Sysco Corporation

Good morning, and welcome to the Cisco's fourth quarter fiscal 21 conference call. As a reminder, today's call is being recorded. We will begin with opening remarks and introductions. I would like to turn the call over to Neil Russell, Senior Vice President of Corporate Affairs and Chief Communications Officer. Please go ahead.

Good morning, everyone, and welcome to Cisco's fourth quarter fiscal 2021 earnings call. On today's call, we have Kevin Hurrican, our President and Chief Executive Officer, and Aaron Ault, 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 fiscal year ended June 27, 2020, 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. 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 President and Chief Executive Officer, Kevin Hurrican.

Thank you, Neil. Good morning, everyone, and thank you for joining our call today. I'm pleased to report that Cisco 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. Our strong results drove improved cash performance, exceeding the cash flow guidance that Erin 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. Cisco's results for the fourth quarter reflect the strength of the overall market recovery, Cisco's ability to win new business, and some early wins coming from our recipe for growth. Cisco'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 in cases shift up versus 2019 volume levels. The volume recovery has happened much faster than the industry predicted, despite the presence of the Delta variant. The US food service industry in total is now within 5% of 2019 levels. As you can see on slide seven 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, Cisco increased market share in a rapidly expanding market. These two factors of a rapidly expanding market and Cisco'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. Cisco 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. Cisco'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 the amount of 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 number 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 broad line 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 20th 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 Cisco Shop platform by our customers, and we are enhancing the website with new features and benefits every month. Our pricing system is now alive 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 number 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 hit those raised minimums. Lastly, our strategic projects to increase delivery frequency and enable omnichannel inventory fulfillment remain 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 & 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 Cisco. Cisco is excited to expand the Greco-Italian specialty platform to new geographies across the US. 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 Cisco 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 Cisco's orders, and certain product categories remain in short supply. I'm confident that Cisco is performing better than the industry at large in delivering what we call customer fill 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 shortages 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 a 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 wage 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 Cisco Driver Academy. The Driver Academy will enable us to recruit our own drivers and train them in the work we do at Cisco. We will be better able to source drivers from our own warehouse associate population and teach them to become drivers through 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 Cisco for an agreed upon period of time. I'm 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 Cisco 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 Ault, 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 balanced 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 in 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. food service were up 88.4% versus the fourth quarter of fiscal 2020 and up 7.7% versus the same quarter in fiscal 2019. SGMA 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, or US Broadline Operations, increased 74.3%, while total case volume within US 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 topic of inflation. The headline is that inflation during the quarter was up 9.6% for total Cisco. Manufacturers passed inflation to us and we successfully passed it on to our customers across categories and customer types. Let me call it 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. food service 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 marginal rates 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 us 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 Cisco has some advantages. We have significant scale in purchasing, which is an aspect which our suppliers will be hearing more about as we leverage the power of buying as one Cisco. 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 tactful 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 Cisco'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 re-imposition of additional COVID restrictions would, if it happened, have as severe of an impact on our business as was the case during the past year. Just like our efforts in the US, 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 accompany significantly increased volumes one-time and short-term expenses associated with a 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 broad line 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 SNAP Act and in support of the transformation. During the fourth quarter, we estimate that we spent more than $36 million against the SNAP Act, 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 our 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 Horizons 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 savings 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 1.2 times to 1.5 times 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 71 cents 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 pay down 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 Invest Today 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 economic 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 up program, we are working it aggressively. We expect to invest most of the fiscal 22 savings into the SNAP Act, 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 federal tax rates 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 SNAP Act and investing for growth, we are increasing our guidance on adjusted EPS by 10 cents 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 plan 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 forecasts. 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.

At this time, I would like to remind everyone, in order to ask a question, press star and the number one on your telephone keypad. And your first question comes from Nicole Miller with Piper Sendler.

Thank you. 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 Cisco's 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 if, 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?

Good morning, Nicole. This is Kevin. I'll take the question just to be clear. You know, I said in my prepared remarks that 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 than the inventory at large, and that's been a huge positive for Cisco. 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. Thank you.

Yeah, 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 FATS. 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 Q4. 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 toss 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. And 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, 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.

Thank you.

Thanks, Nicole.

And your next question comes from Jeffrey Bernstein with Barclays.

Great. Thank you very much. Two questions. The first one, just looking at fiscal 22 more broadly, I know you mentioned the culmination of your earnings guidance bumped a dime. Looks like that's effectively the 4Q beat. But otherwise, the commentary you made, you know, the strong sales that's beating 19 levels and the solid management inflation and costs, I'm just wondering what kept you from raising that guidance seemingly more than the 4Q 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 4Q 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 Cisco. 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 into 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 Invest Today. 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. That one seems pretty successful. But any thoughts around where you are for the penetrating existing accounts or adding growth via M&A would be great. Thank you.

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. 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. 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, you know, 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 Cisco's breadth, depth, and expertise to be able to ship on time and in bulk. 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 quote unquote 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 Cisco 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 Cisco. is that the independent restaurant customer who is 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 Cisco is one 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 in 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 a 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 I the confidence and the guidance that we just provided. As it relates to acquisitions, we're proud and pleased that 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 lemonades. Thank you. Thanks, Jeff.

And your next question comes from Mark Cardin with UBS.

Good morning. Thanks so much for taking the questions. Can you quantify how much of an impact inflation had on your gross profit and EBITDA on 4Q? And how should we think about the impact of that on financials over the next few quarters?

Thanks for the question, Mark. You know, what we've disclosed is that from a gross profit perspective, right, we were gross profit grew over fiscal 19. We've not disclosed and we are not proposing to disclose the actual impact broken out across the lines of the P&L. But I want to go back to what I said before. Modest inflation is a good thing for our business so long as we can manage it as we carry forward. And from a fiscal year 22 perspective, we do expect inflation to continue in the first half at the elevated rates and moderate thereafter.

Got it. That's helpful. And then you noted that today 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 take that. To start with the repeat deposit, we are not experiencing sales impact in the month of July tied to Delta. We're not. That is the fact. That is the headline. We can't predict the future. We do not know if things will change. If governments choose to impact dining, on-prem dining, that would have an impact. That is not in our forecast because we can't predict will that occur or not occur. What I can, I guess, provide from a color perspective is The country of France has been pretty aggressive with implementing a vaccination passport to be required to eat at a restaurant. And we're prepared to execute against that. And we're working very closely, obviously, with our French operations to be ready for that that goes into effect in about a month. I would say there are some that take the position that that vaccine passport will increase people's confidence in going out to eat. There are others that suggest that it might have a foot traffic impact. I guess I would put forward to those two things offset each other, and it's a wash. I don't know is the honest answer, and many of you live in New York and know that New York has communicated a similar vaccine passport, which will be leveraged in Manhattan. It's too soon to tell. What we can say at this point in time is Delta is not having an impact on our business trends. And as I said in my prepared remarks, we're prepared. Aaron said this well. If, in fact, there were some form of a government shutdown, we're prepared to execute against it. We have the ability to execute against it. And I just want to reemphasize one other positive. We've got sectors that are our business that haven't yet moved up the recovery curve that will be doing so as schools come back online, both K through 12 and college in a more meaningful way. When we compare to 2020, for sure, that'll be a positive. And then as companies return to work, and I know select companies have announced a delay of that, but many companies are, in fact, returning to work post-Labor Day. That's another tailwind to our business because we partner with FSM providers as the lead distributor of food to those types of companies. And that is another potential tailwind, along with leisure and business travel picking up in our hospitality segment. So there's a lot in there. That's why we have provided the forecast that we have provided. Going back to Jeff's question, why not more aggressive? It's because we can't predict the unknown. What we can see are the trends that we have, and we're confident in our ability to deliver on the forecast update we provided today. I'll toss to Aaron for any additional commentary. 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 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. 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 restrictions. situation, and that creates a great diversification for us from a portfolio result perspective. Great. Thanks so much.

And your next question comes from Alex Slagle with Jefferies.

Thanks. Good morning. I wanted to follow up on the staffing. I know you made good progress on the hiring initiatives, but it sounds like more to go. So kind of curious how much of this incremental supply chain 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 start. I'll talk about just the state of the state, and then I'll toss to Aaron for answering the quantification part of your question. The good news is we declared we would hire over 6,000 people in the second half of our fiscal 2021, which is the first half of this calendar year, and we succeeded. We hit that target. We are in decent shape nationally. We are definitely in better shape than the industry at large. The good news slash challenge is that the recovery is happening faster than we had modeled, and that is a good thing for the P&L, and it puts pressure on our hiring. We absolutely have incremental drivers and warehouse selectors to be hired. We are working very aggressively to do that, removing any and all obstacles that get in the way, recruiting bonuses, retention bonuses. We are increasing the number of recruiters that we have. We're doing marketing to create awareness of what are very high-quality, high-paying jobs And we literally have a daily stand-up where we talk every day about our staffing health. Neil and I talked about this last night. We have 76 warehouses in just the United States alone, which is by far the biggest count in this industry. And we have a handful of sites that are in a challenged status. However, we have the vast majority of our sites that are not, and we have buffer capacity. So as a single building has challenges, we can flex product demand and volume to all locations. And if you're a smaller company, you just don't have that flex capacity. We have 300 warehouses across the globe, and it's just the breadth and depth and scale of this company in times like this that give us advantage. We're working very hard. This is the number one priority for our company is to increase our staffing health, as I call it. There's more new business to be had and more incremental business to be had as we improve our staffing health, and we're committed to doing it. I'll toss to Aaron, who will answer the financial impact part of your question for Q4 and any comments for 2022.

Sure. I'm not going to give you a number, but allow me to provide a couple of points of context. First is the costs, while increasing, as Kevin called on his remarks, are largely transitory. We expect to work through them over the course of fiscal 2022. Second, they will be funded by our cost out. And again, over time, that will also present us with further opportunity. And lastly, and I found this to be an interesting data point without giving you the number. I was looking at our, you know, driver costs as a percentage of our OpEx. As between Q4 of 21 and Q4 of 19, it was flat. Now, I expect some modest increase in the first part of the year as we work through the situation that we've been discussing in this call, but that gives me some confidence that we will be able to manage through this. Thank you. That's helpful. Thanks.

Thank you, Alex.

And your next question comes from Edward Kelly with Wells Fargo.

Hey, guys. Good morning. Nice quarter. Kevin, can I just I just wanted to ask one follow up on the labor cost inflation side, just because it's been such a big point of contention, I think, for investors in this space right now. But, you know, your your view of this being transitory, How do you think about the risk to that at this point, and what are the data points that you have today that kind of confirms that? I'm just kind of curious as we sort of take a step back, and you obviously have much more visibility than us, how you think about the risk to that view?

Yeah, it's a duck question to ask, and I totally understand it. And I'd be asking the question, too, if I were you. And what others say may be inconsistent and different than what we say. All I'm going to describe is the realities at Cisco, what we're doing. I encourage you to go back to our prepared remarks. I was really careful and thoughtful about how we characterized it. But I will give you additional color and also be as crisp as I can possibly be about what's going on. In our Q4, and it's definitely continued into July, We are spending money on what I call the transitory basis to improve our staffing health. Those things are retention bonuses, hiring bonuses, recruitment bonuses. We're compensating our sales consultants to help us find drivers that are out in the industry. Those expenses are in our P&L in Q4, and we had a very solid quarter because the sales growth we are experiencing is more than covering those quote unquote transitory incremental costs. And we will continue to do those things until the staffing health gets to our level of satisfaction. Where we will be judicious, prudent, and careful is in structural wage permanent cost increases. We will do it if we have to, but we will only do it if we have to. And the why is, as you well know, and in your models, this is why you're asking us this question, you live with those costs forever and they're compounding. I guess trust that I've come from an industry that had labor shortages for more than a decade and experienced substantial cost increases that's the pharmacy industries that doesn't do those that don't know me well enough and we will be extremely prudent to prevent that from happening in this industry with that said we will have to make some investments in base pay because the market has moved on us in select locations and we're prepared to move so that we don't find ourselves in a position of disadvantage what i said in my prepared remarks however is and we will find productivity improvement offsets to offset those cost increases that are, in fact, structural and permanent. Because Aaron and I can see in our business where and how we can be more efficient. So even if there's some wage increases of percent of sales, we can route our trucks more efficiently to reduce miles delivered on an annual basis as just a example to find offsets. Aaron, I'll toss to you if there's anything you want to say about 2022 from a cost perspective. I think it's well said, Kevin. Ed, hopefully that answers your question. And by all means, if you have a follow-up, go right ahead.

Yeah, no, that's good. And then the other thing I wanted to ask you about, you know, Kevin, just in terms of the challenges that, you know, there is just out there, you know, for you and the industry, right, in meeting market demand, given inventory and labor shortages. I'm just kind of curious, you know, how much is actually being left on the table today? You know, I know you are out from the industry, but I think everybody's, you know, in this situation. Does this improve in the coming, you know, quarter or two? So does your outperformance relative to the industry continue to grow? And if we were to have some slowdown related to Delta, does that also say that maybe there is some cushion in that slowdown for you, just given the gap between demand and supply for the industry?

That's a great question. Here are the facts. We have the data to prove that we're performing better than the industry at large in both fill rate and in deliver on time. And we're not meeting our own personal internal expectations for those two important metrics. So there is additional upside to be had as we improve our staffing health at large and then specifically in select challenge locations. And we're moving mountains to be able to do that. So yes, there is more upside as we improve our health. And we've worked to incorporate those types of thoughts into our forward-facing logic, which Erin has covered. You asked how long will it take to get back to a healthier position. I would say it's within the next six months is when we can definitively say we are in a better, healthier position than we are right now. It's the most challenging labor market I've experienced in my career. That is fact. But we do believe we are in a better position. We do believe to answer one of your discrete questions, can Cisco expand its leadership position, the answer is yes, definitively. We believe we can expand our leadership position. How much additional upside is out there is something I'd prefer not to comment upon. You offered an interesting query about delta slowdown as a potential two things offsetting each other. I would just repeat, we're not seeing a delta headwind at this point in time. This is not in our actuals that we are seeing a delta headwind. The thing that would impact the business is if governments put restrictions back on operators. And let's be optimistic that that won't be necessary. And toss back to you, Ed, if you have any other questions.

No, thank you. Great, thank you.

And your next question comes from John Hinbuckle with Guggenheim Partners.

Very high level. Hey, how are you? High level question here. When you think about the impact of this ongoing inflation to dampen demand, how do you get your arms around that philosophically and maybe by what types of businesses And then what can you do to mitigate that pressure for your customers without taking a margin hit, right? I imagine it might be pushing certain lower cost products, but your thoughts on that would be helpful.

Yeah, thank you for the question, John. I just want to make sure I heard the first part of your question. I thought I heard you say, does the increased inflation dampen demand? If I did hear that correctly, I just want to be, I'm sorry, go ahead. Yeah. I just want to be clear on what's happening right now, and this is why this was gross profit dollars favorable for Cisco in our Q4. The increased inflation is not dampening demand at this point in time. Our restaurant partners are succeeding in making their own menu price adjustments. The consumer pent-up demand on eating away from home and the robust consumer spending power that exists out there That's why the elevated inflation, which would normally be problematic, I think we've kind of trained the industry and trained ourselves that 2% to 3% inflation is a healthy zone and above that becomes challenging. This is a unique time, and the elevated inflation that we're experiencing is not decreasing demand. And because of that, while it's having a slightly negative impact on our gross margin rate percentage, we are definitely putting more gross profit dollars in the bank, and therefore it helped us with a strong quarter. To your point, If it continued forever, that would be problematic. And we are working to answer the second part of your question very aggressively with our supplier partners. Are there alternative products, different cuts of meat? As I mentioned, this is a fats, poultry, and pork problem most aggressively at this point in time. And you know that from the coverage of the universe. And we're working really hard to find incremental sources of supply. We believe that is our responsibility for our customers to help decrease COGS over time. And Judy Sansoni and our merchant team are working extraordinarily hard to help us reduce COGS so that we can provide great value to our customers and therefore continue successful, profitable growth for both them and for us. Aaron, anything you want to add to that?

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. John, do you have a follow-up?

No, no, that's good, thanks.

Okay, thank you, John. Operator, we're ready.

And your next question comes from Lauren Silberman with Credit Suisse.

Morning, Lauren. Hey, hope all's well. 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. We'll go back to May 20th 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 is that 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, 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 for this first year of the three-year plan. And we're on track to be able to deliver the $1.5 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.

Okay, thanks. And then just on the case volumes accelerating into July, can you expand on what's driving that acceleration, and are you seeing that broad-based across markets?

We are seeing it broad-based across markets. It has continued into July. We have not seen any form of a slowdown in July on a week-by-week basis. Aaron did a nice job of betting cleanup on one of my commentaries. He reminds us of international. International was mostly closed in Q4. Our largest countries of operations internationally, specifically in Europe, didn't even begin reopening until late May and into June. And there's additional recovery still to be had in international because we have not fully recovered in international. We had a substantial profit improvement quarter over quarter with a break-even performance in Q4, which is a $92 million profit increase from our Q3. And we see continued momentum in front of us as the market continues to reopen, A, international, B, food service management, C, hospitality, and we have not seen a slowdown in the restaurant sector in our largest U.S. business.

I would just add to that one, Lauren, that we have one of the nice things about us getting started early and planning for the recovery is we have the inventory to handle the case growth that we're expecting.

Great. Thank you, guys.

Thank you, Lauren.

And your next question comes from John Glass with Morgan Stanley.

Thanks, and good morning. 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. Here's what we've said, and I would encourage you to go back and look at our May 20th Investor Day presentation. Our external guidance, if you will, or our long-range plan was that we would grow faster than whatever the market performance is. It's not a dollar-based, it's industry-based, if you will. And our commitment was that in fiscal 22, we would grow 1.2 times the market, consistent with the transformation investments we're making, and that by the time we get to fiscal 24, again, because of the investments we're making and then increasingly achieving the ROI on those investments, we'd be growing at one and a half times the market growth as we carry forward. We've disclosed in the past that we have used the Technomic as the source of industry data for us. And so as their forecasts adjust, we adjust our own expectations accordingly. But as Kevin said, we are, and as you can see from our fourth quarter results, we are growing. We are on track relative to our expectations for fiscal year 22 relative to that one point. two times growth, and we're excited about both the organic and the inorganic initiatives that are going to help us to meet our commitments. And then Neil can also follow up with you on some of the details around that off the line if you'd like.

That would be great. Thank you. And then, Aaron, you said you overachieved your savings goal this year, I think 350, 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 initiative 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 come at it from the back end. We expect our cost savings in the short term to fund two things. First, the transformation investments we're making, which are substantial across every element of our business. but then also the SNAP Act, the transitory cost that Kevin has been referring to before. The good thing for us is we got started early with the cost out before we started the transformation investments and indeed before the SNAP Act incremental costs occurred. And so we have the fuel before we need to burn the fire relative to that. What you should take away from that as well, though, is that over time, as we move past the SNAP Act, as we get past the transition, As we move past the transformation investments, that becomes goodness to our income statement, and we expect to drop more of the savings to the bottom line. I've been very careful not to cite percentages. What we have given you is EPS guidance, and indeed the update to EPS guidance today, which is an all-in look at our business overall. Kevin, would you add into that? No. That's good.

Thank you. Okay. Thank you. Thank you, John.

And your next question comes from Kelly Bonilla with BMO Capital.

Morning, Kelly. Kelly, you might be on mute. We can't hear you.

Can you hear me?

We can. We can hear you now.

Oh, perfect. I just wanted to go back, Aaron, to the cost that you talked about, totaled $86 million. You mentioned $36 for recruiting and retention and $50 for transformation. I was just wondering if you could elaborate more on those and if those were specifically called out because they were transitory or just so we can understand how those impacted the quarter and then what you're expecting in those buckets in the upcoming year.

Great, sure. We are monitoring our costs two ways, well, three ways. Let's talk about the spend for a second. We have a specific identified list of strategic initiatives that are tied to our transformation for which there are specific business cases, which lead to the ROI over time that comes from sales and the profit that comes from the incremental sales that result from them. So when I talk transformation investments, it's the spend against those initiatives in the quarter. In contrast, the snapback expenses, we are very carefully monitoring that which we believe to be one-time or short-term or transitory in nature. And it goes to, are we paying recruiting firms more money? Are we doing more recruiting marketing than we were doing before? Are we doing incremental training because of the velocity of new associates we have coming into our buildings? Are we paying retention, et cetera? And that's what you will find within that disclosure. I think you also asked me for trajectory, and what I would tell you is the trajectory for the transformation strategic initiatives, that is built into our expectation, and you can see it in the growth numbers that we've put out there for the next three years, as well as the guidance we've provided on the short term and the long term. With respect to the SNAP Act, because we're managing that every day, I can just leave you with the confidence that We believe we can manage it in the context of the cost out that we're taking and we'll be more aggressive on cost out to help fund the costs if they increase as well, but we believe we can land within the updated EPS guidance that we provided on the call today.

Okay, that's very helpful. And just one last one, I guess, on the local customers. You've talked about the 10% increase in local customers you're serving. And I was just curious if you could talk about the contribution that you're getting from those customers. I assume they start out much lower than maybe a more mature customer. Just curious how that is progressing.

Kelly, it's a great question. This is Kevin. You're absolutely right that a new customer starts out as a lower income cases per drop than a mature tenured customer, and that's to be expected. My commentary would be our new customers are performing equal to or slightly better than historical new customers. We are tracking it by tenure, and we're seeing them move up the penetration growth expectation. So all things are on track. We have not acquired quote-unquote small unprofitable customers. I know that select folks may have tried to interpret that, not people on this call. I'm just saying that is not a problem. We are confident in the new customer wins and our ability to move those customers up the profit ladder, and we're on track.

Thank you.

Thank you.

And our last question will come from the line of John Avinco at JPMorgan.

Hi, great. Thank you very much. The question is on the $400 million of cost saves. Obviously, those aren't this year, but I wanted to get a sense in terms of what type of major buckets that you've identified. Obviously, I'm sorry for the background noise. Obviously, I'm asking this in the context, you're a very growth-oriented company. You plan to take market share. There's a lot of investments that you're making. overall, just give us a sense that that $400 million can be cut without it affecting your infrastructure or service levels or future investment in any way.

Great question. Here's the context I would give you. Before we announced the goal, we had a specific and defined list of initiatives that we believed we could execute over time, taking into account the timing, cadence, and depth of our transformation across key elements of our enterprise to get there. The buckets will be relatively familiar. They will go to how do we operate as an ongoing concern the most efficiently, followed by how are we supporting our customers the most directly. Reflecting our growth aspirations, you're right, there will be areas where we will need to invest in marketing and merchandise and other areas as well. But if we take the list of cost initiatives We believe that it enables the growth objective we have out there, and it is specifically actionable as we move through the period of time. Now, I want to go back and emphasize something I interpreted. You were acknowledging your question, but let me just say it for the group as well. We've over-delivered against the $350 million that was our expectation for fiscal year 21. Our cost-saving efforts will continue through fiscal 22, but what we're saying as part of our guidance is we have both the transformation of the SNAP Act to deal with in the short term. But over the longer term, over our LRP period into 23 and 24, there's an incremental $400 million that will largely come out in 23 and 24 in service of our long-term guidance.

This is Kevin. If I could just add on two things, just nothing that we're doing in our cost out will hinder our ability to serve our customers. In fact, we will add sales reps over time. And we are going to increase delivery frequency to our customers over time. So the cost out is not variable. It's permanent. It's structural. You asked for examples. So some examples. We sold a corporate headquarters that we determined we didn't need because we have more people working from home than we had previously. That's just an asset sale, and it reduced our operating expenses. We restructured our field organization to become more efficient, more agile, more lean. and to be more center-led from a strategy perspective. And that work is done. It's in the rear view mirror, and those costs are permanent, they're structural, and they're removed. And we've got many other examples, but Aaron covered one other in his prepared remarks, which was indirect sourcing. So our purchasing of tires, our purchasing of select IT contracts, there's meaningful, meaningful dollars to be saved for our company as we get more aggressive in how we strategically source. And Aaron personally and his team are doing terrific work in taking out costs in that regard.

Thank you so much.