Q4 2022 Sysco Corp Earnings Call

Quarter fiscal year 2022 conference calls.

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 fourth quarter fiscal year 2022 earnings call on today's call, we have Kevin Hurricane, our President and Chief Executive Officer, Aaron Alt, Our Chief Financial Officer, and Neil Russell, Our SVP of corporate Affairs, and Chief Communications Officer before we begin. Please note that statements made during <unk>.

This presentation, which state the companys or managements intentions beliefs expectations or predictions of the future are forward looking statements within the meaning of the private Securities Litigation Reform Act and actual results could differ in a material manner additional information about factors that could cause results to differ from those in the forward looking.

<unk> 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 July three 2021, subsequent SEC filings and in the news release issued earlier. This morning, a copy of these materials can be found in the investors section.

Cisco Dot com.

non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures is included at the end of the presentation slides and can also be found in the investors section of our website.

To ensure that we have sufficient time to answer all questions, we'd like to ask each participant to limit their time today to one question and one follow up at this time I'd like to turn the call over to Kevin Hurricane.

Good morning, and thank you for joining our call.

Q4 marked another quarter of positive top and bottom line performance at Cisco.

The quarter capped off strong financial performance in fiscal 2022, as we grew annual sales by 33, 8% to over 68 billion for the year Cisco grew our business more than one three times. The industry. This result exceeded our goal for the year in the second half of the year performance was even stronger.

In the first.

Outperformance in the U S helped drive over 17 billion of total company sales growth for the year.

Consistent with our focus on profitable growth, we grew adjusted EPS by 133, 8%.

Our team generated these results while advancing our recipe for growth strategy, improving our balance sheet and delivering compelling shareholder returns.

I will highlight two topics during our call today.

First I will share progress we have made as a company over the past year that displays cisco's unique position of strength in the market.

Second I will convey why we are confident in our trajectory for profitable growth in fiscal 'twenty three before I get started let me acknowledge that we are closely monitoring the macroeconomic pressures that are impacting consumer confidence across the globe such as spikes in gas prices food inflation and rising interest rates.

Despite these external factors Cisco is prepared to deliver significant market share gains and profitable growth this coming year.

So, let's get started with our unique position of strength and a bit more about who we are displayed on slides five and six.

I am often asked to describe sysco simply.

Simply put Cisco is 50% of food supply chain company, and 50% food sales and marketing company.

To be successful as leader at Cisco and to be successful in this business you need to be equally capable of bleeding in both arenas supply chain and sales.

Over the past two and a half years, we have developed a strategy called our recipe for growth.

<unk>, our capabilities in supply chain and sales.

We are transforming Cisco by building new capabilities that will further enable our position as the global leader in food distribution.

Let me first highlight that 50% of Cisco that is our food supply chain by summarizing some of our biggest accomplishments over the past year.

Throughout the year, we have led the industry from an OTT perspective. So there was not a logistics that stands for on time in full.

This past year was the most challenging <unk> year on record in our industry.

During those challenging conditions.

<unk> was able to be better in stock and better able to ship on time versus those that we compete against <unk>.

As a result, we won substantial new business and provided stronger than industry average service levels to our existing customers.

We are deeply committed to returning to and exceeding our historical ownership levels over the coming quarters and years.

We fully converted our supply chain to a full six days service week simultaneously, we converted the majority of our U S. Frontline associates to a four day work schedule, enabling improved work life balance for our associates.

With six day work model for our large network of Dcs will enable Cisco to grow profitably for years to come by better leveraging our physical assets.

The transition to the <unk> model was a big lift and I want to thank our associates and our customers for their partnership and the transition. The six day model will ensure industry, leading OTA results for years to come.

We launched our Cisco driver Academy opening our first training location and began building out a nationwide infrastructure that will be complete by the end of this calendar year.

The driver Academy is helping Cisco address a shortage of skilled drivers.

Academy will increase the number of skilled drivers at Cisco and we will deliver increased lifetime earnings potential for the associates selected to participate.

We have piloted and are scaling new picking methods that our warehouses that will improve the experience of our delivery drivers in.

In addition, we are providing our drivers with advanced material handling equipment that reduces the physicality of their day.

These actions will improve the experience of our drivers, enabling improved productivity improved retention and increased customer service.

Lastly, we have built out a distributed order management system or <unk> for short that will enable omnichannel fulfillment at Cisco in fiscal 'twenty three.

We have decoupled the front end of our network sales from the backend of our network operations through this project.

No longer or customer need to order just through their local site's inventory assortments we.

We are opening up our vast network of inventory to our customers through the dominant implementation, while also improving the productivity of our working capital through this industry leading projects.

We will be launching our first Blake soon with plans to expand and scale in 'twenty three and beyond.

Our supply chain mission at Cisco is clear enable profitable growth by delivering the industry's leading assortment of products delivered on time and in full at a delivery frequency that meets or exceeds our customers expectations are.

Our supply chain greatly enhanced our capabilities to deliver on that mission in fiscal 'twenty two.

Now I would like to highlight the progress that we've made and the other 50% of our company's key work focus food sales and marketing.

We've ever foodie credentials everyday with over 7500 sales consultants and hundreds of culinary partners and product specialists across the globe.

I Dare say there are few if any that know more about food and food trends than our culinary teams.

Our sales associates have the highest customer satisfaction scores in the industry with MTS overall satisfaction rates, a full point higher than our competitors. Please see chart seven.

Our sales consultants are experts in everything from building menus with our customers identifying and introducing new food trends and importantly, partnering with our customers to help save them money.

From a product perspective, we have the broadest assortment of food in the industry and we have expanded that assortment strength with the recent acquisitions of Greco Paragon foods and the coastal companies.

Our product assortment is second to none and we offer fair inappropriate prices to our customers.

I'd like to summarize with our supply chain I would like to highlight some of the progress that we've made over the past year in regards to food sales and marketing we.

We implemented an intelligent data driven pricing system to improve our ability to beat what we call right on price at the customer item level.

We built and scaled a customer personalization engine, which provides our customers with unique offers that meet their specific needs.

We upgraded and improved our digital shopping platform, we improved search navigation, we made it even easier to reorder comment essentials, and we introduced product recommendation engines that increase customer basket size.

We improved we call team based selling better leveraging our sales teams across broad line and our collection of specialty businesses.

Lastly, we can measure success over the past year in several ways.

Now I'd like to firstly during the great resignation, our sales consultant retention in fiscal 2022 exceeded our historical average.

<unk> loved the new tools that we have built and they are deeply embraced our recipe for growth.

And secondly, we successfully grew more than one three times the industry in 2022.

This result exceeded our goal for the year in the second half of the year performance was even stronger than the first.

Our customers are rewarding us with more of their business because of the relationships. They have with our sales teams and because of the new tools and services that we have deployed and food sales and marketing.

Defining excellence in food sales in distribution that is Cisco.

We are confident that we have the size scale and expertise to be the leader in these two arenas, bringing innovation to our customers everyday.

Topic two for today I'd like to discuss the current economic climate and our view for the upcoming year.

We are closely monitoring macroeconomic pressures and data points related to food inflation gas prices and consumer confidence.

There is no doubt that end consumers have a lot on their minds. These days.

We think it's important to remember the resilience of our industry and how we have adapted over the past few years.

We submit respectfully that food away from home is proven to be resilient and quite frankly essentially.

Over the last two and a half years, our industry has dealt with challenge after challenge with three major waves of Covid double digit inflation.

And innovation in Ukraine impacting the food supply.

Despite these challenges we have delivered profitable growth.

We've learned to operate in an abnormal environment and we are prepared to navigate another dynamic year ahead.

While we anticipate that recent macroeconomic headwinds may create less robust industry wide growth rate in 'twenty three than we had originally planned we are prepared to generate sales growth of it.

Least 10% in 2023.

Karen will address guidance in more detail in a moment.

There are several reasons why we believe we will deliver on our financial targets.

First as the industry leader, we're fully diversified covering every corner of the food away from home market, we serve restaurants up and down the price point spectrum and across all restaurant types, we deliver food get health care and education facilities that are less prone to recession.

We delivered to travel and recreation facilities into many office buildings. These last two sectors continued to rebound and we will provide a source of growth in the coming year.

Additionally, we still have big opportunities to grow in the restaurant space, even if foot traffic is more muted than originally forecasted by technomic remember that we serve roughly 50% of the total restaurant door locations and we have roughly 30% share of wallet with existing customers.

<unk> can still grow our business, even if the market growth is less compelling.

And given the strict shutdowns internationally in 2022, we have strong growth potential year over year from our International Division.

Simply put we intend to win share profitably in fiscal 'twenty three.

Second regarding inflation, we continue to work with our customers to pass through the majority of product cost inflation.

Interestingly the relative price of eating out has been less impacted by inflation and the cost of food at the grocery store as seen on slides eight and nine.

When coupled with People's desire to eat out we believe that restaurants will once again prove resilient.

Third our investments include sales and marketing capabilities through our recipe for growth strategy will deliver increased value in the coming year.

The topics I highlighted on this call today, coupled with new programs like fiscal year wait and Cisco Perks will drive increased market share growth.

Once again, we plan to grow faster than the overall industry.

With a target in fiscal 'twenty three are growing 135 times the industry.

This trend will put us on the trajectory needed to deliver our end of fiscal year 'twenty four target of growing one five times the industry we.

We are increasingly confident in our longer term guidance provided in may of 2021 at our Investor day.

In addition to ensuring that we drive compelling market share growth Erin our entire leadership team and I will be focused on productivity improvement and structural cost out.

We are proud of the progress that we've made in reducing structural costs over the past year, and we will be relentlessly focused on improving operations efficiency in fiscal 'twenty three.

Lastly, we are excited to welcome Paulo apparel group as the newly appointed leader of our international operations.

Hello has an extensive track record of driving transformation and building high performing customer focused teams across multiple geographies. This includes over 30 years of experience across seven countries.

<unk> in the food business.

Our international team had a strong year of improvement in 'twenty, two and we are increasingly confident in our future Paulo will take the momentum we are building to the next level.

I would now like to turn it over to Aaron who will provide additional financial details Eric over to you. Thank you Kevin and good morning, the Cisco team delivered strong financial results for the fourth quarter and the full financial year, giving us many reasons to be upbeat about our business.

Let's talk about some of the highlights.

We achieved an all time record for quarterly and annual sales Francisco landing at $19 billion for the quarter and almost 69 billion for the year.

For the fourth quarter, our enterprise sales grew 17, 5% with U S foodservice growing at 16, 4% and international growing at 30%.

At the enterprise level adjusting out the extra week in Q4 of fiscal year 'twenty, one our sales growth was even higher at 26, 5%.

With respect to volume U S. Broadline volume increased five 4% on a 13 to 13 week comparison basis.

We paid $3 5 billion and adjusted gross profit for the quarter and $12 $4 billion for the year up almost 20% versus last year for the fourth quarter and up 32, 5% for the year.

Adjusted gross margin improved to 18, 4% for the fourth quarter with the rate rising from last quarter and up 33 basis points to Q4 fiscal 'twenty one.

Even with the impact of incremental inflation.

GP dollars per case grew in all four segments versus prior year, marking the fourth consecutive quarter of such growth.

We continue to pass along product inflation, which was around 15% in the U S. In the fourth quarter, while passing along part of our operating cost inflation.

Our snapback operating costs dropped to $29 million in Q4.

Productivity gaps however, we're a continuing factor as on the one hand, we returned to employment levels higher than fiscal 19, but on the other we invested to cover over time to address growing demand and lower productivity of the new staff.

We invested $67 million of operating expenses for the recipe for growth in the quarter with supply chain investments ramping up significantly.

Overall, adjusted operating expenses were $2 6 billion for the quarter or 13, 8% of our sales.

Operating leverage improved by 55 basis points for the quarter and 117 basis points for the year.

Adjusted operating income increased by 45% versus last year to $877 million in the quarter.

Also exceeding our pre Covid Q4 2019 results.

An excellent sign of progress.

Operating income for the year was $2 6 billion.

We are particularly pleased with the progress of our U S Foodservice segment.

Which delivered record operating income for the quarter and with the continued sequential progress of our international operations, which once again made progress in the direction of pre Covid profitability.

At the enterprise level, we continue to have the highest EBITDA margin in the industry adjusted.

Adjusted EBITDA surpassed $1 billion for the first time ever in a quarter at Cisco and we delivered $3 $3 billion of adjusted EBITDA for the year, notwithstanding Covid omicron inflation, the invasion of Ukraine and high fuel prices.

Adjusted earnings per share increased to $1 15.

Which is an all time high for the fourth quarter or any quarter for that matter at Cisco.

In regards to the balance sheet, we paid down $450 million of debt as it came due in Q4, we ended the year at two nine times net debt to adjusted EBITDA.

And during the fiscal year, we returned $1 5 billion to shareholders.

Through $500 million of share repurchase.

In the fourth quarter and $959 million of dividends.

Since year end, we have also repurchased additional shares more on that to come.

Cash flow from operations was $1 8 billion and free cash flow was $1 2 billion for the year.

With our focus on driving rising sales and profitability comes rising inventory at a higher balance healthy accounts receivable.

Both the use of cash for the year. Our team continues to manage our receivables balance as well and we also benefited from higher accounts payable we.

We ended the quarter was approximately $867 million in cash on hand.

So, let's turn to look forward in recent months and indeed at the start of my comments today.

<unk> that Kevin and I are upbeat about our business and that view carries through to future quarters for Cisco. The upbeat guidance. We are providing is reflective of our ongoing investments and our extensive efforts to reposition Cisco as a growth company.

As Kevin mentioned earlier, we are well positioned and prepared to operate through another dynamic year and are assessing whether and to what degree are recession will impact the economy and our business. It's worth repeating that we benefit from the scale at which we're operating our diversification as the industry leader across customer types product categories.

Geographies.

Discipline enabled by our pricing tool and our strong balance sheet.

And demonstrated focus on cost takeout we.

We have carefully examine cisco's results during the <unk> recession, and importantly, we benefit from the fact that our company has just operated through and learn from the business interruption of Covid here.

Here's the real punch line, we are better positioned today to address macro events than we have ever been before.

So with all of that said during fiscal 'twenty three from a growth algorithm perspective, we expect to grow at least 135 times the market.

Regardless of the economic environment.

While it is difficult to be precise in the current macro environment.

Our initial estimates of market growth and inflation, we expect top line growth of at least 10% over fiscal year, 2022, which will move Cisco above the $75 billion annual sales Mark for the first time.

Bolt on acquisitions will also contribute to our growth.

We are expecting mid single digit inflation for the full year on an enterprise basis across all categories moderating from high single digits in the first quarter on a year over year basis to low single digits in Q4.

We are not planning for a deflationary environment.

Some categories may be individually inflationary.

We do expect elevated operating expenses during the year as we continue to deal with the hiring environment that is still recovering associate tenure driven productivity issues that we expect to improve over the course of this year and continued planned investments for our transformation.

All is mitigated in part by cost out efforts.

Speaking of cost out we delivered significant cost out in fiscal 2022.

Helping offset incremental operating expenses this year.

We have now exceeded our cumulative cost out target of $750 million.

And we're going back for more.

The achievement of which is already included in our EPS growth expectations.

All in we are growing our adjusted EPS with both volume growth and profit improvements contributing to our substantial increases in earnings per share.

We are guiding adjusted EPS for fiscal year 'twenty three of $4 nine to $4 39.

The midpoint of this range equals a 30% increase in adjusted EPS over fiscal year 2022.

It also represents a 20% increase in our adjusted EPS from our previous high point.

2019.

Please take note of the fact that even the low end of our adjusted EPS range for fiscal year 'twenty three reflects the highest adjusted EPS achieved at Cisco ever in a year.

So I do not intend to debase the definition of our special with economists the low end of our range reflects a modest recession impacting our year in the mid point reflects the current operating environment and the top end reflects a strong economic recovery.

The macro environment, our productivity improvement efforts and the timing of our recipe for growth investments will impact the cadence of our earnings growth with stronger profit growth expected in the second half for.

For Q1, we expect adjusted EPS to be at or near our prior first quarter high point from back in 2020.

The stronger earnings growth in the second half reflects continued progress with our recipe for growth progress on productivity initiatives lapping last year's omicron related slowdown and the fact that Q4 is always our seasonal profit high points.

You may recall that in May 2021, we provided long term guidance for fiscal year 'twenty four to achieve adjusted EPS, 30% higher in fiscal 19.

The midpoint of our fiscal year, 'twenty three guidance, which.

Which is 20% above fiscal 19.

<unk> that we are well on our way to achieving our previous long term EPS guidance.

The midpoint of our guidance also translates to adjusted EBITDA of approximately $4 billion in the year.

We are forecasting continued strong cash generation and an increase from 2022 levels driven by profit increases offset by investments in working capital as our growth with our sales and we continue to support our strategy with tactical investments in inventory.

Our capital allocation strategy remains sustained going forward.

Invest in the business, including through M&A.

Maintain our strong investment grade rating.

And continue our return of capital to shareholders.

With EBITDA growing we expect to make further progress on our net debt to adjusted EBITDA leverage in service of our target of two five times to 275 times.

Also note that we are positioned well in the current rising interest rate environment.

It's approximately 95% of our debt is fixed.

Just last week Moody's reaffirmed this Cisco strong investment grade credit rating and stabilized our rating outlook.

We are committed to completing up to $500 million of share repurchases in fiscal 'twenty three.

And indeed have already completed $267 million of that repurchase commitment during Q1 of this year.

We will be assessing the operating environment and the cash needs of further M&A opportunities before committing to any incremental share repurchase activity beyond the $500 million during the year.

Our status as a dividend aristocrat is important to us and we already announced the effective <unk> annual dividend increase for our fiscal year 'twenty three.

In summary, we view fiscal 'twenty three as excellent build upon fiscal 'twenty two.

As we grow both the topline and the Bottomline.

While playing the long game and investing for the future at Cisco.

All of these efforts are consistent with fulfilling our long term guidance from Investor day.

Which includes exceeding one five times market share growth by the end of fiscal year 2024, and adjusted EPS growth of at least 30% over our record 2019 levels.

With that I will turn the call back over to Kevin for closing remarks.

Thank you Aaron as we conclude I would like to provide a brief summary on slide 25.

Cisco already is the industry leader from an EBITDA margin perspective, and as you heard from Marin we plan to build on that position of strength in fiscal 2023.

Our key takeaways from today's call reflect three points first we advanced the recipe for growth strategy and grew more than one three times the market for the year with the second half even stronger than the first.

Second we improved profitability with sequential progress in both gross profit and operating margin rates and third recognizing macroeconomic pressures as well as the resiliency of our industry. We are confident in our external guidance for fiscal year 2023.

This assumes at least 10% sales growth and 30% EPS growth at the midpoint as we continued to grow with new and existing customers. We will also remain disciplined in expense management with a strong plan to drive increased operating leverage.

Turning to the next slide we are generating substantial top line momentum and accelerating market share gains our recipe for growth transformation is winning in the marketplace and creating capabilities at Cisco that will help us profitably grow for the long term.

We are further building upon and enhancing our competitive scale advantages.

<unk> strength of income statement and balance sheet have enabled us to continue advancing our strategy during a difficult operating environment.

While also rewarding our long term shareholders with disciplined dividend growth and share repurchases.

Lastly, we are committed to our long term financial outlook, which includes significant sales and EPS growth and returning value to our shareholders along the way.

Third bright days ahead for Sysco and I'm, both excited and proud to be part of the journey. Operator, you can now open the line for questions.

Thank you Sir.

Ladies and gentlemen, we will now begin the question and answer session.

If you would like to ask a question. Please press star followed by the number one on your telephone keypad.

If you would like to withdraw your question. Please press star followed by the number Q.

Please standby one moment for your first question.

Your first question comes from Lauren Silberman of Credit Suisse. Please go ahead.

Thank you very much I wanted to ask first one on local case growth down seven eight for the quarter can you give us that number excluding the lapping over the 53rd week just so we understand the underlying trends and then on a three year basis versus 19. It looks like local case growth was down about one 5% pretty consistent I think each quarter throughout the year.

So any color you can provide on what you're seeing with that independent customer.

Hey, good morning, and thank you for the question. This is Kevin I'll just start with the math answer to your question and then I'll talk a little bit about what we're seeing from a volume perspective. So flattish is the answer from a Q4 same number of weeks year over year.

And just keep in mind.

You look at this past year.

When we were comping against a recovery, which Q4, we were comping against a pretty strong recovery in 'twenty. One so flattish volumes on 13 to 13 against prior year pretty strong recovery.

We are seeing right now from a volume perspective is and when you couple that with <unk>.

Inflation that was higher than what we had modeled and expected really strong sales results for the quarter and obviously that strong sales coupled with the flattish volume for local slowed due to a profit number that was robust for the quarter exceeded our guide as Aaron mentioned, our highest quarter ever for Cisco as we think about this coming.

Year I'd point, you to slide 10 that was in our prepared remarks.

Chart does include all business, it's not just local but it speaks for itself the performance of Cisco overtime that we're pulling away from the market and I stated on the call. This morning that we grew at one three times the industry for the year and I also was pretty clear that we grew in the second half even faster than the first so in the <unk>.

It shows that if you look at the lines and the separation that's occurring so we're building momentum that momentum to answer. Your question just on trends is carrying through at the national level and also at the local level, we're winning more new debt national business profit rates that meet or exceed our expectations and we're having a lot of success at the local level.

As well my comments in regards to macroeconomics do apply.

To all customer types, including the mom and pop local independent we view cost of fuel is one of the primary drivers of consumer sentiment and high cost of fuel that was impacting consumers began in Q4.

As included in the business trends that we're producing and it was thoughtful in the guidance that we provided today last but not least aaron's comments of at least 10% sales growth this year and 30% EPS growth and we're confident in our ability to deliver against those.

Mile markers.

Great. Thank you for that and if I could just ask a follow up on gross profit gross profit dollar growth for Keith grass and very strong feels like inflation, peaking whats your content on maintaining gross profit dollars are you seeing any signs of pushback from consumers on the inflation I know youre not expecting deflation in 'twenty three.

But should we see deflation and how do we think about that ability to maintain gross profit dollars. Thank you very much.

Thank you Laurie we're just really pleased with the work that we're doing within our merchant organization to drive to net lowest cost for Cisco through strategic sourcing Judy said, Sony and our merchant team is just doing excellent work to enable Cisco due to our size and scale to provide value to our customers one two.

Cisco brand improvement in the quarter because of the value that Sysco brand provides to our customers, we're helping to save them money at high quality rates and our sales force did a really good job in the most recent quarter of introducing sysco brand to our customers last point only three the intelligent data driven pricing system that we.

Leveraging is enabling us to be very sophisticated and thoughtful on how we are passing through that inflation. So we are confident that we can pass through inflation to our customers and as I mentioned in my prepared remarks, and our sales teams then work with those exact same customers to help them be successful think about portion size think about ingredients.

On the menu you think about the menu itself and how it can adjust modify change to help that and restaurant and be successful and for them to be profitable. During this period of high inflation. So we are confident in our ability to continue to pass through inflation and.

And we are confident in the guide that we provided today I'm going to toss to earn for the second half of your question here an overview.

Great. Good morning, just to observe that we are assuming and expecting moderating inflation levels over the course of the over the course of the year, we're not expecting a deflationary environment. Although some categories may be deflationary and we've built that into our own models from a mix perspective.

What I would observe as well that the inflation in our guidance is actually enterprise not just USPS, which we have typically disclosed in prior quarters, and perhaps reinforce Kevin's point I am quite pleased with both the opportunity we have to optimize our product.

Portfolio the cost structure as Kevin called out for us, but also to work with our customers utilizing sysco brand products to optimize for both of US. While also being pleased with our continued ability to pass through increased product inflation cost to our customers and them onto their own customers.

Thank you very much.

Thank you Laura.

Your next question comes from Ed Kelly of Wells Fargo. Please go ahead.

Yes, hi, good morning, guys. Thanks for the color.

I wanted to start with just the trend in underlying case.

Case growth in the U S could you maybe talk a little bit about the cadence of case growth versus 2019 as the quarter progressed and then.

What you are seeing in July and August are you above 2019.

At this point and then you mentioned consumer sort of changing.

Our seemingly I guess, maybe consumer risk, but are you actually seeing any impact yet.

Good morning, Ed I appreciate the question.

What we talked about on the prepared remarks is just and you. Obviously know this and know this well our diversification from high to low restaurants from the white tablecloth, although we're down to <unk>, we're fully diversified across that spectrum in the broad product range that we carry from good better and best pricing strategies, we cover the gamut from.

Our restaurant customer perspective.

There is no notable call out to report today on shift within restaurant sectors other than to say there are winners and losers in top performers in top companies and top brands are doing well and weaker companies are not doing as well relatively in Ed we're seeing that in each of the restaurant consumer sectors that.

Strong operators are performing well weaker operators are donating share to the strong performers, but theres not a meaningful trend or news for us to share or talk about.

<unk> provided color today relative to our overall performance versus the market accelerating and Whiting as it relates specifically to July August are our recommendation is to focus on the guide that we provided today, which is the 10% sales lift for the year Erinn just talks about the inflation that's inherent in that.

Sales guide and then the profit guide that we provided so no meaningful call out we're up upbeat and positive on the performance of the company and our business trends.

And we point you to the full year guide.

To talk about how we're currently performing.

Okay, Great and then just a quick follow up.

It's really around around SG&A, particularly around the U S business, you know you've made quite a bit of investment this.

This year, you can kind of see that right in your in your Opex dollars versus <unk> 19 or <unk>.

Opex per case for instance in up quite a bit.

How are you thinking about 2023 from sort of that Opex per case standpoint that that continue to grow and then it sounds like it dies.

And then at some point it seems like once this settle down.

There's real opportunity to capitalize on a lot of this investment so I'm kind of curious as to when do you think we see that period.

Yes. Thanks. This is Kevin I'm going to start just talking about overall supply chain productivity and then I'll toss to Aaron who can comment on overall expense leverage in.

You'd like to share in that regard, we haven't called out in our prepared remarks, where we're winning as a company. There are elements, where we're doing really well, we're winning from a topline perspective for gaining share both national and local are doing an excellent job at GP management, passing through inflation, using and strategic sourcing to purchase product at a competitive rate and having.

That impact positively our margin rates and we hit a disappointment from an expense perspective versus where we expect it to be I want to be clear on what the driver of that is.

In general our overall productivity within our supply chain being behind where we expected it to be and I want to unpack that a little bit make some comments about it and then toss to Aaron I wanted to be clear we are properly staffed within our supply chain at this point in time and that is a dramatic improvement year over year. This time last year with the recovery of the business was occur.

And the great resignation was happening now we were understaffed as well as the industry and it created a lot of pain within our supply chain. We are properly staffed at this time, our hiring this improved applicant flow has improved and the training that we're providing to our new associates has simply never been better Becker head into one of our sites.

And to this afternoon to go spend time with our training Academy and celebrate the success of that team is having in providing literally the industry's best training program to our associates to we are properly staffed we are investing in training at a level that we have not before we have a challenge Ed in the overall math, which is a simple following point.

Half of our supply chain associates have been with the company for under a year and it's that point that point alone that results in a productivity rate that is below therefore, our historical average is there a challenge in jobs. There are skilled labor positions and it takes time for someone to move up the productivity curve. The reason for my calling out that data point there.

Fully half of our associate to range up <unk> year is that is absolutely an addressable topic by Cisco's leadership myself, our team and the driver and select the academies that I referenced on today's call, we will improve associate retention and the process of improving that retention improving our training efforts, we will move people up the productivity.

Curve and in the process of moving up the productivity curve.

It will lower our logistics cost as a percent of sales and our logistics costs to serve its taking a little bit longer than we would have liked but we will improve retention, we will improve productivity and that has been included in the guidance that we provided today for fiscal 'twenty three fair enough cost to you for additional comments, great. Let me touch a couple of the elements.

<unk>.

As.

Apparent on the face of Kevins remarks, and we're going to increase volume over the course of fiscal 'twenty three and of course with increased on comes increased cost to service that we would all expect that.

During the quarter. We did also have to address increased cost with things like fuel recruiting et cetera.

The higher and those are moderating right and we have steps in place hedging or other programs to address those as well, but as we look forward. We expect those to improve in fiscal 'twenty three Kevin has already touched on the impact of productivity. We expect as we called out in our guidance, we expect that to improve over the course of the.

Here, our transformation expenses were higher in Q4, and indeed, we will continue to invest heavily in the year as we play the long game against our transformation expense, but those are costs that overtime will moderate and then snapback that came down in Q4, and we expect them to continue to come down.

Over the course of the year now the thing we haven't talked about so far yet as cost out right. We were pleased that we had surpassed our original cost out objective of $750 million during the year and as I said in my prepared remarks, we are going back for more and there is more opportunity one of the benefits of operating of a company of the size of <unk>.

<unk> is where we find a good idea and we deploy it we can recognize what works and that we can deploy to other parts of our enterprise and so we've actually recently revised our structure of cost leadership to go after more and are confident that we can continue to help to offset some of the cost elsewhere in the network at least through cost out.

Carryforward the benefits they are all baked into the guidance that we provided for fiscal year 'twenty three thank you.

Thanks, guys.

Thank you Ed.

Yes.

Your next question comes from Mark Carden of UBS. Please go ahead.

Good morning, Thanks, a lot for taking my questions. So you grew at one three times the market in fiscal 'twenty, two which topped your original expectations. There's obviously some macro challenges in place but is there any reason why you would expect your market share glide path to slow in fiscal 'twenty three before accelerating in 'twenty. Four is this just some conservatism.

Built in with the $1 35 are there specifics on that front that we should be a warehouse.

And Mark I. Appreciate the question. Thank you for asking the step up is just go back to our original guide from May of 'twenty, One our Investor day was to grow at one two in the year that just ended integrate one five in fiscal 2024, and essentially fiscal 'twenty three was going to be a midpoint between those two things as we ramped up our rest.

It would be for growth what happened in fiscal 'twenty two the year that just ended as we had two primary contributions to our success one was our recipe for growth, which I'm going to come back to in a second the second was our ability to ship on time and in full as I mentioned on today's call was greater than the industry at large and we had national customers.

And local customers coming to Cisco and essentially asking us to take on their business and we were able to take on that business at above historical profit rates because of the economic macro conditions as they were so that relative supply chain strength was a large contributor to our success and the recipe for growth was a large contributor to success.

And when we guided today is at 135 times market growth as Aaron said, regardless of how the market performs we're going to perform better than that market in total what will happen in 'twenty. Three is the relative supply chain strength contribution will be smaller because we expect for the overall marketplace.

To be more stable in this coming year and the relative impact of the recipe for growth will be greater in 2003, and the reason it steps up to one 5% in fiscal 'twenty for US again that recipe for growth contribution gets bigger and stronger each year why is that I'll just point to a couple of examples.

We're an agile development helps from a tech perspective, and we're rolling out new functionality to our website literally every two weeks and those contributions of increasing the efficiency of placing an order add value. The work, we're doing with data and analytics to provide suggested orders through our customers get smarter and better over time, which adds value.

I mentioned in my prepared remarks today two of our newer efforts, which is Cisco your way in fiscal <unk>, they're still in implementation mode. At the current time, here's the good news both programs are exceeding our internal expectations for the neighborhoods and customers that had been enrolled and we will roll those programs out nationwide or.

The coming quarters and years and so thats at relative contribution so well.

What we see is a sequential increase in the effective power and weight of those programs and it's why we reiterated today, our overall macro confidence and our ability to grow one five times in the market in fiscal 'twenty, four and we think given everything thats going on in the overall environment. The 135 times guide that we provided today.

As prudent Erinn I'll talk to you for additional comments.

Just one final thought which is to observe that for a company of our size to still have a 17% market share of <unk>, 30% penetration in 50, we serve about 50% of the independents that gives that just reinforces just how much opportunity. There is out there as we deploy the recipe for growth to drive, particularly.

With the benefit of our balance sheet.

Makes sense, thanks for the clarity there and so separately you noted that youre still able to pass through the majority of inflation, our competitors acting any life's rationally with respect to price. There's a temptation for smaller players grow to get more aggressive just to stay relevant and then how does your price until impact your conditioning in this environment.

So we're seeing a rational pricing environment I would say all distributors understand the cost increases to them and understand the impact to their P&L. If they don't pass through the inflation. So we're seeing a rational pricing market out there specific to our pricing tool and what enables one of.

The data feeds into our pricing tool is market price competitiveness and it's a new muscle that Cisco. So think about every region within which we operate we are intelligent about scraping the market to understand price whats happening in the marketplace. It's one of I emphasize that one of the data feeds we've got other data feeds like what's our pricing strategy for that category for.

That cuisine for that customer type and it's a algorithm that gets utilized therefore to provide a specific item customer specific price. So we are better equipped than ever before to understand what's happening in the local environment because pricing is local in this industry than we've ever been before.

Great. Thanks, so much and good luck.

Thank you Mark.

Your next question comes from John <unk> of Guggenheim Partners. Please go ahead.

So Kevin want to start with is at least 10% growth. So.

Grow 10%.

In a mild recession alright.

And I guess, possibly grow faster than that if the macro is better.

What would happen in a slower environment your share gains.

If you can comment that your share gains relative to the market would increase.

Beyond the 135, right and where would that come from primarily do you think thats wallet share that 30% goes up.

And what would be the one or two things that would be most.

Impactful in driving that wallet share this year the next 12 months.

Hey, Jon good questions. Thank you.

Yes mathematically implied in what you just said is if the overall market grows less than what we expected and we communicated today that we see our ability to deliver at least a 10% sales lift. We will then take more share and we will do so profitably I want to be Crystal clear I've said before many times I'll say again, we will not use price as a primary lever.

To try to win business, we think that's irrational and we want to win through our assortment our service our capabilities, our programs et cetera et cetera.

If you pick just one thing to focus on to improve profitability there will be increased penetration with existing customers. That's the direct answer to your question. If we can focus on one thing and one thing only it's increased penetration with existing customers. We are really pleased with what we're seeing John with Cisco year away in fiscal <unk>.

On penetration by providing customers in fiscal year away with late in the evening cutoff increase delivery frequency no order minimums in.

In a compelling service coverage model, meaning dedicated sales reps dedicated driver partner et cetera et cetera.

Board, we are experiencing in those neighborhoods as increased penetration with existing customers and Cisco purposes, and loyalty programs tied to our most important customers essentially to VIP club you get invited into the entire purpose of that club is to increase penetration increase share of wallet with existing customers. So we're bullish.

On those two strategic arrows in our quiver.

But we believe that we can win new business as well our sales reps are motivated financially to win new customers. We've got the largest and most qualified sales force in the industry and they're doing a very good job of new customer prospecting and we continued to win net new customers at accelerated rate. So it's actually the two together.

What's causing that separation on slide 10 of us versus the market, but if you could do one on one only it's increased penetration with existing customers.

And maybe as a follow up to that.

What's the biggest pushback you get right from any restaurant, where you have 30% on average right. So you have plenty that are under 30.

Is it just seems having fewer trucks in the back door everything on one truck.

The economic seems bright overwhelmingly positive.

The hurdle.

Historically right we've heard the hurdle on the protein side is just the perception of quality versus specialists.

That's not the case anymore or is that the biggest hurdle.

Yes, I would say that is not the biggest hurdle, especially when you think about our robust specialty platform, where we have the largest produce specialty business and with Buckhead and Newport, we have the largest specialty meat business as well so we call it team based selling and our ability to deliver that high end fine protein center of plate, along with broad line value.

Is second to none in the industry and we're doing an even better job than ever before and have been able to bring that specialty price point that specialty product along with.

50 pound bags of rice, and flower et cetera, et cetera that broad line is known for so we're doing that very well.

John I would say in the current economic environment and the reality of Covid. The biggest challenge the biggest barrier has been product availability believe it or not the ability to be in stock at all times with key volume items that our customers need and there have been challenges with long term outs on product that if you can't deliver guess what that customer is going to go.

Where else to get that product and then if they do go somewhere else do they get sticky with that source purchasing on that product and then you need to win it back over time. So that's not a problem that's unique to sysco.

Fill rates from suppliers inbound to distributors has been difficult over the last 18 months because of staffing issues and challenges in the supplier base and then that has shown up with our customer telling us hey, listen I need two or three distributors because if you can't fill my order I need to be able to have my menu in stock.

We're making meaningful progress on that topic at Cisco, we are leading the industry from an <unk> perspective, as I mentioned, so we don't view that as a point of weakness we view it as a point of strength, but I'm meaningfully answering your question that that has been for our industry. The biggest challenge product availability topic too which is the more historical answer to your question.

Is it price a competitor comes in on one item and undercut you on price, but that one item and then the customer says hey, wait a minute I can get this product, 10% cheaper somewhere else.

We don't price business.

Just one item, it's a book of business and so there is this that constant I call. It ankle biters competitor coming in trying to undercut you on price on a single item trying to get in the door and that's not a new topic.

People coming in and trying to undercut on a single item, but again, our pricing tool gives us the sophistication that we need to make sure that our sales reps are confident in the prices that they are representing in the marketplace are fair and appropriate and I think we're better equipped to be able to manage that in the future than ever before John back to you. If you have a follow up.

No that's great. Thank you.

Have a great day.

Your next question comes from John Glass of Morgan Stanley . Please go ahead.

Thanks. Good morning, everyone. My question is on <unk>.

International and <unk> International folds into your top line guidance for 'twenty three.

Grain, how where case volume and absolute versus 19 for example, I don't think Thats, a good sense of what inflation with the world inflation has been there.

Are there particular initiatives that you've rolled out in the U S that rollout maybe to those international markets that helped drive sales any color there.

Yes, John Thank you for the question we appreciate it.

We're bullish on our international business strong quarter for the quarter that disclosed wrapped up a strong year versus where we expected that business to be and we are building momentum. So as we think about this upcoming year omicron impacted the United States and we had some softening in the business in Q2, and Q3 will that softening was even greater.

Internationally Europe was in complete lockdown the country of France in particular like shut all restaurants down again during on the ground I mean, it's really different how Europe handled.

Covid and then Canada, while their lockdowns werent as robust as Europe , consumer psyche, and consumer risk tolerance was much lower than the U S and just overall food away from home volumes were down. So we're bullish about the year ahead Paulo, joining our company as I announced today on the call is going to be just a great addition to our.

Team and we have confidence that this coming year will be a sequential increase in both the topline and the Bottomline contribution from international specific to your question about initiatives I Love that question and it's exactly what we are doing we are taking the recipe for growth which is <unk>.

Meaningfully working in the U S and we are bringing the best practices from now this programs to our international domain, starting with Canada. So we're deploying a new modern web site. This year in Canada, we are deploying a new pricing tool in Canada. This year, and we will be bringing programs like Cisco your way in Cisco Perks to Canada.

As well the same goes to Ireland in GB and France.

Round out our larger international sectors, we are bringing to each of those countries. The main elements of our strength portfolio, including advancing Sysco brand is a represented product offering in each of those countries. So we're thoughtful about it we are pragmatic about it we can't do everything overnight, but we are.

Meaningfully rigorously prioritizing, which initiatives are taking two which country win and obviously that's been built into our guidance for this coming year Erinn I'll talk to you for any additional comments great.

Great. Thank you just a couple of observations we've been pleased with the contribution of international business to our fiscal 'twenty two delivery as Kevin called out and indeed, we have baked continued progress into the core or midpoint of our guidance for fiscal 'twenty three as well, we don't separately disclose the volume numbers for the international business, So I'm not prepared.

To do that today other than to observe that one of the nice things about the international business as they continue to make progress as our upbeat on the opportunity that that part of the business continues to present to us to improve as we carry forward and whether its leadership on cost out or driving maybe the recipe for growth initiatives.

Kevin called out we.

Have the opportunity to do more in that part of the business and with new leadership, we have.

We're upbeat there.

Just a quick follow up you talked about snapback in transformation cost persisting into 'twenty three and in fact, that's one of the maybe it's pressure in the first half can you give an order of magnitude or bigger or smaller or similar in 'twenty three than they were in 2002.

I am not going to comment directly on that other than to referring you back to my.

Prepared remarks and in particular the color we tried to give around the cadence of earnings given given where they were the practical reality is if you look at what we said with Q1 being at or near our high point previously and then you do the math from the from the absolute guide it's apparent that the profit increases are.

The year.

That's the best I can give you.

Thank you.

Your next question comes from Alex Slagle of Jefferies. Please go ahead.

Thank you good morning.

On the guidance and what's embedded there.

Kind of what your high level assumptions are around what kind of recovery, you're expecting some of that the categories that lagged here in the U S business and industry and business travel hospitality.

Thoughts there.

Sure. Let me offer a couple of thoughts first we as part of going through our planning cycle for fiscal 'twenty. Three we were quite detailed and looking at the what if scenarios around not just the enterprise as a whole, but the individual constituent pieces of our portfolio and while we don't disclose that as part of our guide you can have.

Some confidence the fact that we've looked at and what might be the same or different around the European business. The parts of the business in the U S. The Canadian business et cetera, both as it relates to the possibility of recession risk score impacts the consumer but also on very variable rates of inflation and how the how the pieces fit together and so what we.

Came out with from a guidance perspective, with our <unk> that range was a balanced view we believe.

If things continue as they are down the midpoint relative to our ability to deliver the profitability of course, if there is a modest impact from a recession perspective again looking at it across the portfolio as we do as we do the math.

The lower end of our guide and indeed, if that doesn't materialize. This summer, saying awards not going to comment on that.

Wanted to also reflect the fact that there is some further upside and the opportunity as well and so we believe our guidance is a balanced approach having done some detailed work on the individual constituent pieces of the portfolio.

This is Kevin I'm, just going to add one point or.

Our total business growth in health, we are seeing positive trends in travel hospitality and business and industry sectors that historically Cisco performed very well in we've also won market share in those sectors over the last two years and then therefore as those two sectors are on their natural recovery curve.

As a tailwind for Cisco because of the market share that we have won over the last two and a half years in those sectors and that education.

The health care sector. We've also won market share in those two sectors as well and those are two very recession proof sectors for Cisco. So we're pleased with our national sales team they've done an excellent job of winning new business over the last couple of years profitably and in several sectors you called out two of them Alex.

We see tailwind in this coming year and that was built into and factored into our guide today.

One final thought.

On this point, which is given the number of different opportunities we have across our diverse portfolio I just want to emphasize that the low end of our range is still the highest EPS at Cisco ever.

Appreciate that and then just on.

On Sigma and the opportunity to drive a recovery in the operating profit there.

It looks like you're looking for improvements in 2300 could you talk about the actions taken in and how much recovery you see coming in 'twenty three in New York.

Take a couple of years to get back to historical profitability levels.

So this is Kevin I'll start just kind of what's happening within the segment and then I'll toss to Aaron to answer your question about the numbers in whatever manner he would like.

So just a reminder for those that are new covering our company.

A little bit about our SYGMA business, it's very different it's very unique in relation to everything else, we do it as a cost per case.

Business on a multiyear contract basis so.

Let's just be honest and clear it was a very difficult year for Sigma as fuel costs rose significantly as labor costs because of retention challenges and productivity challenges tied to that rose significantly Sigma got pinched and pinched hard on rising expenses essentially the inability to pass through.

Rising costs because of the way that business is run on a fee per case basis challenging year last point is its a stretch mile's business, where the route distances are substantially longer than what I call. The pedal runs a broad line, where we started a DC to global power around and come back home Sigma is long distance driving.

And what we call a stretch miles so the rising cost of fuel was a real particular pain point, if I look at this upcoming year I'll just give color commentary on where we have confidence the improvement will come from and then I'll toss to earn the higher turnover and the negative impact of that higher turnover had on our productivity and overtime rates that we were <unk>.

<unk> because of the open jobs.

Was a major pain point and that is meaningfully addressable through the work that we're doing with hiring stability, which is meaningfully improving training effectiveness, which I've already spoken to on this call and our ability to reduce over time reduced the use of third party labor and just frankly run the model more efficiently. So we can get.

Back to more historical standards of cost to serve.

And improve the profitability of Sigma and that is our intention this year aeronaut toss to you for additional comments.

Two quick thoughts first is we are assuming continued progress on profitability for Sigma within our guidance. Although we don't separately guide by segment in that way and then just to repeat the observations made in previous quarters that our expense recovery or some of our expense recovery within the SYGMA segment segment actually trails, and so we'll have an expense of one quarter and we'll pick it up.

We will we'll cover the following quarter Thats part of whats going on.

Helpful. Thank you.

Thank you.

Your next question comes from Jeffrey Bernstein of Barclays. Please go ahead.

Great. Thank you very much two questions. The first one just a follow up Kevin I know the topic earlier was brought up about the broader restaurant industry.

Whether it be chains versus independents or <unk> versus casual dining.

What's your message to be.

So youre really not seeing a change in trend between the different segments. I know you service all restaurants is seemingly you'd be pretty well insulated. If there was trade up or more likely trade down, but just trying to understand what youre seeing across the restaurant industry over the past few months.

Or whether perhaps youre not seeing any change at all and then I had a follow up.

Yes, Jeffrey we prefer not to get into that near to detailed color on individual names of course thats not our place they report their own results.

What we are commenting is that within each of our sectors from white table call all the way down to <unk>, we see winners and losers within each of those sectors and I think youll see that in the coverage that you do across that sector. There are winners and there are losers within each segment, we are not seeing meaningful shifts from the top end.

Of the spectrum to <unk> or within the sectors. What we are seeing point number two for some additional color is that customers within each of the sectors wanting to partner with Cisco to provide value to their customers to help offset the cost of inflation. So examples of that would be sysco brand.

Penetration is increasing which is a good thing for us and we will be sticky on that I wanted to be clear about that when we make progress in sysco brand when customers give it a try and we do product quality cuttings. They loved the product quality. The obviously enjoys the savings from a cost perspective, and then we can be very sticky in that regard.

So that's a key point and then I think you've heard from some of the manufacturers.

Some some shifts from the beef category into poultry that was publicly communicated yesterday and I would say, yes beef has been highly inflationary. It was the most inflationary category over the last couple of years and customers of ours are looking at portion size, they're looking at alternative protein options and that's what our sales process.

Excuse me sales consultants do they help our customers with that the good news on the protein side specific to beef beef prices have normalized.

I know you are aware of that as well so the overall rate of inflation in beef has stabilized meaningfully and we do expect for inflation in aggregate to moderate this coming year as Aaron has called out in our guidance.

Okay.

Got it.

The follow up you mentioned the cost outs I know you're already above the $750 million target and you've gone from more are there big buckets of opportunity that maybe you haven't touched before or is it primarily areas you've already hit but theyre just as incremental opportunity. There just trying to figure out whether it's totally new channels that you're pursuing or just more of the existing.

I would say there is an opportunity everywhere we look.

Whether it's new opportunity or indeed scaling opportunities, we've already identified whether it's indirect purchase or.

Whether it's the structure, we deploy a resource, particularly in parts of the business.

And while it's not part of our cost out per say I want to emphasize the point that we have further opportunity to optimize our cost of goods serve as well as outside of the Blackhawk cost out going forward, but.

There is goodness in the portfolio that we're going to use to help offset.

Cost increases in the short term.

<unk> to our investments.

Now this is Kevin I'll just add one example, which is our Omnichannel project, which I talked about briefly on todays call I haven't really mentioned it too much in prior calls the technology for the distributed order management system goes live this quarter and what it will enable us to do is decoupled to front end sales from the back end operations.

And by doing that we can ensure that we decreased miles driven meaning served the customer from the closest possible warehouse it sounds basic and obvious but it is a meaningful unlock technologically but it also is going to help us with our strategic stocking of product what product is where think about slow moving skus and fewer warehouses that then get cross dock.

Through the last mile delivery location, and really being strategic and optimized of increasing the availability of our inventory, but actually doing it with overall over time less inventory less working capital. Those are examples of that project, which is multiyear and its build trading cost structure take out and.

Judy this future and again built into our guide for this coming year, but that project that project in particular is one that we're excited about.

Got it and just to clarify or I guess to level set for everyone on the call I think you mentioned I mean.

We understand the full year earnings guidance, but you said the fiscal first quarter earnings guidance would be at levels similar to the first quarter of fiscal 'twenty. So is that the 98 cents from getting that right. Then youre thinking the first quarter will be in that 98% range I said, we'd be at or near that 90 expense, yes, just given the.

Transformation investments and the productivity we're working through.

Understood. Thank you.

Thank you Jess.

Ladies and gentlemen, Unfortunately, we have run out of time today. So this is going to conclude your conference call.

We'd like to thank everybody for participating and ask that you. Please disconnect your lines.

[music].

Yes.

[music].