Sysco Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2023

There are 10 speakers on the call.

Operator

Welcome to Sysco's 4th Quarter Fiscal Year 2023 Conference Call. As a reminder, today's call I would now like to turn the call over to Kevin Kim, Vice President of Investor Relations. Please go ahead.

Speaker 1

Good morning, everyone, and welcome to Sysco's Q4 fiscal year 2023 earnings call. On on today's call, we have Kevin Hyrkin, our President and Chief Executive Officer Kenny Chung, our Chief Financial Officer and Neil Russell, our Chief Administrative Officer. Recorded. Before we begin, please note that statements made during this presentation that state the company's or management's intentions, beliefs, expectations is recorded for 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. Available on the call.

Speaker 1

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. Is recorded. This includes, but is not limited to, risk factors contained in our annual report on Form 10 ks for the year ended July 2, 2022, recorded in the SEC filings and the news release issued earlier this morning. A copy of these materials can be found in the Investors section at sysco.com. Is available on our website.

Speaker 1

Is included at the end of the presentation slides and can also be found in the Investors section of our website. Recorded during the discussion today, unless otherwise stated, all results are compared to the same quarter in the prior year. To recorded. At this time, I'd like to turn the call over to Kevin Harkin.

Speaker 2

Thank you, Kevin. Good morning, everyone, and thank you for joining our call today. Recorded. I would like to cover 3 topics during my section of our call. First, I'll provide a summary of our Q4 results recorded and our full year performance.

Speaker 2

2nd, I'll convey an update on our recipe for growth strategy. And lastly, available. I'll provide some commentary on the macro conditions we have modeled for fiscal 'twenty four and how Cisco intends to operate within that environment. Danny will provide much more detailed components of guidance during his section. So let's get started.

Speaker 2

Recorded. We are pleased with the strong finish to the fiscal year. Cisco posted record top line and bottom line results during the 4th quarter. Top line results as seen on Slide 5 were up 4.1% compared to last year, delivering $19,700,000,000 in sales. The strong quarter generated a full year sales result of $76,300,000,000 a record at Cisco.

Speaker 2

We grew annual sales by 12.5 percent or $8,600,000,000 on a constant currency basis. Turning to volumes, Q4 case volume grew 2.3% and local case volume grew 0.8% across our U. S. Foodservice business, successfully growing our market share and furthering our number one position in foodservice distribution. We are pleased with our share gains for the quarter the year, which build on meaningful gains delivered within fiscal year 'twenty 2.

Speaker 2

Recorded. Importantly, these gains are profitable share gains. We are not growing for the sake of growing as we have consistently pursued profitable sales growth vectors domestically and internationally. Moving to gross profit. Recorded.

Speaker 2

Our sales and merchandising teams delivered a strong quarter from a GP growth perspective. We grew gross margin rates is in the range of $1,000,000 and GP dollars per case, which is not easy to do in a disinflationary environment. Our teams are doing excellent work in strategic sourcing to reduce COGS and further penetrating Sysco Brand cases with our customers. Advancing Sysco brand helps gross profit and leads to increased customer retention. Lastly, We are growing our higher margin specialty business, which strengthens our overall margin profile.

Speaker 2

Next in the P and L is operating expense. I am most proud of the quarter from the perspective of the progress that we are making in reducing our expenses. We have been clear with investors that our first half of the year in fiscal 'twenty three had elevated expenses. This was driven by two factors: investments in our business and a supply chain struggling with new colleague productivity. In the second half of fiscal 'twenty three, We made major progress on our expense ratios and greatly accelerated productivity improvement within our supply chain.

Speaker 2

Is. Retention of colleagues has improved, productivity of our colleagues has improved, and our supply chain initiatives are bearing fruit. Is Slide 7 highlights the sequential improvement with OpEx over the course of the last fiscal year. Recorded. We began the year in our U.

Speaker 2

S. Foodservice segment with quarterly operating expense growing over 22%, ended the year with a growth rate of 0.5%. Our focused effort to deliver supply chain efficiencies is expected to be a strong year for the year. We expect to make further operating expense progress scheduled to be scheduled to be scheduled to be scheduled to be scheduled to be scheduled to be scheduled to be scheduled to be scheduled to be scheduled to be scheduled to be scheduled to be scheduled to be scheduled to be scheduled to be scheduled to be scheduled to be scheduled to be scheduled to be scheduled to be scheduled to be scheduled to be scheduled to be scheduled to be scheduled to be scheduled to be properly trained and working safely and productively. We have the leadership expertise, supply chain tools in supply chain infrastructure to lead the industry in this regard, which is one reason why Cisco operates at an EBIT margin over 1.5 times higher than our industry distributor average.

Speaker 2

Record top line recorded and record bottom line performance in Q4 is a direct result of our recipe for growth and our focus on excellence and execution and operations. The improvement from first half to second half within fiscal 'twenty three was notable, enabling Cisco to grow EPS more than 23% recorded for the full year. In addition to delivering a strong P and L in Q4, we achieved record free cash flow recorded and we returned approximately $1,500,000,000 back to shareholders during the year. We are pleased with the strong financial performance in the quarter expected to be a key driver for the company's business. We believe our success in spite of those conditions positions the business to be successful in 2024, which I will speak to more in a moment.

Speaker 2

Is as is my custom, I would like to provide a brief summary of select recipe for growth elements of our strategy from our recent quarter. I I will start within our supply chain initiative. Our work on strengthening engineered labor standards across our supply chain is paying dividends. Recorded. As I mentioned a moment ago, we made significant headway in improving our supply chain efficiency.

Speaker 2

We have recently strengthened our work method standards training within transportation roles, enabling our colleagues to work safely and work more productively. Additionally, we have increased retention rates within our workforce through our improved training programs. Now I would like to highlight the progress that we have made on the food sales and marketing side of our recipe for growth. Last month, recorded. We announced an agreement to purchase Bix Produce.

Speaker 2

Bix Produce is a leading produce specialty distributor based in Minnesota. Recorded. The acquisition is expected to provide a strategic opportunity for FreshPoint to expand its geographic footprint in an area of the country where it does not currently have operations. Biggs has a strong assortment offering, including fresh cut produce, Grab and Go sandwiches and value added production capabilities. In addition to our good work in expanding is recorded and we have deployed more than 100 new feature enhancements.

Speaker 2

Some of these enhancements include a new homepage, These enhancements have driven an increase in product page visits, adding incremental volume through add to cart purchasing. There is no finish line in our digital improvement journey. We will continue to improve our digital tools over time, enabling us to reduce friction in the purchase experience and inspire our customers to buy more from Cisco. Is our centralized pricing tool has given us the ability to be what we call right on price at the region, customer and item level. Is issued in the quarter and even deflation towards the end of Q4 within our core USBL business.

Speaker 2

Is built into our pricing strategies. Managing pricing across 100 of 1000 of customers, Tens of thousands of products and approximately 7,500 sales reps has never been stronger. Is evidenced by our consistently strong performance in GP Dollars growth and adjusted gross margin rate growth of 28 basis points recorded in the quarter. We want our sales reps focused on customer engagement, relationship building, consultative selling in solving problems for our customers. Our pricing tool enables our SDs to spend more time on those value added activities.

Speaker 2

Recorded. Lastly, Cisco UA is now live in over 400 neighborhoods across 5 countries, and our loyalty program, Perks, is active with over 12,000 customers. Both programs are continuing to deliver compelling top and bottom line growth. The past year has been a heavy lift as we work to get these programs off the ground. In 2024, we can focus on maximizing the impact of these compelling programs with less effort and investment required than in 2023.

Speaker 2

In summary, Our recipe for growth is working, enabling Sysco to profitably grow our business and differentiate versus others in our space. Profitably growing faster than the overall market, delivering record top and bottom line results. We expect to continue to win market share being recorded and will be available in the years to come and to do so in a fiscally responsible way. I'd like to wrap up my time this morning with some comments about the operating environment we expect for fiscal 'twenty four and Sysco's positioning within that environment. My main message is that scale matters in this industry and that strong operators are best positioned to succeed recorded in the Q3, regardless of the environmental conditions.

Speaker 2

Cisco is a very strong operator with meaningful scale advantages. Recorded. With that said, in fiscal 'twenty four, we expect the market to grow at a lower rate than 'twenty three. Recorded. We also expect the rate of inflation for the year to be below historical standards.

Speaker 2

In the second half of fiscal 'twenty three, we experienced rapiddisinflation followed by deflation within our core U. S. Broadline business towards the end of the 4th quarter. Followed by muted U. S.

Speaker 2

Broadline product inflation in the second half. We expect that our international segment will remain inflationary during the coming fiscal year given unique marketplace conditions in those geographies. We believe the Q4 environment we just exited is largely reflective of the operating environment for the coming year. Recorded. Importantly, we grew our top and bottom line within that quarter.

Speaker 2

We are being very prudent in fiscal 'twenty four in managing our expenses, recorded in the quarter given the volume and inflation components that I just conveyed. Despite these conditions, Sysco is positioned to succeed, to grow faster than the market and deliver bottom line growth. Our confidence is also based on our structural competitive advantages. 1st, our international business, which is approximately 18% of sales, continues to outperform, providing a natural hedge as international inflation rates remained elevated and are expected to stay higher than the U. S.

Speaker 2

Is 2nd, our purchasing scale is the largest in the industry and our strategic sourcing efforts will enable Cisco to secure improved pricing in a deflationary environment. 3rd, Cisco is a diversified business with strong sales across 12 major product categories to help buffer the impact of inflation or deflation in any one category. Is additionally, our strategic pricing software will enable Sysco to be extremely purposeful on how we manage the impact of disinflation is due to the timing of the company's financial performance and deflation. Lastly, further advancing Sysco brand penetration, domestically and internationally, is another lever to pull to deliver GP Dollar Growth when the environment is deflationary. The exit velocity of fiscal 'twenty three gives us confidence in delivering strong results in 2024.

Speaker 2

In summary, here is what we expect for 'twenty four. Lower rates of overall market volume growth versus 'twenty three, continued market share gains and profitable growth at Cisco, deflation in the U. S. For at least the first half of the year is muted overall company wide inflation for the full year. Disciplined expense management.

Speaker 2

Kenny and I have is an effort to reduce structural expenses by approximately $100,000,000 Extremely disciplined return on invested capital or ROIC focus continued progress in advancing Sysco brand penetration and growth within specialty. In total, given all these interworking variables, recorded. We are modeling an adjusted EPS range of $4.20 to $4.40 for the full year. The midpoint of that guide would generate approximately 7% EPS growth versus fiscal 'twenty three. Now in our 3rd year a key element of our strategy for growth.

Speaker 2

We are positioned to press the accelerator on certain proven initiatives. For example, We can optimize our performance and launch Cisco Your Way Neighborhoods, which takes less effort than starting up a neighborhood. Is our digital tools are becoming more and more pervasive with our customers, and we can optimize the personalization of these interactions to increase yield through each transaction. We have always said that the recipe for growth is a wheel where each initiative fuels the next. Fiscal 'twenty four is a year of optimizing what we have launched versus kicking off net new efforts.

Speaker 2

This will enable Cisco to be laser focused on what matters most, executing with excellence against launched programs. This also means we will be able to grow our business with less investment. This was always our plan within the recipe for growth, and it is coming to reality in fiscal 'twenty four. Recorded. In addition, our expanded geography of specialty businesses, like the recently announced BiCS acquisition, will increase the impact of our higher growth in the Q4 of fiscal 'twenty four, we are committed to both profitably growing our top line, meaningfully reducing OpEx generated by a higher rate of return on key initiatives.

Speaker 2

Given the confidence that we have in our long range roadmap, recorded. We are happy to announce that we have reintroduced ROIC as a long term compensation metric for our leadership team. In addition, recorded. We have increased the weighting of financial metrics within our short term annual bonus program. As I have said many times before, The best companies in the world are growth companies, and we expect that Cisco will continue to profitably grow faster than the overall market.

Speaker 2

Recorded. I am thrilled to have Kenny as my partner on these objectives. We are committed to maximizing every dollar invested in producing the greatest shareholder value. Recorded. I'll now turn it over to Kenny, who will provide additional financial details.

Speaker 2

Kenny, over to you.

Speaker 3

Thank you, Kevin, and good morning, everyone. I would like to start off by thanking our customers, colleagues and partners around the world for helping us deliver another record quarter. Cisco operates a high volume business and I'm proud of our efficient response in servicing and delighting our customers. Recorded. We closed out the fiscal year strong, delivering improvement across the income statement, balance sheet and cash flow.

Speaker 3

Q4 financials reflect positive sales and volume growth and operating expense leverage. Altogether, is recorded. Please render a record quarter of operating income, net income and adjusted EPS. Recorded. Our results also reflect improvements in operational efficiency through productivity and resource optimization.

Speaker 3

Is recorded. This elevated performance will enable us to reinvest back into the business and return excess cash back to shareholders, an important theme we expect for FY24 and beyond. Our unique value proposition

Speaker 2

with the recipe for growth

Speaker 3

at the forefront is what differentiates us as a growth company. As Kevin stated earlier, now turning to a summary of our reported results for the quarter starting on Slide 14. Recorded. For the Q4, our enterprise sales grew 4.1% with U. S.

Speaker 3

Foodservice growing 2.5%, international growing 12.2 percent and Sigma growing 1.4%. With respect to volume, Total U. S. Foodservice volume increased 2.3% and local volume increased 0.8%. Recorded.

Speaker 3

We produced $3,700,000,000 in gross profit, up 7% versus prior year. Recorded. Adjusted gross margin improved to 18.7%, a sequential increase from the prior quarter is an increase of 28 bps compared to last year. Our gross profit dollar and margin percentage improvement during the 4th quarter reflected our ability to continue to effectively manage product inflation, which moderated the 2.1% recorded for the total enterprise consistent with our expectations. The improvement in gross profit was driven by incremental progress from our strategic sourcing efforts as well as improved penetration rates from Sysco Brands products, which increased by 11 bps recorded to 37.2 percent in U.

Speaker 3

S. Broadline and 64 bps to 47.3 percent in U. S. Local results. Overall, adjusted operating expenses were $2,700,000,000 for the quarter or 13.5 percent of sales, a 29 bps improvement from the prior year.

Speaker 3

All 4th operating segments continue to show increases in quarterly profitability, recorded, including substantial growth in the International and Sigma segments. As seen on Slide 2223, Q4 adjusted operating income of $1,000,000,000 for the enterprise showed a strong exit rate, growing 25% compared to FY 2019. This is the highest adjusted operating income quarter in Sysco's history and is now the 4th consecutive period of record quarterly operating income. Recorded. For the year, adjusted operating income increased to $3,200,000,000 growing 17.3% expected to

Speaker 2

be a key

Speaker 3

contributor to our prior FY 2019 record, an important signal of the progress being made at Sysco. Recorded. For the quarter, adjusted EBITDA increased to $1,200,000,000 growing 14.4%. We are thrilled with the progress of our international segment with adjusted operating income growing 58% for the 4th quarter. Recorded.

Speaker 3

As stated earlier, our international business continues to deliver robust growth with positive momentum. Recorded. I am also particularly pleased with the health of our balance sheet, which further strengthened this quarter. We delivered on our target leverage ratio, another important milestone as we ended the year at 2.5x net debt leverage ratio. Is within our target of 2.5 times to 2.75 times, a substantial improvement from 5.1 times just over 2 years ago.

Speaker 3

Recorded. We ended the year with $9,700,000,000 in net debt, with total liquidity of $3,700,000,000 recorded and no commercial paper outstanding. Our debt is well laddered without any maturities over $1,000,000,000 until FY 'twenty seven. Turning to our cash flow. We generated $2,900,000,000 in operating cash flow $2,100,000,000 in free cash flow, which was a new record.

Speaker 3

Our conversion rate from adjusted EBITDA to free cash flow is 55% and operating cash flow conversion of 75% shows the company's robust earnings power. Our strong financial position enabled us to return $1,500,000,000 to shareholders. Recorded. This was done through $500,000,000 of share repurchases and $996,000,000 of dividends. Recorded.

Speaker 3

Despite the changing macroeconomic landscape, we are positioned to grow both top line and bottom line results in FY 2024 recorded in the long term. The guidance we are providing is reflective of the traction our recipes for growth initiatives are gaining in addition to moderate industry growth rates. Furthermore, we believe our Q4 performance provides significant proof expected to drive shareholder value as several of these macroeconomic and industry dynamics are expected to continue into FY 2024. As Kevin highlighted on Slide 7, we began the year with elevated levels conference call of operating expense growth. As a result, operating expenses were an area of focus for our supply chain teams recorded throughout the year and we were able to produce sequential improvements.

Speaker 3

We ended the year with significant operating expense leverage, allowing us to improve margins. This is important progress and we expect continued improvements going into FY24. Let's now turn to the look forward. During FY 2024, we expect top line growth of mid single digits and positive volume growth, which will move Sysco to approximately $80,000,000,000 in annual sales. Is recorded.

Speaker 3

This will be another record for Sysco. Importantly, we expect inflation to be slightly positive on an enterprise basis recorded for the full year. Based on our analysis and the exit rate from the Q4, we believe The first half globally will be slightly positive and the second half will step up. This includes continued deflation in U. S.

Speaker 3

Broadline during the first half of the fiscal year with an expected rebound in the second half of the fiscal year. Based on our structural advantages, Cisco is well positioned to manage our COGS effectively and continue to pass along pricing without impacting demand. Is all about better buying and better selling. Turning to expenses, we expect further improvements in operating expense leverage based on a continuation of the process improvements from this past year. 1 month into the New Year, we've already executed actions to support $100,000,000 of cost out, which has been factored into the guidance.

Speaker 3

We will continue finding incremental opportunities to enhance operational efficiency and adapt swiftly to the constant evolving business environment in which we function. Recorded. We have bottled out frontline operations wage growth to be approximately 4.5 8% to 5%. This is higher than our historical average, but much lower than select other industry news due to the fact that in many instances, our supply chain colleagues are paid above market and our drivers can earn as much as $100,000 per year. We also expect free cash flow to grow further in FY 2024 on top of a record performance in FY2023.

Speaker 3

Recorded. We wanted to also provide guidance on several other important modeling elements. The tax rate for expected to step up to approximately 24.5% compared to 23% in FY2023. Recorded. The increase is driven by geographical mix related to strong international growth and increases in state tax rates.

Speaker 3

We plan to remain in line with our net debt leverage ratio for the year. Related, interest expense is expected to step up issued by about $13,000,000 for the year due to cash uses for growth investments, dividend payments, due to the impact of share repurchases and anticipated M and A activity. Other expenses is expected to be approximately $30,000,000 for the year, driven primarily by pension expense. All in, we are guiding to adjusted EPS for FY 2024 at $4.20 to $4.40 This reflects adjusted EPS growth of approximately 5% to 10%. Our capital allocation strategy will continue to focus on investing in the business.

Speaker 3

Examples include M and A, maintaining our strong investment grade credit rating and continuing our return of capital to shareholders through dividends and share

Speaker 2

repurchases. Expected

Speaker 3

to be consistent with prior year at approximately 1% of sales. Returning cash back to shareholders is important is our dividend aristocrat status, and we plan to step up these efforts in the coming year. In FY 2024, recorded. We will have a $0.04 dividend increase and we expect to complete approximately $750,000,000 of share repurchases recorded as we start the fiscal year with $4,000,000,000 in remaining authorization. Depending on the volume of M and A done in FY 2024,

Speaker 2

recorded. We could increase share repurchases

Speaker 3

further, while continuing to operate within our stated goal of 2.5x to 2.75x leverage. We will look at each investment through the lens of driving growth and ROIC. And I am pleased to state that our ROIC expected to surpass our pre COVID levels through sales growth, margin expansion and prudent management of the balance sheet. Recorded. As a company, ROIC will dynamically guide our operating and investment decisions, which will accrete shareholder value over time recorded as we continue to focus on both margin dollars and percentage growth.

Speaker 3

Now in my role for a few months, I'm constantly impressed by the size and scale advantages at Sysco. This is a high volume business that runs fast, is expected to be a key driver for the company's shareholders. Our scale advantages are also reflected in our industry leading margins. Our diversification as the industry leader across customer types with 2 third in restaurants in 1 third, a recession resistant category such as education and healthcare is also a structural advantage. Our robust industry leading operating cash flow and strong investment grade rated balance sheet gives us access to capital at attractive rates.

Speaker 3

Available to take advantage of opportunities as they present themselves. As you can see in our performance results, our international segment is proving to be an advantage contributing higher rates of growth than our mature U. S. Business and the inflation dynamics in other geographies is helping create a bit of a natural hedge across our business portfolio. We believe that international can continue to be a profitable growth engine available on the call for Sysco.

Speaker 3

I am even more excited 90 days into this role than I was on day 1, and I look forward to our progress ahead. Recorded. With that, I will turn the call back over to Kevin for closing remarks.

Speaker 2

Thank you, Kenny. As we conclude, I would like to provide a brief a summary on Slide 28. Cisco has a strong record of generating consistent results. In fact,

Speaker 4

is

Speaker 2

is expected to be expected to continue in 2024. In addition to compelling top line growth, Cisco is the industry leader from an adjusted EBITDA margin perspective with the strongest balance sheet. We plan to build on that position of strength in fiscal year 2024. We ended our fiscal year 2023 with strong sales, volume and share growth, with record top and bottom line contribution. We have momentum going into the year as our recipe for growth transformation now in its 3rd year, is further building upon and enhancing our competitive scale advantages.

Speaker 2

Importantly, recorded. We have demonstrated our 3rd consecutive quarter of operating leverage with gross profits outpacing operating expense growth. Recorded. For fiscal year 'twenty four, our dual focus on core efficiency measures and optimization from proven growth opportunities will deliver another year of top and bottom line growth. There are bright days ahead for the feud away from home industry and more specifically Cisco.

Speaker 2

I'm both excited and proud to be a part of the journey. And as always, I want to thank our 72,000 plus Sysco colleagues for their commitment to our customers recorded and our shareholders. Operator, you can now open the line for questions.

Operator

Thank you, sir. Recorded. Ladies and gentlemen, we will now begin the question and answer session. Followed by the number 1 on your telephone keypad. If your question has been answered and you would like to withdraw from the queue, one moment please for your first question.

Operator

Your first question will come from Edward Kelly at Wells Fargo. Open. Please go ahead.

Speaker 5

Hi, guys. Good morning. Kevin, so my question is on the guidance. I mean, obviously, is the backdrop for the industry is a

Speaker 3

little bit tougher than what

Speaker 5

it would normally be. And providing guidance in that is not easy. 5% to 10% earnings growth against that is certainly respectable. But can you talk about is the confidence in that level of growth, the cadence that we could be expecting. And if you were to be at the bottom end of the range or worse, what would drive that?

Speaker 5

And if you were at the top, the better end of the range, what would cause that outcome?

Speaker 2

Is Hey, good morning, Ed. This is Kevin. I'll start and I'll toss to Kenny for additional comments. I guess I'd start with a few points. The guide is based on a continuation of momentum that the company has been building over the past 6 months, most notably tied to our operating expense improvements.

Speaker 2

Is we call our planning process 3 big boulders, volume of the market, inflation projections of the market and then our is the highest expense ratios, and we worked very hard to make sure that we can do the best job possible in guiding what these individual three components will be. So let's start with volume. As I said in my prepared remarks, we do expect for the volume growth of the industry to be more muted this coming year. We have factored that in to our guide. We've triangulated that from supplier partners, from economists, from bankers and our own data.

Speaker 2

We have a treasury to have data across all of the different business segments that we serve. So we do expect for volume growth of the market to be more muted. With that said, We're confident that Resysco can grow faster than the market and we are committed to doing so profitably. Topic 2 is inflation or deflation is as it were, and we have to break that down into individual businesses and individual countries. As I said in my prepared remarks, is USPL, we expect to be deflationary for at least the first half of the year.

Speaker 2

We do have a natural hedge at Sysco, given the fact that we have an international segment that is still experiencing inflation due to unique Geography considerations and purchasing considerations within those countries. So when you put that all together for the year, I'll use that same term a second time. We expect for muted inflation for the entire year that's below our historical standards. On the positive side, continued logistics efficiency. A chart on our slide that we're really pleased with is Page 7 in our slides that are out there, the progress that was sequentially made throughout the year quarter over quarter on improving our logistics efficiency, we expect is to continue.

Speaker 2

There are some important below the line things in the guide that Kenny can talk to about tax and interest. To To answer your question on confidence, Ed, I'll end with Q4, the environment that we've just exited and most notably June, We believe to be reasonably consistent with what we expect the overall environmental conditions to be in fiscal 'twenty four, is And we had a solid performance ending the year and a solid performance in June. So when I put all those things together, that's why the guide, what would have to be true to be at the top end, continued performance on operating cost efficiency improvement, accelerate our growth versus the market. Those would be the 2 things directly within our is that could enable us to be at the top. For us to be at the bottom end of that range would be, I'd say, if deflation is lasted longer or persisted longer or were deeper than had been modeled.

Speaker 2

That would be a headwind that would put more towards the bottom end of the range. So we focus on what we can control at Sysco. We're going to drive operating efficiency. Kenny and I, as announced today, have issued $100,000,000 cost out improvement, which is baked into the guidance that we just provided and we've actually executed already against the major components of that plan and We've got our sales teams focused on driving profitable sales growth. With that, I'm going to toss to Kenny for any additional comments.

Speaker 3

Thank you, Kevin. I'll talk about 2 things. 1, the confidence level around the guidance and second, as Kevin alluded to, a couple of below the line items that I think needs a bit more color. The first is around the confidence in the guidance. Our confidence in the guidance is based on how we successfully managed So if you think about Q4, we ended the quarter deflationary in the U.

Speaker 3

S. And with that, We still managed to expand GP margins by 28 bps and operating margin by 56 bps. So again, we're doing it right now. The second piece I would say is that if the environment were to change, we have the agility to flex up and down given the fact that we have a world class balance sheet We have a very agile cost structure, and we have productivity in place, dollars 100,000,000 that has already been executed and baked in, in our guidance. So that is around the confidence of the guidance.

Speaker 3

In terms of the below the line items, there are 2 areas I want to go a bit deeper on. 1 is tax rate. We expect our tax rate to step up from 23% to 24.5%. There's 2 pieces to the tax side. First, we are seeing earnings strengthening across our international markets, which is yielding a higher tax charge.

Speaker 3

Is a good thing. We are seeing our international arm growing fast. The second piece is here in the U. S, we are expecting a higher state tax due to various factors, including the mix of earnings across the state. This is our current view.

Speaker 3

We are continuing to evaluate tax planning strategies, recorded and we also plan to raise capital to deploy against high returning accretive initiatives, which includes growth investments, M and A, return excess cash to shareholders. This is driving the higher interest expense, again, dollars 13,000,000 increase year over year. The last bucket is other expenses. As I mentioned in my prepared remarks, we expect it to be roughly $30,000,000 related to pension expense.

Operator

Available. Your next question will come from Joshua Long at Stephens Inc. Please go ahead.

Speaker 4

Great. Thank you. Hopefully, you might be able to dig into some of the underlying core customer segments. Obviously, we were able to see some of the Case volume trends there that you provided in the release and that's helpful. And just curious if you could tie that together, Kevin, with some of your higher level thoughts on where the consumer is at, how they're choosing to spend their dollars and maybe how that corresponds with your customer makeup as we think about the fiscal 2024 guide?

Speaker 2

Is Joshua, thank you for the question. I'll start just at the more aggregate level. As you know, we serve every segment The food away from home industry, which is what I meant during the answer to Ed's question about we have a treasure trove of data. We can see macro trends. So Our national sales team had a banner year this past year that's on top of a banner year in 2022.

Speaker 2

I want to be very clear that Those growth constructs are profitable growth such as healthcare, education, travel hospitality, business and industry. Those sectors have been continuing to see a tailwind of recovery and we're winning market share profitably in those sectors. National Restaurants, is we are winning large in that regard as well, mostly because those partners view Cisco as a is backbone for them. We're in every state, including Alaska and Hawaii, not every food distributor is, and it's an easy button for them to be able to partner with someone like Sysco is we can distribute coast to coast and many of these restaurants have international doors and through our International Freight Group business, we can export their product is overseas to usually a licensee partner that they use in those countries. So again, for these national restaurant chains, We are a very attractive option for them and we've been winning big.

Speaker 2

Those contracts are multi year contracts and as I've mentioned, we've been signing those contracts at above historical profit margin rates. On the local side, we've been winning in specialty. As I mentioned, the Bix produced acquisition intent today that will be a tailwind for us in fiscal 'twenty four. We're winning with our Italian is segment and we're winning market share in aggregate as a company. So when I think about the end consumer, is the rapid rate of inflation increase this past year, put a strain on the American consumer, specifically beef at one point was 35 plus 8% inflationary.

Speaker 2

You saw portion sizes being reduced at menus. You saw menu price increases. And I do think that had an impact on is particularly the independent sector. And as I think about the future, the deflation that we're currently experiencing in the return to eventually what we would say would be normal rates of inflation, which are 2% to 3% will be good for the end consumer. So When I talk about our teams internally, think about a graph chart where inflation was well above healthy.

Speaker 2

Now we're dealing with disinflation is to deflation and now that curve is going to come back to normal over the next period of time. And as we're thinking about fiscal 'twenty five, is you would see more normal rates of inflation and that should drive a tailwind in volume and those two things together for 2025 would be favorable elements for Sysco. So how are we thinking about this to help our customers? As Kenny said well, we're going to work is tails off to have best possible purchasing economics so that we can share in value with our consumers, things like is discounts on advertisers, so that in fact that can be added to the purchase because when that center plate cost goes up, What we tend to see is dessert and app purchases go down and we want to help our end consumers and customers be successful by providing them with strong and compelling value through Cisco.

Speaker 4

That's helpful. Thank you. And then one follow-up, if I could. When we think about the $100,000,000 in cost out, That comes on the heels of some other great work over the last year or 2 coming out of COVID. Curious if you could dimensionalize that $100,000,000 a little bit more is And you may be not getting into the specifics of it, but just the visibility you have into maybe the timing or the realization of those, is that relatively balanced across the year.

Speaker 4

Do you have do we think about this in terms of just maybe second or third round iterations of initiatives that you've had more experience with in the past and just As you have more time, you found new wins there. Are these entirely new categories? Just any additional commentary you could provide there as we think about is the ability to drive margins and pull costs out of the system would be very helpful.

Speaker 3

Thanks, Josh. This is Kenny. I'll say a couple of things And I'll go in a bit more detail. So for us, it's all about driving operating leverage in our business. And what does that mean?

Speaker 3

Is. That means our GP growth will be faster than expense growth, our EBITDA will be faster than sales, operating leverage on our business. As it relates to the $100,000,000 to your question directly, yes, it will be more balanced across the year. And why is that? Because we've started already, right?

Speaker 3

It started on day 1. So we all the actions have already been executing, meaning it's already baked into our guidance and all actions are underway. That's point number 1. Is Point number 2, this is incremental to the continued productivity gains in supply chain operations and efficiency that Kevin described earlier. The last thing I would say is that we're not stopping, right?

Speaker 3

We will continue to flex in line with market conditions. Now I know you asked for a bit more detail. Let me give you a tangible example. There are multiple parts to the $100,000,000 but let me give you an example. We've been able to expand our global share support center, GSC, is in other markets, most recently in Costa Rica.

Speaker 3

I was there about a month ago, where we've accessed the great talent and to further build our skill advantage. So as our business grows, we're able to leverage a platform that scales accretively and effectively for our earnings.

Speaker 2

Is

Operator

Your next question will come from John Heinbockel at Guggenheim Securities. Please go ahead.

Speaker 6

So Kevin, 2 topics, I'll hit them both upfront. So number 1, is Maybe update on wallet share, right? You've talked about that in the past. Where's that opportunity today? And Obviously, if you drive drop size, right, and that's the most efficient thing you can do.

Speaker 6

Is Where is that? And then 2, I think your overtime is down to 0. So volumes were a little lighter. What lever do you now pull on, right? Because I I don't think you guys want to right, you don't want to furlough folks.

Speaker 6

Where do you go next if overtime is at 0?

Speaker 2

Is Yes. Thanks, John. I'll do the second question first and then your first question second. I want to be crystal clear on what we meant by overtime at 0. It's excess is over time was taken to 0.

Speaker 2

So the industry runs at a, let's call it, an average rate of overtime because some overtime is good. Our employees desire some amount of overtime, your truck that leaves the warehouse and doesn't get back for 12 hours because that's the nature of the route, there's going to be some overtime, Etcetera. So what we meant by that is that excess over time and during the worst of the supply chain disruption, we had meaningful, meaningful excess So we feel really good about that. Where can additional efficiencies come from? Retention improvement, is So our turnover has dramatically improved and it can still further improve to get back to historical levels of retention.

Speaker 2

And if you asked me 6 months ago, what's the single most important thing that we need to do more effectively, it was improve retention because that flows through in many different ways, lower hiring costs, lower training costs, higher productivity because a 2 year veteran is much more productive than a 2 day newbie. They're also safer, is fewer accidents occur because they're trained and know how to do their job. So retention improvement would be the number one lever. But the second lever is just improving discipline to what we is Cisco's Work Standards. The driver academy, we have a selector academy and our engineered labor standards keep getting better and stronger.

Speaker 2

Is through a standard work process. So we still have opportunity to improve. I'm really pleased, most particularly pleased with the improvement we've made in supply chain, recorded and we have factored continued improvement into our 2024 guidance. On the wallet share side of the business, I guess what excites me the most on our opportunity and we're not going to quote a share of wallet percentage today, but Cisco UA and Perks are doing what we want and need for them to do, which is further penetrating additional categories of merchandise with existing customers. The Cisco Your Way model is through increased delivery frequency, a dedicated sales rep, a dedicated delivery driver and our consistent presence in that neighborhood 6 days a week with an Afternoon Recovery Delivery.

Speaker 2

We are seeing what we would expect to see, which is customers in those neighborhoods are adding specialty eliminating another distributor from the purchase consideration and rolling up more with us. And FERC essentially does the same thing, but it's for a customer who happens not to be within a Cisco Your Way neighborhood. They could be 45 miles from the warehouse, but not is within our current Cisco Your Way neighborhood and by providing them with the Perks service capabilities We're doing a really good job in our SSMG, which is our meat business and our produce business. And now we have our next specialty business with Italian. When we put those specialty businesses together, we're making a lot of progress on what we call total team selling, which is bringing that specialist is into the account along with the generalist, the SE generalist, and we're moving the needle on what we call total team selling.

Speaker 2

So it's those three things together, John, that are helping us with Cherubal, which as you said is the most profitable case we can put on the truck.

Operator

Your next question will come from Kelly Bania at BMO Capital Markets. Please go ahead.

Speaker 7

Is Good morning. Thanks for taking our question. I was wondering if we could talk a little bit more is about the centralized pricing tool and the price optimization work that you've been doing, particularly as we do transition is in here, it sounds like into some deflation for certain categories. And just how investors should think about modeling your gross margin as we move forward given kind of not much disclosure at this point on how much of your business saw on a percentage markup versus a dollar markup or how this centralized pricing tool can change that? Is And maybe included in that, can you just give us a little color on how the deflation that you're seeing right now is impacting the gross profit dollars?

Speaker 2

Is Okay, Kelly. Thank you for the question. I'll start just with how we leverage the pricing tool and then I'll toss to Kenny in regards to your questions on GP dollars and percent, and he'll handle that in whatever manner he deems appropriate. On the tool, This was what I tried to articulate during our prepared remarks. During a period of rapid inflation, it was extraordinarily helpful Because we had discipline in regards to passing through what was an extraordinary increase in cost, especially in center of plate.

Speaker 2

I mean, we have proteins going up 35%, as I mentioned a few moments ago. In the older manual world, it would have been unlikely is All 7,500 sales consultants would have passed that through. They would have put too much of a humanistic flare into it and said, you know what, I just know that they can absorb this and I'm not is pass it through and we would have not actually seen the GP dollars per case growth that we experienced past year. So I'm going to call it the discipline to perform within guardrails on the way up. Well, the exact same thing happens on the way down, but it's a different is consideration.

Speaker 2

What I said on the prepared remarks is we will be very purposeful about when we are able to secure improved COGS, how we pass that value on to our customers. Our intention is to pass that volume on to our customers and we need to be thoughtful, disciplined is being pragmatic about how we do that. We have to be competitive with the market and we have to understand the volatility of categories is that went from 30% up to double digits down in a short period of time. So the tool provides structure and discipline in a performance within Guardrails. I do want to be very clear about one point.

Speaker 2

It does not replace the importance of an SC is in that relationship they have at that local restaurant and being what I call again right on price at the local level. And if we have a competitive pressure at the local level, our SEs have a a process they can follow to ask for an exception and we have a Redman team that manages and adjudicates those decisions with financial discipline. Is So it's a combination of 2 things. It's a tool that provides guardrails that we operate within with discipline and predictability. And then we have the ability to respond at the local level through the sales force when in fact something unique is happening that the system can't see through data.

Speaker 2

And we're going to get better and better at that second point. We believe we can make that process faster, more agile and more efficient to give our STs the ability to respond in the moment and that's something that we're working on in fiscal 'twenty four. Kenny, I'd toss to you for any comments from a financial perspective. Yes.

Speaker 3

Thank you, Kevin. Couple of things I want to add, just to recap. In Q4, as I mentioned earlier, we did experience is deflationary in our U. S. Market.

Speaker 3

And with that, we still expanded both GP dollars per case, is the centralized pricing tool, it does help on the margin side. There is quite a few other levers that we have is Enterprise, right, besides pricing. So let me walk you through some of those other things that our enterprise is working on. This includes, 1 is strengthening our international segments, right. This obviously helps on the inflation side.

Speaker 3

They're currently right now international is close to double digit right now the spot on inflation. The second piece is strategic sourcing. 3rd, Cisco Brand Penetration, which we made immense progress this quarter. And then last is the growing specialty and the likes. All these four things I just mentioned, in addition to So you brought up Kelly around pricing drives a higher earnings margin profile for enterprise going forward.

Speaker 7

And I guess just in terms of this lower pricing environment, do you expect

Speaker 2

is Kelly, on the national restaurant business side, we defer to the leaders of those companies to comment. I think they'll all make their own individual choices. I think at the local mom and pop independent level, it's an efficient market and center plate purchase cost will come down for them and will some of them choose to lower the price point on the menu. I think some will and they'll see volume benefit is from that. So it's fungible.

Speaker 2

These things are levers that get pulled. But I'll defer to our large customer base to answer that question, especially the national chains.

Operator

Your next question will come from John Ivankoe at JPMorgan. Please go ahead.

Speaker 8

Hi, thank you very much. The question is on sales force compensation. I know there's been a couple of changes or enhancements in the past years, maybe one being in terms of new account generation, market share per account, is Sysco brand product sales, I think there are a couple of different things, including, I think, most recently the removal of some ceilings that certain sales force is Members were actually hitting in terms of total comp. So just wanted to get a sense of kind of what we should be focused on in 2024, especially in terms of like a stable comp plan. I mean, how it works for

Speaker 3

is

Speaker 8

the organization. Does it make sense to add more or you give more responsibility to the best? Thank you so much.

Speaker 2

John, thanks for the question. I appreciate it. We are making some improvements to our compensation model this year. What John is referring to is we're actually in pilot right now with an improved program. By the way, we like our current program.

Speaker 2

Our sales consultant retention is at all time highs, And we believe the program we have motivates behavior and motivates our colleagues on the right things. With that said, continuous improvement, you can always make something better and stronger. Feedback from our sales consultants has been what John just said, which is there is a cap that exists today and People that do that type of work don't like caps, like the more I sell, the more I should earn and the more Cisco can make. And we agreed with our sales consultants on that. So We are piloting a new structure, a new program, which if they profitably grow their business, they continue to earn.

Speaker 2

And by the way, that's good for Cisco too. So a big company. It's a big machine. It's a big engine. As I said on my call today, it's more than 7,000 sales consultants.

Speaker 2

We need to make sure we Get it right. We need to make sure it's clear, simple and understandable. Therefore, that's why we're doing a pilot. We're pleased with the results of the pilot. We're going to announce actually in August to our sales force the details of that compensation change.

Speaker 2

So with professional I'm going to choose not to comment on what it will be on this call, because we haven't even told our colleagues yet. But in August, we're going to announce at a is worldwide sales meeting. The change, it will be very well received because it's exactly what they've been asking for and We're optimistic that that will help us deliver the guidance that we covered today and to win more share profitably at the local level. So We're pleased with that change. We believe it will motivate even more the right behaviors and it's good for the colleague and it's also good for Sysco and it's good for the shareholder because it's profitable growth.

Speaker 8

Thank you.

Speaker 2

Thank you, John.

Operator

Your next question will come from Alex

Speaker 9

And you touched on some of this with Kelly's question, but your views on the health of these independent restaurant operators, both For the Cisco customers and more broadly, as you think about the traffic environment being a little bit more difficult, inflation pressures coming down, but If you're seeing any evidence of stress out there, closures or erosion in receivables, bad debt that you see on the horizon for that group of customers.

Speaker 2

Okay, Alex, thanks for the question. I'll start just on sentiment of that very important customer segment of ours and I'll toss to Kenny for any comments on receivables and bad debt. From the very beginning of COVID, I've said the following. That local mom and pop entrepreneur is just that they are an entrepreneur. This is their business.

Speaker 2

They are agile, they're scrappy, they're fighters And they have dealt with a lot over the last 4 years. And this inflation to deflation in aggregate will be a good thing for is because think about that curve I was doing, I wish we were on Zoom and you could see me, right? Like the 18% inflation followed by deflation will come back to a normalized 2% to 3% inflation once we've gotten through this transition period and that will be good for the local operator. Is it will be good because it will help with volume and frankly a little bit of margin is benefited from a little bit of inflation. So is the environmental conditions are going to transition to more favorable for that local operator.

Speaker 2

As it relates to how we Cisco can help them, That is the core of who we are, drive to the best possible cost for that operator through strategic sourcing, have a sales consultant who is an expert in their craft, You can help them with menu optimization, productivity improvement, Sysco brand conversion, which Kenny covered very well. We made tremendous strides in this past year of further penetrating Sysco brand. We expect for that to continue and to introduce innovation and newness is to our customers through cutting edge solutions. So we believe in the independent customer. We believe there is a real reason they exist, which is people like local.

Speaker 2

Is they like to eat fresh and those local operators do a wonderful job of buying local product. And again, Sysco is buys and sells more local produce than any other distributor despite our size. When I think about outlook for where we head from here, We have the ability to win more of those customers even if that overall customer base is going through this transition period. We serve roughly half independent doors and we have a big opportunity to grow the number of doors we cover and increase share of wallet going back to John's question with those customers. So independent customers will be a source of growth for us this coming year, which we've built into our guidance.

Speaker 2

Kenny, I'd toss to you for any comment on AR and bad debt.

Speaker 3

Sure. Thanks, Kevin. With respect to AR and bad debt, we are not seeing any drag on working capital. If anything, it's the opposite. In in fiscal year 'twenty three, we actually saw improvement in AR and AP and inventory DSO.

Speaker 3

All these few factors provided a tailwind for working capital, therefore driving our record free cash flow and operating cash flow conversion from EBITDA.

Speaker 2

Recorded.

Operator

Ladies and gentlemen, we have reached our allotted time for the question and answer session. So this will conclude your conference call for this morning. Is available on our website.

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Earnings Conference Call
Sysco Q4 2023
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