Q4 2023 Sysco Corp Earnings Call
Welcome to Cisco's fourth 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 now like to turn the call over to Kevin Kim Vice President of Investor Relations. Please go ahead.
Good morning, everyone and welcome to Cisco's fourth quarter fiscal year 2023 earnings call on today's call, we have Kevin Hurricane, our President and Chief Executive Officer, Danny 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 companys or managements intentions.
His beliefs expectations or predictions of the future are forward looking statements within the meaning of the private Securities Litigation Reform Act and actual results could differ in a material manner additional information about factors that could cause results to differ from those in the forward looking 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 <unk> 2022, subsequent SEC filings and the news release issued earlier this morning.
A copy of these materials can be found in the investors section at Sysco Dot com.
non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures is included at the end of the presentation slides and can also be found in the investors section of our web site.
During the discussion today, unless otherwise stated all results are compared to the same quarter in the prior year to ensure we have sufficient time to answer all questions, we'd like to ask each participant to limit their time today to one question and one follow up at this time I'd like to turn the call over to Kevin <unk>.
Thank you Kevin Good morning, everyone and thank you for joining our call today.
I'd like to cover three topics during my section of our call first I'll provide a summary of our Q4 results and our full year performance.
Second our convey an update on our recipe for growth strategy and lastly, I'll provide some commentary on the macro condition. Since we have modeled for fiscal 'twenty, four and how Cisco intends to operate within that environment anyway.
Andy will provide much more detailed components of guidance during his section.
So let's get started.
We're pleased with the strong finish to the fiscal year.
Cisco posted record topline and bottom line results during the fourth quarter topline.
Topline results as seen on slide five we're up four 1% compared to last year, delivering $19 7 billion in sales the.
The strong quarter generated a four year sales result of $76 3 billion a record at Cisco.
We grew annual sales by 12, 5% or $8 6 billion on a constant currency basis.
That sales growth is the equivalent of creating a net new fortune 500 company within Cisco.
Turning to volumes Q4 case volume grew two 3% in local case volume grew 0.8% across our U S. Foodservice business successfully growing our market share and furthering our number one position in foodservice distribution.
We are pleased with our share gains for the quarter and the year, which build on meaningful gains delivered within fiscal year 'twenty two.
Importantly, these gains are profitable share gains we are not growing for the sake of growing as we have consistently pursued profitable sales growth vectors domestically and internationally.
Moving to gross profit.
Our sales and merchandising teams delivered a strong quarter from the GP growth perspective.
We grew gross margin rates and GP dollars per case, which is not easy to do in a disinflationary environment.
Our teams are doing excellent work and strategic sourcing to reduce Cogs and further penetrating sysco brand cases with our customers.
Advancing sysco brand helps gross profit.
Leads to increased customer retention.
Lastly, we are growing our higher margin specialty business, which strengthens our overall margin profile.
Next in the P&L as operating expense.
I am most proud of the quarter from the perspective of the progress that we're making in reducing our expenses.
We have been clear with investors that our first half of the year in fiscal 'twenty three had elevated expenses.
This was driven by two factors.
Investments in our business and our supply chain struggling with new colleague productivity.
In the second half of fiscal 'twenty, three we made major progress on our expense ratios and greatly accelerated productivity improvements within our supply chain.
Retention of colleagues as improved productivity.
Productivity of our colleagues has improved and our supply chain initiatives are bearing fruit.
All told we delivered an operating leverage of 370 basis points in Q4.
Growing GP dollars meaningfully more than expenses.
Slide seven highlights the sequential improvement with Opex over the course of the last fiscal year.
We began the year in our U S foodservice segment with quarterly operating expense growing over 22%, but.
<unk> ended the year with a growth rate of 0.5%.
Our focused effort to deliver supply chain efficiencies and broad based cost reductions drove the sequential improvement across the year.
We expect to make further operating expense progress in 2024.
We will be focused on ensuring our supply chain is properly staffed properly trained and working safely and productively.
We have the leadership expertise supply chain tools and supply chain infrastructure to lead the industry. In this regard which is one reason why Cisco operates at an EBIT margin over one five times higher than our industry's distributor average.
Record top line and record bottom line performance in Q4 as a direct result of our recipe for growth and our focus on excellence in execution and operations.
The improvement from first half to second half within fiscal 'twenty. Three was notable enabling Cisco to grow EPS more than 23% for the full year.
In addition to delivering a strong P&L in Q4, we achieved record free cash flow and we returned approximately one 5 billion back to shareholders during the year.
We are pleased with the strong financial performance in the quarter, Despite rapid disinflation and slower overall industry market volume growth.
We believe our success in spite of those conditions positions the business to be successful in 2024, which I will speak to more in a moment.
As is my custom I'd like to provide a brief summary of select recipe for growth elements of our strategy from our recent quarter.
I will start within our supply chain initiatives.
Our work on strengthening engineered labor standards across our supply chain is paying dividends.
As I mentioned, a moment ago, we made significant headway in improving our supply chain efficiency.
We have recently strengthened our work method standards training within transportation roads, enabling our colleagues to work safely and work more productively.
Additionally, we have increased retention rates within our workforce through our improved training programs.
The driver Academy is national and the impact of this program is a better trained workforce.
Now I would like to highlight the progress that we've made on the food sales and marketing side of our recipe for growth.
Last month, we announced an agreement to purchase <unk> produce.
<unk> produces a leading produce specialty distributor based in Minnesota.
The acquisition is expected to provide a strategic opportunity for fresh point to expand its geographic footprint in an area of the country, where it does not currently have operations.
<unk> has a strong assortment offering including fresh cut produce grabbing goes sandwiches and value added production capabilities.
In addition to our good work in expanding specialty we also upgraded our digital shopping platform during the quarter.
Our shop digital platform is now available in Spanish and we have deployed more than 100, new feature enhancements.
Some of these enhancements include a new homepage, new category and cuisine pages improved search and navigation and lastly in new deals for you page.
These enhancements have driven an increase in product page visits, adding incremental volume through add to cart purchasing.
There is no finish line and our digital improvement journey.
We will continue to improve our digital tools overtime, enabling us to reduce friction in the purchase experience and inspire our customers to buy more from Cisco.
Our centralized pricing tool has given us the ability to be what we call right on price at the region customer and item level.
During the first half of 'twenty, three we experienced rapid inflation and in the second half of 'twenty, three we experienced rapid disinflation and even deflation towards the end of Q4 within our core <unk> business.
Our merchants have been fighting to secure best possible cost and our pricing tool ensures that the real time cost fluctuations are built into our pricing strategies.
Managing pricing across hundreds of thousands of customers tens of thousands of products and approximately 7500 sales reps has never been stronger.
This is evidenced by our consistently strong performance GP dollar growth and adjusted gross margin rate growth up 28 basis points year over year in the quarter.
We want our sales reps focused on customer engagement relationship building consultative selling and solving problems for our customers our pricing tool enables our Sps to spend more time on those value added activities.
Lastly, Sysco your way is now live in over 400 neighborhoods across five countries.
And our loyalty program perks is active with over 12000 customers.
Both programs are continuing to deliver compelling top and bottomline growth.
The past year has been a heavy lift as we work to get these programs off the ground.
In 2024, we can focus on maximizing the impact of these compelling programs with less effort and investment required than in 2023.
In summary, our recipe for growth is working enabling Cisco to profitably grow our business and differentiate versus others in our space.
What's compelling is that food away from home is a growth sector as seen on slides 10 and 11.
Cisco has been profitably growing faster than the overall market delivering record top and bottom line results.
We expect to continue to win market share profitably in the years to come introduce though in a fiscally responsible way.
I'd like to wrap up my time. This morning, with some comments about the operating environment, we expect for fiscal 'twenty, four and Cisco is positioning within that environment.
My main message is that scale matters in this industry and that strong operators are best positioned to succeed regardless of the environmental conditions.
Cisco is a very strong operator with meaningful scale advantages with that said in fiscal 'twenty four we expect the market to grow at a lower rate than 'twenty three.
We also expect the rate of inflation for the year to be below historical standards.
In the second half of fiscal 'twenty, three we experienced a rapid disinflation followed by deflation within our core U S broadline business towards the end of the fourth quarter.
We expect that deflation will continue within U S. Broadline for the first half of fiscal 'twenty four.
Road by muted U S broadline product inflation in the second half.
We expect that our international segment will remain inflationary during the coming fiscal year.
Given unique marketplace conditions in those geographies.
Net net for Cisco, we expect an inflation rate that is slightly positive throughout fiscal 2024 below our historical average.
We believe the Q4 environment. We just exited is largely reflective of the operating environment for the coming year.
Importantly, we grew our top and bottom line within that quarter, we are being very prudent in fiscal 'twenty four in managing our expenses given the volume and inflation components that I just conveyed despite these conditions Cisco is positioned to succeed.
Faster than the market and deliver bottom line growth.
Our confidence is also based on our structural competitive advantages.
Our international business.
Which is approximately 18% of sales continues to outperform providing a natural hedge as international inflation rates remained elevated and are expected to stay higher than the U S.
Second our purchasing scale as the largest in the industry.
In our strategic sourcing efforts will enable Cisco to secure improved pricing in a deflationary environment.
Third.
Cisco.
As a diversified business with strong sales across 12 major product categories to help buffer the impact of inflation or deflation in any one category.
Additionally, our strategic pricing software will enable cisco to be extremely purposeful on how we manage the impact of disinflation and deflation.
Lastly, further advancing sysco brand penetration domestically and internationally as another lever to pull to deliver GP dollar growth when the environment is deflationary.
The exit velocity of fiscal 'twenty, three gives us confidence in delivering strong results in 2024 in summary, here's what we expect for 'twenty four.
Lower rates of overall market volume growth versus 23 <unk>.
Continued market share gains and profitable growth at Cisco.
Deflation in the U S for at least the first half of the year and muted overall companywide inflation for the full year.
Disciplined expense management, Kenny and I are directed in effort to reduce structural expenses by approximately $100 million.
Extremely disciplined return on invested capital or ROIC focus.
Continued progress in advancing Sysco brand penetration in growth within specialty.
In total given all of these inter working variables. We are modeling an adjusted EPS range of $4 20 to $4 40 for the full year the.
The midpoint of that guide would generate approximately 7% EPS growth versus fiscal 'twenty three.
Now in our third year of recipe for growth, we are positioned to press the accelerator on certain improvement initiatives.
For example, we can optimize our performance and launched Cisco year way neighborhoods, which takes less effort and starting up a neighborhood.
Our digital tools are becoming more and more pervasive with our customers and we can optimize the personalization of these interactions to increase yield through each transaction.
We have always said that the recipe for growth is a wheel where each initiative fuels. The next.
Fiscal 'twenty four is a year of optimizing what we have launched versus kicking off net new efforts. This will enable cisco to be laser focused on what matters, most executing with excellence against launched programs.
Also means we will be able to grow our business with less investment.
This was always our plan within the recipe for growth and it is coming to reality in fiscal 'twenty four.
In addition, our expanded geography of specialty businesses like the recently announced <unk> acquisition, we will increase the impact of our higher growth the specialty segment.
In fiscal 'twenty four we're committed to both profitably growing our topline meaningfully reducing opex and generating a higher rate of return on our key initiatives.
Given the confidence that we have in our long range roadmap. We are happy to announce that we have reintroduced ROIC as a long term compensation metric for our leadership team in.
In addition, we have increased the weighting of financial metrics within our short term annual bonus program.
As I have said many times before the best companies in the World are growth companies and we expect that Cisco will continue to profitably grow faster than the overall market.
I am thrilled to have kidney as my partner on these objectives.
We are committed to maximizing every dollar invested in producing the greatest shareholder value.
I'll now turn it over to Kenny who will provide additional financial details Kenny over to you.
Thank you, Kevin and good morning, everyone.
I would like to start off by thanking our customers colleagues and partners around the world for helping us deliver another record quarter.
<unk> operates a high volume business and I'm proud of our efficient response, and servicing and delighting our customers, we close out the fiscal year strong delivering improvement across the income statement balance sheet and cash flow.
Q4 financials reflect positive sales and volume growth and operating expense leverage altogether. These render a record quarter of operating income net income and adjusted EPS.
Our results also reflect improvements in operational efficiency through productivity and resource optimization.
This elevated performance will enable us to reinvest back into the business and return excess cash back to shareholders. An important theme, we expect for FY 'twenty four and beyond.
Our unique value proposition with the recipe for growth at the forefront, that's what differentiates us as a growth company.
As Kevin stated earlier, we will continue to focus on are celebrating programs that have high returns, which is a key priority and my role here at Sysco.
Now turning to a summary of our reported results for the quarter starting on slide 14.
For the fourth quarter, our enterprise sales grew four 1% with U S foodservice growing two 5% international growing <unk>, 2% and Sigma growing one 4%.
With respect to volume.
It'll U S foodservice volume increased two 3% and local volume increased 0.8%.
We produced $3 7 billion.
And gross profit up 7% versus prior year.
Adjusted gross margin improved to 18, 7% a sequential increase from the prior quarter and an increase of 28 bps compared to last year.
Gross profit dollars and margin percentage improvement during the fourth quarter reflected our ability to continue to effectively manage product inflation, which moderated to two 1% for the total enterprise consistent with our expectations.
The improvement in gross profit was driven by incremental progress from our strategic sourcing efforts as well as improved penetration rates from sysco brands products, which increased by 11 bps to 37, 2% in U S Broadline and 64 bps to 40.
Seven 3% in U S local results.
Overall, adjusted operating expenses were $2 7 billion for the quarter were 13, 5% of sales a 29 bps improvement from the prior year.
All four operating segments continue to show increases in quarterly profitability, including substantial growth in the international and SYGMA segments.
As seen on slide 22, and 'twenty three Q4, adjusted operating income of $1 billion, but the enterprise showed a strong exit rates growing 25% compare to FY 19.
This is the highest adjusted operating income quarter in <unk> history and is now the fourth consecutive period of record quarterly operating income.
For the year adjusted operating income increased to $3 $2 billion.
Growing 17, 3% compare to our prior FY 19 record an important signal of the progress being made at Cisco.
For the quarter adjusted EBITDA increased to $1 2 billion.
Growing 14, 4% we are thrilled with the progress of our international segment with adjusted operating income growing 58% for the fourth quarter.
As stated earlier, our international business continues to deliver robust growth with positive momentum.
I am also particularly pleased with the health of our balance sheet, which further strengthened this quarter.
We delivered on our target leverage ratio another important milestone as we ended the year at two five times net debt leverage ratio.
This is within our target up two five to 275 times a substantial improvement from five one times just over two years ago.
We ended the year with $9 7 billion and net debt with total liquidity of $3 7 billion.
And no commercial paper outstanding.
Our debt as well lateral without any maturities over $1 billion until FY 'twenty seven.
Turning to our cash flow, we generated $2 9 billion in operating cash flow and $2 1 billion and free cash flow, which was a new record our conversion rate from adjusted EBITDA to free cash flow was 55% and operating cash flow conversion.
<unk> up 75% shows the company's robust earnings power.
Our strong financial position enabled us to return $1 $5 billion to shareholders. This was done through $500 million of share repurchases and $996 million of dividends.
Despite the changing macroeconomic landscape, we are positioned to grow both topline and bottom line results and FY 'twenty four and the long term.
The guidance, we are providing is reflective of the traction our recipe for growth initiatives are gaining in addition to moderate industry growth rates.
Furthermore, we believe our Q4 performance provides significant proof of our ability to drive shareholder value at several of these macroeconomic and industry dynamics are expected to continue into FY 'twenty four.
As Kevin highlighted on slide seven we began the year with elevated levels of operating expense growth.
As a result operating expenses are.
Area of focus for our supply chain teams throughout the year, and we were able to produce sequential improvements.
We ended the year with a significant operating expense leverage, allowing us to improve margins.
This is important progress and we expect continued improvement going into FY 'twenty four.
Let's now turn to look forward.
During FY 'twenty four we expect top line growth of mid single digits and positive volume growth, which will move Cisco to approximately $80 billion in annual sales. This will be another record for Cisco and.
Importantly, we expect inflation to be slightly positive on an enterprise basis for the full year.
Based on our analysis and the exit rate from the fourth quarter. We believe that first half globally will be slightly positive in the second half will step up.
This includes continued deflation in U S. Broadline during the first half of the fiscal year with an expected rebound in the second half of the fiscal year.
Based on our structural advantages Cisco is well positioned to manage our cost effectively and continue to pass along pricing without impacting demand it.
It is all about better buying better selling.
Turning to expenses, we expect further improvements and operating expense leverage based on a continuation of the process improvement from this past year.
One month into the new year, we've already executed actions to support $100 million of cost out where it has been factored into the guidance.
We will continue finding incremental opportunities to enhance operational efficiency and adapt swiftly to the constantly evolving business environment in which we function.
We will manage our business with discipline and agility.
We have modeled out frontline operations wage growth to be approximately four 5% to 5%. This.
This is higher than our historical average, but much lower that select other industry news due to the fact that in many instances our supply chain colleagues are paying above market and our drivers can earn as much as $100000 per year.
We also expect free cash flow to grow further in FY 'twenty four on top of our record performance in FY2023.
We wanted to also provide guidance on several other important modeling elements.
The tax rate for FY 'twenty four is expected to step up to approximately 24, 5% compare to 23% in FY2023.
The increase is driven by geographical mix related to strong international growth and increases in state tax rates.
We plan to remain in line with our net debt leverage ratio for the year related interest expense is expected to step up by about $13 million for the year due to cash uses for growth investments dividend payments share repurchases and anticipated M&A activity other expenses.
As expected to be approximately $30 million for the year, driven primarily by pension expense.
All in we are guiding to adjusted EPS for FY 'twenty for at $4 20 to.
To $4 40.
This reflects adjusted EPS growth of approximately 5% to 10%.
Our capital allocation strategy will continue to focus on investing in the business.
Examples include M&A, maintaining our strong investment grade credit rating and continuing our return of capital to shareholders through dividends and share repurchases.
Capex should be consistent with prior year at approximately 1% of sales.
Returning cash back to shareholders is important as is our dividend aristocrat status and we plan to step up these efforts at the coming year and FY 'twenty four we will have a <unk> <unk> dividend increase and we expect to complete approximately $750 million.
Of share repurchases as we start the fiscal year with $4 billion and remaining authorization.
Depending on the volume of M&A done in FY 'twenty four we could increase share repurchases further while continuing to operate within our stated goal of two five to 275 times leverage.
We will look at each investment through the lens of driving growth and ROIC.
And I am pleased to state that our ROIC.
FY 'twenty four is expected to surpass our pre COVID-19 levels through sales growth margin expansion and prudent management of the balance sheet.
As a company ROIC will dynamically guide, our operating and investment decisions, which will accrete shareholder value over time as we continue to focus on both margin dollars and percentage growth.
Now in my role for a few months I am constantly impressed by the size and scale advantages at Cisco.
This is a high volume business that runs fast and any micro adjustments around operational efficiencies are felt quickly.
Our scale advantages are also reflected in our industry leading margins.
Our diversification as the industry leader across customer types, with two third and restaurants, and one third and recession resistant category, such as education and health care is also a structural advantage.
Our robust industry, leading operating cash flow and strong investment grade rated balance sheet gives us access to capital at attractive rates. So we're able to take advantage of opportunities as they present themselves.
As you can see in our performance results. Our international segment is proving to be an advantage contributing higher rates of growth that our mature U S business and the inflation dynamics in other geographies are helping create a bit of a natural hedge across our business portfolio.
We believe that international and continues to be a profitable growth engine for Cisco.
I am even more excited 90 days into this role that I was on day, one and I look forward to our progress ahead with that I will turn the call back over to Kevin for closing remarks.
Thank you Kenny as we conclude I would like to provide a brief summary on slide 28.
Cisco has a strong record of generating consistent results.
Fact, Cisco has grown annual sales and 51 years out of our 54 year history.
We expect our positive momentum to continue in 2024.
In addition to compelling topline growth Cisco as the industry leader from an adjusted EBITDA margin perspective, with the strongest balance sheet.
We plan to build on that position of strength in fiscal year 2024.
We ended our fiscal year 2023, with strong sales volume and share growth growing volumes across both our chain and independent business.
The result was a 23% adjusted EPS growth for the year with record top and bottom line contribution.
We have momentum going into the year as our recipe for growth transformation now in its third year. This further building upon and enhancing our competitive scale advantages.
Importantly, we have demonstrated our third consecutive quarter of operating leverage with gross profits outpacing operating expense growth.
For fiscal year 'twenty for our dual focus on core efficiency measures and optimization from proving growth opportunities will deliver another year of top and bottom line growth.
There are bright days ahead for the feud away from home industry and more specifically Cisco AMB.
I am both excited and proud to be a part of the journey and as always I want to thank our 72000, plus Cisco colleagues for their commitment to our customers and our shareholders.
Later, you can now open the line for questions.
Thank you Sir.
Ladies and gentlemen, we will now begin the question and answer session.
If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
If your question has been answered and you would like to withdraw from the queue. Please press star followed by the number two.
And if you are using a speaker phone please lift the handset before pressing any case.
One moment. Please for your first question.
Your first question will come from Edward Kelly at Wells Fargo. Please go ahead.
Hi, guys good morning.
Yes, Kevin. So my question is on is on the guidance I mean, obviously the backdrop for.
For the industry, it's a little bit tougher than what it would normally be in providing guidance on that backdrop is not easy 5% to 10% earnings growth against that.
Certainly respectable but can you talk about.
The confidence in that level of growth.
The cadence that we could be expecting and if you were to be at the bottom end of the range or what would drive that in a few rental pop the better end of the range.
What would cause that outcome.
Hey, Good morning, Ed This is Kevin I'll start and I'll to us to Kenny for additional comments I guess I would start with a few points. The guide is based on a continuation of momentum.
The company has been building over the past six months, most notably tied to our operating expense improvements.
Our planning process, three big boulders volume of the market inflation.
<unk> of the market and then our expense ratios and we've worked very hard to make sure that we can do the best job possible in guiding what these individual three components will be so let's start with volume as I said in my prepared remarks, we do expect for the volume growth of the industry to be more muted this coming year, we have factored that in.
Two our guide we've triangulated that from supplier partners from economists from bankers and our own data, we have a treasure trove of data across all of the different business segments that we serve so we do expect for volume growth of the market to be more muted with that said, we're confident that <unk> Cisco can grow faster than the market and.
We are committed to doing so profitably topping two as inflation or deflation as it is as it were.
And we have to break that down into individual businesses and individual countries. As I said in my prepared remarks, <unk>, we expect to be deflationary for at least the first half of the year. We do have a natural hedge at Cisco given the fact that we have an international segment that is still experiencing inflation due to unique.
Geography considerations and purchasing considerations within those countries. So when you put that all together for the year I'll use that same term a second time, we expect for muted inflation for the entire year, that's below our historical standards.
On the positive side continued logistics efficiency.
On our slide that we're really pleased with is page seven in our slides that are out there. The progress that was sequentially made throughout the year quarter over quarter on improving our logistics efficiency. We expect to continue there are some important below the line things in the guide that Kenny can talk too about tax and interest.
To answer your question on confidence Ed I'll end with Q4, the environment that we've just exited and most notably June we believe to be reasonably consistent with what we expect the overall environmental conditions to be in.
In fiscal 'twenty, four and we had a solid performance ending the year in a solid performance in June so when I put all those things together that's why the guide what would have to be true to be at the top and continued performance on operating cost efficiency improvement accelerate our growth versus the market those would be the two things.
Within our control that could enable us to be at the top.
For us to be at the bottom end of that range would be I would say if deflation lasted longer or persisted longer or were deeper than had been modeled that would be a headwind that would put it more towards the bottom end of the range. So we focus on what we can throw at Cisco, we are going to drive operating efficiency can eni.
Announced today have.
Issued $100 million cost out improvement, which is baked into the guidance that we just provided and we've actually executed already against the major components of that plan and we've got our sales team is focused on driving profitable sales growth with that I'm going to toss to Kenny for any additional comments.
Thank you Kevin I'll talk about two things one the confidence level around the guidance and second as Kevin alluded to a couple of below the line items I think needs a bit more color. So first is around the confidence in the guidance our confidence in the guidance is based on how we successfully managed.
Q4, so if you think about Q4, we ended the quarter deflationary in the U S and with that we still managed to expand GP margins by 28 bps and operating margin by 56 bps. So again, we're doing it right now the second piece I would say is that.
If the environment were to change we have the agility to flex up and down given the fact that we have a world class balance sheet and we have a very agile cost structure and we have productivity in place the $100 million that has already been executed and baked in in our guidance. So that is around the confidence.
The guidance in terms of the below the line items. There are two areas I want to go a bit deeper on.
One is tax rates, we expect our tax rate step up from 23 to 24, 5%.
There's two pieces to the tax side first we are seeing earnings strengthening across our international markets, which is yielding a higher tax charge.
This is a good thing we are seeing our international arm growing fast.
The second piece is here in the U S. We are expecting a higher state tax expense due to various factors, including the mix of earnings across the state. This is our current view, we are continuing to evaluate tax planning strategies.
And we'll report back as appropriate the second piece is around interest expense.
Overall, the rates has risen and we also plan to raise capital to deploy against high returning accretive initiatives, which includes growth investments M&A and return excess cash to shareholders. This is driving the higher interest expense again $13 million increase year over year. The last bucket is.
Other expenses as I've mentioned in my prepared remarks, we expect it to be roughly $30 million related to pension expense.
Thanks Ross.
Hey, guys.
Okay.
Your next question will come from Joshua Long Stephens, Inc. Please go ahead.
Great. Thank you as hopefully you might be able to dig into some of the underlying core customer segments. Obviously, we were able to see some of the.
Case volume trends there that you provided in the release and Thats helpful. And just curious if you could tie that together, Kevin with some of your high level thoughts on where the consumers that how they're choosing to spend their dollars and maybe how that corresponds with your.
Customer makeup as we think about the fiscal 'twenty four guide.
Yes, Joshua Thank you for the question I'll start.
More aggregate level as you know we serve every segment of the food away from home industry, which is what I meant during the answer to Ed's question about we have a treasure trove of data we can see macro trends. So our national sales team had a banner year. This past year. That's on top of a banner year in 2022, I want to be very clear that those.
Gross.
Those growth constructs are profitable growth, but health care education travel hospitality business and industry those sectors have been continuing to see a tailwind of recovery and we are winning market share profitably in those sectors national restaurants, we are winning large in that regard as well mostly because there.
Partners view, Cisco as a backbone for them.
Every state, including Alaska, and Hawaii, not every food distributor is and it's an easy button for them to be able to partner with someone like Cisco because we can distribute coast to coast and many of these restaurants have international doors into our international freight group business, we can export their product overseas to usually a licensee part.
That they use in those countries. So again for these national restaurant chains, we are a very attractive option for them and we've been winning big those contracts are multiyear contracts and as I've mentioned, we've been signing those contracts at above historical profit margin rates on the local side, we've been winning in.
Specialty as I mentioned, the biggest producing acquisition intent today that will be a tailwind for us in fiscal 'twenty four we're winning with our Italian segment, and we are winning market share in aggregate as a company. So when I think about the end consumer.
The rapid rate of inflation increase this past year.
Put a strain on the American consumer specifically beef at one point was 35 plus percent inflationary you saw a portion sizes being reduced that menu as you saw in menu price increases and I do think that had an impact.
Particularly the independent sector and as I think about the future.
The deflation that we're currently experiencing into return to eventually what we would say would be normal rates of inflation, which are 2% to 3% will be good for the end consumer so when I talk about our teams internally think about Ah graph chart, where inflation was well above healthy now we're dealing with this inflation into deflation.
And now that curve is going to come back to normal over the next period of time and as we're thinking about fiscal 'twenty five you would see more normal rates of inflation and that should drive a tailwind in volume and those two things together for 2025 would be favorable elements for Cisco. So how are we thinking about this to help our customers as Kenny said well.
We're going to work our tails off to have best possible purchasing economics, so that we can share and value with our consumers things like discounts on advertisers. So that in fact that can be added to the purchase because when that center of plate.
It goes up what we tend to see as dessert in App purchases go down and we want to help our consumers and customers be successful by providing them with strong and compelling value through Cisco.
That's helpful. Thank you and then one follow up if I could when we think about $100 billion in cost outs that comes on the heels of.
Some other great work over the last year or two coming out of Covid curious if you could.
Dimensionalize that $100 million, a little bit more and maybe not getting into the specifics of it but just the visibility you have into maybe the timing or the realization of those is that relatively balanced across the year do you have.
Do we think about this in terms of just maybe second or third round iterations of initiatives that you've had more experience within the past and just as you have more time.
Found new wins there are these entirely new categories, just any additional commentary you could provide there as we think about the ability to drive margins and pull costs out of the system would be very helpful.
Thanks, Josh was kind of I'll say, a couple of things and I'll go a bit more detail. So.
For us, it's all about driving operating leverage in our business and what does that mean that means our GP growth will be faster than expense growth, our EBITDA will be faster than sales operating leverage on our business as it relates to the $100 million to your question directly yes, it'll be more balanced across the year and why is that because we've start.
It already started on day, one so we all of the actions have already been executing meaningfully baked into our guidance and all actions are under way that's point number one point number two.
This is incremental to the continued productivity gains and supply chain operations and efficiency that Kevin described earlier.
The last thing I would say is that we're not stopping right. We will continue to flex in line with market conditions now I know you asked for a bit more detail detail. Let me give you a tangible example, there are multiple parts to $100 million, but let me give you an example.
We've been able to expand our global shared service assurance for support Center GSC.
Other markets. Most recently in Costa Rica, I was there on a month ago.
We have access to great talent and a further build our scale advantage. So as our business grows we're able to leverage the platform that best skills, Accretively and effectively for earnings.
Thank you.
Thanks Jess.
Your next question will come from John Heimbach <unk> at Guggenheim Securities. Please go ahead.
So Kevin two topics I'll hit them, both upfront so number one maybe update on wallet share right.
Alright.
You talked about that in the past.
Is that opportunity today, and obviously, if you drive drop size.
Right and that's the most that's the most efficient thing you can do so where does that and then two I think overtime is down to zero. So volumes were a little lighter what lever DNS pull off right because I don't think I don't think you guys want to you don't want a furlough folks.
Where do you go next if overtime is at zero.
Yes, Thanks, John I'll do the second question first and then your first question second I want to be Crystal clear on what we meant by overtime at zero, it's excess overtime was taken to zero. So the industry runs at it.
Let's call it an average rate of over time, because some overtime is good.
Our employees desire some amount of overtime your trucks that leaves the warehouse and doesn't get back from to a virus because thats. The nature of the route theres going to be some overtime et cetera. So what we meant by that is that excess overtime enduring the worst of the supply chain disruption, we had meaningful meaningful excess over time. So we feel really really good about that where can additional.
These come from our retention improvement John .
Our turnover has dramatically improved and it can still further improve to get back to historical levels of retention and if you'd asked me six months ago. What's the single most important thing that we need to do more effectively it was improved retention because that flows through in many different ways, but we're hiring costs lower training.
Higher productivity because of two year veteran is much more productive than a two day newbie Theyre also a safer fewer accidents occur because theyre trained and know how to do their job. So retention improvement would be the number one lever.
But the second lever is just improving discipline to what we call Cisco's work standards. The driver Academy, we have a select or academy and our engineered labor standards keep getting better and stronger we improved processes through leveraging technology and that's the next wave of productivity improvement is too.
Better discipline to a standard work process. So we still have opportunity to improve I'm really pleased most particularly pleased with the improvement we've made in supply chain and we have factored continued improvement into our 2020 for guidance.
On the wallet share side of the business I guess, what excites me the most in our opportunity and we're not going to quote a.
The share of wallet percentage today, but Cisco Huawei and FERC are doing.
What we want and need for them to do which is further penetrating additional categories of merchandize with existing customers. The Cisco you're way model is through increased delivery frequency of dedicated sales rep, a dedicated delivery driver and our consistent presence in that neighborhood six days a week with an afternoon recovery delivery, we are seeing what we.
We would expect to see which is customers in those neighborhoods are adding specialty to the basket eliminating another distributor from the purchase consideration and rolling up more with us and FERC essentially does the same thing, but it's for a customer who happens not to be within a cisco year by neighborhood, there could be a 45 mile.
From the warehouse, but not within.
Current Cisco year way neighborhood by providing them with the service capabilities and dedicated marketing support we're seeing incremental purchases last but not least the specialty we're doing a really good job in our.
SMG, which is our meat business in our produce business and now we have our next specialty business with Italian when we put those specialty businesses together, we're making a lot of progress on what we call total team selling which is bringing net specialists into the account along with the generalist the SCE generalists.
We're moving the needle on what we call. It total team selling so it's those three things together John that are.
Helping us with share of wallet, which as you said is the most profitable case, we can put on the truck.
Okay. Thank you.
Thanks, Tom.
Your next question will come from Kelly Bania BMO capital markets. Please go ahead.
Good morning, Thanks for taking our question.
I was wondering if we could talk a little bit more about the centralized pricing tool and the price optimization work that you've been doing.
Particularly we can transition here it sounds like into some deflation.
A certain category.
And just how investors should think about modeling.
Gross margin.
We move forward given kind of not much disclosure at this point on how much of your business on a percentage markup versus the dollar mark up or how.
Hi, this is centralized pricing tool can change that.
And may be included in that can you just give us a little color on how the deflation that you're seeing right now is impacting gross profit dollars.
Okay. Kelly. Thank you for the question I'll start just with how we leverage the pricing tool and then I'll toss to Kenny in regards to your questions on GP dollars and percent and ill handle that in whatever manner. He seems appropriate.
Tool. This was what I tried to articulate during our prepared remarks during a period of rapid inflation. It was extraordinarily helpful. Because we had discipline in regards to passing through what was an extraordinary increase in cost, especially in center of plate. I mean, we had proteins going up 35% as I mentioned a few more.
Months ago in the older manual world. It would have been unlikely that all 7500 sales consultants would have passed that through they would have put too much of a humanistic flare into it and said you know what I just know that they can absorb this and I'm not going to pass it through and we would have not actually seen the GP dollars per case growth.
That we experienced past year, so im going to call. It the discipline to perform within guardrails on the way up while the exact same thing happens on the way down, but it's a different consideration what I said on the prepared remarks is we will be very purposeful about when we are able to secure improved cogs, how we pass that value under.
Our customers our intention is to pass that volume onto our customers and we need to be thoughtful disciplined and pragmatic about how we do that we'd have to be competitive with the market and we have to understand the volatility of categories that went from 30% up to double digits down in a short period of time. So the two will provide structure.
And discipline and our performance within Guardrails I do want to be very clear about one point. It does not replace the importance of <unk> SC in that relationship they have at that local restaurant and being what I call again right on price at the local level and if we have a competitive pressure at the local level. Our SCS have a process they can follow to add.
For an exception.
And we have a red man team that manages and adjudicate those decisions with financial discipline. So it's a combination of two things. It's a tool that provides guardrails that we operate within with discipline and predictability and then we have the ability to respond at the local levels due to the sales force when in fact, something unique is happening at the <unk>.
<unk> can't see through data and we're going to get better and better at that second point. We believe we can make that process faster more agile and more efficient to give our Sps has the ability to respond in the moment and that's something that we're working on in fiscal 'twenty for Kenny I talked to you for any comments from a financial perspective. Thank you Kevin a couple of things I wanted to.
Just a recap in Q4 as I mentioned earlier, we did experience.
Deflationary in our U S market and went back we still expanded both GP dollars per case GP margins operating margins, both all three of them yes.
Let me answer your question.
These centralized pricing it does help on the margin side. There is quite a few other levers that we have as an enterprise right. Besides pricing. So let me walk you through some of those other things that are enterprise is working on this includes.
One is strengthening our international segments right, because obviously helps on the inflation side. They're currently right now international is close to double digit right now the spot on inflation. The second piece of strategic sourcing third Sysco brand penetration, which we made immense progress this quarter and then lastly.
In specialty and the likes all these four things I just mentioned in addition to what you brought up Kelly around pricing drive a higher earnings margin profile for our enterprise going forward.
And I guess just.
In terms of this lower pricing environment do you expect your your restaurant.
All your customers to pass on lower prices to consumers.
Yes, Kelly on the National restaurant business I would defer to the leaders of those companies to comment I think it will all make their own individual choices.
I think at the local mom and pop independent level.
It's an efficient market.
Center of plate purchase cost will come down for them and while some of them choose to lower the price point on the menu I think some will and they'll see volume benefit from that so it's fungible. These things are levers that get pulled.
But I'll defer to our large customer base to answer that question, especially the national chains.
Your next question will come from John <unk> Banco at J P. Morgan. Please go ahead.
Hi, Thank you very much. The question is on sales force compensation I know theres been a couple of changes or enhancements in the past years maybe.
Being in terms of new account generation market share per account.
Sysco brand product sales I think there are a couple of different things, including I think most recently through removal of some ceiling that certain sales force.
Members are actually hitting in terms of total comp. So just wanted to get a sense of kind of what we should be focused on 24.
Lastly in terms of like a stable comp plan I mean, how it works for both Cisco and the sales force numbers and if you can make a comment.
In terms of the number of salespeople in the Cisco organization does it makes sense to add more or give more responsibility to the best. Thank you so much.
Yes, John Thanks for the question I appreciate it.
We're making some improvements to our compensation model. This year, what John is referring to is.
We're actually in pilot right now with a improved program by the way we like our current program. Our sales consultant retention is at all time highs and we believe the program, we have motivates behavior and motivate our colleagues on the right things with that said continuous improvement you can always make something better and stronger feedback from our consult.
<unk> consultants has been what Jon just said, which is there is a cap that exists today and people that do that type of work don't like caps like Marcel the more I should earn in the more Cisco can make and we agreed with our sales consultants on that so we are piloting a new structure a new program.
Which if they profitably grow their business they continue to earn and by the way that's good for Cisco to so it's a big company. It's a big machine. It's a big engine as I said on my call today, it's more than 7000 sales consultants, we need to make sure we get it right we need to make sure it's clear simple and understandable and therefore, that's why we're doing a pilot where.
Pleased with the results of the pilot, we're going to announce actually in August to our sales force the details of that compensation change so with professional.
Discretion I'm going to choose not to comment on what it will be on this call because we haven't even told our colleagues yet but in August we're going to announce it.
Worldwide sales meeting the change it will be very well received because it is exactly what <unk> been asking for.
We're optimistic that that will help us deliver the guidance that we covered today.
To win more share profitably at the local level. So we're pleased with that change we believe it will motivate even more the right behaviors and it's good for the colleague and it's also good for Cisco and it's good for the shareholder because it's profitable growth.
Thank you.
Thank you John .
Your next question will come from Alex Slagle at Jefferies. Please go ahead.
Thanks, Good morning, I wanted to dive in a little more on the local restaurant business and you touched on some of this Kelly's question, but your views on the health of these independent restaurant operators, both for the Cisco customers and more broadly as you can.
Think about the traffic environment being a little bit more difficult inflation pressures coming down but.
And if youre seeing any evidence of stress out there closures or.
Erosion in receivables bad debt that you see on the horizon.
That group of customers.
Okay. Alex Thanks for the question I'll start just on sentiment of that very important customer segment of ours, and then I'll toss to Kenny for any comments on receivables and bad debt.
From the very beginning of Covid I've said, the following that local mom and pop entrepreneurs just that they are an entrepreneur. This is their business. They are agile are scrappy their fighters and they have dealt with a lot over the last four years and the distant inflation to deflation in aggregate will be a good thing for them.
Because think about that curve I was doing I wish we're on zoom and you could see me right like the 18% inflation, followed by deflation will come back to a normalized 2% to 3% inflation. Once we've gotten through this transition period and that will be good for the local operator, it would be good because it will help with volume and frankly, a little bit.
Of margin.
<unk> benefited from a little bit of inflation so.
The environmental conditions are going to transition to more favorable for that local operator as it relates to how we Cisco can help them that is the core of who we are drive to the best possible cost for that operator through strategic sourcing have a sales consultant who is an expert in aircraft, who can help them with menu optimization.
Productivity improvement Sysco brand conversion, which Kenny covered very well we've made tremendous strides in this past year and further penetrating sysco brand, we expect for that to continue into introduced innovation and newness to our customers through cutting edge solution. So we believe in the independent customer.
Believe theres, a real reason to exist, which is people like local they like to eat fresh and local operators do a wonderful job.
Of buying local product and again, Cisco buys and sells more local produced in any other distributor despite our size.
When I think about outlook for where we head from here.
We have the ability to win more of those customers, even if that overall customer base.
Is going through this transition period, we serve roughly half of those independent doors, and we have a big opportunity to grow the number of doors, we cover and increase share of wallet going back to John's question with those customers. So independent customers will be a source of growth for us this coming year, which we've built into our guidance Kenny I talked to you for any comment on our bad debt.
Thanks, Kevin.
With respect to <unk> and bad debt, we are not seeing any drag on working capital if anything its the opposite.
In fiscal year 'twenty, three we actually saw improvement in AR and AP and inventory DSO. All of these factors provided a tailwind for working capital therefore, driving a record free cash flow and operating cash flow conversion from EBITDA.
Great. Thank you.
Thanks, Alex.
Ladies and gentlemen, we have reached our allotted time for the question and answer session.
So this will conclude your conference call for this morning.
We would like to thank everyone for their participation and ask you to please.
Connect your lines.
Okay.
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