non-restaurant space. Many of the non-restaurant sectors, like healthcare and foodservice management, are less impacted by consumer confidence in restaurant foot traffic. At times like these, our well-balanced business portfolio is a strong asset for Sysco, including our international segment. Our gross profit rate for the quarter was strong, with GP growing 4.2% year-over-year and GP per case growing 1.3% versus prior year. Our merchant team continues to do an excellent job with strategic sourcing and product innovation. Overall expense management continues to improve year-over-year, with operating expenses increasing slower than our top-line. Most notably, our corporate expenses were down 10% for the quarter on a year-over-year basis. The corporate expense reduction was a result of the efficiency work that we deployed in Q3 of this year. Benefits from those expense reductions will continue into 2025, and Kenny will speak to that in more detail. All told, these factors resulted in a 6.4% increase in our operating income year-over-year, enabling us to exceed the midpoint of our full year adjusted EPS guidance. Now that I have highlighted our financial performance for the quarter, I would like to continue the theme of our Investor Day and provide you a bit more color on two of the biggest levers within our P&L

Operator:

Thank you. [Operator Instructions] We'll go first to Mark Carden with UBS. Please go ahead.

Kevin Hourican:

Good morning, Mark. It's Kevin. Thanks for the question. So relative to just what's happening with the macro, trade down, trade out, we're seeing reasonably consistent performance across all forms of restaurant types. It's not just QSR that's being impacted. So pretty consistent traffic declines, by segment. We have a tremendous amount of data, as you know, serving the highest end white tablecloth all the way down to QSR and everything in between. So I just start with traffic to restaurants down 3% for the quarter, as I mentioned in my prepared remarks. We don't anticipate that getting much better in the near term, probably through the election as you indicated. Kenny indicated in our fiscal 2025 guide, we anticipate some improvement in the macro backdrop starting in the second half of our fiscal year. So calendar beginning 2025, hopefully interest rates coming down will be a catalyst for that type of improvement. Why would traffic be down? We believe it's the cumulative impact of inflation over the past three years, while inflation has moderated significantly over the past year. It's still the cumulative impact over the past three years of price increases. As always, we at Sysco convert that into actions that we're taking. We can profitably grow our business even in a slower backdrop, as we did in this most recent quarter. I'm really pleased with our performance in the non-restaurant segment, specifically FSM and travel and hospitality. We're doing very well in those two spaces. Our international local business growing notably. And within local in the U.S., I communicated on today's call the actions that we're taking. We're not satisfied with our current rate of performance in local. We have a strong plan to improve throughout 2025.

Kevin Hourican:

Mark, thanks for the follow-up. We track our retention on a daily, weekly, monthly, quarterly basis. No notable call outs on turnover or retention. We have solid retention of colleagues. We don't anticipate the hiring of the new folks to change that dynamic. What the key to success for '25 will be is ramping up the productivity of that sales colleague workforce, providing them the training that they need. A lot of it is product training, to your point, depends on where they come from. If they come from a culinary background, if they were a sales rep at a competitor, we can ramp them up faster. If they're a good sales colleague, but they need to learn the food space, food business, there's a lot of product knowledge training that goes along with that. So the real key is that focus. Intense, meaningful focus on the training of those new cohorts, working them up the productivity curve. That's the real key to success. That's why we've communicated that the hiring that we did throughout 2024 will positively impact 2025, but more in the back half, the majority of the hiring that we did for that net 450 colleague population was in the second half of fiscal 2024. Related, tied to what you brought up, is we introduced a new compensation model. I'm sure we'll get some questions about that on today's call. We will monitor retention of colleagues very closely tied to that new comp model, but net-net, we're optimistic and confident that the new comp model will positively impact results.

Mark Carden:

Great. Best of luck guys.

Operator:

Next, we'll hear from Lauren Silberman with Deutsche Bank.

Kevin Hourican:

Yes, Lauren, good question. With traffic down to restaurants, cases per operator would be negatively impacted by that fact. And therefore, distributors of all types and all sizes, are going to work hard to be able to get profitable cases to be put on their truck. So yes, it's a competitive environment and competitive intensity increases when traffic is down. We at Sysco, as you're well aware, operate at the highest profit margin rate in the industry. We are extremely disciplined in our process of evaluating pricing strategies for customers. We will not sell cases below cost. We are very disciplined in that regard. Our pricing system, pricing tool, and pricing process enables for our RCs to sell competitively in the marketplace, but within guardrails. So pleased with our performance in profit management, during the most recent quarter. It helped enable strong overall bottom line results. With that said, I'm going to toss to Kenny for further comment on gross margin. Kenny, over to you.

Lauren Silberman:

Great. Very helpful. And then if I could just ask about some of the comments on case growth, the cadence throughout the quarter, restaurants have seen a slowdown in June and July. Any thoughts on if that's where we should expect trends are running to start fiscal 1Q, and if we should expect relatively similar trends in 1Q, to what you saw in 4Q? Thank you very much.

Kenny Cheung:

Sure. So from a phasing standpoint, just to provide color, as Kevin said, I agree. We're seeing similar industry traffic patterns from last quarter into this quarter. So now as you think about the guidance for the year, the 4% to 5%, within that we have volume at low single-digits. And in particular, if you think about the pieces of that, most of the hires was completed in the back half of FY '24. And the new compensation program was just recently rolled out as well. So we start seeing the financial benefit from this investment in the back half of fiscal year.

Kevin Hourican:

Thank you, Lauren.

Jake Bartlett:

Great. Thanks for taking my question. My question was on the sales force investments. And I understand you mentioned that retention has not changed materially, which is encouraging. I think there's some concern among investors that the changes that you're making, the large investments, would create some disruption. Maybe it's disruption of accounts switching sales people. And that provides opportunity for competitors to kind of come in and take them. So the question is, should we expect a disruption in the near term? I mean, is that one reason why sales might be a little bit kind of weaker as this initiative gains steam? Just wanted to get your comments on the near term impacts of these investments?

Kenny Cheung:

Sure. Thanks, Kevin. So, the sales hires, as we said before, this is ROIC positive. That's the headline news. We are deliberate in terms of when and where we add, meaning investing in high growth markets, to ensure optimal return on investment. Now, Jake, kind of to double click on your question in terms of timing. Now, there is some timing, given early on the full return isn't rendered given timing of the ramp, as Kevin mentioned, Kevin mentioned not a flip of a switch. So, the good news is we have other levers in the P&L, to ensure we receive leverage from the enterprise standpoint, expand margin on the bottom line, which is on the guide. All in all, we are confident with the return for our sales consultants and we're confident in our guide.

Operator:

We'll go now to John Heinbockel from Guggenheim. Apologies.

Kevin Hourican:

Hi, John, good morning. I'll start, it's Kevin, I'll toss to Kenny for the comments on the '25 performance. So, it's customer mix and Sysco brand percentage mix are the two primary drivers. As Kenny said, we've profitably grown our CMU business. Key there is profitably grown. We've improved our profitability of CMU, and we have some real solid wins in that space. And we grew national CMU faster than local in the most recent quarter, which applied some margin rate pressure to the overall. We're pleased with our gross margin performance within the local business. It's a customer mix shift. See our comments on the need to improve our local performance that we're not satisfied, with our local case growth performance. We are going to grow our local business responsibly and profitably. We're not going to chase cases - to chase cases. We will be disciplined. We will be pragmatic and thoughtful, but we need to improve our local case performance, and we will and we anticipate that impacting positively, our 2025 business performance. The second part Sysco brand, Kenny did some key commentary early about that. If I could just add one piece of color to Sysco brand, one of the backdrops as to why Sysco brand was slightly down on a percent basis year-over-year, to be clear, Sysco pieces, Sysco brand pieces were up 2% year-over-year. Our GP dollars from Sysco brand was up 3.2%, but there was a minor percentage reduction of mix to national brand products. Here's the key point, our fill rates of national brand suppliers have improved on a year-over-year basis and a quarter-over-quarter basis. So there's less substitution happening from national brand out of stocks into Sysco brand. While that has a slight negative impact on margin rate, that's actually a good thing for our business. It's a good thing for our operations. We want our suppliers to fill on time and ship to Sysco, including our national suppliers, and it's a good thing that national supplier fill rate improvement has stepped up. In the meantime, it has a moderate impact. We are confident that we can increase Sysco brand penetration. Kenny talked to those hows, but by providing value to our customers, motivating our colleagues, through their performance evaluations to be focused upon it, and bringing product innovation to our customers through Sysco brand. So Kenny, over to you for any comments about the modeling for '25.

John Heinbockel:

All right, maybe as a quick follow-up, just curious, going sort of going back to existing account opportunity, right, particularly as you free up some time here for existing sales consultants. I know there's a headwind, right, a macro headwind, but maybe touch on that opportunity, right, to make some improvement in existing wallet share. And then I guess, Kevin, when you think about local case growth, I mean, I think you want to get into the 2% to 3% range ultimately. What do you think is a reasonable target, or the target that you would have for sort of exit rate of fiscal '25? Is that a fair exit rate, or is that an optimistic one?

Kenny Cheung:

Hi, John. So you can expect local volume to be roughly low single-digits growth for the year. Again, for the entire company as well, low single-digits and as part of our guide, which we are confident as we believe these targets are achievable.

Kevin Hourican:

Thanks, John.

Edward Kelly:

Hi. Good morning, guys.

Edward Kelly:

Kenny, I wanted to start with the guidance, and maybe some color on the cadence of how you're thinking about the guidance for the year. If I look at the volume, obviously, you're expecting a volume improvement through the year, both from the new associates as well as some market improvement in the back half. I'm not sure how meaningful that is. But then you have offsets, I guess, around things like corporate, which look like they may be down quite a bit early on. So how do we think about the cadence of the guidance? And specifically, are you comfortable with the Q1 consensus number, because consensus expectation have you up around the same amount each quarter?

Edward Kelly:

Yes, yes.

Edward Kelly:

Got it. And then just a quick follow-up on international. Sales inflected in Q4. Obviously, you're still very optimistic about this business. I don't think the macro over there is anything special. So I'm just curious, maybe talk about momentum in the business and expectations for '25 there?

Kenny Cheung:

Yes. So for international, we have a global operating model that's working as we're replicating the success of recipe for growth, and it's working across international markets. I think if you look at the full year, we were top line 7% growth, bottom line, 24%. I do think one interesting fact is it's not just one market, if you look at across our portfolio, every market sitting within. For example, Europe and International Americas for the year, grew double-digit on operating income, every market, right, between Europe and international, America. So it's not just one market leading is. So the benefit that we're seeing is per-base across the board and we expect that to continue in 2025.

Kevin Hourican:

Thanks, Ed.

Brian Harbour:

Yes, thanks. Good morning, guys. Kenny, just your comments on corporate costs. I know you took some actions in 3Q, right? So that's still kind of a benefit in the first half of the year. But are there ongoing actions just on the corporate cost side, specifically, do you still think you can see improvement there throughout the course of this fiscal year?

Kevin Hourican:

Specifically in international, in particular, we have structural cost improvement opportunities international that we're very focused on. They've already done great work international, which is driving the outsized profit improvement versus domestic U.S., and we expect that to continue.

Kevin Hourican:

Yes. Even throughout the year, this is Kevin. There will be ups and downs by category. Kenny always talks about, we have 13 different category baskets. Some will be up, some will be down. We expect that roughly approximately 2%, which, by the way, we're there right now. We are at that level right now, and we have modeled it, and we expect it to be reasonably consistent at that level throughout the year.

Kevin Hourican:

Thank you.

Kendall Toscano:

Hi, thanks for taking my question. Just curious, I know you talked last quarter a bit about maybe needing to see restaurants take down our investment prices a little in order to drive an improvement in industry volumes. So curious if you've seen kind of any of that starting to play out? And when you are assuming that the macro backdrop improves in the back half of next year, is that assuming that there is some price investment, by the restaurant operators? Thanks.

Kendall Toscano:

Yes. Thank you. Just one quick - another question I had was, I know you mentioned a decline in private label penetration. Did you talk about what drove that?

Kendall Toscano:

Okay. Thanks again.

Operator:

And ladies and gentlemen, due to time constraints, that will conclude our question-and-answer session and Sysco's fourth quarter conference call. Thank you for your participation. You may disconnect your lines at this time, and everyone have a wonderful day.

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 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.

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.

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.

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.

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.

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 --

Kevin Hourican:

Next questions. Thank you.

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.

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?

Operator:

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

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. You mentioned upfront monies in your question. I want to be clear. Upfront monies are not a bad thing. Upfront monies, if they enable you to secure a large customer win for a dedicated period of time with minimum volume guarantees; our finance team underwrites every single one of those deals. I approve personally, the bigger deals, those are good deals. So I don't want you to infer that increase in upfront monies is actually a bad thing. They tend to be a good thing. And we have not, to answer your question, specifically seen an increase that activity in the marketplace. Mark, back to you, if you have a follow-up.

Kenny Cheung:

Yes. So in terms of M&A, what we're doing at Sysco is a couple of things, right? So number one, we are focused very hard on the integration. By the way, the Edward Don integration is underway and the synergies are being realized on both from a go-to-market standpoint as well as from a back office purchase standpoint. So right now, our priority is to focus on integrating and realizing synergies that we have in our portfolio today. In terms of the backdrop and how we think about M&A, and from a more of a macro standpoint, we have a robust pipeline. We have extremely robust pipeline right now, given the lens of ROIC, we will keep a close eye out for accretive opportunities. But at that moment, as I mentioned, we are focused on integrating and realizing synergies as we expect, these M&A opportunities that we have in our portfolio will be enterprise accretive from a multiple standpoint.

Jake Bartlett:

Great. Thanks for taking the question. My first was a clarification on the comments on April trends. There's a big calendar shift of Easter and some spring break. You mentioned, I think that the kind of similar growth rate for both months. So that to me would imply a kind of underlying deceleration in April. I just want to clarify what the message is there, whether the comments are kind of adjusted for those calendar shifts. And then my real question is really about the non-local case growth, and it's not specifically given, but it looks like it implies an acceleration. The question is, what is driving that that non-local case growth? The builders are the drivers of that. And what your expectations are in the next couple quarters, whether you think that that momentum will continue and potentially offset some of the headwinds that we might be seeing in independence. Thank you.

Kevin Hourican:

Yes. And I think the second part of your question is outside of local, what else do you see going on. We've had a tremendous amount of success in our corporate national CMU business over the last few years, and we continue to win net new business profitably. In national sales, including new customer wins signed in the quarter, Q3 that began shipping at the end of Q4 and into fiscal 2025. And one other call out is our SYGMA business, which I mentioned earlier, down $3.5 million in the most recent quarter. We're now lapping week 53 of a customer exit from a year ago. That was an unprofitable customer that wasn't willing to partner with Sysco to far an appropriate margin profile, and we exited that business we are now lapping that, which will positively impact SYGMA's growth rates in Q4, and we've signed some net new profitable business in SYGMA, which will contribute positively to SYGMA in Q4 and into 2025 as well.

Jake Bartlett:

Just if I'm so on, just a follow-up question. Is Easter a negative for you? Or how does the calendar shift just to make sure I understand how the calendar shift would impact Sysco as a whole?

Operator:

And we have our next question from Edward Kelly with Wells Fargo.

Kevin Hourican:

Yes. Good morning, Ed. It's Kevin. I'll start. Yes, Q3, from a volume and traffic to restaurant perspective was a softer macro than we had anticipated. It was negative for the industry, food-away-from-home in total, volume of cases by the food distributor network in aggregate was negative in the quarter and that's not what we would have anticipated for the quarter. So the tone that you heard is tied to that fact based, the overall macro in Q3 was softer than we had anticipated. So that means we need to take share in order to be able to grow at the rate that we desire to grow at. And the good news is we can do that. We can do that by focusing on net new customer prospecting. We can do that by further penetrating our specialty businesses, which have a large opportunity to grow prospective market share. And we have teams really focused in that regard. I think we'll defer a comment on fiscal 2025 until our May Investor Day. But we are confident in our ability to deliver against the guidance for the year. And for that, Kenny, I'll toss you to comment on Ed's question about the guidance range for the year and for the fourth quarter.

Kevin Hourican:

And just to add one, we try not to do three-part answers. But as we think about where else can sources of value come from as we go from 2024 into 2025, there's more to be gained with supply chain productivity. We're not done. There's still gas in the tank on productivity improvement. We're really pleased with our performance in supply chain in March. It was the best performance in years, and we're seeing that carry into Q4, and that can and will carry into 2025. So supply chain productivity will continue to be a beneficial contribution going forward. And then local case growth. We can accelerate local case growth relative to our total company case growth and that's something we're very focused on for fiscal 2025, and we'll talk about how we're going to do that at Investor Day.

Kelly Bania:

Hi, good morning. Thanks for taking our question. Kevin, you noted a couple of times just the need for restaurants to lower their menu prices. Just curious if you can elaborate on any context you're hearing from them about their willingness to do so. And can you also tie in just what you're seeing in California, in particular, in light of the recent wage dynamics there? Are you seeing restaurants pass along those higher costs in terms of menu pricing? How is California impacting the total volumes across the industry?

Kelly Bania:

Thanks. That's helpful. I guess, can you also just talk about how mix or trade down is impacting kind of net pricing or what you're seeing in a sequential basis relative to last quarter in terms of price points among the different like customer cohorts?

Operator:

And our next question comes from Jeffrey Bernstein with Barclays.

Kenny Cheung:

Hey Jeff, it's Kenny. I'll take that one. So first thing is first, and you called it. We are very proud of our leadership team, taking proactive actions given the softer macro backdrop. And the good news is we have a lot of levers in our P&L. In particular, to your question around the $120 million of cost out, let me give a bit more color. As I mentioned, last quarter, it was roughly $100 million. That's increased by $20 million to the $120 million for FY2024. If you double click on that P&L, Jeff, if you look at GSP or corporate operating expense that was $220 million for Q3 and that was down 6% year-on-year. If you look at it quarter-over-quarter between Q2 to Q3, it was down 8%. So the cost is coming out of the P&L. And you are correct. That does include most recent 500 elimination of positions, which is predominantly on the corporate side. So that is correct. We did not impact client-facing roles in our USFS business. In terms of other periods, what are some of the areas of opportunities? There's more room to go. As a company, we continue to have a pipeline of initiatives and savings. I'll give you a couple of examples, but just put color on it. Last quarter, meaning Q3, we rolled out the full implementation of Canada. Sure, Service Center under Mayor and that has yielded accretive savings for our company. And if you think about just pure SG&A, yes, part of its headcount, but we have a big bucket. That's what I call third-party indirect sourcing, and we are making good strides on that one as well. Be a vendor consolidation and rate reduction as well. So there's still a lot of room to go. As Kevin mentioned earlier, on the supply chain side, we saw a record level of productivity this quarter. With that said, we are not back in 2019 levels yet, and we still have room to go on that front as well in terms of P&L accretion from a cost standpoint.

Jeffrey Bernstein:

Understood. And then just my follow-up, Kevin, I know you highlighted on the slide deck, your 17% market share, and I know we've talked about the big three, maybe having still sub-40%. So it does seem like the focus is predominantly on taking further share from the other 60%. I know it doesn't necessarily require M&A. But just -- can you talk about that opportunity to take market share? I would think that opportunity would accelerate if the competition is struggling. I know we've talked about the restaurant industry perhaps struggling. But can you just talk about maybe the other 60% of the foodservice distribution industry, and what you're seeing there in terms of your competition and maybe the greatest opportunity you see there to gain share?

Operator:

And we have our next question from Kendall Toscano with Bank of America.

Kevin Hourican:

That's correct. Your math is correct.

Kevin Hourican:

Center of plate is what drives the purchase ticket in any restaurant. So we're focused on is providing value, good, better, best options, alternative proteins, portion size, center plate is what drives any restaurants purchasing cost. And then commodities is the place that a customer will go to help save themselves money and they'll price shop distributor A versus B. So we need to be, as I said earlier today, right on price on commodities. And we can do so intelligently by leveraging our pricing tool, purchasing those commodities that rates that are industry-leading. And it's a basket of goods they buy from us. And as John Heinbockel asked about, it's managing the elasticity across that book and nobody is better positioned to be able to do that work than Sysco.

Operator:

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

Kevin Hourican:

Thanks Kevin and good morning everyone. Thank you for joining our call today. I'm very pleased with Sysco's performance for the quarter. Our company is the market leader in a growing industry or size and scale matter. This past quarter, we demonstrated that important position of strength by delivering another quarter of double-digit earnings per share growth. Sysco delivered bottom-line growth through a combination of volume growth, disciplined margin management, and expense control. Our positive momentum from the first half of our fiscal year is expected to continue into the second half, and we remain confident in our full year growth expectations for sales and EPS. This includes 2024 adjusted EPS growth of 7% at the midpoint of our guidance range. Sysco has improved how we leverage our scale through the Recipe for Growth strategy and we continue to deliver industry-leading profitability metrics as well as leverage our industry-leading strong balance sheet. Our confidence in the year has enabled us to increase our capital allocation to shareholders for the year. We are announcing today an increase of our stock buyback target for fiscal year 2024. We now expect to buy back approximately $1.25 billion of our stock this year up from our previously communicated $750 million. With the increased stock buyback and our industry-leading dividend yield, we will contribute more than $2.25 billion directly to our shareholders. Sysco's strong balance sheet and free cash flow enable us to make these types of shareholder-friendly decisions while providing ample liquidity to fund the long-term growth of our business. We are, as we say, play from a position of strength. So let's get started with a brief highlight of the quarter on Slide number 5. Beginning with the top line, we delivered sales growth of 3.7%, a sequential improvement from Q1, driven by a combination of positive case volume growth and positive product cost inflation. Importantly, this included a sequential improvement in local case volume growth quarter-over-quarter and year-over-year. We will share more on that later. Turning to the bottom line, we posted over 11% growth in adjusted EPS, generating strong operating leverage. This is the fifth consecutive quarter of positive operating leverage and the 11th consecutive quarter of double-digit adjusted EPS growth. Kenny will provide more details in his financial section. Today, I would like to update you on two topics I highlighted as priorities on our Q1 earnings call

Operator:

[Operator Instructions] Our first question comes from Jeff Bernstein with Barclays. Please go ahead.

Kevin Hourican:

Good morning, Jeff. Thank you for the question. This is Kevin. We're confident in our ability to continue to improve in local sales. As you just said, the 2.9 is an average -- weighted average, obviously, across the three months. And sequentially, the quarter improved each and every one of those months. So we are confident in our ability to continue to make progress in local case volume growth. And at the historic profitability metrics that Sysco industry-leading will continue to produce. So it's profitable local case growth. The biggest drivers, I'd say the performance management on the sales consultant side is the most immediate lever. The compensation change would be the second most impactful measure and total team selling followed up by the increased SC headcount would be the third and the fourth of the four things I said on the call, if I ranked them from an impact perspective. As it relates to the second half of your question on January, there has been a slowdown in January. I would describe it more as a blip, a bump in the road, if you will. There's a couple of factors driving the January. Week one of January had a calendar unfavorability tied to a holiday and where it fell historically cold weather. I hate the W word. I never used the W word, but there was some extraordinary weather in January, which made it awfully difficult to make deliveries to customers in large swaths of the United States. That's backed up by the credit card data from the major banks that consumption that food-away-from-home was down in January. Jeff, I'm not overly concerned about that. It's the lowest volume month of the year that there's going to be a blip or a bump you'd want it to be in that month. So, goes March, so goes the quarter. And we've got levers that we can pull on the year to go, and I toss to Kenny for any additional comment in that regard.

Jeff Bernstein:

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

Jeff Bernstein:

Thank you.

Mark Carden:

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

Mark Carden:

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

Mark Carden:

Make sense. Thanks so much. Good luck guys.

Operator:

The next question comes from John Heinbockel with Guggenheim Securities.

Kevin Hourican:

John, great question. And for the quarter that we just completed, this is the biggest reason for our improvement from what was flat in Q1 to up 2.9 in Q2 is from what I call performance management, which is visit frequency, visit quality. The comp change poorly helped, but it was early innings and that will have a bigger impact in a year to go and the incremental SEs will impact 2025. We've not gone public with the numbers, the targets, John. But we have a very specific target of the number of visits that need to happen per week per SE, and we can track it. We can track it through this year end. And we were not where we needed to be. COVID had a disruption in a lot of things in life, and one of them was SE's doing more of that work from a home office than we would have liked. We kind of ripped that band-aid off and made it really clear on what our expectations are of visit frequency. That's the wheel side of the job. Get out there, pound the street be in front of our customers. This is a relationship business. We're being in front of the customer every week matters, and we have moved the needle meaningfully in the last quarter on the number of visits being completed per week for our SEs. Point two, though, that you brought up is that's only worthwhile if it's a quality visit. So how do we measure quality? We have visited a purpose. And in our CRM tool, it will prompt our SEs with jobs to be done that day, introduce the Sysco brand case, win back the case that was lost over the last x period of time. Sell a category you've not sold before. Those are just three examples of jobs to be done. The CRM data rich understands what's being purchased, what should be purchased. And it essentially prompts the SEs with things to sell. And how do I measure quality? I measure quality by close rate against those jobs to be done and we can track it. We have a scorecard that ranks every one of our sales people from top to bottom, and then we do performance managing against the quality side of the visit. Recognize the top performers, coach the move the middle and hold accountable those that aren't getting the job done and everything in between. John, back to you for any follow-up.

Kevin Hourican:

So, here's my -- how we think about it. It's both, right? It is the gross profit line and the operating income line. If you look at Q2, you can see that our topline growth was 4%. If you just do the math, the cost of goods, if you will, between sales and gross profit was up 3%. So, you had a nice leverage driven by strategic sourcing, our partnership with suppliers driven by mix of business, growth in specialty, local brand penetration. And as a result, GP actually grew 5%. So, we had a nice leverage between sales and GP. Now to Europe on SG&A, we're working extremely hard, driving productivity out. The good news is, is the $100 million of cost out that we talked about at the beginning of the year, that is being seen through the P&L and we're working through a pipeline that's going to render success for us in outer period. And that is -- and you can see GP growing, call it, 5%, and then net earnings growing close to double-digit for the prior year. So, you're getting the leverage, John, on both the cost of good line and the OpEx line and we have initiatives back to both sides of the house.

Kevin Hourican:

Thanks John.

Edward Kelly:

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

Kenny Cheung:

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

Kevin Hourican:

I mean -- this is Kevin. We don't include SSMG in our volumes because the business is measured through pounds. And just getting to a common denominator is difficult. The way Don measures their business is today not the same as how we measure the business cases versus pallets versus eaches. And we want to make sure that we get that right before we include it in our metrics, and that's something that we're working on as a part of our integration planning.

Kevin Hourican:

Thank you, Ed. Have a good day.

Joshua Long:

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

Joshua Long:

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

Kenny Cheung:

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

Operator:

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

Kevin Hourican:

Yeah. So I can start. So you are correct. The local customer does come with an attachment rate with a higher GP dollars per case, and there was a margin accretion as well with the local customer, and we are seeing that flow through the P&L, and that's one of the reasons why you're seeing a nice mix between your leverage on GP as well as the leverage down to EBITDA and net earnings. With that said, though, I think we shouldn't overlook the CMU success that we've had in our business. We are also seeing margin expansion. We are also seeing cost of goods leverage across the portfolio of our CMU business. Again, one may think it's just restaurant, but it's not. There's other specialty growth segments that we're winning in the marketplace, that's driving accretion on the margin side. When we talk about strategic sourcing, it is not just for a local customer. It is the size and scale of Sysco, and that benefit skills across both our local customers and CMU. We are renewing, we are winning businesses at a higher margin clip at the current moment.

Kendall Toscano:

Great. Thanks guys.

Kenny Cheung:

Thanks Kendall.

John Ivankoe:

Hi. Thank you. The question is on inflation. And I'm wondering what kind of indicators you were looking at to sustain inflation through the back half of 2024. I mean some PPI food, for example, metrics might suggest a little bit more deflation than what you're talking about is kind of the first question. And secondly, there's been at least some chatter -- some grocery stores actually sequentially lowering their pricing as their own commodity costs have you been easing. I mean have you seen anywhere in the marketplace in terms of your competitors, maybe on the nationals, but on the local or regionals of different operators that are lowering their price per case to their customers of something that could potentially be influencing the market over time? Thank you.

Kevin Hourican:

It's Kevin, I'll just add. You asked about prices to the consumer in the local business, in particular. It's a very efficient market, John. So, as our COGS come down, yes, the way it works is we then are able to pass through value to our customers. So, unlike a retail store, we're publishing prices in a circular and putting signs on a shelf. For us, it's a dynamic business. The book gets priced weekly, as do our competitors. And as prices come down, it's an efficient market. And that gets passed through to customers. As Kenny said, though, we didn't maintain profitability ratios on the way up. We can maintain profitability ratios on the way down. That's the value of our pricing tool that we are leveraging extensively to make sure that we are where we need to be. As it relates to just general confidence in the year-to-go inflation figures, we've got a lot of data at Sysco. We have global data. We have access to a large amount, as Kenny said, across the 12-plus categories. Some are moving up, some are moving down. The one that's going to be the biggest tailwind in the year to go is Produce. Produce was substantially deflationary in Q2 because of wild markets the year before due to major flooding in California. Produce is going to return to more normal, like low levels of inflation, 1% to 2% versus down substantially in Q2. So that's one of the bigger drivers of giving confidence in the year to go. And we said muted inflation, but certainly muted inflation is up from where we were in the first half of the year.

Kevin Hourican:

Thanks, John.

Alex Slagle:

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

Alex Slagle:

Thank you.

Operator:

The next question comes from Jake Bartlett with Truist Securities.

Kevin Hourican:

Okay. So I'll start, and I'll toss it to Kenny for any additional comment he may have. It's -- our CMU business, it's half of our business. We're winning meaningfully in that space. And yes, we did accelerate in Q2 versus Q1, and we have confidence in our ability to continue to be very successful in CMU. When people hear chain, they think national restaurants. I want to be very clear that is just one portion of that business. Travel and hospitality is in that space. Healthcare is in that space, education is in that space. And we've had notable and meaningful wins in each of those non-national restaurant sectors. In fact, our focus is in non-national restaurant sectors. The low profit portion of CMU is the national chain restaurant space, mostly in the QSR space. That's the lowest profit business. We're really focused on within national sales, which customer types we create a win-win contract relationship with our customers where we can help them achieve their objectives. We can do it at a cost to serve that meets their objectives. And they're willing and want to partner with Sysco on things that are profitable and helpful for Sysco. Like, for example, Sysco brand penetration. With local customers, we have more than 50% of our cases on that truck that are Sysco brand. And one of the reasons why the profit profile is lower in national is a lower penetration of Sysco brand. So we're looking for partners who want to grow together, who want to win together. And our national sales team has been doing a really good job in that regard, and we expect that momentum to continue. Kenny any additional comments you'd like to make?

Jake Bartlett:

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

Jake Bartlett:

Great. I appreciate it. Thank you.

Kenny Cheung:

Thank you.

Brian Harbour:

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

Brian Harbour:

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

Kenny Cheung:

Yes. Brian. So if you think about the -- earlier in the year, the inflation for international was roughly over 10% and this very quarter that we just had was roughly 6.5%. So we are seeing inflation subsiding a bit throughout the quarter. With that said though, we are excited given the one global operating model that we're operating in right now, and that is driving dividends. It extends our size, extends our scale, leverage capabilities, tools and best practices. So as Kevin talked about, a lot of that playbook under the one umbrella of global operating model is really creating dividend. So yes, while inflation is pressured, we are seeing the ops us through future sourcing local case growth, technology play, overall, one global operating model. So yes, we are still very optimistic and bullish about the international market as a growth engine for us. As you can see in Q2, we were up 10% on topline and 30% on operating income.

Operator:

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

Kevin Hourican:

Thank you, Kevin, and good morning, everyone. Thank you for joining our call today. Our prepared remarks will cover the following themes; competence in reiterating fiscal year '24 guidance, another record quarter of disciplined financial performance with a focus on profitable growth, disciplined ROIC and balanced capital allocation priorities. These themes all confirmed Sysco's strength as the market leader. During our call today, I plan to cover two topics. First, a summary of our Q1 results; and second, a spotlight on our Recipe for Growth strategy and how we continue to build capabilities for profitable growth at Sysco. So let's get started on Slide 5. Our positive momentum from last year continued with tops and bottom line growth in Q1 to kick off the new fiscal year. Beginning with the top line, we delivered sales growth of 2.6% driven by a combination of positive case volume growth and effective management of product costs deflation in the U.S. Turning to the bottom line, we posted double digit growth in both adjusted operating income and adjusted EPS, with an adjusted earnings per share of $1.07. We delivered this double digit bottom line growth in a slowing top line macro and deflationary COGS pressure within the U.S. Our ability to post strong results in Q1, considering those factors, is a proof point that Sysco is positioned to be successful in fiscal '24. We believe the breadth and quality of our product assortment across both broadline and specialty, combined with the expertise of our commercial selling organization, and the strength of our supply chain and balance sheet positions Sysco to produce compelling results in the near term, and even stronger results over the longer term. Digging a bit deeper into the quarter, we grew volumes in our U.S. Foodservice segment, with Q1 total case volume growth of 1.6% and local case volume essentially flat year-over-year. We successfully grew share, as the industry was roughly flat for the quarter. Our national sales team posted an outstanding quarter, winning substantial new business in the healthcare, restaurant and hospitality sectors. As I have stated before, we are winning these multiyear contracts with strong profit profiles versus historical averages. Our success is a testament to the improvements we have made and how we serve large national customers. We have made it easier for national customers to do business with Sysco by improving our technology integration with our customers’ systems, and by providing large customers with more dedicated and accountable support. Additionally, our national and international fulfillment scale is very attractive to large concepts. We are able to provide them with supply chain that can scale with them wherever they operate. We expect our national sales segment to continue to outpace the industry due to these capabilities. Our local performance continues to outpace the overall industry, building on a positive multiyear trend. The local market has slowed quarter-over-quarter and Sysco is not reacting by leading with price to win share. Instead, we are focused on profitable growth, properly serving our local customers and improving our local sales execution. Local volume, as I said, was essentially flat and that is something we intend to improve upon in our year-to-go periods. We're taking the following actions to drive increased growth in local volumes. First, we will invest in incremental sales headcount as we have grown our local business faster than the overall industry for each of the past three years. Our territory sizes for the sales teams have increased as well. We are actively hiring more sales resources, which will allow us to optimize territory sizes and enhance sales consultant effectiveness. The benefits from increasing our local sales force will accrue over time as new colleagues complete training and settle into their territories. We expect to see the majority of the positive impact from this action in fiscal year '25. Second, we recently enhanced the compensation model for our sales consultants to incentivize our colleagues to focus on profitably growing their and Sysco's business. This change was implemented recently during our fiscal Q2, and the positive effects will be felt in future quarters of this fiscal year. The change to our compensation model better aligns the incentives of our sales team to the key priorities of Sysco. Third, we recently ramped up our focus on what we call visit frequency and visit quality expectations. Through our robust CRM, we are able to track the activity and outcomes from our sales team. Our sales leadership team is focused on colleague coaching to improve outcomes on both fronts. Lastly, total team selling which was recently expanded coast to coast will improve cross-selling opportunities, combining the relationship strength of our sales consultants with the product expertise of our specialty businesses. All told, we are confident we can increase local sales volume growth, while maintaining momentum with strong margin management. We will drive that improvement through healthy long-term decisions and by remaining disciplined in our pricing decisions. Next, I would like to provide a brief summary of select Recipe for Growth enhancements from our recent quarter. We recently implemented a global operating model for our leadership structure. It is important to note that our international segment posted another strong performance in Q1, solidly growing top line and bottom line faster than the U.S. business. The change to the global operating model will help further accelerate our progress internationally. We will move faster in adopting best practices, delivery of new capabilities, and leveraging new tools across Sysco's global footprint. An example would be taking the Sysco Your Way concept and bringing it to life globally. To head this new operating model, we named Greg Bertrand our Global Chief Operating Officer. In his expanded role, Greg will be accountable for managing Sysco's global operations, driving profitable growth in local sales and operations. I'm extremely confident in Greg as a leader and I'm bullish on the impact that he will have on his expanded geographic territory. We continue to make progress in improving the performance of our supply chain. Chart 10 displays our year-over-year operating profit improvement driven by a positive operating leverage with gross profits growing at a faster rate than operating expenses. Our supply chain operation remains fully staffed, and we continue to improve employee retention and we're building on productivity gains. We recently implemented a new and improved labor scheduling tool that has increased our flexibility in matching our staffing to the variable work nature of our business. As a result, we're becoming more flexible in how we manage our cost structure to match business volume seasonality. The end result of that improvement is a lower cost structure. In addition to our focus on improving current day supply chain performance, we're expanding our supply chain capacity to increase our ability to serve rapidly growing markets. For example, we recently celebrated the groundbreaking for a net new Sysco fold-out site in Mesa, Arizona. Each new fulfillment center at Sysco undergoes a vigorous ROIC review, and a project prioritization test. Each of the investments will increase our capacity and feed future Sysco growth in already successful high growth geographies. We are excited to have the first of these net new buildings in Allentown, Pennsylvania opening later this fiscal year. The Allentown facility will enable us to better serve the highly dense northeast corridor and support the eventual expansion of our specialty platforms in that geography. On October 11, we announced an exciting addition to the Sysco family to our planned acquisition of Edward Don, a leading distributor of food service equipment and supplies based out of Chicago. Founded in 1921 and led by Steve Don, the business generates approximately 1.3 billion in annual revenue and services a broad range of customers across the U.S. We believe the acquisition will be a great addition to the Sysco family, further demonstrating our Recipe for Growth strategy but focusing on building strategic specialty platforms that help us support restaurant and hospitality customers. Every Sysco customer needs restaurant equipment and supplies to manage their business. Don's compelling product offering and robust supply chain capabilities will improve how we serve those customers. After deal closing, Steve Don will continue to lead the business and we will partner together to profitably grow the segment. Most compelling is the following. Sysco sells to hundreds of thousands of customers who are not currently buying restaurant equipment and supplies from either Don or from Sysco. Post the old approval and closure, we have a great opportunity to introduce the Don assortment to Sysco's customers and have a one plus one equals three equation through this accretive acquisition. I look forward to working closely with Steve and his capable leadership team to bring that ambition to life for many years to come. As a wrap up to my remarks this morning, I'll summarize with the following. We grew our top and bottom line within the quarter and achieved positive operating leverage with gross profit dollars outpacing operating expenses. The result was more than 10% growth in adjusted EPS. This double digit growth is on top of a strong year in 2023. We are being very prudent in how we manage the business in fiscal '24. We are closely monitoring the macro environment for signals on customer traffic in the rate of expected inflation this year. We are prepared to take actions to ensure we are successful in the operating conditions presented to our industry. For the full year, we believe Sysco is positioned to succeed growing top line faster than the market and delivering robust bottom line growth. We have three more quarters to go, and we are focused on delivering our plan. I'll now turn it over to Kenny, who will provide a detailed review of Q1 performance and select fiscal year '24 guidance commentary. Kenny, over to you.

Kevin Hourican:

Thank you, Kenny. As we conclude, I'd like to provide a brief summary on Slide 23. We are the market leader in a growing industry. We are the largest in a space where scale matters. We're investing to create additional fulfillment capacity to support profitable growth to further leverage that scale advantage. We're investing in technology to support our customers and remove friction in the purchasing experience. We're expanding our product range to become even more of a one-stop solution for restaurants and strengthening our selling process with improved training, compensation and digital tools to improve the close rate of product introductions to our customers. These efforts are combined with an increase in the size of our sales force in order to reduce territory size, enabling our sales team to provide more dedicated service to our customers. All combined, these capabilities are making it easier for food service operators to focus on what they do best, serving great food for their customers. Sysco has a strong record of generating consistent results. In fact, Sysco has consistently grown annual sales over our more than 50-year history. In addition to compelling top line growth, Sysco was the industry leader from an adjusted operating profit margin perspective. We have the strongest balance sheet, and we're the only food service distributor with an investment grade credit rating. Additionally, we remain the only distributor paying a strong dividend yield. We plan to build on that position of strength for years to come. As our recent proxy statement highlighted, we increased the weighting of financial metrics in our annual incentive program and added return on invested capital as a measurement in our long-term equity plan. These changes are well received by our management team and we are very focused on delivering the guided results. We are confident in the long-term health and growth trends of the food service industry in total. Our $350 billion total addressable market will continue to grow over time, as food away from home has taken share from the grocery channel for 24 of the past 25 years. Scale matters in this industry, and Sysco is playing the long game to strengthen or scale advantages. These factors, coupled with our dividend and share buyback programs, will set investors up to be rewarded over time. I am both excited and proud to be a part of the journey. There is no other place that I'd rather be than at Sysco right here, right now. As always, I want to thank our 72,000 plus Sysco colleagues for their commitment to our customers and our shareholders. Operator, you can now open the line for questions.

Edward Kelly:

Hi. Good morning, guys. Thanks for all the good color. Kevin, I want to ask you, the biggest overhang for this space at this point is probably around case volumes and expectations. Can you maybe just dig in a little bit more around what you're seeing from the customer segments? You did talk about some slowing in the local side today. And then you're obviously making adjustments. Given this backdrop and the adjustments that you're making, is it possible that you could see some improvement in underlying case volume growth from Q1?

Kenny Cheung:

Yes. Thanks, Kevin. Hi, Ed. One thing to add is that in addition to the U.S. market, I think it's important to understand that we have a profitable growth engine in international as well, which makes up roughly 20% of our sales. During Q1, our Canadian business grew 6% in local and our European business grew at a similar rate. From my perspective, growing local is a big part of our long-term vision for Recipe for Growth. Under our global operating models that Kevin's referenced earlier, we are demonstrating sustainable value to our customers through programs like Sysco Your Way, which is yielding dividends as well as Sysco penetration, which is also driving positive flow through our margins. So local and national growth is important. But under the Recipe for Growth umbrella, our focus is sustainable, profitable growth.

Kevin Hourican:

Correct. They are and they're also in the current guide right now.

Kevin Hourican:

Thank you.

Lauren Silberman:

Thank you. I wanted to follow up on the local case volume side and the investments and incremental headcount. Can you talk about what you're seeing with new customer acquisition relative to wallet share gains and negative underlying restaurant traffic just in terms of the composition of what local case growth you're seeing? And where do you see the most incremental opportunity? Is it really to improve on the new customer acquisition side [indiscernible]? Thank you.

Lauren Silberman:

Great, thanks. Shifting on a similar topic, you talked about the local case and investing in incremental headcount, how does this impact your efforts on productivity this year? And then more broadly, if you could just provide any additional color on the progress around productivity? Thank you.

Kenny Cheung:

Thanks, Kevin. So a few points for me. First is in addition to the supply chain productivity Kevin's just mentioned, the corporate initiatives we outlined last call, the $100 million, that is underway and that is going to be realized ratably across the four quarters because we started on day one. That's number one. And if you look at the P&L from a corporate SG&A standpoint, we were down 7% year-on-year. That's point number one. Number two, in terms of the way to think about the pacing of the adds, I'll say one thing. We will be disciplined and deliberate on when and how and where we add, meaning we still expect to achieve positive operating leverage even with the heads that we're adding. So GP growing faster than expenses and bottom line growing faster than top point.

Kevin Hourican:

Thanks, Lauren.

Joshua Long:

Great. Thank you for taking my question. Kevin, you talked about the supply chain overall becoming healthier. That's a continuation of trends we've seen and a lot of the great work that you and your teams are doing. I wanted to see if you might be able to dig in a little bit more there in terms of, obviously, expanding capacity and the labor scheduling tools that you offered there are exciting and measuring the pace of dividends going forward. Can you talk about the underlying labor environment? We didn't spend much time talking about it in the prepared remarks. And I imagine that's because it's largely stabilized or largely improving as you start to think about just all the culminating work that you've done over the last several quarters. But curious if you could provide kind of any additional thoughts there in terms of the overall labor environment, maybe at the warehouse and kind of all the other scaling up that you've done over the last couple of quarters?

Joshua Long:

Great, thank you. I did. It was also encouraged by the improving profit profile you've talked about versus historical periods. So I imagine all of the initiatives and work that you just outlined there go into being able to service those new accounts that you bring on more profitably. But curious if you could talk a little bit more about that at a high level in terms of just other maybe systems, tools, procedures, behind the scenes that are helping to drive that improving profit profile as you go forward?

Kenny Cheung:

Yes, just one point to add. If you'd look at the gross profit line in the quarter, I know usually we talk about gross profit versus expenses, but I think it's worth pointing out that gross profit grew faster than sales, which is a proof point that what Kevin just mentioned, we are managing deflation in the quarter with discipline on the pricing tools side. Sysco brand, as Kevin mentioned, grew 53 bps on the local side for our business, strategic sourcing initiatives and the continued growth of our specialty business as well. On the corporate side, as I mentioned, $100 million is locked in for the year, and we're not stopping. We are looking for more as we speak. I know in the prepared remarks, we talked about Canada. As I'm looking at my own function, we're looking at finding better ways to drive outcomes more with less. So overall, I would say we are on pace with our productivity targets for the year and again looking for more.

Kevin Hourican:

Thanks, Josh.

Jeffrey Bernstein:

Thank you very much. Two questions. One, just Kevin from a top line perspective, I know you mentioned maybe a slowing top line macro and closely monitoring the market. I know three months ago, there was more, I guess, enthusiasm. I think you had mentioned that exit velocity coming out of the June quarter gave you confidence in fiscal '24. So it does seem like it's kind of rocky month-to-month. I'm just wondering where maybe in the restaurant industry, which segments or perhaps chain versus local where you're seeing this greater or less than average volatility? And I think you mentioned most recently that in October, there's an uptick. I'm just wondering if that's industry specific or more Sysco specific. And then I have one follow up.

Kenny Cheung:

Yes. Regarding the guidance as Kevin touched upon, we are confident in our guidance. Here at Sysco, we do adopt what I call the checkbook mentality where our business model allows us to pull levers to ensure we can manage against various market dynamics. As Kevin said, some are controllable and some are not such as the muted market growth and inflation which we were able to successfully navigate through in Q1. Just to put numbers on what Kevin mentioned, 36 bps improvement on GP and then 33 bps improvement on OI. Based on all the variables, risks and opportunities, we feel comfortable with the current guidance range.

Kenny Cheung:

Yes. So let me first just kind of reiterate our guide on inflation. So you are correct. We are seeing one quarter ahead where we expect to on the last guide in terms of inflation in the U.S. market. We were inflationary in total from enterprise standpoint. The second half right now we're keeping what we said on the last call, which is consistently higher versus prior year elevated on positive inflation. In terms of your question around the kind of the product categories with commodities basket, here's how I would think about it. At Sysco, we have a diverse set of commodities or product categories in which we sell to a broad set of customers. The good news is we do not over index on any categories from a volume standpoint. No one categories more than 15% to 20%. Each commodity to your point connect differently. Beef right now is up double digit while other categories are in a different state. From a center plate standpoint, which makes up roughly 13% of our volume, we are seeing that trend up on the inflationary curve. If you think about it, take a step back, Sysco is always managing deflation and inflation because our commodities basket acts differently across the board. That is a reason why we have a natural hedge in the basket itself.

Jeffrey Bernstein:

Thank you.

Operator:

Thank you. We'll take our next question from Kelly Bania with BMO Capital. Your line is now open.

Kevin Hourican:

Kelly, thank you for the question. You're correct on the total headcount for our sales force as of today. We did not on today's call communicate the quantity of headcount adds. It's a meaningful increase. It's in our budget for this year. It's in our guide for the year. It ramps up over time. They all don't start on one day. So think of it as a drumbeat that just gets louder each week. We're having success in filling the job. So it's not something we're struggling to do. And the reason I said sales professionals instead of just sales consultants is it's not just sales consultant generalists. We're adding more protein specialists. We're adding more produce specialists. We're adding more Italian specialists. And of course, we’re adding sales consultants as well across the board. It will have an impact, a very positive impact. What I said in my prepared remarks is think about that more as a 2025 impact, because it takes time for associates to learn the industry, learn the company, learn our tools and systems, learn the selling process. We give them a small territory to start. And then they ramp up that territory size over time. The main benefit, though, is actually the other individual. We're able to free up more capacity in time for an existing strong performer to have fewer accounts to focus on. And then they can actually grow their business as well by spending more time with our best customers. So we're bullish on it for the long term. It's something we will do on an ongoing basis going forward. But it will be a step change upward in the forward facing periods versus the past couple of years.

Kevin Hourican:

Kelly, excellent question. Thank you. I want to be really clear that we're winning meaningfully in national. These are competitive bid, RFPs, multiyear contracts. We're not seeing any reduction in the number of people participating in those competitive bids. We're winning at an increased rate. And we're not winning at an increased rate, because we're buying that business. As you just said, the profit profile of that business is actually up versus historical norms. Why are we winning? We're winning for the following reasons. We have improved our technological integration skills for large national customers. We can more deeply embed our capabilities in tech with that large customers' text to make it easier for them to do business for Sysco. What does that mean? New item setup, substitution management, new door openings, new customer onboarding. We have improved greatly our ability to make it easier for that customer to do what they do, which is focus on running their restaurants, take the worry of supply chain off their table. We've gotten much better at that. The second is we've increased the accountability and capability of our national sales teams. They have the right to make decisions. They are empowered to do so. They are more dedicated to our large national customers. And we funded that internally by taking out cost elsewhere. So our largest customers have more dedicated account and service and they have account reps that are more accountable and can make decisions in order to serve them. That's topic two. Topic three, because we're a global company, we're a one-stop shop for a large national customer to be able to support their door expansion both domestically and internationally. And that's now better understood by large customers that you would obviously know who they are. We're an attractive player and partner of theirs to make it easier for them to grow both domestically and internationally. I want to be really clear, though, that this is not just about restaurants. This is about healthcare. This is about hospitality. This is about education. We have dedicated specific SMEs, subject matter experts, now into each one of those categories. And while that might not be rocket science, that's reasonably new at Sysco. We've increased the skill set and capabilities within each of those dedicated lanes that I just mentioned. If you're going to sell to a healthcare account, you need to be an expert in the nutritional guidance from the government to help that end customer receive the reimbursement from the government that they deserve. You need nurse practitioners that are dietary nutritionists and we are increasing the quantity of people that have those skills. And we're having increased success on new customer acquisition as a result of that. And again, we funded those headcount to internal costs to take out elsewhere. In aggregate, it's working, it's winning and we're really pleased with the performance of our national sales team. Kenny, any additional comment?

Kelly Bania:

Thank you.

Operator:

Thank you. We'll take our next question from John Heinbockel with Guggenheim Securities. Your line is now open.

Kevin Hourican:

Yes, it's a good question, John. And I would say it this way. We're being very strategic about where the headcount adds are happening. It's not peanut butter spread across the country. It's high dense trade areas, high growth trade areas, and where things like Sysco Your Way are happening. And that is where the headcount growth will happen. We're in select geographies with high customer density, with high growth are areas where we will over invest in the new headcount additions, and we expect high yield from that. As it relates to Sysco Your Way, we have a real opportunity to continue to optimize our performance within those neighborhoods. We're now live in more than 450 neighborhoods worldwide. And we have a big opportunity to increase the number of doors we serve within those neighborhoods. There's still tremendous growth potential in those neighborhoods where we don't serve every customer yet. And then for the customers that we are currently serving, we don't have produce and protein and Italian on every one of those customers' truck deliveries, and why wouldn't they order produce and protein from Sysco when we're coming literally every day and we have a sales rep. So we are having so much success and this perhaps is where you may have been going with your question in select Sysco Your Way neighborhoods. We're actually having to split them apart and create two neighborhoods within a geography. In some, we've actually had to split into three neighborhoods. And yes, there is headcount dedication that will occur in that regard. And some of the new headcount that we're hiring this year will in fact be deployed to those neighborhoods.

Kevin Hourican:

On the national side, I'll start with the answer to your question. Then I'll toss to Kenny if he has anything else that he would like to say. Our share count with an existing national customer is very high. For many of them, it's 100%. The opportunity for profit improvement with those accounts are things like penetrate further with Sysco brand. Sysco brand under penetrates with national brand customers versus local customers. But we're making progress on that. Now we're lining up our chief merchant with the chief purchasing officer for those top customers and where can we win together? Where can we partner, move a product over to Sysco brand, share in some of those savings with that national brand customer so that we win together? Other examples would be dropped size incentives. How can we do things in a win-win nature with those customers where if we can be more efficient through a decision that they make, we can share in some of the savings created from that efficiency improvement? Again, just back to why are we winning in national sales? If the contract is not win-win, it's short lift. We need to have contracts that are win for us, win for them, structure the contract that way and then these great sustainable, long-term partnerships. Reminder, these contracts are three to five years in nature. And our retention rate for our national sales customers is extremely high, in large part because we're doing an even better job of having that win-win contract provision where again where we can be more efficient, we will share in some of those savings with that partner. That helps them be more profitable, it helps Sysco be more profitable as well. With that rigorous, disciplined ROIC lens that Kenny mentioned, he mentioned it in SYGMA, we had a customer not to be named that wasn't willing to actually have a contract that was win-win. We walked away. We're more profitable because of it. We're not growing for the sake of growing. We're finding the right partners in national across restaurants, healthcare, education and hospitality. We're focusing on how we serve them better. And we're having a lot of success with that. Kenny, I'll toss to you for any additional comment you'd like to make.

John Heinbockel:

Okay. Thank you.

Operator:

And we'll take our next question from Kendall Toscano with Bank of America. Your line is open.

Kenny Cheung:

Yes. So without going to actual numbers, the way that I would model and think about this, we should drive bottom line accretion through both on the GP side and the operating expense side. And what does that mean? If you look at Q1, as I mentioned earlier, Q1 gross profit growth rate was actually higher than sales, meaning the work that we've done around call it the strategic sourcing, Sysco brand penetration, proper mix of our business that will drive accretion between your sales and your GP line. In terms of operating expense at the low GP, you have two things working in favor for us. One is the continuation of supply chain productivity, as Kevin described earlier. This is tied to productivity. This is tied to better retention for our employees. We try to better productivity yield on the warehouse side and delivery side. And this also dovetails nicely into the productivity work that we've done on the corporate side, which is $100 million I referenced earlier. As I mentioned, we're not stopping there. So to answer your question directly, it is both the GP line and the operation expense line.

Kendall Toscano:

Great. That's really helpful. Thank you.

Kenny Cheung:

Thank you.

Kevin Hourican:

Great. Thank you all for joining us. Please feel free to reach out to the Investor Relations group if you have any follow-up calls. Thank you.

Operator:

Welcome to Sysco's Fourth Quarter Fiscal Year 2023 Conference Call. As a reminder, today's call is being recorded. We will begin with opening remarks and introductions. I would now like to turn the call over to Kevin Kim, Vice President of Investor Relations. Please go ahead.

Kevin Hourican:

Thank you, Kevin. Good morning, everyone, and thank you for joining our call today. I would like to cover three topics during my section of our call. First, I'll provide a summary of our Q4 results and our full-year performance. Second, I'll convey an update on our Recipe for Growth strategy. And lastly, I'll provide some commentary on the macro condition which we have modeled for fiscal '24 and how Sysco intends to operate within that environment. Kenny will provide much more detailed components of guidance during his section. So, let's get started. We are pleased with the strong finish to the fiscal year. Sysco posted record top-line and bottom-line results during the fourth quarter. Top-line results, as seen on Slide 5, were up 4.1% compared to last year, delivering $19.7 billion in sales. The strong quarter generated a full-year sales results of $76.3 billion, a record at Sysco. We grew annual sales by 12.5% or $8.6 billion on a constant-currency basis. That sales growth is the equivalent of creating a net new Fortune 500 company within Sysco. Turning to volumes. Q4 case volume grew 2.3% and local case volume grew 0.8% across our U.S. Foodservice business, successfully growing our market share in furthering our number one position in foodservice distribution. We are pleased with our share gains for the quarter in the year which build on meaningful gains delivered within fiscal year '22. Importantly, these gains are profitable share gains. We are not growing for the sake of growing as we have consistently pursued profitable sales growth vectors, domestically and internationally. Moving to gross profit. Our sales and merchandising teams delivered a strong quarter from a GP growth perspective. We grew gross margin rates and GP dollars per case, which is not easy to do in a disinflationary environment. Our teams are doing excellent work in strategic sourcing to reduce COGS and further penetrating Sysco brand cases with our customers. Advancing Sysco brand helps gross profit and leads to increased customer retention. Lastly, we are growing our higher-margin specialty business, which strengthens our overall margin profile. Next, in the P&L is operating expense. I am most proud of the quarter from the perspective of the progress that we're making in reducing our expenses. We have been clear with investors that our first half of the year in fiscal '23 had elevated expenses. This was driven by two factors

Kevin Hourican:

Thank you, Kenny. As we conclude, I would like to provide a brief summary on Slide 28. Sysco has a strong record of generating consistent results. In fact, Sysco has grown annual sales in 51 years out of our 54-year history. We expect our positive momentum to continue in 2024. In addition to compelling top-line growth, Sysco is the industry-leader from an adjusted EBITDA margin perspective with the strongest balance sheet. We plan to build on that position of strength in fiscal year 2024. We ended our fiscal year 2023 with strong sales, volume, and share growth, growing volumes across both our chain and independent business. The result was a 23% adjusted EPS growth for the year with record top- and bottom-line contribution. We have momentum going into the year, as our Recipe for Growth transformation, now in its third year, is further building upon and enhancing our competitive scale advantages. Importantly, we have demonstrated our third consecutive quarter of operating leverage with gross profits outpacing operating expense growth. For fiscal year '24, our dual focus on core efficiency measures and optimization from proven growth opportunities will deliver another year of top- and bottom-line growth. There are bright days ahead for the food away from home industry and, more specifically, Sysco. I am both excited and proud to be a part of the journey. And as always, I want to thank our 72,000-plus Sysco colleagues for their commitment to our customers and our shareholders. Operator, you can now open the line for questions.

Edward Kelly:

Hi, guys. Good morning. Kevin, so my question is on the guidance. I mean obviously the backdrop for the industry, it's a little bit tougher than what it would normally be, and providing guidance in that backdrop is not easy, 5% to 10% earnings growth against that is certainly respectable. But can you talk about the confidence in that level of growth, the cadence that we could be expecting? And if you were to be at the bottom-end of the range, what would drive that? And if you were at the better end of the range, what would cause that outcome?

Kenny Cheung:

Thank you, Kevin. I'll talk about two things. One, the confidence level around the guidance. And second, as Kevin alluded to, a couple of below-the-line items that I think needs a bit more color. But first is around the confidence in the guidance. Our confidence in the guidance is based on how we successfully managed Q4. So, if you think about Q4, we ended the quarter deflationary in the U.S., and with that, we still managed to expand GP margins by 28 bps and operating margin by 56 bps. So again, we're doing it right now. The second piece I would say is that, if the environment were to change, we have the agility to flex up and down, given the fact that we have a world-class balance sheet and we have a very agile cost structure, and we have productivity in place, the $100 million that has already been executed and baked-in, in our guidance. So, that is around the confidence of the guidance. In terms of the below-the-line items, there are two areas I want to go a bit deeper on. One is tax rates. We expect our tax rate to step up from 23% to 24.5%. There's two pieces to the tax side. First, we are seeing earnings strengthening across our international markets, which is yielding a higher tax charge. This is a good thing. We are seeing our international arm growing fast. The second piece is, here in the U.S., we are expecting a higher state tax expense due to various factors including the mix of earnings across the state. This is our current view. We are continuing to evaluate tax planning strategies, and we'll report back as appropriate. The second piece is around interest expense. Overall, the rate has risen. And we also plan to raise capital to deploy against high-returning accretive initiatives, which includes growth investments, M&A, return excess cash to shareholders. This is driving the higher interest expense. Again, $13 million increase year-over-year. The last bucket is other expenses. As I mentioned in my prepared remarks, we expect it to be roughly $30 million related to pension expense.

Kevin Hourican:

Thanks Ed.

Joshua Long:

Great. Thank you. Hopefully, you might be able to dig into some of the underlying core customer segments. Obviously, we were able to see some of the case volume trends there that you provided in the release and that's helpful. And just curious if you could tie that together, Kevin, with some of your higher-level thoughts on where the consumer is at, how they're choosing to spend their dollars. and maybe how that corresponds with your customer makeup, as we think about the fiscal 2024 guidance?

Joshua Long:

That's helpful. Thank you. And then one follow-up, if I could. When we think about the $100 million cost-outs, that comes on the heels of some other great work over the last year or two, coming out of COVID, curious if you could, can you dimensionalize that $100 million a little bit more, maybe not getting into the specifics of it but just the visibility you have into maybe the timing or the realization of those, is that relatively balanced across the year, do you have - do we think about this in terms of just maybe second or third round iterations of initiatives that you've had more experience with in the past and just as you have more time you found new wins there, are these entirely new categories? Just any additional commentary you can provide there, as we think about the ability to drive margins and pull cost out of the system would be very helpful.

Joshua Long:

Thank you.

Operator:

Your next question will come from John Heinbockel at Guggenheim Securities. Please go ahead.

Kevin Hourican:

Yes. Thanks, John. I'll do the second question first and then your first question second. I want to be crystal-clear on what we meant by overtime at zero. It's excess overtime was taken to zero. So, the industry runs at a -- let's call it an average rate of overtime because some overtime is good, our employees desire some amount of overtime. Your truck that leaves the warehouse and doesn't get back for 12 hours because that's the nature of the route, there's going to be some overtime, et cetera. So, what we meant by that is that excess overtime enduring the worst of the supply chain disruption, we had meaningful, meaningful excess overtime. So, we feel really good about that. Where can additional efficiencies come from? Retention improvement jump. So, our turnover has dramatically improved, and it can still further improve to get back to historical levels of retention. And if you ask me six months ago, what's the single most important thing that we need to do more effectively? It was improved retention because that flows through in many different ways

Kevin Hourican:

Thanks, John.

Kelly Bania:

Good morning. Thanks for taking our question. I was wondering if we could talk a little bit more about the centralized pricing tool and the price optimization work that you've been doing, as particularly as we do transition here, it sounds like into some deflation for certain category. And just how investors should think about modeling your gross margin, as we move forward given kind of not much disclosure at this point on how much of your business on a percentage markup versus a dollar markup or how this centralized pricing tool can change that? And maybe, included in that, can you just give us a little color on how the deflation that you're seeing right now is impacting the gross profit dollars?

Kenny Cheung:

Yes. Thank you, Kevin. A couple of things that I want to add. Just to recap, in Q4, as I mentioned earlier, we did experience deflation in our U.S. market. And with that, we still expanded both GP dollars per case, GP margins as well as operating margins, both -- all three of them. Yes, to directly answer your question, the centralized pricing tool, it does help on the margin side. There is quite a few other levers that we have as an enterprise, right, besides pricing. So, let me walk you through some of those other things that enterprise is working on. This includes

Kevin Hourican:

Kelly, on the National Restaurant business, I would defer to the leaders of those companies to comment. I think they'll all make their own individual choices. I think at the local mom-and-pop independent level, it's an efficient market and center of plate purchase cost will come down for them. And will some of them choose to lower the price point on the menu? I think some will, and they will see volume benefit from that. So, it's fungible, these things are levers that get pulled, but I'll defer it to our large customer base to answer that question, especially the national chains.

John Ivankoe:

Hi. Thank you very much. The question is on sales force compensation. I know there's been a couple of changes or enhancements in the past years, maybe one being in terms of new account generation, market share per account, Sysco Brand, product sales. I think there were a couple of different things including, I think, most recently the removal of some ceilings that certain sales force members are actually heading in terms of total comp. So, just wanted to get a sense of kind of what we should be focused on in '24, especially in terms of like a stable comp plan? I mean, how it works for both Sysco and the sales force numbers. And if you can make a comment in terms of the number of salespeople in the Sysco organization, does it make sense to add more or give more responsibility to the best? Thank you so much.

John Ivankoe:

Thank you.

Operator:

Your next question will come from Alex Slagle at Jefferies. Please go ahead.

Kevin Hourican:

Okay. Alex, thanks for the question. I'll start just on sentiment of that very important customer segment of ours, and then I'll toss to Kenny for any comments on receivables and bad debt. You know, from the very beginning of COVID, I've said the following that local mom-and-pop entrepreneur is just that they are an entrepreneur. This is their business. They are agile, they are scrappy, they are fighters, and they have dealt with a lot over the last four years, and the disinflation to deflation in aggregate will be a good thing for them because think about that curve I was doing, I wish we are on Zoom and you could see me right, like the 18% inflation followed by deflation will come back to a normalized 2% to 3% inflation once we've gotten through this transition period, and that will be good for the local operator. It will be good because it will help with volume and frankly a little bit of margin is benefited from a little bit of inflation. So, the environmental conditions are going to transition to more favorable for that local operator. As it relates to how we Sysco can help them, that is the core of who we are. Drive to the best possible cost for that operator through strategic sourcing, have a sales consultant who is an expert in the their craft. You can help them with menu optimization, productivity improvement, Sysco Brand conversion which Kenny covered very well, we made tremendous strides in this past year and further penetrating Sysco Brand, we expect for that to continue and to introduce innovation and newness to our customers through cutting-edge solutions. So, we believe in the independent customer, we believe there is a real reason they exist which is people like local, they like to eat fresh, and those local operators do a wonderful job of buying local product, and again Sysco buys and sells more local produce than any other distributor despite our size. When I think about outlook for where we head from here, we have the ability to win more of those customers even if that overall customer base is going through this transition period. We serve roughly half of those independent doors, and we have a big opportunity to grow the number of doors we cover, an increased share of wallet going back to John's question with those customers. So, independent customers will be a source of growth for us this coming year, which we've built into our guidance. Kenny, I toss to you for any comment on AR and bad debt.

Alex Slagle:

Okay. Thank you.

Operator:

Ladies and gentlemen, we have reached our allotted time for the question-and-answer session. So, this will conclude your conference call for this morning. We would like to thank everyone for their participation and ask you to please disconnect your lines.

Operator:

Good morning, ladies and gentlemen. Welcome to Sysco's Third Quarter Fiscal Year 2023 Conference Call. As a reminder, today's call is being recorded. We will begin with opening remarks and introductions. I would like to turn the call over to Kevin Kim, Vice President of Investor Relations. Please go ahead.

Kevin Hourican:

Thank you, Kevin, and good morning, everyone. We will start today with a brief review of our financial performance. We will then highlight how we continue to grow share profitably. And as is our custom, we will provide a brief update on select elements of our Recipe for Growth strategy. I will then introduce Kenny Cheung, who joined the team a couple of weeks ago as our Chief Financial Officer. Kenny will share a few thoughts about what attracted him to Sysco and his initial observations. Neil Russell, now on the Chief Administrative Officer role, will provide a detailed update on our third quarter financial results, our balanced approach to capital allocation and lastly he will provide additional commentary around guidance. Our Q3 results, as displayed on Slide number 6 show continued double-digit top and bottom line growth. We grew faster than the overall market profitably, driving case volume growth of 6.1% across our U.S. Foodservice business and total sales growth of 11.7%. Our positive momentum was aided by strong performance from our International division with segment profits nearly doubling year-over-year. Our total company adjusted operating income and adjusted EPS grew approximately 27%, resulting in the highest ever third quarter profit in company history. Importantly, sequential improvements in our supply chain operating expenses resulted in solid operating leverage. I am pleased with the progress that we are making in supply chain productivity and overall expense control. We delivered strong sales growth throughout the quarter despite some industry softness beginning in March. Core traffic to our customers moderated in March, negatively impacting the sales volume in the most important month of the quarter. Third-party data indicates that the overall market volume decelerated through slight growth in March softer than had been expected within the restaurant segment. Additionally, the rate of inflation year-over-year declined at an accelerated rate during the quarter. This pattern of lower volume and lower inflation put pressure on total sales and gross profit for the quarter. A lowering of the overall inflation rate is a good thing for the industry for the long term, but we need to carefully navigate through the reduction period. These two factors, lower traffic and lower inflation are now expected to continue throughout our fourth quarter. Offsetting these near-term headwinds, we expect our progress with supply chain productivity and overall expense control to also continue into our fourth quarter. Putting all of these factors together, we now expect to end the year near the bottom of our adjusted EPS fiscal 2023 guidance range for $4 to $4.15. Recall that last quarter we outlined that the low-end guidance scenario considered softer macroeconomic and industry performance, which is exactly what we experienced in March. On that call, we also outlined our focus on driving fundamental improvements in our cost structure by improving supply chain productivity and driving up costs across the entire company. Our objective was to deliver gross profit growth greater than expense growth, enabling operating leverage expansion. We delivered on that objective in the third quarter, delivering our highest ever Q3 profit at Sysco. We remain very focused on productivity improvement, and we expect our efficiency actions to accelerate into the fourth quarter. At Sysco, we are playing the long game, and we are investing to win through our Recipe for Growth strategy. We are increasing our fulfillment footprint of distribution centers. We are improving our digital tools. We are enhancing our selling process and technology. These efforts are building momentum, and we remain on track to deliver our growth target for fiscal 2023 of growing 1.35x the market. Despite what has become a more challenging macro environment, we are confident in our ability to differentiate versus others in the marketplace and create preference with our customers. We are also prepared to handle the challenges at a slowing macro and lower inflation rates will present to our P&L. We are hyper focused on what we can control. This means executing our sales playbook of driving profitable growth and improving our logistics expenses. I am pleased to report that in the most recent quarter, we made meaningful progress in our supply chain productivity. As you can see on Slide number 8, we delivered improved retention, improved labor productivity and improved overall expenses. While our operating expenses remain elevated compared to historical standards, Q3 marked a major step forward in sequential improvements. We continue to have healthy staffing levels, and we are increasing our fill rates to our customers. These factors are helping Sysco improve our Net Promoter Scores. We will continue to make progress in operating efficiency and improving customer service into our fourth quarter. We profitably grew our volume and sales this quarter with U.S. Foodservice volumes up 6.1% and local case volumes up 4.2%. Sysco continues to succeed versus the overall market. And as I stated a moment ago, we are on track to deliver our stated growth target for the year. We delivered compelling business performance in our specialty businesses this past quarter with notable gains in our Italian platform, and we continue to see very strong performance from our FreshPoint produce business. Winning in the specialty space is a priority in Sysco as our market share is below our fair share in these fast-growing and higher profit margin segments. Sysco brand continues to succeed with increased penetration year-over-year of 29 basis points in U.S. Broadline and importantly growing over 100 basis points in the U.S. local segment. This progress creates a mix benefit as each additional Sysco brand case adds to our profit rate due to the higher margin and positively impacts customer retention due to the unique value proposition of Sysco Brand products. Additionally, I am pleased to report that our sales consultant retention remains at record high levels as our sales reps have adapted well to our improved sales enablement technology, pricing platforms, and our compensation program. And speaking of our compensation program, we plan to implement changes to the program at the beginning of the coming fiscal year. These changes will provide even more incentive for our industry-leading sales reps to grow their business profitably. The updated program is being tested currently in a U.S. region, and the early indications are positive. The modifications to our program came directly from feedback from our sales force. Turning to the Recipe for Growth on Slides 9 and 10. Our key initiatives are winning in the marketplace and fortifying our leading position in foodservice. We continue to drive compelling profitable growth as we expand the Sysco Your Way neighborhoods across the U.S. and internationally. As we highlighted at our recent CAGNY conference presentation, we are now live in over 300-plus neighborhoods across five countries. We will expand the program further in the coming quarters. The results from this customer-focused program continued to exceed our expectations, delivering double-digit top and bottom line growth. Additionally, we continue to gain momentum with Sysco Perks. We have now enrolled more than 11,000 customers into the exclusive loyalty program. Sysco Perks is our invitational only loyalty club, providing members with white glove service. Membership benefits include deliveries up to six days a week, exclusive access to rewards and industry-leading restaurant solutions to help our customers grow their business. When our customers succeed, we succeed, and we believe Sysco Your Way and Perks are two outstanding programs to help our customers be successful and differentiate Sysco from our competition. Lastly, we continue to make excellent progress with enhancing our digital tools. In the most recent quarter, we launched critical enhancements to our Sysco ordering platform called Shop, and we further enhanced our sales consultant CRM tool making it even more clear to our sales consultants the key priorities for each customer visit. The improvements to Shop in our CRM will drive increased penetration with existing customers. Turning to our next topic. We are excited to welcome Kenny Cheung to the Sysco family as our CFO. We conducted an exhaustive global search for our next CFO, partnering with industry experts in talent placement and talent assessment. I'm thrilled that we have the opportunity to find and hire Kenny. Kenny joined Sysco with nearly 20 years of financial and operational executive experience, most recently having served as the CFO at Hertz. Prior to Hertz, Kenny had operational and financial roles at Nielsen, and he started his career with GE. Kenny has extensive financial, operations and international experience. When coupled with his learning agility and financial acumen, we are confident that he will help Sysco profitably grow our business. Kenny leads with a hands-on approach as a team player, and we believe he will be a strong cultural fit for Sysco, something that was essential to me in the search process. I want to publicly acknowledge Neil for his great work over the past few months as our interim CFO and congratulate him on his expanded new position at Sysco. I'm excited that Neil is in the newly created position of Chief Administrative Officer. In that capacity, Neil will help us ensure that our strategic initiatives are on track, including program governance for our expansive Recipe for Growth strategy. He is a trusted partner, and I greatly appreciate his leadership impact. With that, I'll now turn it over to Kenny.

Neil Russell:

Welcome, Kenny. And hello, everyone. I will start today with a review of our third quarter financial performance and then discuss our expectations for the full year to go. During my discussion today, unless otherwise stated, all results are compared to the same quarter in the prior fiscal year. As highlighted in our news release issued earlier this morning, and on Slide 14, which is posted on our website, we delivered double-digit year-over-year growth in both top and bottom line results. And we continued our balanced approach to capita allocation all in the midst of an evolving macro backdrop. Let me begin with a summary of our third quarter results. Sales grew 11.7%, with U.S. Foodservice growing at 10.4% and continued positive momentum in our International segment, which grew at 18%. Volumes grew year-over-year and also improved sequentially. The U.S. Foodservice segment, which includes our Broadline, FreshPoint, Italian and other specialty businesses grew 6.1% and local case volumes increased 4.2%. Adjusted gross profit for the third quarter increased 12.8% to $3.4 billion with adjusted gross margin improving 18 basis points to 18.2%. Gross profit dollars per case grew in all four segments, marking the seventh consecutive quarter of such growth. Our gross profit dollar and margin percentage improvement during the third quarter reflected our ability to continue to effectively manage product inflation, which moderated to 4.9% for the total enterprise, down sequentially from 8.3% during the second quarter of this fiscal year. The improvement in gross profit was also driven by incremental progress from our strategic sourcing efforts as well as improved penetration rates from Sysco Brand products. Overall, adjusted operating expenses were $2.7 billion for the quarter or 14.3% of sales, a 32 basis point improvement from the prior year. This quarter included transformation investments of $60 million. Excess overtime costs, otherwise known as productivity costs were reduced all the way down to zero during the third quarter. As we improve our cost performance, we have now eliminated both snapback and these productivity costs. All four operating segments again showed increases in profitability year-over-year including substantial growth in the International and Sigma segments. As seen on Slide 18, adjusted operating income for the enterprise increased by 27.8% and to $736 million. This is the highest adjusted operating income results for the third quarter in Sysco's history and is now the third consecutive quarter of record quarterly operating income an important signal of the progress being made at Sysco via our recipe for growth. This quarter continued to show gross profit dollar growth outpacing operating expense growth another important illustration of our financial improvement. For the quarter, we grew adjusted EBITDA by 19% to $900 million. Regarding the balance sheet, our solid investment-grade rated balance sheet, strong cash position and healthy liquidity remains a competitive advantage. We ended the quarter at a 2.8 times net debt to adjusted EBITDA ratio. In the third quarter, we repurchased 1.5 million shares and year-to-date, we have now repurchased 4.6 million shares. We are now at nearly $400 million of share repurchases for the year, nearing our goal of up to $500 million. Inclusive of our dividend payments, Sysco has returned a total of $1.1 billion to shareholders thus far in fiscal year 2023. Of note, the Board approved last week another annual increase in Sysco's dividend, continuing the long-standing tradition of regular increases in solidifying our position as a dividend aristocrat. As a reminder, we remain well positioned in the current rising interest rate environment, with approximately 95% of Sysco's debt being fixed at attractive rates. Lastly, we are well positioned with our debt laddering schedule with staggered maturity dates over time. Let's turn to cash. As shown on Slide 19, year-to-date, cash flow from operations was strong at $1.4 billion, a $680 million improvement over the prior year. Net CapEx increased to $446 million as we continue to invest in our Recipe for Growth, particularly with respect to our planned investments in fleet and distribution facilities. This includes three expansion sites and seven new facilities in the next few years as we deliver new capacity in high potential markets and high-growth cuisine segments. Our investments are driving positive returns, and we plan to remain prudent with capital allocation with a focus on ROIC maximization. Free cash flow was very strong during the third quarter, increasing to $980 million year-to-date. This improvement was driven by disciplined inventory management and a positive change in working capital during the quarter. We ended the quarter with approximately $758 million in cash on hand and over $3 billion in total liquidity. As seen on Slide 22, our ESG or sustainability efforts advanced with the unveiling of our first electric vehicle hub in Riverside, California last month for Earth Day. This is the world's first electric vehicle hub of its kind, consisting of electric tractors and electric trailers fueled by renewable solar energy. These trucks are rolling, serving our customers as we speak with more on the way. Our industry-leading climate goals also include a commitment to work with suppliers representing 67% of our Scope 3 emissions to set their own science-based targets by 2026. Importantly, our focus on sustainability and diversity, equity and inclusion is not only the right thing to do, we believe it will be good for business in the long term. Lastly, looking ahead to the remainder of the year and beyond, we now expect diluted adjusted earnings per share near the bottom of the previously disclosed range of $4 to $4.15 per share. While Sysco continues to outperform the market due to the success of our Recipe for Growth strategy, the recent market softness is creating incremental business pressures impacting case growth and lower inflation. These macroeconomic headwinds are impacting traffic levels for some of our customers, resulting in slower traffic levels across the restaurant industry. To offset this, we are actively managing our portfolio and continue to expect further improvements in cost-out activities and supply chain efficiency for the remainder of the year. Additionally, inflation remains on target for a low single-digit rate in Q4 of this fiscal year. As a result, we expect the fourth quarter to reflect a similar positive trend of gross profit dollar growth outpacing operating expense growth. Specific to share repurchases, we remain on target to repurchase approximately $500 million in shares this fiscal year. With that, I will now turn the call back over to Kevin for his closing remarks.

Operator:

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question will come from Mark Carden at UBS. Please go ahead.

Kevin Hourican:

Great. Good morning, Mark. This is Kevin. Thanks for the question. I’ll start just, acknowledging the strike situation and then directly answer your question. I just want to thank our operations team, first and foremost, for the agility that they displayed. During the unanticipated strikes in the most recent quarter, within 24 hours to 48 hours, we were up to full shipping capacity, able to support our customers and communicate effectively with our customers, which is not an easy task given the amount of business that we do on any given day at Sysco. Point two for me is, Sysco pays above market wage rates, and we provide extremely compelling benefits to our associates. That has not changed, and that will not change. We will be a leader in wage and benefits. For example, drivers can make more than a $100,000 a year at Sysco. It’s a good paying job. Unfortunately, as you know, Mark, you indicated there were some strikes in the most recent quarter and the one that impacted our Q2 for up in Boston. These are things we’re working through. We will continue to be fair to our colleagues and also manage our P&L for the long term during our discussions with our labor partners. Our goal is to have a solid relationship with all of our labor partners and to treat our colleagues with respect and the dignity that they deserve, and we’re committed to doing that. As it relates to wage, we’ll talk about that more in August when we provide our fiscal 2024 guidance. I want to be clear that the type of increases that we’re experiencing are not game changing. I know that restaurant names and retail names have talked about double-digit plus type annual wage increases. We are not experiencing that at Sysco. And that’s something we’ll provide you with more clarity and specificity about on our August call.

Kevin Hourican:

Yes, Mark, thanks for the follow-up. We are really pleased with the rate of progress that we made in Q3 from a supply chain productivity perspective. I like to start at the start, which is we are fully staffed. So we are a fully staffed network. We’re beginning to experience improved retention because over time rates have come down and obviously that flows through positively to our P&L. The types of things that we have done to drive that behavior in action is, as you mentioned, the academies for having a meaningful impact on reducing turnover for our new hires, improving productivity for our new hires. We have fully implemented engineered labor standards in our transportation division. We’ve always had that for warehousing, and we now have it for transportation, which allows us to provide our colleagues with proper coaching and recognition when they’re doing well and to help a new person or a person who’s not at the level of productivity and throughput [ph] that we desire to understand how they can individually improve. We’re improving how we flex our labor to match the volume for any given day in any given week, which allows us to, again, hit the desired productivity. And we’re really pleased with the exit velocity of our productivity in March, and we anticipate in our Q4 of this year that we will make continued progress. As I mentioned on the earnings call transcript, we’re still at an elevated level of cost versus our historical norm. And therefore there’s still progress to be made, and that progress will carry into 2024. We anticipate supply chain costs as a percent of sales will come down year-over-year, and we’ll provide you more clarity and specifics behind that on our guide that we will provide you in August. Neil has one comment to add to that. Neil, over to you.

Mark Carden:

Great. Thanks so much. Good luck guys.

Operator:

Your next question comes from John Heinbockel at Guggenheim. Please go ahead.

Kevin Hourican:

Good morning, John. Thank you for the question. We’re really pleased with the performance of Sysco Your Way. Specifically as we roll out additional new neighborhoods, we’re not seeing a diminishing of the impact as each individual neighborhood comes on. I think you’ve heard me talk about that before as the Hawthorne effect. When you launch a pilot, it does great, but then when you attempt to scale it and it diminishes over time. We are not seeing that at all. Each and every neighborhood that we launch comes out of the gate strong and actually sequentially improves month-over-month and quarter-over-quarter. And the lie that happens is twofold. Again, remember, the truck is there literally every day, twice per day. The sales rep is walking the beat, as we call it, every day. And we win new customers on a sequential basis because we’re showing up every day and knocking on the door and saying, do you need anything? Do you need anything? And then within existing customers, we can win categories that they perhaps were buying from a specialty distributor, like a specialty house or a premium protein house and a dairy house. We’re gaining that specialty business and putting it on our truck, and then we’re winning new doors within the neighborhood. So each additional neighborhood that we launched we’re pleased most impressively. We’re now live in five countries and the model is scaling in every country that we’ve launched it in. Most recently, we’ve launched it in Stockholm, Sweden. And right out of the gate, the results have been really strong. So internationally it’s working, domestically it’s working. We anticipate that yes, John, it will exceed – we’ll be on target versus the $1 billion that we have quoted. And there’s the potential for upside, not prepared today to talk about what level of upside, but we’re really pleased with the performance. We’re also pleased with the performance of Sysco Perks, which is our loyalty program. If I may, I do get a lot of questions. Kevin, what’s the difference between Sysco Your Way and Perks? I’m kind of confused. I want to be really clear. Sysco Your Way is about the neighborhood, and it’s a couple of streets, in a town that have 50 plus restaurants on those one or two streets, and it’s about providing next level of service to those specific neighborhoods. Perks is the opposite of that. It’s a customer who’s not in one of those neighborhoods. That’s one of our best customers. It’s an invitation only program. We invite customers in and we provide them with white glove [ph] service, marketing services and culinary engagements. And that program as well, which is now more than 11,000 customers enrolled, is exceeding our expectations.

Kevin Hourican:

John, thank you for the follow-up. And you’re directionally accurate on where we’re headed. So, for everyone else who’s listening, go back to pre-COVID. The Sysco sales consultant was on a full commissioned model. During COVID because the business dropped significantly, we did the right thing for our sales consultants to retain them, and we converted to a base plus bonus model where they earn a livable wage through a base pay, and then they have opportunities to make money through bonus criteria. And that criteria can change quarter-over-quarter to have behavior that we desire to see from that population. For a while it was Sysco brand and then we were focused on helping our customers engage with Sysco Shop. And John, yes, where we’re headed for this coming fiscal year is to put even more incentive in front of the sales consultants for them to profitably grow their business. And the more cases they get put onto a Sysco truck, the more they make and obviously the more Sysco makes as a result. So we’re going to keep the base pay component of what we have because we like that element. It drives retention and quality of life for our associates with ups and downs that occur in business. But we want to put even more, put a more incentive in front of them to drive growth profitably. And what we anticipate the action and reaction from that John will be is real hunger on our sales force to go out and win business, penetrate more lines with existing customers and win new business. So we’re testing it, as I mentioned, the results are preliminarily positive and then we work on the communication plan and change management plan for our 5,000 plus associates in the sales ranks within the U.S. and we expect it to be very well received, because as I mentioned in my prepared remarks, this feedback came directly from our sales results, excuse me, from our sales consultants. Gave me more motivation and incentive to go out and win and go out and sell. And we’re going to be doing exactly that.

Kevin Hourican:

Thank you, John.

Joshua Long:

Great. Thank you for taking the question. Was hopeful we could dig into some of the digital tools that you called out, Kevin, sounds like strength and Sysco Shop and then also your sales associate PRM tool are performing well. Just curious what you could share in terms of the learnings that you’ve seen to date where you might lean into going forward, to the extent you could share that? And then also just, how does those tools and others that you have help you manage the pace of inflation? You mentioned being really important, but how do you use those tools to really navigate this current environment from a pricing and just cost management perspective?

Neil Russell:

Yes. Thanks Kevin. Hey, Josh. Just a couple of headlines for you; the impact of these things that Kevin has been describing, so gross profit dollars growing at a pace faster than expenses now for two quarters in a row is the end result of the improvement in these tools and processes that Kevin was describing and there's one other tool in the toolbox that is helpful for that gross profit dollar growth, and that of course is Sysco brand, which has performed very well for us recently. Now at 36% of what we sell to our local customers and about 46% – I'm sorry, 46% of what we sell to our local customers, 36% what we sell overall. A very powerful tool in the toolbox of managing fluctuations and inflation and the power of the gross profit dollar growth, so all those things combined are leading to that improved progress of that leverage that we speak of.

Operator:

Your next question comes from John Ivankoe at J.P. Morgan. Please go ahead.

Kevin Hourican:

Okay. John, its Kevin. I'll start, and I'll toss to Neil for additional comment. Just a little more color on what we experienced in March, and obviously that's built into how we described our expectations for Q4 and now for the full year. March restaurant traffic did slow down in March; I think that's pretty well understood. Restaurant names, credit card data purchasing, et cetera, did convey a slowdown in March's traffic. Now also to be clear, January and February were benefited by a pretty large year-over-year tailwind tied to Omicron. But again the March traffic was a bit slower than what had been expected. And we are expecting that to continue into our Q4. Now we expect Sysco to outperform versus the market. We're going to win share profitably, and we are committed to delivering on our growth targets. It's just a more overarching comment about traffic. No notable callouts marked on trade down. I know that's often a question within sectors and within segments of our book. The traffic that we experienced was kind of across the board, across our restaurant names that we cover. Specific to inflation I would like to provide a little more color in that regard. The number, the print for the quarter was 4.9%, as Neil said in his prepared remarks. The quarter started a bit higher than what we expected and it ended a bit lower than we expected. So mathematically, what that means is the rate of disinflation in March was steeper than we had anticipated. Now we're prepared to manage that. As I mentioned a second ago in answering Josh's question, for the long-term of this industry, lower inflation is a good thing. I want to be really clear about that. This time last year, we were dealing with 15% inflation, and we were receiving lots of questions from investors about the impact on that inflation would have on consumers psyche and consumer demand and when it decrease what traffic the restaurant. So the fact that the inflation rate is coming down is a good thing. With that said, we need to be thoughtful and strategic about how we manage the transition from double-digit plus inflation to what we're expecting in Q4 to be low-single digits. We have a tool to be able to do that, and that's our pricing tool. I'll reinforce a couple of key points, which is our purchasing costs because of our scale advantage is the best in the industry. And we have the opportunity to be strategic and thoughtful about passing on value when it is created to those end consumers. Specific to your point about product come out of categories, I think, the easiest way to answer that is what categories last year were most inflationary. And John, it was mostly center of plate. So I think you remember this time last year, protein specifically was in the 30% to 40% inflationary space in that subcategory and category went deflationary for a period of time. And what we say all the time is it's not about a category, it's about the overarching book of business, and while protein was deflationary. Our overall book average was plus 4.9%. And then one much more comment about that we're actually getting indications from the supplier community that beef will begin becoming inflationary again in the coming year because of some challenges on the production end of that particular product set. Neil, I'll toss to you for any additional comments.

Kevin Hourican:

Yes. Sorry for the three-part answer to this question, John, but it's just really important for everyone to understand. And as that is happening, as cost is becoming more efficient and therefore our ability to provide value to our customers passes through at a lower rate of inflation, aka disinflation. Simultaneous to that we are taking meaningful costs out of our current supply chain. We are driving improvement in efficiency, and it's those things that need to happen in concert, and I am pleased with the rate of improvement we are making within our supply chain. And again, the performance you see is for the full quarter in our numbers. I'm really pleased with the exit velocity in March of our supply chain productivity that we measure everything, pieces per labor hour, pieces per truck, we literally measure everything. And our exit rate in supply chain, productivity and efficiency in March was really strong. So as our inflation rate begins to decline aka disinflation, we're bringing costs down at exactly the same time.

Kevin Hourican:

Thank you, John.

Jeffrey Bernstein:

Great. Thank you. One follow-up on that last question; the March slowdown that you anticipate continuing through the fiscal fourth quarter, I think you had noted in the release and in your comments that Sysco sales perhaps were maybe stronger or more stable through the quarter. I'm just wondering what do you what there is an opportunity to accelerate market share gains in what's likely a slowdown, presumably again scale matters and you've got more options to mitigate. So I'm just wondering if is an opportunity for greater market share gains in an environment like that? And then I had one follow-up.

Jeffrey Bernstein:

Yes. In fact, perfect. I think you ended it with thoughts around fiscal 2024. Just wondering, I mean, I know back in the day, you had given guidance, which culminated in fiscal 2024. I know it was built off of fiscal 2019, I think it was for EPS growth, 30% plus, which at the time equated to 460 or more. I know it hasn't been mentioned of late and we had a reduction in fiscal 2023 guidance last quarter and the most recent slowdown now you're talking about the lower end of that range, closer to $4, I guess. Just wondering whether there is any still relevance to that prior target, whether you see further acceleration of efficiencies or whatnot? Or maybe throw it to Kenny. Just wondering what can you bring to the table in terms of a greater skill set to help to achieve those prior earnings targets? Thank you.

Kenny Cheung:

Sure. Thanks, Kevin. Hi, Jeff. So a few things from my side of the house. We are entering 2024 with momentum. So keep in mind, we will finish this year in Q4 with record sales and operating income, right? So a lot of momentum entering next year. As Kevin mentioned, there's a few themes that you will see as we unveil the new plan in August next earnings call. One is continuing to take care profitably, right? That's very important for all of us, and that's where refer growth comes in. Second is, we will continue to drive operating leverage in our business. Third is making sure that our balance sheet continues to be healthy and robust from a liquidity, cash and leverage standpoint. To your last question around where do I add value and how I think about these things that I just mentioned, right? As I think about my priorities entering, call it, Q4 and 2024 and there's a few thoughts on my mind, right? First of all, I view myself as a business leader with a finance expertise, right? So I'm a very hands-on operational CFO. So where I work directly with the team and deploy capital where it creates value for our stakeholders. I'm of the mind that one of my job – first priority is to make sure that we generate – continue to generate healthy cash inflows from operations, maximize the conversion from EBITDA and operating income and ultimately, continue the high quality of earnings that Sysco has enjoyed throughout the period. The second piece is continue to partner with the team, right, from a go-to-market standpoint, providing world-class service to our customers. Everything starts with our customers, especially as we grow market share, local, Sysco brands, specialty and the like, which accretes margins for our business. And last but not least, as part of my pedigree in my experience, it's all about per operational excellence, driving productivity and rigor with our supply chain and overall business. A penny for our business is huge, given the fact that we have scale and leverage that we talked about. And this comes full circle to my first point where we must generate cash and flow to invest in our business and to create further value on top of the scale advantage that we enjoy.

Kevin Hourican:

Thank you, Jeff.

Kendall Toscano:

Hi, good morning. Thanks for taking my question. So I wanted to ask about the 2023 guidance. But first, I just wanted to see just a quick follow-up in terms of the local customer channel. So you had talked about some initiatives last quarter to accelerate new customer acquisition in that segment. I was wondering if you had any update on that? And then just in terms of the exit rate for the quarter, you said March for, I guess, the total U.S. Broadline segment was kind of exited at a low or slight growth, I think you said. I guess how does that look for local customers specifically? And can we assume it's still running a bit below the national customers?

Neil Russell:

Hey, Kendall, thanks for your question. As Kevin is talking about here on the industry perspective, we are seeing total growth and albeit, at a slower pace in Sysco outpacing that. It's not as much about the local independent versus the chain or multiunit as much as it is good operators innovating on their menu, offering fresh, local, customizable offerings that map to the end consumer. So I think that's ultimately what we're seeing. As it pertains to the year and the guidance, a few points that we've made that we continue to emphasize, we do expect to grow sales by at least 10% for the year. And as we talked about, we continue to expect a rate of gross profit dollar growth to exceed the expense growth and continue to leverage that. We talked about the inflation that's looking for us to be in that low single-digit range. And as we talked about here today on the call, we'll expect our earnings per share to be about $4 for the full year.

Kevin Hourican:

Thank you, Kendall.

Alex Slagle:

Thank you. Good morning. I wanted to follow-up on the target to grow 1.35 times the market in 2023 and I guess further acceleration ahead and how you're thinking about that ramp relative to previous thoughts? I mean it looked like a pretty strong acceleration in the chart I didn't hear whether you reiterated the 1.5 times for 2024, but just any more color there?

Kenny Cheung:

Yes. Good morning. So capital allocation strategy is positioned for growth at Sysco. We are positioned for growth, right? Return on invested capital, as I mentioned earlier, is the lens in which we will operate to ensure that we are getting optimized return for where we deploy capital and resources. So just a bit of my thought on capital allocation. We will, first and foremost, invest in business and growth. That's because capital investments as Kevin mentioned, technology, digital tools, fleet, buildings, infrastructure footprint right? This also includes specific for growth as well. So we – right now, Sysco has the luxury given the fact that we are generating robust free cash flow to invest in our company, but also return cash to shareholders as well. So right now, I believe that we are well positioned for growth in 2024, given the healthy balance sheet that we have, that allows us a lot of optionality and flexibility.

Kevin Hourican:

Thank you, Alex.

Operator:

Welcome to Sysco's Second Quarter Fiscal Year 2023 Conference Call. As a reminder, today's call is being recorded. We will begin with opening remarks and introductions. I would now like to turn the call over to Kevin Kim, Vice President of Investor Relations. Please go ahead.

Kevin Hourican:

Hello, everyone. Thank you for joining our call this morning. Our reported Q2 results, as displayed on Slide number 6, include positive case volume growth, continued share gains, strong double-digit sales and earnings growth year-over-year. This included operating income growth across each of our segments, including SYGMA and International. Importantly, gross profit growth this quarter outpaced operating expense, an important milestone that we expect to continue into the remainder of the year as we make progress in further improving our supply chain productivity. In addition, we continue to advance forward our Recipe for Growth strategy with continued progress in our digital tools, supply chain investments in sales and merchandising initiatives. The progress that we are making will enable Sysco to better serve our customers and grow profitably for years to come. As you can see on Chart number 7, we continue to succeed versus the overall industry growing1.35x the market in the first half of 2023. I'll break down the sales momentum versus the market further in a moment. Strong top and bottom line growth was delivered for the quarter with adjusted EPS in Q2 of $0.80. I'd like to provide you with some details on select items that impacted our results for the quarter. The first callout is within case volumes. We leveraged a third party to help with macro forecast of the industry's growth. For the second quarter, the projection was that the industry in total, would realize nearly 5% case growth year-over-year. In Q2, the actual industry case growth rate was only 1%, excluding Sysco. This 400 basis points of case volume variance was significant, especially within the local segment. A contributor to the softer volume result was the reality that the Omicron overlap did not lift the market growth rate in November and December as had been anticipated. With that said, it is important to note that we are seeing stronger volume growth in January. Additionally, a labor dispute that impacted three of our operating sites in the second quarter negatively impacted sales and case volumes during the October and November time frame. To be clear, the overall market growth rate is an industry-wide issue, while the labor dispute was a Sysco-specific challenge. The latter of the two issues is now firmly in the rearview mirror. We will monitor the second half of the year case volume trends very closely and we are taking specific actions to accelerate new customer acquisition in the local segment for the second half of this fiscal year given the softer overall market. In addition to explaining the case volume dynamic, I would like to provide an update on operating expenses. As I mentioned, we are making solid progress with improving operating efficiency and we grew GP at a faster rate than expenses in the quarter, a sign of progress and a trend we expect to continue. We are making progress on improving supply chain productivity and I will discuss that further in a few minutes. With that said, the aforementioned labor dispute had a meaningful impact on our Q2 expenses. During this disruption we prioritized deliveries for essential customers, especially in the healthcare and education segments. As a result, we took the actions required to ensure that we could continue operations in these three sites, including leveraging third-party resources when necessary. These customer service measures pressured our expenses for the quarter, negatively impacting operating income. Again, this challenge is in the rearview mirror. On the positive side of the ledger, our contract bid business is exceeding plan on the top and bottom line for the year. Our sales teams are doing an excellent job with customer retention, customer acquisition and profitability management within bid contracts. In addition for our total business, our gross profit per case was strong for the quarter. Our sales and merchandizing teams are doing a solid job with inflation management and strategic sourcing. Additionally, our Sysco brand merchandizing team continues to do good work as we increased Sysco brand case penetration by 65 basis points in the quarter versus the prior year. As you know, each additional Sysco case adds to our profit rate and also positively impacts customer retention. From a sales and margin perspective, we continue to succeed by introducing higher-margin specialty products to our customers and we are winning new business in the higher growth produce segment. The success that we are having in GP per case is expected to continue into the second half of the year and that progress will help offset portions of the market volume softness. Lastly, we are doing a good job of managing expenses at our Global Support Center or corporate expenses putting measures into place mid-Q2 to lower spending in these GSE cost centers. Those measures will stay in place for the remainder of the fiscal year to offset the lower marketplace growth and to mitigate a potential future recession. Turning to the second half, we remain resolute on continuing to drive profitable share gains and drive supply chain operations efficiency improvements. On the operating side of the business, we are making progress on improving our productivity. We are delivering improved retention rates and as a result, lower hiring rates. By hiring fewer people, we have been able to lower recruitment expenses, lower training expenses, and we are seeing increased productivity across warehouse and transportation roles. These improvements will accelerate into the second half of the year. We are fully staffed domestically and internationally and we have detailed work in place to ensure our staffing levels match our daily, weekly and monthly volumes. Q3 is typically the softest volume quarter of the year. and we are improving our flexibility in managing staff levels to lower volume periods, all while preparing for the highest volume quarter of the year,Q4. These staffing planning efforts are built into our year-to-go forecast. There are four factors that influence our full year guidance. Number one, softer than originally budgeted market volumes in the local segment, partially offset by Sysco growing 1.35 times faster than the market in total; number two, higher than originally planned operating expenses, while steadily improving; number three, favorable GP per case and strong margin management; number four, favorable GSE or corporate expenses. Given that we are now at the midpoint of the year and based upon the factors I just covered, we are adjusting our full year guidance. The full year is now guided to be a $0.15 range from $4 to $4.15, which represents year-over-year growth of approximately 23% to 28%, lapping the 126% growth from fiscal 2022. The midpoint of 407 represents a 15% growth rate versus 2019 levels. As is my custom on these calls, I plan to share a bit more color on a few key Sysco initiatives that are driving performance. First, let me start with sales growth. For the first half of the year, Sysco grew 1.35 times the industry and we are on track to deliver our sales growth goal for the year. Our Recipe for Growth strategy is winning in the marketplace. We are seeing solid growth in national restaurants, healthcare and our education segments. At the local level, we are winning business through our specialty programs

Kevin Hourican:

Thank you, Neil. I appreciate all that you are doing for Sysco. As we conclude, I'd like to provide a brief summary on Slide 20. The following are our key takeaways from today's call

Kelly Bania:

Hi, good morning. This is Kelly Bania. Thanks for taking our question. I was wondering if we could just talk a little bit more about the plan for the second half. It sounds like the labor dispute is clearly isolated to the quarter, but the other factors that you called out as contributing to the guidance update. Maybe can you just help us understand what is in the plan for the second half as it relates to these factors, whether it's the below-the-line pension, the productivity, the local growth and maybe just a little more color in general on the local growth, what you think impacted that customer base? What you attribute this to? And what you're expecting in terms of market-based growth from independents in the back half? Thank you.

Neil Russell:

Hey, Kelly, good morning. Good to hear from you. Just a couple of points from me here. First of all, talking about some of the operating expenses we had, as I alluded to in my prepared comments, first of all, snapback costs, which we've talked about for the past several quarters to remind you going back, we are originally about $35 million then they were reduced to $29 million then to $10 million and now very pleased for the second quarter to be down to zero in that. And similarly, for the productivity cost that we've talked about over the last few quarters, we had $41 million and then $41 million again and now down to $22 million for the second quarter. So we are seeing the reductions in both of those lines that we had previously alluded to and we feel like we're very much at a turning point for some of these operating costs and we would expect that momentum to continue into the second half of the year. Addressing the below-the-line item specifically, what you saw in the second quarter, which was expense of about $15 million, I think is a fair representation of what we should expect per quarter for the remainder of the fiscal year. That's largely driven by pension expense, which has been influenced by interest rates. And we feel like that's going to be a fairly stable number because, as you know, we transferred liabilities as part of a transfer plan that we did during the quarter. And as a result of doing that, we had to remeasure the plant and so because we remeasured the plan, we feel like that's going to be a fairly stable number for us. We won't remeasure the plan again until we get to the end of the year. So thanks very much for the question. Hopefully, that helps.

Operator:

Yes sir. Your next question will come from Mark Carden of UBS. Please go ahead.

Kevin Hourican:

Mark, thank you for the question. In aggregate, again, we're on track for the first half of the year. Our stated goal for the year is to grow 1.35 for the year and at the halfway point to be able to deliver that goal. You're right to point out that Q1 was stronger than Q2. The honest straight talk there is the labor disruption, which impacted three of Sysco's operating sites did, in fact, caused a disruption in the period of October and November from a market share perspective. We have cleared that hurdle. We have moved on from that hurdle and we are confident in our ability in the second half of the year to grow 1.35x the market. So that is the reason for Q2 versus Q1, just being direct and straight about it. We are winning at the total level. We're winning on the what we call contract bid business and our initiatives within the local segment are working. And those initiatives are the Italian platform that we are expanding, our growth in our specialty categories and that our customer-specific platforms of Sysco Your Way and Perks major initiatives are delivering the impact that we expect them to deliver and we're very focused on them. As it relates to the second half of the year, what gives us confidence in our ability to deliver the full year. We've got the best trained sales associates in the industry, 5,000-plus strong in the U.S. alone, and they're very focused on penetrating lines with existing customers, and we're going to make new customer acquisition, a bigger priority for our sales reps in the second half of the year given the overall market conditions as we're seeing them. And our sales force is very responsive to their compensation program. And I believe I've shared on prior calls how that program works, the base plus bonus and the bonus is configurable by us. We can tweak it, and we can adjust it and we can make modifications to it. And one of those adjustments for the second half of the year will be to increase the weight on focusing on what we call prospecting or new customer penetration. So I answer the Q2, and we have confidence in our ability to win versus the marketplace. And in aggregate, what we're looking for in the revised guidance – we provided today, the midpoint of 4.07%, just to keep in perspective is a 25% growth over prior year and it's a 15% growth over 2019, which is the peak profitability year of the company. So, all in, in aggregate, really strong year from Sysco in total.

Kevin Hourican:

Thank you, Mark.

Edward Kelly:

Hi guys. Good morning. I wanted to follow up on the cost side and what's embedded in the guidance again. I know when you set your initial guidance this year, there – the low-end incorporated some risk of a, I guess, modest recession. Obviously, the definition of that is debatable. But it does seem like the revision has a lot more to do with the cost side. And my question for you is, how much improvement is embedded from here from a cost perspective? And how much visibility do you have on achieving that improvement, which, ultimately, sort of relates to how confidence in your guidance at this point with this adjustment. And then, as a follow-up to that, how does what's happening in 2023 reflect the goal of 462 plus in fiscal 2024 from an EPS standpoint? Thank you.

Neil Russell:

Thanks, Kevin. Hey, Ed, good morning. Two things, Ed. First of all, on the FY 2023 portion of your question, we completely rebuilt the forecast as part of the process here and gratitude to the finance team for all the good work over the last several weeks to do that. As I alluded to, we feel very good about a few things that we rebuilt and are in there. As Kevin alluded to in his comments, the labor activity expense impact of $26 million is in the rearview mirror, but obviously, that factored into the adjustment that we did. The pension expense that I just spoke about, we remeasured the plans, we have high confidence and what we think those numbers will be going forward. I also mentioned things like the productivity and snapback cost that Kevin just alluded to that we feel very good about the turning point, if you will, that we see on those types of cost items. So we looked at the market, we looked at everything we have, and we have pretty high confidence in the numbers in which we're offering to you for the rest of this year. As it pertains to the second part of your question for next year, fiscal 2024, we're at the halfway point here in FY 2023. We feel really good about the progress we're making across the enterprise. We continue to gain share as we've talked about. We're driving really compelling returns through the Recipe for Growth initiatives including a lot of really good operating efficiency. That's part of the slide Kevin referred you to and our long-term plans reflect double-digit growth in both top and bottom line and along the way, we're returning a lot of value to shareholders through the dividend, share repurchase and of course, the profit growth. So we would typically update the next year during the summer as we look at the end of year results for us and that will be our plan for now. So we'll take a look at fiscal 2024 numbers when were port our end of year 2023 numbers.

Operator:

Your next question will come from Jeffrey Bernstein of Barclays. Please go ahead.

Kevin Hourican:

Hey Jeff, thanks, it's Kevin. I'll start with your question. Just as it relates to Sysco versus the market, I'll just point to the most important of facts, which is that we grew in the most recent quarter, 1.35 times the market. So it is – Sysco is outperforming versus the market and that outperforming is coming from across the board, business health. We are winning meaningfully in the CMU segments

Operator:

Your next question comes from John Heinbockel of Guggenheim Securities. Please go ahead.

Kevin Hourican:

Hey, good morning, John. Thank you for the questions. I'll take them in order. On the local business, drop size, I think just as evidenced by the data that we've shared has been a bit softer than what we had expected on a cases per operator perspective. Now there is work we can do about that. We have the ability to target our sales reps to win back lost cases or introduced new categories through a customer that has not purchased them before, like produce and protein, and we call that team-based selling, and we're getting better and better at doing that type of work. Profitability per customer, we're actually pleased with those metrics and where we are. We've done a nice job managing the inflation path through our Sysco brand win that Neil talked about is notable and significant and that meaningfully helps on profit per customer and we've done quality work with transportation routing over the last 45 days to make sure we're being as efficient as possible on our routes, especially for smaller customers and that has provided us with benefit as well. All of those variables that I just described have been built into the full year forecast that we submitted today. Those are my comments on local. For Sysco Your Way, we couldn't be more pleased with the performance of Sysco Your Way. Each individual neighborhood that we add to the program continues to perform like the initial markets did. That's one of my worries as we scale this thing as we add it to more neighborhoods. There's a halt or effect when you have a pilot program where the performance is outstanding. But when you go to scale, it cannot replicate. We're definitively proving that we can replicate that performance. It is material and significant. And how fast can we go? We're going as fast as prudent, John. There is work that has to be done at the operating site to prepare that site to support a very lead late in the evening, ordering cut-off twice per day delivery, a dedicated consistent driver, dedicated consistent sales reps. So there is customer remapping that has to occur. And we're going at the fastest pace that's prudent because what we can't do is compromise the service experience because what's making this program work the step change level of service that we're providing to those customers and it's not an incremental operating cost for Sysco because these are such dense neighborhoods that are in reasonable close proximity to our warehouses. So – and it's expanded internationally. We're now live in Toronto. We're live in Dublin. We're live in London, and soon, we will be launching in Stockholm. So it just shows you the breadth of this program is not just domestic U.S. It's working everywhere. We have launched it, and we couldn't be more pleased. We're also very pleased with Sysco Perks. Remember, Sysco Perks is not about restaurant dense neighborhoods, is Sysco Perks is a VIP program. It's an invitation-only program for our best of customers, and we provide them Sysco Your Way like benefits, but they're unique to that one specific customer. So that's the first customer who's not inside a Sysco Your Way neighborhood and we're seeing significant lift in profitability and top line growth with customers that are invited into that program and we have meaningfully expanded the rollout of Sysco Your Way – excuse me, Sysco Perks over the last quarter. The last of your three questions was in contract bid. I'm really pleased with our team, both in sales and supply chain in this segment. We've got a great sales leadership team. They've done excellent work with customer retention, customer prospecting. We are winning outsized business. We stopped reporting the number, but the last time I quoted it, we were at net $2 billion worth of incremental business, and we've continued to win net new business in the health care, education and national restaurant space. You asked me a specific question, you see outsized growth coming from that sector. We plan for growth across all of our sectors. And one of the reasons we converted to a 6-day delivery model is so that we have the ability to support that growth without having to make building expansions or building investments. We real feel increased our throughput capacity by 15% across Sysco by converting to a full six day delivery model. So really pleased with our success rate and contract bid. I expect for that success to continue in the forward-facing years. I am going to talk to Neil. He wants to add one more point. Sorry, John, I step down you I'm going to toss it to Neil for one more point.

John Heinbockel:

Thank you.

Operator:

Your next question comes from Lauren Silberman of Credit Suisse. Please go ahead.

Neil Russell:

Hey, Lauren, it's Neil. I'll start and then I'll pass to Kevin. Let me talk about the EPS and the guidance first. There are a few factors that came into play for our adjustment. As I mentioned, we totally and completely rebuilt the forecast based on a few different things. First of all, the market environment that Kevin referenced in his prepared comments and having a clean, good view to where we think the market is right now and headed for the next couple of quarters. On the cost side of the equation, as we talked about the impact of the labor dispute, putting that into the numbers looking at the pension expense, now that we've remeasured the plan at the midpoint of the year, knowing that that will continue forward as I mentioned, that about $15 million of expense that you saw down below the line, carrying forward again in Q3 and again in Q4. And even though improvement, we still have some of those productivity costs that we are carrying and our best view on that. So taking all those factors into consideration, the market environment, some of these expenses, that is what went into the updated guidance and therefore, our confidence that we feel very good about that new number. And then Kevin, over to you.

Operator:

Your next question comes from Alex Slagle of Jefferies. Please go ahead.

Neil Russell:

Hey, Alex, good morning. It's Neil. I'll take that one. As you alluded to, we are well north of the original goal of $750 million of cost out, which we feel very good about and we continue to make progress in that area. Largely speaking, these cost-out initiatives are helping to fund our investments for future growth and we feel very good about the long-term capabilities through some of the digital tools that Kevin just referenced for us to be able to have a good long-term platform for sustainable growth. We're well north of the $750 million. We're working on what the next iteration of that will be, and we look forward to sharing what future cost out numbers can be on top of the $750 million that we've already exceeded. Go ahead, Kevin.

Alexander Slagle:

Thanks.

Operator:

Welcome to Sysco’s First Quarter Fiscal Year 2023 Conference Call. As a reminder, today’s call is being recorded. We will begin with opening remarks and introductions. I would like to turn the call over to Kevin Kim, Vice President of Investor Relations. Please go ahead.

Kevin Hourican:

Good morning, everyone, and thank you for joining our call. Our Q1 results reflected continued positive momentum in our business to start the fiscal year. Our share gains continued this quarter as we posted sales growth of more than 1.4 times the industry. We delivered double-digit growth in the top line and bottom line of our business. Beginning with the top line, we delivered sales growth of 16.2%, driven by a combination of effectively managing inflation and delivering case volume growth. Our U.S. Foodservice volumes and local case volumes continued to grow this quarter. Turning to the bottom line, double-digit growth across operating income and net income resulted in adjusted earnings per share of $0.97, which was in line with our expectations. The strong start to the year gives us confidence in reaffirming our full year guidance. I will highlight two topics during our call today. First, I will put into context Sysco’s sales and volume growth for the quarter by highlighting some of the drivers of our strength. Second, I will detail our progress within our supply chain and our efforts to improve service levels and operations cost efficiency. So let’s get started with our unique position of strength in a growing industry displayed on Slide 7. Beginning with the Foodservice industry, the total addressable market is approximately $350 billion. Sysco grew 17% and the rest of the market grew 12% in the quarter, a strong start to the fiscal year. Restaurants continued to be resilient and our travel hospitality, plus our business and industry segments of our business posted year-on-year improvements. We see continued strength coming as tailwinds in the non-commercial sector should continue. We are closely monitoring macroeconomic conditions for signs of a business slowdown. At this time, we are not seeing recession concerns negatively impacting our business outcomes. With that said, we are prepared to take additional cost reduction actions if or when the recession does begin to impact our P&L. In the backdrop of what has been a strengthening overall market, Sysco continues to outperform. Our sales teams continue to win market share, with Q1 being one of our strongest quarters of net new customer wins. Our national sales team posted an outstanding quarter, winning substantial new business in the education, health care and restaurant sectors. These wins are on top of the more than $2 billion of net new national sales wins delivered over the past two years. It is important to note that we are winning this business at strong profit profiles versus historical averages and these are multi-year contracts. In addition to our success with national sales, our Recipe For Growth is delivering results for Sysco at the local level. Local case volume for the quarter grew 5.4% versus Q1 of 2022, successfully lapping a 26.7% increase from the prior year. Our strong start to the year in national and local sales has us gaining market share overall as we grew more than 1.4 times the market for the period. As a result, we are on track to deliver our stated growth objective for the year. As seen on Slide 8, our Recipe For Growth includes five pillars, focused on building new capabilities that will further enable our leadership position in supply chain and food sales and marketing. As is customary for our quarterly updates, I would like to highlight a couple of our growth drivers. Today, I will highlight progress that we are making in the products and solutions pillar with our Sysco Your Way program, and I will also provide an update on select future horizons work. Within our Products and Solutions growth pillar, we meaningfully advanced our Sysco Your Way program over the past quarter. As a reminder, Sysco Your Way is our service and delivery model for what we call restaurant dense neighborhoods. Think a large number of restaurants and a few block radius. We provide these neighborhoods with a next level of service from Sysco. Examples of that service include a late in the evening order cut off, daily delivery service, dedicated sales and delivery partner representation and additional white glove culinary and marketing services. The constructs of the Sysco Your Way program were developed in partnership with our customers. And as a result, customers are responding favorably. The top and bottom line results from the program are exceeding our expectations. We are winning substantial new customers within these neighborhoods and existing customers are buying more product on a weekly basis. Over the past quarter, we ramped up our implementation efforts, and we will continue to roll out the program to applicable neighborhoods in the coming quarters. We are also bringing the program to international cities with recent implementations in Toronto and Dublin. The scale of Sysco Your Way’s impact on our overall results will grow each quarter as we add net new neighborhoods. From our future horizons growth pillar, we are pleased to announce that we have closed on two independent Italian distributor acquisitions over the past quarter. These acquisitions will give us access to premium Italian products in areas that were previously geographic white spaces for Sysco. We have plans to meaningfully scale these businesses by bringing the Greco go-to-market Italian selling strategy to these geographies. We are very pleased with the status of our work to expand Sysco’s Italian specialty platform nationally. In addition to these two examples highlighted today, we are advancing our Recipe For Growth within our International segment as well. Canada, our largest international business is also making good progress with these initiatives. This year in Canada, we will be upgrading our digital platforms, implementing a modern pricing tool, enhancing our team-based selling capabilities and launching Sysco Your Way. Canada is already a large and profitable market for Sysco that generated over $5 billion of sales last year, while posting number one market share at 17%. The Recipe for Growth strategy will enable our Canadian business to further enhance our competitive advantages and better serve our customers. I’m very excited for the progress that we will be making in Canada to deliver profitable sales growth. These are just a few examples of the good work that is happening, and I look forward to keeping you posted on our domestic and international progress across the five pillars in future quarterly calls. Topic two for today, I’d like to discuss the state of our supply chain improvement and highlight the status of some important work. Our global supply chain work continues to progress. We are simultaneously building on our long-term strategic initiatives like omni-channel while improving productivity levels and cost performance within our supply chain. Our strategic initiatives continue to move forward with six-day deliveries, improving the driver experience, implementing best-in-class associate training and omni-channel fulfillment, all advancing forward in the quarter, and we can see the early signs of progress that these initiatives are delivering. As they progress, they will enable profitable sales growth and improve our supply chain cost efficiency. Our supply chain is a strategic differentiator and the strategic work we are doing will widen that competitive moat in the coming quarters and years. Simply put, no one is doing more than Sysco to improve service levels to customers and to improve cost efficiencies within the Foodservice supply chain. In addition to advancing our strategic initiatives, our teams have remained relentlessly focused on improving productivity in the near-term. We made progress over the past quarter in improving associate retention. Retention improvement will enable us to improve associate productivity, and therefore, lower our operating costs in future quarters. It is important to understand that Sysco’s staffing levels remain healthy across our sites. We are staffed properly to support our current business and also to enable future profitable growth. Given our overall staffing health, we are meaningfully focused on associate retention and best-in-class training of our newer associates to improve productivity levels. We are also teaching our supervisors how to leverage our engineered labor standards to deliver performance-based coaching. As our staffing levels have improved in recent quarters, we have been able to spend more of our leadership time and communication muscle on training to our work methods and standards. And this is where the intersection between our future strategy and our current improvement efforts intersect. A driver academy is graduating cohorts of trainees that are now hitting the streets. These drivers are already showing strong service, safety and productivity standards. As importantly, we are tracking retention by training class, and we can see meaningfully higher retention rates of associates trained by Sysco versus hired from the external market. Over time, the percentage of associates trained from within Sysco will grow, and this ratio growth will improve retention and productivity. Cost of turnover is high in this industry, and improving associate retention is imperative. I’m confident that our training academies will give Sysco a meaningful advantage in the industry. We believe the advancements we are making in our physical capabilities and the investments we are making in improved training will provide improved service levels to our customers and strengthen Sysco’s ability to profitably win market share in the coming quarters and years. I’ll now turn it over to Neil, who will provide an update on our sustainability efforts. Neil, over to you.

Aaron Alt:

Thank you, Kevin, and Neil, and good morning. The Sysco team delivered another quarter of progress with our recipe for growth, resulting in growth across volume, sales and profit giving us many reasons to be upbeat about our business while being appropriately cautious given the complex operating environment. Turning to a summary of our Q1 reported results, Q1 was the highest sales quarter at Sysco ever. We achieved 16.2% sales growth at Sysco for the quarter, with U.S. Foodservice growing at 17.2% and international growing at 13.4%. Reflecting our focus on serving our local and independent customers through both our Broadline and specialty businesses, we are expanding our disclosure of total and local case volumes to, in aggregate, include our FreshPoint U.S. produce, U.S. Italian and other specialty businesses in the metrics. For clarity, our specialty meats business is not yet in this metric as it measures volume in pounds. With respect to volume, total U.S. Foodservice volume increased 7.3% compared to last year. All in, our inclusive local case volumes grew by 5.4% in Q1 2023 over the prior year’s comparable period in the U.S. You can see the history of this metric on Slide 18 compared to the prior year and the 2019 levels. We banked $3.5 billion in adjusted gross profit for the quarter, up 17.3% versus last year. Adjusted gross margin improved 17 basis points to 18.2% for the first quarter. GP per case grew in all four segments versus prior year, marking the fifth consecutive quarter of such growth. Our gross profit and margin improvement reflected our ability to continue to manage product inflation, which was at 9.7% at the total enterprise level, consistent with our guidance as well as incremental progress from our strategic sourcing efforts as we continue to partner with our suppliers. U.S. Broadline inflation was 12% in the quarter. Our inflation metric is in dollars, so the enterprise metric was reduced by the local currency declines against the dollar. Overall adjusted operating expenses were $2.7 billion for the quarter or 14.2% of our sales, a 30 basis point increase as a percentage of sales over the same quarter in the prior year. Cost this quarter increased in workers’ compensation, pension expense, health care and some operational elements like shrink, all of which are being addressed. We have more to do in this area but believe that our supply chain and North American teams has Sysco on the path to improving our operating expense profile. Additionally, this quarter included progress against capturing cost out which represents incremental efforts on top of the more than $750 million of cumulative cost out. Recall that last quarter, we outlined expectations for operating costs to be more heavily weighted in the first half based on the need to work through operating cost inflation, operating productivity challenges and our planned investments in the business. Consistent with that, this quarter included transformation investments of $63 million and new associate related productivity costs of $41 million and an improvement in snapback costs, which are becoming immaterial. All four segments showed increases in profitability year-over-year with SYGMA returning to profitability from the prior year’s modest loss in Q1. Additionally, adjusted operating income in our International segment grew over the prior year also exceeding pre-COVID 2019 levels. Adjusted operating income for the enterprise increased by 12.4% versus last year to $770 million. We grew adjusted EBITDA by 7.5% to $917 million. We often refer to exceeding fiscal 2019 adjusted EPS levels as part of our long-term guidance. It is worth noting that in the first quarter, adjusted earnings per share increased by 16.9% over prior year and for the first time since the onset of COVID exceeded adjusted EPS from the same quarter in fiscal 2019 by $0.06. Applying a macro financial lens, I will point out two financial factors that had an impact on profitability this quarter different from recent years. First, the weakening of local currencies against the U.S. dollar in our international operations. Second, an increase in pension expense tied to the rapid rise in interest rates. In total, those two externalities had a $0.03 negative impact on GAAP and adjusted EPS. On the pension point, to be clear, our largely frozen pension plan remains fully funded and the above reflects the non-cash impact of pension accounting that is a result of extreme movements in the global capital markets. You may have noticed an 8-K about a pension liability transfer exercise in October, subsequent to the end of our first quarter. That transaction decreases Sysco’s plan size, risk and overall administrative costs while protecting retirees as they will be in the hands of an A-rated insurance company. This transaction will result in a non-cash charge in Q2 of $250 million to $300 million, which we expect to be a certain item. Other than the certain items, we expect the income statement impact of the transaction to be largely immaterial to our year. In regards to the balance sheet, our strong investment-grade rated balance sheet remains a competitive advantage for us and we ended the quarter at 3.1 times net debt to adjusted EBITDA. We returned $268 million to shareholders in the form of share repurchase and paid our increased quarterly dividend, returning $517 million in total to shareholders this past quarter. Had we not executed the early share repurchase, our leverage ratio would have been three times. Given the focus on interest rates slightly, I want to remind listeners that approximately 95% of Sysco’s debt is fixed rate. Let’s turn to cash. Recall that the first quarter is typically the quarter in which we have the lowest in-quarter cash flow generation. This year, for the first quarter, cash flow from operations for the quarter was $158.6 million, a $48 million improvement over the prior year. However, net CapEx almost doubled in Q1 of fiscal 2023 to $145 million as we continue to invest in our Recipe For Growth, particularly with respect to our planned investments in fleet and distribution notes. As a result, free cash flow was $14 million for the quarter. Working capital was a use of cash, though we are watching our inventory balances closely as part of our supply chain transformation and are monitoring our accounts receivable closely given the economic environment. We ended the quarter with approximately $438 million in cash on hand. Let’s return to the look forward. As I said at the start of my remarks, we are upbeat about our business while remaining appropriately cautious given the operating environment. While we have work to do on our expense structure, as Kevin called out, Sysco has not yet seen any broad impact on our business from concerns around the risk of recession impacting consumer behavior. As a result, we are sticking with our full year guidance for fiscal year 2023 for adjusted EPS of $4.09 to $4.39. As Kevin mentioned earlier, we are well-positioned and prepared to operate through another dynamic year. We have a plan, and our team is executing against it with the benefit of all the learnings that our company and our industry have worked through in the last couple of years. Lastly, I hope you noticed that we are reporting Q1 a week early. As part of our transformation efforts, we have worked to accelerate our financial close process, increasing the speed of fine data to faster decisions and looking forward, not back. We plan to report earnings faster than our historical cadence for the remainder of the fiscal year. With that, I will turn the call back over to Kevin for closing remarks.

Operator:

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First question comes from Alex Slagle at Jefferies. Please go ahead.

Kevin Hourican:

Hey, good morning, Alex. Thanks for the question. This is Kevin. We’re really pleased with our progress and performance in international. Six consecutive quarters of strong profit improvement, the business is on track year-to-date and we’re really making progress on the Recipe For Growth up in Canada, as I mentioned, but it’s bigger than Canada. We just called out Canada today with some specific proof points to shine a light on the work that’s being done but across the pond in Europe meaningfully advancing forward core Sysco capabilities. Sysco brand penetration improvement this year. We’re filling in assortment gaps that we have in select countries. We’re bringing our team-based selling model that we have optimized in the United States. And as I mentioned, programs like Sysco Your Way, we went live in Dublin at the end of Q1, and that program is off to just an absolutely great start in Dublin, and we will be expanding it. So really pleased with our leadership team, strong, capable, talented team led by Paulo, who joined our company back in August and upward progress in the forward-facing quarters and years. Things like Latin American growth, we have an export business called IFG, which is doing well and we’re really optimistic about our future with international. As you mentioned, there are select countries that we are watching extremely closely. Great Britain, being the country of biggest concern from a macroeconomic perspective. For now, our business is strong in GB. And if that were to change, as I said in my prepared remarks, we are prepared to take action from an expense control perspective, but we’re really pleased with how we’re performing internationally, including GB at this time.

Kevin Hourican:

Thank you, Alex.

Kevin Kim:

Let’s go to the next and see if Ed can come back in.

Jake Bartlett:

Great. Thanks for taking my question. Mine is on the top-line growth, and you reiterated the target of 1.35 times the market. I’m wondering whether that still translates into at least 10% revenue growth in 2023, given what you know about the macro environment now and also within that 10%, what you expect product inflation to be? Thank you.

Aaron Alt:

Great. Thanks, Kevin. Good morning. And we are really pleased with the market share gains and the sales increases over the course of the quarter, as you can imagine that, of course, is coming as a result of the combination between the volume growth and the impact of inflation on the portfolio. If you think back to the guidance that we provided in Q4, we – the sales reference we had was that we would grow at least 10%. And I believe at the time, I commented that at 10% without knowing what was coming from a macroeconomic perspective was tied to the lower end of our range. And so indirectly, yes, in answer to your question, we do expect that the 10% is achievable and that’s at the lower end of our range. I would observe that inflation we guided in Q4, high single digits in Q1, working its way down to low single digits in Q4. Certainly, as we sit here today, the enterprise number in dollars was high single digits, just under 10%. And so things are playing out in that respect as we had expected.

Operator:

Thank you. Next question comes from Edward Kelly at Wells Fargo. Please go ahead.

Aaron Alt:

So I’m going to go back and summarize. I think you’d like us to comment on the volume metrics and then comment on the look forward relative to GP dollars per case, if I summarize your question really. Let me start with the first part of your question on the volume, which is to touch on our disclosure today of the fact that our U.S. Foodservice segment, which is the combination as it has been of our Broadline and specialty businesses had total case growth of 7.3% and local case growth of 5.4%. From the outside, you might say, well, are you lumping the recent acquisitions in and that’s a small part of what’s in the case volume disclosure. But keep in mind that we have had a multibillion-dollar business what we call specialty, which is part of U.S. Foodservice, the segment we do most of our disclosures against that is not part of the U.S. Broadline. And so I want to take you back to the why, and we’re now disclosing a total U.S. Foodservice number, it’s simply this. The Recipe For Growth is designed to bring all of our assets to bear in support of specific customers. And we have customers that are serviced by Broadline, serviced by specialty. Kevin will probably comment on that more as we carry forward. What we’re trying to give you the true view of what’s going on with our total case growth and our local customer growth as we push ahead. And recognizing that this is different, we did provide many quarters of historical look on Page 18 of our earnings presentation to give you that perspective. Maybe before jumping to the second part of your question, Kevin, anything you want to add? We’re good, got it. So now let’s talk about the gross profit per case point now that you raised. We have been pleased over the last several quarters with the fact that while our environment is interesting, right? And indeed, we – our OpEx costs have been increasing our gross profit dollars per case has also been increasing, right? And that is a result of really two initiatives. The first is our ability to work with our customers to pass through our product cost inflation when our costs go up we pass through the cost to our customers as well. And we’ve been pleased with our ability to do that. It also goes to what we’ve been talking about for a couple of quarters on the work we’re doing to buy at scale and the work of our merchants and our commercial services organization to better negotiate, what we’re buying with our vendors as we carry forward. It is likely that inflation will pass. Indeed, our own guidance has inflation coming down, still growing but coming down to low single digits. What will not ask is the capabilities that Kevin and Judy and others have built within merchandising and sourcing. Indeed, our pricing systems that allow us to be right on price as we carry forward. And one of the factors of that is both market what’s going to the marketplace and what’s going with inflation. So, we feel good that the team has built the capability to address whatever comes. Kevin, anything you want to add to that?

Edward Kelly:

Thank you.

Operator:

Thank you. Next question comes from Lauren Silberman at Credit Suisse. Please go ahead.

Kevin Hourican:

Yes. We’re upbeat about the business. And we’re not going to make any comments specific to October. We provided guidance for the year by reiterating our full year guide, and we provided color in regards to the success we’re having at both the national and local level from a volume perspectives. And I think that’s about all we’re going to say in that regard. As it relates to the operating expense parts of your question, I completely understand the question. Our operating costs are elevated versus our historical standards, and we are meaningfully focused on it. I want to highlight a couple of key components here. Point one is that we are properly staffed across our network. And by being properly staffed, that allows us to support growth, reduce overtime, improve safety, and those are actions that will lead to lowering our future costs. We’ve been able to, because we’re properly staffed pivot to focusing on associate retention, associate training and associate engagement. And we see progress within our internal dashboards on those three very critical components. And these are leading indicators of what will become outcomes metrics of things like cost per piece shipped and our transportation efficiency metrics. So as I just said, we can see the leading indicators of success by focusing on associate retention, which is improving associate training, which has meaningfully increased versus prior periods and associate engagement, which retains that individual for longer periods of time. We are confident that we will make progress in our operations outcomes metrics. And as Aaron and I have both stated that improvement will be mostly in the second half. And we have the line of sight towards the improvement that we will make. As I said in my prepared remarks, we’re not just though focusing on that component, which is to improve the day-to-day operations within our buildings, we are also transforming the supply chain for long-term success, six-day deliveries, the launching of our Driver Academy, the deployment of a distributed order management system, which fuels omni-channel fulfillment and improving our overall driving experience. We are simultaneously moving both of these efforts forward at the same time, helping drive efficiency in the day-to-day and also transforming for the long term because we’re playing the long game at Sysco. And we know that the capabilities that we’re building are going to enable us to take profitable share for the long term. Aaron, is there anything you want to add?

Lauren Silberman:

Thank you.

John Heinbockel:

So Kevin, two related questions. what do you look at in the business as sort of a lead indicator of consumer demand weakening, right? There are certain metrics, particularly since you’re not in the industry, the things you’re looking at as a lead indicator, the canary in the coal mine, right, if you will? And then secondly, right, maybe talk about the balance, right? You mentioned making adjustments to OpEx, but by the same token, right, the real opportunity is long-term share gains. So, you don’t want to do anything right that would compromise that. So when you think about taking cost out, where is – how do you balance that? And where are the opportunities to do that right without hurting your long-term positioning?

John Heinbockel:

Thank you.

Operator:

Thank you. Next question comes from Jeffrey Bernstein of Barclays. Please go ahead.

Aaron Alt:

Sure. Thanks for the question. We don’t provide specific labor metrics as part of our disclosures, but I will observe that the market is generally playing out as we anticipated it would coming into the year and given the environment that we’ve been – that we are in. Your question around your EBITDA, we didn’t provide EBITDA on a quarterly basis. And so what I’m going to observe is that we are effectively reaffirming the guidance we gave Q4 overall without giving you a breakdown on a quarterly basis for EBITDA. Keep in mind, from a seasonal perspective, from a profitability perspective, Q4 is always the highest quarter profitability for Sysco, pre-COVID and certainly in recent years as well, followed by Q1 and then Q2 and Q3 are a little bit lower, just given the seasonality of our business. The EBITDA disclosure is relatively new. We’ve been providing it, I believe, in the last year or so. And if I were you, I would look carefully at the definition of how the – we and our competitors that define the calculation of EBITDA as a non-GAAP measure to work through the mechanics there. Thank you.

John Ivankoe:

Hi, thank you. I was hoping to get some color in terms of market share per account. I mean, obviously, there’s been a lot of conversation about new account growth, but just wanted to see success some market share per account, especially as a number of the different things that you’ve been doing around team-based selling around some of the pricing tools changing delivery window availability, even product assortment. I mean a lot of those, at least from the outside would seem that they would, in fact, be quite successful in driving market share per account. So, I wanted to see, I guess, where we were on that time line in terms of what’s currently being realized versus what might be in the future? Or maybe even talking about the success in certain markets or piloted some of these initiatives versus others that have not.

Aaron Alt:

I would just make the added observation that part of what’s also going on here as well as utilizing all of the assets in the portfolio. So it’s the various parts of our business working together to help us to drive the success there.

Joshua Long:

Great. Thank you for taking my question. I wanted to dig into the Sysco Your Way program and just see how that is performing versus your expectations like we’re early on in the long-term opportunity. But based on some of your comments, it sounded like there might be an opportunity for you to expand or find new neighborhoods to layer in there. I’m curious if that’s the case and/or just how that exploration of this platform is unfolding for you?

Joshua Long:

Thank you.

John Glass:

Thanks very much. First, Aaron, just a follow up on the change in the way you’ve disclosed the case growth information. If I look back in the last few quarters, there’s a pretty big difference between what you are now reporting and what you did before six, seven points in the last couple of quarters. Is that similar this quarter? In other words, we’re trying to figure out how to look at your case growth versus maybe what we had estimated. If you could just, comment on the difference between what the old version versus new version. And then Kevin, just on Sysco Your Way and Greco, what’s the percentage of the system that you think can get those either that service or product? What’s the impediment to ruling it out? I know you said you’re rolling it out, but what’s the percentage of your system that you think can ultimately be available those two businesses? Thanks.

Kevin Hourican:

Yes. I mean I love the Sysco Your Way question. We’ve obviously not provided percent lift in penetration lifts and customer acquisition targets. What we did say, I’ll call you back to May of 2021 at our Investor Day that Sysco Your Way would be $1 billion top-line growth effort for this company, and I would reiterate that. And we can see the line of sight towards the performance we’re delivering in the neighborhoods were live. There’s a thing called the Hawthorne effect when you roll out a project to a pilot location and it kills it. And then the question is, can you scale it, right? That’s the Hawthorne effect. We have proven that we can scale Sysco Your Way. We are now live in a significant number of neighborhoods. We’ve trained the trainer and the teams are now executing the rollouts on their own. And we are replicating the performance in the – from the pilot locations in the neighborhoods that we scale to. So, I’ll just bridge back to the May of 2021, $1 billion top-line opportunity for this company and we can see it coming, and I’ll toss Aaron for comment.

Operator:

Thank you. Next question comes from Nicole Miller at Piper Sandler. Please go ahead.

Kevin Hourican:

I’ll do the second, this is Kevin. I’ll do the second half of your question first. We’re making steady progress on what we call on time and in full shipment. So supplier fill rate inbound to Sysco has been steadily improving our merchandising teams have been doing extremely good work to improve that effort, provide more substitutions when they’re available to our customers. And the ability for us to ship on time has improved as our staffing health has improved. Both metrics are still slightly below historical norms, mostly because of the number of new people working within the supply chain, but we’re making steady progress. As it relates to the impact of a recession on our ability to take market share. I think we’ve proved over the last two and a half years during and even [ph] much bigger than a recession COVID, even go back to Omicron last winter. I mean, we saw meaningful negative impact to our business in the month of December, Jan and Feb last winter because of Omicron and we took share all throughout that period of time. And the why is our inventory health, our staffing health and our ability to be there and available for customers is a strength point versus others. The balance sheet that we have affords us the opportunity to make those longer-term decisions. And I would suspect that would be a pattern that would continue into the future if a recession would occur. Aaron, is there anything else you’d like to say about that?

Nicole Miller:

Thank you.

Operator:

Thank you. Next question comes from Kelly Bania at BMO Capital. Please go ahead.

Kevin Hourican:

Yes, I’ll start on the segment part of your question, I’ll toss Aaron for any additional comment. We are winning across the board from a national sales perspective or as we call it contract management CMU business. I just gave examples of what that means for everyone out there and wins came in this most recent quarter from healthcare, from education and also from national restaurants. Because when we talk about national sales, people tend to assume it must mean restaurants and we are putting a meaningful focus on winning across the portfolio of national sales business. And as I said, the team did a really great job in Q1 and that the rates for those contracts are solid. What – separate point from that, my prepared remarks referenced strength that we are experiencing in the non-restaurant space as those customer types are continuing to move up the recovery curve. And I mentioned tailwinds continuing in that space. Think about the number of offices that are reopened and are reopening and are still not fully reopened. And we do a large business tied to providing catering services to those types in all of the forms of food away-from-home that are not restaurants are on the upswing in total and in aggregate. But as Aaron said, all that’s been built into our year-to-go guide that we have provided. So all of that is factored in. We do forecasting for each and every customer type globally and domestically, and that’s been factored into the guidance that we provided. But we’re pleased with the progress that’s been made from our sales team, not just in the last quarter, but the last three years, but this most recent quarter was particularly strong. Aaron, anything to add?

Operator:

Thank you. Next question comes from Mark Carden at UBS. Please go ahead.

Kevin Hourican:

So great question, Mark. We’re positioned to be successful in the short, medium and long term enduring a recession as the question that was asked earlier, we believe we have an opportunity to take share if a recession begins to impact overall strength. And the main reason is, we’re fully diversified, so we cover every element of the food away-from-home, sector from the highest end white table cloth restaurant down to QSR and everything in between. And even within the local sector, we serve all customer types within the local sector. What we said on today’s call is we’re not seeing broad-based trend changes in our numbers; we do not have, at this time, impact of a recession on our P&L. If one were to occur to begin to impact our P&L, we’re prepared to take actions. Things that we would do, as I mentioned, expense tightening. Sysco Brand as a point of positive highlight, we improved our penetration in Sysco brand over the past quarter, and we would expect that to continue as we’re doing good work on assortment management, pricing management and selling skills capabilities and Sysco brand would become even more important. Stimulus would be positive for demand. I don’t have anything specific to comment about the prevalence of that, but it would be a positive. Aaron, over to you for any comment.

Mark Carden:

Great. Thanks and good luck.

Kevin Hourican:

Thank you, Mark.

Jonathan Feeney:

Good morning. Thank you. I wanted to – you touched on this a little bit, but I wanted to ask specifically about the funding environment. First, congratulate you on your fixed cost balance sheet management. I think that’s forward-looking and puts you in a great situation. Congratulations on that. But historically, the first part of the question is, does that – does higher – less availability of funding help you competitively directly versus, says smaller Foodservice distributors who might not have the access to capital you have or might not have been as prudent. And secondly, how about the M&A environment? I mean I know its early days. We don’t even know if we have a recession coming, but one thing is clear. Funding costs are a lot higher. It’s a lot less cash around. So how’s that changed your M&A priorities and availability and likelihood of success? Thanks very much.

Kevin Hourican:

I’ll just say two things about the M&A environment. We’re not responding to inbound phone calls at Sysco. Joel Grade, who leads biz dev for our company is making outbound phone calls, meaning we’re very, very strategic about the types of acquisitions that we are interested in. We’ve talked about them before as being geographic white spaces and capabilities that we need to fill or capabilities themselves that we don’t have that we’re interested in that we think will build out our overarching assortment and/or selling profile and capabilities. And we get a chess board of things we’re interested in, and we’re very thankful for the strong balance sheet that Aaron and his team have helped us develop and deliver over time that gives us the flexibility that we need to want.

Kevin Hourican:

Thank you.

Andrew Wolf:

Thank you. Good morning. My question is in regards to the operating expenses. And I was hoping you could help us sort of unpack some granularity, some of the reasons they’re up. I think most of it or the majority of it is just market-driven, wage rate increases. Maybe you could help us understand that. And it sounds like Sysco is deliberately one; you have a lot of volume but also being fully staffed. A lot of it might be headcount as well. And as you look forward, when those numbers flatten out, so that we can sort of incorporate that in our modeling.

Andrew Wolf:

Great. Thank you for that color. Appreciate it.

Operator:

Thank you. There are no further questions. This does conclude your conference call for today. We thank you for participating, and we ask that you please disconnect your lines at this time. Enjoy the rest of your day.

Operator:

Welcome to Sysco Corporation Fourth Quarter Fiscal Year 2022 Conference Call. As a reminder, today's call is being recorded. We will begin with opening remarks and introductions. I would like to turn the call over to Kevin Kim, Vice President of Investor Relations. Please go ahead.

Kevin Hourican:

Good morning and thank you for joining our call. Q4 marked another quarter of positive top and bottom line performance at Sysco. The quarter capped off strong financial performance in fiscal 2022 as we grew annual sales by 33.8% to over $68 billion. For the year, Sysco grew our business more than 1.3x the industry. This result exceeded our goal for the year and the second half of the year performance was even stronger than the first. The outperformance in the U.S. helped drive over $17 billion of total company sales growth for the year. Consistent with our focus on profitable growth, we grew adjusted EPS by 133.8%. Our team generated these results while advancing our Recipe for Growth strategy, improving our balance sheet and delivering compelling shareholder returns. I will highlight two topics during our call today. First, I will share progress we have made as a company over the past year that displays Cisco's unique position of strength in the market. Second, I'll convey why we are confident in our trajectory for profitable growth in fiscal '23. Before I get started, let me acknowledge that we are closely monitoring macroeconomic pressures that are impacting consumer confidence across the globe such as spikes in gas prices, food inflation and rising interest rates. Despite these external factors, Sysco was prepared to deliver significant market share gains and profitable growth this coming year. So let's get started with our unique position of strength and a bit more about who we are displayed on Slides 5 and 6. I am often asked to describe Sysco. Simply put, Sysco is 50% a food supply chain company and 50% at food sales and marketing company. To be successful as a leader at Sysco and to be successful in this business, you need to be equally capable of leading in both arenas, supply chain and sales. Over the past 2.5 years, we have developed a strategy called our Recipe for Growth that is advancing our capabilities in supply chain and sales. We are transforming Sysco by building new capabilities that will further enable our position as a global leader in food distribution. Let me first highlight the 50% of Sysco that is our food supply chain by summarizing some of our biggest accomplishments of the past year. Throughout the year, we have led the industry from an OTIF perspective. For those not in logistics, that stands for on-time and in full. This past year was the most challenging OTIF year on record in our industry. During those challenging conditions, Sysco was able to be better in stock and better able to shift on time versus those that we compete against. As a result, we won substantial new business and provided stronger-than-industry average service levels to our existing customers. We're deeply committed to returning to and exceeding our historical OTIF levels over the coming quarters and years. We fully converted our supply chain to a full six-day service week. Simultaneously, we converted the majority of our U.S. frontline associates to a four-day work schedule, enabling improved work-life balance for our associates. The six-day work model for our large network of DCs will enable Sysco to grow profitably for years to come by better leveraging our physical assets. Their transition to the six-day model was a big lift. And I want to thank our associates and our customers for their partnership in the transition. The six-day model will ensure industry leading OTIF results for years to come. We launched our Sysco Driver Academy, opening our first training location and began building out a nationwide infrastructure that will that will be complete by the end of this calendar year. The driver academy is helping Sysco addressing the shortage of skilled drivers and our Academy will increase the number of skilled drivers at Sysco and will deliver increased lifetime earnings potential for the associates selected to participate. We have piloted and are scaling new picking methods at our warehouses that will improve the experience of our delivery drivers. In addition, we're providing our drivers with advanced material handling equipment that reduces the physicality of their day. These actions will improve the experience of our drivers, enabling improved productivity, improved retention and increased customer service. Lastly, we've built out a distributed order management system, or DOMS for short, that will enable omnichannel fulfillment at Sysco in fiscal '23. We have decoupled the frontend of our network, sales from the back end of our network operations through this project. No longer will a customer need to order just from their local sites inventory assortment. We are opening up our vast network of inventory to our customers through the DOMS implementation, while also improving the productivity of our working capital through this industry-leading project. We will be launching our first [indiscernible] soon with plans to expand and scale in '23 and beyond. Our supply chain mission at Sysco is clear, enable profitable growth by delivering the industry's leading assortment of products delivered on time and in full at a delivery frequency that meets or exceeds our customers' expectations. Our supply chain greatly enhanced our capabilities to deliver on that mission in fiscal '22. Now I would like to highlight the progress that we have made in the other 50% of our company's key work focus, food sales and marketing. We live our food credentials every day with over 7,500 sales consultants in hundreds of culinary partners and product specialists across the globe. I dare say there are a few, if any, that know more about food and food trends than our culinary teams. Our sales associates have the highest customer satisfaction scores in the industry, with NPS overall satisfaction rates, a full point higher than our competitors. Please see Chart 7. Our sales consultants are experts in everything from menus with our customers, identifying and introducing new food trends and importantly, partnering with our customers to help save them money. From a product perspective, we've the broadest assortment of food in the industry, and we have expanded that assortment strength with the recent acquisitions of Greco, Paragon Foods and the Coastal Companies. Our product assortment is second to none, and we offer fair and appropriate prices to our customers. Like I summarize with our supply chain, I would like to highlight some of the progress that we have made over the past year with regards to food sales and marketing. We implemented an intelligent data-driven pricing system to improve our ability to be what we call right on price at the customer item level. We built and scaled a customer personalization engine, which provides our customers with unique offers that their specific needs. We upgraded and improved our digital shopping platform. We improved search navigation. We made it even easier to reorder Common Essentials, and we introduced product recommendation engines that increase customer basket size. We improved what we call team-based selling, better leveraging our sales teams across broad-line and our collection of specialty businesses. Lastly, we can measure success over the past year in several ways. I'd highlight, too. Firstly, during the great resignation, our sales consultant retention in fiscal 2022 exceeded our historical average. RSEs look the new tools that we have built, and they have deeply embraced our Recipe for Growth. And secondly, we successfully grew more than 1.3x the industry in 2022. This result exceeded our goal for the year and the second half of the year performance was even stronger than the first. Our customers are rewarding us with more of their business because of the relationships they have with our sales teams and because of the new tools and services that we have deployed in food sales and marketing. Defining excellence in food sales and distribution, that is Sysco. We are confident that we have the size, scale and expertise to be the leader in these two arenas, bringing innovation to our customers every day. Topic two for today, I'd like to discuss the current economic climate and our view for the upcoming year. We're closely monitoring macroeconomic pressures and data points related to food inflation, gas prices and consumer confidence. There is no doubt that end consumers have a lot on their minds these days. We think it's important to remember the resilience of our industry and how we have adapted over the past few years. We submit respectively that food away from home has proven to be resilient and quite frankly essential. Over the last 2.5 years, our industry has dealt with challenge after challenge with three major ways of COVID, double-digit inflation and innovation in Ukraine impacting the food supply. Despite these challenges, we have delivered profitable growth. We have learned to operate in an abnormal environment and we are prepared to navigate another dynamic year ahead. While we anticipate that recent macroeconomic headwinds make REIT less robust industry-wide growth rate in '23 than we had originally planned, we are prepared to generate sales growth of at least 10% in 2023. Aaron will address guidance in more detail in a moment. There are several reasons why we believe we will deliver on our financial targets. First, as the industry leader, we're fully diversified, covering every corner of the food away from home market. We serve restaurants up and down the price point spectrum and across all restaurant types. We deliver food to health care and education facilities that are less prone to recession. We delivered to travel and recreation facilities into any office buildings. These last two sectors continue to rebound and will provide a source of growth in the coming years. Additionally, we still have big opportunities to grow in the restaurant space. Even if traffic is more muted than originally forecasted by Technomic, remember that we serve roughly 50% of the total restaurant door locations, and we have roughly 30% share of wallet with existing customers. Sysco can still grow our business even if the market growth is less compelling. And given the strict step-downs internationally in 2022, we have strong growth potential year-over-year from our International division. Simply put, we intend to win share profitably in fiscal '23. Second, regarding inflation, we continue to work with our customers to pass through the majority of cost inflation. Interestingly, the relative price of eating out has been less impacted by inflation than the cost of food at the grocery store as seen on Slides 8 to 9. When coupled with people's desire to eat out, we believe that restaurants will once again prove resilient. Third, our investments include sales and marketing capabilities through our Recipe for Growth strategy will deliver increased value in the coming years. The topics I highlighted on this call today, coupled with new programs like Sysco Your Way and Sysco Perks will drive increased market share growth. Once again, we plan to grow faster than the overall industry, with a target in fiscal '23 of growing 1.35x the industry. This trend will put us on the trajectory needed to deliver our fiscal year '24 target of growing 1.5x the industry. We are increasingly confident in our longer-term guidance provided in May of 2021 at our Investor Day. In addition to ensuring that we drive compelling market share growth, Aaron, our entire leadership team and I will be focused on productivity improvement and structural cost out. We proud of the progress that we have made in reducing structural costs over the past year and we will be relentlessly focused on improving operations efficiency in fiscal '23. Lastly, we are excited to welcome Paulo Peereboom as the newly appointed leader of our international operations. Paulo has an extensive track record of driving transformation and building high-performing customer-focused teams across multiple geographies. This includes over 30 years of experience across seven countries, all in the food business. Our international team had a strong year of improvement in '22, and we are increasingly confident in our future. Paulo will take some momentum we are building to the next level. I'd now like to turn it over to Aaron, who will provide additional financial details. Aaron, over to you.

Kevin Hourican:

Thank you, Aaron. As we conclude, I'd like to provide a brief summary on Slide 25. Sysco already is the industry brief summary on Slide 25. Sysco already is the industry leader from an EBITDA margin perspective. And as you heard from Aaron, we plan to build on that position of strength in fiscal 2023. Our key takeaways from today's call reflects three points. First, we advanced our Recipe per Growth strategy and grew more than 1.3x the market for the year, with the second half even stronger than the first. Second, we improved profitability with sequential progress in both gross profit and operating margin rates. And third, recognizing macroeconomic pressures as well as the resiliency of our industry, we're confident in our external guidance for fiscal year 2023. This assumes at least 10% sales growth and 30% EPS growth at the midpoint as we continue to grow with new and existing customers. We will also remain disciplined in expense management with a strong plan to drive increased operating leverage. Turning to the next slide. We are generating substantial top line momentum and accelerating market charities. Our Recipe for Growth transformation is winning in the marketplace and creating capabilities at Sysco that will help us profitably grow for the long term. We are further building the fun and enhancing our competitive scale advantages. Sysco's strength of income statement and balance sheet have enabled us to continue advancing our strategy during a difficult operating environment, while also rewarding our long-term shareholders with disciplined dividend growth and share repurchases. Lastly, we are committed to our long-term financial outlook, which includes significant sales and EPS growth and returning value to our shareholders along the way. There are bright days ahead for Sysco, and I'm both excited and proud to be a part of the journey. Operator, you can now open the line for questions.

Lauren Silberman:

I just wanted to ask first one on local case growth, down 7% for the quarter. Can you give us that number excluding the lapping over the 53rd week, just so we understand the underlying trend? And then on a three-year basis versus '19, it looks like local case growth is down about 1.5%, pretty consistent, I think, each quarter throughout the year. So any color you can provide on what you're seeing as an independent customer.

Lauren Silberman:

Great. And if I could just ask a follow-up on gross profit. So gross profit dollar growth per case growth has been very strong, it feels like inflation is peaking. What's your confidence in maintaining gross profit dollars? Are you seeing any signs of pushback from consumers on the inflation? And I know you're not expecting deflation in '23, but should we see deflation? I mean how do we think about that ability to maintain gross profit dollars? Thank you.

Aaron Alt:

Great, good morning. Just to observe that we are assuming and expecting moderating into levels over the course of the year. We're not expecting a deflationary environment, although some categories may be deflationary and we've built that into our own models from a mix perspective. I want to observe as well that the inflation in our guidance is actually enterprise, not just USPL which we have typically disclosed in prior quarters. And to perhaps reinforce Kevin's point, I am quite pleased with both the opportunity we have to optimize our product portfolio, the cost structure, as Kevin called out for us, but also to work with our customers, utilizing Sysco Brand products to optimize for both of us while also being pleased with our continued ability to pass through increased product inflation costs to our customers and then on to their own customers.

Ed Kelly:

I wanted to start with just the trend in underlying case growth in the U.S. Could you maybe talk a little bit about the cadence of the case growth versus sort of '19 as the quarter progressed. And then what you are seeing in July and August? Are you above 2019 at this point? And then, you mentioned consumer sort of changing or seeming like, I guess, maybe consumer risk. But are you actually seeing any impact yet?

Ed Kelly:

Okay. Great. And then just a quick follow-up it's really around SG&A, particularly around the U.S. business. You've made quite a bit of investment this year. You can kind of see that right in your OpEx dollars versus '19 or OpEx per case, for instance, quite a bit. How are you thinking about 2003 from sort of an OpEx per case standpoint, does that continue to grow? I mean it sounds like it does. But then at some point, it seems like once this settles down, that there's real opportunity to sort of capitalize on a lot of those investments. So I'm kind of curious as to we see that period.

Aaron Alt:

Great. Let me touch a couple of the elements as apparent on the face of Kevin's remarks, we're going to increase volume over the course of fiscal '23. And of course, with increased incomes, increased cost of service, we would all expect that. During the quarter, we did also have to address increased costs of things like fuel, recruiting, et cetera, cost to hire, and those are moderating, right? And we have steps in place hedging or other programs to address those as well. But as we look forward, we expect those to improve in fiscal '23. Kevin has already touched on the impact of productivity. As we called out in our guidance, we expect that to improve over the course of the year. Our transformation expenses were higher in Q4. And indeed, we will continue to invest heavily in the year as we play the long game against our transformation expense, but those are costs that over time will moderate. And then snapback, they came down in Q4, and we expect them to continue to come down over the course of the year. Now the thing we haven't talked about so far yet is cost out, right? We were pleased that we had surpassed our original cost-out objective of $750 million during the year. And as I said in my prepared remarks, we are going back for more, and there is more opportunity. One of the benefits of operating of a company of the size of Sysco is where we find a good idea and we deploy it, we can recognize what works and that we can deploy to other parts of our enterprise. And so, we've actually recently revised our structure of cost leadership to go after more and are confident that we can continue to help to offset some of the costs elsewhere in the network, at least through cost out as we carry forward. The benefits, they're all baked into the guidance that we've provided for fiscal year '23. Thank you.

Mark Carden:

So you grew at 1.3x the market in fiscal '22 which topped your original expectations. There's obviously some macro challenges in place, but is there any reason why you would expect your market share glide path to slow in fiscal '23 before accelerating in '24? Is this just some conservatism built in with the 1.35 or are there specifics on that front that we should be aware of?

Aaron Alt:

Just one final thought, which is to observe that for a company of our size to still have a 17% market share, 30% penetration and -- we serve about 50% of the independent sticks that just reinforces just how much opportunity there is out there as we deploy the Recipe for Growth to drive, particularly with the benefit of our balance sheet.

Kevin Hourican:

We're seeing a rational pricing environment. I'd say all distributors understand the cost increases to them and understand the impact to their P&L, if they don't pass through the inflation. So, we're seeing a rational pricing market out there. Specific to our pricing tool and what enables one of the data feeds into our pricing tool is market price competitiveness. And it's a new muscle at Sysco. So think about every region within which we operate. We are intelligent about scraping the market to understand price, what's happening in the marketplace. It's one of -- I emphasize that, one of the data feeds. We've got other data feeds like what's our pricing strategy for that category, for that cuisine, for that customer type. And it's an algorithm that gets utilized, therefore, to provide a specific item of customer-specific price. So, we are better equipped than ever before to understand what's happening in the local environment because pricing is local in this industry than we've ever been before.

John Heinbockel:

So Kevin, I want to start with -- you said at least 10% growth. So, you can grow 10% in a mild recession, right, and, I guess, possibly grow faster than that, if the macro is better. So I guess what would happen in a slower environment, your share gains, maybe you can comment -- your share gains relative to the market would increase beyond the 1.35 right? And where would that come from primarily? Do you think that's wallet share that 30% goes up? And what would be the one or two things that would be most impactful in driving that wallet share this year in the next 12 months?

John Heinbockel:

And maybe as a follow-up to that. What's the biggest pushback you get, right, from any restaurant where you have, right 30% on average right? So you have plenty that are under 30%. Because it just seems having fewer trucks in the back door, everything on one truck, the economic seems right, overwhelmingly positive. What's the hurdle? And I mean historically, right, we've heard the hurdle on the protein side is just a perception of quality versus specialists. I imagine that's not the case anymore? Or is that the biggest hurdle?

John Heinbockel:

No, no, that is great.

John Glass:

My question is on international and how international pulls into your top line guidance for '23. Can you maybe frame how -- where case volumes are in absolute versus '19, for example, I don't think we've got the good sense of what inflation what the role has been there? And are there particular initiatives that you've rolled out in the U.S. that roll out maybe to those international markets that help drive sales? Any color there, please?

Aaron Alt:

Great. Thank you. Just a couple of observations. We've been pleased with the contribution of the international business to our fiscal '22 delivery, as Kevin called out. And indeed, we have baked continued progress into the core or midpoint of our guidance for fiscal '23 as well. We don't separately disclose the volume numbers for the international business, so I'm not prepared to do that today other than to observe that one of the nice things about the international business as they continue to make progress is, we're upbeat on the opportunity that, that part of the business continues to present to us to improve as we carry forward. And whether it's leadership on cost out or driving maybe the Recipe for Growth initiatives that Kevin called out, we have the opportunity to do more in that part of the business. And with the new leadership we have, we're up in there.

Aaron Alt:

I'm not going to comment directly on that other than I'm referring you back to my prepared remarks and in particular, the color we tried to give around the cadence of earnings given where they were. The practical reality is if you look at what we said with Q1 being at or near our high point previously and the new to the math from the absolute guide, it's apparent that the profit increases are across the year, and that's the best I can give you.

Alex Slagle:

A question on the guidance and what's embedded there kind of what your high-level assumptions are around what kind of recovery you expect in some of the categories that lagged here in the U.S. like business industry and business travel, hospitality. Just your thoughts there.

Kevin Hourican:

This is Kevin. I'm just going to add one point. Our total business growth in health, we are seeing positive trends in travel, hospitality and business and industry sectors that historically Sysco performs very well in. We've also won market share in those sectors over the last two years, and then therefore, as those two sectors on their natural recovery curve. That's a tailwind for Sysco because of the market share that we have won over the last 2.5 years in those sectors. And then education and the health care sector. We've also won market share in those two sectors as well. And those are two very recession proof sectors for Sysco. So we're pleased with our national sales team. They've done an excellent job of winning new business over the last couple of years, profitably. And in several sectors, you called out two of them, Alex. We see tailwinds in this coming year, and that was built into and factored into our guide today.

Alex Slagle:

Appreciate that. And then just on SYGMA and the opportunity to drive a recovery in the operating profit there, it looks like you're looking for improvements in '23. Could you talk about the actions taken and how much recovery you see coming in '23? Or does this take a couple of years to get back to historical profitability levels.

Aaron Alt:

Just two quick thoughts. First is, we're assuming continued progress on profitability for SYGMA within our guidance, although we don't separate it by segment in that way. And then just to repeat the observation I made in previous quarters that, our expense recovery or some of our expense recovery within the SYGMA segment actually trails. And so, we'll have an expensive one quarter and we'll pick it we'll cover at the following quarter, and that's part of what's going on.

Jeffrey Bernstein:

Great. Thank you very much. Two questions. The first one, just a follow-up. Kevin, I know the topic earlier was brought up about the broader restaurant industry, whether it be chains versus independents or QSR versus casual dining. Was there a message to be that you're really not seeing a change in trend between the different segments? I know you service all restaurants. So seemingly, you'd be pretty well insulated if that was trade more likely to trade down. But just trying to understand what you're seeing across the restaurant industry over the past few months or whether perhaps you're not seeing any change at all? And then I had a follow-up.

Jeffrey Bernstein:

Got it. And then the follow-up, you mentioned the cost outs I know you're already above the $750 million target and you're going for more. Are there big buckets of opportunity that maybe you haven't touched before? Or is it primarily areas you've already hit, but there just -- is incremental opportunity there. Just try to figure out whether there's totally new channels that you're pursuing or just more of the existing?

Kevin Hourican:

And this is Kevin. I'll just add one example, which is our omnichannel project, which I talked about briefly on today's call. I haven't really mentioned it too much in prior calls. The technology for the distributed order management system goes live this quarter and what it will enable us to do is decouple the front-end sales from the back-end operations. And by doing that, we can ensure that we decrease miles driven, meaning serve the customer from the closest possible warehouse. That sounds basic and obvious, but it is a meaningful unlock technologically, but it also is going to help us with our strategic stocking of product, what product is where. Think about slow-moving SKUs and fewer warehouses that then get cross-docked through the last mile delivery location and really being strategic and optimized of increasing the ability of our inventory, but actually doing it with overall over time, less inventory, less working capital. Those are examples of that project, which is multiyear in its build, creating cost structure take out into the future. And again, built into our guide for this coming year, but that project, in particular, is one that we're excited about.

Aaron Alt:

I said we'd be at or near that $098 expense, yes. Just given the transformation investments and the productivity we're working through.

Aaron Alt:

Thank you, Jeff.

Operator:

Good morning, and welcome to Sysco's Third Quarter Fiscal 2022 Conference Call. As a reminder, today's call is being recorded. We will begin with opening remarks and introductions. I would like to turn the call over to Kevin Kim, Vice President of Investor Relations. Please go ahead.

Kevin Hourican:

Good morning, everyone. Thank you for joining our call. Our financial performance this quarter exceeded our internal expectations, driven by strong top line performance, accelerating market share gains, solid gross margin management and improvement in our operations expenses. Earlier today, we raised our full year guidance, and Aaron will walk you through the details in just a few moments. Our strong performance for the quarter demonstrates our focus on the customer and the advancement of our Recipe for Growth strategy. Simply put, we are winning in the marketplace. The best measure of this success is the continued market share gains that we are delivering. Our performance versus the market accelerated in the quarter, and we solidly exceeded our fiscal 2022 goal of growing 1.2x the market. I will highlight three topics during our call today

Kevin Hourican:

Thank you, Aaron. As we conclude, I'd like to provide a brief summary on Slide 20. Sysco already is the industry leader from an EBITDA margin perspective. You've heard me say this before, but we are now taking that robust foundation as the market leader in creating a growth company. Our financial performance this quarter reflects three key points

Lauren Silberman:

Congrats on the quarter. I first just want to ask about the market share, so growing more than 1.2x the market and above where you expected to be when you laid out the strategy last year. Where are you performing better than expected? Is it new customers, wallet share? Are your customers outperforming, so out-comping, if you will? Any color around that?

Aaron Alt:

Lauren, just one quick add, which is we're pleased with the relative contribution to the market share gains across the portfolio. It's coming not just in Broadline but also in our specialty business and in our International business.

Kevin Hourican:

Yes. Thank you, Lauren, for the question. I think consumers are concerned about inflation, and you can't read the paper and watch TV and not understand that high cost of fuel is on people's minds. We're not seeing a slowdown in demand. That's the good news and a headline from today. We're not seeing an impact to our food-away-from-home business. I mentioned in my prepared remarks, we do cover the entire spectrum of food-away-from-home across all price points

Alex Slagle:

Had a question on the earnings guidance. At the midpoint, it seems to suggest a return to the historical 40-60 cadence between the 3Q and 4Q versus the previous views that the 3Q would be below this. So was there something about the timing of the transitory costs or productivity that shifted this mix into 3Q? Or is there an element of conservatism baked into the implied 4Q view?

Alex Slagle:

Great. Just a follow-up question on the International business. If you could talk about the leadership transition there and tons of changes you envision taking place, if anything, in particular, you want to call out.

Operator:

Your next question comes from the line of John Heinbockel with Guggenheim. Your line is open.

Kevin Hourican:

Thank you for the question. I'm actually just going to bridge everyone back to kind of the thesis of Sysco and why we have such confidence in the long-term growth potential of the Company. And at our May 20, 2021 earnings day, we talked about three numbers, 16% market share. We talked about 30% share of wallet and we talked about 50% of doors covered by Sysco in the restaurant space. Good news is the first number has already moved up. We're at 17% share from the most recent calendar year. We anticipate that we'll continue to make progress in that regard. And it's our Recipe for Growth strategy that will enable progress on the other two numbers, which drive the market share, which is increased penetration with existing customers and the continued pursuit of net new customers. And it's at both ends. And I'm not giving you a cop-out answer. I'm just being completely transparent and honest. We are doing more new customer prospecting than in our past, and we are successfully moving new customers up the profitability curve over time. So when we onboard them, you win X percentage of their business, and then we do what we call sell around the room, which is we penetrate additional categories. So we're having a lot of success on winning new customers. The fact that we remain the only foodservice distributor without an order minimum has helped us attract thousands of new customers. And then again, we penetrate further with those customers by selling around the room to move those customers up the profitability curve. And then the tools that I referenced on today's call that help our sales force are enabling us to win more cases and penetrate further with existing lines. So it's a both end answer. One is not more important than the other. We believe that we can significantly increase the number of restaurants that we serve and we can penetrate further. And not to repeat another point I made on the call, but the reason we converted to the six-day full delivery model is to create more flex capacity and more throughput capacity on any individual given week, which will enable us to increase the number of customers that we serve profitably.

Aaron Alt:

Thanks. Appreciate the question. It's fair to say that for Q4, the period in which we provided the guidance, we expect continued elevated inflation, although perhaps starting to come down as we approach the end of the year. We're not, today, going to provide guidance in any respect with respect to the future year. That will come during our Q4 earnings call in a couple of months.

Jake Bartlett:

My first one is just on the trajectory of the business. And it obviously was stronger than you initially expected when you gave guidance for the third quarter. But if you could talk about just your kind of maybe your exit rate in April, whether you're seeing continued improvement and potentially driven by pent-up demand. Any comments there would be helpful.

Jake Bartlett:

Great. That's very helpful. And then I had a question about -- you've talked about investing in the long term and playing the long game. And I'm just wondering, in light of concerns about an economic slowdown potentially coming up, in that context, if you saw a slowdown coming, if you can sort of -- to think that was going to happen, would you pump the brakes a little bit on some of these investments? Or do you plan to remain aggressive, perhaps maybe sacrificing margins in the near term for that kind of long-term point of view?

Aaron Alt:

Thanks. Look, I guess my reaction is this, we're wired for success in the long term at Sysco and whether it's the customer strategy and the opportunity that Kevin called out or the balance sheet and the resources we have to help us through any bump on the road, I want to emphasize we're investing for the long game. While we talk in this call relative to the quarter, relative to the year, really, we're talking about growth over the longer term, the 3-, the 5-, the 10-year period. And it kind of goes back to doing what we said we were going to do. If you go back to the Investor Day comments from, I guess, a year ago now, indeed, if you go back to our earnings calls for the last 18 months, what we said was we were going to invest in the snapback, right? We were going to do that because we wanted to be ahead of the curve. We wanted to be the Company that the foodservice operators were coming to the restaurants because we were the best partner. So we've been investing in inventory down this path. We've been investing in technology down this path. We've been investing in our fleet, and we've been investing in our distribution nodes. And none of that has changed because of the ebbs and flows. And indeed, that's where we continue to be focused as we carry forward because we are holding ourselves accountable and Kevin is holding all of us accountable to the Recipe for Growth and the recipe for profitable growth that comes with it.

Edward Kelly:

I wanted to ask you about gross profit. Results are super impressive this quarter, especially within the U.S. business. Per-case profit and percent margin both up sequentially. But can you talk about how much of this is driven by inflation? How much of this is internally driven? And I think your fuel surcharge goes through gross profit, so maybe that's playing a role. I'm just -- hopefully, you could maybe sort of unpack this sequential improvement versus what we saw last quarter.

Kevin Hourican:

Yes, I'll just add one thing. Just something like a fuel surcharge, that's not a profit accretion for our company. That's just the cost offset, which I know you know. But the effort that Judy Sansone, our Chief Commercial Officer, is driving, we have a major, major strategic sourcing effort underway at Sysco, which helps us improve our cost of goods sold inbound to us. We're very pleased with the work that Judy is doing and the team that she leads is delivering good outcomes. It's hard to actually delineate specifically for you on this call the portion of our goodness, as Aaron says, tied to that versus inflation, and that's just the level of detail that we're not going to go into. But we have a major strategic sourcing effort underway. It is improving our COGS, and, therefore, obviously showing up in our positive GP performance.

Kevin Hourican:

Fill rates from Sysco outbound to our customers improved in the most recent quarter, and it's visible and measurable through both our internal data and also the net promoter scores that we track on a real-time basis, us versus competition. So we are outperforming the market in average. We improved in the quarter. It's coming from two actions. Our suppliers are beginning to improve. It's still meaningfully down versus historical standards, supplier inbound fill rate to Sysco, but it is beginning to improve. And Ed, we're doing an even better job at managing what we call subs and outs, substitutions and out-of-stocks. Our website improving to communicate more upfront to our customers options they have when an item is out of stock. And our sales reps and our merchandising teams are doing very good work to partner with customers in an environment where a specific item is out of stock. There's plenty of food. There's plenty of food available. It's about individual items being out of stock at moments in time, and Sysco working proactively with our customers to be able to serve their needs with something that meets the needs of their menu. So, we're doing a better job in this most recent quarter at that, and we expect continued improvement into Q4 and into our fiscal 2023. As it relates to the overall environmental conditions, our staffing health has improved. It continues to steadily improve. We're not out of the woods. We still have work to do but we're making progress. And then your point about things like maintenance of equipment, yes, shortages are impacting all forms of supply chains, not just food. So access to parts is a challenge and access to new equipment is a challenge. Interestingly, we're doing better work in that regard to centralize that activity at Sysco, to have a better control over parts inventory and purchasing of equipment. And I would emphasize one important point there. Our size and scale can enable us to have preferred advantage with manufacturers who are on limited allocation, and we'll be at the front of the line for equipment. In fact, Aaron and I have preapproved and preordered equipment to support the Recipe for Growth.

Jeffrey Bernstein:

Two questions. The first one, just following up on the international commentary. I know you mentioned that you're somewhat distanced from the Ukraine headwinds with your key markets. And then I know you mentioned separately something about April, that you were seeing strong demand across all geographies, which just trying to get a better sense whether maybe we're misunderstanding the headwinds we're hearing about in the international markets, or whether or not your strong performance is driven more by the delayed recovery that went on in international markets, and therefore, that's more than offsetting maybe a slowdown that might be going on underneath. Just trying to get a sense to whether you're seeing any signs of a slowdown or change in behavior from a European or international consumer perspective.

Jeffrey Bernstein:

Understood. And then just the follow-up. You guys mentioned the six-day workweek and the no minimum deliveries. Clearly, points of differentiation for yourself versus some of your larger competitors. Was wondering, how do you measure the impact of that? Or is that possible? I mean, seemingly, customers have to be quite pleased with both of those things. I'm just wondering how do you gauge the success you're having from that relative to, again, peers that perhaps don't offer either?

Aaron Alt:

Maybe just one add from a financial perspective to Kevin's point about sweating our assets and increasing our capacity, it's a marvelous thing to be able to add that additional day and to be able to address the need for additional trucks as we grow by not having to buy additional trucks because we're further sweating our assets. And similar to that point, from a use of cash perspective, the incremental capacity across our network that it creates for us to grow without having to invest in additional distribution nodes or other trucks on top of that is also an excellent return on that investment.

Kevin Hourican:

That's funny, Jeff.

Kelly Bania:

I just wanted to go back to the comment about case volumes and surpassing the fiscal '19 levels this quarter, which is a great milestone. But just curious if you could give the specific numbers where Sysco's volume is, and forgive me if I missed that. But also where you estimate the industry is on the same metric. And then also, can you dig in a little bit deeper on customer types between restaurants, hospitality, education, how those volumes compare to fiscal '19 levels?

Kevin Hourican:

Yes, just to put a bow around that last part, and since I said earlier, we're not using price as the lever to win new business. The fact that we're growing our business by more than 1.2x the market, Kelly, implies the volume is equivalent to that. There's a strong correlation between the volume trend and the sales trend, us versus others. So that's my best color in that regard. The only thing additional beyond that is we're winning big in specialty. Our produce business, our specialty meat business, we are doing very well. And I call your attention to the higher margin rates from those businesses. So specialty is a growth focus for Sysco. We're winning in Broadline. We're taking market share in Broadline and we are accelerating our momentum in specialty. And the fact that we closed on the Coastal Companies acquisition in the last quarter is a harbinger of good things to come even further in the high-growth, higher-margin produce business because that will pay dividend from a growth perspective for many years to come.

Kevin Hourican:

Yes, Kelly, it's a very good question. I think over time, supply chains will stabilize and improve, and the contribution of benefit to Sysco will decrease over time as the market improves. But very importantly, at the exact same time, our Recipe for Growth is advancing and the capabilities that we're building will have a bigger, more meaningful impact. And I'd just call your attention to the guidance that we provided in May of last year. We said we would accelerate our performance versus the market. This year's stated goal was 1.2x. We're doing much better than that. In the third year of our three-year plan, which was fiscal '24, we said we would grow at 1.5x and we are confident in our ability to do that. The contribution of where that market share capture comes from in our forward-facing years will be less weakness of others, it will be more strength from Sysco.

John Ivankoe:

I wonder what kind of changes you might be sensing within the market as maybe even below what some of the headline numbers may suggest, consumers really expressing a desire to move into Sysco brands, and even beyond that, moving from having more of a scratch model in restaurants to more pre-prepared or value-added products that come into their back door that obviously reduce the demand for labor. Certainly, I've seen some things in the marketplace of people bringing in pre-prepared products I wouldn't have necessarily expected. And I think there's some things kind of written in the news of, I guess, how significant of a trend that this actually may be for restaurants. So wanted you to comment on that and how you feel, if you do think that, that's going to be an acceleration and trend, how you think you'd be best advantaged to take advantage of it.

John Ivankoe:

And if I can ask, I mean, there has been -- I mean, this is a decades-long trend towards the value-added products coming into restaurants. Do you sense a significant acceleration in the last 6 or 12 months as the labor market has become much more challenged for the operators themselves?

Operator:

Your next question comes from the line of Nicole Miller with Piper Sandler. Your line is open.

Kevin Hourican:

Yes, I'll start that. It's a great question. I gave a good example of technology deployment on today's call, which is the turbo-charging of the capability of the sales rep by teeing up on a silver platter for them the next best action for that day's visit that is using data, deep troves of purchasing data to provide a suggestion to the sales rep on something the customer will be interested in and then pre-approving for them an offer that is financially good for Sysco that would be beneficial for the customer. It's a game-changer. Our sales reps are excellent at building strong relationships with customers and they are experts in food. But what we're now providing them is an N-of-1 personalization for each and every customer on something that we know will be desired by the customer and an offer that will be compelling, again, financially for us and also for that customer. So that's a great example. We're making meaningful progress on our website improvement, which is the ordering platform, our digital ordering platform, which I want to be clear is not just a desktop. It's a mobile version. We have click-to-order through e-mails now where we can send an e-mail to a customer with an offer and/or with a suggested order. And with one click of one button, we will ship that product to them. They don't even have to go to an ordering platform. These are what we call removing points of friction, tools and capabilities, leveraging modern technology. We talked about pricing a lot. I don't need to repeat that. What we're working on now is supply chain improvement technology. We want to make the work that our supply chain associates do easier to do. And by making that work easier to do, it will improve the satisfaction of our associates for the job, will help us drive improved associate retention, which will drive improved productivity for Sysco. So without getting into the specifics on today's call for both our warehouse associates and for our drivers, we're making meaningful investments in the technology that those associates interact with to make the job easier. And by making it easier, we make it a better job.

Nicole Miller:

And just a quick last one. Understanding the temp expense, I think, you said was cut in half sequentially. I wanted to ask about if there was an underlying drag from training new employees that may not yet be efficient, and if so, how do we think about that, the 30, 60, 90 days until they are efficient and is there a potential gap up in performance coming?

Operator:

Thank you. That's our last question. This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Good morning, and welcome to Sysco's Second Quarter Fiscal 2022 Conference Call. As a reminder, today’s call is being recorded. We will begin with opening remarks and introductions. I would now like to turn the call over to Kevin Kim, Vice President of Investor Relations. Please, go ahead.

Kevin Hourican:

Good morning, everyone, and thank you for joining. I will highlight four topics today during our call. First, our financial results for the quarter. Second, I will provide some color on the current state of our business and the COVID environment. Third, I will detail our continued share gains despite a difficult macro environment. And finally, I will outline our approach to the long game, with some highlights of our Recipe for Growth transformation. I'll then turn it over to Aaron to discuss our financial results in more detail. So let's get started with our financial results displayed on slide four. Earlier this morning, Sysco reported fiscal second quarter results that were fueled by substantial top line momentum and an acceleration of market share gains. Our sales and volume performance success is a testament to our supply chain strength in the advancement of our Recipe for Growth. Our operating expenses for the period were elevated due to the effects of COVID on our business. And as a result, our bottom line results were below our expectations this quarter. Key headlines for the quarter include strong sales results and market share gains. We delivered growth of more than 1.2 times the market, which exceeded our expectations for the period. We delivered sales growth of 10.5% versus 2019 and sequential volume improvements throughout the quarter until the Omicron variant impacted our December performance. More on Omicron in a moment. As I mentioned, operational expenses within our supply chain were above expectations due to the challenges that COVID is presenting to our labor environment and our transportation costs. I will detail this complex operating environment in a moment. But we remain confident, these incremental expenses, driven by labor costs, are near-term challenges that will improve over time. Our strong sales results and elevated operating expenses resulted in an adjusted earnings per share of $0.57 for the quarter. We further advanced our Recipe for Growth strategy, which we believe will uniquely position Sysco to win in the marketplace for the long-term. Sysco's strength of income statement and balance sheet have enabled us to continue advancing our strategy during a difficult operating environment. That strategic and economic reality will enable Sysco to outperform the market for quarters and years to come. Topic two for today, an update on the state of the business. As I mentioned a moment ago, COVID continues to negatively impact supply chains across the globe and the effect was elevated in Q2 relative to our first quarter. The impact is being felt in product availability shortages from our suppliers and higher than anticipated labor and transportation costs. I would like to further explain some of the labor cost pressures that we are addressing. At Sysco, we have hired thousands of new associates over the past quarter to support the recovery of our industry, which is coming faster and stronger than had been anticipated. We are also winning market share across our business sectors, which adds to our hiring needs. As a result of our hiring and an industry-wide higher rate of associate turnover, we have a higher ratio of new associates in our labor population than we had originally planned. A higher population of less experienced associates has a direct negative impact on our supply chain productivity. The punch line is that our tenured associates perform at a much higher rate of productivity than new associates. With that said, we are confident that we can and will move our newer associates up the productivity curve over time. We have also incurred higher than planned expenses as COVID related illnesses accelerated in the quarter and have come into January. To provide a sense of the magnitude of this disruption, nearly 10% of our US workforce tested positive for COVID during the month of January and were out for a minimum of several days. To cover these absences, we invested in overtime and supplemental third-party resources to ensure that we properly supported our customers. At Sysco, we cannot let our health care, education, hospitality and important restaurant partners go without food because of these labor challenges caused by COVID. Our customer centric approach to ensure that we can ship on time and in full will benefit our relationship with our customers for the long-term, positively impacting retention and growth. We are confident that our service performance is stronger than the industry as measured by our Net Promoter Score. In fact, our NPS performance versus the market expanded in the quarter. Lastly, as I mentioned, Omicron negatively impacted our top line performance, starting the weekend after Thanksgiving. Our business in Europe was impacted first with the reintroduction of major restrictions on our customers. Our sales and volume performances in December were impacted by those restrictions, most notably in the UK, France and Canada. For example, restaurants in the majority of Canada began closing for on-premise dining at the end of the second quarter with restrictions slowly starting to ease in February. These types of restrictions impact our customers' performance and ordering patterns. As a result, we expect the top line impact from Omicron to continue into the third quarter. The speed of the return to pre-Omicron volume levels is uncertain, but we are seeing signs of progress in Europe as restrictions have begun easing. I would like to highlight again that Sysco's sequentially improved sales and volume performance every month compared to 2019 levels until the impact of Omicron began being felt Thanksgiving weekend, and we are confident that we will get back to that growth pattern as Omicron receives. Topic three, let's turn to our market share performance highlighted on slide 5. Despite the challenges presented by Omicron at the end of the quarter, as you can see on slide 5, Sysco delivered exceptional growth versus the market in the second quarter. As a result, we are now confident we will exceed our 1.3x the market growth target for the full fiscal year. Our performance versus the market expanded this quarter. Furthermore, looking back over the last 3 quarters, we are beginning to pull ahead of the industry. The next slide from NPD, shows how over the last 2 years, we have consistently increased the percentage of customers that purchased exclusively from Sysco. This compares to the dotted line that shows the percentage of customers not yet buying from Sysco. You can see that the dotted line is steadily declining. These slides are just 2 more proof points that our team is winning in the marketplace and that our strategy is working. Lastly, topic 4, I will highlight examples in our business transformation and how that progress will enable consistent profitable growth. Today, I will give an update on 2 of our growth initiatives Sysco Your Way and our Italian Cuisine Program. As a reminder, Sysco Your Way is a new service model that we are piloting to better serve what we call restaurant dense neighborhoods. Through this program, we are providing our customers with enhanced levels of service and sales support. We are very pleased with the success of the pilot locations, and we will be expanding the program to net new neighborhoods in the spring of 2022. In addition to Sysco Your Way, I would like to provide an update on our Italian cuisine platform work. As a reminder, Italian is one of the largest cuisine segments and Sysco historically underpenetrated with this important customer segment. We did not have an optimal assortment, and we lap the go-to-market selling strategy to win. Our Greco acquisition has changed that capability in a meaningful way. First off, Greco is off to a great start and is exceeding our Year 1 top and bottom line expectations. We are really pleased with the Greco business and the great work that they are doing. As importantly, we are leveraging the Greco product assortment and selling prowess and bringing the best-selling items to Sysco houses across the country. More on that in due course. Winning in the specialty sectors like Italian is a priority for our Recipe for Growth strategy. Turning to Slide 7. In summary, for the quarter, we are winning as a company in the marketplace. We are growing our business with new and existing customers. Our year-to-date growth is exceeding our 1.2x the industry target for the year and is being driven by our supply chain strength and our Recipe for Growth strategy. We also returned over $650 million of cash to our shareholders during the quarter. We are confident that the impact of our initiatives will grow over time, enabling us to consistently outperform the market at large. As I wrap up my prepared remarks, I want to thank all of our associates at Sysco. These past 2 years have been challenging. We continue to lead the industry from a service perspective and make deliveries to our customers regardless of the COVID conditions. I am proud of our sales, operations and global support center teams for their persistence and customer focus that they have displayed. I really want to thank them for their tenacity and I'll use another word, endurance. I am honored to serve these associates and work by their side. I would also like to welcome the recently appointed members of our Board of Directors

Kevin Hourican:

Thank you, Aaron. As we conclude, I'd like to provide a brief summary. First, this quarter included substantial top line momentum and an acceleration of our market share gains. We are winning in the marketplace, and we have confidence that we will continue to win share. With that said, Q2 presented challenges from Omicron on both our top and bottom line. Our sequential volume growth progress stalled post-Thanksgiving and that headwind has continued into January. More importantly, COVID-related staffing disruptions increased our operating expenses for the quarter. As a result, our bottom line results were below our expectations. Second, despite the short-term impact of Omicron on our business, we are confident that we will resume our volume improvement as soon as the variant recedes. And we can see green shoots of progress in February from a volume perspective. As it relates to expenses, we have a management plan to improve our year-to-go operating expenses. We are meaningfully focused on improving associate retention, training and productivity. These activities are a core competency of Sysco and our experienced field leadership team has a plan to deliver improvement for the remainder of the year. Third, we remain confident in the long-term trajectory at Sysco. And as Aaron stated, we are reaffirming our long-term guidance that includes significant sales and EPS growth. Our Recipe for Growth transformation is creating capabilities at Sysco that will help us profitably grow for the long term. The customer-first solutions we are developing will enable us to grow our share profitably and also enable Sysco to be more efficient. There are bright days ahead for Sysco, and I am proud to be part of the journey. Operator, you can now turn it over for questions.

Edward Kelly:

Hi, guys. good morning. So Kevin and Aaron, I mean, obviously, Omicron has been pretty disruptive to your operations more recently. Can you quantify how much additional cost you saw in Q2 related to that? Is that all in the snapback costs that you provided, or is it in addition to that? And then how do we think about those costs snap back transformation like that in Q3 and then Q4 at this point?

Edward Kelly:

Yeah, great. That's helpful. And then Q3, how do we think about – I mean, I know you gave – helped us with guidance in Q3, but how do we think about those costs as we're modeling out Q3? And then, I guess, the other aspects, and so kind of this is my follow-up, how do we think about where case volumes are running now relative to like that 5% level in the US that you talked about versus 2019 in Q2 and then help internationally there as well?

Kevin Hourican:

Yeah. Thanks, Aaron. Good morning. Thanks for the question. Just as it relates to case volume, one of my comments in the prepared remarks is we had five consecutive sequential months of improvement in case volume growth, which continues Q4 of last fiscal year. Again, we were sequentially improving each and every month, taking market share as evidenced by our slide chart, we're really beginning to pull away from the rest of the market, so winning in aggregate. December was impacted. January was impacted because the restrictions were in place for all of January. We are beginning to see some signs of progress or green shoots in February as restrictions begin to ease, but we're not fully yet back to the pre-Omicron levels. We have 50% restaurant restriction on-premise dining in Canada. We have mandatory work-from-home work orders in France and in the UK. And then in northern urban locations within the United States, still heavy, heavy work from home, which impacts daypart restaurant traffic, as you well know. So we're not quite back to where we were. What we are very confident in is, as the restrictions on our customers ease, vaccine, passports and things like that, mask mandates that impact people's psychology tied to going out. As those things ease, we see fast recovery from our customers and we're prepared from an inventory perspective, we're prepared from a staffing perspective, we're prepared from a service level perspective to be able to serve when our customers are ready, and we expect to continue to pull away from the market from a growth versus the industry perspective. Thanks for the questions. We appreciate it.

Operator:

Your next question comes from the line of Alex Slagle of Jefferies.

Aaron Alt:

Good morning.

Kevin Hourican:

Great question, Alex. This is Kevin. Just first and foremost, inventory management, we have perishable products. So as volume declines, we need to be super fast and agile in regards to managing shrink and risks associated with spoilage. We've gotten very good at that. And you can see it in our performance results at just, our inventory management is significantly improved from 2 years ago when COVID first began. The second is in labor strategy, one of the things that, I made the call with full support of our Board back in December when Omicron began impacting, we were not going to furlough associates our staff. That would be a penny-wise, dollar-foolish decision. Pennies that we could save from furloughing staff in December and January, would cost us twice as much as we attempted to restock the bench and bring people back off furlough because in today's labor environment, we furlough someone, they're going to get a job in another industry at another company. So we made that very purposeful choice to not furlough any staff, not a single person over that period of time, December and January. That will pay dividends for our company. My guess would be smaller, less capitalized companies are not fortunate enough to be able to make those types of decisions. In fact, not only did we not furlough anyone, we hired thousands of people in our Q2 and have continued hiring December into January. At this moment in time, we literally have hundreds of drivers in the passenger seat of a truck getting trained on Sysco standards, Sysco processes, and they will be ready to be driving their own truck as the volume recovery begins. Because keep in mind that there's an entire sector that we serve that isn't yet even back in business sufficiently, and that's what we call business and industry. We had been anticipating that the business and industry sector would have kicked in, in January as most companies were planning a return to work after the holidays. That has not occurred, as you know, and that's future tailwinds to the Sysco recovery as business and industry will begin kicking back in here. It's hard to predict when, but we will be prepared, we'll be ready. Those are just a handful of things that are on the different from March of 2020. And we've gotten pretty agile at dealing with these curveballs. But back to you if you have a follow-up.

Kevin Hourican:

We view it as an opportunity to increase this cobrand first factual. Our Sysco brand fill rate and in-stock is exceeding national brand. That's important. Our ability to keep those very profitable products for Sysco in stock is an important priority for us. And the partners that we work with to produce that product, they're doing well. And again, Sysco brand in aggregate has a higher rate of in-stock than national brands. That's point one. Point two, because of inflation being elevated and everybody knows it's currently elevated, Sysco brand has an even bigger punch than it normally would. So we view Sysco brand as an opportunity to save our customers' money with a high-quality product and we are doing a good job with our sales team of introducing customers to products that they perhaps have not purchased before. And we did see progress in fact, 250 basis points of progress from Q1 into Q2 on Sysco brands penetration, and I would view further tailwind in that regard in the coming years.

Kevin Hourican:

Thanks a lot.