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

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

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

Thank you, Kevin. Good morning. Here are our second quarter fiscal 2022 financial headlines. As seen on Slide 9, sales growth of 41.2% compared to last year, also up 10.5% versus fiscal 2019, leading to our highest Q2 sales ever. Good management of our product cost inflation, recording the highest gross profit in absolute dollar terms for any Q2 at Sysco. A doubling of adjusted operating income and a 62.9% increase in adjusted EBITDA compared to last year, notwithstanding a cost environment, which worsened during the quarter. Continued investment against our long-term recipe for growth, with $44 million of operating expense investments against our strategic investments, creating momentum with our commercial capabilities. Proactive action on the COVID generated labor and safety environments in which we are operating, with $73 million in transitory snapback operating investments such as recruiting costs, hiring marketing, vaccination promotion, contract labor, and sign-on and retention bonuses in the quarter. And while the magnitude was greater than we could foresee last quarter, we experienced productivity challenges and much higher overtime costs in the quarter, resulting from the pandemic-related workforce transition and our prioritization of customer service. With respect to our capital allocation, we refinanced elements of our long-term debt during the quarter, and we returned $657 million of cash to shareholders. With those headlines on the table, let's turn to some details on the financials for the quarter and some thoughts on our outlook. Second quarter sales were $16.3 billion, an increase of 41.2% from fiscal 2021 and a 10.5% increase from fiscal 2019. In the United States, sales in our largest segment, US Foodservice, showed excellent progress, up 45.1% versus fiscal 2021 and up 14% versus fiscal 2019, reflecting the pre-Thanksgiving and pre-Omicron resurgence in volumes and sales. Local case volume within the subset of USFS, our US broadline operations, increased 17.6%, while total case volume within US broadline operations increased 22.5%. SYGMA sales were up 16.5% versus fiscal 2021 and up 15.3% versus fiscal 2019, even with the large customer rationalization we disclosed earlier, which we expect will be complete on a comparable basis following Q3. International sales were up 43% versus fiscal 2021 and down approximately 3% versus fiscal 2019. Sales trends were accelerating nicely in our International segment before the onset of Omicron and restrictions in our key international markets such as the UK, and we are watching post-lockdown trends carefully. Foreign exchange rates had a positive impact of 0.3% on Sysco's sales results. We continue to monitor the impact on our customers and on our business as international restrictions are starting to ease, including in Ireland and the UK. Inflation continued to be a factor during the quarter at approximately 14.6% in our US broadline business. Gross profit for the enterprise was approximately $3 billion in the second quarter, increasing 37.8% versus the second quarter of fiscal 2021, and also exceeding gross profit in fiscal 2019 by 4%. The increase in gross profit was driven by year-over-year improvements in volume versus fiscal 2021 and compared to the same quarter in both fiscal 2021 and fiscal 2019, increases in gross profit dollars per case across all four of our reporting segments as we successfully managed increased costs for our product suppliers while addressing some, but not all, of our increased operating costs. Gross margin rate was 17.7% during the quarter with the margin rate math impacted by product inflation. Of course, it is gross profit dollars that count in an inflationary environment. Turning back to the enterprise, adjusted operating expense came in at $2.4 billion with a combination of planned and unexpected expense increases from the prior year, really driven by four things; first, the increased variable costs associated with significantly increased volumes. Second, as you can see on slide 10, more than $73 million of one-time and short-term transitory expenses associated with the snapback, which we expect to decline in the third quarter. While we have increased wages in select locations, those increases are not material and have the opportunity to be offset by productivity and cost-out improvements going forward. Third, $44 million of purposeful operating expense investments against our Recipe for Growth initiatives, like personalization, digital sales tools, and assortment capabilities, which remain on track to be elevated for the rest of the year. And fourth, the productivity expense challenges Kevin referenced earlier, including ramp-up time associated with new higher productivity in our warehouses and trucks elevated overtime and third-party labor support in the face of staff absences. I want to emphasize that the management team at Sysco has been aggressive in pursuing the cause of the cost increases. While the transformation continues unabated, the team has also pushed hard to identify and action incremental profit opportunities and cost reduction initiatives, which should help the company in the back half and beyond as the environment stabilizes. Together, the snapback investments in the transformation costs totaled approximately $116 million of operating expenses this quarter, and negatively impacted our adjusted EPS by approximately $0.17. All-in, we leveraged our adjusted operating expense structure and delivered expense as a percentage of sales of 14.7%, which is flat from fiscal 2019 and down 145 basis points from fiscal 2021. Our cost-out efforts are meaningfully benefiting our P&L, and we continue to assess and execute against new cost-out projects each quarter. Finally, for the second quarter of fiscal 2022, adjusted operating income increased $262 million from last year to $496 million. This was primarily driven by a 45% improvement in US Foodservice and continued progress on profitability from International, partially offset by SYGMA. The second quarter SYGMA operating loss was driven by higher-than-expected labor costs, which will be offset in future quarters by specific actions already taken by the SYGMA management team. Adjusted earnings per share increased to $0.40 to $0.57 for the second quarter compared to last year. Now, let me share a couple of comments on cash flow and the balance sheet. Cash flow from operations was $377 million on a year-to-date basis, driven by our higher income and lower interest, offset by higher tax payments and a significant investment in working capital. Net CapEx was $175.9 million, somewhat lower than expected given increased lead-times on fleet and equipment. Adjusted free cash flow year-to-date was $201 million. At the end of the second quarter, we had $1.4 billion of cash and cash equivalents on hand. As seen on slide 15, our results this quarter also reflected incremental progress against our capital allocation priorities. This included the further strengthening of our balance sheet by successfully refinancing debt during the quarter at longer maturities and more attractive rates, lowering our adjusted interest expense costs going forward. We also commenced our share repurchase program during the second quarter and repurchased approximately 5.7 million shares for a total of $416 million at an average share price of $72.30. This was in addition to paying our quarterly dividend of $0.47 per share in October. We remain committed to growing our dividend and as previously communicated, planned to next address decisions around our dividend per share during our fiscal Q4. While our track record goes back decades, as you can see on slide 16, over the last seven years, cumulatively, we have returned over $12 billion of cash to shareholders. Let's turn now to the look forward. Our Recipe for Growth transformation plan is on track. However, Omicron had a noticeable impact on our December and Q2 results continuing into January and now February. As a result, we are reaffirming our long-term guidance that for fiscal 2024, Sysco will deliver adjusted EPS growth of at least 30% over our record 2019 EPS of $3.55. We are updating our view of the back half to reflect the realities of the disruption caused by Omicron and the labor environment. We expect to fall below our prior EPS guidance for fiscal year 2022. For the full year, we expect adjusted EPS of approximately $3 to $3.10. This translates to adjusted EPS in the back half of about $1.60 to $1.70. In a typical pre-COVID fiscal year, adjusted EPS for our second half is generally weighted around 40% to Q3 and 60% in Q4 due to normal seasonality of our business. This year, we expect our second half profitability to be weighted even more to the fourth quarter. We expect a stronger Q4 this year relative to Q3 as a result of anticipated volume recovery, lower snapback expenses, improved operating productivity, and specific actions we are taking to offset Omicron. In offering this perspective, we are assuming no further COVID variant disruptions to our operating environment. With that, let me turn the call back over to Kevin for closing remarks.

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

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

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

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

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

Let me discuss the expectations regarding operating expenses, then I will hand it over to Kevin to talk about volume. From the perspective of operating expenses, what we saw in December continued into January, as mentioned in our prepared remarks. As Kevin noted, we are beginning to see some positive signs in February. However, those positive signs do not mean we are back to pre-Omicron performance levels. We expect that our snapback costs will decrease in the second half of the year. Additionally, we believe our supply chain team will make significant progress in productivity during this time, given our scale. However, there’s work to be done, which is why we specifically highlighted the seasonal distribution in our guidance between the third and fourth quarters, expecting a 40/60 split. We emphasized that considering the ongoing Omicron situation, despite the positive signs and the work ahead, we anticipate that the revised guidance will be heavily skewed towards the fourth quarter. Kevin?

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

Thank you.

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

Thanks. Good morning.

Good morning.

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

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

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

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

Got it. Thanks.

Thanks a lot.

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

So Kevin, can you share your views on the current high inflation and how it's affecting unit demand, particularly for food away from home? Additionally, do you think you can grow faster than the 1.5% target for 2024? What would be required to achieve that? For instance, if the market slowed down, could you reach close to double that growth, and would increasing market share be essential to meet your goals? What are your thoughts on this?

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

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

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

Thank you.

Thank you, John.

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

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

That's a great question. I'll respond directly and then add a point that we think is on investors' minds. First, scale is crucial in our industry. Having purchasing scale enables us to get the best possible costs and share value with our customers. From a physical standpoint, we have more distribution centers in the U.S. than anyone else, which allows for shorter, denser routes for last-mile delivery. As we grow, we'll continue to invest in physical capabilities to get even closer to our customers, which will reduce our service costs. The size and scale of Sysco create a beneficial cycle, and we believe this will strengthen over time due to our cash generation and strong balance sheet, allowing us to invest in new facilities that will help lower last-mile delivery costs. One concern we believe investors have is regarding rising labor costs. To clarify, the labor wage rate has been immaterial to the cost pressures we faced in Q2. The main operating cost pressure in the last quarter stemmed from the increased percentage of new hires and higher turnover this past summer, attributed to what some call the "great resignation." We're actively working on improving associate retention, training, and productivity. This is our core strength, and we are confident in our ability to enhance productivity over time. As mentioned, these improvements will have a more significant impact in Q4 than in Q3 because it requires time to implement. When a new driver joins our company, they spend weeks in the passenger seat learning our standards and customer relations, as they represent the company while navigating challenging driving scenarios, especially in tight restaurant locations. The investments we’re making will yield reductions in costs over time, leading to increased productivity and improved EBIT percentage margins. It's important to note that current operating cost pressures are not due to labor rate increases. Looking ahead, we expect that during our annual review process, we will provide a nominally higher wage increase to our associates. They work hard and deserve fair compensation, and we believe our productivity improvement efforts can help absorb these increases.

Thank you very much. I have a quick follow-up on something you mentioned last week regarding rehire rates and the increase in former employees returning to the company. I'm curious if you are measuring this, or if you've noticed any significant changes as former employees come back to Sysco. This seems like a sign of an improving labor market and could have a positive impact on productivity.

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

Thank you.

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

Thank you very much. Kevin and Aaron, both of you mentioned green shoots, which I believe refers to the recent trends from early February. I'm trying to understand if this pertains to a recovery in sales, as we’ve heard some positive signs starting in mid-January, or if it relates more to inflation. We've noticed that spot prices might be easing sequentially on commodities, and possibly it’s becoming somewhat easier to recruit new hires. I want to get your perspective on what you think will improve first as you discuss the green shoots through the fiscal third quarter.

Good morning, Jeff. Thank you for your question. The comment about green shoots was related to an increase in case volume and improving sales. This observation stems from the easing of restrictions, particularly in Canada, where adjustments were made in February, although there are still significant limitations, such as a 50% capacity for on-premise dining. In January, dining in restaurants was prohibited in regions like the Greater Toronto Area and Quebec. As these restrictions begin to lift, we're seeing positive signs. In the UK and France, where strict work-from-home mandates were in place, restrictions are also easing, and this is tied to our anticipated recovery and return to volume levels. In the US, while I didn't specify this earlier, the southern region continues to perform well. The challenge lies in urban centers up north, but we expect to see recovery there as city officials relax their restrictions. Regarding our expectations for progress, we foresee improvements in volume and sales in the third quarter and into the fourth quarter. We also have a plan to address our operating expenses, which includes several key initiatives. First, our focus is on retention, training, and boosting productivity among new hires. Second, we aim to enhance transportation efficiency by optimizing routes. Third, we're making strides with the Sysco brand, which will be a significant focus going forward, promising profit improvements through greater penetration of our brand. I’ll let Aaron explain the other two initiatives we're addressing. Aaron, it's your turn.

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

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

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

Understood.

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

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

That's a great question. Let me address the health of our customer base. During the early days of COVID, fast food drive-throughs saw significant growth, which was reflected in our SYGMA segment's record performance last year. This success was partly due to SYGMA catering to that customer type. In the second year of COVID, the leading performers became restaurant chains with digital apps that enabled convenient to-go orders and contactless payments, enhancing the purchasing experience and fostering customer loyalty. At Sysco, we are focused on personalization. There are some restaurants with excellent loyalty programs that encourage repeat business. This is where we fit in. We assist independent restaurants by connecting them with delivery partners and helping them develop mobile platforms for remote ordering and contactless payment. Our extensive sales force goes beyond selling food; they consult with independent restaurants to help them compete against larger entities, which we believe will build loyalty towards Sysco over time. Our data shows that more Sysco customers are purchasing exclusively from us, and we are steadily increasing our customer base. We are optimistic about the future of independent restaurants and believe those who partner with Sysco will outperform those who do not. We have data to support this, which our sales representatives leverage in their discussions. Regarding inflation's impact on independent restaurants, while it does affect them more negatively, national chains may have an advantage due to long-term supply contracts and fixed pricing, which independent restaurants often lack. As their purchasing agent, we are actively pushing back against cost increases and seeking alternative suppliers and lower-cost items to support them. Our goal at Sysco is to assist independent restaurants through these inflation challenges. Our Sysco Brand products are particularly valued by these customers for their time and cost-saving benefits, and we expect to continue making progress in this area.

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

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

Thank you.

Thank you, John.

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

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

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

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

Hey, Mark, thanks for the question. I want to refer back to my earlier response, highlighting that size and scale are crucial, especially in this COVID environment. The term supply chain resiliency has come to the forefront, shifting from supply chain agility. It's about being able to handle challenges like environmental disasters, political instability, and healthcare issues. Size and scale are significantly important for ensuring supply chain resiliency. We have the inventory to support our customers as they recover. Aaron and I have made sure we have more inventory on hand now compared to pre-COVID. We are also investing in labor, while some of our competitors with weaker balance sheets and income statements are struggling to do the same. They are just trying to get by, while we are actively hiring thousands of people even during the Omicron wave, and this is a strategic decision. Yes, it did affect our operating expenses in Q2, but it positions us well to serve our customers effectively and win new business, which we plan to maintain in the long run. We are confident in our ability to achieve this. Also, I want to mention that we are focused on enhancing our digital capabilities. We have invested in modern pricing software and made significant upgrades to our website and our sales force guiding tool, Salesforce 360, which assists sales reps in understanding their tasks at restaurants during visits. These improvements have boosted the success rates of our sales consultants in acquiring new cases and expanding business with current customers. Such investments, totaling $44 million as noted by Aaron, will help us distinguish ourselves from our competitors. Now, I'll hand it over to Aaron for additional comments.

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

Great. Thanks so much guys.

Thank you, Mark.

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

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

Sure. That's a great question. I haven't provided guidance for fiscal 2023, and I won't do so today. We plan to get through the latter half of this year before working toward long-term guidance. That said, there are a few observations. First, the snapback costs we mentioned are temporary and one-time in nature. We do not anticipate these will lead to long-term or even medium-term increases in our capital structure, and I want to highlight our cost structure as well. As Kevin mentioned earlier, wage rate increases are not significant in terms of our current results and do not reflect structural changes. Regarding our transformation investments, we will continue to focus on this, and we will offer more details on what that entails for 2023 when we provide guidance. It's worth noting again that we will keep investing in the transformation and for the latter half of the year, we expect that the operational expense investments in transformation will be at or above the levels seen in the second quarter.

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

Great question. The increase in our gross profit dollars per case suggests that we are successfully managing and passing on product cost inflation. If the costs weren't rising, we would be stable. The extent to which we pass through operating costs is a decision influenced by the current environment. We are dedicated to supporting our customers and making responsible choices in the short term while keeping our long-term guidance in mind. Kevin, do you have anything to add?

Yes, I want to clarify something that may not be obvious outside our company. There are specific customer types where our transactions are solely based on the cost of the food. Aaron explained that well, and we are performing admirably in that area for that customer type. Additionally, we have other customers with whom we operate on a fee per case basis. In those contracts, there are instances where provisions for food cost increases exist, but when our operating costs rise, like they did last quarter, that's where we face challenges. We are actively addressing this. For instance, in our SYGMA segment, our operating costs increased recently for the same reasons I mentioned earlier. We have a plan to significantly enhance productivity within SYGMA as our staffing improves. We are also reviewing the long-term contracts we have in those fee-per-case arrangements to ensure fairness and partnership with our customers in that segment. I hope this provides some clarity: for item pricing, we can do what you mentioned, and for deeper cases, it involves discussions with our customers and managing those long-term relationships effectively.

Thank you, guys, very much.

Thank you, Lauren.

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