Sysco Corporation

Welcome to Cisco's fourth 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 fourth quarter fiscal year 2023 earnings call. On today's call, we have Kevin Hurkin, our president and chief executive officer, Kenny Chung, our chief financial officer, and Neil Russell, our chief administrative officer. Before we begin, please note the 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 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-GAAP measures to the corresponding GAAP measures is included at the end of the presentation slides and can also be found in the investor section of our website. During the discussion today, unless otherwise stated, all results are compared to the same quarter in the prior year. 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 and one follow-up. At this time, I'd like to turn the call over to Kevin Harkin. Thank you, Kevin.

Good morning, everyone, and thank you for joining our call today. I would like to cover three topics during my section of our call. First, I'll provide a summary of our Q4 results and our four-year performance. Second, I'll convey an update on our recipe for growth strategy And lastly, I'll provide some commentary on the macro conditions we have modeled for fiscal 24 and how Cisco intends to operate within that environment. Kenny will provide much more detailed components of guidance during his section. So let's get started. We are pleased with the strong finish to the fiscal year. Cisco posted record top line and bottom line results during the fourth quarter. Top line results, as seen on slide five, were up 4.1% compared to last year, delivering 19.7 billion in sales. The strong quarter generated a four-year sales result of 76.3 billion, a record at Cisco. We grew annual sales by 12.5% or 8.6 billion on a constant currency basis. That sales growth is the equivalent of creating a net new Fortune 500 company within Cisco. Turning to volumes, Q4 case volume grew 2.3% and local case volume grew 0.8% across our US food service business, successfully growing our market share and furthering our number one position in food service distribution. We are pleased with our share gains for the quarter and the year, which build on meaningful gains delivered within fiscal year 22. Importantly, These gains are profitable share gains. We are not growing for the sake of growing, as we have consistently pursued profitable sales growth vectors domestically and internationally. Moving to gross profit, our sales and merchandising teams delivered a strong quarter from a GP growth perspective. We grew gross margin rates and GP dollars per case, which is not easy to do in a disinflationary environment. Our teams are doing excellent work in strategic sourcing to reduce COGS and further penetrating Cisco brand cases with our customers. Advancing Cisco brand helps gross profit and leads to increased customer retention. Lastly, we are growing our higher margin specialty business, which strengthens our overall margin profile. Next in the P&L is operating expense. I am most proud of the quarter from the perspective of the progress that we are making in reducing our expenses. We have been clear with investors that our first half of the year in fiscal 23 had elevated expenses. This was driven by two factors, investments in our business and a supply chain struggling with new colleague productivity. In the second half of fiscal 23, we made major progress on our expense ratios, in greatly accelerated productivity improvement within our supply chain. Retention of colleagues has improved, productivity of our colleagues has improved, and our supply chain initiatives are bearing fruit. All told, we delivered an operating leverage of 370 basis points in Q4, growing GP dollars meaningfully more than expenses. Slide 7 highlights the sequential improvement with OPEX over the course of the last fiscal year. We began the year in our U.S. food service segment with quarterly operating expense growing over 22%, but ended the year with a growth rate of 0.5%. Our focused effort to deliver supply chain efficiencies and broad-based cost reductions drove the sequential improvement across the year. We expect to make further operating expense progress in 2024. We will be zealot-like focused on ensuring our supply chain is properly staffed, properly trained, and working safely and productively. We have the leadership expertise, supply chain tools, and supply chain infrastructure to lead the industry in this regard, which is one reason why Cisco operates at an EBIT margin over 1.5 times higher than our industry distributor average. Record top line and record bottom line performance in Q4 is a direct result of our recipe for growth and our focus on excellence in execution and operations. The improvement from first half to second half within fiscal 23 was notable, enabling Cisco to grow EPS more than 23% for the full year. In addition to delivering a strong P&L in Q4, we achieved record free cash flow and we returned approximately 1.5 billion back to shareholders during the year. We are pleased with the strong financial performance in the quarter despite rapid disinflation and slower overall industry market volume growth. We believe our success in spite of those conditions positions the business to be successful in 2024 which I will speak to more in a moment. As is my custom, I would like to provide a brief summary of select recipe for growth elements of our strategy from our recent quarter. I will start within our supply chain initiative. Our work on strengthening engineered labor standards across our supply chain is paying dividends. As I mentioned a moment ago, we made significant headway in improving our supply chain efficiency. We have recently strengthened our work method standards training within transportation roles, enabling our colleagues to work safely and work more productively. Additionally, we have increased retention rates within our workforce through our improved training programs. The Driver Academy is national, and the impact of this program is a better trained workforce. Now I would like to highlight the progress that we have made on the food sales and marketing side of our recipe for growth. Last month, we announced an agreement to purchase Bix Produce. Bix Produce is a leading produce specialty distributor based in Minnesota. The acquisition is expected to provide a strategic opportunity for Freshpoint to expand its geographic footprint in an area of the country where it does not currently have operations. Bix has a strong assortment offering, including fresh-cut produce, grab-and-go sandwiches, and value-added production capabilities. In addition to our good work and expanding specialty, we also upgraded our digital shopping platform during the quarter. Our shop digital platform is now available in Spanish, and we have deployed more than 100 new feature enhancements. Some of these enhancements include a new homepage, new category and cuisine pages, improved search and navigation, and lastly, a new deals for you page. These enhancements have driven an increase in product page visits, adding incremental volume through add to cart purchasing. There is no finish line in our digital improvement journey. We will continue to improve our digital tools over time, enabling us to reduce friction in the purchase experience and inspire our customers to buy more from Cisco. Our centralized pricing tool has given us the ability to be what we call right on price at the region, customer, and item level. During the first half of 23, we experienced rapid inflation, and in the second half of 23, we experienced rapid disinflation and even deflation towards the end of Q4 within our core USBO business. Our merchants have been fighting to secure best possible cost, and our pricing tool ensures that the real-time cost fluctuations are built into our pricing strategies. Managing pricing across hundreds of thousands of customers, tens of thousands of products, and approximately 7,500 sales reps has never been stronger. This is evidenced by our consistently strong performance in GP dollars growth and adjusted gross margin rate growth of 28 basis points year over year in the quarter. We want our sales reps focused on customer engagement, relationship building, consultative selling, and solving problems for our customers. Our pricing tool enables our SEs to spend more time on those value-added activities. Lastly, Cisco UA is now live in over 400 neighborhoods across five countries, and our loyalty program, Perks, is active with over 12,000 customers. Both programs are continuing to deliver compelling top and bottom line growth. The past year has been a heavy lift as we work to get these programs off the ground. In 2024, we can focus on maximizing the impact of these compelling programs with less effort and investment required than in 2023. In summary, our recipe for growth is working, enabling Cisco to profitably grow our business and differentiate versus others in our space. Most compelling is that food away from home is a growth sector, as seen on slides 10 and 11. Cisco has been profitably growing faster than the overall market, delivering record top and bottom line results. We expect to continue to win market share profitably in the years to come, and to do so in a fiscally responsible way. I'd like to wrap up my time this morning with some comments about the operating environment we expect for fiscal 24 and Cisco's positioning within that environment. My main message is that scale matters in this industry and that strong operators are best positioned to succeed regardless of the environmental conditions. Cisco is a very strong operator with meaningful scale advantages. With that said, In fiscal 24, we expect the market to grow at a lower rate than 23. We also expect the rate of inflation for the year to be below historical standards. In the second half of fiscal 23, we experienced rapid disinflation followed by deflation within our core U.S. Broadline business towards the end of the fourth quarter. We expect that deflation will continue within U.S. Broadline for the first half of fiscal 24. followed by muted U.S. broad-line product inflation in the second half. We expect that our international segment will remain inflationary during the coming fiscal year, given unique marketplace conditions in those geographies. Net-net for Cisco, we expect an inflation rate that is slightly positive throughout fiscal 2024, below our historical average. We believe the Q4 environment we just exited is largely reflective of the operating environment for the coming year. Importantly, we grew our top and bottom line within that quarter. We're being very prudent in fiscal 24 in managing our expenses, given the volume and inflation components that I just conveyed. Despite these conditions, Cisco is positioned to succeed, grow faster than the market, and deliver bottom line growth. Our confidence is also based on our structural competitive advantages. First, our international business, which is approximately 18% of sales, continues to outperform, providing a natural hedge as international inflation rates remain elevated and are expected to stay higher than the U.S. Second, our purchasing scale is the largest in the industry. And our strategic sourcing efforts will enable Cisco to secure improved pricing in a deflationary environment. Third, Cisco has a diversified business with strong sales across 12 major product categories to help buffer the impact of inflation or deflation in any one category. Additionally, our strategic pricing software will enable Cisco to be extremely purposeful on how we manage the impact of disinflation and deflation. Lastly, further advancing Cisco brand penetration domestically and internationally is another lever to pull to deliver GP dollar growth when the environment is deflationary. The exit velocity of fiscal 23 gives us confidence in delivering strong results in 2024. In summary, here is what we expect for 24. Lower rates of overall market volume growth versus 23. Continued market share gains and profitable growth at Cisco. Deflation in the U.S. for at least the first half of the year and muted overall company-wide inflation for the full year. Disciplined expense management. Kenny and I have directed an effort to reduce structural expenses by approximately 100 million. Extremely disciplined return on invested capital or ROIC focus. continued progress in advancing Cisco brand penetration, and growth within specialty. In total, given all these interworking variables, we are modeling an adjusted EPS range of 420 to 440 for the full year. The midpoint of that guide would generate approximately 7% EPS growth versus fiscal 23. Now in our third year of Recipe for Growth, We are positioned to press the accelerator on certain proven initiatives. For example, we can optimize our performance and launch Cisco Your Way neighborhoods, which takes less effort than starting up a neighborhood. Our digital tools are becoming more and more pervasive with our customers, and we can optimize the personalization of these interactions to increase yield through each transaction. We have always said that the recipe for growth is a wheel. where each initiative fuels the next. Fiscal 24 is a year of optimizing what we have launched versus kicking off net new efforts. This will enable Cisco to be laser focused on what matters most, executing with excellence against launched programs. This also means we will be able to grow our business with less investment. This was always our plan within the recipe for growth, and it is coming to reality in fiscal 24. In addition, our expanded geography of specialty businesses, like the recently announced BICS acquisition, will increase the impact of our higher growth specialty segment. In fiscal 24, we are committed to both profitably growing our top line, meaningfully reducing OPEX, and generating a higher rate of return on key initiatives. Given the confidence that we have in our long-range roadmap, we are happy to announce that we have reintroduced ROIC as a long-term compensation metric for our leadership team. In addition, we have increased the weighting of financial metrics within our short-term annual bonus program. As I have said many times before, the best companies in the world are growth companies, and we expect that Cisco will continue to profitably grow faster than the overall market. I am thrilled to have Kenny as my partner on these objectives. We are committed to maximizing every dollar invested in producing the greatest shareholder value. I'll now turn it over to Kenny, who will provide additional financial details. Kenny, over to you.