Sysco Corporation

Good morning, everyone. Welcome to today's fiscal second quarter fiscal year 2026 earnings conference call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. To register to ask a question at any time, please press star 1 on your telephone. We will begin with opening remarks and introductions. At this time, I would 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 second 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 Securities 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 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, I'd like to ask each participant to limit their time today to one question. If you have a follow-up question, please At this time, I'd like to turn the call over to Kevin Harkin.

Good morning, everyone, and thank you for joining us today. I am pleased to report that Cisco delivered strong results in the second quarter of fiscal 2026. Our results were enabled by improving case volume trends, strengthening gross margin performance, and disciplined expense management. Given the strong start to the year, we now expect full year adjusted EPS to be at the high end of our previously provided annual guidance range of $4.50 to $4.60. We are delivering sequential improvement in our business, setting the stage for further momentum in the second half of the fiscal year. During our call today, we will share insights into the progress that we are making, provide color on each major business segment, We will discuss the external business environment, and we will highlight progress on select growth initiatives. After my remarks, Kenny will highlight our financial results, and he will share why we are confident in our ability to deliver adjusted EPS at the high end of our guidance range. Let's jump into our business results starting on slide four. Our Q2 performance exceeded our previously communicated targets for USFS local volume and adjusted earnings per share. Cisco delivered nearly 21 billion of total revenue, a growth rate of 3% versus the prior year. Importantly, we delivered positive case growth in our local, specialty, national, and international business units. USFS local case volume was up 1.2% in the quarter, an improvement of 140 basis points versus Q1. This improvement in performance was approximately 40 basis points stronger than what we had guided on our last call. The improvement in our performance can be seen on slide eight. Cisco's 140 basis points of local case growth improvement was delivered in an environment where traffic to restaurants, or black box, declined more than 200 basis points year over year and a similar decline quarter over quarter. We are strengthening our performance at Cisco in a softening macro backdrop. Our improvement gives us the conviction in our ability to gain share profitably in the current market conditions. We are pleased with the positive momentum and local volumes over each of the last three quarters in the US as seen on slide number eight. We are now solidly in positive volume growth territory, and we expect continued positive momentum for the second half of the year. More specifically, we expect reported local volume growth of at least positive 2.5% in both Q3 and Q4. To double-click into that 2.5% back half growth, we expect at least 2.1% to come from organic local case growth, representing a 100 basis points improvement versus Q2, with approximately 50 basis points additional contribution from M&A activity recently completed. Turning the page to our national contract business, during our second quarter, our national business generated volume growth of 0.4%. Unpacking this segment further, we saw strong growth in our food service management business, solid growth in travel and entertainment, and positive and strengthening volume growth in our healthcare business. The positive growth from these business units was partially offset by softness in our national restaurant segment. The declining foot traffic to restaurants per black box has negatively impacted our national chain restaurant customers, as can be seen in our results, as volume with these customers was down year over year. For the remainder of fiscal year, we expect case volume growth for national contract customers in total to be greater than 2% due to the onboarding of net new customer wins in the national restaurant customer business and continued strength in our non-restaurant business. Having covered top-line results, I will now transition to the middle of our P&L and highlight our expanded gross margins year over year. Our buying and merchandising teams are doing a solid job of ensuring best price in our procurement efforts and partnering with our sales teams to highlight that value to our customers. As I have mentioned on previous earnings calls, we are working extensively to increase the availability of products in what we call the value tier of a good, better, best product hierarchy. Cisco currently under penetrates in the value tier, and there is an opportunity for improvement, especially in an environment where restaurants are seeking ways to save money. Historically, Cisco has had a strong position in the premium or better best segments of the business. And our merchandising focus on the value tier is intended to supplement our existing assortment. Doing so will enable us to win net new lines from existing customers. The development of a stronger value assortment is actively underway and will progress constructively over the next calendar year. I want to be very clear that these efforts are not intended to trade customers down from better to good. This is about filling voids in the Cisco product assortment, meeting the customer where they are, and growing our business profitably with existing customers. Cisco delivered solid expense control in the quarter, with supply chain productivity continuing to improve quarter over quarter and year over year. Warehouse and driver colleague retention improved in the quarter, driving improvement in productivity. We are delivering strong service to our customers and improving our supply chain cost performance. Turning to our international segments, we are extremely pleased with the performance being delivered by our international team. During the quarter, We delivered sales growth of 7.3% on a reported basis and up 9.9% when excluding the divestiture of Mexico. Starting in Q3, 2026, we will have fully lapped our Mexico business exit. The momentum in our international business was fueled by every international geography. To that end, local case growth in our international segment was up 4.5% in the period. This growth is being generated by expanded supply chain capacity, increased availability of Cisco branded merchandise, increased sales headcount, and easier to use technology. The 4.5% local case growth coupled with disciplined expense management delivered adjusted operating income growth of nearly 26%. This represents the ninth consecutive quarter of double digit operating income growth and highlights the reality that Cisco International is a growth engine within the company. I am proud of the progress that we have made in International, and we are very bullish on our future in this segment. I'd now like to transition into a brief update on select growth initiatives that are driving our positive US local case growth. First off, I would like to provide an update on sales colleague retention and productivity. As was the case in Q1, our colleague retention rate in Q2 was at or above our historical high watermark. We have fully stabilized sales colleague retention, and we are now focused on increasing selling productivity. Due to the higher than normal percentage of sales colleagues that are newer to the role, we are focused on product and selling training. We have full confidence that these training efforts are improving selling effectiveness. In Q2, we can see the improvement through important internal sales metrics. We continue to onboard net new customers at a high level, and we have made meaningful progress in improving customer retention. The spread between new customer onboarding and existing customer loss is measured in a new versus loss ratio. That ratio expanded solidly in the second quarter. To assist all colleagues, we have deployed tools to improve selling productivity. Most notable is our AI360 CRM tool. which is now four months live in production. Engagement with AI360 remains very high, with 95% or more of our colleagues using the tool weekly. More importantly, we can track utilization and selling performance through AI360. Across all sales colleague tenures, those that are using the tool more often are outperforming those that use it less often. The math is very clear. If you use the tool, you sell more. Our goal in the second half of the year is to ensure all of our sales reps are actively engaging with the selling suggestions that come from AI360. To that end, we have new functionality being deployed to the tool on a regular basis. Coming soon will be something that we call swap and save suggestions for our sales consultants to introduce to customers. With the click of one button, the sales consultant will have access to prioritize suggestions of products that can save a customer money. These suggestions are cuisine-specific to the restaurant and are generated by our internal data science team. The key is in the data, knowing which items are acceptable solutions and substitutions. We are able to identify which of the item substitutions will save the customer money, will help Cisco make more money, and importantly, make our sales reps more money too. The suggestions that will be prompted will be those that check each of these three boxes, a win, win, win. AI360 will enable our sales teams to put more of these swap and save opportunities in front of our customers more often. Lastly, I'd like to provide a quick update on Cisco YourWay and PERC's loyalty program performance. Cisco YourWay neighborhoods continue to deliver mid-single-digit volume growth year over year, despite being in the fourth year of existence. that durable growth success proves that the program resonates well with customers. We are growing our customer count and the lines purchased per existing customers within Cisco Year Away neighborhoods. The revamp of Cisco Perks is delivering results as we had anticipated. We are seeing improved customer retention year over year, and we are seeing increased share of wallet with these important customers. Our local business is now growing, as a result of improved colleague productivity in the sales driving programs that I just mentioned. We are confident we will continue to make progress, and therefore, we are confident in the projection that we will improve local volumes to at least 2.5% in the second half of fiscal 2026. As I wrap up my prepared remarks, I would like to provide an update on two miscellaneous topics from the quarter. First is to communicate that we completed a small tuck-in acquisition at the end of the second quarter. We are pleased to welcome Gidsburg Foods, a premier broad-line distributor in the Northeast, to the Cisco family. This transaction increases our customer count in a high-value region of the country and helps Cisco's leverage its supply chain network more completely. We are excited to create additional scale and growth potential in the geography as we welcome the Ginsburg colleagues and customers to Cisco. Over time, we are positioned to unlock additional top-line growth and margin expansion opportunities as we introduce Cisco's buying programs and product assortment to the expanded customer set. Lastly, I want to acknowledge the retirement transition of our Chief Operating Officer, Greg Bertrand. Greg began his Cisco journey in 1991 and quickly advanced through the ranks, serving as our global COO since September of 2023. Greg will be missed personally and professionally, and we thank him for his substantial contributions to Cisco across his 35-year career. Over the next year, Greg will serve as a strategic advisor in a part-time capacity. Greg will focus his time and efforts on helping develop newer Cisco field leaders and will support me directly on select strategic initiatives like the Ginsburg acquisition that I just mentioned. We expect a smooth transition over the next year as we have a strong depth of experienced leadership talent in our field organization. In closing, I want to reiterate that we are encouraged by our strengthening results and that we are confident in our business momentum as we head into the second half of the year. We expect improved productivity from our sales colleagues, driven by strong retention and improved selling effectiveness by leveraging our selling tools and from leaning into select growth initiatives, all backstopped by a supply chain that is performing at exceptionally high levels of service. It is these factors, that give me, Kenny, and our leadership team the confidence that we will deliver 2.5% plus local case growth in the second half and adjusted EPS results at the high end of our guidance range. With that, I'd now like to turn the call over to Kenny. Kenny, over to you.