SYY - NYSE

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

Good morning, everyone, and welcome to Sysco’s first quarter fiscal year 2023 earnings call. On today’s call, we have Kevin Hourican, our President and Chief Executive Officer; Aaron Alt, our Chief Financial Officer; and Neil Russell, our SVP of Corporate Affairs and Chief Communications 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 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 of our website 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 themselves to one question today. If you have any follow-up questions, we ask that you reenter into the queue. At this time, we’d like to turn the call over to Kevin Hourican.

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

Thanks, Kevin, and hello, everyone. Today, I would like to provide a brief update on the status of our sustainability work at Sysco. As we have mentioned, our efforts are anchored around three pillars: people, products, and planet. We are proud that Sysco was a partner organization at the recent White House Conference on hunger, nutrition and health. At the conference, Sysco’s sustainability efforts were recognized for our previously communicated $500 million commitment to global good in our communities by 2025. This includes a donation of 200 million meals to 500 million, cash donations to food banks and volunteer hours associated with our colleagues actively participating in the communities we serve. Earlier this year, our Board also approved plans to include ESG and DEI metrics in our annual incentive plan and important best practice. Every leader at Sysco is now held accountable to making tangible progress on both DEI and climate change efforts for the company, directly impacting our own compensation. These efforts are consistent with our purpose of connecting the world to share food and care for one another. This focus is not only the right thing to do, it will be good for business in the long-term. As I have explained recently to investors, the majority of Sysco’s greenhouse gas emissions are the Scope 3 emissions of our customers. Many of our largest customers have set forth their own climate commitments and Sysco’s improvement will help enable those partners to achieve their goals. I will now turn it over to Aaron, who will provide additional financial details.

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

Thank you, Aaron. As we conclude, I’d like to provide everyone with a brief summary on Slide 20. We plan to build on our position of strength in fiscal year 2023 and beyond. Our key takeaways from today reflect three points. We advanced our Recipe For Growth strategy, and we are on target to grow more than 1.35 times the market in a growing U.S. market. Our financial results this quarter reflected double-digit top and bottom line growth in the backdrop of a large industry that has proven resilient during very challenging macro conditions. Sysco is taking share profitably in a growing industry. Lastly, Sysco remains deeply committed to our strong investment-grade credit rating, a strong and stable balance sheet and disciplined capital allocation. We are committed to our long-term financial outlook, and we have reiterated today our full year guidance for fiscal year 2023. Just as we have done with COVID and the related disruptions over the past few years, we are prepared to navigate the potentially choppy macroeconomic waters in coming quarters. Our strong financial foundation gives Sysco the opportunity to continue to advance our strategy during potentially challenging environments. This reality will enable Sysco to win for the longer-term as our capabilities improve and our initiatives progress. As always, I’d like to thank our 71,000 associates for their commitment to our purpose and for their dedication in serving our customers. Operator, you can now open the line for questions.

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

Hi, thanks. Good morning. I thought it was notable your international business continues to see such strong momentum and now driving the operating profit above 2019 levels. I realize Canada is a meaningful piece of this and it’s been bouncing back in some effective initiatives on the way, but clearly, exposure to some more difficult regions as well. So, I’d love to hear more about what’s driving this relative performance and your confidence that can continue to deliver this kind of strength in the quarters ahead?

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

Great. Thank you.

Thank you, Alex.

Next question comes from Edward Kelly at Wells Fargo. Please go ahead. Edward Kelly, your line is open.

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

Thank you. Next question is from Jake Bartlett at Truist Securities. Please go ahead.

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

Yes, Jake, thanks for the question. It’s Kevin. I’ll start just making some macro comments on top-line growth, and then I’ll toss Aaron for the inflation and sales parts of your question. Yes, we’re really pleased with the start to the year. We stated on our call today, we grew more than 1.4 times the industry, which is a great start to a year with a stated goal of 1.35 times. What I highlighted in my prepared remarks is that the strength is coming from both national and local business. On the national side, our sales teams are just doing a remarkably good job in the healthcare space, in the education space, large national restaurant space on working with our customers and customer prospects on kind of selling the values and capabilities of Sysco, the strength of our supply chain, our nationwide capability within the U.S. to support those national customer partners. And as I mentioned, at profit profiles for those contracts that are above historical standards, and these are multiyear contracts. On the local side, the combination of our specialty businesses that Aaron highlighted that are doing extremely well. Team-based selling, which is leveraging those capabilities within our Broadline segment and the Recipe For Growth beginning to take noticeable traction. So that is why we reiterated our guide for the full year in total, and I’ll toss to Aaron for comments on the inflation and sales ports of your question, too.

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

Thank you.

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

Hi guys. Sorry about that. I’m not really sure what happened. I have a clarification then a question. The clarification is just on the case volume growth that you’re reporting. I think it’s now including M&A. So it’s just curious. Do you think that’s right? And I don’t know if you can give us some comparability versus the numbers that you’ve been providing, so we just know what’s going on here underneath of M&A. And then the question I have is really around gross profit per case in the U.S. Broadline’s business. I mean performance has been obviously very robust. Inflation is, beginning to decelerate as you sort of talked about; I think there’s been a benefit fuel surcharge in here. I’m just kind of curious as to how sustainable you see the current level of gross profit per case in that business? Would you expect it to decelerate and if it does, what fills the vote on that? Thank you.

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

No, I think you covered it. One of the offsets was the very last part of your question, Ed and OpEx cost reductions would be one of the prime focuses of our company in the going forward period. And if the recession impact on the business, GP is something that impacts flow through to the bottom line. Our operating expenses should be and will be improving at that same time horizon, and that’s something we’re actively working on. I’m happy to discuss in more detail.

Thank you.

Thank you, Ed.

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

Thank you very much. I just want to follow up first on case growth. Are you willing to provide any color on cadence throughout the quarter and into October? My actual question is about OpEx and a little bit of a follow-up to what you started with in a prior question. Can you help us understand how to think about OpEx growth from here? I think productivity costs were consistent with the fourth quarter. So is that consistent with your expectations? And then just going forward, the opportunity for cost reductions in a more recessionary environment. Any color on what this could mean in terms of just substance of those actions? Thank you very much.

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

Just to emphasize that I see opportunity for us. And consistent with the guidance where, as Kevin called out, we had said H1 would be heavier for a variety of reasons as we work through productivity, as we work through the environment, as we work through the transformation investments. If you think about the size and the scale in which we’re operating, given that we are staffed the way we are we have incredible opportunity to drive profitable growth at Sysco, and we are executing against our plan. Thank you.

Thank you.

Thank you. Next question comes from John Heinbockel at Guggenheim Partners. Please go ahead.

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

Yes, John. Good morning. Thank you for the question. On the first part, leading indicators, obviously, there’s external data that we mine and capture traffic to restaurants but remind everyone that we are much bigger than just restaurants. We serve large sectors outside of the restaurant chain business, restaurant business, in general, travel hospitality business and industry education, just to name a few. And we have data coming from each of those sectors and from our major customer partners in those sectors on what they see in the forward-facing trends for their business, and we combine all of that, Aaron, through FP&A manages all of that to come up with an overarching forecast view of where we’re headed and that was obviously factored into what we have guided today. On the second part of your question, it’s a good one, which is what would you do in a recession? And what are the types of things that you action upon and what types of things would you not action upon? What we’re prepared to do, if a recession begins to impact our business, which we said on today’s call has not begun. But if, in fact, we do begin to see an impact, there are discretionary expenses that we can tighten. There are, let’s call it, strategic initiatives that from a timing perspective on how fast they deploy and how fast they move that can be worked through and just belt tightening, I think travel, things of that nature. Here’s what we won’t do, and it’s the spirit of your point, John, on the ability to profitably take share during a disruption. We’re not going to reduce staffing in our supply chain. We’re not going to reduce drivers as an example. It was proven through COVID that expense reduction efforts at the beginning of COVID because of how extreme it was resulted in an understaffing scenario for the industry that was extremely difficult to dig out of, and we’re still digging out of it vis-à-vis the number of new employees we have at our company. So our supply chain is something that we will invest in if volumes were to decrease because we believe that, that will put us in a position of strength, which will enable us to win business during that type of disruption. And that business that we win would then be retainable and therefore, very accretive to our longer-term macro algo. So, I know you understand that, that’s just something that we are meaningfully focused on to ensure we stay properly staffed, and we’re playing the long game, as I mentioned.

Thank you.

Thank you, John.

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

Great. Thank you very much. First, just clarifying on the guidance for this year, specific to the first quarter versus the year. I’m just wondering how was the reported EBITDA relative to your internal expectation for the first quarter. I know it seemed like it was a large shortfall versus the Street, but just trying to gauge what you were thinking? Because I think you mentioned you’re still comfortable in the midpoint of the fiscal 2023 range if we’re not seeing a sign of recession. And then my question was really just on labor inflation. You’ve talked about it a bit. Just wondering if you can share whether you look at it as a basket kind of what level we’re seeing in the first quarter? I know you mentioned retention improvements, staffing and turnover improving. Just wondering if there’s any metrics you can share to validate those stats. Thanks.

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

Thank you. Next question comes from John Ivankoe at JPMorgan. Please go ahead.

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

Good morning, John, it’s Kevin. To be clear, my comments on the net new business were tied to national sales because that is a big business. As you know, it’s multiyear contracts. We’re competing versus others and awards are provided. So my meaningfully positive comments about net new business, we’re focused on the corporate national bid sectors and health care, education and restaurants. We had a remarkably good quarter in Q1, and that will then pay forward in future volumes, again, profitable volumes because of the structure of those contracts versus historical profile. As it relates to our local business, your question is a good one. We’re pleased with our performance of the initiatives that we are putting forward and the impact that those initiatives are having on share of wallet. We’re not going to today disclose or share of wallet update but things like Sysco Your way, Sysco Perks, the Italian platform work we’re doing, our enhanced digital tools, which make it easier for customers to order, reorder and see suggested items, the pricing work we’re doing to be right on price at the item level, the aggregate of all of those things deployed, as you mentioned, in regional tests, in customer-specific pilots and neighborhood rollout like Sysco Your Way, we’re very pleased with the performance. Where we are now is rollout. We’re in implementation. And some of those initiatives are still in their embryonic phase, we’re a big company. We do over $1 billion of sales per week, and these initiatives will move the needle for the longer term. They’re just very early from an innings perspective on their impact on customers. But John, we can see the very clear data and the response that these customers provide to us when offered these product solutions, digital tools and capabilities. I’ll toss to Aaron for additional comments.

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

Thank you. Next question comes from Joshua Long at Stephens Inc. Please go ahead.

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

Yes. Joshua thanks for the question. We’re very pleased with how Sysco Your Way is performing. As I said in my prepared remarks, the contracts of that program were developed in concert with our customers. We asked them essentially what’s important to you? What could we Sysco do for you that would result in your increasing your business with us? Or how could we serve you if we’re not currently your partner? Things like very late in the evening order cutoff. I think a chef who is in a fine dining establishment and had a run on seafood or run on steak that evening. They want the confidence of being able to place an order after the evening rush and have it be on the truck that delivers that very next morning, and that happens six plus days per week. That’s what we mean by a different level of service and capability. And we afford the service capability to everyone who is in the neighborhood, whether they were previously a Sysco customer or not because the route density is tremendous in these neighborhoods. As I said on the call, I think 50-plus restaurants and a very dense geographic radius. So, we’re very pleased. We’re seeing a dual win. We’re seeing the customers that were previously with Sysco are buying meaningfully more from us, and we’re seeing customers that weren’t previously ours signing up because they see our truck there every day. They see the delivery partner there every day. They see a sales rep who’s walking the street every day, and I mean that literally, they’re at the neighborhood every day. The aggregate of the performance is strong, robust. The focus now is rolling it out and getting it out to as many eligible neighborhoods as possible, as efficiently as we can because we have to honor that service commitment that I just said for it to work. We know if we don’t deliver upon the promise that it will not deliver the overall outcome. So, we’re going to go at an appropriate pace to make sure we can deliver the service. And as I highlighted, this is not just domestic U.S. We went live in Toronto, we went live in Dublin, and we will be taking this capability to GB, to Sweden and to many other places across the globe in a pragmatic and thoughtful way. But Joshua, we’re really pleased with the performance thus far.

Thank you.

Thank you. Next question comes from John Glass at Morgan Stanley. Please go ahead.

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

Let me address the first question. If you turn to Page 18 of our presentation, we actually give you the history, so you don’t need to do the back calculation of the relative difference both versus prior year and versus fiscal 2019. And to emphasize, we have a couple – even pre-acquisitions, we had a couple of billion dollars of business that is very focused on both growth, consistent with the Recipe For Growth and serving the local customer individually and in partnership with our Broadline operators. And thus our believe it’s better for us to disclose the impact of the Recipe For Growth on the total U.S. portfolio in that way, which is what you see on Page 18. Kevin, over to you on the second question.

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

I just want to emphasize that really exciting initiatives like that one or part and portal [ph] of the guidance we provided both for the year and for the longer term.

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

Good morning and thank you. Appreciate the market share grounding this morning. If you have it available by figure, at least just by I guess kind of proxy. Can you talk about your market share in any last recession? Any really period of economic or consumer weakness? Basically, just trying to understand if you take share and how you move with the industry. And then could you discuss your fill rates and your on-time delivery if possible on a year-over-year basis and sequentially? Thank you.

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

I just – I would just add that one of the signals of the strength of Sysco in any recessionary environment is something I pull from looking back at our results during the recession at 2008, 2009, where – while I wasn’t here, the financial reporting, which shows that our sales were down between 1% or 2%. And that was a very different financial set of circumstances than what we currently believe to be the case. And so the lesson I take from that is that Sysco was strong back then or even stronger under Kevin’s leadership with the Recipe For Growth. And as we’ve said, we see opportunity everywhere we look, and we’re going to play the long game and execute against it regardless of the macro environment.

Thank you.

Thanks, Nicole.

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

Hi, good morning. Kelly Bania here from BMO Capital. Thanks for taking our question. I was wondering if you could just help us unpack that 7% U.S. Broadline case volume growth figure. In terms of end markets or channels, do you see share gains pretty consistent across restaurants, healthcare, education, business and industry? And I guess within that, are there any channels or segments that you feel more or less bullish on relative to kind of pre-COVID, I guess, I was just a little surprised to hear some of the wins and the magnitude of the wins on the healthcare in particular.

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

Just to emphasize that the 7.3% case growth is U.S. Foodservice in total, and we’re seeing growth across the U.S. Foodservice portfolio.

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

Good morning. Thanks a lot for taking my question. So it sounds like your top line is holding up pretty well even with recessionary fears. Just drilling down into the last question a bit more. Are you seeing much of a shift in demand across restaurant types in your local business? And how is that impacting you from a margin standpoint? And then related, we’re not seeing as much at a federal level, but there are a number of states that are in the process of implementing stimulus payments. Would you expect this to be a meaningful tailwind for your business? Can this move the needle in terms of sustaining demand? Thanks.

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

I would just observe on the stimulus point that, as Kevin just said, it’s a one positive factor in an overall tapestry of a business that we’re running as we carry forward. And I haven’t seen details of that need to believe it’s material enough to cost to change our guidance in that way. And so I would assume that it is supportive of the guidance we’ve previously issued.

Great. Thanks and good luck.

Thanks.

Thank you, Mark.

Thank you. Next question comes from Jonathan Feeney at Consumer Edge. Please go ahead.

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

Great. I’ll kick off and take that one. Thank you for highlighting the strength of Sysco for the call. The fact that Sysco is an investment-grade issuer, one of the only in the industry. That also puts a firm focus on our capital allocation is part of why we are also invested in Sysco as a company and driving the Recipe For Growth as we carry forward. We’ve been very clear for the last couple of years that the first thing that we are going to do with the strong cash flow we generate with the balance sheet that we have available to us is to invest in growth to reinforce that very same algorithm of generate the cash flow, to drive the growth carry on as you carry forward. And indeed, that’s what we’ve been doing. Our treasury team has set us up for success by having a highly fixed portfolio at this moment. Having paid down substantial debt, we’ve paid down billions of dollars of indebtedness over the last couple of years. And we’re pleased now where we have financial flexibility. We – there is no maturity coming due that we don’t already have plans for that would require us to enter into high interest rate environment, even with our credit rating to carry forward, which means that we have every dollar available to us that we need, either through cash on hand, through our cash flow or our revolver or other sources if we needed it to both invest organically and the capital that we need to buy the fleet, build the distribution nodes [ph] investment and technology. If M&A comes along, that would be exciting to us, and Kevin will touch on M&A in a second is – we have the resources to be able to do that. And by the way, we’re going to continue to optimize our balance sheet, and we’re going to continue our firm focus on return of capital to shareholders. You will have noticed that we paid – sorry, I misspoke that we purchased shares in the first quarter of $267 million. We got out early on our $500 million commitment. And we’ve continued to pay the increased dividend. And of course, Sysco is a dividend aristocrat, and we’ve – that is one signal of our focus on shareholder return. Kevin, do you want to comment on the M&A environment?

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

Thanks very much.

Thank you.

Thank you. The last question comes from Andrew Wolf at CL King. Please go ahead.

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

Okay. I appreciate the question, Andrew. The primary driver is not wage increase. I just want to be crystal clear about that. That is not the primary driver. The primary driver is productivity levels being below our historical performance averages. And the net productivity impact is hurting the flow-through from the top line to the bottom line, and I’ll talk about that in just a second. The other is volume. Volume is strong. And obviously, volume up drives expense up. That’s an obvious. So let’s talk about the variable cost per piece, which is the metric that we’re most focused on that has the biggest impact. Why is it down? Why is it taking time to improve. I’d like to just kind of walk through the history of where we’ve been, where we are, where we’re going. Where we’ve been is we were understaffed because of a very strong rebound in our business and what was this time last year, the great resignation. We were in a position where we were understaffed. So over time, rates were up days and hours out on truck too long, which caused folks to then leave the industry, not leave to go to a competitor, but leave the industry. So we had meaningful work we needed to do to get the company back to properly staffed and Aaron called those snapback expenses, expenses that we needed to incur to get properly staffed. Here’s the good news. We are now properly staffed. That type of work, that type of investment is behind us, which is why today, Aaron described that as now immaterial and our going forward the snapback investments. As I mentioned on our last quarterly call, roughly half of our supply chain associates are now new to job, new to the company. So we’re investing in training to educate our folks to what we call our work standards, which are about working safely and working productively and that takes time. It takes time to matriculate an order select or up the curve or productivity. It takes even longer time to matriculate a driver up the productivity curve. The good news is we are properly staffed. We are investing our leadership time, our communication muscle and our investment dollars into improving the training that our associates are receiving, which will drive improved retention. And as I said, those are the internal leading indicators that will result in future periods is cost per piece, excuse me, improving, which is why both Aaron and I have said the second half of this fiscal year, our operating cost metrics will be better than the first half as we’re still working up that productivity curve at Sysco.

Great. Thank you for that color. Appreciate it.

Thank you, Andrew.