Sysco Corporation

Welcome to Cisco's fourth quarter fiscal year 2026 conference call. We will begin today's presentation 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 fourth quarter fiscal year 2026 earnings call. On today's call, we have Kevin Hourican, our Chair of the Board and CEO, and Brandon Sewell, our Interim 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 it's 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 So 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 question, we ask that you re-enter the queue. At this time, I'd like to turn the call over to Kevin Hourican.

Good morning, everyone, and thank you for joining us today. I am pleased to report that Cisco delivered strong results in the fourth quarter of fiscal 2026, exceeding our expectations on the top and bottom line. Our results for the quarter beat our prior guidance for adjusted EPS and USFS volumes. The outperformance included healthy case volume growth from both local and national customers in our USFS segment and continued strong volume growth in our international segment. Our strengthening top line trends combined with solid supply chain productivity gains helped drive year-over-year profit growth across each of our four business segments. Additionally, as we mentioned last quarter, we have launched meaningful efficiency improvement efforts powered by AI technology modernization that helped enable solid growth across operating income, EPS, and EBITDA. We will speak more about these efficiency improvement efforts as we provide visibility today into our 2027 fiscal guidance. Most notable in our Q4 performance is that our business momentum accelerated on a two year stack basis. And as a result, we are confident to guide fiscal 2027 to nine to 11% adjusted EPS growth. Let's jump into our business results starting on slide four. From a top line perspective, Cisco delivered over $22 billion of total revenue, a growth rate of 4.7%. These revenue results reflect positive case growth across our local, national, and international business units. From a bottom line perspective, we delivered adjusted earnings per share of $1.53, which was ahead of our previously communicated expectations. The quarter enabled Cisco to deliver $4.61 for the full year, above our full-year guidance range. The beat performance for the year is a sign of the momentum in the business that we expect will carry into 2027. As seen on slides 7 and 8, we have clear positive momentum in our local business, where USFS local volumes for the quarter grew 2.6%. improving 130 basis points sequentially on a two-year stacked basis. Each month of the quarter was stronger than the prior with June being the strongest month of the period on a one and two-year basis. In our USFS segment, we grew local cases 0.5% in the first half of the year and we grew local cases 2.9% in the second half of the year. The meaningful performance step-up was driven by improved colleague retention improved colleague productivity, and targeted growth initiatives. Cisco Your Way and Perks 2.0, for example, delivered solid revenue growth. Most notably, our AI360 selling tool increases sales colleague confidence, productivity, and job satisfaction. The result is that we continued to post compelling new customer win rates along with improved customer loss rates in the quarter. while posting solid improvement in penetration with existing customers. In fact, our penetration performance in the quarter was stronger than the overall industry, proving that the AI selling tools are positively impacting colleague productivity and selling effectiveness. All told, Cisco grew our independent customer business faster than the overall industry as we exited the fiscal year. The sequential improvement we delivered in fiscal 2026 gives us strong confidence in our local business growth targets for fiscal 2027. Another proof point of our progress is evident in our Cisco brand performance. In Q4, we delivered positive Cisco brand mix in our local business with an increase of 30 basis points versus last year to 46.4%, driven by a focused plan of action. We are strengthening our Cisco brand value tier assortment. During Q4, Our value tier item sales growth was four times faster than our overall book of business, and this is not cannibalizing our existing business. These are net new cases being sold to existing Cisco customers. These customers were previously buying these value tier products from other competing distributors and not from Cisco. Getting those cases onto a Cisco truck increases our profitability. In addition to the assortment work, We are working to optimize Cisco brand strategic pricing architecture, linking Cisco brand pricing strategies with the ebbs and flows of national brand prices, similar to what you would experience at a retail store. While this was always our strategic intent, AI tools are helping us execute this strategy more consistently. Lastly, AI360, as I mentioned earlier, is serving up Cisco brand conversion opportunities to our sales colleagues. Our system prompts our sales colleague to engage their customer if an opportunity exists to save a customer money through a brand conversion. Overall, we made significant progress in Cisco brand and we expect mixed penetration to be positive in fiscal 2027. Cisco brand will contribute positively to our overall profitability in 2027. Turning the page to our national contract business, During our fourth quarter, our national business delivered a step up in performance and generated case volume growth of 2.6%. The positive result was driven by growth in our healthcare, travel and hospitality, and food service management businesses, partially offset by industry-wide softness in national restaurants. For fiscal 2027, we expect to deliver positive case volume growth for national contract customers despite a macro foot traffic environment that remains challenged. Foot traffic to restaurants remains down year over year, and Cisco is growing our business, taking share, and delivering profitable growth year over year. We will remain focused throughout 2027 on growing our contract business in healthcare, travel and hospitality, and food service management while optimizing our performance with large national chain restaurants. Moving to the middle of the P&L, gross profit was up 3.7%, reflecting our organization-wide focus on strategic sourcing and momentum with Cisco brand penetration rates. Cisco's adjusted operating profit improved 4.1%, outpacing gross profit and reflecting contributions from continued productivity gains within our supply chain. Supply chain expenses grew at a slower rate than revenue and gross profits. Our warehouse and delivery operations achieved our productivity targets for the year, and we increased on-time delivery performance versus customer promise windows by 10 full points in the quarter. Routing efficiency improvements have lowered our cost to serve and increased the service levels that we provide to our customers. I am thankful for the strong performance from our operations team. These hardworking colleagues and leaders are often the face of Cisco to many of our customers. This year marked our third consecutive year of delivering meaningful reduction in miles driven and improved pieces per mile. As we upgrade our routing software in fiscal 2027, we anticipate continued positive contributions to our P&L from routing efficiency while simultaneously improving the customer experience, especially for Perks customers. As we mentioned during our Q3 earnings call, we kicked off efficiency improvement efforts that benefited the fourth quarter and will carry into fiscal 2027. The efficiency projects help Cisco exceed our adjusted earnings per share guidance for the quarter and the year, despite pausing our share repurchase program. During our guidance section today, we will talk to additional efficiency improvement activities that we are pursuing and how they will contribute to the fiscal 2027 profitability. These efforts include AI driven business transformation. Turning to our international segment, This quarter represents the 11th consecutive quarter of double-digit adjusted operating income growth and highlights the continued strength of Cisco's global footprint, a unique competitive advantage. Our international business delivered adjusted operating income growth of 15.7%, fueled by volume growth in every international geography with local cases growing 4.5%. The continued local op performance is being generated by expanded supply chain capacity, increased availability of Cisco branded merchandise, increased sales headcount, and easier to use technology. Since 2022, our international team has delivered meaningful progress, and we have more than doubled adjusted operating income margins from approximately 2% in 2022 to over 4% in fiscal year 2026. There are no structural barriers that will prevent our international division from achieving the profitability profile of our US business over time. Our international leadership team is performing for today while transforming the business for a stronger future. I am thankful for the leadership and performance being delivered by our international team. Now that I have provided a high level summary of the quarter, I would like to share an update on the status of the Restaurant Depot acquisition. We are excited about the acquisition of Restaurant Depot and the bold new chapter of profitable growth it helps to unlock. A future that creates a combined company positioned to step up sales growth, 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 format to 125 plus net new geographies over time. We will expand affordable options for restaurants by bringing the low-cost Restaurant Depot model to hundreds of additional communities, and we are committed to not raising prices in Restaurant Depot stores. What makes Restaurant Depot great is their compelling value offering. We would do nothing to compromise that under Cisco's ownership. In fact, we think we can strengthen it by buying together and leveraging our combined supply chain to keep costs low. Since our planned acquisition was announced on March 30th, we have worked hard to communicate the strategic merits of the deal. I will not completely repeat those points today, but I would like to highlight the key themes on slide 10. Our combined company will grow faster and will have more exposure to the most profitable segment of the business, local. Local restaurants are performing better than national chains for a host of reasons, and increasing our work focus on local customers is a net net positive for the long term. EBITDA margins of the company are expected to expand by more than 140 basis points. We plan to deliver $250 million of cost synergies through strategic procurement efforts. We will develop and launch revenue growth initiatives that are not included in the deal model. These efforts have the opportunity to exceed the value of the procurement efforts just mentioned. An example of these opportunities is leveraging restaurant depot stores to fulfill orders for Cisco delivery customers When the customer needs product immediately. In many instances, the Restaurant Depot store is closer to our end customer. This multi-channel concept would grow our collective sales in a cost efficient manner. We also have an opportunity to leverage the strong assortments from the two businesses bidirectionally to expand our offerings to the customers. Lastly, we will expand the Restaurant Depot format to harder to reach communities and eventually to Canada. by leveraging Cisco's inbound supply chain capability. All told, these efforts enable day one EPS accretion, year one EPS accretion in the top quartile of M&A transactions, and accelerating EPS accretion as our debt level is reduced and our excess free cash flow is utilized to reduce our share count and increase our dividend. We understand that reducing our debt level is a priority for investors. It is a high priority for Cisco management as well. We are 100% confident in our ability to deliver quickly by utilizing the compelling cashflow generation of core Cisco. We will improve Cisco's cashflow through the AI transformation efforts I mentioned previously. And when combined with Restaurant Depot strong cashflow, we can reduce the debt level quickly. Most importantly, the combined company will grow faster Be more profitable and return more value to shareholders than a standalone Cisco. These efforts are expected to accelerate Cisco's TSR into the mid-teens. In regards to deal approval, as expected, we received a second request from the FTC during the quarter. Our initial expectations for the deal to close by the third quarter of fiscal 2027 remain unchanged. This deal expands affordable food options, creates jobs, and is good for restaurant operators. We are confident that the government review will conclude that the deal is positive for restaurants and for competition. Lastly, I would like to provide an update on the performance results from Restaurant Depot. We have been advised by Restaurant Depot leadership that in their most recently completed calendar quarter, their sales growth was approximately 4% and their operating margins were in line with expectations. Through half of their calendar year, Restaurant Depot is delivering strong profit growth versus prior year in compelling overall financial performance. The Restaurant Depot business will substantially increase Cisco's profitability. It will also provide a natural hedge to a softer economy as the business benefits during economic downturns. More importantly, our combined company can create customer engagement opportunities that will be unmatched in the industry, enabling us to grow our business profitably and the important local customer segment. We believe Cisco's strong finish to the year and the guidance for fiscal 2027 demonstrate a firm foundation from which Cisco will build our future together with Restaurant Depot. In my closing section today, I want to summarize the highlights of our fiscal 2027 guidance. We expect the strong exit velocity of our business in Q4 fiscal 2026 to carry into the coming fiscal year. Our positive momentum will continue in local case growth and Cisco brand mix. Our international division will continue to post double digit profit growth in 2027. We expect to deliver revenue growth of 6% to 7% for the year. The revenue growth will be enabled by approximately 2.5% local case growth in our USFS segment. Through disciplined margin and expense management, we expect to deliver adjusted EPS growth of 9% to 11% in 2027. To be very clear, the revenue and EPS figures just mentioned include the benefits of the 53rd week. Excluding the 53rd week, we expect Cisco's earnings growth to be at the top end of our long-term growth algorithm, even with the suspension of share repurchases and the software macro backdrop. When coupled with our industry-leading dividend, we anticipate a year of double-digit TSR in fiscal 2027. To enable the earnings guidance just referenced, our team introduced an organization-wide efficiency improvement program driven by AI transformation. A summary of these efforts can be seen on slide number 11. We have identified AI growth and business efficiency improvement projects across sales, merchandising, supply chain, and back office. We expect the combined benefit of these efforts to deliver approximately 100 million of in-year savings in fiscal 2027, inclusive of the cost out savings we shared on our Q3 earnings call. Brandon, our technology leadership team, and I are leading this work across the company. The 100 million we have identified is just the start of the effort. We expect to announce our multi-year operating margin expansion commitment from these efforts later this year. The opportunities are significant and exciting. We believe we can improve service to our customers, do our work more efficiently, and reduce our structural operating expenses by leveraging best-in-class technology. Cisco is leading our industry in these efforts and this work will enable us to sustain and expand our industry-leading profitability. The combined impact of our core business momentum and the AI business transformation we expect will deliver adjusted earnings per share growth of approximately 9% to 11% while improving service to our customers. With that, I would now like to turn the call over to Brandon to provide additional insights into our Q4 performance and guidance for fiscal 2027.

Brandon, over to you. Thank you, Kevin, and good morning, everyone. At the highest level, I am encouraged that we were able to over-deliver on our previously communicated guidance for the quarter and the year. As Kevin outlined, our company-specific initiatives drove tangible results across our business. We expect this positive momentum to continue in FY27, anchored on operational rigor, inclusive of our cost savings program. We have a high degree of confidence for delivering our FY27 guidance across the P&L, cash flow, and rewarding our shareholders with another year of dividend growth. As shown on slide 13, our Q4 results included sales growth of 4.7%, continued volume growth in the USFS and international segments, strong margin management, and adjusted EPS of $1.53. As Kevin stated, this allowed us to exceed our annual EPS guidance, delivering $4.61 of adjusted EPS, even after pausing share repurchase for the year. Importantly, our largest and most profitable USFS segment continued to deliver balanced top line growth during the quarter, while also growing adjusted operating income. Our financial results also included free cash flow growth of 16.3% for the year. Q4 benefited from positive operating leverage for the enterprise with a 3.7% rate of growth in gross profit, outpacing a 3.6% rate of growth in adjusted operating expense, which included global pressure from the higher fuel prices. This performance also reflects continued positive volume growth across our important local customers and positive mix shifts from our Cisco brand penetration rate. Performance and local continued to be driven by sales colleague retention, particularly among our newer and mid-tier associates, which helped to drive incremental improvements in productivity rates. Additionally, Volume trends included a step up in growth from our national customers in the U.S. and continued volume growth in our international segment. Our supply chain continued to deliver productivity improvements and performed at an exceptional level as Kevin highlighted. We expect further positive momentum and growth across local, national, and international volumes in addition to progress in supply chain driving compounding productivity gains in FY27 and beyond. Turning to international as shown on slide 15, the positive momentum over the past few years continued in Q4 with sales growth of 6.7%, including local case growth of 4.5%, gross profit growth of 7.3% and adjusted operating income growth of 15.7%. Our strategy drove results with this quarter marking our 11th Thank you. Thank you. Thank you. Thank you. driven by growth across all segments. Total US food service volumes increased 2.5%, reflecting both local and national volume increases of 2.6%. Cisco produced 4.1 billion in gross profit of 3.7%, partially offset by a 17 basis point decline in gross margin to 18.7%. Our teams continue to effectively manage product cost inflation across our category basket, delivering improved gross profit per case performance. Gross margin performance was in line with our expectations for the quarter. However, there were two factors that affected year over year comparability. First is to call out that in our prior year, 2025, we realized outsized single quarter benefits from our strategic sourcing initiatives. The timing of those benefits was unique. to that period and created a challenging comparison. The second factor was in Q4 of this year related to the increased cost of fuel across the business. Approximately 80% of our bulk fuel purchases are hedged over the next fiscal year. During the quarter, elevated fuel costs impacted both food input costs and inbound transportation expenses. We've been very thoughtful about what portion of that increase we absorb in our business to keep our food affordable for customers. Our 2027 plan takes this backdrop into account, and importantly, we are confident we can expand our gross profit margins in the coming year. During the quarter, inflation rates for the enterprise were approximately 2.8%, while inflation in our USBL business was approximately 1.3%. Overall, Adjusted operating expenses were $3 billion for the quarter, or 13.5% of sales, a 20 basis point decrease from the prior year, reflecting strong operating leverage within our business. Results included cost-out efficiencies, partially offset by planned investments in the business across sales headcount, fleet, and building expansions. This also included lapping of $11 million in incentive compensation from the prior year. Additionally, SGMA results this quarter were solid, reflecting 3.1% sales growth and 11.1% operating income growth, driven by continued improvements in our supply chain operations. Corporate adjusted expenses were down 9.8%, which included benefits from the previously discussed cost out efforts implemented earlier in the year, as well as lower insurance and other costs. Overall, adjusted operating income grew 4.1% to 1.1 billion and adjusted EBITDA grew 4.7% to 1.3 billion. Let's now turn to our balance sheet and cash flow. Our investment grade balance sheet remains robust and reflect a healthy financial profile. We ended the quarter at a 2.7 times net debt leverage ratio. Turning to our cash flow, our free cash flow for the year was 2.1 billion, up 16%, highlighting strong quality of earnings and a disciplined CapEx strategy. Building on Kevin's commentary related to the merits of the Restaurant Depot transaction, I would like to provide an update on the deal financing strategy. In June, our finance team executed an additional $2 billion of interest rate hedges, further stepping up our cumulative hedge position related to debt financing. Then in July, we filed our registration statement on Form S-4, which was subsequently declared effective by the SEC. In preparation for this transaction, we remain focused on preserving cash levels, improving our core Cisco working capital, and remain committed to quickly delivering the balance sheet as illustrated on slide 23, consistent with prior communications. We know how important debt reduction is to our investors and it is important to our leadership team as well. To that end, our team has already voted to add structural costs out to our long-term equity performance program. That structural cost improvement will be leveraged to accelerate our debt reduction efforts. and increased Cisco's overall profit margins. Kevin and I are excited about that work and we are partnering with our technology leadership team to improve the efficiency of how we work. These projects are tangible, real and meaningful contributors to our future growth and performance. Kevin and I consistently emphasize that these efforts not only reduce administrative costs and complexity, but also improve the customer experience by enabling our teams to spend more time driving growth and engaging directly with customers. Now, I would like to share with you our expectations for FY27 as seen on slide 24. To be clear, all elements of our fiscal 27 guidance reflect the core Cisco business on a standalone basis and are inclusive of the 53rd week. During FY27, we expect reported net sales growth of approximately 6% to 7% to approximately $90 billion. These assumptions include volume growth, inflation of approximately 1.5% to 2%, and approximately 2% related to an extra week. Specific to volumes, we expect to deliver year-over-year local case growth of approximately 2.5% in USFS, driven by continued productivity gains with sales professionals based on improving tenure. As Kevin mentioned, we are also announcing 100 million of in-year cost out inclusive of the cost out announced in Q3 as detailed on slide 11. On a run rate basis, this represents cost out of approximately 160 million. This financial guidance assumes a macro and industry foot traffic environment similar to conditions of this past year. If conditions improve or should our cost out savings efforts over deliver, this would represent potential upside to our plan. All in, we currently expect full year 2027 adjusted EPS in the range of nine to 11%, equating to adjusted EPS of approximately $5.02 to $5.12. Within the context of the current environment, our outlook reflects the midpoint of the guidance range at approximately 10% growth, which is a significant step up relative to each of the prior two years. To help with phasing for the year, we expect our cost-out benefits to build with the most significant impact occurring in the second half. From a year-over-year comparability perspective, Q1 of FY27 is lapping an approximately 4% benefit, from a favorable effective tax rate in the prior year. All in, we are comfortable with an adjusted EPS range of $1.18 to $1.20 for Q1. For the year, we expect our USFS segment to deliver profit growth. We also expect our international segment to continue delivering double digit profit growth for the year. We remain on target for shareholder returns through approximately $1 billion in dividends. Specific to our dividend, our board of directors previously approved a one-penny increase to our April dividend, which represents approximately 2% growth in our quarterly dividend on a go-forward basis to $0.55 per share. Recall that we previously suspended our annual share repurchase efforts as part of the announced JRD transaction. We look forward to resuming share repurchase efforts after successfully reaching our previously shared deleverage targets. Now, turning to a few other modeling items. For the full fiscal 27 year, we expect adjusted corporate expenses of approximately 900 million, adjusted interest expense of approximately 675 million, adjusted other expense of approximately 50 million, a tax rate of approximately 23.7 to 24.2% and adjusted depreciation and amortization of approximately 850 million. CapEx to remain at approximately 0.8% of sales or 720 million. Looking ahead, we are confident that our company specific initiatives will continue to drive positive momentum into fiscal 2027. Combined with the advantages of our industry-leading scale and capabilities, we are well positioned to accelerate customer growth while delivering long-term value for our shareholders. With that, I will turn the call back to Kevin for closing remarks.

Thank you, Brandon. I appreciate all that you were doing for Cisco, our shareholders, and our customers. Q4 was a quarter displaying momentum and progress at Cisco. We are confident in our continued progress in fiscal 2027 as we plan to deliver solid revenue growth and adjusted earnings per share growth at the high end of our long-term growth algorithm. We are proud of our dividend aristocrat status and 57-year track record of dividend increases. For fiscal year 2027, we expect to deliver a double-digit TSR. Our U.S. business is performing. Our international segment continues to exceed expectations We are working diligently on the Restaurant Depot acquisition. I would like to thank all Cisco colleagues for their dedication to our customers, the strong finish to our fiscal year, and the compelling engagement that they are bringing to our customers. Confidence and momentum are building across the company, and I've never been more excited about the opportunities ahead for Cisco. With that, operator, we're now ready for questions.

Thank you. If you would like to ask a question, press star 1 on your keypad. We ask that you limit yourself to one question. To leave the queue at any time, press star 2. Once again, that is star 1 to ask a question. And our first question will come from Kelly Bania with BMO Capital Markets. Please go ahead.

Good morning. Thanks for taking our question. Kevin, I wanted to ask about the incremental cost savings related to the tech and AI initiatives. Slide 11 was helpful as you called out. Just as you look at those six areas of focus, there are all of these kind of equal contributors. Does one area stand out as the largest contributor to that outlook? And I think there was a comment that this is really just the start of this initiative. So Just curious, it sounds like it's early, but just what is the runway look like in future years? Because the message that I'm hearing is that it can essentially replace the EPS impact of kind of losing the buyback impact this year. So just curious is what kind of that algorithm might look like in future years as you kind of incorporate these savings into the next couple of years.

Good morning, Kelly. Thanks for the question. Why don't I toss to Brandon to get started to set the context of the financial elements of what you just asked, you know, what flows through to 27, our thoughts for the future. You asked about is it evenly distributed or some, you know, bigger hit topics. And so he'll cover a couple and then he'll toss to me and I'll do a wrap up. So Brandon, over to you, please.

Yeah, perfect. Yeah. Thanks, Kelly, for the question. I think for for 27 I'll address first maybe I'll give a couple examples from a timing perspective that 100 million in the tech savings it is net of investment it'll start towards the end of Q1 and it'll be back half weighted as we implement the technology across those work streams that you see on that slide I should also say it'll be weighted towards USFS maybe I'll share a couple of examples from my shop and then Kevin you can add anything you'd like that would contribute towards the $100 million. The first one I would share is tech to improve fill rates and inventory forecasting accuracy. It'll benefit our working capital. As a reminder to the team here, a day of working capital is worth a couple hundred million. So we'll use those improvements to deleverage faster than we've previously shared and that's a body of work we're really excited about. The second example I would share is related to our indirect space. Not a space that generally gets a lot of attention, but we will use reverse auction tools to tackle that indirect expense and it's significant. We buy a lot of indirect and supplies and parts with our fleet and our warehouses and that tech will allow us to work faster and really address more than we've been able to address historically. So those new capabilities are worth Tens of millions and will ramp throughout FY27. Kevin, any projects you want to add?

Yeah, I will. Just before I go into projects, let me just take a giant step back. We've been hard at work at this subject for the past, let's call it 100 plus days, evaluating every part of our business. And the mantra that I'm using as the leader of the company is better, faster, cheaper. Where can we improve the customer experience through improved technology? where can we do the work we do faster more agile solve problems more quickly and the last is do it more efficiently we can eliminate administrative tasks allow our team to spend more time on sales activities allow our team to spend more time with customers you know to grow the business so better faster you know more efficient Brandon gave some Good examples on back office. I'll give a couple of other examples. Routing, we're doing a massive effort on upgrading our routing software. To be very clear, it's our existing routing software provider upgrading to their latest version of their software. It has capabilities that the current version we have does not have. We will be deploying that to all of our US locations eventually internationally, but it's more than the software. It's about changing how we do that work. It's about customer centric routing capabilities, doing that work in a more agile manner, decreasing miles driven while simultaneously increasing our on time to the delivery promise to the customer. That's a perfect example of better and more efficient. The routing opportunity is significant. Another one is tech for tech, leveraging coding improvement technologies. I won't say the name of vendor providers to do the technology work that we do better and more efficiently. We can either do more for the same or we can do the same amount of work we currently are doing for less spend. Last example for me is in our contract bid business. We have many, many thousands of contracts. We can leverage AI technology to write better contracts. contracts that have a better profitability profile. And then we can more importantly leverage technology to match the transactional actual performance of that customer against the contract to make sure that we're paying appropriately for the work that we're doing or getting paid appropriately for the work that we're doing. There can be some leakage in that sector over time if those contracts aren't being managed appropriately. So these are just examples. I think we've given you enough color to say there's tangibleness, there's clarity, and to answer the first part of your question, this will build over time. So the 100 million is net of investment as in it will flow directly to the bottom line in 2027. Brandon quoted the run rate value is 160 million of the work we have already identified. We continue to find new sources of value. We will continue to revise and update the savings opportunities. That number will go up over time and that's something we can talk more about at upcoming investor opportunities. And yes, it more than covers the pausing of the share buyback. Thank you for the question, Kelly.

Thank you. Our next question will come from Edward Kelly with Wells Fargo. Please go ahead.

Hi. Good morning, everybody. I have a follow-up and then a separate question. But just a follow-up one. Kelly's question. I think your supply chain costs alone are probably 60% or so of your OpEx. I mean, that's like $7 billion. So the 100 million seems like it's kind of scratching the surface. Kevin, my question for you is, do you think that, you know, longer term, the opportunity here could be a catalyst to accelerate the algo? Or is it more or less, you know, this is one of the levers that we continue to have to drive confidence in the algo? and then my real question is around the U.S. Broadline's EBIT growth for 27, obviously coming off a little bit softer Q4. Could you just maybe give us a little bit more color on the building blocks of the growth in 27 and the key drivers and how you think about the level of that growth?

Okay, good morning, Ed. Thanks for the questions, Kevin. I'll start on the supply chain and what we see is the opportunity for the AI work to impact our algorithm. Brandon will cover the USFS question. He can explain also in Q4 some of the why within his prepared remarks, but he can reinforce two things that were unique about Q4 and then more importantly, talk about why we're very confident USFS will grow profit year over year throughout 2027. But back to your first question in point, we have tangible, specific, concrete work we're going to do with AI to be better and more efficient in how we do the work. Routing is significant. It is a huge opportunity for continued improvement. We just had a really good year in supply chain. Back to the year we just wrapped up was our strongest supply chain performance in a very long time. It positively contributed to our P&L at large. We grew our supply chain expenses lower than we grew our revenue and our volume in cases. Therefore, it had a positive impact, and we believe that will accelerate in the coming quarters and years with the good work that we are doing. On this morning's call, we're not going to change our long-term algorithm. What the year ahead shows is that net of the 53rd week, so take that out. The guidance that we provided today at the midpoint is at the very high end of our long-term algorithm. How I would say it is the work we're going to do with AI The compounding nature of the efficiency improvement will allow us to be at that high end of the algorithm that we've put out on an ongoing basis. And if there's an opportunity to beat it, as Brandon said, by doing even more work than we have got line of sight to today, we can talk about longer term revisions to the algorithm over time in the future. So let's come back to your question on USFS and profitability. Brandon, over to you.

Yeah, maybe I'll address first Q4, Ed, your question related to the margins and then let me give some commentary on FY27 and how we're feeling specifically about USFS. There were a couple of items in Q4 on a year-over-year perspective that affected our margins. The first was going back to FY25, if we go to Q3, strategic sourcing was low and that value was pushed into FY25 Q4. The year over your lap for 26 Q4 was challenging because of that huge strategic sourcing number in FY26 or FY25 Q4. The second item is fuel. Remember 80% of the fuel we purchase is hedged. With that, inbound freight costs due to fuel were elevated and we don't hedge that inbound fuel. With the inbound, we monitored it during the quarter and We made purposeful choices to absorb some of that cost. So we'll continue to show discipline there and manage our costs and our profitability. I'd say the second point on fuel is on outbound. We've mentioned this before that we have fuel surcharges in place and there is always a lag of 90 days with our contract customers that FY26 Q4 cost then gets paid for in FY27 Q1. So that pressure will ease a bit as we head into FY27. And then the second part of your question, how does all that kind of lead into FY27 USFS profitability? Well, I mentioned, you know, it will ease up a bit as we go into 27. A couple of other things that will take place in 27, the $100 million in cost savings that I just talked about and Kevin talked about will lean USFS. So that will help as we ramp those tech projects throughout the year. The other component that we were really satisfied with in Q4 was our Cisco brand. It was 30 basis points positive. That continues to grow and accelerate, so that will be a bigger contributor now that it has turned positive. Obviously, we'll have a full year of local sales growth in FY27. And then you talked about supply chain a little bit. That's our core operations, and it performed really well in Q4. We've doubled our retention rates. with our drivers and selectors since FY24, but we feel that we have further opportunity to continue those OpEx improvements in FY27. So overall for USFS, we expect to deliver strong profit growth and we're optimistic about the year.

Just put a bow around what Brandon just covered. It's the aggregate of those components that gives us the confidence to deliver profit growth in USFS. And the exit velocity of June and the exit velocity of Q4 is where we need to be. There's no big step up with the exception of the $100 million cost out, which throttles throughout the year because these are projects that launch. The core business is performing. And last but not least, tied to that, one of the projects that Brandon covered is improving our forecast accuracy in the inventory space. We have a dual mandate there of improving fill rate outbound to customers. He quoted it's $250 million of cash that we can improve by taking a day of inventory or a working capital day of inventory improvement to the degree that we succeed on that project or exceed expectations. We will take all of that cash to plow towards delivering faster. That is our commitment. The incremental cash flow that we generate will be targeted towards de-levering faster ahead of schedule versus what we communicated on March 30th for the deal model. We understand how important de-levering is to our investors. It's very important to Cisco.

Thank you. Our next question will come from Lauren Silberman with Deutsche Bank. Please go ahead.

Thank you very much. I have a follow up to Ed and then a real question. The follow up is just on the USFS gross margins, the comments on inbound fuel. Is the right read that you're not passing it fully through, pricing lower, potentially to gain new customers, or is this more of a timing dynamic? And then my real question is on case growth. So U.S. local case growth, you're getting to 2.5% for the year. Any color on what you're seeing quarter to date and how you're thinking about the cadence of growth, and then any more color on expectations on the national side? Thank you.

Okay, good morning, Lauren. Thank you for the question. Kevin, let me just, you know, it can be confusing, fuel, what's hedged, what's not hedged. Brandon covered some key points. Let me repeat some of the key points that he made. Outbound to customers, we are substantially hedged for more than a year. We have a good program we have with key customers, you know, fuel surcharges that are in place that flex up and flex down based on cost economics. What he highlighted is one of the reasons for gross margin pressure in Q4 was inbound. For some of our suppliers, they manage the transportation, Lauren, so it's built into the cost to us on the product, so it shows up on our margin rate. And we did see increased cost on inbound fuel for the fourth quarter. To be clear, we have modeled that for all of 2027. So the guidance that we have put forward for 2027 includes the quote unquote environmental conditions of Q4. So this is not something that should be a pressure point. It's built into our guidance for 2027. Brandon's words were we make purposeful choices on the cost of our product to be priced competitively in the market. So we didn't make an intentional decision to lower price to take share. It's we need to be competitive in the market on the price of our product to our outbound customers and fuel increases that can apply some short term pressure on the margin rate, something that we are confident we have a plan to address for 2027, as I said. So that's the answer on the inbound fuel. We make purposeful choices on what we absorb. and what our market competitive pricing outbound to customers needs to be. For local, we said approximately two and a half percent growth through the year. That should be reasonably consistent throughout the year. There's no quarter that has a big step up requirement. The exit velocity of Q4 was strong. We're off to a good start in July. So quarter one, period one, off to a good start and pretty consistent steady growth throughout fall of fiscal 2027. For national, we didn't quote a specific number. Here's what I would say for national. We'll continue to see strong growth in the national segment in healthcare, education, food service management. We expect to see continued pressure with national restaurants given traffic declines to that segment and the overall pressure that national customers, restaurant customers specifically, are experiencing. Net-net, when you put that all together, we will deliver volume growth in national throughout 2027.

Thank you. Our next question will come from John Hinkenbockel with Guggenheim. Please go ahead.

Hey, Kevin, can you talk about the two biggest opportunities it looks like in local case growth, right, or the loss rate that you referenced, which still I think is above some of your peers. So the opportunity to bring that down and how fast you can do that. And then secondly, lines per account, right? I think you're referring penetrations picked up a little bit. Is that just sort of green shoots here and what you think the opportunity is and how fast that can develop? So those two areas.

John, thank you for the question. New lost pen. So we're very pleased with our new customer win rate. We'd like to sustain that performance. We don't need to see improvement there. We want to sustain new. It's performing at an exceptionally high level. We want to keep that action in place. Loss rate, you're right. We've made meaningful improvement in loss over the past 12 months, and there is additional progress that can be made. Brandon talks a lot about this. Our colleague retention improvement and the increased tenure of our existing colleagues is showing up with improved customer retention. So our loss rate improved year over year, and there's additional opportunity for that loss rate to continue to improve. And the widening spread between new and lost will contribute to case growth. Penetration, if I look back to Q4, is actually where I was most pleased. We made substantial progress on penetration with existing customers. AI360, people ask me all the time, Kevin, how are you measuring it? Is it real? Is it showing up in your P&L? The improvement that we are driving in penetration is obviously tied to our colleague success in productivity, improved retention, improved productivity. But what AI360 is doing for that sales colleague, whether or not they're one year in job or 20 years in the job, is teeing up opportunities for existing customers to sell more product to that customer. It's identifying things that should be on the order that are not. It's pre-approving pricing for that incremental line, incremental case. It's identifying through data what should be able to be sold. and it's prioritizing it into no more than three things to be done that day. We can track who of our colleagues are actioning against these opportunities. We can track close rate by colleague. Our sales leadership team is doing a phenomenally good job of coaching our colleagues based on this powerful information and data on knowing close rate person A versus B. And John, that's showing up on solid improvement in penetration. The exit velocity of our Q4, we're taking share versus the industry. and our penetration performance in Q4 was stronger than the overall industry. And these are trends we expect to continue into 2027, which is why Brandon and I have confidence to guide at the high end of our long-term algorithm. Brandon, anything to add?

Yeah, maybe just one thing just to nail down those themes across the tenure of the colleagues, the penetration improvement, and then just, John, seeing similar results across our geographies, the one word I think of is consistency. If I had to use that one word of Q4 local volume in terms of the month-to-month pattern that we're seeing, even into P1, we're trending using that consistency in FY27, which is really encouraging to us.

Thank you. Our next question comes from John Ivankoff with JP Morgan. Please go ahead.

Hi. Thank you so much. I know there's been attention in private label, and we're seeing that in results now. you know, at Cisco. And I wanted to just get, I guess, a little bit more color in terms of where you're seeing success and where you're seeing opportunity, whether it's on the highest end and premium, I guess, the kind of core and classic or Reliance, which I think is kind of a, in terms of Packer brands, maybe a newer initiative for you. And, you know, and the opposite, you know, of a private label, but just maybe in a, or maybe, you know, related, but in a different way. is how your salespeople are selling some of Cisco's specialty businesses, particularly on the meat side, on the produce side, on cleaning supplies, what have you, just different types of Asian products, the success that your broad line salespeople have had of integrating specialty into their broad line type accounts. Thank you.

Good morning, John. Thank you for the question. We're pleased with the progress that we've made in Cisco Brand. The positive 30 basis points on a year-over-year, quarter-to-quarter perspective is a strong statement of the initiatives that we have deployed in Cisco Brand that will carry into 2027, which to repeat our guidance for 2027, we expect for Cisco Brand to be positive throughout 2027. It started first with product. As I've mentioned previously, we had void in the reliance, to answer your question, product offering, which for others is the opening. We have good, better, best. That's the good product offering that we have. We've started at the item level. Where do we not have matches to Packer label or to national brand where we could introduce those opening price point products or good products to our customers? That is detailed work. It takes time to get the supplier relationships, to audit their factories, to ensure that the products meeting our quality specifications. and that work has been underway now for over the past year and we saw solid improvement in our value tier revenue growth. In fact, I said on the earnings call four times growth of the overall book of business and it is not cannibalizing better best products. These are items that simply were not being bought. We can target specifically which customers are being propagated to for these offers both through AI360 for the sales colleague and also on our website. So it started with product. topic two is pricing architecture as I said on the call we always have the intent for Cisco brand to be a value for the customer aka save them money we have lots of items they ebb and flow with the cost of product going up and down over time and leveraging AI technology we're doing a better job of ensuring that the price architecture to the customer shows consistent value to our customers over time that helps that improves our sell-through performance last but not least one of my favorite App capabilities within AI360 is something we call swap and save, which is if a customer from a sales rep has the opportunity to save the customer money, it prompts them in row one of AI360, introduce the savings opportunity or customer today. And this is new. It was launched within the past few months. It is having a tremendously positive impact and reaction from our sales colleagues. Our colleagues make more money when they sell those cases, but putting it right in front of them, giving them confidence that it is a legitimate sub to that national brand product. If they want to learn more about it, they can click a video and learn about the product and learn about the item, et cetera. Progress. and we expect for that progress to continue. Your question about our specialty business is a great one. We call that total team selling. Well, I didn't have it in my prepared remarks. Total team selling continues to make progress at Cisco and it's across our produce business, our protein business, and as you indicated, our equipment and supplies business, Asian foods businesses as well. We will expand our Asian food business to more geographies in 2027, giving us more of an opportunity for that cross-sell capability. Total team selling continues to perform. there continues to be meaningful opportunity for us. We still have many, many thousands of customers who are buying just Broadline. And as we've shared before, as we add a specialty category to that account, that customer buys more, they have a much higher retention rate and a higher overall profitability. So total team selling continues to perform for the company and will be a growth vector for 2027.

Thank you. Our next question will come from Mark Carden with UBS. Please go ahead.

Good morning. Thanks so much for taking the questions. So sounds like some good progress on local case volumes. How are you thinking about local salesperson headcount growth in fiscal 27? Any acceleration or deceleration relative to fiscal 26? And then when you do see macro pressures like the ones that we're seeing persist, do you see much of a benefit from having a more balanced base bonus structure relative to your peers? Thanks.

Brandon, you want to start this question?

Yeah, so from an IT hiring perspective, you know, we had 450 and 24. We talked about 325. And in 26, we did have growth across both of our main U.S. businesses. Those we've hired over the last two years have moved up the productivity curve, and retention remains high across all those tenures. You know, Mark, we'll continue to hire salespeople for sure. We're at a point where we're balancing that with productivity. We're seeing significant productivity improvement. So we want to strike the balance between those two, but we will absolutely have better or more growth in FY27 as well. And then, you know, from a macro perspective, Okay, from a macro perspective, we have you know we've included all of those pressures in our FY27 guide as an example going back to fuel expenses we modeled fuel expenses to be similar to what we saw in on-highway diesel prices from Q4 when we look at the international space they're under pressure as well due to the geographical nature of it but we're moving forward we just hit our 11th quarter of consecutive double-digit OI growth and we expect that to continue throughout FY27 so we've worked all of those components into our guide and we feel like we'll have a robust year despite the macroeconomic pressures.

Thank you. We'll take our last question from Brian Harbor with Morgan Stanley. Please go ahead.

Yeah, thanks. Good morning. I don't know if you're willing to answer this, but just the questions that have come up as part of the FTC review process Restaurant Depot. What's the nature of those? I guess have those been largely as you expected at the outset here?

The questions are as we expected. And if I could just step back to the bigger picture, we have confidence that the deal will get approved. We've said on today's prepared remarks by our Q3, the facts as the government will see when they review the case file is that these are independent customer channels. that a customer is a cash and carry customer. They choose that channel. That is where they shop. And there is meaningfully ample competition within cash and carry. You've got Costco, you've got Sam's Club, you have thousands of independent cash and carry operators. Two of our competitors operate cash and carry channels as well. So there's meaningfully ample competition in cash and carry. The other customer is a customer who prefers delivery. They want white glove service. They want a delivery to their restaurant. They don't want to own their own van and have to take time out of their their day to have to go over to a store to get their product. And obviously there's ample competition in the delivery. There's very little overlap between the two customer channels today at this time. And that can be back tested looking at, you know, when Restaurant Depot opens a store, what happens? So that's point one. Point two is pricing. They're going to look at, you know, will this deal negatively impact the end restaurant customer? And I cannot be more clear on this topic. We Cisco have no intentions to raise prices at Restaurant Depot stores. As I said in my prepared remarks, we actually think we can improve affordability. How we will do that is by bringing their model to 125 net new geographies. That creates many thousands of jobs. It brings the affordable low-cost leader to net new communities, and that's a positive for restaurants. stores that are operating today we have no intentions of raising prices at those stores it would hurt the stores it would decrease their competitiveness and the value that they're providing to their end customers we would have no economic incentive to do that so we are answering all the government's questions it's a big deal meaning the deal is a large transaction they have to go through their data discovery and we have confidence that the facts will result in the deal getting approved as we said by Q3. What we're most excited about is being able to buy product together, sharing in that procurement efficiency to produce value for our end customers, bring their model to net new geographies and eventually up to Canada. There isn't a strong top performing cash and carry operator up north and we really believe that going to Canada is a compelling opportunity for the long term. And last but not least, eventually at the appropriate time, while today they're separate channels, we have an opportunity to serve customers more effectively. And my favorite example is a delivery primary customer who runs out of something between deliveries and needs it urgently. We Cisco today have limited options to be able to support that customer's needs. Oftentimes a Restaurant Depot store is going to be closer to that customer and our ability to leverage that store for rapid same day delivery is something we're very excited about and we know customers will benefit from. So thank you for the question. Kevin Kim, over to you.

All right, great. Thank you, everybody. Thank you for joining our call today. Please reach out to the investor relations team if you have any follow-up questions. Thank you for your time.

Thank you, ladies and gentlemen. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.