Q1 2023 Sysco Corp Earnings Call
Okay.
Welcome to Cisco's first quarter fiscal year 2023 conference call. As a reminder, today's call is being recorded we will begin with opening remarks and introductions I would like to turn the call over to Kevin Kim Vice President of Investor Relations.
Please go ahead.
Good morning, everyone and welcome to Cisco's first quarter fiscal year 2023 earnings call on today's call, we have Kevin Hurricane, our President and Chief Executive Officer, Eric <unk>, Our Chief Financial Officer, and Neil Russell, Our SVP of corporate Affairs, and Chief Communications Officer before.
Before we begin please note that statements made during 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.
Those in the forward looking statements is contained in the company's SEC filings. This includes but is not limited to risk factors contained in our annual report on Form 10-K for the year ended July 2022, subsequent SEC filings and in the news release issued earlier this morning.
A copy of these materials can be found in the investors section of our website at Cisco Dot com.
non-GAAP financial measures are included in our comments today and in our presentation slide the reconciliation of these non-GAAP measures to the corresponding GAAP measures is included at the end of the presentation slides and can be found in the 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 them.
Two one question today, if you have any follow up questions. We ask that you re enter into the queue. At this time, we'd like to turn the call over to Kevin Good morning, everyone and thank you for joining our call. Our Q1 results reflected continued positive momentum in our business to start the fiscal year.
Our share gains continued this quarter as we posted sales growth of more than one four times the industry.
We delivered double digit growth in the topline and bottom line of our business.
Beginning with the top line, we delivered sales growth of 16, 2% driven by a combination of effectively managing inflation and delivering case volume growth.
Our U S foodservice volumes and local case volumes continue to grow this quarter turning to the bottom line double digit growth across operating income and net income resulted in adjusted earnings per share of <unk> 97.
Which was in line with our expectations.
The strong start to the year gives us confidence in reaffirming our full year guidance I will highlight two topics during our call today.
First I'll put into context, the Cisco sales and volume growth for the quarter by highlighting some of the drivers of our strength second I will detail our progress within our supply chain and our efforts to improve service levels and operations cost efficiency.
So, let's get started with our unique position of strength in a growing industry displayed on slide seven beginning with the foodservice industry. The total addressable market is approximately $350 billion.
Cisco grew 17% and the rest of the market grew 12% in the quarter, a strong start that fiscal year <unk>.
Restaurants continued to be resilient and our travel hospitality, plus our business and industry segments of our business posted year on year improvements we.
We see continued strength coming with <unk> and the non commercial sector should continue.
We are closely monitoring macroeconomic conditions for signs of a business slowdown.
At this time, we are not seeing recession concerns negatively impacting our business outcomes.
With that said we are prepared to take additional cost reduction actions, if or when a recession does begin to impact our P&L.
And the backdrop of what has been a strengthening overall market Cisco continues to outperform.
Our sales teams continue to win market share with Q1 being one of our strongest quarters of net new customer wins.
Our national sales team posted an outstanding quarter, winning substantial new business and the education health care and restaurant sectors. These.
These wins are on top of the more than $2 billion of net new national sales wins delivered over the past two years.
It is important to note that we are winning this business at strong profit profiles versus historical averages and these are multiyear contracts.
In addition to our success with National sales our recipe for growth is delivering results for Cisco at the local level.
Local case volume for the quarter grew five 4% versus Q1 of 2022 successfully lapping a 26, 7% increase from the prior year.
Our strong start to the year and national and local sales has us gaining market share overall as we grew more than one four times the market for the period.
As a result, we are on track to deliver our stated growth objectives for the year as seen on slide eight our recipe for growth includes five pillars focused on building new capabilities that will further enable our leadership position in supply chain and food sales and marketing.
As is customary for our quarterly updates I would like to highlight a couple of our growth drivers today I will highlight progress that we're making in the products and solutions pillar with our Cisco year way program and I will also provide an update on selected future horizons work.
Within our products and solutions growth pillar, we meaningfully advanced our Cisco Youre away program over the past quarter.
As a reminder, Cisco you're waived as our service and delivery model for what we call restaurants dense neighborhoods.
A large number of restaurants in a few block radius.
We provide these neighborhoods with a next level of service from Cisco.
Examples of that service include a late in the evening order cutoff daily delivery service dedicated sales and delivery partner representation and additional white glove culinary and marketing services.
The constructs of the Cisco year way program were developed in partnership with our customers and as a result customers are responding favorably.
The top and bottom line results from the program are exceeding our expectations.
We are winning substantial new customers within these neighborhoods and existing customers are buying more product on a weekly basis.
Over the past quarter, we ramped up our implementation efforts and we will continue to rollout the program to applicable neighborhoods in the coming quarters.
We are also bringing the program to international cities with recent implementations in Toronto and Dublin.
The scale of Cisco year ways impact on our overall results will grow each quarter as we add net new neighborhoods.
From a future horizons growth pillar, we are pleased to announce that we have closed on two independent Italian distributor acquisitions over the past quarter.
These acquisitions will give us access to premium Italian products in areas that were previously geographic white spaces for Cisco.
We have plans to meaningfully scale these businesses by bringing the Greco go to market Italian selling strategy to these geographies.
We are very pleased with the status of our work to expand Cisco's Italian specialty platform nationally.
In addition to these two examples highlighted today, we are advancing our recipe for growth within our international segment as well.
Canada, our largest international business is also making good progress with these initiatives. This.
This year in Canada, we will be upgrading our digital platforms implementing a modern pricing tool enhancing our team based selling capabilities and launching Cisco year away.
Canada is already a large and profitable market for Cisco that generated over $5 billion of sales last year, while posting number one market share at 17%.
The recipe for growth strategy will enable our Canadian business to further enhance our competitive advantages and better serve our customers.
I am very excited for the progress that we will be making in Canada to deliver profitable sales growth.
These are just a few examples of the good work that is happening and I look forward to keeping you posted on our domestic and international progress across the five pillars and future quarterly calls.
Topic two for today I'd like to discuss the state of our supply chain improvements and highlight the status of some important work.
Our global supply chain work continues to progress we are simultaneously building on our long term strategic initiatives like omnichannel, while improving productivity levels and cost performance within our supply chain.
Our strategic initiatives continue to move forward with six to eight deliveries improving the driver experience implementing best in class associated training and Omnichannel fulfillment all advancing forward in the quarter and we can see the early signs of progress that these initiatives are delivering.
As they progress they will enable profitable sales growth and improve our supply chain cost efficiency.
Our supply chain as a strategic differentiator and the strategic work, we are doing will widen that competitive moat in the coming quarters and years.
Simply put no one is doing more than Cisco to improve service levels to customers and to improve cost efficiencies within the foodservice supply chain.
In addition to advancing our strategic initiatives. Our teams have remained relentlessly focused on improving productivity in the near term.
We made progress over the past quarter and improving associate retention for.
Tension improvement will enable us to improve associate productivity, and therefore, lower our operating costs in future quarters. It.
It is important to understand that Cisco is staffing levels remained healthy across our sites.
We are staffed properly to support our current business and also to enable future profitable growth.
Given our overall staffing health, we are meaningfully focused on associate retention and best in class training of our newer associates to improve productivity levels. We.
We are also teaching our supervisors how to leverage our engineered labor standards to deliver performance based coaching as.
As our staffing levels have improved in recent quarters, we have been able to spend more of our leadership time and communication muscle and training to our work methods and standards.
And this is where the intersection between our future strategy and our current improvement efforts intersect.
Our driver Academy is graduating cohorts of trainees that are now hitting the streets. These.
These drivers are already showing strong service safety and productivity standards as.
As importantly, we are tracking retention by training class and we can see meaningfully higher retention rates of associates trained by Cisco versus hired from the external market.
Over time, the percentage of associates trained from within Cisco will grow in this ratio growth will improve retention and productivity.
Cost of turnover is high in this industry and improving associate retention is imperative.
I am confident that our training academies will give cisco a meaningful advantage in the industry.
We believe the advancements we are making in our physical capabilities and the investments we are making in improved training will provide improved service levels to our customers and strengthen cisco's ability to profitably win market share in the coming quarters and years.
I'll now turn it over to Neil who will provide an update on our sustainability efforts bill over to you.
Thanks, Kevin and Hello, everyone today, I would like to provide a brief update on the status of our sustainability work at Cisco as.
As we have mentioned our efforts are anchored around three pillars people products and planet.
We are proud that Cisco was our partner organization at the recent White House conference on hunger nutrition and health <unk>.
At the conference Cisco sustainability efforts were recognized for our previously communicated $500 million commitment to global good in our communities by 2025.
This includes a donation of 200 million meals to fight hunger cash donations to food banks and volunteer hours associated with our colleagues actively participating in the communities we serve.
Earlier this year. Our board also approved plans to include ESG and dei metrics and our annual incentive plan an important best practice.
Every leader at Sysco is now held accountable to making tangible progress on both the EI and climate change efforts for the company directly impacting our own compensation.
These efforts are consistent with our purpose of connecting the world to share food and care for one another.
This focus is not only the right thing to do it will be good for business in the long term.
As I've explained recently to investors the majority as Cisco's greenhouse gas emissions are the scope three emissions of our customers.
Many of our largest customers have set forth their own climate commitments and Cisco's improvement will help enable those partners to achieve their goals I will now turn it over to Aaron who will provide additional financial details. Thank you, Kevin and Neal and good morning, the Cisco team delivered another quarter of progress with our recipe for growth.
Resulting in growth across volume sales and profit, giving us many reasons to be upbeat about our business, while being appropriately cautious given the complex operating environment.
Turning to a summary of our Q1 reported results Q1 was the highest sales quarter in Cisco ever we achieved 16, 2% sales growth at Cisco for the quarter with U S. Foodservice growing at 17, 2% and international growing at 13, 4%, reflecting our.
Our focus on serving our local and independent customers for both our broadline and specialty businesses.
We are expanding our disclosure of total and local case volumes to an aggregate include our fresh point U S produce U S Italian and other specialty businesses and the metrics for clarity our specialty meats business is not yet in this metric as it measures volume in pounds.
With respect to volume total U S. Foodservice volume increased seven 3% compared to last year. All in are inclusive local case volume as grew by five 4% in Q1 2023 over the prior year's comparable period in the U S.
You can see the history of this metric on slide 18 compared to the prior year and the 2019 levels.
We bank $3 5 billion in adjusted gross profit for the quarter up 17, 3% versus last year adjusted.
Adjusted gross margin improved 17 basis points to 18, 2% for the first quarter <unk>.
<unk> per case grew in all four segments versus prior year, marking the fifth consecutive quarter of such growth our gross profit and margin improvement reflected our ability to continue to manage product inflation, which was at nine 7% at the total enterprise level consistent with our guidance as well as incremental progress from our strategic.
Sourcing efforts.
As we continue to partner with our suppliers.
U S broadline inflation was 12% in the quarter.
Our inflation metric is in dollars. So the enterprise metric was reduced by the local currency declines against the dollar.
Overall, adjusted operating expenses were $2 7 billion for the quarter or 14, 2% of our sales.
30 basis points increase as a percentage of sales over the same quarter in the prior year.
Cost this quarter increased in workers compensation pension expense healthcare and some operational elements like shrink.
All of which are being addressed.
We have more to do in this area, but believe that our supply chain and North American teams have Cisco on the path to improving our operating expense profile.
This quarter included progress against capturing cost out which represents incremental efforts on top of the more than $750 million of cumulative cost outs recall that last quarter, we outlined expectations for operating cost to be more heavily weighted in the first half based on the need to work through operating cost inflation operating productivity challenges.
And our planned investments in the business.
Consistent with that this quarter included transformation investments of $63 million and new associate related productivity costs of $41 million.
And an improvement in snapback costs, which are becoming immaterial.
All four segments showed increases in profitability year over year with Sigma returning to profitability from the prior year's modest loss in Q1. Additionally, adjusted operating income in our international segment grew over the prior year also exceeding pre COVID-19 2019 levels.
Adjusted operating income for the enterprise increased by 12, 4% versus last year to $770 million. We grew adjusted EBITDA by seven 5% to $917 million, we often refer to exceeding fiscal 19, adjusted EPS levels as part of our long term guidance.
It is worth noting that in the first quarter adjusted earnings per share increased by 16, 9% over prior year and for the first time since the onset of Covid exceeded adjusted EPS from the same quarter in fiscal 19 by <unk>.
Applying a macro financial lens I will point out to financial factors that had an impact on profitability in this quarter different from recent years first the weakening of local currencies against the U S. Dollar in our international operations second an increase in pension expense tied to the rapid rise in interest rates.
In total those two externalities had a <unk> <unk> negative impact on GAAP and adjusted EPS.
On the pension point to be clear are largely frozen pension plan remains fully funded.
And the above reflects the non cash impact of pension accounting that as a result of extreme movements in the global capital markets. You may have noticed an 8-K about a pension liability transfer exercises in October subsequent to the end of our first quarter.
That transaction decreases cisco's planned size risk and overall administrative costs, while protecting retirees as they will be in the hands of an a rated insurance company. This transaction will result in a noncash charge in Q2 of $250 million to $300 million.
Which we expect to be a certain item.
Other than the certain item, we expect the income statement impact of the transaction to be largely immaterial to our year in regards to the balance sheet. Our strong investment grade rated balance sheet remains a competitive advantage for us and we ended the quarter at three one times net debt to adjusted EBITDA.
We returned $268 million to shareholders in the form of share repurchase and paid our increased quarterly dividend returning $517 million in total to shareholders. This past quarter.
Had we not executed the early share repurchase our leverage ratio would have been three times.
Given the focus on interest rates lately I want to remind listeners that approximately 95% of cisco's debt is fixed rate.
Let's turn to cash and recall that the first quarter is typically the quarter in which we have the lowest end of quarter cash flow generation. This year for the first quarter cash flow from operations for the quarter was $158 6 million a $48 million improvement over the prior year.
However, net capex almost doubled in Q1 of fiscal 'twenty $3 million to $145 million as we continued to invest in our recipe for growth, particularly with respect to our planned investments in fleet and distribution notes.
As a result free cash flow was $14 million for the quarter.
Working capital was a use of cash so we are watching our inventory balances closely as part of our supply chain transformation and are monitoring our accounts receivable closely given the economic environment.
We ended the quarter with approximately $438 million in cash on hand.
Let's return and look forward as I said at the start of my remarks, we are upbeat about our business, while remaining appropriately cautious given the operating environment.
While we have work to do on our expense structure as Kevin called out Cisco has not yet seen any broad impact on our business from concerns around the risk of recession impacting consumer behavior.
As a result, we are sticking with our full year guidance for fiscal year 2023 for adjusted EPS of $4 nine to $4 39.
As Kevin mentioned earlier, we are well positioned and prepared to operate through another dynamic here, we have a plan and our team is executing against it with the benefit of all of the learnings that our company and our industry have worked through in the last couple of years.
Lastly, I hope you noticed that we are reporting Q1, a week early as part of our transformation efforts. So we have worked to accelerate our financial close process, increasing the speed of time data faster decisions and looking forward not back we plan to report earnings faster than our historical cadence for the remainder of the fiscal year.
With that I will turn the call back over to Kevin for closing remarks. Thank.
Thank you Erinn as we conclude I would like to provide everyone with a brief summary on slide 20.
We plan to build on our position of strength in fiscal year 2023 and beyond.
Our key takeaways from today reflect three points.
We advanced our recipe for growth strategy, and we are on target to grow more than 135 times, the market and a growing U S market.
Our financial results this quarter reflected double digit top and bottom line growth in the backdrop of a large industry that has proven resilient during very challenging macro conditions, Cisco is taking share profitably in a growing industry.
Lastly, sysco remains deeply committed to our strong investment grade credit ratings are strong and stable balance sheet and disciplined capital allocation.
We are committed to our long term financial outlook and we have reiterated today, our full year guidance for fiscal year 'twenty three.
Just as we have done with Covid and the related disruptions over the past few years, we are prepared to navigate the potentially choppy macroeconomic waters in coming quarters.
Our strong financial Foundation gives Cisco the opportunity to continue to advance our strategy during potentially challenging environments. This reality will enable cisco to win for the longer term as our capabilities improve and our initiatives progressed.
As always I'd like to thank our 71000 associates for their commitment to our purpose and for their dedication in serving our customers. Operator, you can now open the line for questions.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session.
Do you have a question. Please press star followed by one on your Touchtone phone you will hear I think Tom prompt acknowledging your request.
Speaker phone please Mr Hanson.
Thank you.
First question comes from Alex Slagle with Jefferies. Please go ahead.
Hi, Thanks, good morning.
Notable your international business.
<unk> seen such strong momentum in and now driving the operating profit above 19 levels.
I realised Canada is a meaningful piece of that and it's been bouncing back and effective initiatives on the way, but clearly exposure to some more difficult regions as well so I'd love to hear more about what's driving this relative performance and your confidence that can continue to deliver this kind of strength in quarters.
Ed.
Hey, good morning, Alex Thanks for the question. This is Kevin we're really pleased with our progress and performance in international six consecutive quarters of strong profit improvement.
The business is on track year to date.
<unk>.
Making progress on the recipe for growth up in Canada, as I mentioned, but it's bigger than Canada, we just called out Canada candidate today with some specific proof points to shine a light on the work that's being done but across the pond in Europe .
<unk> advancing forward core sysco capabilities Sysco brand penetration improvement this year, we're filling in assortment gaps that we have in select countries for bringing our team based selling model that we have optimized in the United States and as I mentioned programs like Cisco year away. We went live in Dublin at the end of <unk>.
One and that program is off to just an absolutely great start in Dublin, and we will be expanding it. So we're really pleased with our leadership team strong capable talented team led by Paul <unk>, who joined our company back in August .
And upward progress in the forward facing quarters and years things like Latin American growth, we have an export business called <unk>, which is doing well and we're really optimistic about our future with international as you mentioned there are select countries that we're watching extremely closely great Britain being the country biggest concern from a macroeconomic.
<unk> perspective for now our business is strong in GB and if that were to change as I said in my prepared remarks, we are prepared to take action from an expense control perspective, but we're really pleased with how we're performing internationally, including GB at this time.
Great. Thank you.
Thank you Alex.
Next question comes from Edward Kelly with Wells Fargo. Please go ahead.
Your line is open.
Joanna let's go to the next.
<unk> can come back in.
Thank you next question is from Jake Bartlett with Securities. Please go ahead.
Great. Thanks for taking the question Mike.
Mine is on the top line growth when you reiterated the target of 1.35 times the market I'm wondering whether that's still translates into at least 10% of revenue growth and 23, given what you know about the macro environment now and also within that 10 percentage of what you expect.
<unk> inflation to be thank you.
Yes, Jay Thanks for the question, it's Kevin I'll start just making some macro comments on topline growth and then I'll toss bearing for the inflation and sales parts of your question. Yes, We're really pleased with the start to the year. We stated on our call today, we grew more than one four times the industry, which is a great start to a year with a stated goal of 135, what I hear.
I did in my prepared remarks is that the strength is coming from both national and local business on the national side. Our sales teams are just doing a remarkably good job in the healthcare space in the education space large national restaurant space on working with our customers and customer prospects on kind of selling the values and.
<unk> Cisco the strength of our supply chain, our nationwide capability within the U S to support those national customer partners and as I mentioned net profit profiles for those contracts that are above historical standards and these are multi year contracts on the local side. The combination of our specialty businesses that Erin highlighted that are doing extremely.
Well team based selling which is leveraging those capabilities within our broadline segment and the recipe for growth beginning to take no noticeable traction. So that is why we reiterated our guide for the full year in total and I'll toss to Erin for comments on the inflation and sales parts of your question.
Great. Thanks, Kevin Good morning.
And we are really pleased with both the market share gains in the sales increases over the course of the quarter. As you can imagine that of course is coming at us as a result of the combination between the volume growth and the impact of inflation on the portfolio. If you think back to the guidance that we provided in Q4.
The sales I'll reference we had was that we would grow at least 10% that I believe at the time I commented that at 10% without knowing what was coming from a macroeconomic perspective was tied to the lower end of our range and so indirectly yes in answer to your question. We do expect that the 10% is achievable and that's at the lower end of our range.
I would observe that inflation, we guided in Q4 high single digits in Q1, working its way down to low single digits in Q4, certainly as we sit here today. The enterprise number in dollars was high single digits, just under 10% and so things are playing out in that respect as we had expected.
Thank you.
Thank you next question comes from Edward Kelly with Wells Fargo. Please go ahead.
Hi, guys, sorry about that I'm, not really sure what happened.
I have a clarification.
Question. The clarification is just on the case volume growth that you're reporting I think is now.
Leading M&A. So I was just curious I think thats right and I don't know if you could give us some comparability versus the numbers that you've been providing so we just know whats going on here underneath of M&A.
And then the question I have is really around gross profit per case and.
The U S Broadline business I mean performance has been obviously very robust.
Inflation's beginning.
Beginning to decelerate as you sort of talked about.
I think there has been a benefit fuel surcharge and here Im just kind of curious as to how sustainable you see the current level of gross profit per case in that business.
Would you expect it to decelerate in EBITDA is.
Fill the void on that thank you.
So haven't really come back and summarize I think you'd like us to comment on the volume metrics and then comment on the I'll look forward relative to GP dollars per case.
Our question really let me start with the first part of your question on the volume which is.
To touch on our disclosure today of the fact that our U S. Foodservice segment, which is the combination as it has been of our broad line and specialty businesses had total case growth of seven 3% in local case growth of five 4%.
From the outside you might say well are you lumping. The recent acquisitions and then that's a small part of what's been the case volume disclosures, but keep in mind that we have had a multibillion dollar business, what we call specialty which is part of U S. Foodservice segment, we do most of our disclosures against that is not part of the U S. Broadline.
And so I want to take you back to the why and were now disclosing a total U S. Foodservice number it's simply this the recipe for growth is designed to bring all of our assets to bear and supportive specific customers.
And we have customers that are serviced by broad line service by specialty Kevin will probably comment on that on that more as we carry forward. While we're trying to give you the true view of what's going on with our total case growth in our local customer growth as we push ahead.
And recognizing that this is different we did provide many quarters of historical look on page 18 of our earnings presentation to give you that perspective, maybe before jumping into the second part of your question. Kevin anything you want to add we're going for good psychotic. Its now let's talk about the gross profit per case point that you raised.
We have been pleased over the last several quarters with the fact that our mall our environment is interesting right and indeed, we are opex costs have been increasing our gross profit dollars per case has also been increasing and that is a result of really two initiatives. The first is our.
Our ability to work with our customers to pass through our product cost inflation when our costs go up we pass through the cost to our to our customers as well and we've been pleased with our ability to do that and it also goes to what we've been talking about for a couple of quarters.
Work, we're doing to buy at scale and the work of our merchants and our commercial services organization to better negotiate what we're buying with our vendors as we carry forward now.
Actually that inflation will pass indeed, our own guidance has inflation coming down still growing but coming down to low single digits.
It will not pass is the capabilities that Kevin and Judy and others have built within merchandising and sourcing and indeed, our pricing systems that allow us to be right on price as we carry forward.
And one of the factors of that is both market play what's going in the marketplace and what's going on with inflation. So we feel good that the team has built the capability to address whatever comes Kevin anything you want to add to that.
I think you've covered it.
What are the offsets was the very last part of your question, Ed and Opex cost reductions would be.
One of the Prime focuses of our company and the going forward period.
The recession.
The impact on the business on GP is.
Something that impacts flow through to the bottom line, our operating expenses should be and will be improving at that same time horizon.
That's something we're actively working on im happy to discuss in more detail.
Thank you.
Thank you Ed.
Thank you. Your next question comes from Lauren Silberman Credit Suisse. Please go ahead.
Thank you very much I wanted to follow up on <unk>.
<unk> are you willing to provide any color on cadence throughout the quarter and into October . My actual question is about opex on a little bit of a follow up have you started with prior question can you help us understand how to think about opex growth from here I think productivity costs are consistent with the fourth quarter.
Is that consistent with your expectations and then just going forward the opportunity for cost reductions and then Margaret recessionary environment any color on what this could mean in terms of just <unk> and <unk>.
Thank you very much.
Yes, we are upbeat about the business and we're not going to make any comment specific to October we provided guidance for the year by reiterating our full year guide and we provided color in regards to the success, we're having at both the national and local level from a volume perspective, and I think that's about all we're going to say in that regard as it relates to the <unk>.
Operating expense parts of your question completely understand the question our operating costs are elevated versus our historical standards and we are meaningfully focused on it I want to highlight a couple of key components. Here. One is that we are properly staffed across our network and by being properly staffed that allows us to support growth reduce overtime.
Improved safety and those are actions that will lead to lowering our future costs, we've been able to because we're properly staffed pivot to focusing on associated retention associate training and associate engagement and.
And we see progress within our internal dashboards on those three very critical components and these are leading indicators of what will become outcomes metrics of things like cost per piece shift and our transportation efficiency metrics. So as I. Just said, we can see the leading indicators of success.
Focusing on associate retention, which is improving associate training, which has meaningfully increased versus prior periods and associate engagement, which retains that individual for longer periods of time, we're confident that we will make progress in our operations outcomes metrics and as Aaron and I have both stated that improvement will be mostly in the second.
Half and we have the line of sight towards the improvement that we will make.
As I said in my prepared remarks, we're not just focusing on that component, which is to improve the day to day operations within our buildings. We are also transforming the supply chain for long term success 60 deliveries the launching of our driver Academy the deployment of a distributed order management system, which fuels omnichannel fulfillment.
And improving our overall driving experience we are simultaneously moving both of these efforts forward at the same time helped.
Helping drive efficiency in the day to day and also transforming for the long term because we're playing the long game at Cisco and we know that the capabilities that we're building are going to enable us to take profitable share for the long term and is there anything you want to add.
Just to emphasize that.
The opportunity for us and consistent with the guidance for <unk> is Kevin called out we had said each one would be heavier for a variety of reasons as we worked through productivity as we worked through the environment as we work through the transformation of investments do you think about the size and the scale of which we're operating given that we are staffed the way we are.
We have incredible opportunity to drive <unk>.
Profitable growth at Cisco and we are executing against our plan. Thank you.
Thank you.
Thank you next question comes from John <unk> at Guggenheim Partners. Please go ahead.
So Kevin two related questions.
Do you look at in the business and sort of a lead indicator of consumer demand weakening right. There are certain metrics, particularly since youre not from the industry.
The things Youre looking at as a lead indicator of the Canary in the coal mine right. If you will and then secondly, right maybe talk about the balance right.
Making adjustments to opex, but by the same token right. The real opportunity is long term share gains. So you don't want to do anything right.
Compromise that so when you think about taking cost out.
Whereas how do you balance that where are the opportunities to do that.
Without without hurting your long term.
Positioning.
Yes, John .
Thank you for the question on the first part leading indicators. Obviously, there is external data that we mined and capture with traffic to restaurants, but remind everyone that we are much bigger than just restaurants, we serve.
Large sectors outside of the restaurant chain business, our restaurant business in general travel hospitality business and industry education, just to name a few and we have data coming from each of those sectors and from our major customer partners in those sectors on what they see in the forward facing trends for their business and we combine all of that.
Erin <unk> manages all of that to come up with a overarching forecast view of where we're headed and that was obviously factored into what we have guided today on the second part of your question. It's a good one which is what would you do in a recession and what are the types of things that your action upon and what types of things would you not action upon.
What we're prepared to do if a recession begins to impact our business, which we said on today's call has not begun but if in fact, we do begin to see an impact there are discretionary expenses that we can tighten there are let's call. It strategic initiatives that from a timing perspective on how fast they deploy and how fast they move that can be worked through.
And it's just belt tightening think travel things of that nature, Here's what we want to do and it's the spirit of your point John on the ability to profitably take share during a disruption we're not going to reduce staffing in our supply chain. We are not going to reduce drivers as an example, it was proven through COVID-19 debt.
Spence reduction efforts at the beginning of Covid because of how extreme it was resulted in an under staffing scenario for the industry that was extremely difficult to dig out of and were still digging out of it vis vis the number of new employees, we have at our company so our supply chain.
Is something that we will invest in if volumes were to decrease because we believe that that will put us in a position of strength, which will enable us to win business during that type of disruption in that business that we win within the retainer bowls, and therefore very accretive to our longer term macro algo.
So and then I know you understand that that is something that we are meaningfully focused on.
To ensure we stay properly staffed and we're playing the long game as I mentioned.
Thank you.
Thank you John .
Thank you next question comes from Jeffrey Bernstein Barclays. Please go ahead.
Great. Thank you very much.
First just clarifying on the guidance for this year, specifically the first quarter versus a year I'm just wondering how is the.
The reported EBITDA relative to your internal expectations for the first quarter I know it seemed like it was a large shortfall versus the street, but I'm just trying to gauge what you were thinking because I think you mentioned you're still comfortable with.
The midpoint of the fiscal 'twenty three range, if we're not seeing a soft recession.
And then my question was really just on labor inflation, you have talked about it a bit just wondering if you can share.
Whether you look at it as a basket kind of what level, we're seeing in the first quarter.
I know you mentioned retention improvements staffing and turnover improving I'm just wondering if there's any metrics you can share too to validate those.
So it was.
SaaS. Thank you.
Sure. Thanks for the question, we don't provide specific labor metrics as part of our disclosures, but I will observe that the market is generally playing out as we anticipated it would and coming into.
The year and given the environment that we've been that we are in.
Your question around EBITDA.
We didn't provide EBITDA on a quarterly basis, and so what I'm going to observe is that we are.
Effectively reaffirming the guidance we gave for Q4 overall without giving you a breakdown on a quarterly basis for EBITDA keep in mind from a seasonal perspective from a profitability perspective, Q4 is always the highest quarter profitability for Cisco pre COVID-19.
And certainly in recent years as well followed by Q1 and Q2 and Q3 are a little bit lower just given the seasonality of our business. The EBITDA disclosures relatively new we've been providing and I believe in the last year or so.
And if I were you I would look carefully at the definition of <unk>.
How we how the NR.
In our competitive set define the calculation of EBITDA is a non-GAAP measure to walk through the mechanics there.
<unk>.
Okay.
Thank you. Your next question comes from John <unk> at Jpmorgan. Please go ahead.
Hi, Thank you I was hoping to get some color in terms of market share per account I mean, obviously theres been a lot of conversation about new account growth, but just wanted to see.
Some market share per account, especially as a number of the different things that <unk> been doing around team based selling around some of the pricing tools and changing delivery window availability, even product assortment I mean, a lot of those at least from the outside would seem that they would in fact be quite successful in driving market share per account. So wanted to see I guess, where we were.
On that timeline in terms of.
Whats currently being realized versus what might be in the future or maybe even talking about the success in certain markets that have piloted some of these initiatives versus others that have not thank you.
Good morning, John It's Kevin.
My comments on the net new business were tied to national sales.
Because that is a bid business as you know, it's multiyear contracts, we're competing versus others and awards are provided so.
Meaningfully positive comments about net new business were focused on the corporate national bid sectors in health care education, and restaurants, we had a remarkably good quarter in Q1 and that will then pay forward in future volumes again profitable volumes because of the structure of those contracts versus historical profiles.
As it relates to our local business. Your question is a good one we're pleased with our performance of the initiatives that we're putting forward and the impact that those initiatives are having on share of wallet, we're not going to today disclosed our share of wallet update but things like Sysco Your way Cisco perks, the Italian platform work, we're doing our enhanced digital tools.
Which make it easier for customers to order and reorder and see suggested items the pricing work, we're doing to be right on price at the item level. The aggregate of all of those things deployed as you mentioned and regional tests and customer specific pilots and neighbourhood rollout like Cisco you're way, we're very pleased with the performance.
Where we are now is rollout and implementation and some of those initiatives are still in their embryonic phase where a big company, we do over $1 billion of sales per week and these initiatives will move the needle for the longer term, they're just very early from an earnings perspective on their impact on customers, but John we can see the <unk>.
Clear data and the response that these customers provide to us when offered these product solutions digital tools and capabilities. So I'll toss to Aaron for additional comment I would just make the edit observation that part of whats also going on here as well as us.
Utilizing all of the assets in the portfolio. So it's the various parts of our business working together to help us to drive to success there.
Thank you next question comes from Joshua Long at Stephens, Inc. Please go ahead.
Great. Thank you for taking my question.
Wanted to dig into this fiscal year way program and just see how that is performing versus your expectations I realize we're early on in the long term opportunity, but based on some of your comments it sounded like there might be an opportunity for you to expand or find new neighborhoods to layer in there and curious if thats the case and or just.
How that exploration of this of this platform is unfolding for you.
Yeah Joshua Thanks for the question, we're very pleased with how Cisco Your way is performing as I said in my prepared remarks their contracts of that program were developed in concert with our customers. We asked them essentially what's important to you what what could we Cisco do for you that would result in your increasing your business with us or how can we serve you if we're not currently Europe .
Partner things like very late in the evening order cutoff Cinco chef, who is in a fine dining establishment and had a run on seafood or run on steak that evening, they want the confidence of being able to place an order after the evening rush and have it beyond the truck that delivers that very next morning, and that happened six plus days per week, that's what we mean by.
By a different level of service and capability and we afford this service capability to everyone who is in the neighborhood, whether they were previously a cisco customer or not because the route density is tremendous in these neighborhoods as I said on the call.
50, <unk> 50, plus restaurants in a very dense geographic radius. So we're very pleased we're seeing a dual when we're seeing the customers that were previously with Cisco or buying meaningfully more from us and we're seeing customers that werent previously hours signing up because they see our truck there everyday they see the delivery partner there everyday to see a sales rep, who is walking.
The street everyday and I mean that literally they are at the neighborhood every day the aggregate of the performance is strong robust. The focus now is rolling it out and getting it out to as many eligible neighborhoods as possible as efficiently as we can because we have to honor that service commitment that I just said for it to work we know if we don't deliver upon.
The promise.
And that it will not deliver the overall outcome. So we're going to go at an appropriate pace to make sure. We can deliver the service and as I highlighted this is not just domestic U S. We went live in Toronto, We went live in Dublin, and we will be taking this capability to GB to Sweden into many other places across the globe.
In a pragmatic and thoughtful way, but we're really pleased with the performance thus far.
Thank you.
Thank you next question comes from John Glass at Morgan Stanley . Please go ahead.
Thanks, very much first Eric just a follow up on the change in the way you have disclosed the case growth information if I look back in the last.
Few quarters, Theres, a pretty big difference between what you're now reporting on what you did before six seven points in the last couple of quarters is that <unk>.
Similar this quarter in other words, we're trying to figure out how to look at your case growth versus maybe what we had estimated if you could just comment on the difference between.
What version versus New version and then Kevin just on Cisco Your way in our Greco what's the percentage of the system that you think can get those either that service or product, what's the impediment to rolling it out I know you said, you're rolling it out but what's the percentage of your system that you think could ultimately be available those two two.
Businesses. Thanks.
Let me address the first question if you turn to page 18 of our presentation. We actually give you. The history. So you don't need to do the <unk> calculation.
The relative difference both versus prior year and versus fiscal 19.
Emphasize we have a a couple even pre acquisitions, we had a couple of $1 billion of business that is very focused on both growth consistent the recipe for growth and serving local customer individually and in partnership with our broad line operators that thats, our belief, it's better for us to disclose the.
Impact of the recipe for growth on the total U S portfolio in that way, which is what you see on page 18.
Kevin over to you in a second.
I Love the Cisco Youre way question, we've obviously not provided percent lift in penetration lifts and customer acquisition targets.
While we did say I'll call you back to May of 2021 at our Investor day that Cisco Your way would be a $1 billion top line growth effort for this company and I would reiterate that and we can see line of sight towards.
The performance, we're delivering in the neighborhoods were alive.
Called the Hawthorne effect, when you rollout a project to a pilot location and it kills it and then the question is can you scale. It right. That's the Hawthorne effect, we have proven that we can scale Cisco Youre away. We are now live in a significant number of neighborhoods. We've train the trainer and the teams are now executing the rollouts on their own and we are replicating their performance in the.
The pilot locations in the neighborhoods that we scale two.
So I'll just bridge back to the May of 2021 $1 billion top line opportunity for this company and we can see it coming and ill toss therein for comment I just want to emphasize that really exciting initiatives like that one of our part and parcel of the guidance. We provided both for the year and for the longer term.
Thank you next question comes from Nicole Miller of Piper Sandler. Please go ahead.
Good morning, and thank you.
I appreciate the market share.
Grounding this morning.
You have it available.
<unk> figure at least Jess fye.
Kind of a proxy can you talk about your market share in any loss recession, any really period of economic or consumer weakness.
Just trying to understand.
You take share and how you move with the industry and then could you discuss your fill rates and your on time delivery if possible on a year over year basis and sequentially. Thank you.
During the second just Kevin I'll do the second half of your question first we're making steady progress on what we call on time and in full shipments so supplier fill rate inbound Cisco has been steadily improving our merchandising teams have been doing extremely good work to improve that effort provide more substitution when they are available to our customers.
And the ability for us to ship on time has improved as our staffing health has improved both metrics are still slightly below historical norms, mostly because of.
The number of new people working within the supply chain, but we're making steady progress as it relates to the impact of a recession on our ability to take market share I think we proved over the last two and a half years during an event much bigger than a recession COVID-19 even go back to omicron last winter I mean, we saw.
Meaningful negative impact to our business in the month of December January and February last winter because of Omnicom and we took share all throughout that period of time and the why is our inventory health, our staffing health and our ability to be there and available for our customers is a strength point versus others. The balance sheet that we have.
Words us the opportunity to make those longer term decisions and I would suspect that would be a pattern that would continue into the future. If a recession would occur Eric is there anything else you'd like to say about that.
Just add that one of the signals of the strengths of Cisco in <unk>.
Any recessionary environment is something I pull from looking back at our results during the recessionary OE dollars nine hour, while I wasn't here.
Central reporting which shows that our sales were down between 1% and 2% and that was a very different financial set of circumstances than what we currently believed believed to be the case and so the lesson I take from that is that Cisco was strong back then were even stronger under Kevin's leadership with the recipe for growth and as we've said we see opportunity.
Everywhere, we look and we're going to play the long long game and execute against it regardless of the macro environment.
Thank you.
Thanks Nicole.
Thank you next question comes from Kelly benign at BMO capital. Please go ahead.
Hi, Good morning, Kelly Bania from BMO capital.
Thanks for taking my question I was wondering if you could just help us unpack that 7% U S. Broadline case volume growth figure.
In terms of.
End markets our channels.
Are you do you see.
Share gain pretty consistent across in a.
Restaurants health care education business and industry and I guess within that are there any channels.
Segments that you feel more or less bullish on relative to kind of pre COVID-19.
I guess I was just a little surprised to hear some some some of the wins and the magnitude of the wins on the health care.
In particular.
Yes, I'll start on the segment as part of your question I'll toss to Aaron for any additional comments.
We are winning across the board from our national sales perspective, or as we call. It contract management CMU business I. Just gave you examples of what that means for everyone out there that in wins came in this most recent quarter from health care from education and also from National restaurants, because when we talk about national salespeople tend to assume it must mean restaurants.
And we're putting a meaningful focus on winning across the portfolio of national sales business and as I said the team did a really great job in Q1 and that the rates for those contracts are solid.
Separate point from that my prepared remarks referenced strength that we are experiencing in the non restaurant space as those customer types are continuing to move up the recovery curve and I mentioned tailwind continuing in that space I think about the number of offices that are.
And our reopening on are still not fully reopened and we do a large business tied to providing catering services to those pipes.
And all of the forms of food away from home that are not restaurants are on the upswing in total and in aggregate, but as Aaron said all of that has been built into our year to go guide that we've provided to all of that is factored in we do forecasting for each and every customer type globally and domestically and thats been factored into the guidance that we provided.
But we're pleased with the progress that's been made.
<unk> from our sales team not just in the last quarter, but the last three years, but this most recent quarter was particularly strong there and anything that just to emphasize that the seven 3%.
Case growth as U S foodservice in total and we're seeing growth across the U S foodservice portfolio.
Thank you next question comes from Mark Carden of UBS. Please go ahead.
Good morning, Thanks offered taking my question. So it sounds like your top line is holding up pretty well, even with recessionary fears just drilling down until last question a bit more are you seeing much of a shift in demand across restaurant types in your local business and how is that impacting you from a margin standpoint, and then related we're not seeing.
As much at a federal level, but there are a number of states that are in the process of implementing stimulus payments would you expect this to be a meaningful tailwind for your business can this move the needle in terms of sustaining demand.
Yes.
So great question Mark.
We're positioned to be successful in the short medium and long term enduring a recession is the question that was asked earlier, we believe we have an opportunity to take share if a recession begins to impact overall strength and the main reason why is we're fully diversified. So we cover every element of the food away from home sector from the highest end white tablecloth restaurant down to <unk> and <unk>.
Everything in between and even within the local sector, we serve all customer types within the local sector. What we said on today's call is we're not seeing broad based trend changes in our numbers. We do not have at this time impact of a recession on our P&L. If one were to occur to begin to impact our P&L we're prepared to.
Take actions things that we do as I mentioned.
Expense tightening sysco brand as a point of positive highlight will improved our penetration in sysco brand over the past quarter and we would expect that to continue as we are doing good work on assortment management pricing management and selling skills capabilities and sysco brand would become even more important.
Stimulus would be positive for demand I don't have anything specific to comment about the prevalence of that but it would be a positive earn over to you for any comment I would just observe on the stimulus point that.
As Kevin said, it's a it's one positive factor in an overall tapestry of the business that we're running as we carryforward and I Havent seen details that would lead me to believe its material enough to cause us to change our guidance in that way and so I would assume that it is supportive of the guidance. We previously issued.
Great Thanks, and good luck.
Thank you Mark.
Thank you next question comes from Jonathan Feeney Consumer edge. Please go ahead.
Good morning. Thank you I wanted to you touched on this a little bit, but I wanted to ask specifically about the funding environment first to congratulate you on your fixed cost balance sheet management.
We're looking and puts you in a great situation gratulation on that but historically.
The first part of the question is does that does higher lots availability availability of funding help you competitively directly versus say smaller foodservice distributors, who might not have the access to capital you have or might not have finished prudent Amit secondly.
How about the M&A environment I mean.
I know it's early days, we don't even know if we have a recession coming but one thing is clear funding costs are a lot higher is a lot less cash around so how has that changed your M&A priorities and availability and the like.
<unk> success, thanks very much.
Great I'll kick off and take that one thank you for highlighting our strength of Cisco.
For the call. The fact that Cisco has an investment grade issuer one of the only in the industry that also puts a firm focus on our capital allocation is part of why we're also invested in Cisco as a company and driving the recipe for growth as we carry forward we've been very clear.
For the last couple of years that the first thing that we are going to do with the strong cash flow, we generate with the balance sheet that we have available to us is to invest in growth to reinforce that very same algorithm of generate the cash flow drive the growth carry on Azure carryforward and indeed, that's what we've been doing our treasury team is.
Set us up for success by having a highly fixed portfolio at this moment haven't paid down substantial debt, we've paid down billions of dollars of indebtedness over the last couple of years and we're a place now where we have financial flexibility. We there is no maturity coming due that we don't already have plans for that would require.
For us to enter into a high a high interest rate environment, even with our credit rating to carryforward, which means that we have every dollar available to us that we need either through cash on hand through our cash flow or a revolver or other sources, if we needed it to both invest organically in the capital.
<unk>.
That we need to buy the fleet build the distribution notes investments technology.
If M&A comes along that.
Would be exciting to us on where Kevin will touch on M&A and the second thing is we have the resources to be able to do that Andrew by the way, we're going to continue to optimize our balance sheet and we're going to continue our firm focused on return of capital to shareholders. You will have noticed that we paid.
Sorry, I misspoke that we repurchase shares in the first quarter of $267 million per gallon early on our $500 million commitment and we've continued to pay the increase the dividend.
And of course, Cisco is a dividend aristocrat and we've.
That is one signal of our focus on shareholder return, Kevin you want to comment on the M&A environment.
I'll, just say two things about the M&A environment were not responding to inbound phone calls at Cisco, Joe graduate who leads Biz Dev for our company is making outbound phone calls, meaning we're very very strategic about the types of acquisitions that we are interested in we've talked about them before as being geographic white spaces and capabilities that we need to fill or capability.
<unk> themselves that we don't have that we're interested in that we think will build out our overarching assortment <unk> selling profile and capabilities and we get a chess board of things that we're interested in and we're very thankful for the strong balance sheet that Aaron and his team have helped us develop and deliver overtime that gives us the flexibility that we need to run.
Thanks very much.
Yes.
Thank you. Your last question comes from Andrew Wolf at CL King. Please go ahead.
Thank you. Good morning. My question is in regards to the operating expenses.
And.
I was hoping you could help us sort of unpack.
Some granularity some of the reasons thereof.
Most of it or the majority of it is just market driven wage rate increases maybe.
Maybe you could help us understand that sounded like Cisco deliberately wanted to have a lot of volume.
Also being fully staffed.
It might be head count as well.
As you look forward one of those numbers flatten out so that we can.
Sort of incorporate that in our modeling.
Okay. I appreciate the question Andrew is the primary driver is not wage increase I just want to be crystal clear about that that is not the primary driver. The primary driver is productivity levels being below our historical performance averages and the net productivity impact is hurting the flow through from the top line to the bottom line and I'll talk about.
That in just a second the other is volume volume is strong and obviously volume up drives expense up that's an obvious so let's talk about the variable cost per piece, which is the metric that we're most focused on that has the biggest impact why is it down why is it taking time to improve I'd like to just kind of walk through the history of where we've been where we are where we're going.
Where we've been as we were understaffed because of a very strong rebound in our business and what was this time last year. The great resignation, we were in a position we were understaffed so overtime rates were up.
Days and hours out on truck too long, which caused folks to then leave the industry not leave to go to a competitor, but leave the industry. So we had meaningful work we needed to do to get the company back to properly staffed and Erin called those snapped back expenses expenses that we needed to incur to get properly.
Here's the good news we are now properly staffed that type of work that type of investment is behind US which is why today. Aaron described that is now immaterial in our going forward the snapback investments.
As I mentioned on our last quarterly call roughly half of our supply chain associates are now new to job new to the company. So we're investing in training to educate our folks to what we call. Our work standards, which are about working safely and working productively and that takes time. It takes time to matriculate in order.
Select are up the curve or productivity. It takes even longer time to matriculate a driver up the productivity curve. The good news is we are properly staffed we are investing our leadership time, our communication muscle in our investment dollars into improving the training that our associates are receiving.
Which will drive improved retention and as I said those are the internal leading indicators that will result in future periods cost per pieces cost per piece excuse me.
<unk>, which is why both Aaron and I have said the second half of this fiscal year, our operating cost metrics will be better than the first half as we are still working up that productivity curve at Cisco.
Great. Thank you for that color I appreciate it.
Thank you Andrew.
Thank you there are no further questions. This does conclude your conference call for today, we thank you for participating and we ask that you. Please disconnect your lines at this time.
Okay.
Okay.