Sysco Corporation

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.

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.

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.