Sysco Corporation

Good morning and welcome to Cisco's Second Quarter Fiscal 2018 Conference Call. As a reminder, today's call is being recorded. We will begin today's call with opening remarks and an introduction. I would like to turn the call over to Neal Russell, Vice President of Investor Relations, Communications, and Treasurer. You may begin, sir.

Thanks, Natalia, and good morning, everyone. Welcome to Cisco's Second Quarter Fiscal 2019 Earnings Call. Joining me in Houston today are Tom Binet, our Chairman, President, and Chief Executive Officer, and Joel Grady, our Chief Financial Officer. Before we begin, please note that statements made during this presentation that state the company's or management's intentions, beliefs, expectations, or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act, and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the company's SEC filings. This includes, but is not limited to, risk factors contained in our annual report on Form 10-K for the year ended June 30, 2018, subsequent SEC filings, and in the news release issued earlier this morning. A copy of these materials can be found in the Investors section at cisco.com or via Cisco's IR app. Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures are included at the end of the presentation slides and can also be found in the Investors section of our website. To ensure that we have sufficient time to answer all questions, we'd like to ask each participant to limit their time today to one question and one follow-up. At this time, I'd like to turn the call over to our Chairman, President, and Chief Executive Officer, Tom Benet. Good morning, everyone, and thank you, as always, for joining us.

I'd like to start this morning with some key themes that drove our results for the quarter, along with some comments on the current macro environment we're operating in, followed by a discussion of recent organizational changes, then continuing with our U.S. Food Service Operations business results and concluding with a discussion of our international and other business segments. Joel will then discuss the financial results in more detail. For the second quarter, we saw improved year-over-year top-line results and are continuing to execute on our strategic priorities designed to improve our overall performance. Our focus for the quarter was led by our efforts to enrich the customer's experience of doing business with Cisco and to consistently provide excellent service to help our customers be successful. We remain committed to achieving our three-year plan financial objectives, although the manner in which we achieve them may look slightly different than what we originally outlined. Joel will discuss this further in just a few moments. Our results for the second quarter include a sales increase of 2.5% to $14.8 billion, gross profit growth of 2.7% to $2.8 billion, and adjusted operating expense growth of 2.1%, which delivered an adjusted operating income increase of 4.8% to $603.3, and an adjusted earnings per share decrease of $0.03 per share to $0.75. Local case volume was solid within U.S. Broadline operations, growing 3.3%, of which 2.4% was organic. Total case volume within U.S. Broadline grew 2.9%, of which 2% was organic, with local growth outpacing national this quarter. As previously discussed, we expected overall softer volume this quarter due to the lapping of the HFM acquisition and the lapping of two large national customers. Looking at broader economic and industry trends, And as we think about the key drivers in food service and the segments in which we operate, there are a number of factors which are important to the overall macro environment, including consumer confidence and discretionary spending. And even with the recent and somewhat volatile financial markets, we continue to see U.S. consumer confidence remaining fairly strong, driven by the solid labor market with unemployment remaining low at 3.9% as of December, which is normally a good indicator of that higher consumer confidence. In the restaurant industry, we continue to see sales growth, particularly in same-store sales, though traffic continues to be mixed. And lastly, from an international economic outlook perspective, it's mixed where we do business. In the U.K., the consumer is still dealing with uncertainty and concerns over Brexit next steps. However, this is balanced with some strength in other geographies and, generally speaking, decent consumer spending and overall industry trends in the other international markets where we do business. Turning to the topic of M&A, M&A continues to be an important part of our strategy for growth. Last week, two new acquisitions were made public, one in the U.S., Wah Foods, and one in Ireland, Classic Drinks. So these are examples of smaller transactions, especially compared to the size of Total Cisco, These acquisitions are great examples of our M&A strategy. WA Foods is a central Illinois distributor with the overwhelming majority of its business with independent restaurants. And Classic Drinks is an established specialized wine and spirits distributor, which will further strengthen our existing product portfolio in our Ireland business. I'd like to now transition to some organizational and leadership changes that we recently announced. In order to drive continued growth, and to create value for all Cisco stakeholders, we implemented organizational and executive leadership changes, which will further align the company with its customer-first operating model and streamline the business. These changes will help us increase agility, reduce costs, and accelerate decision-making across the business by getting closer to our customers and better aligning our resources to support and address their evolving needs. Additionally, this reorganization results in an approximate 10% reduction in salaried corporate support positions. And while any decision which impacts our associates is a difficult one, this is an essential step to realign the organization and sharpen our focus on the company's key strategies to enable growth. Now I'd like to transition to our second quarter results by business segment, beginning with U.S. food service operations. Sales for the second quarter were $10.1 billion, an increase of 4.2%. Gross profit grew 4.5%, operating expenses grew 4.7%, and operating income increased 4.2%. Inflation during the first two months of the quarter remained relatively flat, but increased towards the end of the quarter, contributing to the total gross profit dollar growth. Overall gross profit growth was also positively impacted by an increase in case growth, a reduction in spot market usage of inbound freight, continued growth in Cisco brand, which was up 59 basis points in our local segment versus prior year, benefiting from our ongoing category management initiatives and our cutting-edge solutions innovation platform. Our cutting-edge solutions continue to provide value-added products for our customers. We are excited about our next launch of these innovative new products that will be taking place in a couple of weeks, which we also believe could be our best yet. Also of note, we continue to see an increase in the utilization of our digital ordering platform, which has improved over 50% of local cases ordered. Additionally, we continue to make progress on improving our customer-facing tools, including a refreshed delivery app and improvements to our digital shopping platform. From an expense perspective, operating expenses grew for the quarter, driven primarily by continued supply chain cost increases in both the warehouse and transportation areas. While we have seen increased costs in these areas in recent quarters, we continue to remain focused on better managing and mitigating these costs. As an example, we continue to focus on specialized recruiting, training, and onboarding efforts, and we are starting to see an improvement in retention, especially in the warehouse. Moving on to our international food service operations for the quarter, sales increased 0.8%, gross profit decreased 1.6%, Adjusted operating expenses decreased by 2.6%, and adjusted operating income grew 5.1%. In our international segment, from a top-line perspective, we saw improved performance in Canada, with strong sales growth year-over-year, despite some softness in Alberta. In the U.K., top-line performance for the quarter was impacted by continued uncertainty surrounding Brexit, and our business in France was impacted by the Yellow Vest protests during the critical holiday timeframes. From a cost perspective in our international segment, we had some supply chain challenges in the U.K. as we onboarded several new customers to the business. In Ireland, the team continues to execute strongly against their integration initiatives, and as a result, synergies from the merger of Brakes Ireland and Palace are ahead of schedule. Our integration of Brake France and Davigel into Cisco France is not only progressing well, but we launched our new Cisco France brand to the French market last week. at the SURHA World Hospitality and Food Service event in Lyon. This is an important step to building on our position as a leading European food service provider. As we've also discussed, in Europe we have accelerated the investments we are making related to our long-term strategic growth plan, which are designed to enrich the customer experience and position us well in these markets. Joel will discuss this point further in a moment and its impact to our certain items this quarter. Moving on to Sigma, performance for the quarter was down as we continue to optimize our business in this industry segment, and we remain focused on improving our overall operational performance. We expect to see continued softness in the top line as we make disciplined choices in an effort to improve profitability for the long term. And lastly, in our other business segment, guest supply had strong top line performance during the quarter with increased sales of 8.3% and increased gross profit of 5.2%. So costs continue to be a challenge due to continued impact of tariffs, product availability, and the increased cost of shipping products to our customers. Overall, we are pleased with our performance in the hospitality segment and remain excited about the long-term potential for this business. In summary, Overall, the fundamentals in our industry and in our business remain solid. We plan to continue to deliver against our strategic priorities to provide an improved customer experience, excellent customer service, and strong operating performance. And finally, I'd like to thank our dedicated associates across the company for all of their efforts to make Cisco the distributor of choice for our customers and the leader in the food service industry. Now I'll turn the call over to Joel Grady, our Chief Financial Officer.