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.