Sysco Corporation

to Cisco's second quarter fiscal year 2023 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 Kevin Kim, Vice President of Investor Relations. Please go ahead.

Good morning, everyone, and welcome to Cisco's second quarter fiscal year 2023 earnings call. On today's call, we have Kevin Hurkin, our President and Chief Executive Officer, and Neil Russell, our Interim Chief Financial Officer and SVP of Corporate Affairs. Before we begin, please note that statements made during this presentation that state the company's or management's intentions, beliefs, expectations, or predictions of the future are forward-looking statements within the meaning of the Private Security 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 filing. This includes but is not limited to risk factors contained in our annual report on Form 10-K for the year-ended July 2, 2022, subsequent SEC filings, and in the news release issued earlier this morning. A copy of these materials can be found in the investor section at cisco.com. Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAP measures to the corresponding GAP measures is included at the end of the presentation slides and can 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. If you have a follow-up question, we ask that you re-enter the queue. At this time, I'd like to turn the call over to Kevin Herkin.

Hello, everyone. Thank you for joining our call this morning. Our reported Q2 results as displayed on slide number six include positive case volume growth, continued share gains, and strong double-digit sales and earnings growth year over year. This included operating income growth across each of our segments, including SGMA and international. Importantly, gross profit growth this quarter outpaced operating expense, an important milestone that we expect to continue into the remainder of the year as we make progress in further improving our supply chain productivity. In addition, we continue to advance forward our recipe for growth strategy with continued progress in our digital tools, supply chain investments, and sales and merchandising initiatives. The progress that we are making will enable Cisco to better serve our customers and grow profitably for years to come. As you can see on chart number seven, we continue to succeed versus the overall industry, growing 1.35 times the market in the first half of 2023. I'll break down the sales momentum versus the market further in a moment. Strong top and bottom line growth was delivered for the quarter with adjusted EPS in Q2 of 80 cents. I'd like to provide you with some details on select items that impacted our results for the quarter. The first call out is within case volumes. We leveraged a third party to help with macro forecast of the industry's growth. For the second quarter, the projection was that the industry, in total, would realize nearly 5% case growth year over year. In Q2, the actual industry case growth rate was only 1%, excluding Cisco. This 400 basis points of case volume variance was significant, especially within the local segment. A contributor to the software volume result was the reality that the Omicron overlap did not lift the market growth rate in November and December as had been anticipated. With that said, it is important to note that we are seeing stronger volume growth in January. Additionally, a labor dispute that impacted three of our operating sites in the second quarter negatively impacted sales and case volumes during the October and November timeframe. To be clear, the overall market growth rate is an industry-wide issue, while the labor dispute was a Cisco-specific challenge. The latter of the two issues is now firmly in the rearview mirror. We will monitor the second half of the year case volume trends very closely, and we are taking specific actions to accelerate new customer acquisition in the local segment for the second half of this fiscal year given the softer overall market. In addition to explaining the case volume dynamic, I would like to provide an update on operating expenses. As I mentioned, we are making solid progress with improving operating efficiency, and we grew GP at a faster rate than expenses in the quarter. a sign of progress and a trend we expect to continue. We're making progress on improving supply chain productivity, and I will discuss that further in a few minutes. With that said, the aforementioned labor dispute had a meaningful impact on our Q2 expenses. During this disruption, we prioritized deliveries for essential customers, especially in the healthcare and education segments. As a result, we took the actions required to ensure that we could continue operations in these three sites, including leveraging third-party resources when necessary. These customer service measures pressured our expenses for the quarter, negatively impacting operating income. Again, this challenge is in the rear view mirror. On the positive side of the ledger, our contract bid business is exceeding plan on the top and bottom line for the year. Our sales teams are doing an excellent job with customer retention, customer acquisition, and profitability management within bid contracts. In addition, for our total business, our gross profit per case was strong for the quarter. Our sales and merchandising teams are doing a solid job with inflation management and strategic sourcing. Additionally, our Cisco brand merchandising team continues to do good work, as we increased Cisco brand case penetration by 65 basis points in the quarter versus the prior year. As you know, each additional Cisco case adds to our profit rate and also positively impacts customer retention. From a sales and margin perspective, we continue to succeed by introducing higher margin specialty products to our customers, and we are winning new business in the higher growth produce segment. The success that we are having in GP per case is expected to continue into the second half of the year, and that progress will help offset portions of the market volume softness. Lastly, we are doing a good job of managing expenses at our global support center, or corporate expenses, putting measures into place mid-Q2 to lower spending in these GSE cost centers. Those measures will stay in place for the remainder of the fiscal year to offset the lower marketplace growth and to mitigate a potential future recession. Turning to the second half, we remain resolute on continuing to drive profitable share gains and drive supply chain operations efficiency improvements. On the operating side of the business, we are making progress on improving our productivity. We are delivering improved retention rates, and as a result, lower hiring rates. By hiring fewer people, we have been able to lower recruitment expenses, lower training expenses, and we are seeing increased productivity across warehouse and transportation roles. These improvements will accelerate into the second half of the year. We are fully staffed, domestically and internationally, and we have detailed work in place to ensure our staffing levels match our daily, weekly, and monthly volumes. Q3 is typically the softest volume quarter of the year, and we are improving our flexibility in managing staff levels to lower volume periods. all while preparing for the highest volume quarter of the year, Q4. These staffing planning efforts are built into our year to go forecast. There are four factors that influence our four year guidance. Number one, softer than originally budgeted market volumes in the local segment, partially offset by Cisco growing 1.35 times faster than the market in total. Number two, higher than originally planned operating expenses while steadily improving. Number three, favorable GP per case and strong margin management. Number four, favorable GSC or corporate expenses. Given that we are now at the midpoint of the year, and based upon the factors I just covered, we are adjusting our full year guidance. The full year is now guided to be a $0.15 range from $4 to $4.15, which represents year-over-year growth of approximately 23% to 28%. lapping the 126% growth from fiscal 2022. The midpoint of 407 represents a 15% growth rate versus 2019 levels. As is my custom on these calls, I plan to share a bit more color on a few key Cisco initiatives that are driving performance. First, let me start with sales growth. For the first half of the year, Cisco grew 1.35 times the industry, and we are on track to deliver our sales growth goal for the year. Our recipe for growth strategy is winning in the marketplace. We are seeing solid growth in national restaurants, healthcare, and our education segments. At the local level, we are winning business through our specialty programs, produce, protein, and Italian, and through our customer growth initiatives, Cisco Your Way and Perks. Altogether, these sales wins are delivering compelling share gains. In the most recent quarter, we advanced dozens of additional Cisco Uruguay neighborhoods, introduced Cisco Perks to thousands of customers, and began the integration of our latest Italian acquisition in Southern California. The Italian distributor we acquired in Los Angeles, Concord Foods, will be converted to the Greco business model shortly. We are planning for compelling sales and profit growth from that acquisition, located in the second largest Italian market in the country. We will continue to expand the GRECO platform across the country through a combination of both organic and inorganic activities. Topic two for today, I'd like to discuss the state of our supply chain and highlight the status of some important work. I'll start by discussing our core operations environment, and then I will highlight some of our strategic initiatives. During the first quarter of 2023, we achieved fully staffed status across our network. During the second quarter, we were able to focus on colleague training, productivity, and retention. I am pleased to report and shown on chart nine that we are making progress on retention. And as a result, we will need to hire far fewer colleagues in the second half of this year. We're seeing the green shoots of progress that come from the reality of less hiring, like lower recruitment costs, lower hiring costs, lower training expenses, and lower overtime percentages. We are also experiencing improved levels of productivity from our colleagues as they become more skilled in their roles. Our colleague workforce is still inexperienced versus our historical standards, and therefore productivity is still below historical standards. However, we are making solid progress. We expect to make even more progress in the second half, enabling better flow through from the top to the bottom line. Importantly, We grew gross profit dollars in Q2 at a faster rate than our expenses grew, creating a favorable leverage ratio. We expect to make even more progress in the second half of the fiscal year. From a supply chain strategic initiatives perspective, we continued on our journey to enable profitable sales growth, improve service levels to customers, and to be the most efficient distributor within the food service industry. Our omnichannel initiative is now live in our first test region. We are able to share inventory across two Cisco houses, and we have enabled the ability to proactively leverage stocking strategies to improve service levels while lowering our overall level of working capital within the region. As I have mentioned previously, this project will help us lower transportation expenses by ensuring that the last mile distribution to a customer comes from the most proximate DC location, agnostic of where the inventory is staged or warehoused. Equally importantly, we continue to make progress with six-day deliveries. We have moved meaningful business to Saturday delivery, enabling effective day balancing, increased flexibility, and increased capacity utilization across each of our now six full shipping days. The progress of this initiative will position us well for the upcoming peak fourth quarter shipping volume and will enable us to continue winning net new business at the national and local levels. We are pleased to have the implementation in the rear view mirror, and we are now focused on efficiency leverage and customer acquisition. These two projects are perfect examples of how Cisco is transforming supply chain management within food service distribution. Our supply chain will enable us to grow profitably for years to come. I'll now turn it over to Neil, who will provide additional financial details. Thank you, Kevin, and hello, everyone.