Sysco Corporation

Q3 2023 Earnings Conference Call

5/2/2023

spk06: Good morning, ladies and gentlemen. Welcome to Cisco's third 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 like to turn the call over to Kevin Kim, Vice President of Investor Relations. Please go ahead.
spk02: Good morning, everyone, and welcome to Cisco's third quarter fiscal year 2023 earnings call. On today's call, we have Kevin Herkin, our President and Chief Executive Officer, Kenny Chung, our Chief Financial Officer, and Neil Russell, our Chief Administrative Officer. 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 filings. 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 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 follow-up questions, we ask that you please re-enter the queue. At this time, I'd like to turn the call over to Kevin Hurrican.
spk11: Thank you, Kevin, and good morning, everyone. We will start today with a brief review of our financial performance. We will then highlight how we continue to grow share profitably, and as is our custom, we will provide a brief update on select elements of our recipe for growth strategy. I will then introduce Kenny Chung, who joined the team a couple of weeks ago as our Chief Financial Officer. Kenny will share a few thoughts about what attracted him to Cisco and his initial observations. Near Russell, now in the Chief Administrative Officer role, will provide a detailed update on our third quarter financial results, our balanced approach to capital allocation, and lastly, he will provide additional commentary around guidance. Our Q3 results, as displayed on slide number six, show continued double-digit top and bottom line growth. We grew faster than the overall market, profitably, driving case volume growth of 6.1% across our U.S. food service business in total sales growth of 11.7%. Our positive momentum was aided by strong performance from our international division, with segment profits nearly doubling year over year. Our total company adjusted operating income and adjusted EPS to approximately 27%, resulting in the highest ever third quarter profit in company history. Importantly, sequential improvements in our supply chain operating expenses resulted in solid operating leverage. I am pleased with the progress that we are making in supply chain productivity and overall expense control. We delivered strong sales growth throughout the quarter, despite some industry softness beginning in March. Port traffic to our customers moderated in March, negatively impacting sales volume in the most important month of the quarter. Third-party data indicates that the overall market volume decelerated to slight growth in March, softer than had been expected within the restaurant segment. Additionally, the rate of inflation year-over-year declined at an accelerated rate during the quarter. This pattern of lower volume and lower inflation put pressure on total sales and gross profit for the quarter. A lowering of the overall inflation rate is a good thing for the industry for the long term. but we need to carefully navigate through the reduction period. These two factors, lower traffic and lower inflation, are now expected to continue throughout our fourth quarter. Offsetting these near-term headwinds, we expect our progress with supply chain productivity and overall expense control to also continue into our fourth quarter. Putting all of these factors together, we now expect to end the year near the bottom of our adjusted EPS fiscal 2023 guidance range, or $4 to $4.15. Recall that last quarter, we outlined that the low-end guidance scenario considered software macroeconomic and industry performance, which is exactly what we experienced in March. On that call, we also outlined our focus on driving fundamental improvements in our cost structure by improving supply chain productivity and driving out costs across the entire company. Our objective was to deliver gross profit growth greater than expense growth, enabling operating leverage expansion. We delivered on that objective in the third quarter, delivering our highest ever Q3 profit at Cisco. We remain very focused on productivity improvement, and we expect our efficiency actions to accelerate into the fourth quarter. At Cisco, we are playing the long game, and we are investing to win through our recipe for growth strategy. We are increasing our fulfillment footprint of distribution centers. We are improving our digital tools. We are enhancing our selling process and technology. These efforts are building momentum and we remain on track to deliver our growth target for fiscal 23 of growing 1.35 times the market. Despite what has become a more challenging macro environment, we are confident in our ability to differentiate versus others in the marketplace and create preference with our customers. We are also prepared to handle the challenges that a slowing macro and lower inflation rates will present to our P&L. We are hyper-focused on what we can control. This means executing our sales playbook of driving profitable growth and improving our logistics expenses. I am pleased to report that in the most recent quarter, we made meaningful progress in our supply chain productivity. As you can see on slide number eight, we delivered improved retention, improved labor productivity, and improved overall expenses. While our operating expenses remain elevated compared to historical standards, Q3 marked a major step forward in sequential improvements. We continue to have healthy staffing levels, and we are increasing our fill rates to our customers. These factors are helping Cisco improve our net promoter scores. We will continue to make progress in operating efficiency and improving customer service into our fourth quarter. We profitably grew our volume in sales this quarter with US food service volumes up 6.1% and local case volumes up 4.2%. Cisco continues to succeed versus the overall market. And as I stated a moment ago, we are on track to deliver our stated growth target for the year. We delivered compelling business performance in our specialty businesses this past quarter, with notable gains in our Italian platform, and we continue to see very strong performance from our FreshPoint produce business. Winning in the specialty space is a priority at Cisco, as our market share is below our fair share in these fast-growing and higher profit margin segments. Cisco Brand continues to succeed, with increased penetration year-over-year of 29 basis points in U.S. Broadline, and importantly, growing over 100 basis points in the U.S. local segment. This progress creates a mixed benefit as each additional Cisco brand case adds to our profit rate due to the higher margin and positively impacts customer retention due to the unique value proposition of Cisco brand products. Additionally, I am pleased to report that our sales consultant retention remains at record high levels, as our sales reps have adapted well to our improved sales enablement technology, pricing platforms, and our compensation program. And speaking of our compensation program, we plan to implement changes to the program at the beginning of the coming fiscal year. These changes will provide even more incentive for our industry-leading sales reps to grow their business profitably. The updated program is being tested currently in a U.S. region, and the early indications are positive. The modifications to our program came directly from feedback from our sales force. Turning to the recipe for growth on slides nine and 10, our key initiatives are winning in the marketplace and fortifying our leading position in food service. We continue to drive compelling profitable growth as we expand Cisco Your Way neighborhoods across the US and internationally. As we highlighted at our recent Cagney Conference presentation, We are now live in over 300 plus neighborhoods across five countries. We will expand the program further in the coming quarters. The results from this customer-focused program continue to exceed our expectations, delivering double-digit top and bottom-line growth. Additionally, we continue to gain momentum with Cisco Perks. We have now enrolled more than 11,000 customers into the exclusive loyalty program. Cisco Perks is our invitation only loyalty club providing members with white glove service. Membership benefits include deliveries up to six days a week, exclusive access to rewards and industry leading restaurant solutions to help our customers grow their business. When our customers succeed, we succeed and we believe Cisco Your Way and Perks are two outstanding programs to help our customers be successful and differentiate Cisco from our competition. Lastly, We continue to make excellent progress with enhancing our digital tools. In the most recent quarter, we launched critical enhancements to our Cisco ordering platform called Shop, and we further enhanced our sales consultant CRM tool, making it even more clear to our sales consultants the key priorities for each customer visit. The improvements to Shop and our CRM will drive increased penetration with existing customers. Turning to our next topic, we're excited to welcome Kenny Chung to the Cisco family as our CFO. We conducted an exhaustive global search for our next CFO, partnering with industry experts in talent placement and talent assessment. I'm thrilled that we had the opportunity to find and hire Kenny. Kenny joined Cisco with nearly 20 years of financial and operational executive experience, most recently having served as the CFO at Hertz. Prior to Hertz, Kenny had operational and financial roles at Nielsen, and he started his career with GE. Kenny has extensive financial, operations, and international experience. When coupled with his learning agility and financial acumen, we are confident that he will help Cisco profitably grow our business. Kenny leads with a hands-on approach as a team player, and we believe he will be a strong cultural fit for Cisco, something that was essential to me in the search process. I want to publicly acknowledge Neil for his great work over the past few months as our interim CFO and congratulate him on his expanded new position at Cisco. I'm excited that Neil is in the newly created position of Chief Administrative Officer. In that capacity, Neil will help us ensure that our strategic initiatives are on track, including program governance for our expansive recipe for growth strategy. He is a trusted partner and I greatly appreciate his leadership impact. With that, I'll now turn it over to Kenny. Thank you, Kevin.
spk03: And good morning, everyone. I am thrilled and honored to serve as the CFO of the world's largest food service distribution company. So why Cisco? I am excited to join the company at such an opportunistic and transformational time. Notwithstanding recent market dynamics, the food away from home industry is healthy and growing. Currently a $350 billion industry with continued long-term growth tailwinds. Furthermore, one of the most attractive parts of joining this exceptional leadership team is the robust opportunity to build on our leadership position across the global markets we serve. Size and skill matter in this industry, and I believe in the bold transformation that is already yielding dividends for our business. Cisco has a long history of generating robust operating cash flows and engaging in prudent M&A while maintaining a strong history of returning cash back to shareholders. It all starts with our purpose, which is to connect the world to share food and care for one another. Combining our purpose with our unwavering culture for operational excellence and compelling investments around technology, products and solutions, and supply chain productivity are important actions. We believe these and other actions render structural accretive value which will compound with our scale and continue our profitable market share growth. In this role, I plan to leverage my background of adding value for large global companies that are customer service-centric. My experience also includes driving field labor productivity, profitably growing both contracted and short-cycle business, and innovating to create value for our customers. Delivering consistent results will come from our industry-leading people, products, and solutions. Remaining disciplined with supply chain inventory management and capital allocation would be critical to my role as it is all about maximizing return on invested capital and sustainable growth. Lastly, I understand and appreciate the importance of driving environmental sustainability initiatives with Cisco already on a great path under Neil's leadership. While only here for a few weeks, I'm impressed with the bench strength of the financial organization and the passion that my fellow colleagues have for the industry and the company. I look forward to working hand in hand with the wider team as we celebrate our recipe for growth strategy and further our number one position. The future is extremely bright. We have a unique opportunity to build on our leader position and to define the future path for the food service and supply chain ecosystem. I look forward to working with you all. I will now turn it over to Neil, who will provide additional financial details.
spk10: Welcome, Kenny, and hello, everyone. I will start today with a review of our third quarter financial performance and then discuss our expectations for the full year to go. During my discussion today, unless otherwise stated, all results are compared to the same quarter in the prior fiscal year. As highlighted in our news release issued earlier this morning, and on slide 14, which is posted on our website, we delivered double-digit year-over-year growth in both top and bottom line results. And we continued our balanced approach to capital allocation, all in the midst of an evolving macro backdrop. Let me begin with a summary of our third quarter results. Sales grew 11.7%, with U.S. food service growing at 10.4%, and continued positive momentum in our international segment, which grew at 18%. Volumes grew year over year and also improved sequentially. The U.S. food service segment, which includes our Broadline, Freshpoint, Italian, and other specialty businesses, grew 6.1%, and local case volumes increased 4.2%. Adjusted gross profit for the third quarter increased 12.8% to $3.4 billion, with adjusted gross margin improving 18 basis points to 18.2%. Gross profit dollars per case grew in all four segments, marking the seventh consecutive quarter of such growth. Our gross profit dollar and margin percentage improvement during the third quarter reflected our ability to continue to effectively manage product inflation, which moderated to 4.9% for the total enterprise, down sequentially from 8.3% during the second quarter of this fiscal year. The improvement in gross profit was also driven by incremental progress from our strategic sourcing efforts as well as improved penetration rates from Cisco brand products. Overall adjusted operating expenses were $2.7 billion for the quarter, or 14.3% of sales, a 32 basis point improvement from the prior year. This quarter included transformation investments of $60 million. Excess overtime costs, otherwise known as productivity costs, were reduced all the way down to zero during the third quarter. As we improve our cost performance, we have now eliminated both snapback and these productivity costs. All four operating segments, again, showed increases in profitability year over year, including substantial growth in the international and SGMA segments. As seen on slide 18, adjusted operating income for the enterprise increased by 27.8% to $736 million. This is the highest adjusted operating income result for the third quarter in Cisco's history and is now the third consecutive quarter of record quarterly operating income, an important signal of the progress being made at Cisco via a recipe for growth. This quarter continued to show gross profit dollar growth outpacing operating expense growth, another important illustration of our financial improvement. For the quarter, we grew adjusted EBITDA by 19% to $900 million. Regarding the balance sheet, our solid investment grade rated balance sheet, strong cash position, and healthy liquidity remains a competitive advantage. We ended the quarter at a 2.8 times net debt to adjusted EBITDA ratio. In the third quarter, we repurchased 1.5 million shares, and year-to-date, we have now repurchased 4.6 million shares. We are now at nearly $400 million of share repurchases for the year, nearing our goal of up to $500 million. Inclusive of our dividend payments, Cisco has returned a total of $1.1 billion to shareholders thus far in fiscal year 2023. Of note, the Board approved last week another annual increase in Cisco's dividend, continuing the longstanding tradition of regular increases and solidifying our position as a dividend aristocrat. As a reminder, we remain well positioned in the current rising interest rate environment with approximately 95% of Cisco's debt being fixed at attractive rates. Lastly, we are well positioned with our debt laddering schedule with staggered maturity dates over time. Let's turn to cash. As shown on slide 19, Year-to-date, cash flow from operations was strong at $1.4 billion, a $680 million improvement over the prior year. Net capex increased to $446 million as we continue to invest in our recipe for growth, particularly with respect to our planned investments in fleet and distribution facilities. This includes three expansion sites and seven new facilities in the next few years as we deliver new capacity in high potential markets and high-growth cuisine segments. Our investments are driving positive returns, and we plan to remain prudent with capital allocation with a focus on ROIC maximization. Free cash flow was very strong during the third quarter, increasing to $980 million year-to-date. This improvement was driven by disciplined inventory management and a positive change in working capital during the quarter. We ended the quarter with approximately $758 million in cash on hand and over $3 billion in total liquidity. As seen on slide 22, our ESG or sustainability efforts advanced with the unveiling of of our first electric vehicle hub in Riverside, California last month for Earth Day. This is the world's first electric vehicle hub of its kind, consisting of electric tractors and electric trailers fueled by renewable solar energy. These trucks are rolling, serving our customers as we speak, with more on the way. Our industry-leading climate goals also include a commitment to work with suppliers representing 67% of our Scope 3 emissions to set their own science-based targets by 2026. Importantly, our focus on sustainability and diversity, equity, and inclusion is not only the right thing to do, we believe it will be good for business in the long term. Lastly, looking ahead to the remainder of the year and beyond, we now expect diluted adjusted earnings per share near the bottom of the previously disclosed range of $4 to $4.15 per share. While Cisco continues to outperform the market due to the success of our recipe for growth strategy, the recent market softness is creating incremental business pressures impacting case growth and lower inflation. These macroeconomic headwinds are impacting traffic levels for some of our customers, resulting in slower traffic levels across the restaurant industry. To offset this, we are actively managing our portfolio and continue to expect further improvements in cost-out activities and supply chain efficiency for the remainder of the year. Additionally, inflation remains on target for a low single-digit rate in Q4 of this fiscal year. As a result, we expect the fourth quarter to reflect a similar positive trend of gross profit dollar growth outpacing operating expense growth. Specific to share repurchases, we remain on target to repurchase approximately $500 million in shares this fiscal year. With that, I will now turn the call back over to Kevin for his closing remarks. Thank you, Neil.
spk11: As we conclude, I'd like to provide a brief summary on slide number 24. Our Q3 financial performance reflects another record quarter, delivering adjusted operating income growth of over 27% to 736 million. Our profit leverage improved in the third quarter, with gross profit growth outpacing operating expense growth. We expect that performance to continue in the fourth quarter. Industry macro volume trends softened in March, which we expect to continue into Q4. We are also experiencing lower rates of inflation, a trend we expect to continue through Q4. These two factors are partially offset by significantly improving supply chain productivity performance. No one is better prepared to manage a choppy macro landscape than Cisco. Why? Skill matters in this industry. Purchasing scale, logistics route efficiency scale, inventory optimization scale. but even more importantly, customer diversification scale. At Cisco, we serve restaurants up and down the price point spectrum and also have a large non-restaurant customer base. Many of our sectors are recession-proof, for instance, education and healthcare. Other segments are still in recovery, travel hospitality and business and industry. Within our restaurant segment, given that we serve all restaurant types, We retain case volume if and when customers trade up or down within restaurant customer segments. At Cisco, we are steadfastly focused on what we can control. We are focused on winning new business and in penetrating additional cases with existing customers. As importantly, we are focused on improving our supply chain efficiency. Food away from home is a healthy long-term market. and we are prepared to be successful regardless of the short-term macro environmental conditions. Lastly, Cisco remains deeply committed to our strong and stable balance sheet, disciplined capital allocation, and delivering continued returns to our shareholders. Our status as a dividend aristocrat remains a priority, and we are proud to carry that distinction going into our 54th year. Cisco is a resilient and diversified company with scale advantages. We are increasing our scale advantages through our recipe for growth strategy. We are confident that our work product will deliver strong profit growth and compelling returns for our shareholders. Operator, you can now open the line for questions.
spk06: Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If your question has been answered and you would like to withdraw from the queue, please press star followed by the number two. And if you are using a speakerphone, please lift your handset before pressing any keys. One moment please for your first question. Your first question will come from Mark Carden at UBS. Please go ahead.
spk08: Good morning. Thanks so much for taking the question and congrats on the new position, Kenny. I wanted to dig in a bit more on what you're seeing in the labor front. I know the recent strikes you experienced were quite a bit smaller in nature than the ones that took place in October, but are you expecting industry wage headwinds to intensify much more than you originally expected over the course of the next few quarters? And does this impact how you're thinking of offsetting cost outs and what's necessary on that front? Thanks.
spk11: Great. Good morning, Mark. This is Kevin. Thanks for the question. I'll start just acknowledging the strike situation and then directly answer your question. I just want to thank our operations team, first and foremost, for the agility that they displayed during the unanticipated strikes in the most recent quarter. Within 24 to 48 hours, we were up to full shipping capacity, able to support our customers and communicate effectively with our customers, which is not an easy task given the amount of business that we do. on any given day at Cisco. Point two for me is Cisco pays above market wage rates and we provide extremely compelling benefits to our associates. That has not changed and that will not change. We will be a leader in wage and benefits. For example, drivers can make more than $100,000 a year at Cisco. It's a good paying job. Unfortunately, as Mark you indicated, there were some strikes in the most recent quarter and the one that impacted our Q2 for up in Boston. These are things we're working through. We will continue to be fair to our colleagues and also manage our P&L for the long term during our discussions with our labor partners. Our goal is to have a solid relationship with all of our labor partners and to treat our colleagues with respect and the dignity that they deserve, and we're committed to doing that. As it relates to wage, we'll talk about that more in August when we provide our fiscal 24 guidance. I want to be clear that the type of increases that we're experiencing are not game changing. I know that restaurant names and retail names have talked about double digit plus type annual wage increases. We are not experiencing that at Cisco. And that's something we'll provide you with more clarity and specificity about on our August call.
spk08: Great. And then as a quick follow up to that, you've referenced improvements in overall labor productivity. At this stage, how close do you think you are to getting back to normalized labor productivity levels, both in the selector front and the driver front? And then how much of an impact do you think you're seeing today from the new academies?
spk11: Yeah, Mark, thanks for the follow-up. Really pleased with the rate of progress that we made in Q3 from a supply chain productivity perspective. I like to start at the start, which is we are fully staffed. So we are a fully staffed network. We're beginning to experience improved retention because overtime rates are have come down and obviously that flows through positively to our P&L. The types of things that we have done to drive that behavior in action is, as you mentioned, the academies for having a meaningful impact on reducing turnover for our new hires, improving productivity for our new hires. We have fully implemented engineered labor standards in our transportation division. We've always had that for warehousing and we now have it for transportation, which allows us to provide our colleagues with proper coaching and recognition when they're doing well and to help a new person or a person who's not at the level of productivity and throughput that we desire to understand how they can individually improve. We're improving how we flex our labor to match the volume for any given day in any given week, which allows us to, again, hit the desired productivity. And we're really pleased with the exit velocity of our productivity in March. And we anticipate in our Q4 of this year that we will make continued progress. As I mentioned on the earnings call transcript, we're still at an elevated level of cost versus our historical norm. And therefore, there's still progress to be made. And that progress will carry into 2024. We anticipate supply chain costs as a percent of sales will come down year over year. And we'll provide you more clarity and specifics behind that on our guide that we will provide you in August. Neil has one comment to add to that.
spk10: Neil, over to you. Hey, Mark. Good morning. It's Neil. Hope you're doing well. Listen, just a quick follow-on here. You heard in my prepared comments a comment about productivity costs. So, as you know, over the last several quarters, there are a couple of cost categories that were impacting the business that we've made great progress on, and one of which, of course, is directly related to your question. First of all, we had in our cost basis what we called snapback costs. those types of costs that were related to the hiring of a large wave of new colleagues as we improved and increased the volume in our business. And those costs originally as high as nearly $70 million in a quarter came down to $30 million, came down to $20 million, to $10 million. Those were eliminated last quarter. And now similarly, productivity costs, which you really should think about as excess overtime associated with the staffing and productivity in the business to the point of your question where you know, 40 million, then they were 20 million. Those also now are down to zero. So having made progress on both the snapback costs and productivity costs being eliminated, if you will, is really good signals of progress to Kevin's point. Great.
spk08: Thanks so much. Good luck, guys. Thank you, Mark.
spk06: Your next question comes from John Heinbockel at Guggenheim. Please go ahead.
spk07: Kev, I wanted to start real quick with, so Cisco, your way, if you could sort of frame the newest markets that you've entered, how they're performing versus some of the earlier ones, getting better at executing this. And then I think in the past, you thought that was a billion-dollar opportunity. Do you still think that's true, or is it bigger than you thought, perhaps?
spk11: Good morning, John. Thank you for the question. We're really pleased with the performance of Cisco Your Way. Specifically, as we roll out additional new neighborhoods, we're not seeing a diminishing of the impact as each individual neighborhood comes on. I think you've heard me talk about that before as the Hawthorne effect. When you launch a pilot, it does great, but then when you attempt to scale it and it diminishes over time, we are not seeing that at all. Each and every neighborhood that we launch comes out of the gate strong and actually sequentially improves month over month and quarter over quarter. And the lie that that happens is twofold. Again, remember, the truck is there literally every day, twice per day. The sales rep is walking the beat, as we call it, every day. And we win new customers on a sequential basis because we're showing up every day and knocking on the door and saying, do you need anything? Do you need anything? And then within existing customers, we can win categories that they perhaps were buying from a specialty distributor, like a specialty house or a premium protein house and a dairy house. We're, you know, gaining that specialty business and putting it on our truck and then we're winning new doors within the neighborhood so each additional neighborhood that we launched were pleased most impressively we're now live in five countries and the model is scaling in every country that we've launched it in most recently we launched it in stockholm sweden and right out of the gate the results have been really strong so Internationally, it's working. Domestically, it's working. We anticipate that, yes, John, it will exceed. We'll be on target versus the billion dollars that we have quoted, and there's the potential for upside. Not prepared today to talk about what level of upside, but we're really pleased with the performance. We're also pleased with the performance of Cisco Perks, which is our loyalty program. If I may, I do get a lot of questions, Kevin, what's the difference between Cisco YourWay and Perks? I'm kind of confused. I want to be really clear. Cisco Your Way is about the neighborhood and it's a couple of streets, you know, in a town that have, you know, 50 plus restaurants on those one or two streets. And it's about providing next level of service to those specific neighborhoods. Perks is the opposite of that. It's a customer who's not in one of those neighborhoods. That's one of our best customers. It's an invitation only program. We invite customers in and we provide them with white glove service, marketing services, and culinary engagements. And that program as well, which is now more than 11,000 customers enrolled, is exceeding our expectations.
spk07: And then one quick follow-up. You mentioned the comp change that you're testing. I think that relates to the sales consultants, right, that side of the business. And is that, I assume that is some form of hybrid commissions. Because I don't think you're going to full commission, but some hybrid. Is that fair? And then what do you think the greatest impact is on the business?
spk11: John, thank you for the follow-up. And you're directionally accurate on where we're headed. So for everyone else who's listening, go back to pre-COVID. The Cisco sales consultant was on a full commissioned model. During COVID, because the business dropped significantly, we did the right thing for our sales consultants to retain them, and we converted to a base plus bonus model. where they earn a livable wage through a base pay. And then they have opportunities to make money through bonus criteria. And that criteria can change quarter over quarter to have behavior that we desire to see from that population. For a while, it was Cisco brand. And then we were focused on helping our customers engage with Cisco shop. And John, yes, where we're headed for this coming fiscal year is to put even more incentive in front of the sales consultants for them to profitably grow their business And the more cases they get put onto a Cisco truck, the more they make, and obviously the more Cisco makes as a result. So we're going to keep the base pay component of what we have because we like that element. It drives retention and quality of life for our associates with ups and downs that occur in business. But we want to put even more incentive in front of them to drive growth profitably. And what we anticipate the action and reaction from that, John, will be is real hunger on our sales force to go out and win business, penetrate more lines with existing customers, and win new business. So we're testing it. As I mentioned, the results are preliminarily positive. And then we work on the communication plan and change management plan for our 5,000-plus associates in the sales ranks within the U.S. And we expect it to be very well received because, as I mentioned in my prepared remarks, this feedback came directly from our sales consultants. Give me more motivation and incentive to go out and win and go out and sell, and we're going to be doing exactly that. Thank you. Thank you, John.
spk06: Ladies and gentlemen, as a reminder, we are asking that you limit yourself to one question, and if you have a follow-up, please re-queue. Your next question will come from Joshua Long at Stevens. Please go ahead.
spk04: Great. Thank you for taking the question. I was hopeful we could dig into some of the digital tools that you called out, Kevin. Sounds like Strength and Cisco Shop and then also your sales associate CRM tool are performing well. Just curious what you could share in terms of the learnings that you've seen to date, where you might lean into going forward to the extent you could share that. And then also just how do those tools and others that you have help you manage the pace of inflation? You mentioned being really important, but how do you use those tools to really navigate this current environment from a pricing and just cost management perspective?
spk11: Good morning, Josh. Thank you for the question. It's two parts, so I'll address it as such. On the digital side, just, you know, Can't thank our digital team and our business team enough for the progress that we're making in our digital tools. So big shout out to our Cisco technology teams. Let me just break it down into the two most impactful pieces that are helpful to the customer. And then I'm going to answer the inflation question through the third prong, which is pricing technology. For digital, Cisco Shop is our ordering platform. We just continue to make meaningful progress in the usability of that tool. Improve navigation. There are categories of product that we sell, like supplies and equipment, which is a very high margin category for us. That was really difficult for our customers to shop in the past. They had to go to a separate website called Supplies on the Fly, and we're increasing significantly the accessibility of those high margin categories and products. Improving the search results, improving the navigation capability of the website. But here's where it's most powerful. non-intrusive pop-ups to our customer to help them make good choices in their order that they place. For example, they forgot to put into that order an item that we know they order regularly. There will be a dialogue box that pops up at multiple places throughout their shopping experience to remind them of that, and they have to interact with it in order to be able to proceed forward in a non-intrusive way. We're providing them with suggestions on things that they should be buying that we know based on the cuisine that they are in and the products they're buying that should be riding on a Cisco truck. And we're integrating that with pricing. For example, if they have not bought that item before, we can offer them a new item pricing discount because if we're able to win that item that we've never sold before, that is meaningfully margin accretive for Cisco because the most profitable case put on a Cisco truck is the next case going on a truck to an existing customer that we're already routing the driver to deliver to. So those are just examples. Improved navigation. improved shopability, suggestions for things that should be in fact placed on the order. But here's where the digital and human piece comes together effectively at Cisco in unparalleled ways versus our past. Those same suggestions that we're providing to the customer on shop are now being conveyed to the sales rep through our CRM tool in a very dynamic way. And there are two methods by which this can be activated. One is preparing for a customer visit. They can go into the customer tab of our CRM and they can see explicitly the types of deals and the types of offers that have been put in front of the customer that they may or may not have purchased from. They can follow up specifically on those offers. We are seeing step-level increases of engagement from our customers when that customer has seen the offer digitally and also it's been presented to them from their sales rep. And that's the power of Cisco. This is not a pure digital business. This is a relationships business. Our sales reps are culinary pros. They have intimate relationships with our customers, but now they're empowered with specific offers for that customer unique to their cuisine type. And again, the power is the digital and human experience. And these two tools, our CRM and our shop platform are talking to one another in a way that they never have before. And I call that visits with a purpose. What are the two or three things that I need to get done today? when I visit this customer, and we can track it. We can track it at the colleague level. Who is closing at a higher rate than the average? Who is closing at a rate lower than the average? And we provide, obviously, selling coaching to go along with that. So we're super pleased with our tools and the progress we're making. The second half of your question was about inflation and how are we managing it through our tools. This is where our pricing platform tool is enormously helpful. As Neil has said before, and I'm going to talk to him in a minute for comment, The local street business is an efficient market. As costs of product are going up quickly, those cost increases are passed on in that market. And the same is true if costs are coming down. The customer expects to be able to see a lower price on their order with Cisco and others that we compete against. Our pricing tool allows us to manage that environment in a dynamic way at the item level for each and every customer, I'm really pleased with how this company performed when we were dealing with this time last year, 15% inflation. And now that we're dealing with the opposite, which is a disinflation environment, we are using those tools to be thoughtful and strategic. We call being right on price versus the market. And our scale advantages of purchasing allow us to get the net lowest cost for Cisco. And we can, in fact, pass on value to our customers and win share profitably. Neil, I toss to you for additional comments.
spk10: Yeah, thanks, Kevin. Hey, Josh. Just a couple of headlines for you. The impact of these things that Kevin has been describing, so gross profit dollars growing at a pace faster than expenses now for two quarters in a row is the end result of the improvement in these tools and processes that Kevin is describing. And there's one other tool in the toolbox that is helpful for that gross profit dollar growth, and that, of course, is Cisco Brand, which has performed very well for us recently. now at 36% of what we sell to our local customers and about 46%, I'm sorry, 46% of what we sell to our local customers, 36% what we sell overall. A very powerful tool in the toolbox of managing fluctuations in inflation and the power of the gross profit dollar growth. So all those things combined are leading to that improved progress of that leverage that we speak of. Thank you.
spk06: Your next question comes from John Ivanco at JPMorgan. Please go ahead.
spk09: Hi. It's related questions or points, I suppose. You know, at first, what is the nature of the customer type slowdown that you saw in March into April? Is it, you know, full service, independent restaurants or local, you know, customers, which, you know, I think is, you know, one of your highest targets? profit customers. So if you don't mind addressing that. And then secondly, you know, the slowdown in inflation, if you could talk about what cost categories it's happening in. I mean, are these the categories that are most likely sold to street accounts or, you know, is there a cost plus a dollar component to that or cost plus a percent component to that? Just wanted to get some more clarity of what's happening beneath the surface on inflation. Thank you.
spk11: Okay, John, it's Kevin. I'll start and I'll toss to Neil for additional, you know, comment. Just A little more color on what we experienced in March, and obviously that's built into how we describe our expectations for Q4 now for the full year. March restaurant traffic did slow down in March. I think that's pretty well understood. Restaurant names, credit card data, purchasing, et cetera, did convey a slowdown in March traffic. Now, also to be clear, January and February were benefited by a pretty large year-over-year tailwind tied to Omicron. But again, the March traffic was you know, a bit slower than what had been expected. And we are expecting that to continue into our Q4. Now, we expect Cisco to outperform versus the market. We're going to win share profitably, and we are committed to delivering on our growth targets. It's just a more overarching comment about traffic. No notable call-outs, Mark, on trade down. I know that's often a question within sectors and within segments of our book. The traffic that we experienced was kind of across the board. you know, across our restaurant names that we cover. Specific to inflation, I would like to provide a little more color in that regard. The number, the print for the quarter was 4.9%, as Neil said in his prepared remarks. The quarter started a bit higher than what we expected and it ended a bit lower than we expected. So mathematically what that means is the rate of disinflation in March was steeper than we had anticipated. Now we're prepared to manage that. As I mentioned a second ago, In answering Josh's question, for the long term of this industry, lower inflation is a good thing. I want to be really clear about that. This time last year, we were dealing with 15% inflation and we were receiving lots of questions from investors about the impact on that inflation would have on consumer psyche and consumer demand and would it decrease what traffic to restaurants. So the fact that the inflation rate is coming down is a good thing. With that said, we need to be thoughtful and strategic about how we manage the transition from double digit plus inflation to what we're expecting in Q4 to be low single digits. We have a tool to be able to do that. And that's our pricing tool. I'll reinforce a couple of key points, which is our purchasing costs because of our scale advantage is the best in the industry. And we have the opportunity to be strategic and thoughtful about passing on value when it is created to those end consumers. Specific to your point about product to matter categories, I think the easiest way to answer that is what categories last year were most inflationary? And John, it was mostly center of plate. So I think you remember this time last year, protein specifically was in the 30 to 40% inflationary space. And that subcategory and category went deflationary for a period of time. And what we say all the time is it's not about a category, it's about the overarching book of business. And while protein was deflationary, Our overall book average was plus 4.9. And then one much more comment about that. We're actually getting indications from the supplier community that beef will begin becoming inflationary again in the coming year because of some challenges on the production end of that particular product set.
spk10: Neil, I'll toss to you for any additional comment. Thanks, Kevin. Just a little bit of color commentary around some of those points. At any given point in time, You have some categories that are inflationary, like currently for us dairy, some that are deflationary, like for us currently poultry, and some that have swung. You know, as Kevin just talked about, so beef, which was recently deflationary, is now becoming inflationary for us. And it was the pace of disinflation, particularly in March, that changed a bit. And we ended, as Kevin said, the quarter at about 5% for the total quarter in terms of inflation. The local customer market is fairly efficient in terms of how you pass this through. And on the chain or multi-unit side, you have longer visibility with the contracts that we have with those types of customers. Put all of this together and you still expect low single-digit inflation for the fourth quarter, which as Kevin indicated, if you were to look over a 20-year time horizon, would actually be the preferred rate of inflation for both us and our customers. So that's where we think we are right now. Back to Kevin for any last points.
spk11: Yeah, sorry for the three-part answer to this question, John, but it's just really important for everyone to understand. And as that is happening, as cost is becoming more efficient, and therefore our ability to provide value to our customers passes through at a lower rate of inflation, aka disinflation, simultaneous to that, we are taking meaningful cost out of our current supply chain. We are driving improvement in efficiency, and it's those things that need to happen in concert. And I am pleased with the rate of improvement we are making within our supply chain. And again, the performance you see is for the full quarter in our numbers. I'm really pleased with the exit velocity in March of our supply chain productivity that we measure everything, pieces per labor hour, pieces per truck. We literally measure everything. And our exit rate in supply chain productivity and efficiency in March was really strong. So as our inflation rate begins to decline, aka disinflation, we're bringing costs down at exactly the same time.
spk09: Thank you.
spk11: Thank you, John.
spk06: Your next question comes from Jeffrey Bernstein at Barth Lease. Please go ahead.
spk05: Great. Thank you. One follow-up on that last question. The March slowdown that you anticipate continuing through the fiscal fourth quarter, I think you had noted in the release and in your comments that Cisco sales perhaps were maybe stronger or more stable through the quarter. I'm just wondering whether you think there's an opportunity to accelerate market share gains in what's likely a slowdown. Presumably, again, scale matters and you've got more options to mitigate. So I'm just wondering if there's an opportunity for greater market share gains in an environment like that. And then I had one follow-up.
spk11: Okay, Jeff, this is Kevin. I'll answer the first question and then toss to you for the follow-up. So we're bullish on Cisco's ability to win in the market for the long term. We are playing the long game, as I said in my prepared remarks. The recipe for growth strategy is all about better serving our customers and growing our business profitably and enabling Cisco to do so at a rate that is faster than the overall market rate of growth. And we're on track to be able to do that for our third consecutive year. Specifically, you know, Jeff, what we will double down on during a period of time that would be a slower macro is initiatives and strategies that we know are working. So push even harder and work even faster on Cisco your way. Engage our Cisco Perks customers with the benefits that are available to them because we have proven that a Cisco Perks member who engages with one of Cisco's programs, and that would be an example, a culinary service, buys more from Cisco on an ongoing basis. The work we're doing with our website, it's move faster, improve it even more. Spanish language version of our website is going live soon. Just double down on our ability to advance forward our strategy because our strategy is working and our strategy is winning in the marketplace. Italian, as an example, we've doubled our market share in Italian over the past year, in large part through the Greco & Sons acquisition. But remember, the Greco acquisition was about taking that platform nationwide not just cultivating it within its existing geographies, and we're making meaningful progress in being able to advance that Italian platform by opening new physical geographies, most recently out in California through an acquisition we did in L.A., and we're going to flip that acquisition to the Greco model and meaningfully grow that business. So, Jeff, we're all about profitable growth and doing so responsibly, and we do believe there's an opportunity not just in our Q4, but as we head into fiscal 2024, to lead the industry from a profitable growth perspective. Toss it back to you for your follow-up.
spk05: Yeah, in fact, perfect. I think you ended it with thoughts around fiscal 24. I was wondering, I mean, I know back in the day you had given guidance which culminated in fiscal 24. I know it was built off of fiscal 19. I think it was for EPS growth 30% plus, which at the time equated to 460 or more. I know it hasn't been mentioned of late, and we had a reduction in fiscal 23 guidance last quarter and the most recent slowdown. Now you're talking about the lower end of that range, close to $4, I guess. Just wondering whether there's any still relevance to that prior target, whether you see further acceleration of efficiencies or whatnot, or maybe throw it to Kenny. Just wondering what Kenny brings to the table in terms of greatest skill set to help to achieve those prior earnings targets. Thank you.
spk11: Good job. Appreciate the question. This is Kevin. I'll start and then I am going to toss to Kenny for a comment. Just to be clear, we're going to provide our guidance for 24 at our August call. We are confident in our plans at Cisco to continue to advance our recipe for growth. The strategy is working and what we are confident in are some, let's call it macro comments. We are confident we can grow our business profitably faster than the industry. We are confident we can continue to make improvements in our supply chain efficiency. things of importance that will provide you with more color on in August because we're deep in the throes of our fiscal planning process as we speak. And that work will happen over the next couple of months is what level of inflation will we assume for fiscal 24? What level of market growth will we assume for 24? And then what more from an efficiency cost out structural perspective will we specifically be able to account for and book, you know, in our plans for 24. So we need to put all that together to provide a reasonable guide for next year. That will come in August. And Kenny, I toss to you for additional comments. Sure. Thanks, Kevin.
spk03: Hey, Jeff. So, you know, a few things from my side of the house. You know, we are entering 2024 with momentum. So keep in mind, we will finish this year in Q4 with record sales and operating income, right? So a lot of momentum entering next year. As Kevin mentioned, there's a few themes that you will see as we unveil the new plan in August, the next earnings call. One is continue to take care properly, right? That's very important for all of us, and that's where recipe for growth comes in. Second is we will continue to drive operating leverage in our business. Third is making sure that our balance sheet continues to be healthy and robust from a liquidity, cash, and leverage standpoint. So to your last question around where do I add value and how I think about these things that I just mentioned, right? As I think about my priorities entering, you know, call it Q4 in 2024, there's a few thoughts in my mind, right? First of all, I view myself as a business leader with finance expertise, right? So I'm a very hands-on operational CFO, so where I work directly with the team and deploy capital where it creates value for our stakeholders. I'm of the mind that one of my job, you know, first priority is to make sure that we generate, continue to generate healthy cash inflows from operations, maximize the conversion from EBITDA and operating income. and ultimately continue to high quality earnings that Cisco has enjoyed throughout the period. The second piece is continue to partner with the team, right, from a go-to-market standpoint, providing world-class service to our customers. Everything starts with our customers, especially as we grow market share, local, Cisco brands, specialty, and the like, which increase margins for our business. And last but not least, you know, as part of my pedigree and my experience, it's all about pure operational excellence. driving productivity and rigor with our supply chain and overall business. A penny for our business is huge, given the fact that we have skill and leverage as we talked about. And this comes full circle to my first point, where we must generate cash and flow to invest in our business and create further value on top of the skill advantage that we enjoy.
spk05: Thank you.
spk03: Thank you, Jeff.
spk06: Your next question comes from Kendall Toscano at Bank of America. Please go ahead.
spk00: Hi, good morning. Thanks for taking my question. So I wanted to ask about the 2023 guidance, but first I just wanted to see just a quick follow-up in terms of the local customer channel. So you had talked about some initiatives last quarter to accelerate new customer acquisition in that segment. I was wondering if you had any update on that. And then just in terms of the exit rate for the quarter, you said March for, I guess, the total U.S. broad line segment was kind of at a low or slight growth, I think you said. I guess, how does that look for local customers specifically? And can we assume it's still running a bit below the national customers?
spk11: Yeah, Kendall, this is Kevin. I'll start, and then I'll toss to Neil for additional color. So part of it is accidentally there we got a mixed message between the marketplace, which means all businesses, and then Cisco specific. So I'll unpack it and make it more clear. The comment about March low growth or slight growth, I believe were the exact words I used, that's an overall market condition. That is restaurant names in aggregate. leveraging third-party data and credit card data. That was that comment. We grew substantially more than that. We grew our local case volume 4% in the most recent quarter and total business 6%, which is that's the answer to the second part of your question. Yes, we are growing our non-restaurant business and our CMU restaurant business, that's the contracted long cycle, to use Kenny's term, at a faster rate than local. And the why is twofold. One, Cisco is the industry leader in the non-restaurant sector, and that's business and industry, travel, hospitality, and those businesses remain in meaningful recovery. So, that's not a slight on the local business, it's that we're seeing significant rebound in health in travel, and we're seeing offices reopening, we're seeing more people going back to work on a daily basis, and we're seeing companies extend the number of days per week they expect their colleagues to be returning to work. And we've been tremendously successful in our national sales business. We stopped reporting the number, but the last time we reported it, it was two plus billion of net new wins for national business. And I want to be really clear about that. We did not buy that business. The contracted margin rates for those wins exceeded our historical standards. The reason why companies are partnering with Cisco is our national scale, our breadth and reach. scale matters in this industry and our ability to ship on time and in full and provide competitive marketplace rates shine through strongly over the last couple of years from a national perspective. So that gives you the color. Our total was six. You know, our local was four plus. That's volume. And the overall market itself in March was like growth. Our commentary for the Q4, I'm going to toss to Neil for anything he would like to say about that.
spk10: Hey, Kendall, thanks for your question. As Kevin is talking about here on the industry perspective, We are seeing total growth, albeit at a slower pace, and Cisco outpacing that. It's not as much about the local independent versus the chain or multi-unit as much as it is good operators innovating on their menu, offering fresh, local, customizable offerings that matter to the end consumer. So I think that's ultimately what we're seeing. As it pertains to the year and the guidance, a few points that we've made that we continue To emphasize, we do expect to grow sales by at least 10% for the year. And as we talked about, we continue to expect a rate of gross profit dollar growth to exceed the expense growth and continue to leverage that. We talked about the inflation that's looking for us to be in that low single-digit range. And as we talked about here today on the call, we'll expect our earnings per share to be about $4 for the full year.
spk00: Great. I think that answers all my questions. Thanks again.
spk11: Thank you, Kendall.
spk06: Your next question comes from Alex Slagle at Jefferies. Please go ahead.
spk12: Thank you. Good morning. I wanted to follow up on the target to grow 1.35 times the market in 23 and I guess further acceleration ahead and how you're thinking about that ramp relative to previous thoughts. I mean, it looked like a pretty strong acceleration in the chart. I didn't hear whether you reiterated the 1.5 times for 24, but just any more color there.
spk11: I'll start and then I'll toss to Kenny for any final or additional comments that he'd like to make about 24. Alex, appreciate the question. So what I said on today's prepared remarks is we're on track for our goal for this year. So we are consistently growing more than the market and that's our third consecutive year of doing that. So we're pleased with the progress that we are making. Cisco has been the largest in this industry for a long time. We have had the highest EPS as a percent of sales or EBITDA as a percent of sales in this industry by a wide margin for a long time. And we have become a growth company. We are consistently growing more than the industry and we are accelerating our rate of progress. So the recipe for growth is the why and the how and the increased allocation of capital specific to footprint, meaning infrastructures. That's not an increase in the total capital at Cisco. It's, you know, Neil, help me out. We said how many buildings? Did we say that number publicly yet? Seven. I didn't want to misspeak, so forgive me for tossing to Neil. We have seven physical buildings in flight as we speak. And those buildings are going to increase our fulfillment capacity in high growth markets, in high rate of success markets for Cisco. In the past, we've called those foldouts. Some of those seven buildings are for our Italian platform to be able to replicate the Greco model in geographies where we don't currently have an Italian platform. So we're bullish on our long term. As I said, we're playing the long game at Cisco. The recipe for growth is working. Perks, Cisco your way, our improved website, our pricing capabilities, the physical infrastructure enhancements that I mentioned. Neil was out in California last week looking at Riverside, which is our site that has our first electric trucks. We will be a leader in that space. You can envision a future where Manhattan blocks combustible engines going into Manhattan for delivery. Deliveries must be between midnight and 4 a.m. and need to be on an electric truck. Cisco will be prepared to do that faster than anyone in our industry. So we're pleased with our progress. We're proud that we just posted the most profitable quarter in the company's history. And obviously, the overall market from time to time throws some curveballs. And I mentioned a few of those at the beginning of today's prepared remarks. As it relates to 24, Kenny, I'll Toss to you for a final word.
spk03: Yeah, so good morning. You know, capital allocation strategy is positioned for growth at Cisco. We are positioned for growth, right? Return on invested capital, as I mentioned earlier, is the lens in which we will operate to ensure that we are getting optimized return for where we deploy capital and resources. So just a bit of my thoughts on capital allocation. You know, we will first and foremost invest in business and growth. This includes capital investments, as Kevin mentioned, technology, digital tools, fleet, buildings, infrastructure, footprint, right? This also includes recipe for growth as well. So right now, Cisco has the luxury, given the fact that we are generating robust free cash flow, to invest in our company, but also return cash to shareholders as well. So, right now, I believe that we are well positioned for growth in 2024, given the healthy balance sheet that we have that allows us a lot of optionality and flexibility.
spk12: Great. Thank you. Thank you, Alex.
spk06: Ladies and gentlemen, unfortunately, we have reached our allotted time for today's conference call, so this will be concluded. We would like to thank everybody for participating and we would ask you to please disconnect
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-