Sysco Corporation

Please stand by, we're about to begin. Good morning, everyone, and welcome to Cisco's first quarter fiscal year 2026 conference call. As a reminder, today's call is being recorded. We will begin with opening remarks and introductions. With that, I would now like to turn the call over to Mr. Kevin Kim, Vice President of Investor Relations. Please go ahead, sir.

Good morning, everyone, and welcome to Cisco's first quarter fiscal year 2026 earnings call. On today's call, we have Kevin Herkin. 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 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 June 28, 2025, 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 gap 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. If you have a follow-up, please, we ask that you re-enter the queue. At this time, I'd like to turn the call over to Kevin Hurrican.

Good morning, everyone. We appreciate your joining our call today. I'm pleased to report that Cisco delivered a strong financial quarter to start fiscal 2026 with solid performance on the top and bottom line. Most importantly, we have inflected positive in our US Broadline local business, and we are building momentum in our local business across the board. During our call today, we will share insights into the progress that we are making and highlight key growth initiatives that are fueling our performance improvement. After my update on our business progress, Kenny will highlight our financial results, and he will communicate why we are confident that we will deliver our four-year financial guidance. In fiscal 2026, we plan to deliver profitable growth across USFS, international, and our SGMA segments, even in a macro backdrop that is less than compelling. So let's get started with our financial results on slide four. In Q1, we exceeded our financial plan and delivered our second consecutive beat relative to consensus expectations. For the quarter, our strong performance was driven by volume improvement coupled with expanded gross margins and solid expense control. Most importantly in the quarter, our local volumes improved sequentially every month of the period. During the quarter, Our rate of local volume improvement was more than two times the overall industry traffic rate of improvement. The positive inflection versus industry traffic was the strongest in September, once again conveying the progress that we made throughout the quarter. Our Q1 results were driven by sales growth of 3.2% on a reported basis and up 3.8% to last year when excluding the divestiture of Mexico. Gross profit grew 3.9% and adjusted EPS to 5.5%. Our financial outcomes were anchored by another compelling performance from our international segment, excellent work by our merchandising teams on gross profit expansion, strong productivity improvement from our supply chain, and a sales organization that is increasing their stride in growing our local business. Momentum is building at Cisco across the board, and we are confident we will accelerate that momentum throughout 2026. Given the importance of our local street business, I would like to go a bit deeper on our performance as seen on slide number eight. The chart displays our meaningful sequential progress in U.S. local over the past three quarters. Our Cisco Broadline local business inflected positive in the quarter, delivering volume growth of 0.4%. The USBO performance was 130 basis points stronger than our Q4 results, which significantly outpaced the improvement in restaurant traffic during the quarter. Per BlackBox, restaurant traffic in Q1 improved by 60 basis points. As a result, Cisco improved more than two times the overall industry in the quarter. We are pleased that industry traffic improved, and it is even better to see Cisco improving at a faster clip. As I mentioned earlier, September was the strongest month of the quarter for Cisco and the strongest month of positive variance versus the industry. Importantly, Cisco has continued to make progress in October. Given the strong start to Q2, we anticipate that we will improve our total U.S. local by at least an additional 100 basis points in Q2 versus Q1, continuing our positive momentum. In Q1, Our USFS total local business posted a negative 0.2% case volume result in the period. A friendly reminder that our US Food Service volume reporting includes an ongoing negative impact from an intentional business exit within our FreshPoint business, as previously communicated on our Q4 call. In Q1, the FreshPoint business exit negatively impacted our total local performance by over 50 basis points. When excluding this headwind from this quarter, our USFS total local business grew 0.3%. Turning from local to our international segment, we are extremely pleased with the performance being delivered by our international team. We delivered outsized sales growth of 4.5% on a reported basis and up 7.9% when excluding the divestiture of Mexico. International continues to deliver positive customer mix benefits, growing the local segment much faster than our total book of business. In fact, our international business posted local case volume growth of approximately 5% for the quarter. The customer mix shift to local helped drive adjusted operating income growth of 13.1%, representing the eighth consecutive quarter of double-digit profit growth. The P&L strength was delivered from every single region in our international portfolio. Cisco's international portfolio is delivering strong top and bottom line growth within every major market we operate. Cisco's international business is a strong standout in the overall food away from home industry and will be a tailwind for Cisco for many years to come. It is equally important to note, as Kenny has said previously, over the past three years we have doubled the profit margin rate of our international business and we will continue to work to increase international profitability while simultaneously taking share in growing the top line. We call this performing for today while transforming for tomorrow. Cisco's international team is doing a great job of embodying that ethos. Before I segue into a brief update on our growth initiatives, I would like to do a quick shout out to our entire supply chain organization. Year to date in 2026, We have greatly improved our customer service levels on time and in full. And we have improved our health and safety performance by reducing accidents in our warehouses and on the road. Additionally, our operators have reduced product shrink and they have increased colleague productivity across the board. In my six years at Cisco, this is the strongest quarter our supply chain has delivered from a service and cost perspective. I thank our entire supply chain for the great job they are doing. I have full confidence that the strong results will continue throughout 2026. Doing so will help us win new business and increase the retention of the customers we serve today. I would like to now transition into a brief update on select growth initiatives that highlight the progress that we are making as a company. Let's start with our colleague population. In our first quarter, sales consultant retention improved meaningfully versus 2025 and versus our exit velocity of Q4. We have fully stabilized our sales colleague population, and we expect the overall productivity of our sales force to improve throughout 2026. As outlined in our recent proxy, our colleague engagement scores have strongly improved. Our colleagues are expressing positive sentiment in regards to overall engagement, team inclusion, and working in a rewarding and motivating culture with a compelling compensation program. These engagement drivers improved strongly year over year. We are bullish about our ability to continue our local progress momentum, given the stability of our sales force. Our sales organization is stable, and many talented industry sales professionals are becoming increasingly interested in working at Cisco. During our recent quarter, we introduced AI360, our AI-empowered sales tool, and we are very pleased with the initial impact and colleague receptivity. Approximately 90% of our SEs are actively using the tool on a daily, weekly basis. While it remains early days, our outcomes data suggests that there is a strong correlation between high colleague engagement with the tool and improved volume and selling performance by those same colleagues. The work our sales teams do every day is hard. Each sales consultant serves dozens of customers, and the day of an SE is very dynamic. Throughout an average day, SEs answer questions, provide consultative services to restaurants, solve problems for their customers, and they actively sell. AI360 helps balance these activities and improve overall customer service levels while simultaneously increasing time for selling activities. The customer could ask if there are gluten-free options for their menu. They could ask for advice on seasonally relevant proteins for their upcoming menu change, or They could ask for cost savings ideas and suggestions, given the overall inflation in the food basket. Our best SEs are seasoned at answering these types of questions while proactively selling. AI360 helps all sales colleagues manage these conversations productively, reducing administrative barriers, and increasing the amount of time that they can spend actively prospecting and selling. Another important initiative is our customer loyalty program, Perks 2.0. Perks targets our local street customers that buy the most, buy the most often, and deserve the absolute best from Cisco. Over the past quarter, we have enrolled all eligible customers into the new Perks program, introduced the benefits to our customers, and have greatly increased our colleague visit frequency to these accounts. We have improved supply chain service levels to Perks accounts, And our 24 by seven help desk is resolving Perks questions the first time, 98% of the time. In Q1, we experienced an improvement in customer retention with Perks customers versus our broader book of business. Over time, we are very confident that Perks will be a differentiator for these customers. And as such, we'll improve customer retention rates and Perks will help us penetrate these customers with additional lines. In Q1, can see the green shoots of positive impact of these initiatives on our local business during the quarter we increased the number of new accounts open versus prior year and we simultaneously decreased the number of lost accounts first prior year that performance enabled an increased spread between new and lost of more than 220 basis points versus the prior year the new lost positive spread was an incremental improvement of 40 basis points versus Q4, with September being the strongest period of the quarter. Our improved retention of colleagues is also helping us drive increased penetration of lines with existing customers. From Q4 to Q1, our penetration with existing customers improved by 90 basis points. This can be directly attributed to the increased selling skills of our team and the assistance they are receiving from technology tools. As I wrap up my prepared remarks, I submit we are very pleased with our Q1 results. We are building momentum across sales, merchandising, and operations. Our team is increasing their pace month over month, quarter over quarter. We expect this progress to accelerate even further throughout 2026. While the external market is important, the improvement we are delivering at Cisco is being driven by growth initiatives within our control. Cisco Euroway is three years live in the market and continues to drive success. Total team selling is now two years in market and is continuing to accelerate progress and market share. We expect our new initiatives of AI360, Perks 2.0, and pricing agility to build upon the success of Cisco Euroway in total team selling and therefore fuel continued positive momentum in our local business. With that, And now I'd like to turn the call over to Kenny. Kenny, over to you.