Sysco Corporation

Good morning and welcome to Cisco's third quarter fiscal year 2019 conference call. As a reminder, today's call is being recorded. We will begin today's call with opening remarks and introductions. I would like to turn the call over to Neil Russell, Vice President of Investor Relations, Communications, and Treasure. Please go ahead.

Good morning, everyone, and welcome to Cisco's third quarter fiscal 2019 earnings call. Joining me in Houston today are Tom Bonnet, our Chairman, President, and Chief Executive Officer, and Joel Brade, 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 investor 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 Binet.

Good morning, everyone, and thank you all for joining us. I'd like to start off this morning with an overview of our third quarter performance and a discussion around our business segments and the key highlights for the quarter. Following that, Joel will cover the financial results in further detail. Overall, We are pleased with our overall operating and financial performance for the third quarter. We delivered improved year-over-year growth in line with our expectations and managed costs well, including the ongoing cost savings associated with our business transformation initiatives. The improved pace of performance for the second half of fiscal 2019 that we previously spoke of is, in fact, taking shape. And while we still have work to do, We remain confident in our ability to deliver our adjusted operating income growth target and now expect that to be at the low end of the $650 to $700 million range. Joel and I will both elaborate on this further. From a total Cisco perspective, our third quarter results include increased sales of 2.2% to $14.7 billion, gross profit growth of 2.9%, an adjusted operating expense decrease of 0.4%, which translated into an adjusted operating income increase of 16.6% to $620 million, and an adjusted earnings per share increase of 17.4% to 79 cents. Turning to U.S. restaurant industry data, the overall sales trends remain mixed. According to BlackBox and Naptrack, we saw some choppiness throughout the quarter. as March data was generally positive compared to February, in part due to weather, which negatively impacted February sales. Additionally, same-store sales were positive for the quarter, although traffic once again declined. However, even with this recent choppy industry performance, the overall macro trends remain generally favorable for our customers, as illustrated by continued low unemployment, which was at 3.8% for March, and strong GDP growth for the first quarter at 3.2%. Economic growth in the international markets in which we operate was mostly positive. This includes modest growth in the food service sector, although we continue to see the impacts of Brexit on our UK business due to uncertainty and low consumer confidence. In Canada, the Consumer Confidence Index continues to rise, with March seeing the third consecutive monthly increase. with economic forecasting the Canadian food service industry to grow 0.6% in real terms or 4.1% on a nominal basis for calendar year 2019. Additionally, we continue to see reasonable overall trends in the other international markets where we do business. As we discussed last quarter, we anticipated seeing an increased benefit from our transformation initiatives beginning in the second half of this year. and we began to see those benefits show up this quarter. Overall, our results included a bit softer top line than expected, offset by good overall expense management, which delivered solid operating profit performance that was in line with our expectations. Examples of initiatives that are driving benefits from an expense management perspective include our field finance transformation and the corporate office administrative restructuring, which we implemented last quarter. As it relates to acquisitions, In April, we acquired J&M Wholesale Meat and Imperial Foods, two smaller Central California distributors. J&M Meat is a food service distributor that specializes in key center-of-the-plate products, and Imperial Foods carries dry canned good products, which both are complementary to our existing broad-line business in the Central California area. They also provide Cisco with the opportunity to further extend our reach to the important Hispanic customer segment. we will begin to see the impact to our business in the fourth quarter from both of these acquisitions. Additionally, in the quarter, we made the decision to sell our Iowa premium cattle processing business. While our three-year plan forecast included positive operating income for this business, we believe the divestiture of this business is in alignment with our strategic priorities and allows us to focus on our core strength as a distributor. The transaction will result in a reduction of planned operating income of approximately $25 million and is the reason for us now projecting to achieve the low end of our adjusted operating income growth range. Now I'd like to transition to our third quarter results by business segment, beginning with U.S. food service operations. Sales for the third quarter were $10.1 billion, an increase of 4.1%. Gross profit grew 5.1%. including an improvement in gross margin of 18 basis points. Adjusted operating expenses grew 2.3%, and adjusted operating income increased 10%. Total case volume within U.S. Broadline grew modestly at 2.1% for the quarter, of which 1.3% was organic. However, we delivered relatively solid growth in our local business, as local case growth was up 3.1%, of which 2.2% was organic. We are pleased with the gross profit growth we delivered for the quarter, which was impacted by a number of factors, including continued positive momentum from category management as we continue to deepen our relationships with our strategic supplier partners, year-over-year favorability from the impact of inbound freight, and continued growth in our Cisco-branded products, which increased by 28 basis points with our local customers this quarter. In addition, the inflation rate for the quarter was 2.3% in U.S. broad lines, up nearly a point from the second quarter of this fiscal year. Technology continues to be one of our fundamental enablers of growth as we transform our business to serve our customers in ways that best meet their needs. We are continuing to provide new capabilities and tools to enable an improved experience of doing business with Cisco, including new ordering tools, which has driven our e-commerce ordering utilization to more than 53% with our local customers. From a cost perspective, Within U.S. food service operations, our expense management was solid, as adjusted operating expenses were 2.3% for the quarter. While we continue to see supply chain cost challenges in the warehouse and transportation areas, we are seeing positive momentum from our recruiting, onboarding, and retention initiatives. These challenges were partially offset by continued improvements seen as a result of our routing optimization initiatives and ongoing process improvements. Furthermore, our finance transformation and smart spending initiative have also provided benefits in the quarter. Moving on to international food service operations for the quarter, sales decreased 1.5%, gross profit decreased 3.1%, adjusted operating expenses decreased by 5.8%, and adjusted operating income grew 30%. We saw solid overall performance in Canada with strong top-line growth and solid gross profit dollar growth of more than 5%, driven in part by an inflation rate of 2.6%, along with strong expense management partially benefiting from our ongoing regionalization efforts, which are progressing well. In Europe, we continue to have mixed results. The U.K. continues to feel the effects of Brexit uncertainty, causing depressed consumer confidence. However, our Brexit U.K. business continues to stabilize operationally, as a result of our multi-year initiatives to transform the business. In France, social unrest continues to impact tourism and consequently food away from home consumption. Our sales performance during the third quarter was adversely impacted by this unrest and by some operational challenges associated with integrating Break France and Davigel into Cisco France. That said, the overall integration and supply chain transformation continues to be on track to deliver the long-term benefits that are part of our multi-year plan. As for our business in Latin America, we continue to see growth opportunities in this region, both with our chain restaurant customers and with our expansion of cash and carry locations to complement our broad-line footprint in both Costa Rica and Panama. Moving on to SGMA, we continue to make disciplined choices in an effort to deliver improved profitability. In Q3, we saw expected softness in the top line due to transition customers, while seeing gross margin increase by 28 basis points year over year. Solid expense management drove adjusted operating expenses down 7.1% versus prior year, resulting in significantly improved operating performance. In an effort to improve overall profitability in this important segment of the business, we will continue to take a very disciplined approach to growth as we move forward. Lastly, in our other business segment, we recently announced the restructuring of guest supply. As the industry landscape evolves, we are focusing on optimizing our business model and creating a more focused and agile organization to better meet the changing needs of our customers. The new operating structures created three distinct business units under the parent company Guest Worldwide. The business units include Gilchrist & Soames, our amenity manufacturing unit, Manchester Mills, one of the world's leading textile producers, and Get Supply, which serves the world's top hotel chains and independent properties in over 100 countries as a full-spectrum distribution solution provider. In summary, we continue to feel good about the fundamentals of our business. Our customer and operational strategies are firmly aligned around enriching our customers' experience of doing business with Cisco. and we remain focused on engaging our 67,000 dedicated associates around the world to deliver against our financial objectives associated with our three-year plan. Let me now turn the call over to Joel Grade, our Chief Financial Officer.