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.

Good morning, everyone, and welcome to Sysco's fourth quarter fiscal year 2023 earnings call. On today's call, we have Kevin Hourican, our President and Chief Executive Officer; Kenny Cheung, our Chief Financial Officer; and Neil Russell, our Chief Administrative Officer. Before we begin, please note that statements made during this presentation that state the company's or management's intentions, beliefs, expectations or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act, and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the company's SEC filings. This includes, but is not limited to, risk factors contained in our annual report on Form 10-K for the year ended July 2, 2022, subsequent SEC filings and 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 also be found in the Investors section of our website. During the discussion today, unless otherwise stated, all results are compared to the same quarter in the prior year. To ensure we have sufficient time to answer all questions, we'd like to ask each participant to limit their time today to one question and one follow-up. At this time, I'd like to turn the call over to Kevin Hourican.

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.…

Thank you, Kevin. And good morning, everyone. I would like to start-off by thanking our customers, colleagues, and partners around the world for helping us deliver another record quarter. Sysco operates a high-volume business, and I'm proud of our efficient response in servicing, delighting our customers. We closed out the fiscal year strong, delivering improvement across the income statement, balance sheet and cash flow. Q4 financials reflect positive sales and volume growth and operating expense leverage. Altogether, these rendered a record quarter of operating income, net income, and adjusted EPS. Our results also reflect improvements in operational efficiency to productivity and resource optimization. This elevated performance will enable us to reinvest back into the business and return excess cash back to shareholders, an important theme we expect for FY '24 and beyond. Our unique value proposition with the Recipe for Growth at the forefront is what differentiates us as a growth company. As Kevin stated earlier, we will continue to focus on accelerating programs that have high returns, which is a key priority and my role here at Sysco. Now turning to a summary of our reported results for the quarter starting on Slide 14. For the fourth quarter, our enterprise sales grew 4.1%, with U.S. Foodservice growing 2.5%, International growing 12.2%, and SYGMA growing 1.4%. With respect to volume, total U.S. Foodservice volume increased 2.3% and local volume increased 0.8%. We produced $3.7 billion in gross profit, up 7% versus prior year. Adjusted gross margin improved to 18.7%, a sequential increase from the prior quarter and an increase of 28 bps compared to last year. Our gross profit dollar and margin percentage improvement during the fourth quarter reflected our ability to continue to effectively manage product inflation which moderated at 2.1% for the total enterprise, consistent with our expectations.…

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.

[Operator Instructions] Your first question will come from Edward Kelly at Wells Fargo. Please go ahead.

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?

Hi, good morning, Ed. This is Kevin. I'll start, and I'll toss to Kenny for additional comments. I guess, I'd start with a few points. The guide is based on a continuation of momentum that the company has been building over the past six months, most notably tied to our operating expense improvements. We call our planning process, three big boulders. Volume of the market, inflation, projections of the market and then our expense ratios. And we've worked very hard to make sure that we can do the best job possible in guiding what these individual three components will be. So, let's start with volume. As I said in my prepared remarks, we do expect for the volume growth of the industry to be more muted this coming year. We have factored that in to our guide. We've triangulated that from supplier partners, from economists, from bankers and our own data. We have a treasure trove of data across all of the different business segments that we serve. So, we do expect for volume growth of the market to be more muted. With that said, we're confident that we, Sysco, can grow faster than the market and we are committed to doing so profitably. Topic two is inflation or deflation as it is, as it were. And we have to break that down into individual businesses in individual countries. As I said in my prepared remarks, USBL we expect to be deflationary for at least the first half of the year. We do have a natural hedge at Sysco, given the fact that we have an International segment that is still experiencing inflation due to unique geography considerations and purchasing considerations within those countries. So, when you put that altogether for the year, I'll use that same term a second…

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.

Thanks guys.

Thanks Ed.

Your next question will come from Joshua Long at Stephens Inc. Please go ahead.

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?

Hi, Joshua. Thank you for the question. I'll start just at the more aggregate level. As you know, we serve every segment of the food away from home industry, which is what I meant when I answered to Ed's question about, we have a treasure trove of data. We can see macro trends. So, our national sales team had a banner year this past year, that's on top of a banner year in 2022, I want to be very clear that those growth constructs are profitable growths at healthcare, education, and travel, hospitality business and industry, there sectors have been continuing to see a tailwind of recovery and we are winning market share profitably in those sectors. National restaurants, we are winning large in that regard as well, mostly because those partners view Sysco as a backbone for them. We're in every state including Alaska and Hawaii, not every food distributor is, and it's an easy button for them to be able to partner with someone like Sysco because we can distribute coast-to-coast, and many of these restaurants have international doors into our international freight group business, we can export their product overseas to usually a licensee partner that they use in those countries. So, again, for these national restaurant chains, we are a very attractive option for them, and we've been winning big. Those contracts are multi-year contracts, and as I've mentioned, we've been signing those contracts at above historical profit margin rates. On the local side, we've been winning in specialty as I mentioned, the BIX produce acquisition intent today, that will be a tailwind for us in fiscal 2024. We're winning with our Italian segment and we're winning market share in aggregate as a company. So, when I think about the end-consumer, the rapid rate of inflation…

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.

Thanks, Josh. It's Kenny. I'll say a couple of things, and I'll go bit more detail. So, for us, it's all about driving operating leverage in our business. And what does that mean? That means our GP growth will be faster than expense growth, our EBITDA will be faster than sales, operating leverage on our business. As it relates to the $100 million, to your question directly, yes it will be more balanced across the year and why is that? Because we've started already, right? It started on day one. So, we -- all the actions have already been executing, meaningfully baked into our guidance, and all actions are underway. That's point number one. Point number two, this is incremental to the continued productivity gains and supply chain operations and efficiency that Kevin described earlier. The last thing I would say is that we're not stopping, right? We will continue to flex in line with market conditions. Now, I know, you asked for a bit more detail. Let me give you a tangible example. There are multiple parts to the $100 million. So, let me give you an example. We've been able to expand our global share -- shared support center, GSE, into other markets, most recently in Costa Rica. I was there about a month ago. Well, we have accessed a great talent and to further build our scale advantage. So, as our business grows, we're able to leverage a platform that scales accretively and effectively for earnings.

Thank you.

Thanks, Josh.

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

So, Kevin, two topics. I'll hit them both upfront. So, number one, maybe update on wallet share, right. You talked about that in the past. Where is that opportunity today and obviously, if you drive drop size right, and that's the most efficient thing you can do. So, where is that? And then two, I think, you're overtime is down to zero. So, volumes were a little lighter. What lever do you now pull on, right, because, I don't think you guys want to or you don't want to furlough folks. Where do you go next if overtime is at zero?

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: Lower hiring costs, lower training costs, higher productivity because a two-year veteran is much more productive than a two-day newbie. They're also safer, fewer accidents occur, because they're trained and know how to do their job. So, retention improvement would be the number one lever. But the second lever is just improving discipline to what we call Sysco's work standards. The Driver Academy, we have a Selector Academy and our engineered labor standards keep getting better and stronger. We improve processes through leveraging technology, and that's the next wave of productivity improvement is to have better discipline to a standard work process. So, we still have opportunity to improve. I'm really pleased, most particularly pleased with the…

Okay, thank you.

Thanks, John.

Your next question will come from Kelly Bania at BMO Capital Markets. Please go ahead.

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?

Okay, Kelly. Thank you for the question. I'll start just with how we leverage the pricing tool, and then I'll toss to Kenny in regards to your questions on GP dollars and percent and he'll handle that, and whatever matter he deems appropriate on the tool. This was what I tried to articulate during our prepared remarks. During a period of rapid inflation, it was extraordinarily helpful because we had discipline in regards to passing through what was an extraordinary increase in cost, especially in center of plate. I mean, we had proteins going up 35%, as I mentioned a few moments ago. In the older manual world, it would have been unlikely that all 7,500 sales consultants would have passed that through, they would have put too much of a humanistic flare into it and said, you know what, I just know that they can absorb this and I'm not going to pass it through, and we would have not actually seen the GP dollars per case growth that we experienced past year. So, I'm going to call it the discipline to perform within guardrails on the way up. Well, the exact same thing happens on the way down, but it's a different consideration. What I said on the prepared remarks is we'll be very purposeful about when we are able to secure improved COGS, how we passed that value on to our customers. Our intention is to pass that volume on to our customers. And we need to be thoughtful, disciplined, and pragmatic about how we do that. We have to be competitive with the market and we have to understand the volatility of categories that went from 30% up to double-digits down in a short period of time. So, the tool will provide structure and discipline in a performance within guardrails. I do want to be very clear about one point. It does not replace the importance of an SD in that relationship they have at that local restaurant in being what I call again, right on price at the local level. And if we have a competitive pressure at the local level, our SDs have a process they can follow, to ask for an exception, and we have a RevMan team that manages and adjudicates those decisions with financial discipline. So, it's a combination of two things. It's a tool that provides guardrails that we operate within with discipline and predictability. And then, we have the ability to respond at the local level through the sales force when, in fact, something unique is happening that the system can't see through data. And we're going to get better and better at that second point. We believe we can make that process faster, more agile and more efficient to give our SDs the ability to respond in the moment, and that's something that we're working on in fiscal '24. Kenny, I toss to you for any comments from a financial perspective.

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: One is strengthening our International segments, right, because obviously it helps on the inflation side. Currently, right now, International is close to double-digit right now the spot on inflation. The second piece is strategic sourcing. Third, Sysco Brand penetration, which we made immense progress this quarter. And then last is going specialty and the likes. And all these four things I just mentioned, in addition to what you bought up Kelly around pricing, drive a higher earnings margin profile for our enterprise going forward.

And, I guess, just in terms of this lower pricing environment, do you expect your restaurant and all your customers to pass on these lower prices to consumers?

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.

Your next question will come from John Ivankoe at JPMorgan. Please go ahead.

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.

Yes. John, thanks for the question. I appreciate it. We are making some improvements to our compensation model this year. What John's referring to is we're actually in pilot right now with an improved program. By the way, we like our current program. Our sales consultant retention is at all-time highs and we believe the program we have motivates behavior and motivates our colleagues on the right things. With that said, continuous improvement, you can always make something better and stronger. Your feedback from our sales consultants has been, what John just said, which is there is a cap that exists today, and people that do that type of work don't like caps, like more I sell the more I should earn and the more Sysco can make, and we agree with our sales consultants on that. So, we are piloting a new structure, a new program, which if they profitably grow their business, they continue to earn. And by the way, that's good for Sysco, too. So, it's a big company, it's a big machine, it's a big engine. As I said on my call today, it's more than 7,000 sales consultants. We need to make sure we get it right. We need to make sure it's clear, simple, and understandable and, therefore, that's why we're doing a pilot. We're pleased with the results of the pilot. We're going to announce actually in August to our sales force the details of that compensation change. So, with professional discretion, I'm going to choose not to comment on what it will be on this call, because we haven't even told our colleagues yet. But in August, we're going to announce the worldwide sales meeting the change, it will be very well-received because it's exactly what they've been asking for, and we're optimistic that that will help us deliver the guidance that we covered today and to win more share profitably at the local level. So, we're pleased with that change. We believe it will motivate even more the right behaviors, and it's good for the colleague and it's also good for Sysco, and it's good for the shareholder because it's profitable growth.

Thank you.

Thank you, John.

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

Thanks. Good morning. Wanted to dive in a little more on the local restaurant business, and you touched on some of this with Kelly's question. But your views on the health of these independent restaurant operators, both for the Sysco customers and more broadly, as you think about the traffic environment being a little bit more difficult, inflation pressures coming down. But, If you're seeing any evidence of stress out there, closures or erosion in receivables, bad debt that you see on the horizon for that group of customers?

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.

Sure. Thanks, Kevin. With respect to AR and bad debt, we are not seeing any drag on working capital. If anything, it's the opposite. In fiscal year '23, we actually saw improvement in AR and AP and inventory DSO. All these factors provided a tailwind for working capital, therefore driving our record free cash flow and operating cash flow conversion from EBITDA.

Okay. Thank you.

Thanks, Alex.

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.