Q1 2022 Sysco Corp Earnings Call

Our president and Chief Executive Officer, Kevin Hurricane.

Thank you good morning, everyone and thank you for joining our call.

This morning, I will discuss Cisco is steadily improving financial results I'll provide an update on our business transformation and finally I'll provide some color on the current state of our business environment. I will then turn it over to Aaron who will discuss the details of Cisco's first quarter financial results.

Let's get started with our financial results displayed on slide four.

Earlier. This morning, Sysco reported first quarter of fiscal 2022 results that were fueled by substantial topline momentum that continues to exceed our expectations are.

Our topline results sequentially increased each month of the quarter. Despite the presence of the Delta variant and have continued to improve into October.

Our sequential improvement in sales and volume is a clear statement of our supply chain strength and our ability to win meaningful market share in this climate.

We are pleased with the top line results and our flow through to the bottom line exceeded our expectations for the quarter.

This strong start gives us confidence in reaffirming our guidance for the full year.

Key headlines for the quarter include a growing top line that improved sequentially throughout the quarter and continued growth through October as seen on the right side of slide four Q.

Q1 represented another period of strong net new business wins for Cisco at both the national and local level.

These customer wins will fuel our success in quarters and years to come.

Customers are responding to Cisco as relative supply chain strength.

Our new purpose platform and our improving capabilities driven by our recipe for growth strategy.

All told we delivered sales growth of eight 2% versus 2019.

We outperformed our fiscal 2022 growth goal of one two times the market in the first quarter delivering the strongest growth versus the market in the last five plus years.

We believe additional growth is still in front of us at Sysco as our volume has yet to fully recover in certain segments, such as hospitality business and industry Foodservice management and international.

As these segments recover additional momentum will be added to our business. We are preparing now for select segments to further recover in early 2022 by strategically placing inventory and bolstering our staffing levels. For example, we anticipate that our business and industry segment will see upward momentum in <unk>.

During at select customers plan to reopen their offices at that time.

International travel restrictions are beginning to ease, which should benefit our hospitality select or in specific regions of our business.

Our operational expenses for the quarter increased due to higher volumes elevated overtime rates and an intentional expenditures that were targeted to improve our staffing hill.

We invested in incremental marketing to advertise open positions.

We provided new associates to re sign on bonuses and provided referral and retention bonuses to existing staff.

We anticipate that these expenses will continue in our second quarter and that we can make progress in reducing the level of investment in the second half of our fiscal year.

Our profit flow through from the top to the bottom line should improve as a result in the second half.

Gross margin for the quarter was impacted by high rate of inflation, which increased to approximately 13%.

We expect inflation to continue at a similar rate through the second quarter before beginning to taper later in the fiscal year.

Given current trends in the industry, we expect the tapering will begin further into the fiscal year than we had initially modeled.

Our international business continues to show strong improvement.

We have improved from posting a loss in Q3 of 2021 to breaking even in Q4 to making more than $60 million of adjusted profit and our Q1 of fiscal 2022.

It is important to note that our international business is skewed to large contract customers that are still heavily impacted by COVID-19 for.

For example, we over index in Europe, and the business industry and travel segments that remain constrained versus 2019 levels.

As such the relative sales performance in the international sector still lags that of the U S segment. However, it also conveys that we have additional recovery still in front of us internationally.

Our recipe for growth strategy will enable our international business segment to improve how we serve local customers overtime.

And we anticipate a shift in our customer mix to the more profitable local sector as we progress on our three year strategic plan.

In summary, we delivered very strong top line results increased profit per case shipped and experienced elevated operating expenses that increased our cost to serve.

The combination of these results delivered a strong adjusted operating income for the quarter of $685 million in.

And adjusted earnings per share of <unk> 83.

Both results exceeded our expectations for the quarter and position Cisco to deliver our full year guidance.

Darren will provide more details on our financials shortly but we are pleased to be off to a strong start in the new fiscal year.

Topic, two let's turn to our business transformation, which is highlighted on slide five.

As important as our strong quarterly financial results our business transformation remains on track and I will highlight a few examples of our progress this morning.

Our pricing project implementation is now substantially complete.

The centralized pricing tool enables sysco to strategically manage the high levels of inflation. We are currently experiencing with disciplined and strategic control.

We can determine at the customer item level exactly what level of inflation inflation to pass through we.

We can optimize the pass through to balance profitability and sales growth.

There is no better time than the present to have this powerful capability.

Longer term the pricing tool will enable us to accelerate sales growth profitably as we optimize pricing to increase share of wallet and increase pricing trust with our customers.

Our work on the personalization engine continues to advance this innovative industry, leading program will enable Cisco to further penetrate lines in cases with existing customers and we will improve our sales consultants ability to win new accounts, we will supplement personalization with increased service levels for top customer.

Through an innovative loyalty program that we will discuss more in future quarterly calls.

Our sales transformation is proving to be very successful.

As our sales teams continue to win new business at record levels.

As I mentioned into my financial narrative are local and national sales teams delivered strong wins in the quarter that will help fuel our future growth profitably.

Lastly, we are continuing to improve the efficiency of our organization as we further reduced our structural expenses to fund our strategic initiatives.

Over the past few quarters, we regionalize the leadership structure of our specialty businesses fresh point and SMG and we followed the playbook of our U S. Broadline regionalization and have now implemented the more agile and efficient model for our two main specialty businesses.

As shown on slide six during our first quarter, we successfully closed on the <unk> transaction, which we expect to deliver over $1 billion and incremental sales to Cisco in fiscal 2022.

Head of our deal model expectations or.

More importantly, we plan to leverage that record business model to build a nationwide Italian platform that is the best in the industry.

Which will further deliver incremental sales beyond the $1 billion just mentioned.

In addition to closing the record transaction, we acquired a produce distributor in October that will operate as a part of our fresh point business segment, and we will improve our ability to provide fresh produce and value added fresh cut capabilities to the Pennsylvania, and Ohio markets.

May not realize that Cisco is the largest specialty produce distributor in the United States vis vis our <unk> platform.

Our produce business has a high growth CAGR and attractive margins.

Growing in the specialty sector is a priority for Cisco, enabling us to gain more share of wallet from our customers by combining our broadline capabilities with a premium service levels selling skills and product assortment availability of specialty.

Our recipe for growth is still in the very early innings, but we can see the benefits of our developing capabilities and the new customers. We are winning and the progress that we're making in market share gains importantly, our first quarter results exceeded our one two times market share growth target for fiscal 2022.

More importantly is the recipe for growth matures the impact on our top line growth will accelerate as such we remain committed to growing profitably one five times the market as we exit our fiscal 2024.

Topic re for today is an update on the state of the business.

During our last earnings call I highlighted the critical importance of staffing health due to the supply chain challenges that are well documented across all industries.

As covered on bullets on slide seven we have made progress throughout this quarter and improving our staffing levels.

Our leadership team top to bottom has been extraordinarily focused on improving our staffing health.

A good example of our efforts is the execution of our first ever nationwide hiring event in the second week of October.

We leveraged extensive digital marketing and a streamline hiring process to net more than 1000, new supply chain associates to bolster our troops.

Coupled with our year to date hiring success, we are making solid progress on increasing our throughput capacity.

Additionally, during the quarter, we opened our first driver Academy.

Our first academy classes insertion as we say at Cisco and we are training our next generation of Cisco drivers we.

We are bullish on expanding this program across the country in the coming year and we are confident they will make a meaningful difference in generating a solid driver of pipeline.

From a product availability perspective, although our fill rates still lag our historical standards, we were able to deliver a higher fill rates of customers than the industry average we.

We have strong relationships with our key suppliers and our merchant team that is extremely focused on finding and sourcing product substitutions.

I have personally engaged with top suppliers to ensure solid partnership with Cisco and I am cautiously optimistic that our suppliers' performance will improve through the remainder of the year and into our fiscal 2023.

Supplier improvement will be a key to improving customer fill rate and customer satisfaction.

Lastly, you may have seen the recent announcement regarding the department of Labor's Occupational safety and health administration requirements for employers with 100 or more employees I am pleased to inform you that Cisco began a weekly COVID-19 testing regimen in September and as such we are already compliant with the majority of the Osha <unk>.

<unk> guidelines.

The safety of our associates and our customers is our number one priority and we remain steadfast in protecting our team.

In summary, Cisco continues to lead the industry and how we are supporting our customers during this challenging supply chain environment.

Our net promoter scores are outperforming the broad line distribution industry and our ability to serve customers remains best in class.

We remain the only national distributor without systemwide minimum orders and we will endeavor to increase the flexibility and service that we provide our customers in the coming quarters and years.

The impact of our relative supply chain success can be seen in our results we sequentially increased sales throughout the quarter and expanded our market share capture.

We now have more than 10 consecutive months of gaining market share and we are on track to deliver our stated goal for the year growing one two times the industry and our recipe for growth strategy will enable us to accelerate over the next three years and grow at one five times the industry by the end of our fiscal year 2024.

I want to thank all of our associates for their tremendous hard work over the past quarter as Cisco experienced unprecedented growth and supply chain challenges, we are winning in the marketplace and that would not have been possible without the dedication of our sales logistics and merchandising teams I am honored to serve these associates and <unk>.

By their side.

I'll now turn it over to Aaron who will provide additional details on our financial results for the quarter before we open it up for questions Eric over to you.

Thank you Kevin and good morning, our strong first quarter fiscal 2022 financial headlines are growing demand with sales exceeding Q1 fiscal 2019 by eight 2%.

Profitable quarter exceeding our plans with EBITDA comparable to pre Covid 2019 levels aggressive investment by Cisco against hiring the snapback, allowing Cisco to lead the industry in otherwise turbulent times.

<unk> investments in working capital to continue to lead in product availability.

A strong return to profitability by our international business and great progress against our balanced capital allocation strategy, including continued investments against the five pillars of our recipe for growth and upgrades to triple B of our investment grade rating by S&P, the elimination of all debt covenant restrictions on our ability.

To repurchase shares or increase our dividend in the future and a decision that we're announcing today, namely that we have satisfied our internal criteria to commence share repurchase in the second quarter of fiscal 2022, we will begin our repurchase of up to $500 million of shares over the course of this fiscal.

Year.

During today's call I am going to cover the income statement and cash flow for the quarter and then I will close with some observations on our guidance for fiscal 2022.

First quarter sales were $16 $5 billion, an increase of 39, 7% from the same quarter in fiscal 2021, and an eight 2% increase from the same quarter in fiscal 2019.

In the United States sales in our largest segment U S. Foodservice were up 46, 5% versus the first quarter of fiscal 2021, and up 11, 6% versus the same quarter in fiscal 2019.

SYGMA was up 11, 8% versus fiscal 2021 and up five 1% versus the same quarter in fiscal 2019.

You will recall then Sigma the increase in sales in the quarter as more modest because of the purposeful transition out of an unprofitable customer, which we announced in our third quarter fiscal 2021 earnings call and because during the quarter. Some consumers are switching from their favorite <unk> drive drive up back to some of.

Excellent Sitdown restaurants served by our more profitable U S foodservice segment.

Local case volume within a subset of USF S. R. U S. Broadline operations increased 43, 8%, while total case volume within U S. Broadline operations increased 28, 1%.

With respect to our international business restrictions continue to ease across our international operations in the first quarter International sales were up 34% versus fiscal 2021, while also improving sequentially over prior quarters to down less than 1% versus fiscal 2019, indicating that we have more upside.

To come.

Foreign exchange rates had a positive impact of one 1% on Cisco sales results.

Inflation continued to be a factor during the quarter at approximately 13%.

The good news is that we continue to manage our profitability well in the inflationary environment.

Let me call. It a couple of numbers and then we'll discuss inflation further.

Gross profit for the enterprise was approximately $3 billion in the first quarter, increasing 33, 9% versus the same quarter in fiscal 2021.

It also exceeding gross profit in fiscal 2019 by 2%.

The increase in gross profit was driven by year over year improvements in volume versus fiscal 2021.

And.

Compared to both fiscal 2021 and fiscal 2019 increases in gross profit dollars per case across all four of our reporting segments.

That's a real sign of health of our business.

Florida is gross profit dollars that count inflation did impact our gross margin rates for the enterprise during the quarter as a decreased 79 basis points versus the same period in fiscal 2021 and finished at a rate of 18, 1%.

The rate was flat sequentially with Q4 fiscal 2021.

The gross margin decline versus the prior year was driven by accelerating inflation and margin changes at our higher margin U S businesses with the larger U S. <unk> businesses growing volume at lower margin rates.

We continue to manage the inflationary pressures with both our suppliers and our customers and thus far have not seen much pushback on our ability to pass along pricing.

In addition to the fact that we are now substantially completed our rollout of our periscope pricing system means that we have more tools than ever before to manage our profitability, while being right on price.

Turning back to the enterprise adjusted operating expense came in at $2 $3 billion with expense increases from the prior year driven by three things first the variable costs associated with significantly increased volumes.

More than $57 million of one time and short term transitory expenses associated with the snapback and third more than $24 million of operating expense investments for a recipe for growth.

Together, the snapback investments in the transformation costs totaled approximately $81 million of operating expense this quarter and negatively impacted our adjusted EPS by <unk> 12.

Even with those significant snapback in transformation operating expense investments, we leveraged our adjusted operating expense structure and delivered expense as a percentage of sales of 13, 9%.

And almost 200 basis point improvement from fiscal 2021, and a 64 basis improvement from the same quarter in fiscal 2019.

During the simple math, if we removed the transitory snapback investments and the transformation investments I referenced earlier total opex would have been at 13, 4% of sales.

That is a real sign of the power of our earlier cost out efforts.

To repeat what we said before during fiscal 2022, our cost out helps us to cover snapback and transformation costs.

Finally for the first fiscal quarter adjusted operating income increased $320 million from last year to $685 million, putting us basically on par with adjusted operating income for fiscal 2019.

Even with the snapback investments and the transformation investments.

This was primarily driven by a 58% improvement in U S foodservice and strong profitability from international.

Adjusted earnings.

Earnings per share increased 49 to <unk> 83 for.

For the first quarter for.

Perhaps pointing out the obvious if we extract the $51 million of incremental interest expense. We are carrying in Q1 of fiscal 2022, resulting from the COVID-19 related precautionary bonds, we issued in 2020.

Our adjusted EPS results for Q1 of fiscal 2022 would have been more in line with our pre Covid adjusted EPS results for Q1 of fiscal 2019.

If you go a step further and exclude both the interest expense and the $81 million of snapback in transformation costs, you really begin to see why we believe that in the long term sysco has significant earnings potential.

Now, let me share a couple of comments on cash flow and the balance sheet.

Cash flow from operations was $111 million during the first quarter as we responded to ryzen sales and purposely invested in inventory and supportive management product available availability during the snapback better than the industry.

We also purposely invested in longer lead inventory to support customers such as K 12 schools and health care facilities during the snapback consistent with Cisco's purpose statement.

We also saw manageable changes in receivables levels that we expected to accompany ryzen sales arising from the mix of business as Cisco executes its recipe for growth.

Our net Capex spend was $79 $4 million and is ramping up as teams submit business cases for investments against the recipe for growth.

We will manage those investments over the course of our three year plan to ensure our growth.

Free cash flow for the first quarter was $31 million.

At the end of the first quarter after our investments in the business payments on the acquisition price for Greco and our dividend payments, we had $2 1 billion of cash and cash equivalents on hand.

In May we committed to supporting a strong investment grade credit rating with a targeted net debt to adjusted EBITDA leverage ratio.

Of two five times to 275 times.

Which we continue to expect to hit by the end of fiscal 2022.

Later this year, we plan to pay off the $450 million of notes due in June of 2022 and May should the circumstances warranted take further action against our debt portfolio.

S&P recently acknowledged the progress against our leverage ratio by upgrading us to triple B flat.

We also paid our increased dividend of <unk> 47 per share in July and again in October given that we paid our increased dividend starting in July consistent with our status as a dividend aristocrat. We expect to next address decisions around our dividend per share sometime during calendar year 2022.

As I mentioned earlier, we plan to commence share repurchase activity under the $5 billion share repurchase authority, we announced in May at Investor day, beginning in the second quarter as I stated a moment ago that will take the form of the repurchase of up to $500 million of shares by the end of the fiscal year.

That concludes my prepared remarks on the fiscal first quarter now before closing I would like to provide you with some commentary on the outlook for fiscal 2022.

As Kevin highlighted we expect to continue to grow at or above one two times the market in fiscal 2022.

We are operating in a dynamic environment with significant inflation while.

While we do expect inflation to moderate by the fourth quarter of fiscal 2022, it may take longer to taper than originally anticipated, though it is hard to predict.

We expect to pass through the vast majority of our Cogs inflation.

We are assuming continued heavy snapback in transformation investments in Q2 at levels at least equal to the investments in Q1.

We are reaffirming our EPS guidance for the year fiscal 2022, EPS will be in the range of $3 33.

To $3 53.

Reflecting the 10 cent increase that we called out last quarter.

As always our EPS guidance does not assume changes to the federal tax rate.

All in all we have confidence for the rest of the year.

In summary, we've had a solid quarter and the fundamentals of our business remains strong. We are excited about the future as we continue to advance cisco's recipe for growth.

Operator, we're now ready for questions.

And as a reminder to ask a question you will need to press star one on your telephone keypad to withdraw your question press the pound or hash key please standby, while we compile the Q&A roster.

Our first question comes from the line of Mark Carden of UBS.

Good morning, Thanks, a lot for taking my questions. So it sounds like you've made some good progress on reaching your hiring targets, which is great to hear one of your competitors recently noted that it started implementing some more base paint races without necessarily commenting on that competitor is this in line with what you've been seeing in the broader environment could we be seeing some more structural pressures here.

Yes.

Good morning, Mark It's Kevin I'll, just I'll start with the answer to your question just macro just where things are from a staffing health perspective, as I said it in the prepared remarks, we've made a lot of progress in the quarter. We are definitely leading the industry from a health of staffing perspective, and health of our supply chain, which is what's enabling us to win market share.

Sharon what I would say is that the situation has steadily improved through the quarter August I would submit is probably our toughest spot of the calendar year from a staffing perspective as our volume was really recovering in our staffing needs were most significant in September 23 States opened up the government's supplemental benefits were retired.

And we did see an increase in applicant flow, we actually werent anticipating that because our base pay wages are well above the $15 per hour breakeven component.

<unk> get paid in the mid Twenty's, our drivers get paid in the mid <unk>, we werent expecting it.

Improvement tied to that but we did experience an improvement in September tied to the retiring of those benefits, most notably or even more importantly, we've gotten a lot better at recruiting hiring and training of our staff. We're really pleased with the efforts to digitize our marketing efforts tied to our open jobs we've screened.

Blind to the hiring process and as I mentioned in my prepared remarks, we conducted our first ever nationwide at every single site in the country hiring event in netted over 1000 people joining our team in just one week alone, which was big progress for us. So we're doing really well from a recruitment perspective.

To answer to your question specifically as I said on my remarks, we have not had to resort to quote unquote meaningful base pay change the vast majority of the expenses that we are.

Fourth our what we call transitory or TUI doors, you can go through you can turnaround you can come back so what does that mean.

Hiring bonuses retention bonuses referral bonuses advertising, we are spending money in places like Facebook to advertise the awareness and creation of a visibility to these jobs nearing a called out but those expenditures will continue into Q2.

And then we will have the opportunity to begin to taper some of those investments because they are transitory. We've had select locations a very small number of them that we did a wage review and needed to make some adjustments, but that was not meaningful or material for Cisco.

I want to add something Tustin, one quick one quick add which is as Kevin called out the vast majority of our Q1 and ultimately Q2 snapback costs are transitory and we have the opportunity to cover the rest through further productivity efforts that we already have underway.

Awesome that's great.

Do you guys think youre fill rate currently compares to the broader industry, presumably youre still stronger than most but any changes from a gap here. Thanks.

And Mark Thanks for the follow up so we use external reporting and internal reporting through net promoter score to gauge our fill rate and how it's trending ours has been improving over the last quarter. Our merchant team has been working extremely hard for items that have what we call long term out situations to find alternatives find new suppliers find alternative.

Products that we can submit suggest to our customers to provide those customers with suggestions on how to get those items cut into their menus et cetera et cetera. So our team has worked harder than ever before on ensuring we can improve the rates answered. Your question is yes, our performance is stronger than the industry and yes that gap widened in the quarter we.

Believe it's one of the components of our market share capture but it's not the only reason it's three reasons. It's our throughput capacity is higher because of the staffing health, yes, our fill rate is stronger the third though as our sales teams are just doing an extraordinarily good job of being out in the market acquiring new customers and winning more share of wallet with existing.

Listing customers.

Alright, thanks, so much and good luck.

Thanks Mark.

And your next question comes from the line of Alex Slagle with Jefferies.

Hey, good morning.

And may have missed something but the local case growth on a two year basis versus 19 seemed to decelerate more sequentially into the fiscal first quarter than the U S. Broadline trend, even asking adjusts for the tougher compare so I wonder if we could discuss the dynamics you observed during the quarter, while the local case momentum that drag a bit more.

Im reading that right.

Our local business is performing really well Alex we're pleased with the progress that we're making we continue to win new customers at the local level partnering and supporting our existing local customers with menu expansion and the like if it's a percent of total that you're referencing we've had a lot of success with.

Net new business at the national level and within the education sector and within the health care sector.

Perhaps the percent of total component that you're seeing is actually fueled not because of deceleration in our local business, we accelerated our performance at the local level.

The national sales and <unk> business we.

We've just done extraordinarily well with winning new business and to be Crystal clear. This isn't a guns or butter choice. One success at the national level does not hinder our ability over the long term to win at the local level, we're going to win at both national and local level and again, our staffing health and supply chain strength is what's enabling us to be able.

To do that.

That makes sense. Thanks for that and then if you could offer any color into the underlying trends in the various segments in October and just sort of some thoughts on potential for that progress relative to 19 that moderate as we get into the holiday period.

And tougher compares obviously and in many ways.

Against that.

Alex Thanks for the question I'll start with the headline which as you know as you saw on our chart October was continuation of acceleration of our total performance. So each month of our Q1 accelerated in October continue that strength and that's despite the presence of the delta variant during the quarter. So we're really pleased with topline.

Strong compelling continued growth fueled by a recovering market, but even more fueled by our market share capture as I as I said in my prepared remarks, we're growing at more than one two times the market, which is the highest rate of growth at Cisco and in more than five years.

The sectors that are still constrained versus 19, that's the language that I would use travel and hospitality for sure Foodservice management International as I called out on my prepared remarks, and there is some softness in healthcare vis vis long term care tied to Covid, which is new starts or new <unk>.

Ed patients as they call them are constrained, we're not concerned about health care for the long term with the aging of America. They call. It the silver tsunami, we actually view health care as a growth opportunity for our company for the longer term we.

We see the opposite of what you just said, Alex we see our customers contacting us in the travel industry and business in travel and hospitality excuse me and business and industry sectors gearing up for what they believe to be a January step up in volume and mostly that's driven by corporations.

That have been mostly working from home beginning the process of bringing their employees back to work in January we do very well in that space partnering with foodservice management companies.

And we're working right now to preposition inventory to be prepared from a staffing perspective as far as rolling over tough comp compares for holiday season, that's not something we're concerned about nine months add something here and over to you I would just add you should take great note of our announcement of our results for October and understand that we are accelerating across our port.

Folio and we have significant opportunity both in our fiscal Q2, and as Kevin called out, particularly into Q3 and Q4.

Great. Thanks Congrats.

Thanks, Alex.

Your next question comes from the line of Edward Kelly of Wells Fargo.

Hi, good morning, guys.

Kevin I wanted to add just sort of revisit one thing thats been talked about a little bit here, but I know you've talked about your fill rates speeding.

Our competitors, but it does sound like generally there are still some headwind here.

Here related to sort of inventory that labor is at quantum is it possible to quantify.

What you think is being left on the table associated with that and then kind of gets into the second part of my question, which is.

Is it also possible to talk about where some of the segments are kind of running versus 2019 and I ask all this because.

In your case volume.

Still modestly below 19 in the U S, which is obviously understandable.

But I'm kind of curious as to what all of this is saying about where your case volume can be.

Let's call it by the end of this fiscal year or style for early next year. When life is obviously hopefully a lot more normal.

So any color that you could add there would be super helpful. I think.

Good morning, Ed. Thank you for the questions, Kevin I'll start with fill rate.

My language that I used in the prepared remarks is we're performing better than the industry average and that is the most accurate descriptor of our performance. We are below our historical fill rate standards. We set a very high bar for ourselves on ship on time in shipping full and we are below our historical standards. The why is our.

Fill rates from our suppliers to us is well below our historical standards, our output to our customers is actually significantly higher than the inbound fill rate to Cisco and the how and why behind that is the work we do to find substitutes to bridge customers to alternative products and that's what's creating the relative strength of the Cisco versus us.

Others is the good work our merchant teams are doing to find product substitution.

I think your question is more like is there even more sales to be had in fill rates improve I would say, yes, how long it will take for fill rate to improve as subject for debate. So what we're doing because we want to take ownership of what we can directly control is to be even better at managing fill rate. So we're improving our website to provide dynamic visibility.

<unk> two out of stocks and provide suggestions at point of sale to the customer on things that can be bought alternatively, and our sales teams and merchandising teams. When we find ourselves as I mentioned earlier in a situation of long term outs are being very proactive providing quick selling bulletins to our sales teams digital marketing pushes to our customers, including E mails on some.

Adjusting to them alternatives and the like so it's a core strength of our company.

Meaningfully desire for the inbound fill rate to Cisco to improve our working very closely with our suppliers on that and we think it will improve but not not quickly it's going to be a kind of a sequential steady slow improvement in fill rates into our fiscal 2023 as it relates to volume and the second part of your question.

What I would say is we expect at the end of our fiscal Q3 to be back to 2019 from a volume perspective, and we have segments that we'll be at that level in Q2 of this fiscal year. So within our existing fiscal year, we will be back to 2019 volume levels.

I am not going to break it down by sector.

Not something I'm prepared to do this morning go ahead. Please.

Got it and when you say.

Fiscal Q3 is that total company volume or is that U S frontline volume.

Total company all Cisco combined at the end of our Q3 will be at 2019 volume levels.

Great and then just a quick follow up for art I guess.

Can you provide any additional color on the fiscal second quarter. Historically, you have a little bit of sort of like.

I guess, the seasonal step back versus Q1.

Just kind of curious as if we're going to see that again here I look at the consensus number it's not far off of what you just reported for Q2.

So just any any incremental thoughts there.

I would offer two thoughts which is we are enthusiastic about the continued positive trends, we're seeing in the topline as we move into what historically pre COVID-19 may have been a seasonal period, but this is this year is like no. Other in that respect, but also then mitigated somewhat by the call out around the fact that we do continue to.

Spect to invest heavily against snapback and the transformation in the second quarter for US we have confidence in the year, we have comped in the long term.

And we are quite excited about the progress the operational teams are making in service of fiscal 'twenty two in Q1 and certainly in Q2.

Great. Thank you.

Thank you Ed.

Your next question comes from the line of John Heimbach of local Guggenheim partners.

Hey, guys, let me start with.

You had a nice pick up right in your performance versus the industry.

Since the second half of last year, I think you're probably up in 2025 bps.

That coming from predominantly.

Right.

New versus existing accounts.

Pieces per stop lines per stop.

What are the one or two biggest drivers of that acceleration in share gains.

Good morning, John This is Kevin the predominant reason for the market share capture as net new customers served at Sysco, both at the national and local level. So we're winning more new business than at any other point in time in company history. The life breaks down to two pretty fundamentally basic things first is the compensation model that we changed as you know.

In June of last year, we are now compensating our associates to be more prospecting versus cultivating and that is paying dividends.

Drive the behaviors that we expect and we are seeing significant benefit and dividend from rewarding those associates for the good work Theyre doing and winning new business, but the second reason is the supply chain health, we have customers almost on a daily basis, large and small coming to us and asking for Cisco to take on their business.

I won't name the states that we had a very large education customer come to us This week actually in states.

We're not getting the support we need and consistent would take on our business and we're finalizing the details of the contract which is why I'm not going to quote where but we expect that business to come onboard by Jan one so that is a signal of our strength the confidence that large and small customers have in our ability to ship on time in full at rates greater than the market.

John specifically.

Competitor segment Thats coming from I think it's kind of all the best.

But stronger players with broader access to inventory clearly performing well our back.

Back to prove that point, we have more inventory on hand at this moment in time than we did pre COVID-19. So are there select product shortages, yes, but we've been able to invest in inventory, we have more inventory on hand than pre COVID-19 and our staffing levels are where we need them to be but every time, we bring on more people are demand increases and then we have to go even higher even.

More people, which is proving that there is continued runway. This was aaron's point, a moment ago on our ability to grow our topline as we continued to make progress on our staffing and throughput capacity John back to you for any follow up.

Yes.

Second question is do you think about look out to 'twenty four 'twenty five take a longer term view.

Are you more confident in gross margin being.

But it has been historically or.

Or that the <unk>.

Cost structure of the business will be less right in light of.

So a lot of the macro dynamics.

Dynamics, we're seeing today, which one of those two was more likely to drive.

Higher long term profit margins.

John what we've articulated is we're really bullish on our EBIT margin expanding that we will move that needle.

I do not believe that that growth will come primarily from product margin expansion, it's going to come from continued disciplined expense.

Optimization by taking structural cost out and investing in capabilities that drive the topline so why <unk>.

EBIT margin grows as a the topline will be accelerating b will be taking structural cost out of the business and those two levers in combination is what expands the EBIT margin, but sales growth and cost reduction is not firm margin rate growth.

And then I'll pass to you for any additional comments.

I would just add and supported Kevin's point that I am also excited by elements of our merchandising and our supply chain transformation that over time as we work through this very inflationary periods.

Should provide us with new opportunities in particular I'm excited with the work that's underway in connection with Cisco's private label brand and other elements that will be supportive of our overall financial profile. So to answer your question. While the short term certainly we are challenged from a or it's lower than we would have hoped from a gross margin perspective because of the impact.

Inflation over the longer term the 'twenty four 'twenty five.

We are quite a bit.

Thank you.

Thanks, Matt.

Your next question comes from the line of Nicole Miller of Piper Sandler.

Thank you good morning.

Last question is around the centralized pricing tool so.

Intuitively I think about pricing power and price going up.

Have a line of commentary about taking market share with the pricing tool, which makes me think about the value proposition of maybe not price down but neutral so how do you balance that pension.

The call. It's a great question and you're right that my recent narrative of our pricing software has been about managing inflation. It's just because of the unprecedented environment that we're currently in double digit inflation is unique and what the tools, helping us in the current period as being very strategic and thoughtful about how to pass through that.

And in a responsible way and being confident that when we make those decisions that theyre executed well, we used to do that work manually through a large sales force. We can now do that through our strategic pricing office and when we make the decision. It's executed immediately and we can monitor the impact of those decisions and updated on a daily basis.

If need be so the reason.

For my narrative on inflation is just because of the environment. We're in for the longer term.

We'll have the pricing project is to be a pricing system excuse me is to move to a strategic price optimization I'm not going to name the category because I don't want to telegraph that but we've got select categories, where we are above market from a pricing perspective, we make decent very high quality margins and we're going to run price optimization tests, if we lower slightly our pricing.

<unk>.

In that category does the sales growth more than offset the margin dilution and with a pricing software you can do tests versus control geography based tests to optimize for the right price and how I would describe that work is the following we will make investments in certain items that are TV key value items <unk> and <unk>.

We'll raise prices nominally in the tail of the inventory SKU, which is less visible to the customers, which therefore results in flattish margin rates, but growing topline as we or as my term is right on price at the item customer level, which allows us to win more market share. So that's the longer term goal of the project.

However, the system has been extremely useful during this early part of our fiscal 2022, and how we manage inflation.

That's very helpful. Thank you second and final question.

It's very helpful to understand the hiring and that some of that is coming back, but I am wondering about the underlying turnover thinking that could be a leading indicator could you speak to you.

How turnover trending both like at the distribution distribution facilities and for drivers as well.

Yes retention is extraordinarily important to our staffing health and during the first quarter of this fiscal year, we were extremely focused on hiring because again, the winning of the new business that we've been able to post over the last two years requires us to continue to increase our throughput capacity. We are spending an extensive amount of time.

On improving retention retention is lower than historical run rate averages to answer your question, but it's getting better as we are putting even more focus on retention. The most important population for US is our driver population. It's a highly skilled job, it's a customer facing role and one of the investments that we've made our knit together.

Is that a driver retention bonus we paid in Q1, we're going to pay it again in Q2 and net retention bonus for our drivers is working it had a noticeable and visible positive impact on retention and that's the type of investments that I referred to as a transitory type of investment we will do that investment for as long as it takes.

We do expect as we improve our overall staffing health that the need for those types of investments will go down and here's why overtime rates are running very high currently at Cisco versus our historical standards I called that out in my prepared remarks over time is actually the thing that drives retention.

If we're spending or excuse me, providing our associates too much overtime.

So we're working extremely aggressively to bolster our staffing troops such that we can have over time back to historical standards and that will improve retention. It also improves the P&L because overtime rates are pretty punitive to the overall P&L and I called that out in my prepared remarks, where I said, our second half of this fiscal year, we should expect.

To see improvements in overtime reductions in some of the transitory expenses that I stated, which will help the P&L guarantee for any further comments.

I think we're there yet.

Okay.

Thank you. Thank you thanks.

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

Thanks, very much just first back on gross margin I understand your comments about gross margin dollars per case or gross margins per case are higher do you see demand destruction, though within certain categories that may be a factor in gross margin prices are too high so your consumers or your customers are switching.

So far no.

Thank you and Kevin you opened the door on loyalty and I know you want to talk about it in the future, but how do you think about loyalty in this business is it akin to what our consumer loyalty program is or is this more nuance is it more about adding value added services versus discounts how would loyalty work in this industry do you think at a high level.

We've proven that a mom and pop independent restaurant.

Operate similar to a consumer and retail they decide based on value.

<unk> based on price the decided based on services that you mentioned, a moment ago the value and the unlock of the loyalty program that we're building is making net customer specific what the offers are to them and making it indelibly cleared to them.

The value that's being brought to them by.

Cisco, we're going to talk about more in the future because it's in pilot as we speak and we like to have actual factual results before we talk about things publicly we are very pleased with the initial progress steps forward in our loyalty program. We are building the data and the plumbing from an it perspective to execute against that effort nationwide and we.

Our piling it highlighting it currently in select geographies and we will refine it optimize iterate it but it will be similar to the types of loyalty programs that you are familiar with as a customer.

The data is in the cloud, we're able to use machine learning to optimize against the data and yes. There are value added services that we will provide for those customers that are part of the program.

There'll be able to take advantage of to improve their business results and outcomes. So we're excited about it we're bullish on it and we'll talk more about it in future quarters. Thank.

Thank you.

Thank you from the line of Lauren Silberman of credit Suisse.

Thanks for the question just first on capital allocation, you announced plans to resume share repurchases.

<unk> hundred million for the year. So can you just talk about your capital allocation priorities and how we should be thinking about the use of cash from here.

Sure happy to do so we are remaining loyal to the capital allocation strategy, we called out at our Investor Day in May which is our first focus is on driving the growth getting to the one 2% to one five times.

Market growth.

And so our first use of cash is to invest in the business either organically or Inorganically. As you recently saw with Greco and a couple of the other small deals that Kevin called out.

Once we've invested against the business for the business cases that are in front of US. We are also very focused on maintaining a strong balance sheet and the actions. We took particularly at the end of last year, certainly facilitated that and we're feeling good about the strong balance sheet that we have in the recent upgrade of the reading bye.

S&P, we have continued opportunities to improve that of course, given the interest levels, we're carrying versus prior years, but we're feeling good about our capital allocation against our debt portfolio. So far and that then leaves us with the return of capital to shareholders. We increased our dividend as you heard me call out we've now paid that twice.

We'll touch it again.

During calendar calendar 2022.

And with the benefit of cash on hand, we decided it was time to start returning capital to shareholders as well in our first step there is to is the the announcement of the $500 million share repurchase beginning this quarter. So all in very consistent with what we had telegraphed we were going to do at Investor Day, and that's how we continue to manage the recipe.

For growth.

I think Darren described it very well I think the punch line is we are ahead of schedule on that activity, which is why youre and updated our guidance on when we would begin to stock buyback to this quarter.

Great. Thanks, and if I could ask you a follow up on the transitory nature of the elevated costs can you talk about what gives you the confidence that opex expenses in some of those.

Thanks, Ken taper in the back half of the year or is it primarily reflecting expectations at staffing levels are closer to target and then within those incremental investments snapback or transformation.

What do you see as more transitory versus permanent can you expand that.

<unk>.

Happy to let me give you some visibility to what's in our bucket of step back and it is things like <unk>.

Retention programs.

Hiring bonuses sign on bonuses the incremental recruiting support for the massive hiring we're doing right now.

The incremental marketing.

Third party contractors were bringing into help on a temporary basis relative to staffing those things are transitory onetime while Q1 Q2, but are not permanent cost structures, what's not in there for instance has increased overtime costs thats not transitory that's not one time, but.

And also have the opportunity to bring.

Bring it down over time and are actively working that so now you have a sense of what's in the bucket. So why do I have confidence that we can address it over time. It's twofold. First is we got started early relative to cost out efforts and so to a degree we put some money in the bank.

In advance of need and that effort will continue as we carryforward second element as you heard Kevin and I alluded to this earlier of the benefit of all the investment we are doing against our supply chain transformation is incremental productivity, which helps us to manage the overall cost structure as we carry forward.

Lastly, and finally, if I can add one which is just the nature of the category as I called out they are by definition.

Onetime or transitory.

Thank you.

Yes.

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

Yes.

Great. Thank you very much.

Two questions. The first just a follow on.

It's been mentioned a few times.

The sales momentum in the market share gains, which are ahead of the one two times in the fiscal first quarter that you were targeting for the full year.

What are I guess to assess from the outside so I'm just wondering how do you. How do you arrive at success on that front, maybe you can share what you believe the industry growth is I know some of your peers large and even small often make similar claims to growing faster than the industry. So just trying to gauge how youre able to assess that maybe what the industry is growing relative to yours in the first quarter.

If we should expect that type of commentary going forward on future quarterly calls.

Yes, Jeff so the $1 two statement is specifically tied to technomic data, so we get that data from them.

Once per quarter and that is a data point that I can only report upon once per quarter. As a result of that we can see on a weekly monthly basis or a relative growth. We can generally see the markets relative growth through other sources of data, but once per quarter, we get the legitimate data feed from technomic and that is where that data.

Comes from.

Understood.

And then the follow up is just on the pricing.

The margin percentage down, but the dollars up which I guess is.

Whats important here.

I know you mentioned the ability to pass along inflation to customers, which I think has historically been a big benefit in the draw for investors to foodservice distribution, and obviously with inflation right now even more attractive so.

So just wondering your confidence and the ability to continue to pass through.

I think there was some mention of maybe not much pushback, but wondering what the pushback is accelerating or you'd expect it to accelerate if the inflation is going to remain in the double digits or whether you're really confident in the ability to pass it on for however, long the inflation last thank you.

Hey, Jeff I guess the punch line is we are confident that we can pass on the inflation.

However, an editorial comment and then im going to provide some color comments, we don't think that double digit inflation in perpetuity is good for the industry. It is not something we desire it's not something we accept and we are working very aggressively to push back on cost increases find alternative suppliers find alternative items that can lower than Atlanta.

For our customers and we do believe that inflation will begin tapering its just going to take longer to begin tapering that we originally expected back at the beginning of the year, which Eric talked about accurately and clearly during his narrative.

But with that said, we are not experiencing pushback from our customers. The primary reason is in consumers aren't slowing down in their consumption of food away from home, but the opposite is true we continued to see sequential improvement in our overall results tied to volume growth and also obviously inflation.

At high levels.

All out with their with specificity, what we do with our customers. We have built a proprietary inflation tool calculator, where we can take a inbound raw material to us that is significantly elevated from a cost perspective, and we can highlight for our customers what items on their menu are directly impacted by that inflationary item.

<unk> to then suggest to them the type of menu price changes that they should make and that's what we mean with things like value added services and I'm not talking about an obvious thing like.

Meat and poultry I'm talking about things like fast shortening and oils are highly inflationary right now and there are many different products on our menu that are impacted by that particular raw ingredient cost increase so our sales reps have been trained and equipped to be able to work with our end customers to educate them that this raw material has increased here's our.

Suggested to you on what you can do with your menu price and it's for that reason that our customers aren't pushing back to the degree that you might suspect externally because they view us as a partner and that's what we are.

We're partnering with them to help them be successful and profitable and the good news for this industry is that the end consumer has remained robust and strong Jeff back to you for any further comment.

Very thorough thank you very much.

Thanks, Jeff and good day.

And our last question comes from the line of Kelly Bania of BMO capital.

Hi, good morning, Thanks for taking my questions.

Just wanted to go back to the discussion of case volume.

Particularly versus 2019, just where exactly was that for the quarter I guess focusing on U S broadline and within that can you share any detail on the volume versus 19 for those core restaurant customers versus the non restaurant hospitality business and industry.

Segments.

Good morning, Kelly, it's Erin we are getting into an area that we don't typically disclose at that level of detail I guess, what I would offer up to us as that.

As Kevin either alluded to are set allowed we are not yet back to fiscal 19 levels.

Within the enterprise or the U S business, but quickly approaching it and as we.

Get into the back half of our year, starting in the U S or in North America, and then broadly beyond that we do have.