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.

Hello, and welcome to Sysco's second quarter fiscal 2022 earnings call. On today's call, we have Kevin Hourican, our President and Chief Executive Officer; and Aaron Alt, our Chief Financial Officer. Before we begin, please note that statements made during this presentation, which state the company's or management's intentions, beliefs, expectations or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act, and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the company's SEC filings. This includes, but is not limited to, risk factors contained in our Annual Report on Form 10-K for the year ended July 3, 2021, subsequent SEC filings and in the news release issued earlier this morning. A copy of these materials can be found in the Investors section at sysco.com. Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures is included at the end of the presentation slides and can be found in the Investors section of our website. To ensure that we have sufficient time to answer all questions, we'd like to ask each participant to limit their time today to one question and one follow-up. At this time, I'd like to turn the call over to Kevin Hourican.

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…

Thank you, Kevin. Good morning. Here are our second quarter fiscal 2022 financial headlines. As seen on Slide 9, sales growth of 41.2% compared to last year, also up 10.5% versus fiscal 2019, leading to our highest Q2 sales ever. Good management of our product cost inflation, recording the highest gross profit in absolute dollar terms for any Q2 at Sysco. A doubling of adjusted operating income and a 62.9% increase in adjusted EBITDA compared to last year, notwithstanding a cost environment, which worsened during the quarter. Continued investment against our long-term recipe for growth, with $44 million of operating expense investments against our strategic investments, creating momentum with our commercial capabilities. Proactive action on the COVID generated labor and safety environments in which we are operating, with $73 million in transitory snapback operating investments such as recruiting costs, hiring marketing, vaccination promotion, contract labor and sign-on and retention bonuses in the quarter. And while the magnitude was greater than we could foresee last quarter, we experienced productivity challenges and much higher overtime costs in the quarter, resulting from the pandemic-related workforce transition and our prioritization of customer service. With respect to our capital allocation, we refinanced elements of our long-term debt during the quarter, and we returned $657 million of cash to shareholders. With those headlines on the table, let's turn to some details on the financials for the quarter and some thoughts on our outlook. Second quarter sales were $16.3 billion, an increase of 41.2% from fiscal 2021, and a 10.5% increase from fiscal 2019. In the United States, sales in our largest segment, US Foodservice, showed excellent progress, up 45.1% versus fiscal 2021 and up 14% versus fiscal 2019, reflecting the pre-Thanksgiving and pre-Omicron resurgence in volumes and sales. Local case volume within the subset of USFS,…

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.

Thank you, sir. [Operator Instructions] Your first question comes from the line of Edward Kelly of Wells Fargo.

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?

Hi, good morning. Great questions. I'm going to refer you back to our earlier remarks on pieces of that and then provide a couple of additional supplements. What was remarkable to us was the progress we were making up through the Thanksgiving holiday on the top line and indeed against the overall plan. With the onset of Omicron, we start to see the impact on volumes and certainly on our operating expenses. But for the quarter, we incurred $73 million of snapback cost, which is the combination of contract labor, retention bonuses, sign-on bonuses, training, vaccination credits, et cetera. We also incurred more than $40 million on transformation costs. But what's not in those two numbers that I referenced in the script is $40 million of overtime and other productivity impacts driven by both our response, ensuring that we're serving the customer but also then us working with the labor force and transition.

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?

Why don't I touch the expectations on OpEx, then toss is to Kevin on volume. From an OpEx perspective, what we experienced in December continued into January, as we described in our prepared remarks. And as Kevin alluded to, we're starting to see some green shoots in February. But green shoots does not equal back to pre-Omicron run rate. We are anticipating that our snapback cost will come down in the back half. We're also anticipating that our supply chain team, given our scale will make good progress against productivity in the back half as well. But we have work to do, which is why we were purposeful in our remarks in calling out both the seasonal split on our guidance between Q3 and -- on our annual results between Q3 and Q4, the 40/60, if you will, and emphasizing that given the continued Omicron environment, not withstand the green shoots, and the work we have to do that we expect the updated guidance to be heavily weighted to Q4. Kevin?

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.

Thank you.

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

Thanks. Good morning.

Good morning.

What do you think are the most important changes or improvements you've made as a company to be better prepared for unexpected surges or events like this that we've been through? I mean, perhaps things that are less obvious to investors that might give confidence that the impact of future events would be less of a headwind, perhaps even more of a share gain opportunity for Sysco?

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.

That's helpful. A follow-up just on the Sysco branded product mix. How is this impacted by the supply chain challenges versus customer preferences? And how do you see that progressing through the calendar year?

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.

Got it. Thanks.

Thanks a lot.

Your next question comes from the line of John Heinbockel of Guggenheim Partners.

So Kevin, let me start with your thoughts on elevated inflation an impact on unit demand, right, food away from home. And then if you guys -- can you grow faster than that 1.5% goal for 2024. What would it take to do that -- and for example, could you get close to two times if the market grew slower and to get to where you want to get to share gains have to play a bigger role? What's your thought on that?

John, thanks for the questions. Tied to inflation, it's double-digit at this time. As you know, it's been double-digit now for longer than any of us in the industry would like. We have not seen yet a reduction in consumer demand tied to that higher inflation. And it's hard to predict how long that will be able to persist, but we're not seeing elasticity of pricing impact consumer purchasing and that is a positive. It has obviously helped our P&L. In the most recent quarter, as Aaron said, we increased GP dollars per case in each of our reportable segments. So we're doing a good job of passing through inflation. We're also doing a good job of helping our customers find lower cost alternatives. So menu suggestions, narrowing the number of items on the menu, so they can increase their profitability. Portion size, as you know, optimization so that they can keep their ticket on the menu the same and do so from a lower COGS to them. So those things are going well. Protein is even higher than the overall basket of inflation. We need to see progress on supplier availability in protein. It's a priority for Sysco. We are working with our supplier partners in the protein category to work on longer-range forecasts so they have consistency or purchase volume from Sysco, so that they can be efficient in their production. And we are working as hard as we can to find additional sources of supplies in the protein category because we need to bring the protein inflation down. John, that's the number one focus for us from an inflation perspective. As it relates to the second half of your question, which was can we grow faster than 1.5, yes, we're pleased to report today that we are exceeding our goal for this year, which was 1.2%. Prior quarter, we had said we are on track to deliver 1.2. So those words matter. We changed our words from on track to exceed. We are confident we will exceed the 1.2 this year. Our third year goal of our three-year plan, which is fiscal 2024, it remains at this time at 1.5. Do I have confidence we can do better than that? And we'll talk more about that at Investor Day. But we like our strategy. It's winning in the marketplace. If you look at the chart in our prepared remarks, you can see the pulling away from the industry, and I don't anticipate that slowing down.

And maybe just as a quick follow-up. When you think about 2024 now, right, versus maybe six months ago, do you think your thought now is revenue will be higher and profit margins lower than you thought six months ago, or it's too early to make that call?

John, good morning. It's Aaron. I really like your question because like you, we are very focused on the long-term. And we were purposeful in reaffirming our 2024 guidance. We believe it, we can see it, right? And we're going to get there. And I would take you back to something I said at our Investor Day back in May, which was the opportunity is everywhere at Sysco and what I would describe it now is progress is everywhere at Sysco. And we're going to get through the current volatility driven by Omicron. I'm quite pleased with what I'm seeing from a disciplined perspective in the business, and we are putting all the pieces in place so that by the time we get to 2024, we're talking about the upside, right? But for the moment, we have to stay focused on getting through Omicron getting through the quarter, getting through the half, but we are quite confident in the future.

Thank you.

Thank you, John.

Your next question comes from the line of Jake Bartlett of Truist Securities.

Great. Thank you for taking the question. My first was on Omicron and kind of understanding the near-term impacts that had on your staffing in demand. But I'm wondering if there's any longer-term impacts in your view and whether that's pushing out the supply chain disruptions materially? Have you a longer impact there? And did you see any disruptions maybe closures, for instance, with some of your independent customers? Anything that might just last longer than as we look at the cases come down sharply here?

Jake, it's a good question. I'll answer directly as asked and then I'm going to add one point that we believe is on investors' minds tied to this. First and foremost, scale matters in this industry meaningfully. So, purchasing scale matters so we can get best possible costs so we can share value with our customers. Scale matters from a physicality perspective. So, we have more distribution centers in the United States, our primary country than anyone else, which means our last mile delivery is a shorter route, a more dense route than others. And as we continue to grow, Aaron and I will make appropriate investments in incremental physical capabilities to put us even closer to the customer, which will lower our cost to serve. And you can see the flywheel that comes from the size, breadth and scale of Sysco, and we believe that will become an increasing strength capability over time because of the cash generation of this company and our strong balance sheet, we have the ability to invest in net new facilities to lower that cost to serve last-mile delivery. So, we believe it will be an increasing strength formula for our company. One of the questions that we believe is on investors' minds is, Kevin, aren't you worried about labor costs? Everyone we talked to is talking about labor costs going up. I just want to be clear on this topic. Labor wage rate is immaterial to the cost pressure that we experienced in Q2. I'll repeat that, the labor wage rate was immaterial in our Q2. Our wage -- excuse me, our operating cost pressure in this past quarter, if you had to single it down to like the biggest thing was the percentage of people working for us that are new tied…

Great, great. Thank you very much. And just really a quick follow-up to that. Last week, Brinker, you talked about interest in rehire rates and seeing an increase in the rehiring of former employees. And I'm just wondering, whether -- I mean, that's something that's, I think, it’s a sign of an improving labor market, but also could really help with productivity. Is that something that you're measuring or seeing any material change there as people might have left for whatever reason are coming back to Sysco?

Yes, Jake, it's a great question. I think I said a couple of quarters ago, we've rehired 100% of people that we furloughed back in March from a supply chain perspective. So we've been fully open for business now for a long time, and we're growing. So we're taking market share. We're winning new customers. Our sales are obviously well above 2019. Our volumes, we anticipate will be back to and then above 2019 in the not-too-distant future. So we've got the open to hire shingle out there. In fact, we're getting much more effective at recruiting for open positions. Our marketing team is getting more sophisticated on how to target applicants, and we're getting better and better at training them. But in the future, to specifically answer your question, Jake, we're actually going to have to go to people from outside this industry, to meet the hiring needs and higher demands that we have. It's why we formed our driver academy. Just a little bit of color on that. We're now live in two physical driver academy locations. Our first CDL class has graduated from our driver academy and we think we're going to have to eat our own cooking, pun intended, where we're going to have to find people who aren't today CDL class drivers, teach them to trade, train them and then have them work for a long time for Sysco. And again, that's an example of size and scale matter. We pay people to participate in that program; whereas today, if you were an average person wanting to become a driver and you enter driver school, you actually have to pay the driver school. So think about that flip, from having to go, from having to pay to attend and lose time working, to we actually pay you to attend the Sysco Driver Academy, and we're bullish about that and expanding that opportunity across the country. Thank you for the questions.

Thank you.

Your next question comes from the line of Jeffrey Bernstein of Barclays.

Great. Thank you very much. Kevin and Aaron, I think you both mentioned green shoots. I believe that was in reference to just more recent February -- early February trends. I'm just trying to assess whether that's more on the sales side starting to recover, which I know we've heard some talk about starting in mid-January things are getting better? Or whether you're referring to more inflation, because we've seen spot prices maybe start to ease sequentially on commodities and maybe, as we've talked about earlier, maybe a little bit easier to do some hiring. So just trying to assess what you think comes first as you talk about the green shoots through the fiscal third quarter.

Good morning, Jeff. Thanks for the question. The green shoot comment that I made was actually tied to cases -- excuse me, case volume, therefore, and sales beginning to improve. That's what that comment was tied to. As restrictions begin to ease, Canada just in February has relaxed. They still have a very onerous restriction in place, which is a 50% on-prem dining, but it was like literally restaurants were closed in Canada. In the GTA, Greater Toronto area, in Quebec province, you couldn't eat in a restaurant for the month of January. So those restrictions that began easing. In the UK and France, the restrictions have been very heavy, mandatory work-from-home. We're seeing restrictions ease there and the green shoot comment was tied to as those restrictions ease, we can see a recovery of the business and a return of volume. And then in the US, I didn't give this color commentary. The Southern one-third of the United States continues to perform very well. The headwind in the US is in the urban centers in the north, and we anticipate recovery being made in those environments as, again, restrictions in these -- that's mostly a city mayor decision as the restrictions they're putting on customers ease. Point two, that -- where else will progress come from? So we do expect volume and sales to make progress in Q3 and certainly into Q4. But operating expenses, we have a plan. We have a management action plan to address our operating expenses. It's a five-part plan. I'll cover three quickly, and then I'll toss to Aaron, who’ll cover two. First and foremost it’s about retention, training and productivity. We need to move the new hires up the productivity curve, and we are maniacally focused on improving that new hire productivity. Topic two is transportation efficiency. There's Golden Nam Hills, we like to say on ensuring that the trucks are being routed most optimally. There's work we can do. It's pick and shovel work to ensure that our transportation efficiency is operating at the highest level. The third is Sysco brand. The question that came up earlier in today's conversation from Alex. We are making progress in Sysco brand. It will be a big focus in the year to go, and we anticipate profit improvement in the year to go tied to increasing penetration of Sysco brand. And then I'll toss to Aaron for the two other topics we're addressing. Aaron, over to you.

Thanks, Kevin. Of equal importance are our progress against COGS. We have opportunities to source better. Our strategic sourcing efforts are gathering steam, and we're bullish on where that will take us over time. And then, of course, being relentless on cost out and accelerating our efforts and frankly, finding new projects. We have a big goal out there from May. We are accelerating that goal, trying to bring the goodness forward to help us offset what we've been experiencing over the last couple of quarters. I do want to cross out one modeling point just for clarification. I want to point out to those who are working in their models that January is a seasonal low for us, even in the absence of Omicron, right? And so while the green shoot you're hearing us talk about green shoots, those are largely coming in February and beyond.

Understood. And then my follow-up, I guess, relates to that profitability point you just made. I know for a number of quarters now, you guys have referenced improving profitability starting in the second half of fiscal 2022, which we're finally here, seemingly as I guess, investments ease a little bit, profitability improves initiatives on that front. Just wondering whether you still see that thesis intact or whether there's been delays to that. Obviously, you reiterated the fiscal 2024. So it seems like the end zone is still at the same spot, but just wondering whether there's a concern that there's more of a hockey stick type recovery or whether you still believe that starting in the back half of fiscal 2022, a lot of the initiatives you put in place are really going to start to bear fruit putting aside kind of the Omicron variant.

I appreciate the question. Let me offer some perspective. Everything we have said we are going to do, we are doing. What has changed is the environment in which we're operating, right? And so while we got out of the box early at the end of fiscal 2021, working on aggressive cost-out efforts and working on GP sourcing efforts, right? The visibility of those things in the P&L has been impacted by the environment in which we're operating. So we do have strong confidence in our long-term guidance. We have visibility to the actions that we had planned to take internally on cost out and gross profit recovery actions. And we aren't backing away from those. And those efforts aren't slowing down. If anything, they're actually accelerating. So while, I'm going to refer you back to my earlier comments about the back half guidance and what the short-term environment means for us. Kevin and I and the entire management team are locked hands, and we're going to deliver on fiscal '24 of being at or above our all-time EPS high from fiscal 2019.

Understood.

Your next question comes from the line of John Glass of Morgan Stanley.

Thanks very much. I wanted to go back to the health of your customer base and looking at the difference between your overall Broadline case growth and your local case growth. Is it fair to say independent restaurants have been more negatively impacted by the things like you mentioned about staffing shortages, etcetera? And inside of that, is there any growing concern that inflation is impacting their financial health? Is there any negative reads that you're seeing in terms of independent restaurants viability in this inflationary environment or not?

John, that's a really terrific question. Let me just go back to this health of the customer component. If we go back to the beginning of COVID, fast food QSR drive-through meaningful share winner. And you could see that in our SYGMA reportable segment for last year, SYGMA had a record year in both top line and bottom line. In part because SYGMA indexes towards obviously serving that customer type. That was year one of COVID. Year two of COVID, the big winners are the sophisticated restaurant chains that have a digital app that allows to go ordering, that allows paperless, contactless payment, I meant just frictionless ease of purchase and really loyalty. One of the things we're working on at Sysco is personalization. Well, there are select retailers -- excuse me, restaurants, I won't name the names of them that are pretty fantastic loyalty program that prompt their customers to buy more from them and come back to their restaurants more often. Those are the big winners at this point in time. As it relates to Sysco and how we can help the mom and pop. This is the sweet spot of who we are? So we are helping independent restaurants, figure out how to connect to a delivery partner. We help them with a creation of a mobile version of their venue so that customers can shop remotely and pick up or take out and also, we're helping them with things like contactless payment in the restaurant. So we have the largest sales force in the industry, and that literally is what they do. They don't just sell food. They consult with mom-and-pops to help them compete more effectively with some of the larger companies. And we believe that will earn loyalty to Sysco over time. We believe…

Thanks for that. And then just on inflation on the comment, do you think the second quarter here was the peak of inflation as you look into what you're seeing in the third quarter? Do you think the rate of inflation begins to cool off, or do you not see that yet?

We are continuing to see elevated levels of inflation. And as much as I would like to call when the down point will be impossible for us to do. And so we are assuming elevated inflation through the rest of the fiscal year, if modestly down in Q4 versus Q3.

Thank you.

Thanks, John.

Your next question comes from the line of Mark Carden of UBS.

Good morning. Thanks a lot for taking my questions. So not too long ago, you guys noted that you've seen a 10% increase in local doors served against the 10% decline in overall local doors open. These numbers still largely hold true as the variant disruption had much of an impact on this front? Thanks.

Yes, Mark, it's holding true. So in fact, we're continuing to make progress. We kind of pivoted on how we reported it this quarter. The answer to your question is, yes, it's holding true. This quarter, we chose to provide you even more color by putting a chart in our prepared remarks that shows the percent of customers buying unique from us going up and then the percentage you do not buy from us going down. You put those two together, and it's resulting in the number of unique doors that we're serving continues to go up. And I would say the bankruptcy rate of independent customers continues to be lower than what many had predicted. And I think mom-and-pop operators, they see a light at the end of the tunnel and they're prepared to benefit from an industry recovery that's still in front of us.

Okay. Great. And then thinking more from the food distribution industry perspective, has Omicron impacted the competitive landscape in the sense of as the combination of another wave of restrictions and continued labor pressures impacted their ability to stay in business either in the US or internationally and thinking about the smaller independent distributors there?

Hey, Mark, I appreciate the question. I would just kind of call back to my answer to one of the previous questions, which is that size and scale matter and have become even more important in this COVID environment. Supply chain resiliency is the newest buzzword if you think about places like World Economic Forum and what our CEO is talking about, it used to be supply chain agility and -- people now are talking about supply chain resiliency that you can weather storms of environmental conditions, political unrest and then things like this, which is a healthcare tied topic. So size and scale matter meaningfully when you're talking supply chain resiliency. We have the inventory to be able to support our customers as they recover. Aaron and I have invested to ensure that we have more inventory on hand at the present time than we did pre-COVID. We also are investing in labor, as I mentioned earlier, and some less strong balance sheet and income statement competitors of ours aren't able to do that. They're holding on to get through, and we're hiring thousands of people, while Omicron is in our midst and that's intentional. And yes, it impacted our operating expenses in Q2, but it will position us to be able to serve our customers in a proper way, win new business. In that business, we intend to keep forever. So, those are our ambitions. We are confident in our ability to do so. and yes, size and scale matter. Last comment for me is digital before I toss to Aaron. One of our transformation investments is to improve our digital capabilities. So, modern pricing software, substantial improvements to our website. We've made substantial improvements to our sales force guiding tool, which we call Salesforce 360, which literally guides the sales rep on what the job to be done is at that restaurant on that given visit. We've made substantial improvements to that tool, which have increased our sales consultant success rate on penetrating new cases and winning new lines of business with existing customers. So, those types of investments, which are not immaterial, as Aaron quoted on the call today, $44 million worth of investments in those types of capabilities, we're going to distance ourselves from those that we compete with. Cost, Aaron, for additional comments.

Kevin, I just want to ladder back to one of our earlier answers, which is this is why we're confident in our long-term guidance because we are willing to support the customer now, right? Short-term, it will have an impact on profit, but we're doing the right things by the customer when they need us while investing for the long-term, and this is going to be part of the ecosystem and the algorithm we build to meet or exceed that guidance for 2024.

Great. Thanks so much guys.

Thank you, Mark.

Your next question comes from the line of Lauren Silberman of Credit Suisse.

Thank you for the question. Just first, to follow up on the snapback and transformation costs. How much of these costs are going to carry forward in the fiscal 2023 cost base? Should we see the full sort of $73 million of snapbacks fall off in fiscal second quarter of 2023 and really the $44 million of transformation costs to be in the base? Just trying to understand how to think about the structural.

Sure. Great question. So, of course, I haven't provided you with fiscal 2023 guidance, so I'm not going to do so today. We're going to get through the back half of this year and then we're going to work towards the long-term guidance. That important qualifier aside a couple of observations. The first is that the snapback costs we're calling out, they're transitory, short term are onetime in nature. And so we do not expect those to be long-term or even medium term increases to our capital structure, and I want to emphasize our cost structure. And when I emphasize -- I want to emphasize something Kevin said earlier, which is wage rate increase increases are immaterial to our current results. And so there's not a -- those don't include structural changes, so to speak. With respect to our transformation investments, we do -- we will continue to invest against the transformation -- and we'll provide more clarity on what that looks like in 2023 when we get to 2023 guidance. Important caveat, though, I think I've said before, let me say it again now, our -- we will continue to invest in the transformation and in the back half, assumed in our guidance is that the transformation OpEx investments will be at or above where they were in Q2.

Okay. And then separately, seeing double-digit inflation, you've talked about effectively managing the product inflation. Can you talk about the dynamics between inflation hitting the cost line versus the price that you're pushing through on topline? Just trying to understand the pricing power opportunities to recoup some of the elevated OpEx costs. I know some are transitory, some are permanent. So, just said more clearly, can we assume you were pricing above the 14.5% inflation in U.S. broadline?

Great question. The math, because our cost -- our gross profit dollars per case is up, would imply that we are indeed able to pass through and manage our product cost inflation if we weren't as -- if that wasn't going up, we would be stable, right? As far as how far we go, it's a choice we have to make in the context of the environment where we're in, as far as how much of the operating costs we passed through on a regular basis. We are committed to supporting the customers and doing the right thing in the short-term environment as we focus on the long-term guidance. Kevin, anything you want to add to that?

Yes. Just one thing to add. It really is a good question, Lauren. I want to be clear on something that might not be obvious outside our company. There are certain customer types where our transaction with them is purely through the purchase of the food and how much the food costs. So Aaron just described that very well. And we're doing a good job in that regard for that customer type. We also have other customers that we transact from a fee per case basis. And it's in those contracts that -- there are times are provisions for food cost increases, but when our operating cost increase, like they did in the most recent quarter, that's where we get pinched. And we are working aggressively on that. In fact, our SYGMA sector -- excuse me, SYGMA reporting segment, our operating cost increased in SYGMA in the most recent quarter tied to the same reasons that I described earlier. We've got a plan to meaningfully improve the productivity within SYGMA, as our staffing is improving. And also, we are looking at the long-term contracts that we have in those types of fee-per-case arrangements, so that we have fairness and partnership with the customers that we work with in that reporting segment. So I hope that gives you some color where it's item price, yes, we can do what you described. And if it's a deeper case, it's actually a conversation with our customers and that partnership, long-term relationship management that I referenced a second ago.

Thank you, guys, very much.

Thank you, Lauren.

Your next question comes from the line of Brian Mullan of Deutsche Bank.

Hey. Thank you. Just wondering if you might provide an update where the volume recovery stands at present for some of the non-restaurant sectors in the U.S. relative to the fiscal 2019 level of business. If you could just talk about hospitality and health care. Kevin, you referenced business and industry as well in the prepared remarks. Just looking for a sense of magnitude, in terms of how much there is to go when we get back to normal.

Yes, Brian, terrific question. I hinted at this a little bit ago. We have two primary sectors that are still down meaningfully. We're not going to quote a percentage, but I'll say it down meaningfully and that's business and industry, and we're the leading food provider in that space. So we partner with foodservice management companies, and we are the primary distributor to those companies for offices, catering and the rest. So that sector is still down meaningfully. We had anticipated that, that sector was going to really kick in, in January, and that did not occur. Most companies are still currently working from home. Most companies have actually stopped trying to predict when they’re going to go back to working from the office. But we do anticipate progress being made in the year to go, but it’d be slower progress than we thought. On the optimist longer-term view, it's additional tailwind fuel at Sysco. And what we've said is, we'd be getting to flat volume to 2019 kind of inclusive of our current business performance and trends that got delayed because of Omicron, as Aaron said very well in his prepared remarks. But we have tailwinds still in front of us on that business and industry. And the second is travel and hospitality. Again, we are a very large player in the travel and hospitality space. Business travel currently down significantly. Leisure travel performed quite well last summer. We anticipate this summer will be a very strong leisure travel summer. But business travel conferences and the like that drives a big portion of that business isn't meaningfully recovered yet, and that will also be a further tailwind for us into the future.

Okay. Thank you. And then as a follow-up, just a question on the loyalty program pilots in the US. Are there any early learnings you might be able to discuss and then at a high level, could you talk about what you're envisioning for the program? What are some of the longer term benefits if you get it right? And then conversely, what are some of the challenges in terms of getting this done the way you want, driving widespread restaurant customer adoption?

Hey, Brian, that's a great question. I love it. Today, I chose to focus on Sysco, your way and Italian cuisine, just to keep my prepared remarks short, but we've got progress happening on all five elements of our recipe for growth. And for sure, we're making meaningful progress in personalization. It starts with data. Treasure troves of data of purchasing patterns and purchasing behavior and that data is now in the cloud. We've got machine learning and artificial intelligence technology going against that data to provide customers with offers that are unique to them, and those offers are now showing up through our Sysco shop platform. And the customer almost doesn't even know that it's happening. And that's what's brilliant about end of one personalization. And when we say one, I mean, each specific customer getting an offer that's unique for them. I can assure you we're the only food service distributor that is doing that. The second point, though, is our sales rep activation, which I mentioned briefly a moment ago. We've got the best trained sales team in the industry, and they are experts in food. These are chefs. These are former restaurant owners. We're now though teeing up for them, hey, as you're heading into the Bar & Grill on Main Street, this is specifically what they haven't been buying from us. Here's an offer specific for you for today only that you can talk to that customer about. There's a sample that will be on the next truck. There's a Sysco brand selling opportunity to save them money. And just the power of that data being provided to our sales reps and also to the customer through Sysco shop, it's going to increase penetration with existing customers, which is the best way to improve profitability for a distributor like us, but it's also going to enable us to win new business. As it relates to Sysco shop now being able to provide pricing at the item level for someone even before they have begun ordering from Sysco. That's a first for us. Tied to your customer adoption question, that's a very good one. In the future, we will talk to you about our loyalty program. It's called Sysco Perks. That is an actual loyalty program that we are enrolling people into and today, I'm not prepared to give an update on that endeavor other than the pilot is going well, and more to come at a future update on the expansion plans of that pilot.

Thank you.

Thank you Brian.

Your next question comes from the line of Kelly Bania of BMO Capital.

Hi, good morning. Thanks for fitting us in. Wanted to just ask about another question on hiring aside from the near-term illness related staffing pressures. Just curious how much more hiring you need to do by the end of the fiscal year? And can you talk about the level of talent you're able to find? And just any quantification of that wage rate figure. I think it was noted as not material, but are we talking low single digit, mid-single digit? Any help on that front would be helpful.

Kelly, thanks. We're not going to quote a year ago hiring number. That's not something that we're going to do here. Aaron provided an outlook, I just reference you to the outlook that he provided. As it relates to the wage pressure, we were pretty clear today to talk about that's not actually material and should not be something that is concerning as it relates to our long-term expense algorithm. We do anticipate this summer that it will be elevated versus our norm, but it's an amount that will be manageable in our ecosystem. We've got compelling projects that we're working on to improve driver productivity. We're purchasing a piece of material handling equipment that we are equipping our drivers to use on their routes that help them with managing their days, and those are the types of things that we're talking about. So again, our expense pressure that we've experienced in the most recent quarter are the things that we described with wage increase not being material.

Okay. Fair enough. And then, Kevin, you talked about this a little bit in terms of the contract side of the business. But I guess, investors are just really wondering how the contract negotiation process is going? And just in general, the competitive for contracts and how, if at all, the cost environment is being kind of factored into contracts as you're resigning those and moving forward.

Kelly, it's a really good question. And it's obviously, I'm going to keep private between us and our key customers and suppliers, the contract negotiations that we have and the relationship discussions that we have. But I would say the following: we are appreciated even more now than ever before tied to our size, scale, our ability to ship on time and in full. You can infer what that means vis-à-vis contracting language, but we are appreciated even more now than ever before. There is a scarcity of supply. There is a lack of ship on time and ship in full capacity on the market right now. And we're not going to 'take advantage of that.' That's not who we are as a company because we look at long-term partnerships and relationships. But we're going to have fair and balanced contracts with the people we do business with, and Sysco has appreciated more now than probably ever before. Hopefully, that was clear.

Thank you.

Thank you. Appreciate the question.

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