Q3 2023 Sysco Corp Earnings Call

Speaker 1: The thousand have.

Speaker 2: year 2023 conference call.

Speaker 2: As a reminder, today's call is being recorded.

Speaker 2: 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.

Speaker 3: Good morning everyone and welcome to Cisco's third quarter fiscal year 2023 earnings call. On today's call we have Kevin Hurkin, our President and Chief Executive Officer, Kenny Chung, our Chief Financial Officer, and Neil Russell, our Chief Administrative Officer. Before we begin, please note that statements made during this presentation that state the company.

Speaker 3: or management's intentions, beliefs, expectations, or predictions of the future are forward-looking statements within the meaning of the Private Security Litigation Reform Act, and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the company's SEC filings.

Speaker 3: This includes what is not limited to, risk factors contained in our annual report on form 10K for the year ended July 2nd, 2022, subsequent SEC filings, and in the news release issued earlier this morning. A copy of these materials can be found in the investor section at Cisco.com. Non- GAAP financial measures.

Speaker 3: are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures is included at the end of the presentation slides and can be found in the investor section of our website. To ensure we have sufficient time to answer all questions, we'd like to ask each participant to please

Speaker 3: to limit their time today to one question. If you have follow-up questions, we ask that you please reenter the queue. At this time, I'd like to turn the call over to Kevin Hurkin.

Speaker 4: Thank you, Kevin, and good morning, everyone. We will start today with a brief review of our financial performance. We will then highlight how we continue to grow share profitably, and as is our custom, we will provide a brief update on select elements of our recipe for growth strategy.

Speaker 4: I will then introduce Kenny Chung, who joined the team a couple of weeks ago as our Chief Financial Officer.

Speaker 4: Kenny will share a few thoughts about what attracted him to Cisco and his initial observations.

Speaker 4: Neil Russell, now in the chief administrative officer role, will provide a detailed update on our third quarter financial results, our balanced approach to capital allocation, and lastly, he will provide additional commentary around guidance.

Speaker 4: Our Q3 results, as displayed on slide number six, show continued double-digit top and bottom line growth. We grew faster than the overall market, profitably, driving case volume growth of 6.1% across our U.S. food service business in total sales growth of 11.7%.

Speaker 4: Our positive momentum was aided by strong performance from our international division, which segment profits nearly doubling year-to-year.

Speaker 4: Our total company adjusted operating income and adjusted EPS grew approximately 27%, resulting in the highest ever third quarter profit in company history.

Speaker 4: Importantly, sequential improvements in our supply chain operating expenses resulted in solid operating leverage.

Speaker 4: I am pleased with the progress that we are making in supply chain productivity and overall expense control.

Speaker 4: We delivered strong sales growth throughout the quarter despite some industry softness beginning in March.

Speaker 4: Put traffic to our customers moderated in March, negatively impacting sales volume in the most important month of the quarter.

Speaker 4: Third-party data indicates that the overall market volume decelerated to slight growth in March, softer than had been expected within the restaurant segment.

Speaker 4: Additionally, the rate of inflation year over year declined at an accelerated rate during the quarter. This is a test for the

Speaker 4: this pattern of lower volume and lower inflation put pressure on total sales and gross profit for the quarter. A lowering of the overall inflation rate is a good thing for the industry for the long term, but we need to carefully navigate through the reduction period.

Speaker 4: These two factors, lower traffic and lower inflation, are now expected to continue throughout our fourth quarter.

Speaker 4: Offsetting these near-term headwinds, we expect our progress with supply chain productivity and overall expense control to also continue into our fourth quarter.

Speaker 4: Putting all of these factors together, we now expect to end the year near the bottom of our adjusted EPS fiscal 2023 guidance range or $4 to $4.15.

Speaker 4: Recall that last quarter we outlined that the low-end guidance scenario considered software macroeconomic and industry performance, which is exactly what we experienced in March.

Speaker 4: On that call, we also outlined our focus on driving fundamental improvements in our cost structure.

Speaker 4: by improving supply chain productivity and driving out costs across the entire company.

Speaker 4: Our objective was to deliver gross profit growth greater than expense growth, enabling operating leverage expansion. We delivered on that objective in the third quarter, delivering our highest ever Q3 profit at Cisco.

Speaker 4: We remain very focused on productivity improvement and we expect our efficiency actions to accelerate into the fourth quarter.

Speaker 4: At Cisco, we are playing the long game and we are investing to win through our recipe for growth strategy. We are increasing our fulfillment footprint of distribution centers.

Speaker 4: We are improving our digital tools. We are enhancing our sewing process and technology.

Speaker 4: These efforts are building momentum and we remain on track to deliver our growth target for fiscal 23 of growing 1.35 times the market. Despite what has become a more challenging macro environment, we are confident in our ability to differentiate versus others in the marketplace and create preference with our customers.

Speaker 4: We are also prepared to handle the challenges that a slowing macro and lower inflation rates will present to our P&L.

Speaker 4: We are hyper focused on what we can control. This means executing our sales playbook of driving profitable growth and improving our logistics expenses.

Speaker 4: I am pleased to report that in the most recent quarter, we made meaningful progress in our supply chain productivity.

Speaker 4: As you can see on slide number 8, we delivered improved retention, improved labor productivity, and improved overall expenses.

Speaker 4: While our operating expenses remain elevated compared to historical standards, Q3 marked a major step forward in sequential improvements.

Speaker 4: We continue to have healthy staffing levels and we are increasing our fill rates to our customers.

Speaker 4: These factors are helping Cisco improve our net promoter scores.

Speaker 4: We will continue to make progress in operating efficiency and improving customer service into our fourth quarter.

Speaker 4: We profitably grew our volume in sales this quarter with US Food Service volumes up 6.1% and local case volumes up 4.2%.

Speaker 4: fiscal continues to succeed versus the overall market, and as I stated a moment ago, we are on track to deliver our stated growth target for the year.

Speaker 4: We delivered compelling business performance in our specialty businesses this past quarter, with notable gains in our Italian platform, and we continue to see very strong performance from our Freshpoint produce business.

Speaker 4: Winning in the specialty space is a priority at Cisco, as our market share is below our fair share in these fast-growing and higher profit margin segments.

Speaker 4: Disco brand continues to succeed with increased penetration year over year of 29 basis points in U.S. Broadline and importantly growing over 100 basis points in the U.S. local segment.

Speaker 4: This progress creates a mixed benefit, as each additional Cisco brand case adds to our profit rate due to the higher margin and positively impacts customer retention due to the unique value proposition of Cisco brand products.

Speaker 4: Additionally, I am pleased to report that our sales consultant retention remains at record high levels, as our sales reps have adapted well to our improved sales enablement technology, pricing platforms, and our compensation program.

Speaker 4: And speaking of our compensation program, we plan to implement changes to the program at the beginning of the coming fiscal year. These changes will provide even more incentive for our industry-leading sales reps to grow their business profitably.

Speaker 4: The updated program is being tested currently in a US region and the early indications are positive.

Speaker 4: The modifications to our program came directly from feedback from our sales force.

Speaker 4: Turning to the recipe for growth on slides 9 and 10, our key initiatives are winning in the marketplace and fortifying our leading position in food service.

Speaker 4: We continue to drive compelling profitable growth as we expand the SCO Your Way neighborhoods across the US and internationally.

Speaker 4: As we highlighted at our recent CAGNY conference presentation, we are now live in over 300 plus neighborhoods across five countries.

Speaker 4: We will expand the program further in the coming quarters.

Speaker 4: The results from this customer-focused program continue to exceed our expectations, delivering double-digit top and bottom line growth.

Speaker 4: Additionally, we continue to gain momentum with Cisco Perks. We have now enrolled more than 11,000 customers into the exclusive loyalty program.

Speaker 4: This group perks is our invitational only loyalty club providing members with white club service.

Speaker 4: Membership benefits include deliveries up to six days a week, exclusive access to rewards, and industry-leading restaurant solutions to help our customers grow their business.

Speaker 4: When our customers succeed, we succeed. And we believe Cisco Year Way and Perks are two outstanding programs to help our customers be successful and differentiate Cisco from our competition.

Speaker 4: Lastly, we continue to make excellent progress with enhancing our digital tools.

Speaker 4: In the most recent quarter, we launched critical enhancements to our Cisco ordering platform called Shop, and we further enhanced our sales consultant CRM tool, making it even more clear to our sales consultants the key priorities for each customer visit.

Speaker 4: The improvements to shop in our CRM will drive increased penetration with existing customers.

Speaker 4: Turning to our next topic, we are excited to welcome Kenny Chung to the Cisco family as our CFO .

Speaker 4: We conducted an exhaustive global search for our next CFO , partnering with industry experts in talent placement and talent assessment.

Speaker 4: I am thrilled that we have the opportunity to find and hire Kenny.

Speaker 4: Kenny joined Cisco with nearly 20 years of financial and operational executive experience, most recently having served as the CFO at Hertz.

Speaker 4: Prior to Hertz, Kenny had operational and financial roles at Nielsen and he started his career with GE.

Speaker 4: Kenny has extensive financial, operations, and international experience.

Speaker 4: When coupled with his learning agility and financial acumen, we are confident that he will help Cisco profitably grow our business. Kenny leads with a hands-on approach, is a team player, and we believe he will be a strong cultural fit for Cisco. Something that was essential to me in the search process.

Speaker 4: I want to publicly acknowledge Neil for his great work over the past few months as our interim CFO , and congratulate him on his expanded new position at Cisco.

Speaker 4: I'm excited that Neil is in the newly created position of Chief Administrative Officer. In that capacity, Neil will help us ensure that our strategic initiatives are on track, including program governance for expansive recipe for growth strategy. He is a trusted partner, and I greatly appreciate his leadership impact. With that, I'll now turn it over to Kenny.

Speaker 3: Thank you, Kevin, and good morning, everyone. I am thrilled and honored to serve as the CFO of the world's largest food service distribution company. So why Cisco? I am excited to join the company at such an opportunistic and transformational time. Notwithstanding recent market dynamics, I am excited to be here to discuss the future

Speaker 3: The food away from home industry is healthy and growing, currently a $350 billion industry with continued long-term growth tailwinds.

Speaker 3: Furthermore, one of the most attractive parts of joining this exceptional leadership team is the robust opportunity to build on our leadership position across the global markets we serve. Size and scale matter in this industry, and I believe in the bold transformation that is already yielding dividends for our business.

Speaker 3: Cisco has a long history of generating robust operating cash flows and engaging in prudent M&A while maintaining a strong history of returning cash back to shareholders.

Speaker 3: It all starts with our purpose, which is to connect the world to share food and care for one another. Combining our purpose with our unwavering culture for operational excellence and compelling investments around technology, products and solutions, and supply chain productivity are important actions.

Speaker 3: We believe these and other actions render structural creative value which will compound with our scale and continue our profitable market share growth.

Speaker 3: In this role, I plan to leverage my background of adding value for large global companies that are customer service centric. My experience also includes driving field labor productivity, profitably growing both contracted and short cycle business, and innovating to create value for our customers.

Speaker 3: Delivering consistent results will come from our industry-leading people, products, and solutions. Remaining disciplined with supply chain inventory management and capital allocation would be critical to my role, as it is all about maximizing return on invested capital and sustainable growth.

Speaker 3: Lastly, I understand and appreciate the importance of driving environmental sustainability initiatives with Cisco already on a great path under Neil's leadership.

Speaker 3: While only here for a few weeks, I'm impressed with the bench strength of the financial organization and the passion that my fellow colleagues have for the industry and the company. I look forward to working hand in hand with the wider team as we accelerate our recipe for growth strategy and further our number one position.

Speaker 3: The future is extremely bright. We have a unique opportunity to build on our leader position and to define the future path for the food service and supply chain ecosystem.

Speaker 4: I look forward to working with you all. I will now turn it over to Neil, who will provide additional financial details. Welcome Kenny, and hello everyone. I will start today with a review of our third quarter financial performance and then discuss our expectations for the full year to go. During my discussion today, unless otherwise stated, all results are compared to the same quarter in the prior fiscal year.

Speaker 4: As highlighted in our news release issued earlier this morning and on slide 14, which is posted on our website, we delivered double-digit year-over-year growth in both top and bottom line results.

Speaker 4: and we continued our balanced approach to capital allocation.

Sales grew 11.7% with U.S. food service growing at 10.4% and continued positive momentum in our international segment which grew at 18%. Volumes grew year over year and also improved sequentially. The U.S. food service segment, which includes our Broadline, Fresh Point, Italian and other specialty businesses, grew 6.1% and local case volumes increased 4.2%. Adjusted gross profit for the third quarter increased 12.8% to $3.4 billion.

with adjusted gross margin improving 18 basis points to 18.2%.

Our gross profit dollar and margin percentage improvement during the third quarter reflected our ability to continue to effectively manage product inflation, which moderated to 4.9% for the total enterprise down sequentially from 8.3% during the second quarter of this fiscal year. The improvement in gross profit was also driven by incremental progress from our strategic sourcing efforts, as well as improved penetration rates from Cisco brand products. Overall adjusted operating expenses were $2.7 billion for the quarter.

Excess overtime costs, otherwise known as productivity costs, were reduced all the way down to zero during the third quarter. As we improve our cost performance, we have now eliminated both SNAP-VAC and these productivity costs. All four operating segments again showed increases in profitability year over year, including substantial growth in the international and SGMA segments. As seen on slide 18, adjusted operating income for the enterprise increased by 27.8% to $736 million.

This quarter continued to show gross profit dollar growth outpacing operating expense growth, another important illustration of our financial improvement. For the quarter, we grew adjusted EBITDA by 19% to $900 million. Regarding the balance sheet, our solid investment grade rated balance sheet, strong cash position, and healthy liquidity remains a competitive advantage.

We ended the quarter at a 2.8 times net debt to adjusted EBITDA ratio. In the third quarter, we repurchased 1.5 million shares and year-to-date, we increased the number of shares in the EBITDA ratio.

We have now repurchased 4.6 million shares. We are now at nearly $400 million of share repurchases for the year, nearing our goal of up to $500 million.

Inclusive of our dividend payments, Cisco has returned a total of $1.1 billion to shareholders thus far in fiscal year 2023.

Of note, the board approved last week another annual increase in Cisco's dividend, continuing the long-standing tradition of the

of regular increases and solidifying our position as a dividend aristocrat.

As a reminder, we remain well positioned in the current rising interest rate environment, with approximately 95% of Cisco's debt being fixed at attractive rates.

As shown on slide 19, year to date, cash flow from operations was strong at $1.4 billion, a $680 million improvement over the prior year. Net CapEx increased to $446 million as we continued to invest in our recipe for growth, particularly with respect to our planned investments in fleet and distribution facilities. This includes three expansion sites and seven new facilities in the next few years as we deliver new capacity in high potential markets and high growth cuisine segments. Our investments are driving positive returns and we plan to remain...

with the unveiling of our first electric vehicle hub in Riverside, California last month for Earth Day.

This is the world's first electric vehicle hub of its kind, consisting of electric tractors and electric trailers fueled by renewable solar energy.

These trucks are rolling, serving our customers as we speak, with more on the way.

Our industry leading climate goals also include a commitment to work with suppliers representing 67% of our scope 3 emissions to set their own science-based targets by 2026.

Importantly, our focus on sustainability and diversity, equity, and inclusion is not only the right thing to do, we believe it will be good for business in the long term.

Lastly, looking ahead to the remainder of the year and beyond, we now expect diluted adjusted earnings per share near the bottom of the previously disclosed range of $4 to $4.15 per share.

While Cisco continues to outperform the market due to the success of our recipe for growth strategy, the recent market softness is creating incremental business pressures impacting case growth and lower inflation. These macroeconomic headwinds are impacting traffic levels for some of our customers, resulting in slower traffic levels across the restaurant industry. To offset this, we are actively managing our portfolio and continue to expect further improvements and cost out activities and supply chain efficiency for the remainder of the year.

Additionally, inflation remains on target for a low single digit rate in Q4 of this fiscal year.

As a result, we expect the fourth quarter to reflect a similar positive trend of gross profit dollar growth outpacing operating expense growth.

Specific to share repurchases, we remain on target to repurchase approximately $500 million in shares this fiscal year.

With that, I will now turn the call back over to Kevin for his closing remarks. Thank you, Neil. As we conclude, I'd like to provide a brief summary on slide number 24.

Our Q3 financial performance reflects another record quarter, delivering adjusted operating income growth of over 27% to $736 million. Our profit leverage improved in the third quarter, with gross profit growth outpacing operating expense growth. We expect that performance to continue in the fourth quarter.

Industry macro volume trends softened in March, which we expect to continue into Q4. We are also experiencing lower rates of inflation, a trend we expect to continue through Q4.

These two factors are partially offset by significantly improving supply chain productivity performance. No one is better prepared to manage a choppy macro landscape than Cisco. Why? Skill matters in this industry.

purchasing scale, logistics route efficiency scale, inventory optimization scale, but even more importantly, customer diversification scale.

At Cisco, we serve restaurants up and down the price point spectrum and also have a large non-restaurant customer base.

Many of our sectors are recession-proof, for instance, education and health care. Other segments are still in recovery, travel, hospitality, and business and industry.

Within our restaurant segment, given that we serve all restaurant types, we retain case volume if and when customers trade up or down within restaurant customer segments.

in penetrating additional cases with existing customers.

As importantly, we are focused on improving our supply chain efficiency. Food away from home is a healthy long-term market and we are prepared to be successful regardless of the short-term macro environmental conditions.

Lastly, Cisco remains deeply committed to our strong and stable balance sheet, disciplined capital allocation, and delivering continued returns to our shareholders.

Our status as a dividend aristocrat remains a priority and we are proud to carry that distinction going into our 54th year.

Cisco is a resilient and diversified company with scale advantages.

We are increasing our scale advantages through our recipe for growth strategy. We are confident that our work product will deliver strong profit growth and compelling returns for our shareholders.

Operator, you can now open the line for questions.

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 1 on your telephone keypad.

If your question has been answered and you would like to withdraw from the queue, please press star followed by the number 2. And if you are using a speakerphone, please lift your handset before pressing any keys.

If your question has been answered and you would like to withdraw from the queue, please press star followed by the number 2. And if you are using a speakerphone, please lift your handset before pressing any keys. One moment please for your first question.

Your first question will come from Mark Carden at UBS. Please go ahead.

Good morning. Thanks so much for taking the question and congrats on the new position, Kenny. I wanted to dig in a bit more on what you're seeing on the labor front. I know the recent strikes you experienced were quite a bit smaller in nature than the ones that took place in October . But are you expecting industry wage headwinds to intensify much more than you originally expected over the course of the next few quarters?

And does this impact how you're thinking of offsetting cost out somewhat necessary on that front? Thanks. Great. Good morning, Mark. This is Kevin. Thanks for the question. I'll start just acknowledging the strike situation and then directly answer your question. I just want to thank our operations team, first and foremost, for the agility that they displayed.

during the unanticipated strikes in the most recent quarter. Within 24 to 48 hours, we were up to full shipping capacity, able to support our customers and communicate effectively with our customers, which is not an easy task given the amount of business that we do on any given day at Cisco. Point two for me is, you know, Cisco pays above market wage rates, and we provide extremely compelling benefits to our associates that has not changed.

These are things we're working through. We will continue to be fair to our colleagues and also manage our P&L for the long term during our discussions with our labor partners. Our goal is to have a solid relationship with all of our labor partners and to treat our colleagues with respect.

the dignity that they deserve and we're committed to doing that. As it relates to wage, we'll talk about that more in August when we provide our fiscal 24 guidance. I want to be clear that the type of increases that we're experiencing are not game-changing. I know that restaurant names and retail names have talked about double-digit plus type annual wage increases. We are not experiencing that at Cisco.

And that's something we'll provide you with more clarity and specificity about on our August call. Great, and then as a quick follow-up to that, you've referenced improvements in overall labor productivity. At this stage, how close do you think you are to getting back to normalized labor productivity levels, both in the selector front and the driver front? And then how much of an impact do you think you're seeing today from the new academies?

Mark, thanks for the follow-up. Really pleased with the rate of progress that we made in Q3 from a supply chain productivity perspective. I like to start at the start, which is we are fully staffed. So we are a fully staffed network. We're beginning to experience improved retention because over time rates have come down and obviously that flows through positively to our P&L. The types of things that we have done to drive that behavior in action is, as you mentioned, the academies are having a meaningful impact on reducing turnover for our new hires, improving productivity for our new hires. We have fully implemented engineered labor standards in our transportation division. We've always had that for warehousing and we now have it for transportation.

versus our historical norm and therefore there's still progress to be made and that progress will carry into 2024. We anticipate supply chain costs as a percent of sales will come down year over year and we'll provide you more clarity and specifics behind that on our guide that we will provide you in August .

Neil has one comment to add to that. Neil, over to you. Hey Mark, good morning. It's Neil. Hope you're doing well. Listen, just a quick follow-on here. You heard in my prepared comments a comment about productivity costs. So as you know, over the last several quarters, there are a couple of cost categories that were impacting the business that we've made great progress on and one of...

which of course is directly related to your question. First of all, we had in our cost basis what we called snapback costs, those types of costs that were related to the hiring of a large wave of new colleagues as we improved and increased the volume in our business. And those costs originally as high as nearly $70 million in a quarter, came down to 30, came down to 20 to 10. Those were eliminated last quarter.

if you will, is really good signals of progress to Kevin's point.

Great, thanks so much. Good luck guys. Thank you Mark. Our next question comes from John Heimbackel at Guggenheim. Please go ahead.

Hey Kev, wanted to start real quick with, so Cisco your way, if you could sort of frame the newest markets that you've entered, how they're performing versus some of the earlier ones, getting better at executing this. And then I think in the past you thought that was a billion dollar opportunity.

Do you still think that's true or is it bigger than you thought perhaps?

Good morning, John . Thank you for the question. We're really pleased with the performance of Cisco Yearway. Specifically, as we roll out additional new neighborhoods, we're not seeing a diminishing of the impact as each individual neighborhood comes on. I think you've heard me talk about that before, is the Hawthorne effect. When you launch a pilot, it does great, but then you attempt to scale it and it...

diminishes over time. We are not seeing that at all. Each and every neighborhood that we launch comes out of the gate strong and actually sequentially improves month over month and quarter over quarter. And the lie that that happens is twofold. Again, remember the truck is there literally every day twice per day. The sales rep is walking the beat as we call it every day.

and we win new customers on a sequential basis because we're showing up every day and knocking on the door and saying, do you need anything? Do you need anything? And then within existing customers, we can win categories that they perhaps were buying from a specialty distributor, like a specialty house or a premium protein house and a dairy house. We're working off, you know.

gaining that specialty business and putting it on our truck and then we're winning new doors within the neighborhood. So each additional neighborhood that we launched we're pleased most impressively. We're now live in five countries and the model is scaling in every country that we've launched it in. Most recently we launched it in Stockholm Sweden.

right out of the gate the results have been really strong. So internationally it's working, domestically it's working. We anticipate that yes John it will exceed, you know, we will be on target versus the billion dollars that we have quoted and there's the potential for upside. Not prepared today to talk about what level of upside but we're really pleased with the performance.

We're also pleased with the performance of Cisco Perks, which is our loyalty program. If I may, I do get a lot of questions, Kevin, what's the difference between Cisco Yearway and Perks? I'm kind of confused. I want to be really clear. Cisco Yearway is about the neighborhood and it's a couple of streets in a town that have 50 plus restaurants on those one or two streets and it's about providing next level of service.

to those specific neighborhoods. Perks is the opposite of that. It's a customer who's not in one of those neighborhoods. That's one of our best customers. It's an invitation only program. We invite customers in and we provide them with white belt service, marketing services, and culinary engagements.

And that program as well, which is now more than 11,000 customers enrolled, is exceeding our expectations.

And then one quick follow-up, you mentioned that the comp change that you're testing

I think that relates to the sales consultants, right? That side of the business. And is that, I assume, that is some form of hybrid commission.

Right, I don't think you're going to full commission, but some hybrid is that fair? And then what do you think the greatest impact is on the business?

John , thank you for the follow-up. You're directionally accurate on where we're headed. For everyone else who's listening, go back to pre-COVID, the Cisco sales consultant was on a full commissioned model. During COVID, because the business dropped significantly, we did the right thing for our sales consultants to retain them when we converted to a base plus bonus model.

where they earn a livable wage through a base pay, and then they have opportunities to make money through bonus criteria. And that criteria can change quarter over quarter to have behavior that we desire to see from that population. For a while it was Cisco brand and then we were focused on helping our customers engage with Cisco Shop.

John , yes, where we're headed for this coming fiscal year is to put even more incentive in front of the sales consultants for them to profitably grow their business. And the more cases they get put onto a Cisco truck, the more they make and obviously the more Cisco makes as a result. So we're going to keep the base pay component of what we have because we like that element. It drives retention.

it as I mentioned the results are preliminarily positive and then we work on the communication plan and change management plan for our 5,000 plus associates in the sales ranks within the US and we expect it to be very well received because as I mentioned in my prepared remarks this feedback came directly from our sales consultants.

give me more motivation and incentive to go out and win and go out and sell and we're going to be doing exactly that. Thank you. Thank you John . Ladies and gentlemen as a reminder we are asking that you limit yourself to one question and if you have a follow-up please re-queue.

Your next question will come from Joshua Long at Stevens. Please go ahead. Great. Thank you for taking the question. I was hopeful we could dig into some of the digital tools that you called out, Kevin. Sounds like strength and Cisco shop and then also your sales associate PRM tool are performing well. Just curious what you could share in terms of the learning that you've seen.

Good morning Josh, thank you for the question. It's two parts so I'll address it as such. On the digital side, just you know, can't thank our digital team and our business team enough for the progress that we're making in our digital tools. So big shout out to our Cisco technology teams. Let me just break it down into the two most impactful pieces.

of product that we sell like supplies and equipment, which is a very high margin category for us, that was really difficult for our customers to shop, you know, in the past. They had to go to a separate website called Supplies on the Fly and we're increasing significantly the accessibility of those high margin categories and products. Improving the search results, improving the navigation capability of the website, but here's where it's most powerful.

non-intrusive pop-ups to our customer to help them make good choices in their order that they place. For example, they forgot to put into that order an item that we know they order regularly. There will be a dialog box that pops up at multiple places throughout their shopping experience to remind them of that, and they have to interact with it in order to be able to proceed forward in a non-intrusive way.

We're providing them with suggestions on things that they should be buying that we know based on the cuisine that they are in and the products they're buying that should be riding on a Cisco truck. And we're integrating that with pricing. For example, if they have not bought that item before we can offer them a new item pricing discount because if we're able to win that item that we've never sold before that is meaningfully margin accreted for Cisco.

But here's where the digital and human piece comes together effectively at Cisco in unparalleled ways versus our past. Those same suggestions that we're providing to the customer on shop are now being conveyed to the sales rep through our CRM tool in a very dynamic way. And there are two methods by which this can be activated. One is preparing for a customer visit.

They can go into the customer tab of our CRM and they can see explicitly the types of deals and the types of offers that have been put in front of the customer that they may or may not have purchased from.

They can follow up specifically on those offers. We are seeing step level increases of engagement from our customers, when that customer has seen the offer digitally, and also it's been presented to them from their sales rep. That's the power of Cisco. This is not a pure digital business. This is a relationships business.

Our sales reps are culinary pros. They have intimate relationships with our customers. But now they're empowered with specific offers for that customer unique to their cuisine type. And again, the power is the digital and human experience. And these two tools, our CRM and our shop platform are talking to one another in a way that they never have before. And I call that visits with a purpose. What are the two or three things that I need to get done today when I visit this customer? And we can track it. We can track it at the colleague level. Who is closing at a higher rate than the average?

who is closing at a rate lower than the average, and we provide, obviously, spelling coaching to go along with that. So, we're super pleased with our tools and the progress we're making. The second half of your question was about inflation and how are we managing it through our tools. This is where our pricing platform tool is enormously helpful. As Neil has said before, and I'm going to toss to him in a minute for comment.

The local street business is an efficient market. As costs of products are going up quickly, those cost increases are passed on in that market. And the same is true if costs are coming down. The customer expects to be able to see a lower price on their order with Cisco and others that we compete against. Our pricing tool allows us to manage that environment in a dynamic way at the item level for each and every...

to get the net lowest cost for Cisco, and we can in fact pass on value to our customers and wind share profitably. Neil, I'd like to talk to you for additional comments. Yeah, thanks, Kevin. Hey, Josh. Just a couple of headlines for you. The impact of these things that Kevin has been describing, so gross profit dollars growing at a pace faster than expenses now for two quarters in a row is the

the end result of the improvement in these tools and processes that Kevin is describing. And there is one other tool in the toolbox that is helpful for that gross profit, dollar growth, and that of course is Cisco brand which has performed very well for us recently, now at 36% of what we sell to our local customers, and about 46% – I'm sorry, 46% of what we sell to our local customers, 36%.

at JP Morgan. Please go ahead. Hi, it's related questions or points I suppose. You know at first what is the nature of the customer type slowdown that you saw in March into April ? Is it you know full-service independent restaurants or local you know customers which I think is you know one of your highest.

profit customers. So if you don't mind addressing that. And then secondly, the slow down in inflation, if you could talk about what cost categories it's happening in. I mean are these the categories that are most likely sold to street accounts or is there a cost plus a dollar component to that or a cost plus a percent component to that. Just wanted to get some more clarity of what's happening beneath the surface.

I think that's pretty well understood. Our restaurant names, credit card data purchasing, et cetera, did convey a slowdown in March traffic. Now also to be clear, January and February were benefited by a pretty large year-over-year tailwind tied to Omicron. But again, the March traffic was a bit slower than what had been expected. And we are expecting that to continue into our Q4. Now we expect Cisco to outperform versus the market. We're going to wind share profitably. You could see this movingí soon, and yet I'm not at a place like Omicron anymore.

we are committed to delivering on our growth targets. It's just a more overarching comment about traffic. No notable call-outs mark on trade down. I know that's often a question within sectors and within segments of our book. The traffic that we experienced was...

kind of across the board, across our restaurant names that we cover. Specific to inflation, I would like to provide a little more color in that regard. The number, the print for the quarter was 4.9%, as Neil said in his prepared remarks. The quarter started a bit higher than what we expected and it ended a bit lower than we expected. It ended a bit higher than what we expected.

So mathematically, what that means is the rate of disinflation in March was steeper than we had anticipated. Now, we're prepared to manage that. As I mentioned a second ago, we're

in answering Josh's question. For the long term of this industry, lower inflation is a good thing. I want to be really clear about that. This time last year we were dealing with 15% inflation and we were receiving lots of questions from investors about the impact on that inflation would have on consumer psyche and...

consumer demand and when it decreased what traffic the restaurant. So the fact that the inflation rate is coming down is a good thing. With that said we need to be thoughtful and strategic about how we manage the transition from double digit plus inflation to what we're expecting in Q4 to be low single digits. We have a tool to be able to do that and that's our pricing tool. I'll reinforce a couple of key points, which is our purchasing cost because of our scale advantage is the best in the industry.

And we have the opportunity to be strategic and thoughtful about passing on value when it is created to those end consumers. Specific to your point about product to matter categories, I think the easiest way to answer that is what categories last year were most inflationary. And John , it was mostly center of plate. So I think you remember this time last year, protein specifically within the 30 to 40 percent inflationary space.

that subcategory and category you know went deflationary for a period of time and what we say all the time is it's not about a category it's about the overarching book of business and while protein was deflationary our overall book average was plus 4.9 and then one much more comment about that we're actually getting indications from the supplier community that beef will begin becoming

inflationary again in the coming year because of some challenges on the production end of that particular product set. Neil, I'll toss to you for any additional comment. Thanks, Kevin. Just a little bit of color commentary around some of those points. You know, at any given point in time, you have some categories that are inflationary like currently for us dairy.

some that are deflationary, like for us currently poultry, and some that have swung. You know, as Kevin just talked about, so beef, which was recently deflationary, is now becoming inflationary for us. And it was the pace of disinflation, particularly in March, that changed a bit. And we ended, as Kevin said, the quarter at about 5% for the total quarter.

in terms of inflation. The local customer market is fairly efficient in terms of how you pass this through. And on the chain or multi-unit side, you have longer visibility with the contract that we have with those types of customers. Put all of this together and you still expect low single-digit inflation for the fourth quarter, which as Kevin indicated, if you were to look over a...

value to our customers passes through at a lower rate of inflation, aka disinflation, simultaneous to that. We are taking meaningful costs out of our current supply chain. We are driving improvement in efficiency, and it's those things that need to happen in concert, and I am pleased with the rate of improvement we are making within our supply chain.

really strong, so as our inflation rate begins to decline, aka disinflation, we're bringing costs down at exactly the same time.

Thank you. Thank you.

Your next question comes from Jeffrey Bernstein at Barth Lease. Please go ahead. Great, thank you. One follow-up on that last question. The March slowdown that you anticipate continuing through the fiscal fourth quarter, having yet noted in the release and in your comments that...

Cisco sales perhaps were maybe stronger or more stable through the quarter. I'm just wondering whether you think there's an opportunity to accelerate market share gains in what's likely a slowdown. Presumably again scale matters and you've got more options to mitigate. So I'm just wondering if there's an opportunity for greater market share gains in an environment like that and then I had one follow-up.

Okay, Jeff, this is Kevin. I'll answer the first question and then toss to you for the follow-up. So we're bullish on Cisco's ability to win in the market for the long term. We are playing the long game, as I said in my prepared remarks. The recipe for growth strategy is all about better serving our customers and growing our business profitably.

enabling Cisco to do so at a rate that is faster than the overall market rate of growth and we're on track to be able to do that for our third consecutive year. Specifically, you know Jeff, what we will double down on during a period of time that would be a slower macro is initiatives and strategies that we know are working. So push even harder and work even faster on Cisco your way.

Engage our Cisco perks customers with the benefits that are available to them because we have proven that a Cisco perks member who engages With one of Cisco's programs and that would be an example a culinary service buys more from Cisco on an ongoing basis The work we're doing with our website, it's move faster improve it even more Spanish language version of our website is going live soon. Just

doubled down on our ability to advance forward our strategy because our strategy is working and our strategy is winning in the marketplace. Italian, as an example, we've doubled our market share in Italian over the past year in large part through the Greco Insons acquisition. But remember the Greco acquisition was about taking that platform nationwide, not just cultivating it within its existing geographies. We're making meaningful progress in being able to advance that Italian platform.

by opening new physical geographies most recently out in California through an acquisition we did in LA. And we're going to flip that acquisition to the Greco model and meaningfully grow that business. So Jeff, we're all about profitable growth and doing so responsibly. And we do believe there's an opportunity not just in our Q4, but as we head into fiscal 24 to lead the industry from, you know, a profitable growth perspective. Toss back to you for your follow-up.

Yeah, in fact, perfect. I think you ended it with thoughts around fiscal 24. I was wondering, I mean, I know back in the day you had given guidance which culminated in fiscal 24. I know it was built off of fiscal 19. I think it was for EPS growth 30% plus, which at the time equated to 460 or more. I know it hasn't been mentioned of late and we had a reduction in fiscal 23 guidance last quarter.

to achieve those prior earnings targets. Thank you. Jeff, appreciate the question. This is Kevin. I'll start and then I am going to toss to Kenny for a comment. Just to be clear, we're going to provide our guidance for 24 at our August call. We are confident in our plans at Cisco to continue to advance our recipe for growth. The strategy is working and what we are confident in are some, let's call it macro comments. We are confident we can grow our...

business profitably faster than the industry. We are confident we can continue to make improvements in our supply chain efficiency. Things of importance that we'll provide you with more color on in August , because we're deep in the throes of our fiscal planning process as we speak, and that work will happen over the next couple of months, is what level of inflation will we assume for fiscal 24? What level of market growth will we expect to see in the next couple of months?

Hey Jeff, so a few things from my side of the house. We are entering 2024 with momentum. So keep in mind, we will finish this year in Q4 with record sales and operating income. So a lot of momentum is entering next year. As Kevin mentioned, there's a few themes that you will see as we unbuild the new plan in August and next earnings call. One is continue to take care, probably. That's very important for all of us. And that's where recipe for growth comes in.

Second is we will continue to drive operating leverage in our business. Third is making sure that our balance sheet continues to be healthy and robust from a liquidity, cash and leverage standpoint. So to your last question around where do I add value and how I think about these things that I just mentioned, right? As I think about my priorities entering, you know, call it Q4 in 2024.

There's a few thoughts in my mind, right? First of all, I view myself as a business leader with a finance expertise, right? So I'm a very hands-on operational CFO . So where I work directly with the team and deploy capital where I create value for our stakeholders. I'm of the mind that one of my job, one of my job, you know, first priority is to make sure that we continue to generate healthy cash inflows from operations.

maximize the conversion from EBITDA and operating income, and ultimately, continue to high quality earnings that Cisco has enjoyed throughout the period. The second piece is continue to partner with the team, from a go-to market standpoint, providing world class service for our customers. Everything starts with our customers, especially as we grow market share, local, Cisco brands.

specialty, and the like, which increase margins for our business. And last but not least, you know, as part of my pedigree and my experience is all about pure operational excellence, driving productivity and rigor with our supply chain and overall business. A penny for our business is huge, given the fact that we have skill and leverage as we talked about. And this comes full circle to my first point where we must generate cash and flow to invest in our business and create further value on top of the skill advantage that we enjoy.

Thank you.

Thank you. Thank you, Jeff.

Your next question comes from Kendall Toscano at Bank of America. Please go ahead. Hi, good morning. Thanks for taking my question. So, I wanted to ask about the 2023 guidance, but first I just wanted to see just a quick follow-up in terms of the local customer channel. So, I'm going to go ahead and get started.

You had talked about some initiatives last quarter to accelerate new customer acquisition in that segment. I was wondering if you had any update on that, and then just in terms of the exit rate for the quarter, you said March for, I guess, the total U.S. U.S. Broadline segment was kind of at a low.

or slight growth, I think you said. I guess how does that look for local customers specifically? And can we assume it's still running a bit below the national customers?

I'll start and then I'll toss to Neil for additional color. So part of it is accidentally there we got a mixed message between the marketplace, which means all businesses and then Cisco specific. So I'll unpack it and make it more clear. The comment about March, low growth or slight growth, I believe were the exact words I used. That's it.

growing our non-restaurant business and our CMU restaurant business, that's the contracted long cycle to use Kenny's term, at a faster rate than local. And the lie is twofold. One, Cisco is the industry leader in the non-restaurant sector and that's business and industry, travel, hospitality, and those businesses remain in meaningful recovery.

That's not a slight on the local business. It's that we're seeing significant rebound in health in travel, and we're seeing offices reopening, we're seeing more people going back to work on a daily basis, and we're seeing companies extend the number of days per week they expect their colleagues to be returning to work. So, we've been tremendously successful in our national sales business.

We stopped reporting the number, but the last time we reported it, it was 2 plus billion of net new wins for national business. And I want to be really clear about that. We did not buy that business. The contracted margin rates for those wins exceeded our historical standards. The reason why companies are partnering with Cisco is our national scale, our breadth and reach scale matters in this industry and our ability to ship on time and in full and provide competitive marketplace rates.

shine through strongly over the last couple of years from a national perspective. So that gives it a color. Our total was six, you know our local was four plus, that's volume, and the overall market itself in March was light growth. Our commentary for the Q4, I'm going to toss to Neil for anything he would like to say about that.

Hey Kendall, thanks for your question. As Kevin is talking about here on the industry perspective, you know, we are we are seeing total growth and albeit at a slower pace and Cisco outpacing that. It's not as much about the local independent versus the chain or multi-unit as much as it is good operators innovating on their menu, offering fresh local customizable.

offerings that matter to the end consumer. So I think that's ultimately what we're seeing as it pertains to the year and the guidance. A few points you know that we've made that we continue to emphasize we do expect to grow sales by at least 10% for the year and as we talked about we continue to expect a rate of gross profit dollar growth to exceed the expense growth and continue to leverage that. We talked about the inflation that's looking for us to be in that low single-digit range.

ahead. Thank you. Good morning. I wanted to follow up on the target to grow 1.35 times the market in 23 and I guess further acceleration ahead and how you're thinking about that ramp relative to previous thoughts. I mean it looked like a pretty...

a strong acceleration in the chart. I didn't hear whether you reiterated the 1.5 times for 24, but just any more color there. I'll start, and then I'll toss to Kenny for any final or additional comments that he'd like to make about 24. Alex, appreciate the question. So what I.

pleased with the progress that we are making. Cisco has been the largest in this industry for a long time. We have had the highest EPS as a percent of sales or EBITDA as a percent of sales in this industry by a wide margin for a long time. And we have become a growth company. We are consistently growing more than the industry.

we are accelerating our rate of progress. So the recipe for growth is the why and the how and the increased allocation of capital specific to footprint, meaning infrastructure. That's not an increase in the total capital at Cisco, it's you know you'll help me we said how many buildings did we say that number publicly at seven. I didn't want to miss

Some of those seven buildings are for our Italian platform to be able to replicate the Greco model in geographies where we don't currently have an Italian platform. So we're bullish on our long term. As I said, we're playing the long game at Cisco. The recipe for growth is working. Perks to screw your way, our improved website, our pricing capabilities, the physical infrastructure enhancements that I mentioned. Neil was out in California last week looking at Riverside, which is our site.

in the company's history. And obviously the overall market, from time to time there were some curve balls. And I mentioned a few of those at the beginning of today's prepared remarks. As it relates to 24, Kenny, I'll toss to you for final word. Yeah, so, good morning. Capital allocation strategy, it's precision for growth at Cisco.

We are positioned for growth, right? Return on invested capital, as I mentioned earlier, is the lens in which we will operate to ensure that we are getting optimized return for where we deploy capital and resources. So just a bit of my thoughts on capital allocation. We will first and foremost invest in business and growth. That includes capital investments, as Kevin mentioned, technology, digital tools, fleet, buildings, infrastructure, footprint, right? This also includes basically for growth as well. So right now, Cisco has the luxury, given the fact that we are generating robust free cash flow.

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