Sysco Corporation

Please stand by. Your program is about to begin. Welcome to Cisco's third quarter fiscal year 2025 conference call. As a reminder, today's call is recorded. We will begin with opening remarks and introductions. I would like to now 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 2025 earnings call. On today's call, we have Kevin Hurkin, our chair of the board and CEO, and Kenny Chung, our CFO. 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 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 June 29, 2024, 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-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 period 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. If you have a follow-up question, we ask that you re-enter the queue. At this time, I'd like to turn the call over to Kevin Herkin.

Good morning, everyone, and thank you for joining us today. Q3 was a difficult quarter for the industry that began with wildfires in California, which significantly impacted our important Southern California region and included historic winter storms throughout the country in January and February. We sized these events as having an approximately 150 basis points negative impact on sales trends for food distributors in the quarter. Food traffic to restaurants during the quarter reflected these challenges, with January down 1.3%, February down 5.7%, and March down 2.3%. The quarter overall was down 3.1%. which represented a 150 basis points deceleration versus Q2's traffic level of down 1.6%. In addition to the effects of adverse weather in the quarter, consumer confidence has been shaken by the recent trade policy and tariff negotiations. As you are aware, the closely followed Michigan Consumer Confidence Survey recently highlighted that consumers are expressing one of the lowest levels of confidence in approximately 20 years. The decline in confidence levels gives us concern for the full year ahead. I'll speak more about tariffs and their impact on the industry in a few moments. As a reminder, Kenny and I communicated on our Q2 call that we had anticipated nominal improvement in the business macro environment going from the first half into the second half of our fiscal year. Unfortunately, at this time, we have experienced the opposite macro effect. And Cisco's business performance for Q3 reflects the industry traffic deceleration. We are disappointed with the quarter, but it is important to note two things. Cisco's USFS volume trends for the quarter trended in line with the industry traffic deceleration. And more importantly, business performance in March strengthened over the course of the month. And while it is unusual for us to comment about the first month of a quarter, Given the uncertainties in the macro backdrop, and given our softer than expected Q3, we felt it was important to highlight our April performance was stronger than March. For the month of April, industry traffic adjusted for calendar shifts has trended slightly better than March. The Easter shift in the period complicates year-over-year comparisons. However, even when adjusting for the Easter calendar shift, April has produced stronger volume growth rates versus March, and versus Q3. We are pleased to see the relatively stronger start to our Q4, but we are cautiously planning our business for the remainder of 2025, given the aforementioned tariff uncertainties and consumer confidence data. Given that macro backdrop, I will now pivot to Cisco's results for the quarter where, as you can see on slide number four, we delivered sales results of $19.6 billion, up 1.1% on a reported basis, and up 1.8 percent to last year when excluding the divestiture of Mexico. We delivered adjusted operating income of $773 million, down 3.3 percent to last year, and adjusted EPS of 96 cents flat to last year. We converted negative 3.1 percent foot traffic to restaurants into positive sales by winning new business and successfully passing through approximately 2.1 percent inflation for the quarter. Importantly, we are making solid progress on our $100 million profit improvement efforts that Kenny discussed last quarter, with a positive contribution in the period from our strategic sourcing and inbound logistics efficiency improvements. Those efforts will have an increased positive impact on our Q4. Our international segment posted another compelling quarter with profit growth of double digits. This is the sixth consecutive quarter of double-digit profit growth from our international segment. Within USFS, our national sales business delivered flat volume growth for the quarter and sales growth of 2.3%. Both figures were below our expectations, driven by softness in the national restaurant sector. Within national sales, our non-commercial business continues to perform with strength in food service management, education, and travel and leisure. Our local business delivered negative 3.5% volume growth for the quarter. This was a step down versus our Q2 performance, but the step down was consistent with the traffic change to the industry on a quarter-over-quarter basis. Lastly, our Sigma segment delivered sales growth of 9.5% for the quarter, driven by strong customer wins versus prior year. The sales and volume growth in Sigma will begin to reduce in coming quarters as we begin to lap large customer wins within the last year. Sigma is having a very strong year, growing top line 9% and bottom line 17% year to date. We are disappointed with the overall financial performance in the quarter as we had expected a stronger macro backdrop. With that said, important initiatives to improve our local business are beginning to deliver results. It is unfortunate that our self-help improvement is coming at the same time that the industry backdrop softened. However, we remain 100% focused on accelerating our progress. We anticipate that we'll increase our progress on these important initiatives in the coming quarters. Now that I have covered the general backdrop of the industry in Cisco sales, volume, and profit performance, I would like to provide an update on specific initiatives we are driving to improve our performance results. First, I'd like to discuss the state of our sales consultant workforce. I am pleased to report that our 2025 hiring cohorts are progressing nicely up their productivity curve. Each of our hiring classes are on target to achieve their sales and volume targets. Importantly, I can also report today that our sales consultant retention has significantly improved versus the first half of the year. SE turnover was a headwind for Cisco in the first half of fiscal 2025, and we expect it will become a tailwind in 2026 as we lap those colleague departures and our new hires increase their productivity. Regarding colleague retention, we just completed our annual employment engagement survey, and our sales colleague job satisfaction was up solidly year over year. Colleague engagement drives retention, and colleague retention drives positive customer engagement. Given questions we've received on recent investor calls, I would like to explain the net net impact of colleague turnover in a bit more detail so that you have clarity on what we are experiencing. During the first half of 2025, we experienced elevated colleague turnover that peaked in September. The negative impact of SC departures is immediate as we need to reassign customer locations to other Cisco colleagues. During that customer realignment, select customer attrition occurs. As such, A departing colleague has an immediate negative headwind impact on our business, and that headwind can persist for a full 12 months until you lap the customer departure. In contrast to the immediate impact of a departure, a colleague hiring has the opposite time horizon. New colleague hiring has a slow and gradual positive impact on the business. New colleagues start with a small book of business and grow that business over time as they expand their territory. The length of time to become productive for a new sales consultant is approximately 12 to 18 months on average, as it can be quicker or slower depending upon the level of sales experience of the new hire. Putting it all together, as a result of these two factors, BISCOL 2025 has experienced a net headwind from our colleague population. Given that we have stabilized our retention figures, and that our new hires are performing, we expect the scales of this equation to tip from negative to positive as we enter fiscal 2026. The second local topic I would like to highlight today is colleague compensation and performance management. Our sales consultants are embracing our compensation model. They are driving the right selling behaviors, and they are, on average, making more money than prior year. These actions are most notable in the winning of new business. where we have opened more new accounts in March than any prior period outside of COVID snapback. We have work to do in order to improve customer retention as industry churn across distributors is currently above the historical average. As a result, we have a company-wide effort on improving local customer retention to complement the success we are having with new account wins. The hyper focus on service and retention will be a stronger positive vector in fiscal 2026 versus 2025. The third topic for today is our fulfillment capacity expansion. We previously spoke to opening a new facility in Allentown, PA earlier this year. That new DC is focused on winning new business in the population dense Northeast corridor. I recently visited our next new site just outside Tampa that will support the growing Florida market. The new facility in Tampa will open the summer and will increase our ability to win net new business in the Florida region by expanding our storage and throughput capacity, especially to support the peak winter months. Internationally, we are on track to open new facilities in Sweden and Ireland in the summer. Each of these projects will support expanded storage and throughput capacity that we believe will enable us to profitably grow our business in target rich international geographies. Lastly, I would like to speak to our work to improve our pricing agility. At the Cagney conference in February, Cisco introduced a new local sales initiative that is currently in pilot mode in select regions. As I said at Cagney, we are pleased with our margin discipline and overall price competitiveness utilizing our current pricing system and architecture. With that said, it is a competitive marketplace, and competition will occasionally offer our customers savings on select items. Today, our sales reps need to seek approval in order to match a given competitor price on a given item. The time delay of that approval process can sometimes result in a lost sale or even a lost customer. We're working to speed up this process and provide our frontline colleagues with decision-making authority, leveraging our pricing tools. Our sales professionals will be able to respond to the customer in the spot moment, enabling incremental opportunities to potentially save a sale, all while maintaining strong margin discipline. This increased speed to action will improve case volume and customer retention. Most importantly, our underlying pricing technology will be leveraged to underpin the agility process. We will roll out the new model once the pilot results are matching our intended outcomes and as we prepare and train our colleagues, new and experienced, to sell in this model. As I wrap up the update on local sales, I want to congratulate our international team for another outstanding quarter. International local volume increased 4.5%. Even more impressively, adjusted operating income increased 17.4%. Particular strength was delivered from our Canada, Great Britain, and Ireland businesses. We expect a continuation of these strong results from our international segment in Q4 and into fiscal 2026. As I wrap up the business review section of my prepared remarks, I would like to make a few comments on some additional important topics. First off, I would like to address what we are seeing with tariffs and their potential impact on the food distributor landscape. It is important to note that Cisco purchases greater than 90% of our products within country, in each country that we operate. Food is inherently local, and our sourcing teams greatly leverage local food suppliers As a result, our tariff exposure is much less than most industries. For those products that we cannot source locally, like avocados from Mexico, we are working efficiently to understand the impact of tariffs on our costs. At this time, produce from Mexico and Canada is exempt through USMCA. With that said, we recently learned that tomatoes will in fact be taxed and tariffed when imported. To manage these complexities, we have stood up a tariff management task force that meets daily. The focus of the task force work is the following. Number one, ensure we have products in stock and available for our customers. Number two, defend against price increases from suppliers and do everything possible to minimize their impact on potential cost increases for our customers. Number three, find alternative sources of product if and when a cost increase is excessive. Number four, work with our customers to find menu alternatives and product choice alternatives that can reduce the potential negative cost increase impact. All told, Cisco is in a better position than anyone in the food service distribution space to manage this dynamic situation, given our size, scale, and global procurement division. Our global leadership gives us a strategic advantage to understand the supplier community in hundreds of countries. and have the ability to leverage that knowledge and those relationships in our procurement efforts. As you have heard from other company CEOs, our main concern with tariffs is not product cost inflation. Our main concern is the negative impact that tariff noise and volatility is clearly having on end consumer confidence and sentiment. The Michigan Consumer Confidence Survey data I referenced earlier presents a clear reflection of that concern. We are hopeful that the uncertainty and volatility stabilizes, and that the economy doesn't dip into a recession. With that said, we are making preparations for a more challenging environment, and we will be appropriately cautious in our outlook. To help offset softness that may be created by the macroeconomy, Kenny and our entire leadership team are focused on disciplined cost management and contingency planning. Cisco's industry-leading balance sheet is a major source of strength in times like these, as we are able to continue investing in our business when others will need to pull back. This can take the form of winning new customers, building inventory to support new business, and even pursuing M&A if we find the right target opportunity at the right price. Cisco is in a position of strength in times of greatest uncertainty. My last topic for today is the introduction of a pilot program at Cisco whereby we will open two cash and carry store locations within the Houston community. As you can see on slide seven, the store concept is called Cisco to go. We are interested in cash and carry for the following reasons. It is the fastest growing part of the food away from home space in a business where we have 0% market share today. Cash and carry customers are looking for A, value, B, convenience, and C, oftentimes the ability to pay cash. This is a customer that Cisco is not adequately serving today through our delivery model. By having the customer pick up the product themselves at our store location, we eliminate the most expensive part of the supply chain, final mile delivery. That cost elimination enables Cisco to offer our world-class products at lower prices than when we deliver to the restaurant. This enables us to meet the needs of the value-seeking customer more effectively. I want to be very clear, this is a two-store pilot. The future of the initiative will be determined by the outcomes we produce in these test locations. It is important to note that these two stores are supported from Cisco's existing supply chain, leveraging our own product assortment. As a result, we have a strong command of the projected cost to run the stores. Leveraging our existing supply chain is a major strength of the format, given both stores are in close proximity to our Houston, D.C. We are excited to open the two stores in Houston soon and welcome value-seeking restaurant customers into this compelling shopping environment. I'll now turn it over to Kenny, who will provide a detailed review of Q3 performance and select fiscal year 2025 guidance commentary. Kenny, over to you.

Thank you, Kevin, and good morning, everyone. I plan to start with high level thoughts on our performance, detail our Q3 financials, and then dive into full year 2025 guidance. To start, financial results this quarter included sales growth with stable adjusted EPS performance. In the context of all of the challenging macro headlines over the past few months, growing sales as the industry leader while retaining best in class profit margins and rewarding our shareholders with our balanced capital allocation is noteworthy. However, this quarter missed expectations. As Kevin highlighted, the challenging macro and continuation of negative industry traffic directly impacted results. In this dynamic backdrop, we will remain agile in our management of the business as we also heighten our focus on the controllables. Our strong business fundamentals Industry-leading balance sheets and strong cash flow generation are competitive advantages, especially in a challenging macro environment. As part of our balanced approach to capital allocation, we remain positioned to generate robust free cash flow that enables us to both invest in long-term growth while also rewarding our shareholders. Specific to this last point, we have repurchased $700 million in shares and paid out $752 million in dividends year to date, including repurchasing $400 million in shares this quarter. Further, we recently increased our plan quarterly cash dividend by 3 cents to 54 cents per share. This represents a 6% increase year over year and sets FY26 up to be our 56th year of delivering dividend growth. Looking ahead, we expect our dividend to continue growing commensurate with our adjusted EPS growth. Now, let's discuss our performance and financial driver for the quarter, starting on slide 11. For the third quarter, our enterprise sales grew 1.1% on an as-reported basis driven by U.S. Food Service and Sigma. Excluding the impact of our now-divested Mexico business, sales grew 1.8%. With respect to volume, stable volumes across the enterprise included total U.S. Food Service volume decreasing 2% and local volume decreasing 3.5%. Our national business remains stable, highlighting the strength of the recession resilient sectors in which we operate, such as food service management, travel and leisure, and education. The local volume performance compares to down 1.9% in Q2 2025. The sequential deceleration was consistent with the industry traffic deceleration, but also included headwinds from the carryover impact of sales colleague turnover from earlier in the year. Going forward, we expect stronger contributions from newer sales professionals that continue to work up the productivity curve and benefits from the stabilization of colleague retention that Kevin mentioned earlier. International segment results, excluding Mexico, this quarter demonstrated steady top momentum and double-digit operating income growth. This reflects continued momentum from successfully applying the Cisco Playbook. The ongoing success is highlighted by local volumes growing 4.5% and broad-based operating income growth across our international portfolio. We produced $3.6 billion in gross profit down 0.8% and gross margin of 18.3% with improved gross profit per case performance. The decline in gross profit dollars for the quarter was primarily driven by negative volumes as well as mix. Volume was impacted by the macro and negative traffic partially offset by continued growth in our more recession resilient businesses. Second, mix remained pressured from the continued impact of our national business outpacing our local performance, as well as negative mix from lower Cisco brand penetration rates. In addition, the industry challenging traffic backdrop drove delays as compared to our expected timelines, which resulted in fewer than expected strategic sourcing deals being finalized this quarter. That said, we remain confident around the overarching opportunity and our line of sight on benefits to Q4 from recently completed deals. Going forward, we expect improving gross margins driven by incremental benefits from strategic sourcing initiatives as part of our cost savings program and an improvement from MIX. Product inflation came in at 2.1% for the total enterprise. consistent with our expectations. This is the average across all of our major product categories with our teams regularly managing through pockets of fluctuation. Overall, adjusted operating expenses were $2.8 billion per quarter or 14.3% of sales, a 17 basis point improvement from the prior year. We continue to experience improved retention rates and productivity with our supply chain colleagues. This is resulting in strong NPS anchored by our highest service levels of the year for on-time deliveries, helping offset elevated supply chain labor rates and funding long-term growth consistent with our ROIC framework. This includes investment in higher growth areas of the business with fleet building expansion and sales headcount. Lower annual bonus incentive compensation in our USFS segment and Global Support Center also impacted expenses for Q3. We remained disciplined with our corporate expenses, down 16.8% from the prior year on adjusted basis, which also included accretive productivity cost out, along with efficiency work that we deployed in FY24. These benefits are included in our $100 million cost savings program. Building off Kevin's point around tariffs, we are focused on leveraging our size and skill advantages by buying better to sell better. Our customer mix is a strategic advantage. We have efficient pass-through with national customers and spot pricing from existing and growing local customer base. Our inventory turnover of approximately 14 times per year also enables us to work through inflation and deflation quickly relative to other industries. Overall, adjusted operating income was $773 million for the quarter, reflecting strong growth in our international segment and expense management and global support center offset by declines in our USFS segment. For the quarter, adjusted EBITDA of $969 million was down 0.8% versus the prior year. Let's now turn to our balance sheet and cash flow, a compelling competitive advantage. As I have explained before, our balance sheet affords us the financial tools and flexibility to make the right decision both for the short and long term as we seek to grow our business while driving industry-leading returns on invested capital. Our balance sheet remains robust and reflects a healthy financial profile. This includes flexibility and optionality from approximately $4.4 billion in total liquidity, well above our minimum threshold. We ended the quarter at a 2.8 times net debt leverage ratio. Turning to our cash flow, we generated approximately $1.3 billion in operating cash flow and $954 million in free cash flow year to date. Free cash flow was driven by strong quality of earnings and prudent management of working capital. This quarter marked our strongest conversion rate of the year. For the full year, we continue to expect strong conversion rates from adjusted EBITDA to operating cash flow at approximately 70% and free cash flow at approximately 50%. As noted earlier, our strong financial position enabled us to return approximately $649 million to shareholders this quarter. Now, I would like to share with you our updated expectations for Q4 and FY25. Given the uncertain environment and general concerns regarding consumer confidence, we are lowering our four-year guidance for FY25 as seen on slide 17. During FY25, we now expect reported net sales growth of approximately 3%, slightly down from the prior target of 4% to 5%. This is largely driven by lower than expected volume growth driven by the market. Our assumptions for inflation of approximately 2% and contributions from M&A remain unchanged. We now expect full year 2025 adjusted EPS growth of at least 1%. For Q4, this implies adjusted EPS to be at least flat. The revision to guidance reflects that the current uncertain macro environment and its outsized impact to the second half of the year, which historically is more profitable. This upcoming quarter also includes our planned strategic investments related to refreshing our fleet and building capacity coming online. This updated guidance assumes no further degradation of the restaurant trapping environment and a slight improvement to our volume performance. Importantly, we believe this guide is achievable based on a strong exit velocity for March and continued momentum into April and Q4, including higher contributions from cost out. We remain confident in delivering our run rate cost savings target of approximately $100 million, which we expect to benefit Q4 in the first half of 2026, helping offset the current macro environment. We plan to remain focused on operational discipline, tightening the belt as necessary, and investing for long-term growth. We remain target to reward our shareholders through the distribution of essentially all of our annual free cash flow with over $1 billion in dividends and $1.25 billion in share repurchases. This assumes fourth quarter share repurchase of $550 million and dividends of $250 million. For the year, we expect to operate within our stated target of 2.5 times to 2.75 times net leverage ratio and maintain our investment grade balance sheet. Now turning to a few other modeling items. For Q4, we expect a tax rate of approximately 24% and adjusted depreciation and amortization of approximately $200 million. interest expense is now expected at approximately $170 million. Looking ahead, and as we have proven over time, we will leverage our position as the market leader to drive disciplined growth as we remain focused on unlocking value that will reward our shareholders. With that, I will turn the call back to Kevin for closing remarks.

Thank you, Kenny. Q3 did not live up to our expectations on the top or bottom line. The macro softness directly impacted our volume trends within the important local and national restaurant business sectors. Our trade down in volume during the quarter is directly linear with the widely communicated traffic decline experienced by the industry over the same period. With that said, we can see progress that we are making on activities within our local business. Colleague retention has stabilized. New customer win rate is accelerating. As I mentioned, we are still working through the headwind of prior quarters colleague resignations, but that impact will reduce in magnitude each quarter. As we head into fiscal 2026, the net-net of colleague retention and new colleague hiring will become a tailwind. Why? Our new hires are performing, and they are responding to the updated compensation model. They are opening new business. They are hitting their sales targets. Additionally, our new distribution centers will increase our ability to win profitable new business in important geographies, both domestically and globally. The most compelling proof point to highlight the self-help progress we are making in our local business is the percentage of new business we are opening weekly. March was a very strong month for opening new business, and the progress has continued into April. Combined with our efforts in customer retention, Through pricing agility and improved service levels from our supply chain, we are confident we can grow our customer count in 2026. From a business perspective, March local volume improved 270 basis points versus February, and local volume during the first weeks of April improved further versus March. We are pleased to see the stronger April, and we are cautiously planning our coming months due to the tariff uncertainty. I am confident Cisco will make progress on our improvement initiatives in the coming periods. The external environment will be throwing some curveballs in the year to go, and we are prepared to market margins. Rock solid balance sheet and fiscal responsibility will be strength points as we navigate this volatile environment. I am confident in our ability to win versus the overall marketplace in challenging conditions. just like we successfully grew our business during the COVID disruptions. At times like these, our higher than industry profit margins and strong balance sheet cannot be overstated. We also expect our international division, which has been less impacted by the volatility, to continue to be a strong point for the company. Having the diversified business will be a strength point ahead. With that, operator, we're now ready for questions.

Thank you. At this time, if you'd like to ask a question, please press the star key followed by the one key on your telephone keypad. You may remove yourself from queue at any time by pressing star two. In the interest of time, we do ask you limit yourself to one question. Again, that is star one. If you'd like to ask a question, our first question will come from Alex Lagle with Jefferies.

Thanks for the question. Good morning. I had a question on the local business. You could kind of talk about the sales headcount investments you've been making, where we are with that, and I guess any evidence these investments are really moving the needle. You provided a couple interesting tidbits on the acceleration into March and April, but any other sort of pockets of your business where you can point out where you're seeing the initiatives deliver positive organic case growth or clear market share gain, something that really gives you confidence that the drivers are in place and working as hoped.

Good morning, Alex. It's Kevin. Thank you for the question. I'll start with your first part of your question, which is sales consultant headcount. We expect to end the year at approximately 4% growth on our headcount, excuse me, covering from head cold, approximately 4% growth year-over-year at the conclusion of Q4. It's an estimate. It'll be at least 4% growth. That's the answer to that question. As it relates to signals of progress, as I said in my prepared remarks, we have several proof points that we can share. March being stronger than Q3 in total, April being stronger than Q3, nose up, if you will, on the controllables, evidenced by new customer win rate. In the month of March, we opened more new customers than at any point in time other than the snapback recovery from COVID. Proof point number two is the quality and productivity of the training cohorts. As you know, we hire people in classes. Those classes graduate. And we track them every single month on their performance versus where we expect them to be. And I can definitively communicate that our hiring cohorts are producing, they're growing their productivity at the rate we expect and anticipate. And as I said in my prepared remarks, Why that's not evident and visible in market share gains slash volume growth that we're proud of in year to date is the offset to these things, which was the increased colleague turnover that experienced during the first half of the year. As I said in my prepared remarks that peaked in September, it improved in Q2, but we're still carrying that headwind of the colleague separation because when they depart, there's some customer loss that goes along with that. We anticipate the scales of that equation, as I mentioned in prepared remarks, to tip to positive in Q1 of fiscal 2026 because of the confidence in the new hires, and that would be lapping that increased separation. So, Kenny, anything to add?

Yeah. Hey, Alex. Kenny here. I'll add a couple things here. One piece is we are encouraged by seeing select geographies already hitting our growth expectations driven by the SD ads, improved retention, as well as the new comp model that we talked about. And then that's carrying into Q4 as well. So that's one proof point to answer your question. The second thing I would say is that as you think about our book of SCs right now, the ones that are in our books, you know, literally most of them are higher in the back half of FY24 and the first half of FY25. With each passing month, the SCs become more productive. And we're seeing that with our cohorts that Kevin just referred to. The improvement is not binary, meaning each month, each day, each quarter, they're becoming more productive. And the interesting fact here is that we will be experiencing a significant amount of folks entering that 12 to 18 months timeframe now. And based on our own internal tracking data, there is a step level function change up to the good once we hit that. So you'll see some of that in Q4, and that's the reason why we do expect Q4 local volume to improve versus Q3. The last thing I would say around your question around sales account investment, I agree with Kevin, will be around Over 4% increase year on year. We are committed on growing our local sales professional headcount and will be disciplined on pacing the volume to expectations and market conditions. We'll be very deliberate on when and where we add. Thank you.

Thank you. Our next question will come from Mark Cardin with UBS.

Great, good morning, and thanks so much for taking the question. So I wanted to ask another one on local, more from an industry-wide perspective. How has the local restaurant industry backdrop held up relative to national restaurants? And then within that, are you seeing any regional challenges? And how has that fluctuated over the past few months?

good morning mark it's kevin thank you for the question uh national restaurants had a really tough quarter that's the headline that's the punchline uh it was soft consistent with the local numbers that obviously we disclose and and report when you look at our national case volume number you have to keep in mind yes there are national restaurants in that mix but it's offset by real strong strength in food service management travel and entertainment education is held up strong and we have a very stable health care business so National for us was stronger than local, but if you unpack within national and look at this national restaurants, it was a tough, tough quarter for national restaurants. Obviously, there are individual select names that are doing incredibly well. You know who they are, but in aggregate, you know, really tough quarter for national. And it was exacerbated in February, which kind of going back to one of Alex's questions, you know, we're seeing strength where we're adding headcount. Kenny hit that point very, very well. But the pain in Q3, the weather was everywhere. I happen to live in the south. We had four inches of snow in Houston. That never happens. Really adverse weather in the mid parts of the country, the temperate zone, and obviously the north at the tail end of February had back to back to back weeks of really adverse weather. So the headwind was pretty much geographically throughout the United States. Interestingly, our international division, one of the reasons it's continuing to perform, we're not experiencing some of these you know, headwinds from an external factor perspective. The tariff and tax thing is not negatively at this time impacting our international division, and it's one of the reasons, along with our strong business performance, that we're doing well in that regard.

Thanks so much. Good luck. Thank you, Mark.

Thank you. Our next question will come from Jeff Bernstein with Barclays.

Great. Thank you very much. I had one clarification on a comment you made earlier and then a question. The clarification is just on that local case growth. I know you said you're directionally similar to the industry in terms of easing. I'm just wondering whether you think any of it is self-inflicted, whether you see industry data that gives you confidence you're not underperforming peers. That was my clarification. Otherwise, the question is just on the fiscal 25 guidance. I feel like the past couple of quarters you were Confident that even if the macro were to pressure the top line, you had levers to accelerate cost and efficiency savings to still hit that 6% to 7% EPS growth. So it does look like you lowered the top line by 1% or so, 1% to 2% actually, but you took down the EPS guidance by 5% plus. Just wondering how you see that playing out, whether or not there's less low-hanging fruit, or you just decide you don't want to damage the long-term infrastructure for short-term earnings. Any thoughts on that between top and bottom line? Thank you.

Jeff, very, very questions. It's Kevin. I'll start, and Kenny will back clean up as it relates to your appropriate question regarding the full year guide. Back to local, we are confident that in Q3, our performance relative to the market was consistent. In fact, it's almost to the penny. If you track the traffic change from Q2 to Q3 to our local case growth performance Q2 to Q3, we were consistent with the industry. We are confident we did not erode in our performance relative to the overall market. We are pleased with the start of Q4. As I said, April was stronger than March. March was stronger than Q3. We're beginning to see some positive separation in our performance relative to the market as we begin Q4, and it's this timing thing that I'm talking about relative to colleague separation. The new cohorts that are hitting their 12-month anniversary date in Q4, as Kenny already communicated, and even more of them We'll have that 12-month anniversary as we roll into fiscal 2026. We need to display separation in our performance versus the market in a positive way. And we are seeing the green shoots of progress, Jeff, that are going to enable that outcome. We'll talk about that more in August, obviously, as we provide guidance for fiscal 2026. As it relates to Q3, we understand your question. One thing I would point to is that the steepness of the drop-off in February was meaningfully unanticipated. I said in my prepared remarks, the traffic down 5.7%. It was like a light switch. When that happens, it's really difficult to get that type of cost out of your system that fast, especially when March rebounded quite solidly versus February. We don't want to furlough drivers. We don't want to cut costs that you end up having to reverse later. That is really painful. The other thing relative to adverse weather of that nature is it drives operating expenses up. Think about the number of facilities we have, snow removal at our large parking lots. And then when you're doing deliveries in that type of environment, a lot of those trucks are coming back half full, meaning we load the truck for 20 stops. It comes back three hours into the route and you have to put all that inventory back to stock. Some of that inventory has to be disposed because it's perishable. So these things add cost. So yes, it's a volume headwind when traffic drops like that, but it's also a cost headwind because of some of the examples that I just provided. So why don't we transition from that into how we're thinking about our guide for Q4 and our general outlook in general. And I'll pass that to Kenny. Over to you, Kenny.

Yeah. Hey, Jeff. Thanks, Kevin. Just one comment on Q3 before we head into the four-year guide and the confidence around that number. If you take a step back on Q3, we did miss EPS consensus by $0.06. Now, if you unpack that in simple fashion, roughly $0.05 is driven by volumes. As Kevin talked about in his prepared remarks, We assume nominal improvement in foot traffic, while foot traffic actually fell quarter-by-quarter by 150 bps, right? So, again, that's a nickel or 85% of the miss, and the other 15%, we'll call it a penny, is driven by timing shifts from strategic sourcing deals, given the backdrop in which we operate in. And the good news is we had deals closed between post-quarter and today. Therefore, that's the vote of confidence for our $100 million impact, the annualized $100 million impacting Q4. In terms of the guidance, Jeff, I think the question behind your question is how confident are you in the number in any context there? So I'll answer it with two points here. Just to recap, you're correct. The full year is 3% sales growth and then EPS at least 1% growth. The two reasons why we are confident, first, what Kevin just talked about, momentum. We have momentum. We continue to see it, not just the market standpoint, but a lot of our self-help initiatives are working as well, let alone the momentum market, meaning our sales professions are becoming more productive, climbing up the productivity curve, as well as our expense productivity items in the $100 million. All of that is on pace and on target. Therefore, momentum is there across the P&L. And just to double-click more on the self-help, we have begun the realization of savings in Q3. It's heavier-weighted towards Q4. And, again, it goes back to the leverage we have in our P&L. Retention is the gift that keeps on giving. We're seeing retention in our SPs as well as in our supply chain colleagues. Fun fact here, our supply chain has the highest productivity here today right now. So, again, with all of these combined, we are very confident with our current guide. Kevin?

We don't like to do three-part answers, but this question is very, very important as we think about the full year guide that we updated today. We're very pleased with the start of Q4 from a volume improvement perspective versus March. So you may be asking, well, so then why the Q4 guide? We're being very cautious is the point. Given the tariff uncertainty, the volatility in the market, the Michigan Consumer Confidence Survey results that I referenced, we're being very cautious. We're being thoughtful about the management of expenses, the management of the discipline of the P&L. We're pleased with the self-help activities that I referenced on today's call. and therefore the prudence, if you will, of the guide that we put out for Q4. Thank you. Thanks, Jeff.

Thank you. We'll move next to Edward Kelly with Wells Fargo.

Yeah, hi. Good morning, everybody. Kevin, I wanted to just zero in on, you know, Salesforce and the opportunity that you see ahead of you. I mean, you talked about 4% growth in the Salesforce by the end of 2025. you've talked historically about, you know, adding about 450 people, you know, annually. So that growth, if you're still going to achieve that in 26 should be higher. If you do the math, you know, on this normalizing turnover and the Salesforce growth, you know, it's not hard to look at local case volumes and say that there's a three 500 basis point opportunity for you to improve that business. But my question is, is it that simple? Meaning like, you know, Are there other issues preventing that map from working? The pricing tool has been something that's been talked about that I think maybe is creating some friction. There's maybe some lag on the customer loss, right? If salespeople are leaving in a year, do they come off non-competes? And do you continue to have some issue there? I'm just curious as to how you see the magnitude of the self-help opportunity and the cadence of the benefit that you may get in 26. Because I think where the stock is trading today, you know, the stock is saying that the market doesn't see that benefit coming. So, you know, if you could give us, you know, some color there, I think it'd be helpful.

Ed, good morning. Thank you for the question. Appreciate the question. We need to prove it through our outcomes, and that is what we will do. And we understand that as management team and as the leaders of this company, we need to prove it through our outcomes. What gives us confidence, and we're not going to provide guidance for 2026 today because that's how I would need to answer your question, where we have confidence is the following factors. And I just have to repeat some of the key messages because the math is indelibly clear. We need to retain the colleagues we have. at a historically strong rate. And fiscal 2025 was a meaningful headwind in that regard. I want to reiterate, though, it was intentional. We needed to make a change to our comp model. It was structural. It was required. It was necessary. And it's been challenging. And it's been difficult to work our way through that change. If we could go back in time, we would still make the change to the comp model that we made. We could have improved our execution of that change, obviously, given some of the accelerated turnover, but the change to the comp model was necessary. So that specific headwind of the increased turnover negatively impacted this year, and we can see in our current outcomes we have absolutely stabilized retention. I'd like to do better than that. I'd like to have our retention be higher than it has ever been. And we have a concerted effort across all elements of our organization to improve retention even further, not just stabilize it, but make it be at highest levels. That's who we hire. That's how we train them. That's how they're treated when they're out on the road doing their job. It's their direct supervisor being in the car with them, going on ride-alongs, helping them from the skills development perspective. At NetNet, I'm confident that The turnover challenge will be a net tailwind in 2026. I heard your point on rolling the 12 months of the non-competes. Loud and clear, we understand that, and we have a plan to help offset that. Offsetting that headwind is the tailwind, and we were intentionally very clear today on how long it takes for a colleague to get to productive. It's on average 12 to 18 months. Kenny was very clear that in this Q4, the Q4 we're now in, we have more people hitting that 12-month mark obviously than we have in any prior quarter, and that will increase now from here. I've used before the metaphor of turning on water in a pipe. It has to go from one end of the pipe to the other, but once it gets to the other end of the pipe, now the water keeps flowing. We are just now in our Q4 getting to the first quarter where water is now flowing through that pipe in a consistent way. As it relates to the, you know, previously we've quoted a headcount growth number, you know, 400 to 500 colleagues. Today, we updated that to reflect that this year we anticipate to end at approximately plus four. We'll be very disciplined about that. We know that there are geographies that can absolutely take significantly increased headcount. See Florida, we're about to open a net new brand new building in Florida. We'll be hiring up in Florida to support that new building and to win meaningfully from a share of perspective in that state. Excuse me, as an example only. So those are my thoughts on Salesforce. I am confident in 26. Salesforce will be a tailwind, not a headwind. And it is absolutely fact that it was a headwind in fiscal 2025. What else is going on with the second part of your question? There's a lot going on. It's a dynamic environment. The pricing environment and the needs of the end customer are clear. They are seeking value given the pressure on the restaurant's P&L. Their labor costs are up. For many of them, their rent cost is up. And they've experienced 30% to 40% food inflation over the past five years. So customers are value seeking. We need to be thoughtful and we need to be agile on how we meet the customer where they are. And that's related to things like the product offering that we have, the pricing that we have, and as I mentioned on the call today, the rollout of price agility. It's something we need to manage extremely Well, and that's why I said in my prepared remarks, the change management and the training plan on how to put that tool out in the market is critical. We have to execute with excellence when we roll that program out to ensure that we can match pricing agility with margin rate discipline. And that is why we haven't gone nationwide yet. We're working on that change management plan, that training plan. Pricing in the marketplace is one of the variables. You go beyond those two, excuse me, variables, and the industry is experiencing a bit higher rate of customer churn than what is normal, and that's tied to point two, which is the customer-seeking value. This is not a unique point to Cisco. Just churn in aggregate is at a higher level, and we're going to talk more in the future about improving the service level experience that we provide to our best customers, an end-to-end program that can help reduce churn. customer churn. So those would be the top three. Salesforce, productivity, pricing agility, and improving customer churn. Aggregate those three, we're confident that we can grow local volume and have an attractive P&L, and we'll talk more in August about Guide for 26. Kenny, anything to add?

Yeah, and add to your specific question around the math, right? Your math is correct. Right now, you're seeing our expenses, sales headcount, 4% to 5%. So I think your question is there's a spread between, obviously, the return, as Kevin spoke about. As Our SCs climb the productivity curve as the initiatives kick in. We should expect a spread to reduce, meaning sales growing closer in with our expense base. And that's me. You are correct. That is an opportunity for our company.

Thanks, guys.

Thank you, Ed.

Thank you. Our next question will come from Jake Bartlett with Truist.

Great, thanks for taking the question. I want to start with just a clarification. You've mentioned this inflection for the Salesforce initiatives and the comp changes to move to positive in fiscal 26. I want to make sure I understand your expectations for when that could happen. September was the peak of the increased turnover. Is the September timeframe the right way to think about it or really is it possible that we could see that inflection in the first quarter? It sounded like maybe that was possible given the given the improvements that you're seeing now. And then my real question is about your capital allocation. The dividend increase was the largest it's been in a few years. Maybe if you can talk about why you're kind of leaning into the dividend increase so much after pretty modest increases for the last two and your kind of approach to, I know we've elevated share buybacks in 25, but is that something that you expect would continue beyond 25?

Good morning, Jake. Thank you for the question. As it relates to the Salesforce inflection, definitively it will inflect to a positive in fiscal 2026. When we provide our guidance for 2026, we'll provide more color on how you should think about the full year and how you should think about the first half of the second half. That's the most I can say today. The second point, though, from a green shoots of progress in color, April, we are seeing a stronger performance versus March. And we are seeing some separation of our performance versus the overall market from a positive share gain perspective. So it is not a light switch. It does not go from off to on. The separation impact negative is immediate. As I mentioned on my prepared remarks, the improvement that comes from the new colleague is gradual over time. So think about a slope of two curves when they intersect and how that then shows up as a net gain. tailwind it will be a net tailwind in fiscal 2026 and we are doing everything we can to improve the productivity of our new colleagues and as i mentioned improve colleague retention as i mentioned in the answering of ed's question i'm not satisfied with getting retention back to where it historically was i want it to be even better than it historically was to turn the head count in our sales colleague population into a ongoing and permanent point of strength for the company as it relates to the dividend i'll just get started and then toss to kenny We are a dividend aristocrat. We've raised our dividend now 56 consecutive years in a row. There are very few companies that can say that. In my closing remarks, I talked about there's no better company to work for or from a balance sheet perspective to invest in than a company like Cisco in times like these. Our industry-leading income statement from a profit as a percent of sales and our rock-solid balance sheet affords us the opportunity to return value to shareholders, even in challenging and difficult times. We raised our dividend even during the COVID period, which is a meaningful point of strength. So, Kenny, why don't you answer the specifics of how we thought about the increase for next year?

Absolutely. So let's start just a quick recap on cap allocation. We'll first and foremost invest in our business, and anything accessed will be returned back to shareholders. Given where our cash and liquidity position sits, which is over $4 billion a quarter, we have the luxury to do both. Invest in our business and reward our shareholders. So to your exact question, speaking to rewarding the shareholders, as Kevin talked about, we're very proud of the fact that we're raising our dividends 6%. Again, as I said before, we expect the dividend raised to be commensurate with future EPS growth for our business. You know, taking a giant step back, At CFO, I'm proud of the fact that we were able to maintain our $1.25 billion share repo this year and raise the dividend by 6%, especially given the market backdrop, which directly impacts our profit profile. The reason being, and this is your second question, right, how do we think through it? It's because we have a strong investment-grade balance sheet, solid business fundamentals, and the fact that we are confident in the business today and on the forward. So that's the rationale how Kim and I thought about the dividend raise.

Thank you. Thank you, Jake.

Thank you. Our next question comes from John Heinbacher.

Hey, Kevin, can you talk to this elevated churn across the industry? I think you sort of suggested maybe it's price-oriented, right? Is that wrong? What do you think is driving that? You also suggested you have some ideas about how to eat into that. And then just when I think about the magnitude, you know, maybe what is a good level of churn for the industry? What has it stepped up to? It seems like maybe it's stepped up, you know, 100 basis points or more. But I'd be curious how that's changed.

Good morning, John. Thank you for the question. Churn has increased, you know, as an industry overall. You know, I'll say there's a couple of drivers behind it. Number one is customers are value-seeking. As I mentioned, their labor costs are up, rent is up, food costs are up. They're seeking ways to help their profitability, and food cost is one of those mechanisms. Price visibility has increased, as you know, as more customers are placing their orders online. Net-net in aggregate, that's a good thing. So more customers placing their orders online is a good thing because they see more of our cataloged They are inspired to buy things they didn't buy before. We can prompt them to do swap and save to alternative products that can help them save money. We can suggest items that they can buy that they're not buying. Net-net conversion to online is a good thing. With that said, the conversion to online increases price transparency, not just at Cisco, but across all distributors. more customers are enabled to seek value by the online visibility to pricing. These are environmental conditions. John, I am confident that given Cisco's size and scale, we can be very competitive and successful in that environment so our profit rate is a percent of sales and our purchasing scale before cisco to be able to buy goods we call it buy better to sell better and provide value to our customers in that price visible online way we can lean in with suppliers and do programs together with them to provide savings to customers to entice them to buy from cisco so that's point number one relative to the term point number two is supply chain resiliency this goes back to covid you know prior to covid the percentage of a customer's business that that customer gave to one distributor was higher than it is today. And when product shortages occurred everywhere in the industry and customers couldn't get everything they needed from their primary distributor, they signed up a second, a third, a fourth distributor. As you know, there's always been backups in an account, but what we see in the industry is a higher percentage of purchases happening with, quote unquote, the backup. because customers don't want to find themselves in a position where they can't get what they need. To be clear, we've done that with our supplier population. We buy more food in the food away from home space than anyone else. We have preferred partner suppliers, but we've had to add backups and sometimes tertiary suppliers to cover our needs if and when our primary supplier can't get us what we need. So, John, that too is a part of the equation. As it relates to actionable forward-facing 2026 activities, There's a reasonably small percentage of our customer base that drives a significantly disproportionate portion of our profit pool, and we are going to lean in hard with those best customers. And I'm going to talk more about that at future investment engagement opportunities, a reboot and a significant focus on our best customer retention and best customer penetration. And we believe that will be another tailwind for our fiscal 2026. Thank you. Thank you, John.

Thank you. This does conclude the time we have for questions. Thank you for joining Cisco's third quarter fiscal year 2025 conference call. You may now disconnect.