Sysco Q2 2023 Earnings Call Transcript

Presentation

[Operator]

Welcome to Sysco's Second Quarter Fiscal Year 2023 Conference Call. As a reminder, today's call is being recorded. We will begin with opening remarks and introductions.

I would now like to turn the call over to Kevin Kim, Vice President of Investor Relations. Please go ahead.

[Kevin Kim, Vice President of Investor Relations at Sysco]

Good morning, everyone, and welcome to Sysco's second quarter fiscal year 2023 earnings call. On today's call, we have Kevin Hourican, our President and Chief Executive Officer; and Neil Russell, our Interim Chief Financial Officer and SVP of Corporate Affairs.

Before we begin, please note that statements made during this presentation that state the company's or management's intentions, beliefs, expectations or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the company's SEC 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 at sysco.com.

Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures is included at the end of the presentation slides and can be found in the Investors section of our website. To ensure that we have sufficient time to answer all questions, we'd like to ask each participant to limit their time today to one question. If you have a follow-up question, we ask that you re-enter the queue.

At this time, I'd like to turn the call over to Kevin Hourican.

[Kevin P. Hourican, President and Chief Executive Officer at Sysco]

Hello, everyone. Thank you for joining our call this morning. Our reported Q2 results as displayed on Slide number 6 include positive case volume growth, continued share gains and strong double-digit sales and earnings growth year-over-year. This included operating income growth across each of our segments, including SYGMA in international. Importantly, gross profit growth this quarter outpaced operating expense, an important milestone that we expect to continue into the remainder of the year as we make progress in further improving our supply chain productivity.

In addition, we continue to advance forward our Recipe For Growth strategy with continued progress in our digital tools, supply chain investments and sales and merchandising initiatives. The progress that we're making will enable Sysco to better serve our customers and grow profitably for years to come. As you can see on chart number 7, we continue to succeed versus the overall industry growing 1.35 times the market in the first half of 2023. I'll break down the sales momentum versus the market further in a moment. Strong top and bottom-line growth was delivered for the quarter with adjusted EPS in Q2 of $0.80.

I'd like to provide you with some details on select items that impacted our results for the quarter. The first call out is within case volumes. We leveraged a third-party to help with macro forecast of the industry's growth. For the second quarter, the projection was that the industry in total would realize nearly 5% case growth year-over-year. In Q2, the actual industry case growth rate was only 1% excluding Sysco. This 400 basis points of case volume variance was significant, especially within the local segment. A contributor to the softer volume results was the reality that the Omicron overlap did not lift the market growth rate in November and December as had been anticipated.

With that said, it is important to note that we are seeing stronger volume growth in January. Additionally, a labor dispute that impacted three of our operating sites. In the second quarter negatively impacted sales in case volumes during the October, November timeframe. To be clear, the overall market growth rate is an industry-wide issue while the labor dispute was a Sysco specific challenge. The latter of the two issues is now firmly in the rearview mirror. We will monitor the second half of the year case volume trends very closely and we are taking specific actions to accelerate new customer acquisition in the local segment for the second-half of this fiscal year given the softer overall market.

In addition to explaining the case volume dynamic, I would like to provide an update on operating expenses. As I mentioned, we are making solid progress with improving operating efficiency and we grew GP at a faster rate than expenses in the quarter, a sign of progress and a trend we expect to continue. We are making progress on improving supply chain productivity and I will discuss that further in a few minutes. With that said, the aforementioned labor dispute had a meaningful impact on our Q2 expenses. During this disruption, we prioritized deliveries for essential customers especially in the health care and education segments.

As a result, we took the actions required to ensure that we can continue operations in these three sites, including leveraging third-party resources when necessary. These customer service measures pressured our expenses for the quarter negatively impacting operating income. Again, this challenge is in the rearview mirror. On the positive side of the ledger, our contract bid business is exceeding plan on the top and bottom-line for the year. Our sales teams are doing an excellent job with customer retention, customer acquisition and profitability management within bid contracts. In addition, for our total business, our gross profit per case was strong for the quarter. Our sales and merchandising teams are doing a solid job with inflation management and strategic sourcing.

Additionally, our Sysco brand merchandising team continues to do good work as we increased Sysco brand case penetration by 65 basis points in the quarter versus the prior year. As you know, each additional Sysco case adds to our profit rate and also positively impacts customer retention. From a sales and margin perspective, we continue to succeed by introducing higher margin specialty products to our customers and we are winning new business in the higher growth produce segment.

The success that we're having in GP per case is expected to continue into the second half of the year and that progress will help offset portions of the market volume softness. Lastly, we're doing a good job of managing expenses at our global support center or corporate expenses putting measures into place mid Q2 to lower spending in these GSC cost centers. Those measures will stay in place for the remainder of the fiscal year to offset the lower marketplace growth and to mitigate a potential future recession.

Turning to the second half. We remain resolute on continuing to drive profitable share gains and drive supply chain operations efficiency improvements. On the operating side of the business, we are making progress on improving our productivity. We are delivering improved retention rates and as a result lower hiring rates. By hiring fewer people, we have been able to lower recruitment expenses, lower training expenses and we are seeing increased productivity across warehouse and transportation roles. These improvements will accelerate into the second half of the year. We are fully staffed domestically and internationally and we have detailed work in place to ensure our staffing levels match our daily, weekly and monthly volumes.

Q3 is typically the softest volume quarter of the year and we are improving our flexibility in managing staff levels to lower volume periods, all while preparing for the highest volume quarter of the year, Q4. These staffing planning efforts are built into our year to go forecast. There are four factors that influence our full year guidance: number one, softer than originally budgeted market volumes in the local segment, partially offset by Sysco growing 13.5 times faster than the market in total; number two, higher than originally planned operating expenses whilst steadily improving; number three, favorable GP per case and strong margin management; number four, favorable GSC or corporate expenses.

Given that we are now at the midpoint of the year and based upon the factors I just covered, we are adjusting our full year guidance. The full year is now guided to be at $0.15 range from $4 to $4.15, which represents year-over-year growth of approximately 23% to 28% lapping the 126% growth from fiscal 2022. The midpoint of $.407 represents a 15% growth rate versus 2019 levels. As is my custom on these calls, I plan to share a bit more color on a few key Sysco initiatives that are driving performance. First, let me start with sales growth.

For the first half of the year, Sysco grew 1.35 times the industry and we are on track to deliver our sales goal for the year. Our Recipe For Growth strategy is winning in the marketplace. We are seeing solid growth in national restaurants, healthcare and our education segments. At the local level, we're winning business through our specialty programs, produce, protein and Italian and through our customer growth initiatives Sysco Your Way and Perks. Altogether, these sales wins are delivering compelling share gains.

In the most recent quarter, we advanced dozens of additional Sysco Your Way neighborhoods, introduced Sysco Perks to thousands of customers and began the integration of our latest Italian acquisition in Southern California. The Italian distributor we acquired in Los Angeles, Concord Foods, will be converted to the Greco business model shortly. We are planning for compelling sales and profit growth from that acquisition located in the second largest Italian market in the country. We will continue to expand the Greco platform across the country through a combination of both organic and inorganic activities.

Topic two for today, I'd like to discuss the state of our supply chain and highlight the status of some important work. I'll start by discussing our core operations environment and then I will highlight some of our strategic initiatives. During the first quarter of 2023, we achieved fully staffed status across our network. During the second quarter, we were able to focus on colleague training, productivity and retention. I'm pleased to report and shown on chart 9 that we are making progress on retention and as a result, we will need to hire far fewer colleagues in the second half of this year. We are seeing the green shoots of progress that come from the reality of less hiring like lower recruitment costs, lower hiring costs, lower training expenses and lower overtime percentages. We are also experiencing improved levels of productivity from our colleagues as they become more skilled in their roles.

Our colleague workforce is still inexperienced versus our historical standards and therefore, productivity is still below historical standards. However, we are making solid progress. We expect to make even more progress in the second half enabling better flow through from the top to the bottom-line. Importantly, we grew gross profit dollars in Q2 at a faster rate than our expenses grew creating a favorable leverage ratio. We expect to make even more progress in the second half of the fiscal year. From a supply chain strategic initiatives perspective, we continued on our journey to enable profitable sales growth, improved service levels to customers and to be the most efficient distributor within the foodservice industry.

Our omnichannel initiative is now live in our first test region. We are able to share inventory across two Sysco houses and we have enabled the ability to proactively leverage stocking strategies to improve service levels while lowering our overall level of working capital within the region. As I have mentioned previously, this project will help us lower transportation expenses by ensuring that the last mile distribution to a customer comes from the most proximate DC location agnostic of where the inventory is staged or warehoused. Equally importantly, we continue to make progress with six day deliveries.

We have moved meaningful business through Saturday delivery enabling effective day balancing, increased flexibility and increased capacity utilization across each of our now six full shipping days. The progress of this initiative will position us well for the upcoming peak fourth quarter shipping volume and will enable us to continue winning net new business at the national and local levels. We are pleased to have the implementation in the rearview mirror and we are now focused on efficiency, leverage and customer acquisition. These two projects are perfect examples of how Sysco is transforming supply chain management within foodservice distribution. Our supply chain will enable us to grow profitably for years to come.

I'll now turn it over to Neil who will provide additional financial details.

[Neil A. Russell, Senior Vice President, Corporate Affairs, Chief Communications Officer and Interim Chief Financial O at Sysco]

Thank you, Kevin, and hello, everyone. It's good to be with all of you and I look forward to our ongoing discussions while I'm in this interim role. During the second quarter, we delivered solid growth in both top and bottom-line results and continued our balanced approach to capital allocation, all important elements of our Recipe For Growth as we further enhance competitive advantages for Sysco. I'll start with a summary of our second quarter results. Sales grew 13.9% with U.S. Foodservice growing at 13.7% and continued positive momentum for our international segment, which grew at 17%. Volumes for the U.S. foodservice segment which includes our Broadline, FreshPoint U.S. Produce, U.S. Italian and other specialty businesses grew 5.2% and local case volumes increased 3.2%.

Gross profit for the second quarter increased 15.9% to $3.3 billion versus last year with gross margin improving 29 basis points to 18%. Gross profit dollars per case grew in all four segments versus prior year marking the sixth consecutive quarter of such growth. Our gross profit and margin improvement during the second quarter reflected our ability to continue to effectively manage product inflation, which moderated to 8.3%, down sequentially from 9.7% during the first quarter at the total enterprise level. The improvement in gross profit per case was also driven by incremental progress from our strategic sourcing efforts as we continue to partner with our suppliers.

Overall, adjusted operating expenses were $2.7 billion for the quarter or 14.3% of sales, a 33 basis point improvement as a percentage of sales over the same quarter in the prior year. This quarter included transformation investments of $55 million and new colleague related productivity cost of $22 million. This is an improvement compared to $63 million of transformational investments and $41 million of productivity costs in the first quarter. Snapback costs were reduced all the way down to zero during the second quarter. We are pleased with the sequential improvement we experienced in both snapback and productivity during the quarter. All four operating segments again showed increases in profitability year-over-year during our second quarter.

As seen on Slide 15, adjusted operating income for the enterprise increased by 37.6% versus last year to $682 million. This is the highest adjusted operating income result for the second quarter in Sysco's history. Just a few years ago, our operating income was about one-third of the amount we achieved this year, an important signal of the progress being made at Sysco via our Recipe For Growth. It is worth noting that adjusted operating income for the quarter was generally in line with external expectations. Importantly, as Kevin shared in his introduction, this quarter marked an important milestone as gross profit dollar growth outpaced operating expense growth illustrating the beginning of the anticipated leverage with more progress expected going forward.

For the quarter, we grew adjusted EBITDA by 23.9% to $831 million. We are pleased with the continued top-line growth in the second quarter. Gross profit dollar growth outpaced operating expense growth and each of our segments generated substantial operating income growth. Our results this quarter were also impacted by three items including, one, the impact of the labor dispute during the quarter at Sysco. We estimate this impacted our results by approximately $26 million during the second quarter. Second, as just mentioned, a continuation of productivity costs of $22 million directly related to the higher volume of new colleagues we hired over the past couple of quarters. The first two items are included in adjusted operating income.

The third item was below the operating income line in other income and expense, which showed adjusted expenses up $26 million over the prior year. This increase in expense was primarily due to increased pension expenses, which were a result of higher interest rates. Regarding pension, we also completed the transfer of a portion of our pension liabilities in the second quarter decreasing Sysco's plant size, risks and overall administrative costs, while protecting retirees as they will now be in the hands of an A rated insurance company. This transaction resulted in a non-cash charge in the second quarter of $315 million.

In regard to the balance sheet, our strong investment grade rated balance sheet remains a competitive advantage for Sysco and we ended the quarter at 3 times net debt to adjusted EBITDA. In the first half of the year, we returned $268 million to shareholders in the form of share repurchases and paid our increased quarterly dividend, in total returning $766 million to shareholders. As a reminder, specific to our debt, we remained well-positioned in the current rising interest rate environment with approximately 95% of Sysco's debt being fixed rate at attractive rates.

Let's turn to cash. Year-to-date, cash-flow from operations for the quarter was $503 million, a $126 million improvement over the prior year. Net capex increased to $284 million as we continue to invest in our Recipe For Growth, particularly with respect to our planned investments in fleet and distribution facilities. Free cash flow increased to $219 million for the quarter. Working capital was a modest use of cash. We continue to monitor our inventory balances as well as our accounts receivable given the economic environment. We ended the quarter with approximately $500 million in cash on hand and over $3 billion in total liquidity.

Lastly, looking ahead to the remainder of the year and beyond, as Kevin mentioned earlier, we are adjusting our full year EPS guidance range to $4 to $4.15 per share for fiscal year '23. The midpoint of this range reflects our current business plan, including the three items I described earlier. The low end represents a further macroeconomic softness and potential subsequent reduction in food away-from-home volume demand. The high end of the range represents an improved macro-environment or outside Sysco performance. As we look toward the remainder of the fiscal year, we expect further improvements in productivity costs as the prior wave of new hires continues to ramp up in their roles. We also expect the second half of fiscal '23 to reflect a similar trend of gross profit dollar growth outpacing operating expense growth.

Now I would like to provide a brief update on the status of our sustainability and diversity, equity and inclusion work at Sysco. We issued our 2022 sustainability report and our DEI report in November. Sustainability is a key ingredient to our Recipe For Growth strategy to help ensure that we are growing responsibly and purposefully while leading our industry toward a more sustainable future. We are proud of the actions we continue to take to build a more sustainable future for Sysco and for our industry. It is through these actions that during the second quarter, our MSCI ESG rating was upgraded from BBB to A in their latest ratings assessment. This is a reflection of our ongoing work in sustainability across Sysco's three pillars of ESG, people, product and planet.

Furthermore, Sysco aspires to create a global culture that is decidedly diverse, equitable and inclusive, one where we foster belonging as we care for another and connect the world through food and trusted partnerships. Our recently issued DEI report takes a deeper look into our strategic approach to diversity, equity and inclusion at Sysco and our commitment to caring for people. Since accelerating our DEI efforts in early 2020, we've developed a three-year roadmap to guide our DEI journey as we embed our strategic priorities throughout the business and achieve our DEI goals.

Importantly, we recently achieved our current 2025 workforce representation goal and have now established a cross functional task force to develop new workforce representation goals as we move forward. All of these efforts are consistent with our purpose of connecting the world to share food and care for one another. Both of these reports can be found on sysco.com. The focus on sustainability and DEI is not only the right thing to do, it will also be good for business in the long-term.

With that, I'll turn the call-back over to Kevin for his closing remarks.

[Kevin P. Hourican, President and Chief Executive Officer at Sysco]

Thank you, Neil. I appreciate all that you're doing for Sysco. As we conclude, I'd like to provide a brief summary on Slide 20. The following are our key takeaways from today's call. Our first half financial performance with a 15% increase in sales and a 26% increase in adjusted EPS displays the progress Sysco is making to win in the marketplace while we are transforming our business for the future. Our profit leverage improved in the second quarter and we expect that ratio to improve further in the second half of this fiscal year. We communicated today several factors that impacted Q2 profit results. Importantly, the labor dispute is behind us and we're making solid progress on improving our operating expenses.

On the sales and volume side of the ledger, our core growth initiatives are working as designed and we will focus on winning more new local customers in the second half of the year. Sysco has proven that we can win share when we make it a priority for our sales teams. Encouragingly, January volume growth is off to a strong start. Lastly, Sysco remains deeply committed to our strong and stable balance sheet, disciplined capital allocation and delivering continued returns to our shareholders. Our status as a dividend aristocrat remains a priority and we are proud to carry that distinction going into our 54th year. We look forward to keeping you posted on our progress as a company and look forward to highlighting more about our longer-term initiatives at the CAGNY Conference in a few short weeks.

Lastly, I'd like to provide a brief update on the status of our CFO search. We are making solid progress. The interest level from highly qualified candidates has been very strong. We have a very compelling pool of talent to choose from and we are progressing along in the evaluation and selection process. I would like to thank Neil for the outstanding job he is doing as our Interim CFO. He is a trusted partner and I greatly appreciate his leadership.

Operator, you can now open the line for questions.

Questions and Answers

[Operator]

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

[Kelly Bania, Analyst at BMO Capital Markets]

Hi, good morning. This is Kelly Bania. Thanks for taking our question. I was wondering if we could just talk a little bit more about the plan for the second half. It sounds like the labor dispute is clearly isolated to the quarter, but the other factors that you called out as contributing to the guidance update. Maybe can you just help us understand what is in the plan for the second half as it relates to these factors, whether it's the below the line pension, the productivity, the local growth? And maybe just a little more color in general on the local growth? What do you think impacted that customer base? What you attribute this to? And what you're expecting in terms of market-based growth from independents in the back half? Thank you.

[Kevin P. Hourican, President and Chief Executive Officer at Sysco]

Good morning, Kelly. Thank you for the question. It's Kevin. I'll start with comments about the updated revised guidance. I'll talk about the local growth specific question and then I'll pass to Neil for the below the line components of your question. It's a good question and lot to it. So we'll take it into each of those three parts. The forecast that we revised today is what we would call a middle of the road, center of the fairway forecast. It's our updated view given the conditions that we are operating within and the data that we have available to us. I'd like to start with the comment on overall market growth. We do leverage a third-party firm to provide us guidance on what the overall market will be. And as I said on my prepared remarks, the expectation was that for the quarter they disclosed that the market in total will be up 5 and the market in total excluding Sysco was up 1.

Now we budgeted for and are delivering more growth than the market. So we layer on top of the market growth 1.35 times from a Sysco specific performance. The good news is we are achieving that particular outcome. We are in fact delivering performance results greater than the market. It's the reality that the market itself is performing softer, lower than what had been expected. I'll come back to that in a minute to answer the second part of your question. So that needed to be adjusted for the full year, which we have done. I'm not going to quote a specific local case volume growth for the second half. Just to point you to our total guidance includes our updated view on the second half of the year. Our operating expenses, we've updated for the year to reflect the current rates of productivity, which are lower than what we had originally budgeted.

But as I called out in my prepared remarks, we're making steady progress, green shoots of improvement. I call your attention to slide 9 in our prepared slides showing you the specific data that are the leading indicators of what will become cost per piece improvements and cost per piece reductions and we are making meaningful progress in supply chain productivity. So we updated point two which was our cost per piece shift for the year to go. And then the labor dispute happened already, but it needed to be incorporated into our full year because the guide we provided today is a full year and it was a $26 million operating income hit to the quarter. That's now closed. It is in the rearview mirror. It is behind us and that will not be repeated in the second half of the year.

And the other income component, I'm going to toss to Neil in just a moment to for him to explain its portion of impact on the full year. Let me just address the softer growth rates kind of what are the drivers of that, why is it transpiring and then toss it over to Neil. I think it's a couple of factors, Kelly. Number one is 2022 actually ended-up being stronger than what the third-party modeling component had expected. So my belief there is that some of the over delivery, if you will, on snapback of COVID recovery in 2022 softened some of the recovery in '23. That's point number one. Point number two is inflation as many of the restaurant names reported at ICR a couple of weeks ago. They're delivering strong top-line results, but foot traffic in their own case volume metric, if you will, is flat to down nominally. And that I believe is reflective in the overall volume component and the impact of inflation.

Number three, consumer sentiment, mindset relative to everything that's being written in the newspapers, etc, and how that impacts consumer behavior. Last but not least and I mentioned this in my prepared remarks is Omicron. We had expected and anticipated a bump in November and December tied to that rolling over last year's headwind and we didn't see that bump in November, December. It is reported on my call earlier this morning that we are seeing strong year-over-year performance in January and that is a positive. So it's -- when we put all of those things together, the best predictor of future outcomes are current outcomes and we essentially took our current trends, modeled them forward for the second half of the year, applied what we call a center of the fairway view, loaded in our own views of risks and opportunities and the things that we can do to manage our business performance and therefore updated our guidance and provided that clarity today. I'll pass to Neil for comment about the below the line elements that impacted EPS.

[Neil A. Russell, Senior Vice President, Corporate Affairs, Chief Communications Officer and Interim Chief Financial O at Sysco]

Hey, Kelly. Good morning, good to hear from you. Just a couple of points from me here. First of all, talking about some of the operating expenses we had as I alluded to in my prepared comments, first of all, snapback costs which we've talked about for the past several quarters to remind you going back were originally about $35 million. Then they were reduced to $29 million, then to $10 million and now very pleased for the second quarter to be down to 0 in that. And similarly, for the productivity costs that we've talked about over the last few quarters, we had $41 million and then $41 million again and now down to $22 million for the second quarter. So we're seeing the reductions in both of those lines that we had previously alluded to and we feel like we're very much at a turning point for some of these operating costs and we would expect that momentum to continue into the second half of the year. Addressing the below the line items specifically, what you saw in the second quarter which was expense of about $15 million I think is a fair representation of what we should expect per quarter for the remainder of the fiscal year. That's largely driven by pension expense, which has been influenced by interest rates and we feel like that's going to be a fairly stable number because as you know, we transferred liabilities as part of a transfer plan that we did during the quarter. And as a result of doing that, we had to remeasure the plan. And so because we remeasured the plan, we feel like that's going to be a fairly stable number for us. We won't remeasure the plan again until we get to the end of the year. So thanks very much for the question. Hopefully that helps.

[Kevin P. Hourican, President and Chief Executive Officer at Sysco]

Let's go to our next question, please.

[Operator]

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

[Mark Carden, Analyst at UBS Group]

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

[Kevin P. Hourican, President and Chief Executive Officer at Sysco]

Mark, thank you for the question. In aggregate, again, we're on track for the first half of the year. Our stated goal for the year is to grow 1.35 for the year and at the halfway point, we're on track to be able to deliver that goal. You're right to point out that Q1 was stronger than Q2. The honest straight talk there is the labor disruption, which impacted three of Sysco's operating sites did in fact cause a disruption in the periods of October and November from a market share perspective. We've cleared that hurdle. We have moved on from that hurdle and we are confident in our ability in the second half of the year to grow 1.35 times the market. So that is the reason for Q2 versus Q1 just being direct and straight about it. We are winning at the total level. We're winning on the what we call contract bid business and our initiatives within the local segment are working and those initiatives are the Italian platform that we're expanding, our growth in our specialty categories and then our customer-specific platforms of Sysco Your Way and Perks. Each of those four major initiatives are delivering the impact that we expect them to deliver and we're very focused on them.

As it relates to the second half of the year, what gives us confidence in our ability to deliver the full year, we've got the best trained sales associates in the industry, 5,000 plus strong in the U.S. alone and they're very focused on penetrating lines with existing customers and we're going to make new customer acquisition a bigger priority for our sales reps in the second half of the year given the overall market conditions as we're seeing them. And our sales force is very responsive to their compensation program and I believe I shared on prior calls how that program works, the base plus bonus and the bonus is configurable by us and we can tweak it and we can adjust it and we can make modifications to it. And one of those adjustments for the second half of the year will be to increase the weight on focusing on what we call prospecting our new customer penetration. So I answered the Q2 and we have confidence in our ability to win versus the marketplace. And in aggregate, what we're looking for and the revised guidance we provided today, the midpoint of $4.07, just to keep in perspective is a 25% growth over prior year and it's a 15% growth over 2019, which is the peak profitability year of the company. So all in, in aggregate, really strong year from Sysco in total.

[Mark Carden, Analyst at UBS Group]

All right. Thanks so much and good luck.

[Kevin P. Hourican, President and Chief Executive Officer at Sysco]

Thank you, Mark.

[Operator]

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

[Ed Kelly, Analyst at Wells Fargo & Company]

Hi guys, good morning. I wanted to follow up on the cost side and what's embedded in guidance. And I know when you set your initial guidance this year there, the below end incorporated some risk of a I guess modest recession. Obviously, the definition of that is debatable, but it does seem like the revision has a lot more to do with the cost side. And my question for you is how much improvement is embedded from here from a cost perspective and how much visibility you have on achieving that and prevent, which ultimately sort of relates to how confidence in your guidance at this point with this adjustment? And then as a follow-up to that, how does what's happening in '23 reflect the goal of $4.62 plus in fiscal '24 from an EPS standpoint. Thank you.

[Kevin P. Hourican, President and Chief Executive Officer at Sysco]

Yeah. Good morning. Thank you for the question. As it relates to opex and I repeat, a couple of the numbers that Neil communicated and then provide a little more color on the why we have confidence in our ability to drive the improvement in the second half of the year, pass to Neil for any additional color or comments about the overall confidence that we have in the forecast for the year. Snapback has been taken to zero and that was a material number a year ago and big progress has been made. We're no longer needing to do things like hiring bonuses and referral bonuses and the marketing spend that we were doing to create awareness of jobs. So snapback has gone to zero. The productivity piece and that's specifically measured as excess over time, if you will, has gone from $41 million in Q1 to $22 million in Q2 and we expect for that to continue.

I'd point you to Slide 9, Ed, and I put that chart in there on purpose to show you the progress in the collective community, the progress we're making on retention improvement and how that retention improvement will therefore drive transportation as well as warehouse operations metrics. We have finite data, real-time data, weekly data. I host a weekly call talking about our productivity at the site level that all of our key leaders attend and we have firm understanding of where we are and where we need to be week-over-week, month-over-month, quarter-over-quarter to hit the full year. So we updated our guidance today to reflect the fact that, yes, our operating costs in the second half of the year will be higher than what we originally budgeted, but improvement from where we stand here today at the end of Q2 and we're seeing the progress that needs to be made in order for us to be able to deliver the full year and it has my personal full attention and the full attention of all of our leaders. Neil, I'll toss to you for any additional comments.

[Neil A. Russell, Senior Vice President, Corporate Affairs, Chief Communications Officer and Interim Chief Financial O at Sysco]

Thanks, Kevin. Hey, Ed, good morning. Two things, Ed. First of all, on the FY '23 portion of your question, we completely rebuilt the forecast as part of the process here and gratitude to the finance team for all the good work over the last several weeks to do that. As I alluded to, we feel very good about a few things that we rebuilt and are in there. As Kevin alluded to in his comments, the labor activity expense impact of $26 million is in the rearview mirror, but obviously that factored into the adjustment that we did. The pension expense that I just spoke about, we remeasured the plans. We have high confidence and what we think those numbers will be going forward. I also mentioned things like the productivity and snapback costs that Kevin just alluded to that we feel very good about the turning point, if you will, that we see on those types of cost items. So we looked at the market. We looked at everything we have and we have pretty high confidence in the numbers in which we're offering to you for the rest of this year.

As it pertains, Ed, to the second part of your question for next year, fiscal '24, we're at the halfway point here in FY '23. We feel really good about the progress we're making across the enterprise. We continue to gain share. As we've talked about, we're driving really compelling returns through the Recipe For Growth initiatives including a lot of really good operating efficiency that's part of the slide Kevin referred you to. And our long-term plans reflect double-digit growth in both top and bottom-line. And along the way, we're returning a lot of value to shareholders through the dividends, share repurchase and of course the profit growth. So we would typically update the next year during the summer as we look at the end of year results for us and that'll be our plan for now. So we'll take a look at fiscal '24 numbers when we report our end of year '23 numbers.

[Ed Kelly, Analyst at Wells Fargo & Company]

Thank you.

[Operator]

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

[Jeffrey A. Bernstein, Analyst at Barclays Capital]

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

[Kevin P. Hourican, President and Chief Executive Officer at Sysco]

Hey, Jeff, thanks. It's Kevin. I'll start with your question. Just as it relates to Sysco versus the market, I'll just point to the most important effects, which is that we grew in the most recent quarter 1.35 times the market. So it is Sysco is outperforming versus the market and that outperforming is coming from across the board business health. We're winning meaningfully in the CME segments, education, healthcare, contract bid within the restaurant sector and the gross profit rate in that sector has also been strong and has been ahead of where we expected it to be. At the local level, our business performance in total is being driven by our core growth initiatives within local that I referenced earlier. So this is not a Sysco specific situation. It is a macro and we're actually pleased with our performance relative to the market.

The only thing in the most recent quarter that was specific to Sysco was the labor dispute in three of our sites, which meaningfully pressured our operating expenses. We've sized that for the investment community today to communicate that was a $26 million operating income hit for the quarter, which was a combination of expenses and also sales and therefore flow through to margin impact from the three markets that were impacted by the labor disruption. So as was called out by one of the other questions earlier on this call, our Q2 growth versus the market was a little bit slower than our Q1 growth, but we still grew meaningfully versus the industry.

As it relates to the second half of the year and then I'll toss to Neil if he has anything additional. We've been thoughtful about the full year volume. As Neil said, we took a big step back at the midway point, turned over every rock, looked at every component of our build of the full year budget and comparative to the trends of the business performance. And we applied for the second half of the year the trends of our business. We've known trend vendors that we Sysco can positively impact. The operating expense that Ed just asked about is a projected improvement in the second-half of the year, but we've been thoughtful about volumes looking at the second half and note the January strength that I referenced was not contemplated at the time that we built that second half.

The Omicron tailwind will abate here quickly in February. As you know, things begin to reopen in the middle of February to the tail end of February and the forecast adjustment that we provided today is our best view of the full year center of the fairway as I mentioned. Neil, over to you for any additional comments.

[Neil A. Russell, Senior Vice President, Corporate Affairs, Chief Communications Officer and Interim Chief Financial O at Sysco]

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

[Operator]

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

[John Heinbockel, Analyst at Guggenheim]

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

[Kevin P. Hourican, President and Chief Executive Officer at Sysco]

Hey, good morning, John. Thank you for the questions. I'll take them in order. On the local business drop size, I think just as evidenced by the data that we've shared has been a bit softer than what we had expected on a cases per operator perspective. Now there's work we can do about that and we have the ability to target our sales reps to wind backlog lost cases or introduce new categories through a customer that has not purchased them before, like produce and protein and we call that team based selling and we're getting better and better at doing that type of work. Profitability for customer, we're actually pleased with those metrics and where we are. We've done a nice job managing the inflation pass-through. Our Sysco brand win that Neil talked about is notable and significant and that meaningfully helps on profit per customer. We've done quality work with transportation routing over the last 45 days to make sure we're being as efficient as possible on our routes, especially for smaller customers and that has provided us with benefit as well. All of those variables that I just described have been built into the full year forecast that we submitted today. Those are my comments on local.

For Sysco Your Way, we couldn't be more pleased with the performance of Sysco Your Way. Each individual neighborhood that we add to the program continues to perform like the initial markets did. That's one of my worries as we scale this thing, as we add it to more neighborhoods. There's a hawthorne effect when you have a pilot program where the performance is outstanding. But when you go to scale it, can it replicate? We're definitively proving that we can replicate that performance. It is material and significant and how fast can we go, we're going as fast as prudent, john. There is work that has to be done at the operating site to prepare that site to support a very late fleet in the evening order and cut off, twice per day delivery, a dedicated consistent driver, dedicated consistent sales reps.

So there's some customer re-mapping that has to occur. And we're going at the fastest pace that's prudent because what we can't do is compromise the service experience because what's making this program work is the step change, the level of service that we're providing to those customers. And it's not an incremental operating cost for Sysco because these are such dense neighborhoods that are in reasonable close proximity to our warehouses. So -- and it's expanded internationally. We're now live in Toronto. We're live in Dublin. We're live in London and soon we will be launching in Stockholm. So it just shows you the breadth of this program is not just domestic U.S. It's working everywhere we have launched it and we couldn't be more pleased.

We're also very pleased with Sysco Perks. Remember Sysco Perks is not about restaurant dense neighborhoods where Sysco Perks is a VIP program. It's an invitation-only program for our best of customers and we provide them Sysco Your Way like benefits, but they are unique to that one specific customer. So that's a per customer who is not inside a Sysco Your Way neighborhood and we're seeing significant lift in profitability and top-line growth with customers that are invited into that program and we have meaningfully expanded the rollout of Sysco Your Way -- excuse me, Sysco Perks over the last quarter.

The last of your few questions was in contract bid. I'm really pleased with our team, both in sales and supply chain in this segment. We've got a great sales leadership team. They've done excellent work with customer retention, customer prospecting. We're winning outsized business. We stopped reporting the number, but the last time I quoted it, we were at net $2 billion worth of incremental business and we've continued to win net new business in the healthcare, education and national restaurant space. You asked me a specific question, do you see outsized growth coming from that sector. We plan for growth across all of our sectors. And one of the reasons we converted to a six to eight delivery model is so that we have the ability to support that growth without having to make building expansions and building investments. We feel increase our throughput capacity by 15% across Sysco by converting to a full six to eight delivery model. So really pleased with our success rate in contract bid. I expect for that success to continue in the forward facing years. And then I've talked to Neil, he wants to add one more point. Sorry, John, I stepped down. I'm going to toss to Neil for one more point.

[Neil A. Russell, Senior Vice President, Corporate Affairs, Chief Communications Officer and Interim Chief Financial O at Sysco]

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

[John Heinbockel, Analyst at Guggenheim]

Thank you.

[Kevin P. Hourican, President and Chief Executive Officer at Sysco]

Thanks, John.

[Operator]

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

[Lauren Silberman, Analyst at Credit Suisse Group]

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

[Neil A. Russell, Senior Vice President, Corporate Affairs, Chief Communications Officer and Interim Chief Financial O at Sysco]

Hey, Lauren, it's Neil. I'll start and then I'll toss it to Kevin. Let me talk about the EPS and the guidance first.There are few factors that came into play for our adjustment. As I mentioned, we totally and completely rebuilt the forecast based on a few different things. First of all, the market environment that Kevin referenced in his prepared comments and having a clean good view to where we think the market is right now and headed for the next couple of quarters. On the cost side of the equation, as we talked about the impact of the labor dispute putting that into the numbers, looking at the pension expense now that we've remeasured the plan at the midpoint of the year knowing that, that will continue forward as I mentioned that about $15 million of expense that you saw down below the line carrying forward again in Q3 and again in Q4. And even though improvement, we still have some of those productivity costs that we are carrying in our best view on that. So taking all those factors into consideration, the market environment, some of these expenses, that is what went into the updated guidance and therefore, our confidence that we feel very good about that new number. And then Kevin, over to you.

[Kevin P. Hourican, President and Chief Executive Officer at Sysco]

Sure. Lauren, thank you for the question. I do want to be really clear that we are growing volume and we posted a performance result in the most recent quarter. Our total volume growth was plus 5.2, local volume growth was plus 3.2. What the facts are we are growing faster than the market. The reality is that the overall market was expected to be mid-single-digits and then we would have been in the high-single-digits with our growth on top of that. It's now the total market is low-single-digits. We're growing in mid single-digits. So it's meaningful growth. This is not the growth that we had budgeted essentially this time a year ago leveraging third-party data. So again, growing and this is a very large business, $350 billion business. We have 17% market share. We are meaningfully confident in our ability to grow versus the market to take share and to deliver compounded growth on an annual basis on the top line and bottom line. We'll talk more about that in August as Neil said.

What are the types of actions that we can take and then you asked a very specific question, are we worried about deep discounting? I'm not worried about deep discounting. That is not the recipe for success in this industry. Leading with price is not sticky. Leading with price is able to be copied by others. We're going to lead with service differentiation through Sysco Your Way, through Perks, through our Italian platform expansion and we are going to be very clear on allocating our sales reps time to spend more time with new customer prospecting, but that does not imply that price is the lever. It's calling upon a customer that you've not served before. It's bringing in a specialty produce expert to penetrate produce in a category that hasn't purchased it before.

It's introducing one of our Buckhead Meat premium protein specialists to a customer who is not buying premium protein, but yet we offer the best product in the industry, etc. So it's about in the second half of the year leveraging our growth initiatives. They are working and we can accelerate those initiatives of Perks, Sysco Your Way, Italian and allocation of time and our sales reps can spend more of their time with prospecting new and penetrating further with existing and we're getting better and better at that.

I haven't spoken a lot about digital tools today, but we've enhanced our website. To make it more clear to customers who have not purchased a product from us before, we provided them even better suggestions on you might also consider the following, that technology gets easier to use and better over-time. We are now able to push promotional emails to a customer articulating to them product that would be compelling to them and providing them a short-term discount in order to make it interesting to them to give that product a try, but those are levers that are newish to Sysco leveraging email, leveraging text, leveraging our digital tools and the capability of targeting our sales reps to the right customer prospect with a pre-approved deal that's compelling to the customer, but underwritten by Sysco finance as compelling and profitable for us.

[Operator]

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

[Alex Slagle, Analyst at Jefferies Financial Group]

All right. Thank you and good morning. Just wondering how the opportunity for additional cost out actions gets reflected in the new outlook, if you can comment on the pace of these opportunities beyond $700 million [Phonetic] or so realized to-date.

[Neil A. Russell, Senior Vice President, Corporate Affairs, Chief Communications Officer and Interim Chief Financial O at Sysco]

Hey, Alex, good morning. It's Neil. I'll take that one. As you alluded to, we are well north of the original goal of $750 million of cost out, which we feel very good about and we continue to make progress in that area. Largely speaking, these cost out initiatives are helping to fund our investments for future growth and we feel very good about the long-term capabilities through some of the digital tools that Kevin just referenced for us to be able to have a good long-term platform for sustainable growth. We're well north of the $750 million. We're working on what the next iteration of that will be and we look forward to sharing what future cost out numbers can be on top of the $750 million that we've already exceeded. Go ahead Kevin.

[Kevin P. Hourican, President and Chief Executive Officer at Sysco]

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

[Alex Slagle, Analyst at Jefferies Financial Group]

Thanks.

[Operator]

Ladies and gentlemen, at this time, we have reached the allotted time for today's conference. [Operator Closing Remarks]

Participants

Corporate Executives

• Kevin Kim, Vice President of Investor Relations
• Kevin P. Hourican, President and Chief Executive Officer
• Neil A. Russell, Senior Vice President, Corporate Affairs, Chief Communications Officer and Interim Chief Financial O

Analysts

• Kelly Bania, BMO Capital Markets
• Mark Carden, UBS Group AG
• Ed Kelly, Wells Fargo & Company
• Jeffrey A. Bernstein, Barclays Capital
• John Heinbockel, Guggenheim
• Lauren Silberman, Credit Suisse Group AG
• Alex Slagle, Jefferies Financial Group Inc.