Q3 2025 Sysco Corp Earnings Call
Please standby your program is about to begin.
Speaker Change: Welcome to Cisco's third quarter Finance fiscal year 2025 conference call. As a reminder, today's call is being recorded.
Speaker Change: We'll begin with opening remarks, and introductions I would like to now 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 third quarter fiscal year 2025 earnings call on today's call, we have Kevin Hurricane our chair of the board and CEO and Kenny Chang our CFO before we begin. Please note that statements made during this presentation that state the companys or managements intentions beliefs expectations or.
Speaker Change: 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.
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. This includes but is not limited to risk factors contained in our annual report on Form 10-K for the year ended June 29th 'twenty 'twenty four subsequent SEC filings and in the news release.
Speaker Change: <unk> 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.
Speaker Change: In the investors section of our website during the discussion today unless otherwise stated all results are compared to the same period 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. 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.
Speaker Change: Hey, Kevin a hurricane.
Kevin: Good morning, everyone and thank you for joining us today.
Kevin: Q3 was a difficult quarter for the industry that began with wildfires in California, which significantly impacted our important southern California region and included historic winter storms throughout the country in January and February. Besides these events is having an approximately 150 basis points negative impact.
Kevin: On sales trends for food distributors in the quarter.
Kevin: Foot traffic to restaurants during the quarter reflected these challenges with January down one 3%.
Kevin: We're already down five 7% in March down two 3%.
Kevin: Quarter overall was down 3.1, which represented a 150 basis point deceleration versus Q2 as traffic level of down one 6%.
Kevin: In addition to the effects of adverse weather in the quarter consumer confidence has been shaken by the recent trade policy and tariff negotiations as you are aware the closely followed Michigan consumer confidence survey recently highlighted that consumers are expressing one of the lowest levels of confidence and approximately 20 years.
Kevin: The decline in confidence levels gives us concern for the full year ahead.
Kevin: I'll speak more about tariffs and their impact on the industry in a few moments.
Kevin: As a reminder, Kenny and I communicated on our Q2 call that we had anticipated nominal improvement in the business macro environment going from the first half into the second half of our fiscal year.
Kevin: Unfortunately at this time, we have experienced the opposite macro effect and Cisco's business performance for Q3 reflects the industry traffic deceleration.
Kevin: We are disappointed with the quarter, but it is important to note two things.
Kevin: Cisco is U S S volume trends for the quarter trended in line with the industry traffic deceleration and more importantly business performance in March strengthened over the course of the month.
Kevin: And while it is unusual for us to comment about the first month of a quarter given the uncertainties in the macro backdrop and given our softer than expected Q3, we felt it was important to highlight our April performance was stronger than March for the month of April industry traffic adjusted for calendar shifts has trended.
Kevin: Slightly better than March.
Kevin: The Easter shift and the period complicates year over year comparisons however, even when adjusting for the Easter calendar shift April has produced stronger volume growth rates versus March and versus Q3.
Kevin: We are pleased to see the relatively stronger start to Q4, but we are cautiously planning our business for the remainder of 2025, given the aforementioned tariff uncertainties and consumer confidence data.
Kevin: Given that macro backdrop, I will now pivot to Cisco as the results for the quarter, where as you can see on slide number four we delivered sales results of $19 6 billion up one 1% on a reported basis and up one 8% to last year when excluding the divestiture of Mexico.
Kevin: We delivered adjusted operating income of $773 million down three 3% to last year and adjusted EPS of <unk> 96, <unk> flat to last year.
Kevin: We converted negative three 1% foot traffic to restaurants into positive sales by winning new business and successfully passing through approximately two 1% inflation for the quarter.
Kevin: Importantly, we are making solid progress on our $100 million profit improvement efforts that Kenny discussed last quarter with a positive contribution in the period from our strategic sourcing and inbound logistics efficiency improvements those efforts will have an increased positive impact on our Q4.
Kevin: Our international segment posted another compelling quarter with profit growth of double digits. This is the sixth consecutive quarter of double digit profit growth from our international segment.
Kevin: Within U S. Our national sales business delivered flat volume growth for the quarter and sales growth of two 3%.
Kevin: Both figures were below our expectations driven by softness in the national restaurant sector.
Kevin: Within National sales, our noncommercial business continues to perform with strength in foodservice management education and travel and leisure.
Kevin: Our local business delivered negative three 5% volume growth for the quarter.
Kevin: This was a step down versus our Q2 performance, but the step down was consistent with the traffic change to the industry on a quarter over quarter basis.
Kevin: Lastly, our SYGMA segment delivered sales growth of nine 5% for the quarter driven by strong customer wins versus prior year the.
Kevin: Sales and volume growth in Sigma will begin to reduce in coming quarters as we begin to lap large customer wins within the last year Sigma.
Kevin: Sigma is having a very strong year growing top line, 9% and bottomline, 17% year to date.
Kevin: We are disappointed with the overall financial performance in the quarter as we had expected a stronger macro backdrop with that said important initiatives to improve our local business are beginning to deliver results. It is unfortunate that our self help improvement is coming at the same time that the industry backdrop Boston However.
Kevin: We remain 100% focused on accelerating our progress we anticipate that we will increase our progress on these important initiatives in the coming quarters.
Kevin: Now that I've covered the general backdrop of the industry and Cisco is sales volume and profit performance I would like to provide an update on specific initiatives, we're driving to improve our performance results.
Kevin: First I'd like to discuss the state of our sales consultant workforce.
Kevin: I am pleased to report that our 2025 hiring cohorts are progressing nicely up their productivity curve each of our hiring classes are on target to achieve their sales and volume targets. Importantly, I can also report today that our sales consultant retention has significantly improved versus the first half of the year.
Kevin: <unk> turnover was a headwind for Cisco in the first half of fiscal 2025, and we expect it will become a tailwind in 2026 as we lap those colleague departures and our new hires increase their productivity regarding colleague retention. We just completed our annual employment engagement survey and our sales colleague.
Kevin: Job satisfaction was up solidly year over year colleague engagement drives retention and colleague retention drives positive customer engagement.
Kevin: Given questions. We've received on recent Investor calls I would like to explain the net net impact of colleague turnover in a bit more detail. So that you have clarity on what we are experiencing.
Kevin: During the first half of 2025, we experienced elevated colleague turnover. It peaked in September the negative impact of FC departures as immediate as we need to reassign customer locations to other Cisco colleagues.
Kevin: During that customer realignment select customer attrition occurs.
Kevin: As such our departing colleagues has an immediate negative headwind impact on our business and that headwind can persist for a full 12 months until you lap that customer departure.
Kevin: In contrast to the immediate impact of a departure a colleague hiring has the opposite time horizon.
Kevin: <unk> new colleague hiring is a slow and gradual positive impact on the business new colleagues start with a small book of business and grow that business over time as they expand their territory.
Kevin: A length of time to become productive for our new sales consultant is approximately 12 to 18 months on average as it can be quicker or slower depending upon the level of sales experience of the new hire.
Kevin: Putting it altogether as a result of these two factors fiscal 2025 has experienced a net headwind from our colleague population.
Kevin: Given that we have stabilized our retention figures and that our new hires are performing we expect this scales of this equation to tip from negative to positive as we enter fiscal 2026.
Kevin: The second local topic I would like to highlight today is colleague compensation and performance management or.
Kevin: Our sales consultants are embracing our compensation model they are driving the right selling behaviors and they are on average making more money than prior year. These.
Kevin: These actions are most notable in the winning of new business, where we have opened more new accounts in march than any prior period outside of Covid snapback.
Kevin: We have work to do in order to improve customer retention as industry churn across distributors is currently above the historical average as a result, we have a companywide effort on improving local customer retention to complement the success, we are having with new account wins the.
Kevin: The hyper focus on service and retention will be a stronger positive vector in fiscal 2026 2025.
Kevin: The third topic for today is our fulfillment capacity expansion.
Kevin: We previously spoke to opening a new facility in Allentown PAA earlier this year.
Kevin: That new DC this focused on winning new business and the population dense northeast corridor.
Kevin: I recently visited our next new site, just outside Tampa that will support the growing Florida market the.
Kevin: The new facility in Tampa will open this summer and will increase our ability to win net new business in the Florida region by expanding our storage and throughput capacity, especially to support the peak winter months.
Kevin: Internationally, we are on track to open new facilities in Sweden, and Ireland through the summer each of these projects will support expanded storage and throughput capacity that we believe will enable us to profitably grow our business in target rich international geographies.
Kevin: Lastly, I would like to speak to our work to improve our pricing agility.
Kevin: At the Cagny Conference in February Cisco introduced a new local sales initiative that is currently in pilot mode in select regions.
Kevin: As I said at Cagny, we are pleased with our margin discipline and overall price competitiveness utilizing our current pricing system and architecture.
With that said it is a competitive marketplace and competition will occasionally offer our customers savings on select items.
Kevin: Today, our sales reps need to seek approval in order to match given competitive price on a given item.
Kevin: The time delay of that approval process can sometimes result in a loss sale or even a loss customer.
Kevin: We're working to speed up this process and provide our frontline colleagues with decision, making authority leveraging our pricing tools.
Kevin: Our sales professionals will be able to respond to the customer and the spot moment, enabling incremental opportunities to potentially save a sale all while maintaining strong margin discipline.
Kevin: This increase speed to action will improve case volume and customer retention.
Kevin: Most importantly, our underlying pricing technology will be leveraged to underpin the agility process, we will rollout the new model. Once the pilot results are matching our intended outcomes and as we prepare and train our colleagues new inexperienced to sell in this model.
Kevin: As I wrap up the update on local sales I want to congratulate our international team for another outstanding quarter International local volume increased four 5%.
Kevin: Even more impressively adjusted operating income increased 17, 4% particular strength was delivered from our Canada, Great Britain and Ireland businesses.
Kevin: We expect the continuation of these strong results from our international segment in Q4 and into fiscal 2026.
Kevin: As I wrap up the business review section of my prepared remarks I.
Kevin: I would like to make a few comments on some additional important topics.
Kevin: First off I would like to address what we are seeing with tariffs and their potential impact on the food distributor and landscape.
Kevin: It is important to note that Cisco purchases greater than 90% of our products within country in each country that we operate food is inherently local and our sourcing teams greatly leveraged local food suppliers.
Kevin: As a result, our tariff exposure is much less than most industries.
Kevin: So those products that we cannot source locally like avocado from Mexico, we are working efficiently to understand the impact of tariffs on our costs at this time produce from Mexico, and Canada is exempt through U S. MCA with that said, we recently learned that tomatoes willing back to be taxed and tariffs when imported.
Kevin: To manage these complexities we have stood up a tariff management task force that meets daily.
Kevin: The focus of the task force work is the following number one ensure we have products in stock and available for our customers.
Kevin: Number two defend against price increases from suppliers and do everything possible to minimize their impact on potential cost increases for our customers.
Kevin: Number three find alternative sources of product if and when that cost increase is excessive.
Kevin: Number four work with our customers to find menu alternatives and product choice alternatives that can reduce the potential negative cost increase impact.
Kevin: All told Cisco is in a better position than anyone in the foodservice distribution space to manage this dynamic situation given our size scale and global procurement Division.
Kevin: Our global leadership gives us a strategic advantage to understand the supplier community in hundreds of countries and have the ability to leverage that knowledge and those relationships in our procurement efforts.
Kevin: As you have heard from other companies Ceos, our main concern with tariffs is not product cost inflation. Our main concern is the negative impact of tariff noise and volatility is clearly, having an end consumer confidence and sentiment.
Kevin: Michigan consumer confidence survey data I referenced earlier presents a clear reflection of that concern.
Kevin: We're hopeful that the uncertainty and volatility stabilizes and that the economy doesn't dip into a recession.
Kevin: With that said, we are making preparations for a more challenging environment.
Kevin: We will be appropriately cautious in our outlook.
Kevin: To help offset softness that may be created by the macro economy, Kenny and our entire leadership team are focused on disciplined cost management and contingency planning.
Kevin: <unk> industry, leading balance sheet as a major source of strength in times like these as we are able to continue investing in our business when others will need to pullback.
Kevin: This can take the form of winning new customers building inventory to support new business and even pursuing M&A. If we find the right target opportunity at the right price.
Kevin: Cisco is in a position of strength and times of greatest uncertainty.
Kevin: My last topic for today is the introduction of a pilot program at Cisco, whereby we will open to cash and carry store locations within the Houston community.
Kevin: As you can see on slide seven the store concept is called Sysco to go we are interested in cash and carry for the following reasons it.
Kevin: It is the fastest growing part of the food away from home space in a business, where we have zero percent market share today.
Kevin: Cash and carry customers are looking for a value be convenience and see often times the ability to pay cash.
Kevin: This is a customer that Cisco is not adequately serving today through our delivery model.
Kevin: By having the customer pick up the product themselves at our store location, we eliminate the most expensive part of the supply chain final mile delivery.
Kevin: That cost elimination enable Cisco to offer our world class products at lower prices than when we deliver to the restaurants.
Kevin: This enables us to meet the needs of the value seeking customers more effectively I wanted to be very clear. This is a two store pilot the future of the initiative will be determined by the outcomes. We produce in these test locations. It is important to note that these two stores are supported from Cisco as existing supply chain leveraging our.
Kevin: Our own product assortment as a result, we have a strong command of the projected cost to run the stores.
Kevin: Leveraging our existing supply chain is a major strength of the format given both stores are in close proximity to our Houston DC. We're excited to open two stores in Houston soon and welcome value seeking restaurant customers into this compelling shopping environment.
Kevin: I'll now turn it over to Kenny who will provide a detailed review of Q3 performance and select fiscal year 2025 guidance commentary Kevin over to you.
Kenny Chang: Thank you, Kevin and good morning, everyone.
Speaker Change: Start with high level thoughts on our performance detail, our Q3 financials, and then dive into full year 2025 guidance.
Speaker Change: To start financial results. This quarter included sales growth with stable adjusted EPS performance.
Speaker Change: The context of all of the challenging macro headlines over the past few months growing sales as the industry leader, while retaining best in class profit margins and rewarding our shareholders with our balanced capital allocation is noteworthy.
Speaker Change: However, this quarter missed expectations.
Speaker Change: Kevin highlighted the challenging macro and continuation of negative industry traffic directly impacted results.
Speaker Change: And this dynamic backdrop, we will remain agile in our management of the business as we also heightened our focus on the controllable.
Speaker Change: Our strong business fundamentals industry, leading balance sheet and strong cash flow generation, our competitive advantages, especially in a challenging macro environment.
Speaker Change: As part of our balanced approach to capital allocation, we remain positioned to generate robust free cash flow that enables us to both invest in long term growth while also rewarding our shareholders.
Speaker Change: Specific to this last point, we have repurchased $700 million in shares and paid out $752 million in dividends year to date, including repurchasing $400 million in shares this quarter.
Speaker Change: Further we recently increased our planned quarterly cash dividend by three to 54 cents per share.
Speaker Change: This represents a 6% increase year over year, and FY 'twenty fix up to be our 56th year of delivering dividend growth.
Speaker Change: Looking ahead, we expect our dividend to continue growing commensurate with our adjusted EPS growth.
Speaker Change: Now, let's discuss our performance and financial driver for the quarter starting on slide 11.
Speaker Change: For the third quarter, our enterprise sales grew one 1% on an as reported basis driven by U S Foodservice and Sigma.
Speaker Change: Excluding the impact of our now divested Mexico business sales grew one 8%.
Speaker Change: With respect to volume stable volumes across the enterprise included total U S foodservice volume decreasing 2% and local volume decreasing three 5% or.
Speaker Change: Our national business remains stable highlighting the strength of the recession resilient sectors in which we operate such as foodservice management travel and leisure and education.
Speaker Change: The local volume performance compares to down one 9% in Q2 2025 the.
Speaker Change: The sequential deceleration was consistent with the industry traffic deceleration, but also included headwinds from the carryover impact of sales colleague turnover from earlier in the year.
Speaker Change: Going forward, we expect stronger contributions from newer sales professionals that continue to work up the productivity curve and benefits from the stabilization of colleague retention that Kevin mentioned earlier.
Speaker Change: International segment results, excluding Mexico, this quarter demonstrated steady momentum and double digit operating income growth. This reflects continued momentum from successfully applying the Cisco playbook.
Speaker Change: The ongoing success as highlighted by local volumes growing four 5% and broad base operating income growth across our international portfolio.
Speaker Change: We produced $3 $6 billion and gross profit down <unk>, 8% and gross margin of 18, 3% with improve gross profit per case performance.
Speaker Change: The decline in gross profit dollars for the quarter was primarily driven by negative volumes as well as mix <unk>.
Speaker Change: Volume was impacted by the macro and negative traffic, partially offset by continued growth in our more recession resilient businesses second mix remained pressured from the continued impact of our national business outpacing our local performance as well as negative mix from lower physical brand per.
Speaker Change: On attrition rates.
In addition, the industry challenging traffic backdrop dropped delays at compare to our expected timelines, which resulted in fewer than expected strategic sourcing deals being finalized this quarter.
Speaker Change: Said.
Speaker Change: We remain confident around the overarching opportunity and our line of sight on benefits to Q4 from recently completed deals.
Speaker Change: Going forward, we expect improving gross margins driven by incremental benefits from strategic sourcing initiatives as part of our cost savings program and an improvement from mix.
Speaker Change: Product inflation came in at three 1% for the total enterprise consistent with our expectations. This is the average across all of our major product categories with our teams regularly managing through pockets of fluctuation.
Speaker Change: Overall, adjusted operating expenses were $2 $8 billion for the quarter or 14, 3% of sales a 17 basis point improvement from the prior year.
Speaker Change: We continue to experience improved retention rates and productivity with our supply chain colleagues.
Speaker Change: This is resulting in strong NPS anchor by our highest service levels of the year for on time deliveries, helping offset elevated supply chain labor rates and funding long term growth consistent with our <unk> IC framework.
Speaker Change: This includes investment in higher growth areas of the business with fleet building expansion and sales head count.
Speaker Change: Lower annual bonus incentive compensation and our U S. FSS segment and global support Center also impacted expenses for Q3.
Speaker Change: We remain disciplined with our corporate expenses down 16, 8% from the prior year on adjusted basis, which also included accretive productivity cost out along with efficiency award that we deployed in FY 'twenty four.
Speaker Change: These benefits are included in our $100 million cost savings program.
Speaker Change: Building off Kevin's point around tariffs, we are focused on leveraging our size and scale advantages by buying better to sell better.
Speaker Change: Our customer mix is a strategic advantage.
Speaker Change: We have efficient pass through with national customers and spot pricing from existing and growing in local customer base. Our inventory turnover of approximately 14 times per year also enables us to work through inflation and deflation quickly relative to other industries.
Speaker Change: Overall, adjusted operating income was $773 million for the quarter, reflecting strong growth in our international segment and expense management and global support center offset by declines in our U S segment for the quarter adjusted EBITDA of 969.
Speaker Change: <unk> was down <unk>, 8% versus the prior year.
Speaker Change: Let's now turn to our balance sheet and cash flow a compelling competitive advantage.
I have explained before our balance sheet affords us the financial tools and flexibility to make the right position both for the short and long term as we seek to grow our business, while driving industry, leading returns on invested capital.
Speaker Change: Our balance sheet remains robust and reflects a healthy financial profile. This.
Speaker Change: This includes flexibility and optionality from approximately $4 $4 billion in total liquidity well above our minimum threshold. We ended the quarter at a two eight times net debt leverage ratio.
Speaker Change: Turning to our cash flow, we generated approximately $1 $3 billion in operating cash flow and $954 million and free cash flow year to date.
Speaker Change: Free cash flow was driven by strong quality of earnings and prudent management of working capital.
Speaker Change: This quarter marked our strongest conversion rate of the year 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: As noted earlier, our strong financial position enabled us to return approximately $649 million to shareholders. This quarter.
Speaker Change: Now I would like to share with you our updated expectations for Q4, and FY 'twenty five given the uncertain environment in general concerns regarding consumer confidence we are lowering our full year guidance for FY 'twenty five as seen on slide 17 during FY 'twenty five we now expect.
Speaker Change: <unk> reported net sales growth of approximately 3% slightly down from the prior target of 4% to 5%. This is largely driven by lower than expected volume growth driven by the market are assumptions for inflation of approximately 2% and contributions from M&A remain on.
Speaker Change: Changed we now expect full year, 2025% adjusted EPS growth of at least 1% for Q4. This implies adjusted EPS to be at least flat.
Speaker Change: The revision to guidance reflects that the current uncertain macro environment and its outsized impact to the second half of the year, which historically its more profitable. This upcoming quarter also includes our planned strategic investments related to refreshing our fleet and building capacity coming online.
Speaker Change: This updated guidance assumes no further degradation of the restaurant traffic environment, and a slight improvement to our volume performance.
Speaker Change: Importantly, we believe this guide is achievable based on our strong exit velocity for March and continued momentum into April in Q4, including higher contributions from cost out we remain confidence in delivering our run rate cost savings target of approximately $100 million.
Speaker Change: Which we expect to benefit Q4, and the first half of 2026, helping offset the current macro environment. We plan to remain focused on operational discipline tightening the belt necessary and investing for long term growth.
Speaker Change: We remain targets reward our shareholders through the distribution of essentially all of our annual free cash flow with over $1 billion in dividends and $1 two 5 billion in share repurchases.
Speaker Change: This assumes fourth quarter share repurchase of $550 million and dividends of $250 million.
Speaker Change: For the year, we expect to operate within our stated target of two five times to 275 times net leverage ratio and maintain our investment grade balance sheet now.
Speaker Change: Now turning to a few other modeling items for Q4, we expect a tax rate of approximately 24% and adjusted depreciation and amortization of approximately $200 million.
Speaker Change: Interest expense is now expected at approximately $170 million looking ahead and as we have proven over time, we will leverage our position as the market leader to drive disciplined growth as we remain focused on unlocking value that will reward our shareholders.
Speaker Change: With that I'll turn the call back to Kevin for closing remarks.
Speaker Change: Thank you Kenny Q3 did not live up to our expectations on the top or bottom line the.
Speaker Change: The macro softness directly impacted our volume trends within the importance local and national restaurant business sectors.
Speaker Change: Our trade down in volume during the quarter as directly linear with the widely communicated traffic decline experienced by the industry over the same period.
Speaker Change: With that said, we can see progress that we're making on activities within our local business.
Speaker Change: Colleague retention has stabilized new customer win rate is accelerating.
Speaker Change: As I mentioned, we're still working through the headwind of prior quarters colleague resignation, but that impact will reduce in magnitude each quarter.
Speaker Change: As we head into fiscal 2026, the net net of colleague retention and new colleague hiring will become a tailwind.
Speaker Change: Our new hires are performing and they are responding to the updated compensation model. They are opening new business. They are hitting their sales targets. Additionally, our new distribution centers will increase our ability to win profitable new business and important geographies, both domestically and globally.
Speaker Change: The most compelling proof point to highlight the self-help progress we are making in our local business is the percentage of new business. We are opening weekly.
Speaker Change: March was a very strong month for opening new business and the progress has continued into April.
Speaker Change: Combined with our efforts and our customer retention through pricing agility and improve service levels from our supply chain. We are confident we can grow our customer count in 2026.
Speaker Change: From a business perspective March local volume improved 270 basis points versus February and local volume during the first weeks of April improved further versus March we are pleased to see the stronger April and we are cautiously planning are coming months due to the tariff uncertainty I.
Speaker Change: I am confident Cisco will make progress on our improvement initiatives in the coming periods. The external environmental ethos include balls in the year to go and we are prepared.
Speaker Change: Print margins rock solid balance sheet and fiscal responsibility will be strain points as we navigate this volatile environment.
Speaker Change: I am confident in our ability to win versus the overall marketplace and challenging conditions just like we successfully grew our business during the Covid disruptions.
Speaker Change: At times like these are higher than industry profit margins and strong balance sheet cannot be overstated. We also expect our international division, which has been less impacted by the volatility to continue to be a strong point for the company.
Speaker Change: Having the diversified business will be a strength point ahead with that operator, we're now ready for questions.
Speaker Change: Thank you at this time, if you'd like to ask a question. Please press the star key followed by the one key on your telephone keypad.
Speaker Change: You may remove yourself from queue at any time by pressing star two.
Speaker Change: Interest of time, we do ask you limit yourself to one question.
Alex Slagle: Again that is star one if you'd like to ask a question. Our first question will come from Alex Slagle with Jefferies.
Alex Slagle: Thanks for the question good morning, I had a question on the local business.
Alex Slagle: Can you talk about the sales head count investments, you've been making where we are with that and I guess any evidence. These investments are really moving the needle you provided a couple interesting tidbits on the acceleration in the March and April, but any other sort of pockets of your business, where you can point out.
Alex Slagle: Where youre seeing.
Alex Slagle: The initiatives deliver positive organic case growth or clear market share gains something that really gives you confidence in that.
Alex Slagle: Drivers are in place and working as hoped.
Alex Slagle: Hey, good morning, Alex It's Kevin. Thank you for the question I'll start with your first part of your question, which is sales consultant head count we expect to end the year at approximately 4% growth in our head count.
Alex Slagle: Excuse me government from medical.
Alex Slagle: <unk>, 4% growth year over year at the conclusion of Q4, it's an estimate it will be at least 4% growth. That's the answer to that question as it relates to signals of progress as I said in my prepared remarks, we have several proof points that we can share March being stronger than Q3 in total.
Speaker Change: Oral being stronger than Q3's nose up if you will the controllable evidenced by new customer win rate in the month of March we opened more new customers than at any point in time other than the snapback recovery from from Covid proof point number two is the quality and productivity of the training cohorts as you know we hire people in classes.
Speaker Change: Those prices graduate and we track them every single month on their performance versus where we expect them to be and I can definitively communicate that our hiring cohorts are producing they are growing their productivity at the rate, we expect and anticipate and as I said in my prepared remarks, why that's not evident invisible and market share gains slash.
Speaker Change: Volume growth that we're proud of in year to date is the offset to these things which was the increased colleague turnover that experienced during the first half of the year as I said in my prepared remarks that peaked in September it improved in Q2, but we're still carrying that headwind of the colleague separation because when they depart theres some customer.
Speaker Change: Loss that goes along with that we anticipate the scales of that equation as I mentioned in the prepared remarks, the tip to positive in Q1 of fiscal 2026 because of the confidence in the new hires and that we'll be lapping that increased separation, so Ken anything yet yeah, Hey, Alex from Kenny here.
Kenny Chang: I'll add a couple of things here.
Speaker Change: One pieces, we are encouraged by seeing select geographies already hitting our growth expectations driven by the etsy ads improved retention as well as the new comp model that we talked about and thats carrying into Q4 as well so that one proof point to answer your question. The second thing I would say is that as you think about our book of vessels right now for ones that are on our books.
Speaker Change: Literally most of them are higher in the back half of FY 'twenty four in the first half of FY 'twenty five with each passing month, the sp's become more productive and we're seeing that with our cohorts, but Kevin just refer to the improvement is not binary meaning each month each day each quarter. They are becoming more productive and the interesting factor is that we are we will be experiencing.
Speaker Change: <unk> a significant amount of folks into in that 12 to 18 months timeframe now and based on our all in between total tracking data. There is a step level function change up to the good once we hit that so youll see some of that in Q4 and Thats. The reason why we do expect Q4 local volume to improve versus Q3 of last thing I would.
Speaker Change: Say around your question around felt that kind of investment I agree with Kevin will be around over 4% increase year on year. We are committed on growing our local sales professional head count and will be disciplined on pacing the volume to expectations and market conditions will be very deliberate on when and where we add.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question will come from Mark Carden with UBS.
Mark Carden: Great Good morning, and thanks, so much for taking the question. So I wanted to ask another one on local more from an industry wide perspective, how has the local restaurant industry backdrop held up relative to national restaurants, and then within that are you seeing any regional challenges and how is that fluctuated over the past few months.
Mark Carden: Hey, good morning, Mark its Kevin. Thank you for the question National restaurant has had a really tough quarter. That's the headline that's the punchline.
Mark Carden: Soft consistent with the local numbers that obviously, we disclose and report when you look at our National case volume number you have to keep in mind, yes, there are national restaurants in that mix, but it's offset by real strong strength in foodservice management travel and entertainment education has held up strong and we have a very stable.
Mark Carden: Health care business, so national for us were stronger than local but if you unpack within national look at this national restaurants. It was a tough tough quarter for national restaurants. Obviously, there are individual select names that are doing incredibly well you know who they are but in aggregate really tough quarter for national and it was exacerbated in February.
Mark Carden: What's kind of going back to one of Alex's questions, we're seeing strength, where we're adding head count can you hit that point very very well, but the pain in Q3, the weather was everywhere I happen to live in the South we had four inches of snow in Houston that never happens really adverse weather in the mid parts of the country that temporary zoned and obviously the north at the tail end of February to head back to.
Mark Carden: Back to back weeks have really adverse weather. So the headwind was pretty much geographically throughout the United States Interestingly, Our international Division one of the reasons, it's continuing to perform we're not experiencing some of these.
Mark Carden: Headwinds from an external factor perspective, the tariff and tax thing is not negatively at this time impacting our international Division and it's one of the reasons along with our strong business performance that we're doing well in that regard.
Mark Carden: Thanks, so much good luck.
Mark Carden: Thank you Mark.
Speaker Change: Thank you. Our next question will come from Jeff Bernstein with Barclays.
Mark Carden: Yes.
Mark Carden: Great. Thank you very much.
Speaker Change: One clarification on a comment you made earlier and then a question. The clarification is just on that local case growth.
Mark Carden: I know you said, you're directionally similar to the industry in terms of easing I'm just.
Mark Carden: Wondering whether you think any of it is self inflicted whether you see.
Mark Carden: Industry data that gives you confidence you're not underperforming peers that was my clarification otherwise. The question is just on the fiscal 'twenty five guidance.
Mark Carden: I just feel like the past couple of quarters, you were confident that even if the macro will pressure. The top line you had leverage to accelerate cost efficiency savings to still hit that 6% to 7% EPS growth. So it does look like you lowered the top line by.
Mark Carden: 1% or so once to 2% actually but you took down EPS guidance by 5% plus.
Mark Carden: Wondering how you.
Mark Carden: See that playing out whether or not there's less low hanging fruit or you. Just decide you don't want to damage. The long term infrastructure for short term earnings any thoughts on that between top and bottom line. Thank you.
Mark Carden: Yes, very fair question, it's Kevin I'll start and Kenny will bat clean up as it relates to your appropriate question regarding to the full year guide back to local we are confident that in Q3, our performance relative to the market was consistent.
Mark Carden: Fact, it's almost to the Penny if you track the traffic change from Q2 to Q3 to our local case growth performance Q2 to Q3, we were consistent with the industry. We are confident we did not.
Mark Carden: Road in our performance relative to the overall market. We are pleased with the start of Q4 as I said April was stronger than March March was stronger than Q3, we're beginning to see some positive separation and our performance relative to the market as we begin Q4 and it's this timing thing that im talking about relative.
Mark Carden: Two colleagues separation the new cohorts that are hitting their 12 month anniversary date in Q4, as Kenny already communicated and even more of them will have that 12 month anniversary as we roll into fiscal 2026, we need to display separation in our performance versus the market in a positive way and we are seeing the green shoots of progress Jeff that are going to.
Mark Carden: <unk> that outcome will talk about that more in August obviously, as we provide guidance for fiscal 2026 as it relates to Q3, we understand your question.
Mark Carden: One thing I would point to assist that steepness of the drop off in February was meaningfully unanticipated I said in my prepared remarks, the traffic down five 7% and it was like a light switch when that happens, it's really difficult to get that type of cost out of your system that fast, especially when March rebounded quite solidly versus February we don't want to furloughed.
Drivers, we don't want to.
Mark Carden: Cut costs that you end up having to reverse later that is really painful the other thing relative to adverse weather of that nature as it drives operating expenses up so I think about the number of facilities, we have snow removal at our large parking lots and then what are you doing deliveries and that type of environment. A lot of those trucks are coming back half full meaning we lowered the truck for 'twenty.
Mark Carden: It comes back three hours into the route and you have to put all that inventory back to stock some of that inventory has to be disposed because it's perishable. So these things add cost. So yes, it's a volume headwind when traffic drops like that but it's also a cost headwind because of some of the examples that I just provided so why don't we transition from that into how we're thinking about our guide for Q4 and our.
Kenny Chang: Our outlook in general and I'll pass that to Kenny over to UK, Yeah, Hey, Jeff. Thanks, Kevin just one comment on Q3 before we head into the full year guidance and the confidence around that number if you take a step back on Q3, we didn't Miss EPS consensus by <unk>, <unk> view, unpack fats and simple fashion roughly.
Mark Carden: Five.
Mark Carden: Is driven by volumes as Kevin talked about in his prepared remarks, we assume nominal improvement in foot traffic, whilst the traffic actually fell quarter over quarter by 150 bps right. So again, that's a nickel or 85% of the mis and the other 15% or call. It a penny is driven by timing shifts from strategics.
Mark Carden: Sourcing deals given the backdrop in which we operate in and the good news is we had deals close between post quarter end today, therefore that as a vote of confidence for our $100 million impact annualized.
Mark Carden: $109 impacting Q4 in terms of the guidance, Jeff I think the question behind the question is how confident argue in the number and any any context there.
Mark Carden: Ill answer it.
Mark Carden: With two points here.
Mark Carden: Just a recap.
Mark Carden: Youre correct. The full year is 3% sales growth and then EPS at least about 1% growth. The two reasons why we are confident first of all what Kevin just talked about momentum we have momentum we continue to see it not just a market standpoint, but a lot of our self help initiatives are working as well I'll let alone.
Mark Carden: The momentum market, meaning our sales professionals are becoming more productive climbing up the productivity curve as well as our expense productivity items and the $100 million all of that is on pace and on target. Therefore momentum is there across the P&L and just to double click more on our self help we have begun that.
Mark Carden: Realizations of stages in Q3 is heavier weighted towards Q4 and again it goes back to the leverage cap in our P&L retention is the gift that keeps on giving we're seeing retention in our Sps as well as intercept play train colleagues fund facts here, our supply chain at the highest productivity year to date right now so again with all of these combined.
Mark Carden: We are very confident with our current guide Kevin.
Mark Carden: We don't like to do three part answers, but discretion is very very important as we think about the full year guidance that we updated today. We're very pleased with the start of Q4 from a volume improvement perspective versus March. So you may be asking was sudden and why.
Mark Carden: You forgot we're being very cautious is the point given the tariff uncertainty the volatility in the market the Michigan consumer confidence survey results that I referenced we're being very cautious we're being thoughtful about the management of expenses and management of the discipline of the P&L. We are pleased with the self help activities that I referenced on today's call and.
Mark Carden: Therefore, the prudent if you will of the guide that we put out for Q4.
Mark Carden: Thank you.
Jeff: Thanks, Jeff.
Jeff: Thank you, we'll move next to Edward Kelly with Wells Fargo.
Edward Kelly: Yes, hi, good morning, everybody.
Speaker Change: Kevin I wanted to I wanted to just zero in on sales force.
Edward Kelly: And the opportunity that you see.
Edward Kelly: Talked about 4% growth in the sales force by the end of 'twenty five you've talked historically about adding about 450 people annually. So that growth. If you are still going to achieve that in 2006.
Edward Kelly: Be higher.
Edward Kelly: You do the math on this normalizing turnover in our sales force growth.
Edward Kelly: Not hard to look at local case volumes and say that there is at three 500 basis point opportunity for you to improve that business, but my question is isn't that simple meaning like.
Edward Kelly: Are there other issues, preventing that mass market and the pricing tool has been something thats been talked about that I think maybe is creating some friction.
Edward Kelly: Maybe some lag on the customer loss.
Edward Kelly: Salespeople are leaving.
Edward Kelly: In a year and they come off non competes and do you continue to have some issue there.
Edward Kelly: Just curious as to how you see the magnitude.
Edward Kelly: The self help opportunity and the cadence of the benefit that you may get in 'twenty, six because I think where the stock is trading today.
Edward Kelly: Stock is saying that the market doesn't see that benefit coming so if you could give us some color there I think it would be helpful.
Speaker Change: Good morning. Thank you for the question I. Appreciate the question, we need to prove it through our outcomes and that is what we will do and we understand that as management team and as the leaders of this company we need to prove it through our outcomes what gives us confidence and we're not going to provide guidance for 2026 today, because thats, how I would need to answer to your question, where we have confidence.
Speaker Change: <unk> is the following factors and I just have to repeat some of the key messages because the math is indelibly clear.
Speaker Change: Need to retain the colleagues we have at a historically strong rate in fiscal 2025 was a meaningful headwind in that regard I want to reiterate though it was intentional we needed to make a change to our comp model. It was structural it was required it was necessary and it's been challenging and it's been difficult to work our way through that to change.
Speaker Change: We could go back in time, we would still make the change to the comp model that we made we could have improved our execution of that has changed obviously given some of the accelerated turnover, but the change to the comp model was necessary. So that specific headwind of the increased turnover negatively impacted this year and we can see.
Speaker Change: And our current outcomes, we have absolutely stabilized retention.
Speaker Change: To do better than that I would like to have our retention be higher than it has ever been and we have a concerted effort across all elements of our organization to improve retention, even further not to stabilize it but make it would be at highest levels, that's who we hire that's how we train them thats, how theyre treated when they are out on the road doing their job.
Speaker Change: It's their direct supervisor being in the car with them going on right along is helping them from a skills development perspective.
Speaker Change: Net net I am confident that the turnover challenge will be a net tailwind in 2026 I heard your point on Rolling 12 months of the noncompete routing clear, we understand that and we have a plan to help offset that.
Speaker Change: Offsetting that headwind is the tailwind than we were.
Speaker Change: Intentionally very clear today on how long it takes for our colleagues get to productive. It's on average 12 to 18 months Kenny was very clear that in this Q4. The Q4. We're now in we have more people hitting that 12 month, Mark obviously than we have in any prior quarter and that will increase now from here.
Speaker Change: Just before the metaphor turning on water in a pipe and has to go from one end of the pipe to the other but once it gets to the other end of the pipe now the water keeps flowing we are just now in our Q4 getting to the first quarter for water is now flowing through that pipe in a consistent way as it relates to the previously we've quoted of head count growth number 4% to 500 colleagues.
Speaker Change: Today, we updated that to reflect that this year, we anticipate to end at approximately plus four will be very disciplined about that we know that there are geographies that can absolutely take significantly increased head count She Florida, we're about to open a net new brand new building in Florida will be hiring up in Florida to support that new building into when meaningful.
From a share perspective.
Speaker Change: In that state.
Speaker Change: Gives me as an example, Omega so those are my thoughts on Salesforce I am confident in 'twenty six salesforce will be a tailwind not a headwind and it is absolutely a fact that it was a headwind in fiscal 2025, what else is going on with the second part of your question. There is a lot going on it's a dynamic environment.
Speaker Change: Pricing environment and the needs of the end customer are clear they are seeking value given the pressure on the restaurants P&L or labor cost are up for many of them their rent cost is up and they've experienced 30% to 40% food inflation over the past five years. So customers are value seeking we need to be thoughtful and we need to be agile and how we meet.
Speaker Change: The customer where they are and thats related to things like the product offering that we have that pricing that we have and as I mentioned on the call today, the rollout of price agility, it's something we need to manage extremely well and Thats why I said in my prepared remarks, the change management and the training plan on how to put that tool out in the <unk>.
Speaker Change: Market is critical we have to execute with excellence when we roll that program out to ensure that we can match pricing agility with margin rate discipline and that is why we haven't gone nationwide. Yet we're working on that change management plan, that's training plan pricing and in the marketplace is one of the variables you go beyond those two.
Speaker Change: Yes.
Speaker Change: Excuse me variables.
Speaker Change: And the industry is experiencing a bit higher rate of customer churn than what is normal and thats tied to point to which is the customers seeking value. This is not a unique point to Cisco just churn in aggregate is at a higher level and we're going to talk more in the future about improving the service level experience that we.
Speaker Change: <unk> to our best customers and end to end program that can help reduce customer churn. So those would be the top three salesforce productivity pricing agility and improving customer churn aggregate. Those three we're confident that we can grow local volume and have an attractive P&L and we'll talk more in August about guide for 'twenty six Kenyan yet.
And add to your specific question around the math right. Your math is correct right now youre seeing our expenses sales head count 4% to 5%. So I think your question is theres a spread between obviously the return.
Speaker Change: As we kind of spoke about as.
Speaker Change: Our <unk> climbed the productivity curve as initiatives kick in we should expect the spread to reduce meaning.
Speaker Change: Meaning sales growing closer and with our expense expense base and Thats you are correct that as an opportunity for our company.
Speaker Change: Thanks, guys.
Thank you Ed.
Speaker Change: Thank you. Our next question will come from Jake Bartlett with tourists.
Speaker Change: Great. Thanks for taking the question I wanted to start with just a clarification you've mentioned this.
Speaker Change: In an inflection for the sales force initiatives in the England pump changes to to move to positive in fiscal 2006, I want to make sure I understand your expectations for when that could happen.
Speaker Change: Timber was the was the peak of the increased turnover in the September timeframe, the right way to think about it or really is it possible that we could see that inflection in the first quarter sounded like maybe that was possible given the given the improvements that youre seeing now and then my real question is about is about your <unk>.
Speaker Change: Allocation the dividend increase was the largest it's been in a few years and maybe if you can talk about why.
Speaker Change: You're kind of leaning into the dividend increase.
Speaker Change: So much happier pretty modest increases for the last two in and Youre kind of approach to I know, we've had elevated share buybacks.
Speaker Change: 25, but.
Speaker Change: Is that something that you expect would continue beyond 'twenty five.
Speaker Change: Good morning, Jake. Thank you for the question as it relates to the Salesforce inflection definitively it will inflect to a positive in fiscal 2026, when we provide our guidance for 2026, we will provide more color on how you should think about the full year and how you should think about the first half of the second half thats. The most I can say.
Speaker Change: Today, the second point, though from a green shoots of progress in color April we are seeing a stronger performance versus March and we are seeing some separation of our performance versus the overall market from a positive share gain perspective so.
Speaker Change: It is not a light switch does not go from off to on.
Speaker Change: The separate pardon my cough forgive me the separation impacts negative as immediate as I mentioned on my prepared remarks, the improvement that comes from the new colleague is gradual over time, so think about a slope of two curves when they intersect intersect and how that then shows up as a net tailwind it will be a net tailwind in fiscal 2020.
Speaker Change: And we are doing everything we can to improve the productivity of our new colleagues and as I mentioned improved colleague retention as I mentioned in answering of Ed's question I am not satisfied with getting retention back to where it historically was I wanted to be even better than it historically was to turn the head count.
Speaker Change: And our sales colleague population into a ongoing and permanent point of strength for the company as it relates to the dividend I'll just get started and then toss to Kenny we are a dividend aristocrat. We've raised our dividend now 56 consecutive years in a row. There are very few companies that can say that in my closing remarks, I talked about there is no better company to work for.
Speaker Change: Or from a balance sheet perspective to invest in than a company like Cisco in times like these our industry, leading income statement from a profit as a percent of sales and our rock solid balance sheet affords us the opportunity to return value to shareholders, even in challenging and difficult times, we raised our dividend even during the Covid period, which is a meaningful point of strength, though can you why don't you answer that.
Speaker Change: Specifics of how we thought about the increase for next year, absolutely. So let's start just a quick recap on cap allocation will first and foremost invest in our business and anything access will be returned back to shareholders, given where our cash and liquidity position sits which is over $4 billion for the quarter. We have the luxury to both invest in our business and reward our shareholders. So to your exact question.
Speaker Change: Speaking to rewarding the shareholders as Kevin talked about we're very proud of the fact that we are raising our dividend, 6% again as I said before we expect the dividend raise to be commensurate with future EPS growth for our business.
Speaker Change: Taking a giant step back as CFO I'm proud of the fact that we were able to maintain our $1 $5 billion a share repo this year and raised the dividend by 6%, especially given the market backdrop, we historically impacts our profit profile. The reason being and this is your second question right. How do we think through it it's because we have a strong investment grade balance sheet.
Speaker Change: Solid business fundamentals and the fact that we are confident in the business today on the forward. So that's the rationale Kevin I thought about the dividend raise.
Speaker Change: Thank you.
Speaker Change: Thank you Jason.
Speaker Change: Thank you. Our next question comes from John Heimbach of Guggenheim.
Speaker Change: Hey, Kevin can you talk to.
Speaker Change: This elevated churn across the industry I think you sort of suggested maybe its price oriented.
Speaker Change: Right.
Speaker Change: Is that wrong. What do you think is driving that you also suggested you have some ideas about how to.
Speaker Change: Eat into that and then just when I think about the magnitude.
Speaker Change: Maybe what is a good level of churn for the industry. What is it stepped up to it seems like maybe it's stepped up in a 100 basis points or more.
Speaker Change: But I'd be curious how thats changed.
John: Good morning, John Thank you for the question.
Speaker Change: Churn has increased as an industry overall I will say there is a couple of.
Speaker Change: Drivers behind at number one is customers are value seeking as I mentioned their labor costs are up rent is up food costs are up they are seeking ways to help their profitability and food cost is one of those mechanisms price visibility has increased as you know as more customers are placing their orders online net net in AG.
Speaker Change: <unk>, that's a good thing so more customers, placing their orders online is a good thing because they see more of our catalog.
Speaker Change: Our inspired to buy things they didn't buy before we can prompt them to do swap and saved to alternative products that can help them save money. We can suggest items that they can buy that theyre not buying net net conversion to online is a good thing with that said the conversion to online increases price transparency, not just cisco, but across all distributors. So <unk>.
Speaker Change: More customers are enabled to seek value by the online visibility to pricing. These are environmental conditions, John I am confident that given Cisco has size and scale, we can be very competitive and successful in that environment. So our profit rate as a percent of sales in our purchasing scale affords Cisco.
Speaker Change: To build or buy goods, we call it buy better to sell better and provide value to our customers in that price visible online way, we can lean in with suppliers and do programs together with them to provide savings to customers to entice them to buy from Cisco. So that's point number one relative to the churn point number two is supply chain resilient.
Nancy: Nancy and this goes back to Covid prior to Covid the percentage of our customers' business.
Speaker Change: That customer gave to one distributor was higher than it is today and when product shortages occurred everywhere in the industry and customers Couldnt get everything they needed from their primary distributor they signed up a second or third or fourth distributor as you know theres always been backups in an account, but what we see in the industry.
Speaker Change: As a higher percentage of purchases happening with quote unquote, the backup because customers don't want to find themselves in a position where they can't get what they need to be clear we've done that with our supplier population, we buy more food in the food away from home space than anyone else, we have preferred partner suppliers, but we've had to add backups and sometimes tertiary suppliers to cover our needs.
Speaker Change: If and when.
Speaker Change: Primary supplier can't get us what we need so John that too is a part of the equation as it relates to actionable forward facing 2026 activities. There is a reasonably small percentage of our customer base that drives a significantly disproportionate portion of our profit pool, and we are going to lean in.
Speaker Change: Hard with those best customers and I'm going to talk more about that at future investment engagement opportunities a reboot and a significant focus on our best customer retention and best customer penetration.
Speaker Change: And we believe that will be another tailwind for our fiscal 2026.
Speaker Change: Thank you.
Speaker Change: Thank you John.
Speaker Change: Thank you. This does conclude the time, we have for questions. Thank you for joining <unk> third quarter fiscal year 2025 Conference call you may now disconnect.
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