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.