Sysco Corp (SYY) — Q4 2021 Earnings Call Transcript

Good morning, everyone, and welcome to Sysco's Fourth Quarter Fiscal 2021 Earnings Call. On today's call, we have Kevin Hourican, our President and Chief Executive Officer, and Aaron Alt, our Chief Financial Officer. Before we begin, please be aware that any statements made during this presentation regarding the company's or management's intentions, beliefs, expectations, or predictions about the future are forward-looking statements. Actual results could differ materially. Additional information on factors that may cause actual results to differ from these forward-looking statements is available in the company's SEC filings, including risk factors in our annual report on Form 10-K for the fiscal year ended June 27, 2020, subsequent SEC filings, and the news release issued earlier this morning. These materials can be found in the Investors section at sysco.com. We will also include non-GAAP financial measures in our comments today and in our presentation slides. Reconciliations of these non-GAAP measures to the corresponding GAAP measures are provided at the end of the presentation slides and can also be found in the Investors section of our website. At this time, I'd like to turn the call over to our President and Chief Executive Officer, Kevin Hourican.

Thank you, Neil. Good morning, everyone, and thank you for joining our call today. I'm pleased to report that Sysco had a strong fourth quarter to close out a fiscal year unlike any other in our company's history. I'm proud of our team for their hard work, the results we delivered and the unrelenting support that we have provided to our customers. I'll start my comments today with a few key points about the quarter. First, our business recovery is stronger than anticipated in the U.S., and the recovery is taking hold in our international markets. Our sales growth exceeded our internal projections and has continued to accelerate into our Q1 of fiscal 2022. Second, our profitability for the quarter was stronger than anticipated, driven by the aforementioned strong sales and disciplined expense management. Third, our strong results drove improved cash performance, exceeding the cash flow guidance that Aaron provided in our last earnings call, which allowed us to pay down more debt than originally planned. Fourth, we made meaningful progress in advancing our Recipe for Growth strategy. I will highlight our progress on select initiatives during our call today. Sysco's results for the fourth quarter reflect the strength of the overall market recovery, Sysco's ability to win new business and some early wins coming from our Recipe for Growth. Sysco's sales for the quarter across all of our businesses were up 82% versus 2020 and up 4.3% versus 2019. Our sales results in our U.S. business were up 7.7% versus 2019. Sales results in June benefited from accelerating inflation, which Aaron will discuss in detail. The restaurant sector of our business is near full recovery with local sales and cases shipped up versus 2019 volume levels. The volume recovery has happened much faster than the industry predicted despite the presence of the Delta variant. The U.S. foodservice industry in total is now within 5% of 2019 levels. As you can see on Slide 7 in our presentation, according to SafeGraph data, foot traffic is up in restaurants since March and continues to be up more than foot traffic in grocery stores. Most notably, Sysco increased market share in a rapidly expanding market. These two factors of a rapidly expanding market and Sysco's gaining of market share resulted in a strong sales quarter. We anticipate that these trends will accelerate further in fiscal 2022. Consumer spending power, as featured on Slide 8, is robust and strong. The key message is that food away from home is not permanently impaired. It is vibrant. It is healthy. Sysco is best positioned to support the rapidly increasing demand due to our balance sheet, our large physical footprint and our substantial human capital investment in salespeople and in supply chain resources. The momentum shown in the fourth quarter has continued in the first period of fiscal 2022 where our July results have further accelerated. We see a sequentially improving market as additional sectors of recovery kick in: international, specialty, schools and colleges, business office cafeterias, just to name a few. There is ample additional recovery beyond the robust business we are currently experiencing with restaurant partners. Sysco's success can be directly attributed to the proactive steps we took to be ahead of the COVID business recovery. The Net Promoter Score of our delivery operations continues to lead the industry. With that said, we are working aggressively to increase staffing levels across our operations so that we can maintain our leading service position and win additional net new business. The distributors that can ship on time and in full at this critical period have an opportunity to take market share for both the short and the long term. One proof point of this success is demand for net new national account wins since the onset of the pandemic. During the fourth quarter, we won another $200 million of business with national customers, bringing the cumulative total to $2 billion of net new wins since March of 2020. While we don't plan to report on this number moving forward as we transition to a more normalized financial reporting cadence, it is a strong indicator of our capabilities as the industry leader to gain share during a period of disruption. As you can see on Page 12 of our slides, in addition to the large national account wins we have delivered, we have grown our local customer count by about 10%, which is a pace of 2.5 times greater than the broadline industry. In June, we increased our market share by 60 basis points and posted our sixth consecutive month of market share gains. Our sales force is very motivated to win. Our supply chain continues to lead the industry from a service perspective despite the substantial hiring challenges, and our Recipe for Growth strategy is beginning to benefit the business and our customers. Our top line results during the quarter were positively influenced by higher-than-normal inflation. During the fourth quarter, our inflation rate was approximately 9.6%. Aaron will discuss this in more detail in his prepared remarks. Our performance in the non-restaurant sectors of our business trailed the success of restaurants for the quarter. With that said, we are beginning to see improvements in the travel, hospitality, and FSM sectors of our business as restrictions ease, and leisure travel has commenced this summer. As businesses begin returning more to an office environment, we expect our FSM segment to further improve. Our international segment improved sequentially throughout the fourth quarter as restrictions on businesses began easing in late May and into June. Notably, our international segment broke even for the quarter, reflecting a $92 million profit improvement over the third quarter. The improvement displays the positive impact that increased sales and disciplined expense management will have on our international P&L. We expect to benefit significantly in fiscal 2022 from the improving international financial statements. I would like to take a few moments to provide an update on our Recipe for Growth transformation. Please see Slide 13 in our presentation. You will remember our introduction of the Recipe for Growth at our May 20 Investor Day. I will quickly provide an update on the main pillars of our growth strategy. Digital. Our first pillar is to become a more digitally enabled company so that we can better serve our customers. We continue to see excellent utilization of our Sysco Shop platform by our customers, and we are enhancing the website with new features and benefits every month. Our pricing system is now live in over 25% of our regions, and we remain on track to complete the implementation by the end of this calendar year. Our personalization engine, which is currently under construction, remains on track, and initial manual tests of the capability with pilot customers are proving beneficial. Products and solutions. Our second pillar is to improve our merchandising and marketing solutions to grow our business. In this regard, our team is doing good work in developing improved merchandising strategies against specific cuisine segments. I'll speak more about the Greco acquisition in a moment and how that acquisition accelerates our efforts to better serve Italian customers. Supply chain. Growth pillar three is to develop and create a more nimble, accessible and productive supply chain. As I mentioned earlier, we are better positioned to support customers in their recovery as our supply chain network is better staffed than the industry at large. We remain the only national distributor with no order minimums for our customers at a time when competitors have been increasing their order minimums and select competitors are releasing customers who can't meet those raised minimums. Lastly, our strategic projects to increase delivery frequency and enable omnichannel inventory fulfillment remains on track. Customer teams. Our fourth growth pillar is to improve the effectiveness of our sales organization. As we have said many times, our sales consultants are our number one strength. The Net Promoter Scores our associates receive is the best indication of their impact on our business. Meanwhile, our efforts to better leverage data to increase the yield of our sales process are paying dividends. Future horizons. Our final growth pillar is to explore and develop future horizons. This work has two major parts: assessing new business opportunities, including M&A; and becoming a more efficient company so that we can fund our growth. We are pleased to report that we will close on the Greco and Sons acquisition in the coming weeks. Greco's business is highly specialized in the Italian segment and brings net new capabilities and products that are accretive to Sysco. Sysco is excited to expand the Greco Italian specialty platform to new geographies across the U.S. As I mentioned, our future horizons work also includes our becoming a more efficient company so that we can fund our growth. We are making substantial investments in technology and infrastructure capabilities to strengthen the company. Our discipline across that work is funding those investments. We are on track to deliver $750 million of structural cost reductions, inclusive of what we delivered in fiscal 2021. Aaron will discuss this program in more detail in a few moments. As I stated at our Investor Day, the power of our Recipe for Growth comes from our ability to deliver all five of the growth elements that are displayed, not just from one key element. We believe only Sysco has the breadth, depth and expertise to leverage each of these five elements to better serve our customers. Before I wrap up my remarks this morning, I want to acknowledge the reality of the current operating environment. The food-away-from-home supply chain is under significant pressure. A robust customer demand environment is outpacing available supply in select categories. Our supplier partners are struggling with meeting the demand of Sysco's orders, and certain product categories remain in short supply. I'm confident that Sysco is performing better than the industry at large in delivering what we call customer bill rate, but we are performing below our historical performance standards. Our merchant teams are working closely with current suppliers, actively sourcing incremental supply from new suppliers, and we are working with our sales teams to offer product substitutions to our customers. This work is challenging, but we can execute this work better than others in this industry. I thank our suppliers for all they are doing to increase production, and I also thank our customers for their patience. In addition to the challenges we've experienced with product supply, the labor market has been challenging. We mentioned in a previous earnings call that we would hire over 6,000 associates in the second half of fiscal 2021. I am pleased to report that we have successfully achieved our hiring target, but we continue to have hiring needs as the business recovery is happening faster than we had modeled. It is a very tight labor market out there, and we are working extremely hard to ensure we can fill all of our warehouse and driver positions. While we are in decent shape nationally, we have hotspots around the country that present challenges. The product and labor shortage situation is undoubtedly putting some pressure on our cost to serve at this time. I would describe these incremental costs as mostly transitory as we are making responsible decisions on where and how to invest. I am confident we will see a return to a more balanced supply-and-demand equation in the future which will return inflation to more normal levels. I cannot predict the specific by-when date on inflation normalization, but I am confident it will eventually normalize. In the meantime, we have robust sales results that are offsetting the margin rate pressure introduced by elevated inflation. In regards to labor costs, we are being very judicious to avoid creating a structural cost increase going forward. What that means specifically is that we are being very aggressive in adopting mostly temporary wage actions, like hiring bonuses, referral bonuses and even retention bonus programs, all of which can be leveraged extensively while the hiring process remains challenging and then reduced or eliminated as conditions improve. We intend to be responsible and judicious in structural increases to base pay that cannot be easily removed when the labor market improves. We will work aggressively to offset these cost increases in wages through improved productivity. We are also taking aggressive actions to improve the labor market itself by investing in our future. I'm excited to announce today that we are investing in our first Sysco Driver Academy. The Driver Academy will enable us to recruit our own drivers and train them in the work we do at Sysco. We will be better able to source drivers from our own warehouse associate population and teach them to become drivers to this unique industry program. We will pay trainees to attend our academy, and we'll cover all of their licensing and certification fees. These associates will sign a contract to work for Sysco for an agreed-upon period of time. I am excited for what this Driving Academy will do for our recruitment pipeline, and I believe we are likely to expand the program nationally once we have worked through the learning curve of our first location. In summary, we had a strong fourth quarter that exceeded our sales and profit expectations. The results during the quarter sequentially accelerated, and they bode well for a successful fiscal 2022. During fiscal 2022, we expect to achieve growth at a rate of 1.2 times the industry. That rate of growth is expected to accelerate across the three years of our long-range plan, and we intend to deliver 1.5 times the market growth in fiscal 2024. We expect to expand our leadership position while we grow profitably, and we intend to return compelling value to our shareholders. I want to say thank you to all of our Sysco associates who continue to help our customers grow and succeed each day. The business recovery has presented challenges that our business associates have embraced head-on. I thank them for their commitment and their tireless work ethic that they have displayed during this labor-constrained environment. I'll now turn the call over to Aaron Alt, who will discuss our financial results, along with some additional forward-looking details for the upcoming year. Aaron, over to you.

Thank you, Kevin. Good morning. Our key fourth quarter fiscal 2021 headlines are strong demand; increasing sales; a profitable quarter, increasingly reminiscent of pre-COVID operations; and stronger cash flow than anticipated. Our fiscal fourth quarter results provide excellent proof points that consumers continue to seek relief from food-at-home fatigue, that the restaurant industry recovery is in full swing in the U.S. and that the international restaurant industry has the potential to come roaring back. During the fourth quarter, we did what we said we were going to do at Investor Day as we balance five financial priorities: early and tactical investments in labor and inventory to be better prepared than anyone else in the industry for the chaotic industry recovery; thoughtful strategic investments and capabilities and technologies to advance our Recipe for Growth over the long term; continued focus on our cost-out program to fund both the snapback costs and our growth agenda; accelerated reduction of our debt levels; and increased return of capital to shareholders. Today, I'm going to lead off with the income statement for the quarter, briefly discuss the cash flow and balance sheet, and then I will close with a positive update to our guidance for fiscal year 2022, which reflects the rapid acceleration of the recovery of our business and other factors. For full year results, I will refer you to our press release and our 10-K. As Kevin noted, fourth quarter sales were $16.1 billion, an increase of 82% from the same quarter in fiscal 2020 and a 4.3% increase from the same quarter in fiscal 2019. Please note that this year, our fiscal year had a 53rd week, which included 14 weeks in the fourth quarter as compared to only 13 weeks in the fourth quarter of each of fiscal 2020 and fiscal 2019. That additional week was worth just under $1.2 billion in sales. Sales in U.S. Foodservice were up 88.4% versus the fourth quarter of fiscal 2020 and up 7.7% versus the same quarter in fiscal 2019. SYGMA was up 45.3% versus fiscal 2020 and up 20.9% versus the same quarter in fiscal 2019. For the quarter, local case volume within a subset of USFS, our U.S. Broadline operations, increased 74.3%, while total case volume within U.S. Broadline operations increased 71.4%. Given the interest in the recovery curve from COVID-19, today, we are disclosing that our July fiscal 2022 sales were also quite strong. Sales were more than $4.9 billion, an increase of 44.3% from the same period in fiscal 2021 and a 7% increase over the same period in fiscal 2019. Kevin brought up the top of inflation. The headline is that inflation during the quarter was up 9.6% for total Sysco. Manufacturers passed inflation to us, and we successfully passed it on to our customers across categories and customer types. Let me call out a couple of numbers, and then we'll discuss our response to inflation further. Gross profit for the enterprise was $2.9 billion in the fourth quarter, increasing 86.2% versus the same quarter in fiscal 2020. Most of the increase in gross profit was driven by year-over-year increases in sales; the 53rd week in fiscal 2021 worth about $208 million; and margin rate improvement at our largest business, USFS. Gross margin as a percentage of sales during the quarter actually increased 41 basis points versus the same period in fiscal 2020 and finished at a rate of 18.1%. The gross margin increase was driven by business mix with the higher-margin U.S. Foodservice businesses growing alongside improvements in higher-margin countries in our international segment. Importantly, the enterprise margin rate improvement was also driven by 17 basis points of margin rate improvement in our largest business. Now I'm sure you think I'm calling out the obvious when I say that in an inflationary environment, what counts at the end of the day is the health of our dollar gross profit, that which we put in the bank. The good news for us is that in the U.S., as our sales have been rising, in part, due to inflation, our dollar profit per case has also been increasing. Notably, in the U.S., our dollar profit per case is higher now than it was in fiscal year '19. You may ask, 'Why do we have confidence that we can protect gross profit dollars in the short term and rate over time?' The answer is that Sysco has some advantages. We have significant scale in purchasing, which is an asset which our suppliers will be hearing more about as we leverage the power of buying as One Sysco. In addition, the majority of our customer contracts contain cost escalation clauses. Finally, our merchandising transformation includes implementation of center-led pricing technology and other changes which allow us to navigate through the inflationary environment. No one tactic should be viewed in isolation, but the combination of our efforts arms us to deal with what we expect to be continued inflation in categories like poultry, beef, paper, and disposables. That said, you can expect that we will be careful and tactical as we keep our eye on the real prize: execution against our Recipe for Growth. Let's now turn to our international business. Restrictions started to visibly ease in key jurisdictions towards the end of the quarter. For the fourth quarter, international sales were up 83.4% versus fiscal 2020 but down 14.6% versus fiscal 2019. Foreign exchange rates had a positive impact of 2.9% on Sysco's sales results. What we see in our largest international markets gives us additional signs of confidence for fiscal 2022. Local consumers are eager to get back to normal. And importantly, with the playbook established and significant operational change behind us, we do not expect that the reimposition of additional COVID restrictions would, if it happened, have as severe an impact on our business as was the case during the past year. Just like our efforts in the U.S., the international operations have been sourcing inventory and hiring staff aggressively to move up the recovery curve. Turning back to the enterprise. Adjusted operating expense increased 44.5% to $2.3 billion with increases driven by the variable costs that the company significantly increased volumes, onetime and short-term expenses associated with the snapback and investments against our Recipe for Growth. Our expense performance reflects the great progress we have made against our $350 million cost-out savings goal as well as the need to invest in both the current demand recovery and the long-term initiatives that Kevin mentioned earlier. In fact, we exceeded our $350 million cost-out goal during the full year. As we have highlighted in prior calls, the majority of the savings are coming from SG&A, but there are some savings from cost of goods sold as our teams continue to improve our capabilities to better optimize supplier relationships. Within operating expenses, key examples of the cost savings efforts are regionalizing first our Broadline operations, and most recently, our specialty produce operations. Other examples of areas where we achieved good cost savings would be indirect sourcing, technology cost savings, and sourcing of freight contract costs. As I called out in Q3, we are investing heavily against the business, both in support of the snapback and in support of the transformation. During the fourth quarter, we estimate that we spent more than $36 million against the snapback, including incremental investments against recruiting, training, retention, and maintenance. We also estimate that we spent more than $50 million against our transformation initiatives, such as customer-centered growth, pricing, supply chain, and technology strategic initiatives. Even with those significant investments, our adjusted operating expense as a percentage of sales improved to 14.3% from fiscal 2020 and moved to within 30 basis points of fiscal 2019's 14% as a percentage of sales for the fourth quarter. If we adjust out the purposeful snapback and transformation investments we are making as temporary, we can better see the savings as our OpEx as a percentage of sales would have been 13.8% on an adjusted basis. Here are a couple of points of emphasis for you. Part of the future horizon component of our Recipe for Growth is achieving cost-out to fund the growth. We are leading with the cost-out before we make the investments. The savings are structural. We are not counting variable expense changes. Our statement's goals are owned by our entire executive leadership team. The savings are intended to increase over time. Recall that we raised our objective to $750 million with the incremental savings coming largely over the course of fiscal '23 through fiscal '24. Kevin and I must approve all new spend on our developing capabilities that offset these savings. Remember, it is these capabilities that are generating the market share gains of 1.2x to 1.5x through fiscal 2024. All in all, we view cost-out as a good news part of our long-term story. Finally, for the fourth quarter, adjusted operating income increased $639 million to $605 million for the quarter. Our adjusted effective tax rate was 20.2%. Adjusted earnings per share increased $1 to $0.71 for the fourth quarter. The primary difference between our GAAP EPS and our adjusted EPS was the impact of our debt tender premium payment. As I noted at the start of my remarks, in the interest of time, I am not going to cover the full year results as part of my prepared remarks. The information is in our press release, and we are happy to take questions, of course. We are pleased with the improvement each quarter as our business has recovered from the onset of COVID over the course of the last year or so. Let me just wrap up the income statement by observing that for the year all-in, we delivered $1.02 of GAAP EPS and $1.44 of adjusted EPS. Now a couple of comments on cash flow and the balance sheet. Cash flow from operations for the fourth quarter was $424 million. Net CapEx for the quarter was $180 million or 1.1% of sales, which was $79 million higher compared to the same quarter in the prior year. Free cash flow for the fourth quarter was $244 million, significantly above our anticipated free cash flow, even while we grew and maintained inventory at a level $400 million higher than Q4 fiscal '19. At the end of fiscal 2021, after our investments in the business, our significant reductions in debt and our dividend payments, we had $3 billion of cash and cash equivalents on hand. During the year, we generated positive cash flow from operations of $1.9 billion, offset by $412 million of net capital investment, resulting in positive free cash flow of $1.5 billion for the year. As you know, at Investor Day, we articulated our debt paydown plans: $2.3 billion of deleveraging already accomplished during the fiscal year through May 2021; plans for an additional $1.5 billion of further debt reductions by the end of fiscal year '22. Because we have sized the headline on our Q4 tender offer to $1 billion, we are already tracking $150 million ahead of our debt repurchase commitments. Lastly, we returned almost $1 billion of capital to shareholders in fiscal year '21 in the form of our quarterly dividends. We were pleased to announce at Investor Day a $0.02 per share increase to our dividend, on which we made the first payment in July. This brings our dividend to $1.88 per share for the full calendar year 2022 and enhances our track record of increasing our dividends and our status as a dividend aristocrat. That concludes my prepared remarks on the quarter and year-end results. Now before closing, I would like to provide you with some updated guidance for fiscal year 2022. In May, I laid out our growth aspiration of growing at 1.2 to 1.5 times the market. Also recall that we said, in fiscal year '22, we expected adjusted EPS of $3.23 to $3.43. We also called out that in fiscal year '24, we expect adjusted EPS of 30% more than our high points in fiscal year 2019, call it more than $4.65. Our projections and guidance were tied to the Technomic market projections as they existed at the time. Frankly, the speed of recovery of consumer demand has been nothing short of remarkable. We are seeing the positive impact broadly across our business. Sales are recovering more quickly than we or the market trend experts anticipated. That means that to hit our 1.2 times market growth in fiscal year 2022, we have to grow faster, and we are. As a result, we are raising our sales expectations and now expect sales for the enterprise to exceed fiscal '19 sales by mid-single digits, adding roughly $2.5 billion to our top line guidance. Every segment of our business, other than our other segment and the FSM component of our USFS business, is now forecast to exceed fiscal '19 sales by the end of fiscal year '22. Inflation is more of a factor than we had anticipated for the first half of fiscal '22, and we expect it to continue into the first half of our new year. But our business is proving that it can pass along at least the increases necessary to preserve dollar per case profit. As a result, while margin rate may be weaker than originally expected in the first half of the fiscal year, we expect strong gross profit dollars growing with sales and are holding to our Investor Day guidance that gross margins will improve over fiscal '21 and move toward fiscal '19 levels for the full year. Regarding the cost-out program, we are working it aggressively. We expect to invest most of the fiscal '22 savings into the snapback, including the transitory incremental costs that Kevin discussed earlier and important transformational initiatives. From a tax perspective, we expect our overall effective rate to be approximately 24% in fiscal 2022 as we are not assuming changes to the federal tax rate in this guidance. And based on the early strength of the recovery that Kevin mentioned during his remarks, as impacted by inflation and our continued progress against managing through the snapback and investing for growth, we are increasing our guidance on adjusted EPS by $0.10 for fiscal year 2022 by moving the range up to $3.33 to $3.53. Now let's be clear, no one can forecast the unknown. The Delta variant is out there, and our updated guidance does not bake in a shutdown case. We are providing this guidance based on what we can see in our business right now, and we will follow with further updates, positive or negative, as the environment evolves around us, and we continue to execute against the transformation and the snapback. In addition, with rising sales comes an increase in operating cash flow. We continue to maintain the balanced capital allocation strategy that we highlighted at Investor Day. First, investing in our business for long-term growth and increasing our industry-leading position. Capital expenditures during fiscal 2022 are expected to be approximately 1.3% of sales, reflecting the increased sales levels. We continue to look for further sources of smart inorganic growth as we laid out at Investor Day. Second, we plan to maintain a strong balance sheet and expect to hit our announced net debt-to-EBITDA target during fiscal year '22. And finally, recall that, in May, we announced the conditions to the initiation of share repurchase, resulting from the new $5 billion share repurchase authorization. Here they are: the market recovery must be robust. That is happening. The investments in the business must be fully funded, including M&A. We expect to have more than adequate capital for our planned investments. Our debt reduction must continue, and our investment-grade rating must be preserved. As I discussed, we are ahead of schedule on reductions of debt and expect to hit our leverage target toward the end of the year. Excess liquidity must exist to fund the repurchase program. It is early days, but with the accelerating recovery, we anticipate available cash to exceed our earlier forecast. Applying the criteria we announced in May, if business trends continue, then we will consider options to return more capital in fiscal '22. However, having said those words out loud, I want to be clear: Our decision tree is based on our balanced capital allocation strategy. In summary, our performance over the past year has been strong, and the fundamentals of our business are solid as we look to the coming year. We are excited about the future as we kick off fiscal year 2022. Operator, we are now ready for questions.

Two questions. I was going to ask you first to help us out on the industry overall. So if we think about some, I'll call it, purging of accounts, right, where you just can't get there, not saying Sysco is doing that, but just very broadly high level, I was wondering if you could talk about how material that is. Is it too early? I mean, it just seems reactionary, as like you said, July, the recovery is ongoing. And then where does that account go? I mean, does it go to another broadliner? Or do they head to cash and carry?

Nicole, this is Kevin. I'll take the question. So just to be clear, I said in my prepared remarks, we remain the only national distributor that does not have order minimums, and we have stayed true to that throughout this entire crisis, including during the COVID recovery. I communicated even more clearly in regards to that, that we remain in a better staffing and inventory position and the inventory at large, and that's been a huge positive for Sysco. Our July results, as we communicated on the call, continue the sequential momentum of increased sales and case performance, and we are not seeing a slowdown in our performance in the month of July. I don't like commenting on what others are doing. I don't think that's my place. I think it is public knowledge that select distributors are, in fact, raising order minimums. And they are, in fact, deciding to not ship to select customers. Where that customer goes, it would be a combination of a distributor that has the availability to ship and cash and carry. Those would be the two places that the customer would go.

Fair enough. And then just for your team specifically, on inflation, obviously material. Could you talk about some key commodities in terms of exit rate or real-time? I'm thinking along the lines of poultry, pork, beef, and we're hearing maybe that moderating a bit.

Yes. We're not seeing a moderation in inflation. That is not something that is occurring in our book of business. Where it's coming from is pets, poultry, as you communicated, and pork, and that's consistent in the most recent period versus how we exited Q4. What we said in our prepared remarks is that inflation accelerated sequentially each month in quarter 4. I would say July has been flattish to the exit velocity of inflation from the month of June, and we've not seen a slowdown. Now what I did say in my prepared remarks is I do anticipate inflation will eventually slow down. Supply will come back into harmony with demand. And when that occurs, the price inflation that we are experiencing, and then, therefore, we're partnering with our customers to pass it on, will begin to normalize, but it has not meaningfully begun to do so yet at this time. And I'll pass to Aaron for any additional comments that he wants to make.

Thank you, Kevin. A couple of quick thoughts. First, modest inflation is not a bad thing in the industry, so long as we can pass it through, and we have proven in the last quarter that we expect to be able to pass it through. Kevin already called out that we were high single digits from an inflation perspective in Q4, really, across our categories, and we are forecasting that will continue certainly into Q1 of our new fiscal, if not the first half, and then moderate thereafter. It's also important to point out that we're dealing with a two-year stack. Fiscal 2020 was actually modestly deflationary, and so we're reacting to that. And I just want to point out again that, given our scale, given the advantages we have, right, we have been successful and expect to be successful in passing through whatever inflation throws at us by commodity type as we carry forward. Thank you.

Great. Two questions. The first one, just looking at fiscal '22 more broadly. I know you mentioned the culmination of your earnings guidance bumped $0.10. Looks like that's effectively the Q4 beat. But otherwise, the commentary you made, the strong sales that's beating '19 levels and the solid management of inflation and costs, I'm just wondering what kept you from raising that guidance seemingly more than the Q4 beat. I'm just wondering whether you're tempering expectations on thoughts that maybe things do slow down. I think you mentioned that you're anticipating the trends continue the way they are. So just wondering what are the headwinds that potentially or the push and pull that will potentially limit you from raising the guidance on fiscal '22 more than the Q4 beat? And then I had one follow-up.

Sure. Well, let me respond to that great first question, and I would answer it this way. We believe in a cautious and pragmatic approach to our financial guidance to Wall Street. The practical reality is that there's a lot going on, right, with the continued COVID recovery as well as the significant transformation that Kevin is leading across Sysco. And so both, as we laid out during our Investor Day in May and now with this update 90 days later, we're taking a cautious and pragmatic approach to it. Things that could change, of course, is the speed of the recovery curve, right? It could accelerate or moderate, right? We're taking the best view we've got in the business as we are today. Similarly, from a profitability perspective, we have talked about our significant cost-out objectives, balancing out the snapback costs as well as the investments we're making in the transformation. And so we believe that the guidance range we've provided today, the $3.33 and the $3.53, is a cautious and pragmatic update to the guidance we provided at Investor Day, and that's what we're going to go get done.

Understood. And then the follow-up was just on the industry as we're hopefully in the later stages of the COVID pandemic. I know going in, there was excitement around a few things: one, further penetrating existing accounts, also adding new accounts and then adding growth via M&A. So I'm just wondering, Kevin, maybe your thoughts versus the start of COVID, whether you'd say there's any positive or negative surprises. I think you gave us some color around the $2 billion of adding new accounts, so that one seems pretty successful. But any thoughts around where you are for penetrating existing accounts or adding growth via M&A would be great.

Jeff, thanks for the question. I'll just cover kind of the three sources of growth and just repeat a couple of key messages, add a little bit of additional commentary. Yes, from a national sales wins perspective, we posted an additional substantial quarter, net $200 million additional on top of what we've already won. So that's more than $2 billion of net business in the national sales. To be clear, we're not going to report that number going forward. That's something that we were doing during COVID to give a sense of confidence on what was happening kind of under the water because the overall water level was lower than what it should have been because of COVID, but we're going to pause, going forward, on reporting on that. But we had another great quarter, and we don't anticipate that slowing down. We have the ability to continue to win national contract business. The why is that those customer types have tremendous confidence in Sysco's breadth, depth, and expertise to be able to ship on time and in full. I get asked the question all the time, 'Why are you winning on the national sales basis?' It is not because of rates. We do not 'underbid' the market to try to win new business. We bid appropriate market rates, and we win because of our service experience and our capabilities of our national sales team to represent Sysco in a compelling way. So that trend has continued. I would say the surprise, and it's a very pleasant and positive one for the industry at large and also for Sysco, is that the independent restaurant customer who was predicted to go out of business just simply has not. We are shipping 10% more unique doors than we were pre-COVID, and that factoid alone conveys the health of the independent customer, but it also conveys that Sysco has won big in net new customers in the independent space because the industry is down about 10%, so we have a 20-point delta in our performance versus the industry at large and the ability to serve that customer type. The why that has occurred is because we have changed our compensation model for our sales reps. We make it worth their while now to more significantly prospect new customers, and we have improved the customer onboarding process in a meaningful way. And we've eliminated order minimums, which eliminates, again, another barrier of our new customer joining our mix. I would say in regards to customer lines of penetration, that's something that our Recipe for Growth is going to address in spades, and I anticipate additional momentum on cases per operator in fiscal 2022, and that gives Aaron and me the confidence in the guidance that we just provided. As it relates to acquisitions, we're proud and pleased. Very soon, we will be closing on the Greco acquisition. It's a terrific business focused on the Italian segment, unique products, unique service model, delivery frequency that is substantial, and we're going to grow that platform. We believe that there are additional acquisitions out there that are tuck-in, fold-in. We do not have plans at this time to do any substantial M&A.

Can you quantify how much of an impact inflation had on your gross profit and EBITDA in 4Q? And how should we think about the impact of that on financials over the next few quarters?

Thank you for the question, Mark. We have indicated that our gross profit increased compared to fiscal '19. However, we haven't provided specific details on the impact across the P&L lines, and we do not intend to do so. I want to reiterate that modest inflation can be beneficial for our business as long as we manage it effectively. Looking ahead to fiscal year '22, we anticipate that inflation will remain high in the first half and then moderate afterward.

Got it. That's helpful. And then you noted that to date, the Delta variant hasn't had much of an impact on demand. Just curious how this compares to what you saw in the U.K. with respect to consumer behavior, understanding the restrictions are a bit different out there, but whether there are any learnings that you can bring to the U.S. from it.

Mark, it's Kevin. I'll start by emphasizing the positive aspect. We are not seeing any sales impact in July related to Delta. That's the key point. While we cannot predict the future or potential changes, such as government actions affecting on-premises dining, this is not included in our forecast since we cannot foretell if such changes will happen. From a broader perspective, France has been proactive in implementing a vaccination passport requirement for dining in restaurants, and we are ready to manage that alongside our French operations, with this policy taking effect in about a month. Some believe that the vaccine passport will bolster people's confidence in dining out, while others feel it may reduce foot traffic. I think these factors may balance each other out, but it's uncertain. Many of you are aware that New York is introducing a similar vaccine passport, which will be used in Manhattan, but it's too early to draw conclusions. Currently, Delta is not affecting our business trends. As I mentioned earlier, we are prepared for any government shutdown and have the capability to adapt. I also want to highlight a positive aspect: there are sectors within our business that have not yet fully recovered but will as schools, both K-12 and colleges, resume in a more significant way. Compared to 2020, this will certainly be beneficial. Moreover, many companies are returning to work after Labor Day, which serves as another boost for our business since we are the primary distributor of food to these organizations. This, along with the revival of leisure and business travel in our hospitality sector, represents considerable opportunity. That's why we provided the forecast we have. Addressing Jeff's question about why we aren't more aggressive, it's because we can't forecast the unknown. However, we are confident in the trends we can observe and in our ability to meet the updated forecast shared today. I'll hand it over to Aaron for any further insights.

Thank you, Kevin. Two brief thoughts, just to reemphasize, as Kevin called out. There are parts of our business, notwithstanding our great Q4 results, that still have the opportunity to come up the recovery curve: education, FSM, and significant parts of our international business. But I also want to point out what perhaps is obvious, forgive me for that, during the last couple of quarters, we've been managing a global business where the restrictions are different by city or different by state. And so as we look forward, part of the strength of our portfolio is that it's a portfolio. And we will have regions performing differently than others as various cities, counties, states, or countries react differently to their situations, and that creates a great diversification for us from a portfolio result perspective.

I wanted to follow up on the staffing. I know you made good progress on the hiring initiatives, but it sounds like there's more to go. So kind of curious how much of this incremental supply chain and labor inflation hit in the fourth quarter relative to last quarter and how to think about the magnitude into the first quarter and '22 as additional channels come back. I know you provided some metrics, but if you could clarify that.

This is Kevin. I'll begin by discussing the current situation, and then I'll hand it over to Aaron to address the quantification part of your question. The good news is that we set a goal to hire over 6,000 people in the second half of our fiscal 2021, which aligns with the first half of this calendar year, and we achieved that. We are in a relatively good position nationally and better off than the industry overall. The positive aspect is that the recovery is occurring faster than we anticipated, which is beneficial for our financials but also adds pressure to our hiring process. We have additional roles and warehouse selectors to fill, and we are actively working to address that. We are removing any barriers to recruitment, such as offering bonuses for hiring and retention, increasing our recruitment team, and promoting awareness of the high-quality, well-paying jobs we offer. We have daily meetings to discuss our staffing status. Neil and I reviewed this last night. We have 76 warehouses in the United States, the largest number in the industry, with only a few facing challenges. Most of our sites are performing well, and we have additional capacity to manage demand across locations. Smaller companies typically lack this flexibility. Globally, we manage 300 warehouses, and the scale of our operations gives us an advantage, especially in challenging times. Enhancing our staffing health is our top priority, as it will lead to more new and incremental business opportunities. We are dedicated to this effort. Now I’ll turn it over to Aaron to discuss the financial implications for Q4 and comments for 2022.

Sure. I'm not going to provide a specific number, but I can share a couple of points for context. First, while costs are increasing, as Kevin mentioned, these increases are mostly temporary. We anticipate managing through them throughout fiscal '22. Second, our cost reductions will fund these expenses, and over time, this will create additional opportunities for us. Lastly, I found it interesting that our driver costs as a percentage of our operating expenses remained stable between Q4 of '21 and Q4 of '19. I do expect a slight increase in the early part of the year as we navigate the challenges discussed in this call, but this stability gives me confidence that we can manage the situation effectively. Thank you.

Kevin, I wanted to follow up on labor cost inflation because it's a significant concern for investors right now. You mentioned that you view this as a transitory issue. What is your current assessment of the risks associated with that perspective? What data points do you have that support this view? I'm interested in how you assess the risks involved, especially since you have more visibility than we do.

Yes, that’s an important question, and I completely understand your concerns. I would likely ask the same thing if I were in your position. It's worth noting that what some others say may not align with our views. What I’m going to share are the realities at Sysco and our current actions. I encourage you to refer back to our prepared remarks; I was deliberate in how I characterized our situation, but I will provide further clarification as clearly as possible. In our fourth quarter, which has continued into July, we are making expenditures on a temporary basis to enhance our staffing situation. This includes retention bonuses, hiring bonuses, and recruitment bonuses. We are also compensating our sales consultants to assist in finding drivers within the industry. These expenses appear in our P&L for Q4, and we had a strong quarter because our sales growth more than offsets these temporary costs. We will maintain these efforts until our staffing levels meet our standards. However, we will be cautious regarding permanent structural wage increases. We will consider them only when absolutely necessary. As you know, these costs are enduring and accumulate over time, which is why you're inquiring about them. My background in an industry that has dealt with labor shortages for over a decade has taught me the importance of being careful with costs, especially in the pharmacy sector. We want to prevent a similar issue in our industry. That said, we do need to invest in base pay in certain locations where the market has shifted, and we are ready to adapt to avoid any competitive disadvantages. As I mentioned in my prepared remarks, we will seek productivity improvements to offset any structural and permanent cost increases, as Aaron and I have identified opportunities in our operations for greater efficiency. For example, we can run our trucks more effectively to decrease annual delivery miles, creating potential offsets for wage increases relative to sales. Aaron, I'll hand it over to you if you want to share any thoughts on the cost perspective for 2022.

I think it's well said, Kevin.

How do you view the effects of ongoing inflation on demand, and what types of businesses should we consider? What strategies can you adopt to alleviate that pressure for your customers without sacrificing margins? I assume this might involve promoting certain lower-cost products, but I'd appreciate your insights on this.

Thank you for the question, John. I want to make sure I understood your first question correctly. I believe you asked if increased inflation dampens demand. If that’s correct, I’d like to hear more about it.

Yes. Go ahead.

I want to clarify the current situation, which has led to favorable gross profit dollars for Sysco in our fourth quarter. The ongoing inflation is not hindering demand at this time. Our restaurant partners are successfully adjusting their menu prices, and there is significant consumer demand for dining out, along with strong consumer spending power in the market. Typically, elevated inflation would present challenges, but we seem to have adapted to a perception that 2% to 3% inflation is manageable, while anything above that is tougher. This is a unique period, and despite experiencing elevated inflation, demand remains high. While this has slightly impacted our gross margin rate percentage, it has actually contributed to an increase in gross profit dollars, leading to a strong quarter for us. If this trend were to persist indefinitely, it would be a concern, and we are actively seeking answers to the second part of your question in collaboration with our supplier partners. We are exploring alternative products and different cuts of meat, especially in the poultry and pork sectors, and we are putting in significant effort to secure additional supply sources. We see it as our duty to assist our customers in reducing cost of goods sold over time. Judith Sansone and our merchant team are diligently working to lower COGS so we can deliver great value to our customers and ensure profitable growth for both them and us. Aaron, do you have anything to add?

I would just add one data point, which is the proof point in Kevin's observations is that foot traffic in the restaurants are up, even with the increased menu prices.

Given your stronger-than-expected sales near term and what looks like accelerating market share, can you help contextualize where you see your results versus the industry today as we think about that 1.2 times the industry market rate target in fiscal '22? And then given all the national and local customer wins as well as your initiatives, more orders, better staffing, better inventory, do you think that 1.2 times could be conservative?

Lauren, thank you for the question. This is Kevin. Go back to May 20 when we talked about our three-year plan. What we described at that time for both '22, '23 and '24 was this is what we have received from Technomic, that's the company that we use for this, is the view on what the market recovery will be and that we will grow 1.2 times that in our first year of the three-year plan and 1.5 times that in fiscal 2024. Both Aaron and I did a caveat that as the market grows faster, we need to grow faster, too. And if the market underperformed versus those forecasts, we commit we will grow 1.2 times. I would actually take the view of the industry recovering much faster than what we expected, could put pressure on that 1.2 times, but we are not communicating anything other than we are fully committed to delivering that level of growth. The total, for sure, will be higher for 2022 than what we originally thought, which is why Aaron announced today a lift of $2.5 billion of incremental sales. And we're on track to deliver the 1.2 times for this first year of the three-year plan, and we're on track to be able to deliver the 1.5 times as well for the third year. So trying to be as transparent as I can. The market is growing, which is why we lifted sales by $2.5 billion, and we're on track to deliver the 1.2. We are seeing growth across various markets, and this trend has continued into July without any signs of slowdown on a week-by-week basis. Aaron effectively clarified one of my points regarding international operations. Internationally, we were mostly shut down in Q4, and our biggest markets, particularly in Europe, only began reopening in late May and June. There is still significant recovery potential in international markets as we have not fully bounced back. We achieved a notable profit improvement quarter-over-quarter, moving from a breakeven in Q4 to a $92 million profit increase from Q3. We see ongoing momentum as the market reopens, especially in international operations, foodservice management, and hospitality. Additionally, we have not observed any slowdown in the restaurant sector within our largest U.S. business.

I would just add that one of the advantages of starting early and planning for the recovery is that we have the inventory to support the growth in cases that we are anticipating.

I just wanted to go back and make sure I'm clear on the growth you're expecting, the 1.2 times the industry. What is the industry expectation or your view or whoever you look to for that advice, what are they assuming the industry is growing at in '22? And is there a comparable number we can look to for the fourth quarter, what your growth was relative to the industry?

Sure. I encourage you to review our May 20 Investor Day presentation. Our long-range plan suggests that we will grow faster than the overall market performance. This isn't based on dollar figures, but rather on industry metrics. We committed to growing 1.2 times the market in fiscal '22, aligned with the transformation investments we are making. By fiscal '24, thanks to these investments and the increasing return on them, we aim to grow at 1.5 times the market rate. We have previously stated that we utilize Technomic for industry data, and we adjust our expectations based on their forecasts. As Kevin mentioned, we are indeed growing, as reflected in our fourth quarter results. We are on track with our 1.2 times growth goal for fiscal year '22, and we are optimistic about both our organic and inorganic initiatives that will help us fulfill our commitments. Neil can also provide additional details off the line if you'd like.

Yes, that would be great. And then, Aaron, you said you overachieved your savings goal this year, I think $350 million. Maybe just by how much? And as a longer-term question, you talked about another $400 million opportunity at some point in '23 and '24. Have you thought about, is this savings really going to reinvest in the initiatives you've talked about? Or do you think about a net versus gross savings? Or is that too far off to really get that kind of granularity?

Let me address this from a different perspective. We anticipate that our cost savings in the short term will support two main areas: first, the significant transformation investments we are making across all aspects of our business, and second, the temporary costs that Kevin mentioned earlier. Fortunately, we began our cost-reduction efforts before implementing the transformation investments and before the additional snapback costs emerged, giving us a solid foundation before we need to utilize those funds. Furthermore, as we progress beyond the snapback and transition period, and as we complete our transformation investments, this will have a positive impact on our income statement. We expect to allocate more of these savings to our bottom line. I've been cautious about providing specific percentages. Instead, we have provided EPS guidance, which reflects an overall assessment of our business situation.

This is Kevin. I would like to mention two points. First, our cost-cutting measures will not affect our ability to serve our customers. In fact, we plan to add sales representatives over time and increase delivery frequency for our customers. The cost reductions we are implementing are permanent and structural. For instance, we sold a corporate headquarters that was deemed unnecessary because more employees are working remotely now than before. This asset sale reduced our operating expenses. We also restructured our field organization to enhance efficiency, agility, and strategic leadership. That restructuring is complete, and those costs are fixed and structural. We have many other examples, including indirect sourcing. Our purchasing strategies for tires and specific IT contracts will result in significant savings as we adopt a more aggressive approach to strategic sourcing. Aaron and his team are doing an excellent job in this area to reduce costs.