Sysco Corporation

Welcome to Cisco's third quarter fiscal year 2026 conference call. As a reminder, today's call is being recorded. We will begin with opening remarks and introductions. I would like to turn the call over to Kevin Kim, Vice President of Investor Relations. Please go ahead.

Good morning, everyone, and welcome to Cisco's third quarter fiscal year 2026 earnings call. On today's call, we have Kevin Herkin, our Chair and CEO, and Brandon Sewell, our Interim 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 GAAP measures is included at the end of the presentation slides and can 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 question, we ask that you re-enter the queue. 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'm pleased to report that Cisco delivered strong results in the third quarter of fiscal 2026. Our results were enabled by improving case volume trends, strengthening gross margin performance, and disciplined operational execution. We delivered our progress improvement in a continued choppy macro environment. Given our positive momentum, we remain confident in our expectations for full year adjusted EPS to be at the high end of our annual guidance range of $4.50 to $4.60. Most notably, we delivered 3.3% local volume growth in our U.S. business, a 210 basis point improvement versus the prior quarter, and our strongest quarter local volume growth in three years. We have clear momentum in our local business and we have confidence that we will continue to post strong local results in Q4 and into fiscal 2027. While our primary focus for today's call will be the underlying strength of our core business, we will also discuss the strategic rationale surrounding our entry into the cash and carry space with our recently announced planned acquisition of Jethro Restaurant Depot. After my remarks, Brandon will highlight our financial outcomes and share his thoughts on the financial merits of the Jethro Restaurant Depot transaction. Before I begin, I would like to formally introduce our Interim Chief Financial Officer, Brandon Sewell. Although Brandon may be a new name to many listening to the call today, he has been an important senior leader within Cisco for the past 12 years. Most recently, Brandon served as CFO of Cisco's largest segment, our U.S. food service business. Prior to the U.S. CFO role, Brandon held several senior leadership roles across the organization spanning global financial planning and analysis, merchandising, and supply chain. He will work closely with our executive leadership team to ensure continuity and disciplined execution of Cisco's financial strategy as we conduct a full search for a permanent CFO across internal and external channels. As I've shared with many of you over the recent weeks, Brandon is a very strong candidate for the permanent role. In the meantime, we are thankful and appreciative to have his expertise and leadership as a steadying hand and expert in our business. Brandon, thank you for your leadership. Let's jump into our business results starting on slide number four. From a top line perspective, Cisco delivered nearly 21 billion of total revenue, a growth rate of 4.7% versus the prior year. These revenue results reflect positive and accelerating case growth across our local, specialty, national, and international business units. From a bottom line perspective, we delivered adjusted earnings per share of 94 cents. which was in line with our expectations and inclusive of the previously discussed $63 million headwind related to lapping lower incentive compensation the prior year, reflecting an approximate impact of $0.10 per share. Our revenue growth was fueled by improving volume trends across our business, but most notably by our USFS local case volume. Overall foot traffic to restaurants remains challenged. and Cisco was improving our performance due to selling initiatives within our direct control. Gross profit was up 6.5% year-over-year, and when excluding the $63 million in incentive compensation headwind, our operating income and operating income margin would have expanded on a year-over-year basis, while our adjusted EPS would have expanded to be in line with or slightly better than our long-term earnings growth algorithm. Looking at our underlying momentum in this way gives Brandon, our leadership team, and me the confidence in the trajectory of our core business. We are encouraged by our results overall as our teams delivered strong volume growth in a soft restaurant traffic environment. Per BlackBox, traffic to restaurants was down approximately 1.9% in the quarter. Cisco's improved performance is being generated by increased sales colleague retention and increased colleague productivity. our sales colleagues delivered our fourth consecutive quarter of improvement in new customer win rates. We are able to take share and grow profitably even in a market with soft overall conditions due to our sales colleague training initiatives and sales enablement tools that are increasing colleague productivity. Specifically, AI360 is improving new colleague onboarding, and it is helping colleagues of all tenures increase their selling effectiveness. When coupled with our customer growth programs like Cisco Your Way and Perks 2.0, Cisco is improving how we serve our customers. Our progress in local volume can be clearly seen on slide eight in our presentation. Looking ahead in our fourth quarter, we expect to deliver at least 2.5% of local volume growth. To be clear, Posting a volume growth of 2.5% in our fourth quarter would equate to a 120 basis point improvement versus Q3 on a two-year stack basis, a clear continued acceleration in overall business outcomes. Importantly, we are now growing our local business faster than our overall business, which is very helpful to the overall operating margins of the company. Turning the page to our national contract business during our third quarter, Our national business generated case volume growth of 1.4%. We delivered strong growth in our healthcare, travel and hospitality, and food service management businesses. The positive growth from these businesses was partially offset by softness in our national restaurant segment. The declining foot traffic to restaurants per black box has disproportionately affected our national chain restaurant customers and can be seen in our results, as volume with these customers was down year over year. For the fourth quarter, we expect case volume growth for national contract customers to improve versus Q3, driven by continued strength in our non-restaurant business and onboarding of net new customer wins in the national restaurant customer business. Turning to our international segment, we are very pleased with the performance being delivered by our international team. The momentum in our international business was fueled by every international geography. To that end, Local case growth in our international segment was up 3.8% in the quarter. This growth is being generated by expanded supply chain capacity, increased availability of Cisco brand and merchandise, increased sales headcount, and easier to use technology. This strong demand coupled with disciplined expense management delivered adjusted operating income growth of nearly 13%. Impressively, this represents the 10th consecutive quarter of double-digit operating income growth and highlights the continued strength of Cisco International as a growth engine within the company. Before turning the call over to Brandon, I want to highlight some of the key points tied to our previously announced agreement to acquire Jetro Restaurant Depot, the leading cash and carry food service supplier in the United States, as well as provide a brief update on the recent performance of that business. The acquisition of Restaurant Depot is a bold new chapter of profitable growth for Cisco, one that creates a combined company that is expected to grow faster, be more profitable, and return more value to shareholders than a standalone Cisco. Most importantly, we will increase our ability to help save restaurants money with a more efficient buying program and by expanding Restaurant Depot's low-cost leader format to 125 plus net new geographies over time. Our two companies are better together and our end customers will benefit. The cash and carry channel is large, growing, and resilient with an approximately $60 to $70 billion total addressable market. Restaurant Depot is the leader in the channel with a best in class format that serves smaller customers that are seeking value, freshness, and convenience. Restaurants tend to choose which channel they prefer first, and they select a business partner within their channel. customers seeking savings and the ability to pay with cash or a credit card find the Restaurant Depot one-stop shopping environment very compelling. Cisco serves a larger customer that is seeking delivery and the support of an in-person sales colleague. These customers desire the convenience of delivery and the high touch service that comes with our dedicated and well-trained sales force. Our sales consultants provide restaurant advice, culinary suggestions, and even menu price optimization suggestions. The minimal overlap between these two customer types creates clear separation between the two channels. With that said, our new company will be able to serve more restaurant operators, reach more purchasing occasions, and provide savings to more customers when we are a combined entity. From a financial perspective, Cisco will gain access to a large, resilient, and growing new channel of customers that is entirely local. I'd like to spend some time sharing initial examples of how our two companies will be better together, increasing enterprise profitability and improving how we serve local customers. The first benefit is in purchasing efficiency. We will deliver $250 million of net cost synergies through the transaction. I want to be very clear that we do not intend to reduce headcount at either company as a result of the transaction. The cost synergies will come from buying products and services more cost effectively than we do today. By combining our volumes, we can be more efficient for Cisco and for our supplier community. As a result, we will buy better. We are extremely confident in our ability to deliver against this cost reduction target. The second benefit will be generated through revenue synergies across two companies. As I said in the deal announcement, revenue synergies beyond opening new stores are not included in the accretion targets of the deal model. But first, let me address the new store opening opportunity. We have completed a thorough analysis of the geographic white space opportunity for new Restaurant Depot locations, and we are very confident in our ability to open five to six net new stores per year for the next 25 years. Or, stated differently, we are extremely confident that the core U.S. market can easily accommodate 125 net new Restaurant Depot locations over time. Many of these locations can be served directly by Restaurant Depot's effective and efficient supply chain, and select new store locations will be enabled by leveraging Cisco's vast inbound supply chain capabilities. By opening 125 net new Restaurant Depot locations We will bring the low-cost leader format of restaurant supplies to more customers, saving tens of thousands of restaurants money, and we will create thousands of new jobs in the process. The opening of these five to six new stores per year is included in our modeled assumptions to support Restaurant Depot's core revenue growth. Beyond opening new stores, I would like to highlight additional vectors of growth enabled by our combination. The upside from these concepts is not included in the equation figures that we have shared with you. The first example is cross-selling each other's expansive product assortments. Restaurant Depot has a compelling opening price point product line that has been developed across decades. There are many Cisco delivery customers that would like to buy these products, and they would like to have them delivered on their existing Cisco order. For instance, a customer could be buying premium protein and premium produce. but they are less particular on select frozen products. Offering these delivery customers a lower price tier of merchandise would equate to incremental cases on existing deliveries. Those that know this industry well understand that the most profitable case is the incremental case added to an existing delivery. To avoid trade-down cannibalization, we can target customers with personalized offers and provide those offers to customers who are not buying from within a given product category. Next up is an even bigger idea. Cisco's primary delivery customer receives approximately two deliveries per week. Running a restaurant is a dynamic business, and our customers often run out of products between their Cisco deliveries. Cisco today does not have a cost-effective solution to meet those spur-of-the-moment needs. And as a result, our customers are forced to take action on their own, and oftentimes are buying items across a wide array of retail options. By partnering with Restaurant Depot, Cisco's sales colleagues will be better able to solve the need-it-now customer scenario. Concepts like Click and Collect, or same-day delivery from Restaurant Depot's locations, will be a tool in our sales team's arsenal to meet these customers' needs. As we continue to open new stores, the Restaurant Depot store location will become an increasingly convenient asset to be leveraged. One more example is how Cisco can help Restaurant Depot customers. As small customers find success in their business, they oftentimes open a second or a third location. By partnering with Cisco, Restaurant Depot can provide these growing customers seamless engagement across the two purchasing channels. delivery from Cisco when they want it, and cost savings at the store when they have time to shop for themselves. We will develop a loyalty program that rewards our customers, big and small, for the incremental purchases that they make across our multi-channel format. Buy more, save more. It will be simple to understand, and we will reward customers for purchasing growth regardless of channel. By combining Cisco and Restaurant Depot, Our business will be able to provide the type of service a customer is looking for when they need it at a price point they desire to pay. Together, we will become a nationwide omnichannel food service provider that grows our business profitably. This transaction meaningfully expands our penetration of the local customer segment, the most profitable segment in food service. Restaurant Depot's business is 100% local. The acquisition is expected to increase Cisco's local revenue by 1.5 times, increasing our enterprise margins. Lastly, as I mentioned on the announcement call, cash and carry is a very resilient channel. During every economic downturn, cash and carry has taken share from the overall market. Why? Because restaurant operators seek to save money in those times. And Restaurant Depot is their 100% best way to save money while getting everything they need in a one-stop shopping environment. Gaining access to cash and carry increases Cisco's profitability and resilience. Any transaction of this size does come with integration risks, risks that we will carefully manage through a talented integration management office. Most importantly, Restaurant Depot will be run as a standalone segment within broader Cisco. It will continue to be run by Richard Kirchner, its longtime CEO, and Richard's existing and talented leadership team. They will make all key decisions on how the cash and carry business will be run. There will be limited technology integration as Restaurant Depot is a retail stores business. There's no need for us to rip and replace key enterprise software that successfully runs Restaurant Depot today. From a culture perspective, our two companies are excited for how we can work together and engage on what I call pull, not push, growth opportunities. Cisco will help Restaurant Depot on topics where we can help, like opening new store locations. And Restaurant Depot will most certainly be able to help Cisco better serve that need-it-now customer purchasing occasion. As I said in my introduction, the new company will grow sales faster, be more profitable, and will return more value to our shareholders than a standalone Cisco. As Brandon will explain in a few moments, the deal is immediately accretive and is in the top quartile of deals from a year one and year two earnings accretion perspective. In a moment, Brandon will explain our commitment to quickly reduce our debt level. In summary, this transaction is good for our shareholders in the short, medium, and longer term time horizons. Looking ahead, we understand that investors want to learn about Restaurant Depot, including how Restaurant Depot is performing. We expect the deal to close by approximately Q3 of fiscal 2027. Between now and then, we will provide periodic updates on the performance of Restaurant Depot. To that end, we have been advised by Restaurant Depot that in their most recently completed calendar quarter, their volume growth was approximately 4% and their operating margins were in line with expectations. In closing, I want to reiterate that we are encouraged by the strong results of our core business. Our leadership team is committed to delivering at least 2.5% local case growth in the fourth quarter and adjusted EPS results at the high end of our annual guidance range. We will continue to deliver strong results as we prepare to create a bold new chapter of growth with Restaurant Depot as a part of the broader Cisco family. With that, I'd now like to turn the call over to Brandon.