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.

Good morning, everyone, and welcome to Sysco's Second Quarter Fiscal Year 2023 Earnings Call. On today's call, we have Kevin Hourican, our President and Chief Executive Officer; and Neil Russell, our Interim Chief Financial Officer and SVP of Corporate Affairs. Before we begin, please note that statements made during this presentation that state the company's or management's intentions, beliefs, expectations or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the company's SEC. This includes, but is not limited to, risk factors contained in our annual report on Form 10-K for the year ended July 2, 2022, 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. If you have a follow-up question, we ask that you reenter the queue. At this time, I'd like to turn the call over to 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…

Thank you, Kevin, and hello, everyone. It's good to be with all of you, and I look forward to our ongoing discussions while I am in this interim role. During the second quarter, we delivered solid growth in both top and bottom line results and continued our balanced approach to capital allocation. All important elements of our Recipe for Growth as we further enhance competitive advantages for Sysco. I'll start with a summary of our second quarter results. Sales grew 13.9% with U.S. food service growing at13.7% and continued positive momentum for our International segment, which grew at 17%. Volumes for the U.S. foodservice segment, which includes our Broadline, FreshPoint U.S. produce, U.S. Italian and other specialty businesses, grew 5.2% and local case volumes increased 3.2%. Gross profit for the second quarter increased 15.9% to $3.3 billion versus last year with gross margin improving 29 basis points to 18%. Gross profit dollars per case grew in all four segments versus prior year marking the sixth consecutive quarter of such growth. Our gross profit and margin improvement during the second quarter reflected our ability to continue to effectively manage product inflation, which moderated to 8.3%, down sequentially from 9.7% during the first quarter at the total enterprise level. The improvement in gross profit per case was also driven by incremental progress from our strategic sourcing efforts as we continue to partner with our suppliers. Overall adjusted operating expenses were $2.7 billion for the quarter or 14.3% of sales, a 33 basis point improvement as a percentage of sales over the same quarter in the prior year. This quarter included transformation investments of $55 million and new colleague-related productivity costs of $22 million. This is an improvement compared to $63 million of transformational investments and $41 million of productivity costs in the…

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: Our first half financial performance with a 15% increase in sales and a 26% increase in adjusted EPS displays the progress Sysco is making to win in the marketplace while we are transforming our business for the future. Our profit leverage improved in the second quarter and we expect that ratio to improve further in the second half of this fiscal year. We communicated today several factors that impacted Q2 profit results. Importantly, the labor dispute is behind us and we are making solid progress on improving our operating expenses. On the sales and volume side of the ledger, our core growth initiatives are working as designed and we will focus on winning more new local customers in the second half of the year. Sysco has proven that we can win share when we make it a priority for our sales teams. Encouragingly, January volume growth is off to a strong start. Lastly, Sysco remains deeply committed to our strong and stable balance sheet, disciplined capital allocation and delivering continued returns to our shareholders. Our status as a dividend aristocrat remains a priority and we are proud to carry that distinction going into our 54th year. We look forward to keeping you posted on our progress as a company and look forward to highlighting more about our longer-term initiatives at the CAGNY conference in a few short weeks. Lastly, I'd like to provide a brief update on the status of our CFO search. We are making solid progress. The interest level from highly qualified candidates has been very strong. We have a very compelling pool of talent to choose from and we are progressing along in the evaluation and selection process. I would like to thank Neil for the outstanding job he is doing as our interim CFO. He is a trusted partner and I greatly appreciate his leadership. Operator, you can now open the line for questions.

[Operator Instructions] Your first question will come from Kelly Bania of BMO. Please go ahead.

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.

Good morning, Kelly. Thank you for the questions. It's Kevin. I'll start with comments about the updated revised guidance. I'll talk about the local growth specific question and then I'll toss to Neil for the below the line components of your question. It's a good question and a lot to it. So we'll take it into each of those three parts. The forecast that we revised today is what we would call a middle-of-the-road, center of the fairway forecast. It's our updated view given the conditions that we are operating within and the data that we have available to us. I'd like to start with the comment on overall market growth. We do leverage a third-party firm to provide us guidance on what the overall market will be and as I said on my prepared remarks, the expectation was that for the quarter that disclosed that the market in total will be up five and the market in total, excluding Sysco was up one. Now we budgeted for and are delivering more growth than the market. So we layer on top of the market growth 1.35 times from Sysco's specific performance. The good news is we are achieving that particular outcome. We are, in fact, delivering performance results greater than the market. It's the reality that the market itself is performing softer or lower than what had been expected. I'll come back to that in a minute to answer the second part of your question. So that needed to be adjusted for the full year, which we have done. I'm not going to quote a specific local case volume growth for the second half, just to point you to our total guidance includes our updated view on the second half of the year. Operating expenses, we've updated for the year…

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.

Mitchell, let’s go to our next question please.

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

Good morning. Thanks so much for taking the question. So, I wanted to dig in a bit more on market share. You noted that you grew at 1.35x the market in 1H, which was a bit of a slowdown from last quarter's 1.4x pace. What in your view was most impactful in driving the slowdown relative to the market? Was it mainly competitors having more access to supply? Do the labor issues have much of an impact and what gives you the most confidence that share trends can accelerate again in the back half of the year? Thanks.

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.

All right. Thanks so much and good luck.

Thank you, Mark.

Your next question will come from Edward Kelly of Wells Fargo. Please go ahead.

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.

Ed, good morning. Thank you for the question. As it relates to OpEx I repeat a couple of the numbers that Neil communicated and then provide a little more color on why we have confidence in our ability to drive the improvement in the second half of the year. Toss to Neil for any additional color or comments about the overall confidence that we have in the forecast for the year. Snap back has been taken to 0, and that was a material number a year ago and big progress has been made. We're no longer needing to do things like hiring bonuses and referral bonuses and the marketing spend that we were doing to create awareness of jobs. So Snapback has gone to zero. The productivity piece, and that's specifically measured as excess over time, if you will, has gone from $41 million in Q1 to $22 million in Q2 and we expect for that to continue. I point you to Slide 9, Ed, and I put that chart in there on purpose to show you the progress in the collective community, the progress we're making on retention improvement and how that retention improvement will, therefore drive transportation, as well as warehouse operations metrics. We have finite data, real-time data, weekly data, I host a weekly call, talking about our productivity at the site level that all of our key leaders attend and we have a firm understanding of where we are and where we need to be week-over-week, month-over-month, quarter-over-quarter to hit the full year. So we updated our guidance today to reflect the fact that, yes, our operating costs in the second half of the year will be higher than what we originally budgeted, but an improvement from where we stand here today at the end of Q2 and we're seeing the progress that needs to be made in order for us to be able to deliver the full year and it has my personal full attention and the full attention of all of our leaders Neil will toss to you for any additional comments.

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.

Thank you.

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

Thank you very much. Just following up on the most recent softening you mentioned. I know there was some talk about how operating expenses have perhaps surprised you to the upside. I was hoping the shift to the market volume softness you mentioned. Just wondering how much of that you think is unique to Sysco or perhaps unique to specific product lines or geographies? I know you mentioned that you're still outpacing the industry, but it doesn't seem like the restaurants or other customers that we hear from are really talking about as lowdown and in fact, we're talking about a little bit of a benefit from the Omicron lapse. I am just wondering if you can offer some detail on where you think the the softness came from and then whether your guidance assumes softness continues. I know you said January is looking better. I wasn't sure whether you're extrapolating that better January trend in the back half of the year assumption. Thank you.

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: Education, healthcare, contract bid within the restaurant sector and the gross profit rate and that sector has also been strong and has been ahead of where we expected it to be. At the local level, our business performance in total is being driven by our core growth initiatives within local that I referenced earlier. So this is not a Sysco-specific situation. It is a macro and we're actually pleased with our performance relative to the market. The only thing in the most recent quarter that was specific to Sysco was the labor dispute in three of our sites, which meaningfully pressured our operating expenses. We've size that for the investment community today to communicate. That was a $26 million operating income hit for the quarter, which was a combination of expenses and also sales and therefore, flow through to margin impact from the three markets that were impacted by that labor disruption. So as it was called out by one of the other questions earlier on this call, our Q2 growth versus the market was a little bits lower than our Q1 growth, but we still grew meaningfully versus the industry. As it relates to the second half of the year and then I'll toss to Neil if he has anything additional. We have been thoughtful about the full year volume. As Neil said, we took a big step back at the midway point, turned over every rock, looked at every component of our build of the full year budget and compared it to the trends of the business performance and we applied for the second half of the year, the trends of our business with known trend vendors that we - Sysco can positively impact, the operating expense that Ed just asked about is a projected improvement in the second half of the year. But we've been thoughtful about volumes looking at the second half. And no, the January strength I referenced was not contemplated at the time that we built that second half. The Omicron tailwind will abate here quickly in February. As you know, things began to reopen in the middle of February to the tail end of February and the forecast adjustment that we provided today is our best view of the full year center of the fairway, as I mentioned. Neil, over to you for any additional comments.

Yes. Thanks, Kevin. Hey, Jeff, good to hear from you, as well. Just a couple of points from me. To answer your question, yes, we have factored in current performance to the year-to-go guide. One additional item I would point out to you is we've had improvement in our Sysco brand penetration, which we're very pleased with. That team has been doing a very good job, further penetrating both current accounts and new accounts with our Sysco brand product, which, of course, is a higher-margin product. So we see that momentum we're factoring that into our guide as well. So we do have good confidence in the year to go look that we have in the numbers we offered and just a reminder for those, the guide, the midpoint that we offered today is a 25% year-over-year growth and a 15% growth over 2019. So we like what we see there and we have really high confidence in that guidance.

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

Hey, Kevin, a couple of things. On the local business, what are you seeing with drop size and profitability per stop right? What are the trends there? What's the thought on the your way rollout, right? How quickly can you roll that out? I know the target was to get to $1 billion of incremental revenue, how quickly can that be done? And then just lastly, the contract bid. I know that's very lumpy. Do you think that is abnormally – the opportunity abnormally large over the next year or pretty much in line with what it had been?

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…

Hey John, I just want to put a proof point out there to wrap up what Kevin was talking about. I'll bring you back to the slide presentation in Page 9. In looking at our U.S. Broadline business sequentially, second quarter versus prior first quarter, our delivery pieces per hour for our driver universe 500 basis point improvement and then in the warehouse, in the selector position, a 600 basis point improvement in what we're seeing there. So all these initiatives wrap together are really driving good momentum across both top line and bottom line and how we're managing it. I think it's a really good proof point. A lot of the initiatives Kevin was just walking you through.

Thank you.

Thanks, John.

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

Thank you, very much. I wanted to ask a quick follow-up on the EPS and then ask a question. But I understand there's a few moving pieces in the second quarter. Looking at the second half of the year, I guess what's driving the reduction in the guide relative to what you expected in the beginning of the year? I just want to have a better understanding of that. And then, Kevin, I know you mentioned engaging in specific actions to accelerate local case growth in the second half of the year. I guess, one, what are those actions? And the genesis of the question is, just given the softness that you've talked about in the environment, do you expect the category to get more promotional or competitive in the back half of the year as everyone tries to sort of grow market share? Thank you.

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.

Sure. Lauren, thank you for the question. I do want to be very clear that we are growing volume and we posted a performance result in the most recent quarter. Our total volume growth was plus 5.2. Local volume growth was plus 3.2. What the facts are, we are growing faster than the market. The reality is that the overall market was expected to be mid-single digits and then we would have been in the high single digits with our growth on top of that. It's now the total market is low single digits. We're growing in mid-single digits. So it's meaningful growth. It's just not the growth that we had budgeted essentially this time, a year ago, leveraging third-party data. So again, growing, and this is a very large business, $350 billion business. We have 17% market share. We are meaningfully confident in our ability to grow versus the market to take share and to deliver compounded growth on an annual basis on the top line and bottom line. We'll talk more about that in August as Neil said. What are the types of actions that we can take? And then you asked a very specific question, are we worried about deep discounting? I am not worried about deep discounting. That is not the recipe for success in this industry. Leading with price is not sticky, leading with price is able to be copied by others. We're going to lead with service differentiation through Sysco Your Way, through Perks, through our Italian platform expansion and we are going to be very clear on allocating our sales reps time to spend more time with new customer prospecting, but that does not imply that price is the lever. It's calling upon a customer that you've not served before. It's bringing in…

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

All right. Thank you. Good morning. Just wondering how the opportunity for additional cost out actions gets reflected in the new outlook. If you could comment on the pace of these opportunities maybe beyond the [Indiscernible] or so realized to-date?

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.

Yes. So Neil, just did a good job talking about structural cost out and what I want to talk about is just operational cost. The biggest focus in the second half of the year has brought out through a couple of prior questions is the ability to continue to make progress in improving productivity. I haven't spoken about the strategic initiative side of those efforts during Q&A. I just want to reinforce the importance of our driver academy. It's now nationwide and all hired drivers now go through the Sysco Driver Academy. If they don't have a CDL, they can become CDL certified. If they have a CDL, they get expert training and Sysco work practices and safety programs. So that training program is meaningfully working. The retention and therefore lack of turnover for the people that are going through that program is meaningful. And as time goes on, the percentage of our associate population that has gone through that training program increases and then the retention value from that will grow over time. So we're very, very pleased with the improvement in retention from our driver program and that will result in higher productivity into the future, because we're really good at training our associates when they're going through that program and also when they're with us and the more tenured they are, the more productive they are, the more safe they work and that is a positive to our forward-facing outcomes. And we're building new muscle in regards to staffing that I talked about earlier. We're doing a better job of forward-facing planning on peak window periods, lower volume window periods and having more staffing flexibility so that we can be more nimble for the business up and down trends so that our cost per piece can improve over time tied to that improved staffing level and we're getting much better at that.

Thanks.

Ladies and gentlemen, at this time, we have reached the allotted time for today's conference. We would like to thank everybody for participating and ask that you kindly disconnect your lines.