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.