Q2 2025 Sysco Corp Earnings Call
[inaudible] Sarah
[inaudible]
Welcome to Cisco's second quarter fiscal year 2025 conference call.
Speaker Change: 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.
Speaker Change: Good morning everyone and welcome to Cisco's second quarter fiscal year 2025 earnings call. On today's call we have Kevin Hourican, our chair of the board and chief executive officer, and Kenny Cheung, our chief financial officer.
Speaker Change: Before we begin, please note that statements made during this presentation that state the company's or management's intentions, beliefs, expectations, or predictions of the future are forward-looking statements within the meanings of the Private Securities Litigation Reform Act, and actual results could differ in a material manner.
Speaker Change: 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 Change: This includes, but is not limited to, risk factors contained in our annual report on Form 10-K for the year ended June 29, 2024, subsequent SEC filings in the news release issued earlier this morning.
Speaker Change: A copy of these materials can be found in the investor section at cisco.com.
Speaker Change: 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 investor section of our website.
Speaker Change: During the discussion today, unless otherwise stated, all results are compared to the same quarter in the prior year.
Speaker Change: To ensure we have sufficient time to answer all questions, we'd like to ask each participant to limit their time to one question. If you have a follow-up question, we ask that you re-enter the queue. At this time, I'd like to turn the call over to Kevin Hourican.
Kevin Hourican: Good morning everyone and thank you for joining us today. Our financial results this quarter delivered improved performance and positive momentum with stronger top and bottom line year-over-year growth rates as it compared to our first quarter.
Kevin Hourican: Cisco is delivering value over the short term with disciplined P&L management and remains well positioned to advance our business strategy while delivering upon our financial commitments presented at our recent Investor Day.
Kevin Hourican: Importantly, we expect the positive momentum from our Q1 into Q2 to accelerate in the second half of the year as we benefit from sales and operations improvement initiatives.
Kevin Hourican: Our leadership team is 100% focused upon executing with excellence, with a strong plan in place to deliver our full year 2025 guidance.
Kevin Hourican: Turning to Cisco's performance during the quarter on slide number five, I'm pleased to report that Cisco delivered over $20 billion of total revenue, a growth of 4.5% versus fiscal 2024, and a sequential improvement from Q1 growth rates.
Kevin Hourican: The revenue growth was driven by U.S. Food Service volume growth of 1.4% and moderate inflation of 2.1%.
Kevin Hourican: From a volume perspective, we generated 4.3% national volume growth, 3% volume growth in our international segment, and a decline of 0.9% in our USFS local case business.
Kevin Hourican: Our national sales business continues to perform at an exceptionally high level, with strong customer retention, and we continue to onboard high-quality, net-new national business.
Kevin Hourican: Our international segment posted very compelling results, with adjusted operating income up 26.5%.
Kevin Hourican: The strong profit growth was generated in part by local case growth of plus 4.7% year-over-year.
Kevin Hourican: We continue to advance the Cisco playbook in our international geographies.
Kevin Hourican: expanding our assortment, introducing Cisco branded products, and increasing Boots on the Street sales headcount to win new local business.
Kevin Hourican: I will discuss our international business in more detail in a few moments.
Kevin Hourican: In the USFS business, we are making solid progress on our top priorities across our multiple business units. Local case performance this quarter, excluding the impact of our Don business, was down 1.9%.
Kevin Hourican: It was a choppy quarter, with hurricane impacts at the beginning of the quarter and holiday shifts that negatively impacted the end of the quarter. The year-over-year comparison was also impacted by strong growth rates from the prior year.
Kevin Hourican: Specific to our local business, we are seeing progress in our internal measures of success, and we remain confident that our efforts will help deliver improvements in the second half of fiscal 2025. More on this in a few moments.
Kevin Hourican: Lastly, our top-line growth included strong contributions from Sigma, where sales were up 10.6%.
Kevin Hourican: Now that we have summarized Cisco's top-line performance, let's briefly discuss the external market.
Kevin Hourican: Food traffic to restaurants in the U.S. was down approximately 2% for the second quarter, which represents a moderate improvement from Q1. We expect to see continued improvement in traffic trends as we head into the second half of the year.
Kevin Hourican: Inflation for the industry has maintained at approximately 2%, which is within the normal range when we look at cost of goods sold inflation over the course of decades.
Kevin Hourican: From a bottom-line perspective, Cisco delivered adjusted EPS of 93 cents, a growth rate of 4.5% versus prior year, consistent with our expectations.
Kevin Hourican: The EPS growth was driven in part by the aforementioned volume growth, discipline margin management, and an organization-wide focus around efficiency improvement.
Kevin Hourican: Margin Management will remain a point of strength for the full year.
Kevin Hourican: As we stated on our Q1 call, we anticipate that our strategic sourcing efforts will pick up momentum as the year progresses.
Kevin Hourican: As a result, we expect the positive momentum and gross profit from Q1 to Q2 to step up in the second half of the year, as we have a direct line of sight to the actions that will deliver our full-year margin performance.
Kevin Hourican: On the expense side of the ledger, we anticipate continued improvements in our supply chain efficiency.
driven by improving colleague retention statistics.
Kevin Hourican: and improved transportation route optimization. These routing efforts will reduce miles driven, lowering our costs while simultaneously improving our ability to deliver on time and in full to our customers. A win-win.
Kevin Hourican: Now I'd like to provide a brief update on our main business units, starting with International, where we grew our top line 3.6% for the quarter, and we grew adjusted operating income by an impressive 26.5%.
Kevin Hourican: Our strong profit growth is being driven by continued operational improvements, increased procurement synergies, and a strong customer mix.
Kevin Hourican: Local case growth in our international segment is up 4.7% year-over-year. Adding to our international success is a strong strategic sourcing program that is expanding globally and the successful growth of our Cisco Euroway local sales program.
Lastly, we are deploying enterprise technology that is improving efficiency.
Kevin Hourican: In short, our international segment is running the Cisco Playbook. It's working, and we expect the positive momentum with international to continue into the second half of the year.
Kevin Hourican: Our national sales business continues to deliver compelling top and bottom line results. For the quarter, national volume was up 4.3% as our supply chain solutions domestically and internationally resonate with our largest customers.
Kevin Hourican: Cisco has the assortment breadth, supply chain footprints, and technology solutions to be a one-stop shop for large customers.
Kevin Hourican: We make it easy to do business with Cisco, with dedicated account teams that help enable customer growth, support their business expansion, and oftentimes support the customer's international expansion.
Kevin Hourican: The success we are having in national sales is flowing through from top to the bottom line as these customers help improve our route density, cover our fixed costs, increase our procurement synergies with key suppliers.
Kevin Hourican: We expect our national sales business to continue to deliver strong results due to high customer retention and continued new customer wins.
Kevin Hourican: Lastly, I'd like to provide an update on our local business.
Kevin Hourican: As I mentioned a few moments ago, we expect an improvement in our local performance in the second half of the year. We are making progress with our sales team hiring and training, and our sales compensation program is motivating the right behaviors.
Kevin Hourican: We see clear signs of progress on important drivers of the business. As an example, our new customer win rate has ramped up significantly over the last quarter. The increased new customer win rate is attributed to our new compensation program and the increased sales professional headcount we are onboarding.
Kevin Hourican: New customers typically start by providing a portion of their business to Cisco. And as we work to, what we call, sell around the room and penetrate additional product categories with these newer customers, the positive contribution from them will grow over time.
Kevin Hourican: The new customers we are winning today are going to be the strong, mature penetration customers of tomorrow. We expect our customer win rate progress to carry into our second half and into fiscal 2026.
Kevin Hourican: A second proof point is the progress that we were making with sales colleague headcounts. Our sales consultant retention has substantially improved from Q1 to Q2, as the change management associated with our new compensation model has taken root, and colleagues are experiencing the benefits of the new program.
Kevin Hourican: Additionally, we are making solid progress against our 2025 hiring goals with quality hires from the industry.
Kevin Hourican: Another proof point within our local segment is the improvement that we are making with our service proposition.
Kevin Hourican: Over the past quarter, we improved our service offering to our customers with increased customer-facing fill rates and improved on-time delivery performance.
Kevin Hourican: Our supply chain continues to make strong progress month over month, and that is evidenced by our Net Promoter Score, which improved solidly on a quarter-over-quarter and year-over-year basis.
Kevin Hourican: We expect continuing improvement in service levels in our second half of fiscal 2025.
Historically, MPS Improvement
Kevin Hourican: has a strong correlation to business growth in future quarters. The sales and volume growth comes from increased customer retention and by winning new lines from existing customers.
Kevin Hourican: Lastly, we increased our distribution capacity over the past quarter with new and expanded facilities to support our business.
I am most bullish on our Italian platform expansion.
Kevin Hourican: Over the past six months we have entered new geographies with our Greco-Italian platform and we will continue to expand to new geographies in the coming calendar year.
Kevin Hourican: The winning formula is clear, have the right Italian products, at the right price, sold by colleagues that are full-time Italian cuisine experts.
Kevin Hourican: Our success has been replicated in each new Greco market we have entered. I expect compelling results from the Italian platform in the second half of fiscal 2025 and for years to come as we advance our Greco expansion efforts. We have substantial white space to be filled in the coming years.
Kevin Hourican: As I wrap up my comments this morning, I will summarize with the following.
Kevin Hourican: We made progress from Q1 to Q2 in top and bottom line results.
Kevin Hourican: We delivered upon our financial expectations for the quarter, and we have posted progress on important strategic initiatives.
Kevin Hourican: The progress on key initiatives like sales professional hiring and increasing our new customer win rate will fuel our improvement in the second half of fiscal 2025.
Kevin Hourican: When combined with the very compelling business performance we are already delivering from national sales business, our international segment, and our Sigma segment, we have the confidence to reiterate our four-year financial guidance.
Kevin Hourican: I am pleased with the progress that we are making in our supply chain from a service and cost perspective, in our merchandising ranks from a gross margin management perspective, and with our sales team from a skills development perspective.
Kevin Hourican: The combination of the progress across these three vectors will build over time. I want to personally thank Cisco's 76,000 plus colleagues and our entire leadership team for their continued focus in energy. We have the best team in the industry and I'm proud to work with them every day serving Cisco's global customers.
Kevin Hourican: I also want to thank our supplier partners who have helped Cisco improve service levels to our customers over the past quarter. I'll now turn it over to Kenny, who will provide a detailed review of Q2 performance and select fiscal year 2025 guidance commentary. Kenny, over to you.
Kenny Cheung: Thank you, Kevin, and good morning, everyone. As Kevin highlighted, our results for the quarter were driven by improvements across the core financials drivers.
Kenny Cheung: Sales, gross profit, and operating expense. Our success in Q2 was broad-based across business segments in our product portfolio.
Kenny Cheung: We generated positive operating leverage and sequential improvements to gross profits while continued operating expense management rendered adjusted operating margin expansion.
Kenny Cheung: Here at Cisco, we have levers across our P&L, and our actions are driving structural improvements to the business.
Kenny Cheung: We believe the table is set for continued improvement in the second half of our fiscal year. For example,
Kenny Cheung: This was on full display in our international segment this quarter. The positive momentum over the past few years continued into Q2, with sales growth of 4%
Kenny Cheung: Gross profit growth of 7% and adjusted operating income growth of 26.5%
Kenny Cheung: The Cisco playbook is delivering across all geographies, driven primarily by our size and skill advantages in these markets, along with M&A contributions from the recent specialty additions to the portfolio, which are performing well.
Kenny Cheung: We expect our positive momentum in international to step up further in the second half of the year.
Kenny Cheung: In addition to improved P&R results this quarter, I would be remiss if I did not highlight the compelling competitive advantage that our strong balance sheet and robust cash flow generation provides. On that note, I am pleased to announce the upsizing of our share repurchase plan.
Kenny Cheung: For this fiscal year, we now expect to buy back $1.25 billion of shares, up from our prior plan of $1 billion.
Kenny Cheung: The full-year amount has the potential to flex up further depending on M&A activity for the remainder of the year.
Kenny Cheung: Further, we take both our role as a dividend aristocrat and our track record of dividend growth seriously as we are one of only four consumer staples companies that have grown dividends for the past 25 plus years.
Kenny Cheung: This year, we expect to distribute to shareholders $1 billion in dividend payments. In total, we are now on target to return over $2.25 billion to shareholders through share repurchase and dividends at FY25.
Kenny Cheung: Our balance sheet affords us the financial tools and flexibility to make the right decisions both for the short term and long term as we seek to grow our business while driving industry-leading returns on invested capital and generating a double-digit TSR for our investors.
Kenny Cheung: Now, turning to a summary of our reported results for the quarter, starting on slide 14. Slide 14. Slide 15. Slide 16. Slide 17. Slide 18. Slide 19. Slide 20. Slide 21. Slide 22. Slide 23. Slide 24. Slide 25. Slide 26. Slide 27. Slide 28. Slide 29. Slide 30. Slide 30. Slide 31. Slide 32. Slide 33. Slide 34. Slide 35. Slide 36.
Speaker Change: For the second quarter, our enterprise sales grew 4.5% in line with our guidance in the financial algorithm we shared during Investor Day.
Speaker Change: Our sales results were driven by U.S. Food Service growing 4.1%, International growing 3.6%, and Sigma growing 10.6%.
Speaker Change: With respect to volume, total U.S. Food Service volume increased 1.4% and local volume decreased 0.9%. Don positively impacted U.S. Food Service volumes by 1.6% and local volumes by 1%.
National volume growth in the quarter also included margin expansion.
Speaker Change: Local results were lapping the highest rates of growth in the prior year, as well as headwinds from weather disruptions and unfavorable holiday time impact on a year-over-year basis this year.
Speaker Change: We produced $3.7 billion in gross profit of 3.9% and gross margin of 18.1%.
Speaker Change: On a dollar basis, we are encouraged by the expanding gross profit dollar per case trend and continued opportunities around our strategic sourcing efforts.
Speaker Change: Looking to the second half, we expect to execute on secured actions to expand the depth and breadth of our strategic sourcing to buy better, to sell better.
Speaker Change: This includes working with existing suppliers, looking for incremental win-win opportunities, often adding items to existing contracts, and scoping out work with new suppliers.
Speaker Change: Additionally, continual improvements in sourcing will come, allowing us to lever the scale of our North America presence, which includes our six billion dollars Canadian business.
Speaker Change: As I mentioned earlier, strategic sourcing is one example of structural improvements we expect to enhance gross profit in the second half of our fiscal year.
Speaker Change: A gross profit dollar growth reflected our ability to continue to effectively manage product inflation, which came in at 2.1% for the total enterprise, consistent with our expectations.
Speaker Change: This is the average across all of our major product categories, with our teams regularly managing through pockets of fluctuations.
Speaker Change: We are doing an excellent job managing our corporate expenses with continued progress year over year.
Speaker Change: We have been extremely disciplined and reduced corporate expenses by 1.3% from the prior year on an adjusted basis, driven by efficiency work that we deployed in FY24 and incremental actions during the quarter.
Speaker Change: We are making continued progress with our financial algorithm target of lowering corporate expenses to 1% of sales.
Speaker Change: Overall, adjusted operating expenses were $2.9 billion for the quarter, or 14.2% of sales, a 13 basis point improvement from the prior year, reflecting supply chain and corporate expense efficiency.
Thank you.
Speaker Change: Our supply chain operations remain fully staffed, we continue to improve colleague retention year over year, and we are building on productivity gains with piece per labor hour improvements compared to the prior year.
Speaker Change: Our outbound sale rates to our customers also improved during the quarter, which will help drive increased MPS and sales in the coming quarters.
Speaker Change: Turning to fuel expenses, we remain disciplined around the pacing of our sales professional hires and will continue to focus on the quality and return on investments of our new hires as they continue to climb up the productivity curve.
Speaker Change: These deliberate investments are well-laddered, with this year's hires expected to start driving financial contributions next year and thereafter.
Speaker Change: Our teams are successfully applying the Cisco playbook to drive continued growth and margin expansion.
Speaker Change: Adjusted operating income growth also benefited from SIGMA, contributing 11.8% profit growth, as our focus on operational excellence resulted in improved profits from higher productivity alongside growth of new customers.
For the quarter, adjusted EBITDA increased to $969 million.
or up 4.4%.
Speaker Change: Our balance sheet remains robust and reflects the organization's healthy financial profile. We ended the quarter at a 2.76 times net debt leverage ratio.
Speaker Change: We ended the quarter with $11.8 billion in net debt and approximately $3.1 billion in total liquidity, which is substantially above our minimum threshold.
Turning to our cash flow.
Speaker Change: We generated approximately $498 million in operating cash flow and $331 million in free cash flow for the first half, with a year-over-year variance driven by timing related to working capital, which also includes the opportunistic purchase of inventory with solid economics.
Speaker Change: For the full year, we continue to expect strong conversion rates from adjusted EBITDA to operating cash flow at approximately 70% and free cash flow at approximately 50%.
Speaker Change: Our strong financial position enabled us to return approximately $444 million to shareholders this quarter.
Speaker Change: We remain confident in growing both top-line and bottom-line results in FY25 in line with our financial algorithm. Importantly, we are reiterating our 2025 guidance metrics as seen on slide 20.
Speaker Change: During FY25, we expect net sales growth of 4 to 5 percent.
Speaker Change: Net sales growth includes continued inflation of approximately two percent, positive volume growth of low single digits, and contributions from M&A during the year.
Speaker Change: All in, we are guiding to adjusted EPS growth of 6 to 7% in line with our financial algorithm range.
Speaker Change: We continue to believe the second half will improve from investments in the sales professionals and other growth initiatives.
Speaker Change: Additionally, we expect margin benefits as we leverage our unique scale advantages to expand strategic sourcing efforts to include a wider basket of categories, more efficiently harness our global buying power, and improve inbound freight logistics to minimize touch points across our networks.
Speaker Change: Combined with recent actions around our organizational optimization at our GSC, we expect over 100 million dollars of annualized savings to benefit gross profit dollars and operating expenses starting in the second half.
Speaker Change: This figure highlights our ability to be disciplined with expenses and offset macro industry environment headwinds in the first half and fund business investments this year.
Speaker Change: This is consistent with our focus on driving continual business improvement and we plan to explore additional actions going forward.
Speaker Change: In addition to these self-help initiatives, which we expect to drive the majority of our second half lift, we continue to expect a stronger macro and modest industry traffic improvements.
Speaker Change: All in, we expect a stronger rate of adjusted EPS growth in the second half of the year, growing at a positive high single-digit growth rate, with similar rates of growth across Q3 and Q4.
Speaker Change: Consistent with our ROIC focus, we divested our joint venture in Mexico in mid-December. This is expected to impact international sales by approximately $500 million on an annualized basis and be immaterial from a profit standpoint.
Thank you for joining us.
Speaker Change: From a modeling perspective, international top-line results will be negatively impacted from an as-reported perspective for the next year, as Mexico will be out of the number starting next quarter, but accretive to international margins.
Speaker Change: We do not plan to recast prior year numbers, however, we do plan to provide additional context to aid in modeling this segment until we lap itself at the end of this calendar year.
Speaker Change: In the upcoming quarters, we will provide growth comparisons with and without Mexico in an effort to add clarity around operating trends and enhance year-over-year comparability.
This is another signal of continued confidence in our business.
Speaker Change: Specific to Sherry Purchase, we note that this figure can flex up depending on M&A activity.
Speaker Change: For the year, we expect to operate within our stated target of 2.5 to 2.75 times net leverage and maintain our investment grade balance sheet.
Speaker Change: The adjusted tax rate for FY25 is now expected to range from 24.5% to 25%, slightly lower than our initial view.
Speaker Change: Adjusted depreciation and amortization remains unchanged at approximately $800 million for the year.
Speaker Change: In closing, I'm confident in our FY25 guidance and our ability to deliver on our long-term financial algorithm with levers across the business.
Speaker Change: We believe we are taking the right steps for long-term benefit of the business and unlocking value that will reward our shareholders. I look forward to our progress ahead as Cisco is positioned to win. With that, I will turn the call back to Kevin for closing remarks.
Kevin: Thank you, Kenny. I appreciate all you are doing for Cisco. The discipline leadership that you and your team display are a real strength for our company.
Kevin: Before we turn it over to questions, I want to reiterate the following key points.
Kevin: We believe these businesses are positioned to continue delivering compelling performance in the quarters and years to come.
Kevin: Our local business is in the midst of a business improvement phase. We have the right actions in place and we are showing clear signs of progress by increasing our new customer win rate and improving Net Promoter Scores.
Kevin: Our solid balance sheet affords us the opportunity to return value to our shareholders while we are profitably growing our business.
Kevin: The announcement today of raising our share repurchase target for the year is just one example of the discipline we will deploy to ensure that our shareholders benefit along our journey.
Kevin: More to come as we have additional announcements in the future. Our future is bright as we expand our competitive moats, leveraging our size, our scale, and our talented people.
With that, Operator, we're now ready for questions.
Kevin: The floor is now open for your questions. If you would like to ask a question at this time, please press star 1 on your telephone keypad.
Kevin: You may remove yourself at any time by pressing star 2. Once again, to ask a question, please press star 1.
Speaker Change: Our first question will come from Mark Carden with UBS. Please go ahead.
Mark Carden: Morning and thanks so much for taking the question. So you talked about some expected tailwinds in the second half of the fiscal year. How have January sales trended to date, just especially when considering some of the headwinds related to the southern winter storms?
Speaker Change: and the Los Angeles area wildfires. And then would you expect this to have an outsized impact on either your local or national businesses in 3Q?
Kevin Hourican: Good morning, Mark. It's good to hear from you. It's Kevin. Just let me start with, you know, tailwinds and, you know, reasons for confidence in the second half. I'll briefly talk about January, toss to Kenny for additional thoughts.
Kevin Hourican: which will result in forward-facing increased momentum again on that new customer win rate and then DC capacity expansions that occurred over the last six months that those buildings enabled increased throughput increased customer ability to serve etc etc so when we put all that together we have a clear path towards delivering the outcomes that we expect to deliver which will then allow us to deliver the financial guidance that we have put forward specific to January just one reminder January is the lowest volume month of the year
Speaker Change: and that's the case for the entire industry every year. You're absolutely right that the California wildfires had an impact on Southern California. The even bigger topic is the Southern storm that impacted a large portion of the United States. We live and work in Houston, and it was quite the event in Houston this last week.
Speaker Change: We're working through it. Our goal is to serve our customers during those periods of time. What we're proud of is we're the first.
Speaker Change: to be out on the road delivering to customers, getting them back on their feet, working through that progress with our customers as they, you know, reopen and grow their business. As it relates to does it impact national or local more, impacts them equally, so we're not concerned about that. Jenny, excuse me, Kenny, any additional comments on January? Sure. Hey, Mark, good morning. You know, taking a step back, you know, overall in terms of industry foot traffic, in terms
Kenny Cheung: So Q2 improved from Q1. Q1 was down 4%, and Q2 was down 2%. With that said, as Kevin mentioned, January was a bit choppy with weather and other disruptions, and one thing to note
Kenny Cheung: If we had to choose a month to have uncontrollable disruptions, it would be January, given the majority of our Q3OI and EPS lands in February and March.
Kenny Cheung: Now, we are encouraged by the fact that, you know, in select geographies, we are already seeing nice progress made based on our investments in SC additions as well as our new comp model. And then one thing to kind of call out, most of our comments are usually U.S. based, but for international, strong momentum there. We saw a strong push on Christmas.
Kenny Cheung: Holiday Year End on both local and national volume, and then Momentum's curing into January. So the bottom line is we are confident we can operate in any environment as proven in prior periods, which supports our confidence in our FY25 guide.
Thanks so much, guys, and good luck.
Thanks Mark. Thanks Mark.
Speaker Change: Thank you. Our next question will come from Lauren Silberman with Deutsche Bank. Please go ahead.
Speaker Change: And then, Kenny, I think you mentioned $100 million in annualized savings to help GP dollars in the back half. Can you expand a bit on some of the drivers of that? Thank you.
Speaker Change: by holiday shift which impacted the entire industry. So you've read about that through all of the retail names that are out there but one last week between Christmas.
Speaker Change: excuse me, Thanksgiving and Christmas, that does have an impact to the restaurant industry and an unfavorable calendar shift as it relates to that. And then the bow around that is we had a very strong volume growth in Q2 last year. So we're lapping, you know, strong numbers from a year ago, but that's because of that calendar component that I just
Speaker Change: you know, talked about the prior year was very favorable from a calendar perspective. So when we put all that together, and I know it's choppy, and there's a lot to be normalized there. When you're normalized for those things, Q2 is solid versus Q1 from an underlying performance perspective. And the more important point is we have the direct line of sight towards why it will be even stronger in the year to go. The direct line of sight towards the hiring we're doing, the new customer win rate, which is building momentum, the net promoter score momentum that we're driving, which will
Speaker Change: Forward view add to your customer retention and increased, you know penetration. So we put all that together We do have confidence in our ability to improve local and in the success that we're driving in the other three segments is notable And repeatable Kenny your comments to that and then turn it over to you
Kenny Cheung: Yeah, so let me add on to Kevin's comments on, you know, the confidence in local, you know, we
Kevin Hourican: at the Fiscal Year, so let's be clear about that. And why is that? If you look at the underlying themes of our business, most of our incremental sales professionals were hired at the end of FY24 and beginning of this year. So with each month, these sales professionals are more productive, therefore contributing more on the sales side.
Kevin Hourican: The COMP model is working very well. We're tracking it very closely, and it does two things, just to remind everybody. It incentivizes for growth and to grow profitably, and we're seeing both right now through our new customer acquisition account that Kevin referenced in his prepared remark.
Kevin Hourican: And last but not least, as we approach the second half of the year, and Kevin talked about this for the Q2, most of our lift is driven by self-help, and we will be lacking a more favorable comp in the second half of the year, which yields our confidence.
that we talked about in a pair of remarks.
Kevin Hourican: And Lauren, in terms of the $100 million annualized savings, as you heard as part of our guide, we are expecting a
Kevin Hourican: second half of a year step up on EPS growth. So to put it to some real numbers, the first half is roughly call it three and a half percent EPS growth and the back half will be a high single digit growth rate.
Kevin Hourican: and I'll go slow on this part. One of the key drivers is that we have line of sight.
to $100 million of annualized savings to benefit both.
the gross profit line and the operating expense line. So.
Kevin Hourican: to your second part of the question. What are some of the details and examples that we can talk about? So there's a few buckets. The first bucket is strategic sourcing. The second bucket is supply chain efficiencies, i.e. inbound logistics that we spoke about.
Kevin Hourican: prior. And the last but not least, organizational optimization, which has been implemented recently already. So that's been done for the quarter. So the good news is we are starting to see savings from this month, meaning January, and we will continue to execute.
Kevin Hourican: on the other actions, which we have a strong line of sight to by the end of this quarter.
Kevin Hourican: We expect these savings to obviously materialize this year, but because they're structural...
Kevin Hourican: They will also continue into the first half of 2026 as well. These savings highlight our ability to be disciplined with expenses and offset any macro or industry environment headwinds from the first half and allows us to reinvest in the business as well.
Kevin Hourican: Now, we're not stopping here. We plan to explore additional actions going forward. These benefits are already in the current guide, and it's another proof point that our ability to grow EPS by high single digits in the second half of the year. Again, the indexing of the benefits would gear towards GP.
Hope that's helpful.
Very helpful. Thank you, guys.
Speaker Change: Drone, Drone, Drone,
Thank you for your question.
Speaker Change: Our next question will come from John Heimbachel with Guggenheim Securities. Please go ahead.
Speaker Change: I have a multi-part on the Salesforce. So just remind us, I think you've got cohorts coming out of training every six to eight weeks or something like that. When I think about the number of people that are going to come off and non-compete,
Speaker Change: So how do you think about that and then I and then I think you guys seeded these salespeople with five accounts
Speaker Change: and they have to double that over six months. So when I try to think about all of this cadence-wise,
Speaker Change: Right, and when you return to positive territory on local case growth.
Speaker Change: You know, and I recognize you're you know down whatever, you know, one to two percent Today, is that is that possible toward the end of this fiscal year or is that really a 20 fiscal 26? dynamic
Speaker Change: Good morning, John. Thank you for the question. I'll start with your cohorts and the cadence. We track it in exactly the way that you're describing. So we hire in waves, we train in waves, we deploy them out.
to geographies, as Kenny has said many times, targeted geographies.
Speaker Change: there are growth geographies, there are market share capture opportunities, we have Italian platform expansion opportunities and the likes we're being very surgical about.
Speaker Change: where we deploy. Each cohort is tracked longitudinally over time to how they're performing and where they need to be performing. The headline without disclosing confidential internal information is, each of the cohorts is where we need them to be on their maturity curve. We're pleased with the performance from the 2024 hiring, as Kenny said, which was mostly Q4. And we're pleased with the initial performance.
Speaker Change: of the hires that we have done this fiscal year. They are onboarding new customers. That's the primary go-get for the new hires. We give them a small little territory, as you quoted, and now they gotta be out on the street knocking on doors and we're pleased with their performance.
Speaker Change: You're right, for competitive hires, there's a non-solicit window and we honor that. We're extremely respectful of that. So to the point you're making, roughly, on average, 12 months after they onboard, there's a second wave of growth that can come from those new hires as those restrictive agreements.
expire and we anticipate benefit in 2026.
Speaker Change: for that behalf. So the headline is we're pleased with the hiring, we're pleased with the quality of the staff we've onboarded, and we're pleased with the trajectory of their new customer performance. See my prepared remarks, notable increase in our new customer performance.
Speaker Change: in Q2. As it relates to when to return to positive growth, here's what I can say today. We are confident in our ability to show and display progress.
Speaker Change: quarter over quarter, and we anticipate that we will show you numerically that progress.
on a quarter-over-quarter basis.
Speaker Change: Due to the reasons that we said in answering Lauren and Mark's question that, you know, I prefer not to repeat because of the length of the call and the number of questions that we anticipate. But it's a combination of the colleague hiring, the improvement in service we're delivering, the progress we're making on the new customer win rate, and the expansion of our DQC capacity. You put all that together, we're confident in displaying numerically progress as this year progresses on a quarter over quarter basis.
Thank you.
Thank you, John.
Speaker Change: Thank you. Our next question will come from Jeffrey Bernstein with Barclays. Please go ahead.
Thank you.
Jeffrey Bernstein: Thank you very much. Just one clarification on your last comment and then a question. Just the assumed continued improvement that you're talking about. Can you share any color in terms of the case growth that you're assuming for the back half of the year relative to, I guess,
Jeffrey Bernstein: I think you said the industry was most recently down 2%. I'm just wondering what you are...
Speaker Change: in the back half of the year. And then, Cybill, I'm just wondering if you can comment on the Cisco brand sales. I know it's a percentage of total sales. It seems like the U.S. broad line and the local both have been easing. I'm just wondering your confidence in your ability to accelerate that mix.
I look forward to working with you.
Speaker Change: It seemed a compelling offering and a challenge macro the consumers are looking to, or the restaurant customers are looking to save. So just wondering your thoughts on those Cisco branded sales. Thank you.
Speaker Change: Yes, certainly, Jeff. Good morning. Let me just clarify the minus two, excuse me, percent that you mentioned there, that was foot traffic to restaurants.
Speaker Change: Who are we hoping to see in Q2? That wasn't a Cisco performance number. So the minus two is foot traffic. We're expecting moderate aka slight improvement in that as we enter our second half. Mostly in that light spring time frame, as I mentioned in my prepared remarks, and we're going to be lapping it down for input traffic. You know, we don't anticipate that the industry will experience
Speaker Change: I'm going to be talking about what it means to have a minus three or a minus four on top of what last year's minus three minus four from a traffic perspective. So there'll be some natural gravity based.
Speaker Change: improvement tied to foot traffic. With that said, Kenny says this all the time, we don't need for that to occur in order to deliver our numbers. We are prepared to have the ability to deliver our financial algorithm despite economic external conditions. We have plenty of self-help activities in place that can move the needle for Cisco. So the traffic improvement in the macro is reasonably immaterial to the overall year-to-go performance.
Speaker Change: It's the $100 million of economic improvement that Kenny talked about. That's actually the primary driver of first half EPS growth versus second half EPS growth. That's a meaningful and big deal. And as he said, direct line of sight with most of those actions or many of those actions already completed. And that will have wrapped value into next year.
So again, it's progress.
Speaker Change: in local over time, and I have to emphasize this word, profitably. We could easily move the needle from a volume perspective if we wanted to by being rational in price. And we're just simply not going to do that. We are going to be disciplined. We are going to be consistent. We're going to run the Cisco play on the street. And the primary way we need to show the progress is by incremental sales headcount, which we've talked a lot about, and we are where we need to be in that forward-facing progress. So we need to show it to you in the outcomes, and we're going to do that as this year.
Speaker Change: Progresses a second part of your question, which was Cisco brand Cisco brand it's performing as we expected it would for the quarter and we do not have concerns with Cisco brand it's a
Speaker Change: Fortress for us. It is an incredible program. You know the stats, you know, 46% of our cases in the local sector, you know, have Cisco brand on the truck.
Speaker Change: and you know we're pleased with our performance. The primary causal is national suppliers really struggled during the past couple of years and during that period of time when supplier inbound fill rate to us was declining Cisco brand we were doing a really good job of being in stock on the Cisco branded product and there was some shift towards Cisco brand and there's a little bit of a return to the mean in that regard. With that said we are confident over the longer time horizon that we can and will grow Cisco brand. We're constantly introducing new items.
Speaker Change: We're constantly partnering with the supplier community to bring innovation forward through Cisco Brands, and as you said, when consumers are looking for...
Speaker Change: value and customers are looking for value, Cisco Brand is a great alternative. So again, the main causal for the year-over-year decline is the natural impact of suppliers of national branded products improving their fill rate, which net-net for the industry is a good thing. We know select customers really want national brand and we're in stock on those products. We obviously give that customer choice. So Jeff, that's the answer to the second part of your question.
Speaker Change: Hey, Jeff. Good morning, Kenny. Just one thing to add on the local piece of it, you know, Kevin and I speak a lot about US, but international is doing really well on local case growth.
Speaker Change: every market in our international business group, local case, where there wasn't just one region, one area. So, I'll give you an example. Canada, our biggest market, through 5%.
GB second biggest market in international group 8%
Speaker Change: And on Cisco brand, you know, Kevin's right, but you know, one thing to put these in perspective.
Speaker Change: It is still an over $22 billion business, and it's still growing.
possibly as well with strong penetrations across our business.
Speaker Change: We do expect penetration rates to start to stabilize as we improve our local performance on the forward. I think one thing to note as well is it's important to call that, as we talk about the $100 million, especially around strategic sourcing, that impacts fiscal brand and also non-fiscal brand as well, which is one of the reasons why we're expecting leverage in the second half of the year.
and the next episode of the series.
Speaker Change: Thank you. Our next question will come from John Ivanko with JP Morgan. Please go ahead.
John Ivanko: Hi, thank you. I hope these numbers are more or less apples to apples, but certainly correct me if I'm wrong. Earlier in the call, you talked about Cisco local case volumes that were down 1.9, excluding Don. And in your presentation, you know, that the overall restaurant industry was down.
John Ivanko: So I just did want to get, you know, kind of a sense of that underperformance. Maybe real pockets of opportunity, you know, that you may see that might be based on customer type. Maybe there's a specific geography that's really been lagging for you that we're not aware of.
John Ivanko: – if it's a share per account issue or if new customers have been entering the industry that perhaps you've just been having a tracking. So are there really any major pockets of underperformance?
John Ivanko: You know that you see nationally or even locally, you know that you can kind of come and say hey We fix these couple of things and then we go from under performance to outperformance. Thank you
John Ivanko: I know externally when you look at the numbers and you don't have all the internal details, it looks like a deceleration. And it was not a disillusion and local Q2 to Q1. It's a solid performance.
John Ivanko: It performed in line with what we expected. The more important is we are confident we will step up that local performance as we head into Q3 and as we head into Q4. Now to the second part of your question, specific region, that's actually what gives us the confidence.
John Ivanko: where we are not seeing meaningful year-over-year weather. Kenny talked about this, you know, vis-a-vis January. We're doing well in January. We're stepping up in January versus Q2 in those geographies that haven't been impacted by the wildfires.
John Ivanko: or the weather, where we have deployed the incremental head count surgically, we are seeing those regions be very successful from a performance perspective.
John Ivanko: And we're a large company, John, as you know, and of course we have select regions that are underperforming versus our company average, and we're very clear on what is happening in those geographies and what we need to do to improve. But there's no common theme with those geographies, there's no unique, you know,
John Ivanko: from a competitive dynamic perspective or an industry perspective. You know, a large company with lots of regions, you always have a bottom X percent that you're working to improve and we're deeply committed to doing that. So net-net in aggregate, we are confident in our year to go. I haven't talked a lot about the comp program today, but the compensation program change that caused a lot of disruption at Cisco in Q1, that changed.
John Ivanko: disruption is now behind us. Our sales reps are benefiting from the new comp program.
Kenny Cheung: They are making more than they were making previously Because they were changing their behaviors and doing the things we want them to be doing out on the sales cycle Which will benefit Cisco and clearly will benefit our colleagues as well So we anticipate that will gain momentum as the year progresses along with the incremental hiring that we've been doing along the way Kenny anything to add to that? Yeah So we just want a couple things to add, you know We are seeing a strong correlation between headcount ads and also volume growth at the market So it is working and this is providing color on Kevin's last comment
Kenny Cheung: on the COP model. We're seeing total new customer acquisition count go up. Again, I think Kevin said it. Today's new customers are tomorrow's penetration opportunities for us. That's great. And remember, the COP model also rewards for margin-attractive.
Kenny Cheung: activities. So total team selling, a great one for us. It's really leveraging our broad line skill and specialty assortment. We're seeing that continue to increase as well this quarter. So overall the comm model is working for us. It's a win-win for our colleagues as well as for our company.
Okay, thank you.
Thanks, Jeff.
Speaker Change: Thank you. Our next question will come from Jake Bartlett with Truist Securities. Please go ahead.
Speaker Change: Sigma. You know that that's the kind of forward question. Also in the quarter itself, if you could just help us with what the inflation was by segment for the product costs, that would be helpful.
Back to Kevin.
where we're seeing offsets.
Speaker Change: which is what brings the total book down is in the commodities space.
Speaker Change: and Chris. And that's increased product availability. That's things we do to lower price through competitive sourcing, and when we can lower price inbound to Cisco, we can pass on and share that value with our end consumers. So mostly in commodities.
Speaker Change: We're actually seeing in some of them deflation on a year-over-year basis and it's the entire book of business
Kenny Cheung: that puts to that forecast of two. I'd say if it's gonna miss versus our forecast, it probably misses on the higher end, but that's not something that we're forecasting as of today. Kenny, anything to add to the inflation question? Yeah, so I would just say right now we're operating in a normalized inflationary environment. So Mark,
Kenny Cheung: To your question, Jake, you know, in terms of what we're seeing by segment, for the total company, it's roughly 2.1%.
Kenny Cheung: for U.S. business. It's pretty consistent, right? U.S. business, U.S. operations 2.7 and then our European business roughly 2.9. So it's Kevin's point.
Kenny Cheung: If we were to miss, there will be some upside given the fact that we are currently trending slightly higher.
Kenny Cheung: driven by the center of the plate dynamics that Kevin talked about. I think the other point that's important to note for Cisco is we have a diverse set of product categories and the good news is we don't over index.
Kenny Cheung: or exposed to any single category from a basket standpoint. So long story short, we are operating in a normalized inflation environment, which bodes well for the industry.
Kenny Cheung: It's one plus epsilon for the three-part answer. Everything we're talking about is excluding the potential impact of tariffs. We can't anticipate exactly what will occur. Nobody knows exactly what will occur. That quote that we put out for the 2% excludes any impact of tariffs.
Thank you.
Thank you, Jake.
Thank you.
Speaker Change: Thank you. Our next question will come from Edward Kelly with Wells Fargo. Please go ahead.
Yeah, hi, good morning everyone
Speaker Change: Kevin, I wanted to, I wanted to ask you about Salesforce and local case performance. And you mentioned from a Salesforce perspective, could you just maybe take a step back and, you know, talk a little bit about, you know, where things stand today? I think you said, you know, that the sales comp issue is behind you. You know, what does that mean?
Speaker Change: and then stepping back big picture, the gap between local case growth and national case growth is pretty large right now. Is that okay longer term for you to achieve the multi-year goals that you want to achieve?
Speaker Change: Good morning, Ed. I'll start with your question about Salesforce and the comp and the change that has occurred there, and then, Kenny, I'll ask you to answer the question on the algorithm that we put out back at our investor day and how local and national contribute that work.
Speaker Change: So what I meant by the comment of the impact of the comp changes behind us, let me just take a giant step back and say the comp change we made was a change we made because we wanted to. Listening to our sales colleagues, listening to our customers, looking at our P&L, putting all that together, you know, our best sales colleagues wanted a commission structure or a comp structure that provided them more upside to their outcomes.
Speaker Change: That's what our best people want. And then on the lower performer side, we had too many people that were living off their base pay and not doing the behaviors that we needed and frankly, not growing their book of business. And so therefore, the change we put forward on July 1,
Speaker Change: the more they earn and that's exactly again what our best performers wanted and that is a topic that will have legs it will have momentum that builds over time because see the second point which is we're onboarding a healthy number of new colleagues who will be able to win new business and grow our business and succeed from themselves from a comp program tied to how we reward them for opening new business so the Q2 headline retention was solid in our colleague population and we expect for that to continue in the go forward
Thank you.
Speaker Change: Kenny talked to you for the second part of its question. Yes, the answer for us is quite simple. We have to go both.
Right, but the answer is to grow both and just
Speaker Change: No, but I don't want to dismiss the success of CMU. CMU, our national customer business, is doing really well. We are winning in the space, and we're winning profitably as well. That's really important.
Speaker Change: and I do understand with CMU and national customers going faster it does dilute margin rates I understand that and with that said the reason why you need both is because the fact that our national business provides route density for us right really skills and covers our fixed costs and the local business since the truck is going there anyways taxed on whether there's no case on the route itself and also it's a higher margin business so so when Kevin and I work with our managing team day in and day out it's not just simply let's grow
Speaker Change: up to drive, marginal expansion, and top line growth from both sides of the house for us.
Speaker Change: Let's plus up the end of Kenny's point there. We're extremely pleased with our national business and our international business and our Cigna business extremely pleased
Speaker Change: that are impacting negatively local because of the success we're having with national. We're not running out of slots in the warehouse. We don't have issues with hiring colleagues in the supply chain. Our trucks have capacity to support growth. What we need to see and what we're going to see is improvement in local. So we need to continue to drive the significant and visible success.
Speaker Change: in the three business sections that are killing it and will continue to do so. And we expect and we will show progress in local in the go forward.
Thank you. Thank you, Ed. Thanks, Pat.
The End
Speaker Change: Thank you. Our last question will come from Alex Slagle with Jeffries. Please go ahead.
Hey, thanks for the question. I wanted to ask...
Speaker Change: You know, you finished up 24 well above where you were in the years leading up to the pandemic, and then a really good start here in the first half of 25. So just trying to think about what we should look for for the margin. Is it a gradual grind higher here, or do you think there's some point where you see a flattening out, or...
Speaker Change: or maybe more of an inflection, just kind of thinking about the cadence of initiatives rolling out and the degree that their OPEX investments near term are.
Speaker Change: anything else to think about on that and I did have one follow-up on the adjusted earnings whether there's that sale lease back gain in there if you have any comment on the magnitude
Speaker Change: Okay, Alex, good morning. Thank you for the question. It's Kevin. I'll start with international. Again, the headline We are extremely pleased with our international business
Speaker Change: the leadership team, the business progress that's being made, the initiatives that we are driving that is helping deliver that business progress. It's certainly not coming from the macroeconomy in these countries. We are winning because we're taking share, we're taking share profitably, and we're growing our business. So just shout out to our international leadership team for the great job that they are doing. And you're right, that the EBIT as a percent of sales today within our international segment is lower than the total company book of business.
Speaker Change: which therefore is what gives us the direct confidence that we're not slowing down in international anytime soon. International will be the growth engine within the company for years to come, tied to our ability to grow the top line and as importantly, or even more importantly, improve the EBIT as a percent of sales. There are no structural barriers in any of the international countries that we compete in that puts a false ceiling on our profit rate. So I'm not gonna quote a percentage of EBIT,
Speaker Change: That's more fodder for an investor day type conversation, but there's no wall coming anytime soon. We expect outsized top and bottom line growth from international the program's Cisco your way expansion. We're expanding our category assortment. We're introducing Cisco brand. We're putting more sales boots on the ground headcount. We are putting in technology to make the business more efficient. We're expanding our supply chain in most of, if not all of our international countries from a new buildings perspective.
Speaker Change: there's the opportunity for M&A activity in both Ireland and GB within the past calendar year. We've built it on specialty capabilities, one in produce, one in protein.
Speaker Change: Guess what, that's exactly what we've done in the United States, and we have tremendous white space within those bolt-on specialty businesses in the countries that we currently operate within, and I'm just really proud of our international business and the great work that they're doing. Kenny, I'll toss to you for any additional comments, and then Alex's second question. Yeah, sure. The only comment I would add on international is...
Speaker Change: You know, we've been able to replicate our size scale from U.S. to international, and the good news is it's not one market. Every market sitting in Europe, for example, in all international segment was up double digit.
Speaker Change: and OI. Three numbers. Top line four, GP seven, and then lastly, OI up 27 percent. So it's working for basically across all markets, not just one market.
Speaker Change: Alex, to your question about sell lease back, you know, and let me walk through how Kevin and I and the team think through this one, right? What's our viewpoint?
Speaker Change: Consistent with our ROIC focus, we continue to look for opportunities to redeploy capital through buying and selling, both on the business side and the asset side. So, as an example, on the business side, we divested our JV in Mexico, and we were able to redeploy that capital.
Speaker Change: to fuel international growth, and we're seeing it. So it's working. R-O-Y-C, ACREDA, check.
Speaker Change: This same concept applies to assets, i.e., for example, facilities that we own. These actions help provide capital to fund new facility projects and hire more ROIC-competitive areas. So I'll give you a good example.
Speaker Change: A market that has rising, for example, rents for us, like Hawaii, for example, and we were able to take that and buy that asset down and re-deploy the capital from a less-
Speaker Change: Again, as all part of asset management and trying to drive growth from an ROA standpoint. The other thing I would say is that the proceeds from the SELL LEASE PACT also enabled us to expand as well as to add more locations supporting our bronline business.
Kevin Hourican: Our virtual Italian platform that Kevin talked about, as well as our new facility in the U.S. and international as well.
Kevin Hourican: So, the way I want to bundle this one up is, overall, Cisco is a growth company sitting in a growth vector. We want to continuously and proactively to look at our portfolio, and we do this, great companies do this, by the way, every single day, our portfolio, and to ensure that we are positioning ourselves from a footprint standpoint for a profitable growth and maximize our return on assets.
Thanks very much.
Thanks a lot.
Kevin Hourican: Thank you. At this time, I would like to turn the call back over to Kevin Hourican for any additional or closing remarks.
Kevin Kim: Right, thank you all. This is Kevin Kim. If you have any questions for the Investor Relations team, please feel free to reach out to myself as well as any members of the Cisco Investor Relations team. Thank you for the time.
Thank you.
in this video.