Sysco Corporation

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

Thank you, Joelle, and good morning, everyone. Welcome to Cisco's fourth quarter and full year fiscal 2020 earnings call. On today's call, we have Kevin Hurrican, our President and Chief Executive Officer, and Joel Grady, our Chief Financial Officer. Before we begin, please note that statements made during this presentation would 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. I thank you for joining the call with us this morning. I hope that you and your families are safe and healthy. As we continue to navigate through this unprecedented environment, our first priority will always be the health and well-being of our associates. I want to thank all of our associates for their tremendous work during a period of high stress at both work and at home. I want to especially thank our warehouse associates and our drivers, whose frontline associates showed up every day during this crisis to take care of our customers, including those customers in the healthcare sector that needed our support more than ever. During this morning's call, I will discuss the state of the current business environment, Cisco's effective management of the COVID-19 crisis, and how we are strategically transforming the company to be even more effective in how we service our customers and grow our business. I'll then turn it over to Joel, who will discuss Cisco's fourth quarter and fiscal 2020 financial results. Lastly, I'll make a few closing remarks before we turn the call over for Q&A. It has been five months since the effects of COVID-19's pandemic began to significantly impact our industry in Cisco's business directly. As we discussed during the third quarter call, immediately after the onset of the crisis, Cisco took swift and decisive action to reduce variable and structural costs, to ensure liquidity, and to pivot our business to maximize sales during a period of disruption. I am tremendously proud of the work that we have done during this crisis to help our restaurant partners be as successful as possible during immensely difficult operating conditions. I will highlight a few of these wins in just a moment. Most importantly, we are not just managing through a crisis. We are transforming our company during this crisis. While others are focused on survival, we are transforming our company to improve how we serve our customers and differentiate from our competition. I will highlight the progress we are making on our transformation during today's call. Before I cover our transformation, however, I would like to give you a quick update on how we have managed the crisis to date and the general state of our business. First, Joel and his team took swift action to further strengthen our overall liquidity, which affords us financial flexibility during this difficult operating environment. As Joel will describe further, We have approximately $8 billion of available liquidity, which enables us to manage through the crisis and position Cisco for long-term success. We are unique in our ability to invest in our business to transform the company during a time of tumult. Second, we have worked rapidly to stabilize the business by taking out costs. In the fourth quarter alone, we removed approximately $500 million worth of operating expenses. which includes more than $300 million of structural and permanent costs on an annual run rate basis. We are working to remove even more structural expense, something I will discuss further in a moment. Third, we created new sources of revenue, which included the extensive work we have done to help our restaurant customers be successful. I'm very proud of the work our sales force has been doing to help our customers during this uncertain time. We have helped our restaurant customers pivot to new selling models, which includes helping them with pop-up shops in the front of their dining room and provides additional revenue streams for these customers. A powerful example of this is the fact that the restaurant operators that have engaged with Cisco on concepts like a restaurant marketplace are performing over 20% better to prior year than those who have not engaged. Our sales consultants, importantly, have helped over 16,000 of our customers set up marketplaces. We have also helped our customers with alternative reopening plans, such as patio extensions and outdoor dining options. We have provided customers with the technological support to start a website if they did not already have one. Additionally, we have helped connect them to preferred delivery partners and set up takeout menus and have provided them with the much-needed to-go containers needed to support a delivery model. We've helped our customers narrow their menus to a more focused assortment to help them maintain profitability on that narrower menu selection. Lastly, we have provided products for cleaning, sanitation, and personal protection without disruption so that our customers may continue business operations. We believe that these overall actions will help us retain customers and win net new ones in the independent restaurant customer space well beyond the pandemic. We can measure the impact of these actions through our Net Promoter Score with restaurant operators. I am proud to say that our NPS has increased 900 basis points during this crisis when compared pre versus post. For those that know NPS, a 900 basis point improvement in 100 days is a dramatic improvement. Increasing MPS has proven to increase sales and customer retention over time. This improvement is a perfect example of the Cisco we are becoming. We are not just selling food products. We are delivering products and valued services. Separately, we have shifted sales of products to regional and national grocery retailers to help alleviate the strain in the food supply chain. Although some of those sales to our larger retail partners will be opportunistic in nature, we have in fact created long-term relationships with select regional grocers where we can add value to items such as quality proteins or fresh produce where our buying advantage is helpful to them. On our last call, we announced a $500 million on an annual basis new business win. Since that time, we have secured an additional $500 million worth of incremental new business. The reliability of our operations and the capability of Cisco have enabled us to win over 1 billion annualized of new business during this crisis. We have the capability and the sales force to win new customers at the local and at the national contract level simultaneously. As it relates to the current business environment, I would like to highlight the pace of our business recovery. From May through June, we experienced steady and consistent week-over-week sales improvement. As countries and states began reopening, we experienced a swift business recovery. Unfortunately, as cases have begun increasing in certain locations, the business recovery has somewhat stagnated. With that said, it is clear that food away from home fatigue is real, excuse me, food at home fatigue is real, and that consumers are ready to reengage with restaurants, when it is safe to do so in their community. The speed and pace of that re-engagement will be dictated by the restrictions that are placed upon the industry. As long as there are safe ways to access restaurant quality meals, consumers are ready to eat away from home. Until then, our best customers are succeeding through things like takeout, delivery, and extensive patio dining. I'm glad to say that the rate of Cisco customer closures is less than the industry average, illustrating the value that we can bring to our customers through value-added services and advice. Joe will go into further details about the business environment by geography in just a little bit. Our business improvement throughout the quarter was significant, which we feel good about. We are pleased to communicate today that our results came in notably better than expected. We exited fiscal 2020 with a profitable adjusted operating income rate, which bodes well for fiscal year 2021. Additionally, Cisco was able to generate positive free cash flow during the last period of the quarter. Both the positive free cash flow and adjusted operating income were achieved despite a sales decline of approximately 30%. We anticipate sales in fiscal 2021 to be stronger than that exit rate of fiscal 2020, even with a choppy recovery, and therefore we have increased confidence in regards to fiscal 2021 profitability. I will now shift to highlight some of our progress against our transformation initiatives. We are undertaking a bold transformation that will improve how we serve our customers, differentiate Cisco from our competitors, and help transform the industry. First, we have accelerated our work to become a more digitally enabled company. We are investing to improve our digital order platform called Cisco Shop. This tool makes it easier for customers to do business with Cisco, allows Cisco to increase sales with those customers, and increases customer retention. Examples of these digital technological improvements include the following. improving the search function capabilities so that relevant and compelling results are returned to customers, which will help increase lines per customer order. We've also implemented a suggested order function for our customers, which will help introduce new items or menu trends. We've increased the effectiveness of our sales consultants by providing them with digital tools to engage their customers. Examples include enabling them to show streaming videos, highlighting menu trends, in pushing promotional opportunities to their customer base. Additionally, we are deploying a digital pricing tool. With the implementation of our new pricing tool, we can simultaneously increase sales and create margin expansion. Our second transformation effort is in our sales model. We are making it easier for our customers to do business with Cisco and to increase the effectiveness of our sales teams. 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. This includes a change to our sales compensation model, which will now focus more directly on growth. Additionally, we are increasing the number of sales specialists who will help increase sales penetration with both new and existing customers. These roles will help increase our share of wallet and increase sales in premium products, which we have struggled to penetrate in the past. Combined, these capabilities will enable our sales team to visit more customers, inspire our customers to purchase more from Cisco, and reduce friction in the purchasing environment. The last piece Friction removal will also be enabled by centralizing key customer support functions for large and or national accounts. These key accounts will have dedicated account reps that will own their experience end-to-end across all facets of Cisco's extensive business. Our third transformation, and new since the last time we have spoken, we are regionalizing our operations in the U.S., This important initiative was not public at the time of our Q3 earnings call, but we have recently begun our implementation. In July, we completed wave number one of our regionalization efforts. Through regionalization, we will be a more efficient company, we will be more agile with our decision-making, and we will execute against strategies in a more efficient manner. Our leaders will have bigger roles and will help ensure alignment and consistency across the country. Regionalization is a new leadership structure for our U.S. Broadline business. With this change, we will move from our current six markets comprised of 76 operating companies to four markets that consist of approximately 30 regions, each made up of two to three operating sites. Each region will consist of one region president and one cross-functional regional leadership team responsible for the performance across that region. This regionalization of our U.S. business is the enabler that allows us an entirely new, more centralized, more aligned, more agile Cisco to go to market. We're unleashing the power of the consolidated enterprise by making this change, eliminating redundancies, and shortening time to making decisions. This regionalization project will lay the necessary foundation for all future transformation initiatives in Cisco's future growth. It is important to note that we are not closing any physical distribution locations with this change, and we are retaining our local drivers, our local warehouse associates, and importantly, our local sales force that supports our customers. Our fourth transformation is our structural fixed cost removal from our business and becoming a more efficient company. As previously mentioned on our third quarter earnings call, we had identified and implemented actions to remove approximately 300 million of annualized permanent fixed costs from the business for fiscal 2021. Today we are updating those figures to 350 million derived from improvements we are making in operations, transportation, and corporate functions. In addition to this 350 million for 2021, We have identified additional cost improvement opportunities that we are pursuing that will generate savings starting in fiscal 2022 and beyond. We are calling these combined efforts our corporate modernization, and we will update investors on the additional favorable impact that can be expected as we move forward. Throughout this crisis, we have stayed focused on supporting our customers and putting them first as we have defined our strategy. The decisions that have impacted our associates were difficult to make. With that said, our decisions were informed by our strategy. That strategy will improve the service that we provide our customers and differentiate Cisco from others in our space. The transformation ensures that we are a stronger, leaner, and more agile company. And through our transformation, we will be better aligned to execute on what matters most. By accelerating the pace of change at Cisco through our company-wide focus on these strategic initiatives, we are positioning the company for future success, ensuring that we will emerge from the crisis stronger. Now I would like to turn the call over to Joel, who will discuss our fourth quarter and fiscal 2020 results, along with additional financial details around our business environment. I'll come back after to offer a final perspective before moving into Q&A. Joel, over to you.