Sysco Corporation

Good morning and welcome to Cisco's third quarter fiscal 2020 conference call. As a reminder, today's conference is being recorded. We will begin with opening remarks and introductions. I would like to turn the call over to Neil Russell, Vice President of Corporate Affairs. You may begin.

Good morning, everyone, and welcome to Cisco's third quarter fiscal 2020 earnings call. On today's call, we have Kevin Hurrican, our President and Chief Executive Officer, and Joel Grade, our Chief Financial Officer. Before we begin, please note that statements made during this presentation, which 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 29, 2019, 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 President and Chief Executive Officer, Kevin Hurrican.

Thank you, Neil, and good morning, everyone, and we thank you for joining our third quarter fiscal 2020 earnings call. I hope that you and your families are staying safe and healthy during this time. As the business world manages through this rapidly changing operating environment, our first priority as leaders and as a company will be the health and well-being of our associates, our customers, and our shareholders. Our prepared remarks today will be longer than normal due to the amount of content that we want to share with you. During this morning's call, I'll spend time discussing Cisco's rapid response to the COVID-19 crisis and how we are positioning the company for long-term success. It is extraordinarily important that we as leaders manage simultaneously for the short-term and also for the long-term success of Cisco. My comments today will inform you on both of these time horizons. I'll then turn it over to Joel, who will discuss Cisco's third quarter results and provide further financial updates. Lastly, I'll make a few closing remarks before we complete the Q&A section of the agenda. As I begin my remarks, let me assure you, we have the financial ability to weather this storm for as long as it takes. We entered the COVID-19 crisis with an extremely strong balance sheet, and we have taken important steps to further strengthen our cash position, helping to ensure our liquidity during the crisis and enable our ability to emerge stronger than ever. In response to the current environment, we have identified four key areas of focus. First, we have taken swift action to further strengthen our overall liquidity. As I mentioned, we entered this crisis in a strong position, and we have strengthened our liquidity to provide us with additional flexibility. We have built more than $6 billion of cash and available liquidity that allows for not only financial flexibility and survivability during this crisis, but will enable us to capitalize on an unprecedented competitive opportunity. I am confident that Cisco has the financial ability to invest in inventory and also service levels upon the return of customer demands to food service. There will be profitable market share gains to be had as this crisis unfolds and Cisco will have the investment capability to profitably win new customers. Second, we are focused on stabilizing the business by removing costs from the system. Towards the end of March, our business declined significantly from the moment the shelter-in-place orders were issued. It is a good thing that we are practicing social distancing as a society. The shelter-in-place orders are helping to flatten the curve. With that said, social distancing orders have had a significant impact on the restaurant, hospitality, and education customer segments that we serve. As a result, we needed to quickly reduce our expenses in order to match the lower level of business volumes. Our leadership team has taken swift action to reduce costs during this downturn. In the fourth quarter of fiscal 2020 alone, we have removed more than 500 million of expenses from the business, which includes the difficult decision to reduce our staffing levels by approximately 33% through temporary workforce furloughs and permanent reductions in force. Additionally, We have substantially reduced miles driven by rerouting our transportation fleet and implementing productivity improvements in our operating companies. We will leverage technology improvements to implement those structural changes without compromising service or quality. This is one example of how we will be a leaner, more agile, and stronger version of Cisco post COVID-19. benefits of these changes will begin to be realized in q4 of fiscal 2020 and the permanence changes will deliver an annualized benefit of approximately 300 million dollars in the fourth quarter of fiscal 2020 the expense reductions while significant will be more than offset by the top line sales volume decreases that we are experiencing additionally we have reduced capital expenditures to only business-critical transformational projects. Physical projects like building expansions, fleet purchases, they have been put on hold. Our CapEx investments will focus on those things that will improve Cisco's capabilities and will allow us to win market share in the future. By focusing on a narrower set of strategic initiatives, we will accelerate the pace of change at Cisco, and we will complete key projects more rapidly than previously planned. Examples of these efforts include improving the capability of our shop platform, which is our customer ordering tool, increasing the effectiveness of our Salesforce selling tool, and implementing a pricing tool that will improve management of margin for the long term and increase the percentage of time that our Salesforce can spend on consultative selling versus administrative tasks. Combined, These capabilities will enable our sales team to visit more customers, inspire our customers to purchase more from Cisco, and simultaneously reduce friction in the purchasing environment. These investments in digital technology will allow us to improve the effectiveness of our sales force and increase their efficiency. As a more streamlined company, we will garner more business from our existing customers. An example of this improvement would be the development of a suggested order for our ongoing customers. These orders will include basic items they buy weekly, but will also introduce customers to new items, popular trends, and even deals of the week. These offers will be personalized to the individual customer. The intersection between personalized relevant offers in Cisco's vast purchasing scale creates a capability that is unmatched in the marketplace. We will better leverage our scale advantages that we are now developing, and we are now developing differentiating customer centricity capabilities. Third, we are working diligently to leverage the upside that exists during this crisis by capturing new business opportunities and pivoting our support of current and new customers. Cisco serves a broad spectrum of the food service industry. Prior to the COVID-19 pandemic, roughly half of food consumption within the U.S. took place away from home, and the other half took place inside the home. COVID-19 has obviously tilted that balance and shifted more purchases to the retail grocery channel. As a result, we have pivoted our distribution model to include retail, grocer, and new supply chain partnerships, sectors that we essentially did not serve pre-COVID. We are working with some of the best retail companies in the world in an agile manner to meet the rapidly evolving needs of our customers and communities through both supply chain and labor service partnerships. Over the past several weeks, Cisco has shifted sales of products to regional and national retailers to help alleviate strain in the food supply chain due to a surge in demand at retail stores and shifts within the economy. A brief highlight of some of these wins. We are partnering with the government agencies across the global regions we service to provide much-needed food to communities in need. In the UK, we are shipping more than 200,000 meal kits per week on the behalf of DEFRA, the UK's version of the USDA. In the U.S., we are working with FEMA and the USDA to provide fresh food for those in need through outreach to food-insecure communities. And as recently as May 1st, we submitted our bid to participate in the Coronavirus Food Assistance Program. We would like to thank the various government authorities for their support of these communities in need and also the farmers that we partner with in the food supply chain. Cisco has become a supplier of products to retail grocers. We have shipped hundreds of truckloads of protein, fresh product, and bulk consumables to select retail partners. We expect the majority of this work to be transitory in nature, with the potential for select partnerships to have staying power. We have increased our level of support to our healthcare customers. Our healthcare segment sales have increased roughly 15% to 20%, as we continue to arrange for deliveries of critical products, including PPE to hospitals, urgent care facilities, and long-term care facilities. We are delivering in a safe manner for our associates and those healthcare customers. We are proud to support these frontline healthcare workers, and we salute their dedication to better health. On the logistics side, Cisco is now offering supply chain service contracts such as carrier services, crosstalking, and freight brokerage. Over 50 contracts have been signed with national and regional companies to provide third-party logistics services through the use of Cisco's vast transportation fleet and logistics capabilities. And lastly, Cisco has entered into labor-sharing agreements with select retailers to provide temporary work for opportunities of our furloughed Cisco associates. This action is providing work for our team members and enables Cisco to call them back as soon as volume returns. Our highly skilled labor is providing much-needed assistance to retail. Furthermore, I am pleased to announce that we have filled our important Chief Supply Chain Officer position from the last time we spoke. On April 6th, we welcomed Marie Robinson to Cisco. Marie brings decades of substantial logistics experience to our team from a diverse set of industries in which she has worked. She has managed complex apparel distribution networks, international supply chain, and has direct experience in the food sector. I have full confidence that she will work collaboratively with the rest of our leadership team and will be a tremendous addition to Cisco. Many of our longer-term strategic initiatives will be led by our supply chain department as we transform how Cisco goes to market. It is important to note that while the retail logistics opportunities are significant, and show our ability to quickly adapt to the rapidly evolving environment, these opportunities do not offset our volume declines in the food-away-from-home space. This good work shows our agility, the fight, if you will, within our culture, and we are proud to serve new partners during a downturn in our core business. The part of driving our upside efforts that I am most excited about is the work within our core business to help our restaurant customers be successful. Make no mistake, food away from home is struggling right now with substantial volume decreases the prior year. At risk are the hundreds of thousands of small business customers we serve. At Cisco, we take our leadership position in the food distribution industry very seriously. And now, more than ever before, We are doing everything possible to help our customers. I am proud of the steps that we are taking to serve both new and existing restaurant customers during this difficult time. Cisco is delivering more products and solutions, including Cisco Knows Fresh, an expansive product assortment that includes fresh meats and seafood, produce, dairy, and refrigerated specialty items. We are 100% open for business across all lines of business. especially during these challenging times. We want our customers to know they can count on Cisco to help them succeed with innovative food and product offerings. We developed a COVID-19 selling bundle and leveraged our shop platform to introduce it to all of our customers. We call it our Focus 15 COVID Package, which features a combination of cleaning products, takeout containers, paper goods, and PPE. These bundled solutions are quickly delivering critical goods that our customers need to maintain seamless business operations. By keeping our customers in stock with these essentials, we are helping enable their business to pivot to takeout and delivery and helping them keep their kitchens safe and clean. We remain in stock on these crucial products. We have been assisting thousands of customers with website development for takeout and delivery solutions throughout the outbreak of COVID-19. Many of our smaller partners do not have these capabilities in-house. Cisco has helped provide tools, tips, and solutions to develop digital platforms that drive customer engagement and increase traffic, while also helping provide ancillary services such as home delivery, menu design, to-go containers, and other considerations during this unique environment. We are offering training webinars and educational programs to help our customers navigate the CARES Act and supporting small businesses to help them retain their employees during this pandemic. In under 48 hours, we built a training webinar to help these small customers apply for loans and taught them what the funds are able to be used for in running their business. Our sales team actively invited our customers to join us for these important training sessions. It is a great example of how Cisco is delivering solutions, not just food-related products. Actions like this will ensure steadfast partnerships with our customers long into the future. In less than two weeks, We have helped thousands of restaurants create product marketplaces or grocery restaurants or pop-up shops, lots of names for it, which includes transforming dining areas into pop-up shops where customers can shop for essential pantry items like eggs, condiments, bread, toilet paper, and paper towels. These additional product sales are not only helping communities, but they're also helping the restaurant industry increase traffic and protect jobs. We are pleased to see that our volume to restaurant customers has been improving sequentially, week over week, since it hit the low mark at the end of March. At Cisco, we are helping our customers stay in business, run their business, and transform their business. We know that these activities will help us retain and win additional business from them well beyond the pandemic. In addition to helping our restaurant customers, Cisco has started rolling out direct-to-consumer sales, an area of business that we did not participate in pre-COVID. Our Buckhead Meat and Fresh Point companies have held several pop-up events which sell specialty meat and produce direct to consumers. Furthermore, through Cisco's new websites, onthefly.com within the U.S. and Cisco at Home in Canada, consumers can purchase restaurant-quality steaks to be delivered direct to their homes. We have started offering will call opportunities from our physical locations through web-enabled ordering. If a customer prefers, they can purchase product directly from one of our operating companies and pick up the product themselves. And lastly, within the consumer space, we have partnered with third-party logistics services to offer prepackaged meal boxes featuring a box of specialty produce delivered straight to the customer's front door. We are learning a lot in these direct-to-consumer initial concepts, And we are leveraging these learning opportunities to better serve our customers and keep the food supply chain running. Because simply put, the food supply chain in this country does not work without Cisco. Finally, I would like to talk about what we are doing as a leadership team to ensure Cisco's success post-COVID-19. We refer to this work internally as our snapback planning. The snapback planning includes the following key items. integrated supply chain planning with our customers and our key suppliers to ensure that inventory levels will match the business recovery. Our strong relationships with key suppliers will enable Cisco to stay in stock for our customers during the recovery period and also as we win net new customers. We are also accelerating key strategic initiatives. An example of this work is the transformation of our go-to-market sales structure. We are transforming our sales structure to be more focused, aligning the incentives of the sales force more closely with our business objectives, and increasing the partnership of our sales teams across our multiple lines of business. Cisco stands ready as the distribution provider that is properly positioned for food away from home once the demand returns. We have a strong balance sheet that will allow us to invest when others will not have the same level of strength. When our customers begin to reopen their restaurants, Cisco will have more than enough liquidity to rapidly replenish its inventory to meet the rising demand, to ensure that deliveries are made on time and in full capacity, and to capitalize on the upside by winning new business. In fact, share opportunities are already emerging, as Sigma won a substantial piece of new business as the incumbent distributor confronted economic challenges. Currently, our sales team is doubling down on their customer focus. We are focused on a combination of both better serving our customers and prospecting new ones. We are 100% confident there will be profitable new customers to be served as the crisis creates new opportunities to gain profitable share. We are also confident that demand for food away from home will return over time, and we stand ready to enable that return of demand today. as we continue to be our customers' most valued business partner. Cisco will win in the marketplace through a combination of strong liquidity, agile business decisions, and value-added partnerships that fuel business relationships. We expect that the combination of winning more business from our existing customers through the trust and partnership we have cultivated during COVID-19, paired with the prospecting of net new customers, will increase Cisco's market share significantly within the $300-plus billion food-away-from-home sector post-COVID. We believe that the capability improvements that we are accelerating during this crisis, coupled with the financial strength of our company, will enable our success for the long term. Now I'll turn it over to Joel, who will discuss our third quarter results, along with additional financial details around our business environment. After we finish QA, I will come back on the line to offer a final perspective regarding the company. Joel, over to you. Thank you, Kevin. Good morning, everyone.