Newsfilter article unlocker

Good afternoon, everyone. It is noon on day two, so we're pushing into the back half of our conference here. We want to thank everyone for joining us here. Hopefully people had a chance to grab some lunch, or we'll do so afterwards. My name is Jeff Bernstein, and I'm the Restaurant and Food Service Distribution Analyst here at Barclays. We are thrilled to introduce our next presenting company, which is Cisco Corporation. with us on stage all the way from Houston, Texas. We have Kevin Hurrican to my immediate right, who's the chairman and CEO, and Brandon Sewell, who's the interim CFO. By way of background, for those perhaps not familiar, Cisco distributes food and related products to the $380 roughly billion food service industry. The company has 335 or so distribution facilities around the world. serving 730,000 customer locations. 2027 guidance is for 90 billion in sales, up six to seven percent year on year. And I should say their fiscal 27 began July 1st. That's led by local case growth, ultimately generating nine to 11% EPS growth. And all was reiterated this morning. So for those who did not see the 8K that was published this morning, all fiscal 27 guidance was reiterating. In addition, this morning, Cisco noted that momentum to close fiscal 26, again, which ended in June, has carried into early fiscal 27, which is very encouraging to hear. And in addition to the fiscal 27 guidance reiteration, management raised their midterm guidance range for sales and EPS and introduced the target of at least $500 million of AI-related efficiencies to be realized by fiscal 29. So lots going on at Cisco. Kevin and team keen to present the greatest, latest and greatest update to you. So with that said, I will turn it over to Kevin to kick it off. Thank you. Okay, great. Thank You, Jeff. Appreciate it. Pleasure. Okay, good afternoon, everyone. Thank you for joining us during the lunch hour. We appreciate your being here. The highlight of my professional career is my ability to present this slide. So we are providing you some forward-looking statements, and you've all read it, so I can now move on from the highlight of my career. So again, we're glad to be here, the 19th Annual Barclays Conference. We do have a lot to talk about today, the press release that we put out this morning. Hopefully you had a chance to read some of it. If not, don't worry, we are going to cover all of that material today, Brandon, myself, while we are up here. I'm going to ask your permission in advance. I am going to go very fast through certain slides that are more about the company that you perhaps have seen before so we can get to the new news, the important news, the things of the day. So here's an example of a slide you've seen before. We are the largest in the industry from a broad line distribution perspective. We're also number one in what we call specialty distribution. So that's our produce business, our protein business, our Italian business, Asian foods business, and we own an equipment supply company called Dom. Those things together are what we call specialty. It's about a $10 billion business for Cisco. One quick reminder, 60% of what we are is restaurants. Approximately 40% of What We Do is something we call non-commercial. So that's health care, education, travel, and hospitality, and the like. And we'll go into more of these in detail, or each of these, in more detail. Cisco, we grow consistently. you can see on the chart our strong track record of consistently growing our business. The other thing we grow every year is our dividend. We've grown our dividend 56 consecutive years. We are a dividend aristocrat. We will consistently continue to grow our dividend for core Cisco. We have ample opportunities to continue our growth trajectory. We can take additional share in the Broadline channel. I remind investors that the big three combined in our space have less than 40% total share. It is still a very fragmented industry, and if you get past the top five, six, seven distributors, it drops off significantly to family-owned, multi-hundred-million-per-year annual turnover revenue companies. It's a very fragment space. We can and will take more share and Broadline. We've defined specialty as a $10 billion growth opportunity for the company. We'vedefined our international business as a 10 billion dollar growth opportunity. And this is before we enter into the Cash and Carry channel through what we have in front of us, the Restaurant Depot acquisition, which we will talk more about today. We are a profitable company. We are the most profitable on a rate basis in our space, and we will be and are a growth company. So this chart shows just the different customer profiles that we're in. As I mentioned before, we hold the leadership space in each of the businesses that we compete within, except for one. We're number two in health care. We are taking share in health carer. You can see on the chart it's growing at a healthy clip, and we are improving our relevance and capabilities within health care, that non-commercial space, which are the three on the right-hand side of the page, growing at an extremely healthy rate. and these are more profitable customers than large national restaurants. It's a very attractive business for Cisco. Again, K-12, university, the office complex that you work in is getting food delivered from a company like Cisco. We're the largest, and we're becoming increasingly more relevant to these customers. Why? Our national and many of these entities are international. So our national and international scale, our tech integration, We are creating direct technological connections with these companies for inventory feeds, country of origin, product attributes, sustainability, and things of that nature. Our food safety, data quality, data integrity, our sustainability and cybersecurity capabilities. These are the things that these large customers are looking for, and ever increasingly, they're reaching out to Cisco. But let's talk about our local business. We view it as the most important business in the company. The why is because of its profitability rate. Local restaurant customers, we are meaningfully more profitable. What is local for those that might be newer to the space? These are mom-and-pop restaurants. They own one, two, three, four, five restaurants. Some of them are a little bit bigger than that, but the vast majority of these customers are small entrepreneurs, mom- and pop owners. We have been underperforming in our local segment. You can see on the left-hand side of the chart, for about a year, two year and a half, not meeting our own internal expectations. I've been very open on this stage in prior years about the why behind that. We implemented a new compensation system two summers ago. It was the right comp program. We rolled it out less effectively than we could have. We ended up losing a few more people than we would have liked in the subsequent year, and that hurts in this space. We are in a relationships-based business where a sales rep has a direct relationship with their customer, and if they leave the company, they tend to bring some customers with them and that's what happened during that duration. Here's the main punchline. That problem is done. It is behind us. Our colleague retention is at all-time highs. Our colleague productivity is steadily improving. We have selling tools out in the market, one of them called AI360, which is a sales agent in the palm of the hand of our sales reps through an app we have co-developed that gives them suggestions on what to sell to that specific customer on that specific day. We have selling initiatives like Cisco Yearway and Perks that are resonating in the market, and Cisco Brand is building momentum. When I put all of these things together, Brandon and I can measure them through selling productivity and job satisfaction, both of which are up and to the right. And then the punchline outcome of that is we have meaningfully improved our local business. We just exited our Q4 above our goal of 2.5% case growth, and we have guided fiscal 27, the year we're now two months into, at 2.50% volume growth in local for the full year. And that is a step up from prior year on a two-year stack basis each quarter as the year progresses. And we're on track to deliver against our Q1 commitment quarter to date. Let's talk in more detail about the net new news for the day. Jeff just mentioned this. We're only two months into the year, but we are reaffirming our guidance for fiscal 2027. Just a reminder on what that guidance is. It is a step up versus our last couple of years' performance. On the revenue side, 6% to 7% growth. On The Profit side, earnings per share growth 9% to 11%. Let's anchor on the midpoint on The Profits for a second. That's a 10% earnings growth on a 53-week basis. We are crystal clear about this. It's a footnote. We've said it over and over and over again, this includes the 53rd week. So if you want to take two points off the right hand side, that's about what the 53th week is worth. We're talking an 8% earnings per share growth for fiscal year 2027, which is at the high end of the long-term guidance range that we put out a few years ago. We are confident in our ability to deliver against these performance data in spite of what's going on in the end market. And yes, we know about $100 fuel. We know about consumers feeling pinched. We know about the overall kind of feeling of things. What I would say is the following. For independent restaurant customers in particular, the end consumer is holding in there. We are seeing some pressure on the national restaurant business, and as I've said before, that's the least profitable business. So we think about the 40% non-commercial holding in there doing strong, doing well. Local restaurants performing better than national restaurants. Brandon and I have a plan to deliver these numbers in spite of the end macro being choppier. What I really wanted to talk about is this slide right here, and Jeff just mentioned this a moment ago. On our Q4 earnings call, we introduced for fiscal year 2027 a $100 million profit improvement driven by AI and modern technology to transform the way we do work. On that call, we promised that we would communicate to investors and update to that figure over time as we had even more clarity onto the drivers behind the multi-year positive impact and projects that are now live that we can directly see flowing into the P&L. So again, to be crystal clear, actually, let me go back a page. $100 million of AI-powered profit improvement is embedded within our fiscal 2027 guide. That is this chart. And we are communicating that number is $500 million for the three-year out target. So 27, 28, 29. The $100 million is in the 27 guidance. It is included in what we see as a $500 billion operating margin expansion in fiscal 2029, which I'm going to talk about the impact that that will have on our guidance in just a moment, excuse me, on where that will show up and how that will come through in just the moment. So we are communicating the $500 million today driven by these four topics that are on this page. I want to impress two things upon you. There are 30 initiatives that ladder up to reach and achieve the total $500 million. That may sound like a lot, so I want to make it even more clear. Four topics are going to drive 70% of the value from this program. So we can be all over those topics, managing them every single day, ensuring that they're delivering their outcomes. And these are the projects that are listed on this page. I'm going to cover two of them. Brandon will cover more of them when he comes up on stage. So real fast, supply chain. This is about routing. We drive 4.5 million miles per week in just the United States alone. We can route more intelligently. We can rout more effectively, bringing miles off the road, reducing fuel costs, reducing wear and tear on tires, reducing the overtime that we spend with our drivers. On the top right box, merchandising. We have a dual stated goal here. One is to improve our fill rates to our customers by approximately 50 to 100 basis points. The Second is to reduce the amount of inventory we have in our system as an overall working capital objective. Brandon can talk more about that and how that positively impacts the Restaurant Depot deal in a moment. Indirect sourcing and customer experience back office, Brandon will cover. What excites me as the CEO is the following. These strategies will help us improve the customer experience. We call making a better Cisco, A faster Cisco, a more efficient Cisco. An example of better is the routing project that I just mentioned. Not only can we reduce the number of miles that we drive, our ability to show up on time to the customer goes up because of the routing tool upgrade that we are putting forth. The fill rate improvement objective that I talked about a moment ago is purely going to improve customer experience because the customers are going to get what they order when they order it. These are examples of better. More efficient is we can do that work with fewer resources, with less inventory, driving fewer miles. These are efficiency plays. Brandon and I have a strong line of sight to this program. We have taken one of our top leaders, a hypo within the company, and created an AI transformation office. That individual works directly for our chief information officer and meets weekly with Brandon, myself, and the office of the CIO to talk about these programs to ensure that they are on track. Several are live already, and we can see the goodness flowing in the P&L. Several of them are going to ramp throughout the year, which is why the value of the $500 million stair steps up over time. Dedicated AI transformation office. You may have seen a couple of weeks ago, we also announced some updates to our board. I'm the chair of the board. We updated our board in two ways. We added two very capable members to our Board. One comes from the industry, former CFO of Airmark, Compass, and a competitor. awesome add to quality of knowledge of our industry to our board the second though comes from a ai tech company in the supply chain space jason murray and jason can add value to our ai program hitting the ground running and we have changed our tech committee to our AI transformation and technology committee and that committee is now meeting with our management team monthly to ensure that we are moving the ball down the field with pace, with urgency, delivering our required outcomes. So the net all culminates into this chart. We are raising what we are calling our mid-term guidance, specifically 2028 and 2029. And why we're calling that mid- term guidance is we do expect the Restaurant Depot deal to close in our Q3, which is January through March of the upcoming calendar year and we're going to provide you updated longer term guidance inclusive of restaurant depot after the deal is closed so everything on this page is cisco core specific for the midterm 27 guidance we're clear about we put it out we're reiterating today 28 29 guidance is what is on this stage we're increasing our sales nominally we're keeping the low end of the range at four it was at four we've taken what was four to six moving it up to four to seven and the Why is two of our AI initiatives are sales-driving capabilities? One at the local level, which is the AI selling tool I mentioned earlier, AI360, and the other is we're going to improve what we call a bid center of excellence on how we bid for large corporate contract business. That's on the revenue side. The more significant move is on earnings per share. We had a 6 to 8 guidance previously. It is now 9 to 11. I like to focus on midpoints. That's moving the midpoint 300 basis points for 3%, fueled by the $500 million of profit expansion that I mentioned a moment ago through our AI efficiency efforts. This three-point raise is something that we are confident in. We've been asked this morning, are you sure you can do this given the overall backdrop in economic conditions? Yes, we are sure. Brandon and I are confident In this guide. we have appropriated appropriate levels of conservativism to the flow through of the 500 we believe when we do our jobs well that this is a performance outcome that we can deliver and we desire to actually be in the beat and raise club on a permanent basis to actually do better than what is shown here but this is what we're signing up for and this is wat we are committing to to the degree that we produce incremental cash flow from this guidance which we will we're going to delever faster than our original plan. Brandon will talk more about that in a moment. So speaking of delevering, we are excited about the opportunity to bring the Jethro Restaurant Depot business into the Cisco family. We call it a bold new chapter for growth. The why is it's a clear and separate channel from delivery. Customers choose what channel they shop within first, then they choose who they do business with within that channel second. The restaurant that's choosing cash and carry is typically a smaller operator. They're seeking value. They are seeking value, they are seeking value. On average, Restaurant Depot's prices are 15 to 20% cheaper than delivery options that are able to be brought to their restaurant. They choose to go to the store and do the work themselves because they are choosing to save money and Restaurant Depot does a great job in that space. I'll hurry up here to get on to some of those key stats that Brandon's going to cover in a moment. On the left-hand side of this page is why we're doing this deal. Our local business becomes one and a half times bigger with this effort. The middle side talks about the financial impact of Restaurant Depot on the Cisco P&O. 20% more revenue, 45% more EBITDA, 55% more free cash flow. And after we have successfully delevered, the ability for Cisco to leverage that free cashflow to return value to our shareholders is significant. The deal is day one accretive. It is year one top quartile accretives when measured by comparison to other large deals. And it is a significant value accretion over time, especially after we have successfully delevered. Integration risks are small relative to other deals because Restaurant Depot will be managed as a standalone company and we're not doing rip and replace of their enterprise technology. The work we'll do in a minute when I talk about better together synergies does not require deep systems integration. As I mentioned a moment ago, we expect the transaction to close in that roughly 2-3 time frame. This chart says what we know to be true, which is Restaurant Depot is a great business. It consistently grows its revenue, and they have grown their profit 30 consecutive years. Savings, selection, and service, seven days a week. That is the mission of this business, and Richard Kirshner and his team do a phenomenal job of running it. Today we're going to give you some new disclosures about Restaurant Depot that we think you're going find interesting, so I'm going to turn it over to Brandon, who's going to first come up and talk about Core Cisco and then I'll share a little more detail on JRD. Brandon, over to you. Thank you, Kevin. Thank you all for your time today. It's great to see you. Really, today revolves around three key themes. Number one is Cisco's restaurant, Cisco being the leading food distributor in restaurant and commercial space. Number two, our short-term growth. So we announced in Q4 that our FY27 to Kevin's point, is 9 to 11% EPS growth, including the 53rd week. And today we came out with more news on the medium term for FY28 and 29 that will continue that trend of 9 to11%. We'll talk a little bit more about that. If you look at our CAGRs on top line and bottom line over the past five years. You'll see it was about 4% on top line and about 6% on the bottom line. FY27 will be the highest growth of each of those five years on both metrics. It's something we're really proud of. It accentuates the momentum that we have in our business. And for Q1, we are on track to our $1.18 to $112 EPS guidance that we gave with $119 being the midpoint. With these returns that we see and the momentum we feel for 27 combined with the industry leading rates on the P&L, return on invested capital at the top of the industry and the highest free cash flow, we feel it's a very positive return for our investors and something we're very excited about, not to mention we're the only food distributor with an investment grade balance sheet. As we look at the future to 28 and 29, both Jeff and Kevin referenced this, and this morning we put out a press release. The way I would ask you to think about it is this. We talked about $100 million of technology savings for FY27. We're on track for that. We are building those programs. Kevin stated there are 30 projects, but really four projects make up 70% of the value. We spent months Researching software, technology, our own internal processes across these areas, which gives us the confidence to go out with what we did today on the press release. These savings will give us $500 million, and I want to go into detail on one of them that I'm very passionate about for two reasons. One, it's in my own space, but also two, this will save us tens of millions of dollars and it doesn't impact the customer at all. Cisco spends annually more than a billion dollars per year on indirect expense. Think of tires, truck parts, janitorial in our 350 plus warehouses throughout the globe. Think of refrigeration repairs. I could go on and on and On. Through those opportunities, today, we RFP many of them, but not all of them. There are two places where we're going to save money, OPEX, and one is doing what we do today, but doing it more efficiently and getting greater cost savings. The second place is there is a medium and a long tail where we just don't get to all of those RFPs today. The reverse auction software that we've researched and we've tested will enable us to RFP all of them and will get us tens of millions of dollars in savings on an annualized basis. It's fantastic software. It's things that we haven't used historically in order to give us significant efficiency in this space as one example. as we look to pivot to restaurant depot we have talked about with investors four specific places where they have made inquiries one is in the margin profile i'm going to go into a little bit more detail today than we have historically two is our deleveraging plan three is our future store growth we have said there are 125 plus stores of capacity in the united states not to mentioned some in Canada. And then, of course, the last one, which we did not include in the deal model, are better together top line synergies. So let's jump in a bit to the margin profile. And again, this is a little more color than we have shown historically. What you'll see on this page is we've received some questions as it relates to club stores. How does Restaurant Depot compare to club stores. And I want to say right up front that some of these club stores are some of the best-run retailers in the entire world, and we have a ton of respect for them. Restaurant Depot is a slightly different business model, and I'll share with you why. The question really revolves around the 13% EBITDA margins, the 12% operating income margins. Are they sustainable? How are they that high when you have some of the best run retailers in the world who have margins that are significantly lower. That variance of roughly 8% is split fairly evenly between both margin and OPEX. As you look at this bridge that we have created, it starts to spell out the details as to how they are different. If you just start with the retail location itself, Restaurant Depot is in more of an industrial type space, whereas club stores are generally more prime real estate. It's cheaper. If You go inside the store, it is in a more industrial feel inside of a Restaurant Depot, meaning the lighting is not quite as good. The flooring, the merchandising aspect of the store is not quite to the level of the club store and therefore it's significantly cheaper if you move over and you look at operating hours it operates fewer hours which simply means less cost from a lean operating perspective employees actually in the stores I'll go into detail on the next slide so let me save it for then but just think about product mix as the next bar. You know, if you go into a club store, and I'm sure you do at times, you start in the parking lot, and generally speaking, there might be a fuel station. You might go inside, and you might service your car or get new tires. You Might stop by the pharmacy. Maybe you get a pair of glasses. As you go through it, you pass some samples, and then eventually you work your way up to buying a hot dog or two. All of those things are amazing things, but the products that I just named don't exist in a Restaurant Depot, and many of them are lower margin than Restaurant Depot products. Now, on the flip side, what that means is shrink is a little bit higher in Restaurant Depot because it's all food. They're great products, but that product mix provides a significant difference between Restaurant Depot and a club store. The point here is the margins are durable. They are sustainable. They have been in place for two decades, and they will be in place for another two decades. The other places that exist as a difference between the two are things like marketing. It's cheaper at Restaurant Depot. Credit card fees are actually slightly less. The flip one is there are no membership fees at Restaurant depot, and that is a source of income for the club stores. Let me dive in a little bit deeper into the lean operating model of a restaurant depot. I started when I talked about product mix, but think of the associates within a club store that are related to that product mix. Again, you might have a pharmacist, you might have an optician. You might have an attendant at a membership desk. Those roles don't exist within Restaurant Depot. And go on a little journey with me. A supplier in a Restaurant Depot store delivers a full truckload to the back dock of the store. An employee, who is a Restaurant Depo employee, goes in with a pallet jack or a forklift and takes that pallet off of that truck, off of that trailer. They immediately load it into a pick slot or a reserve on the reserve rack. And then that customer picks that product, takes it to the front of the store, checks out through a cashier, and drives away. That's pretty much the model of a restaurant depot. So you have some people in the warehouse, you have some people on the dock, you Have some cashiers, and then you have some store leadership. What you don't have are all of the other ancillary roles, which means it's a significantly leaner operating model in our restaurant depot, which accounts for somewhere around 2% to 4% of reduced expense. As we've compared these two, again, I want to reiterate, we have a ton of respect. For these club stores, it's just a different business model. We have very high confidence in that 12% operating income percent and 13% EBITDA. speaking of restaurant depot we are on track so we would say that we expect it to close in q3 we are currently ramping up our financing we will do a billion dollars in common equity and we will due the remainder in debt all of that is in full speed ahead we are in process on day one, we will be at four and a half turns net leverage. Within 24 months, we will reduce that to three and a half turns in that leverage. Now, one thing I want to add is this does not take into account some of the initiatives that Kevin talked about. So we expect through those initiatives to reduce our working capital by two days. A day of working capital is a couple hundred million dollars. Those things would accelerate this. I personally and Kevin and I together and our management team are fully committed to deleveraging within this time frame to be at three and a half turns by 24 months. The beauty of Restaurant Depot is it has a significant free cash flow and it's very very efficient and within four years our free cash flows Cisco will double through Restaurant Depot's acquisition. This is my last slide, and I'll pass it back to Kevin. We have delivered over the last 13 years, including 27, roughly the value of half of our market cap. It's something we're very proud of. Through the deleveraging process, we will continue our dividend. We've paused our share repurchase. We're excited about this picture, but we're even more excited about what the AI cost efficiencies will bring, not to mention the added benefit and accretion that Restaurant Depot will bring. and we're excited to move forward with that perspective. I will pass it back to Kevin to talk about the last two items and appreciate your time today. Okay, Brandon, thank you. We've just got a few minutes left, so we'll move with pace. Again, we're trying to be crystal clear. Of course, this goes strengthening performance and our excitement about the Restaurant Depot transaction. I'd like to give two incremental pieces of color. Brandon just established this is a very profitable business. You may remember back in the month of May, we talked about Restaurant Depot's profitability relative to our mom-and-pop local distributor business. Roughly at Parity, we have a high-profit local business. We got a lot of questions about, yeah, but how does it compare against the club stores? How is it so much more profitable? I think you've just definitively answered that question. Lower occupancy costs, lower construction build, lower payroll as a percent of sales equals higher profit, and it's 100% food. They're not selling pharmacy a business that I know well, which is very, very low profit, just as an example. We are excited about this box. The box is a fit for purpose for a specific customer, a restaurant. And everything that restaurant needs is in one roof. And to be clear, the club stores offer some large pack sizes. But if you want to outfit your restaurant with every single thing that you need at the best prices in town, restaurant depot is second to none which is why we are so excited about it with cisco's inbound supply chain we believe we can take the brand to 125 net new communities that truckload movement that brandon referenced is what is so important being able to go truckload from a supplier straight to a store to be able to efficiently bring the product to the store in the lowest net landed cost and where they have a store that is too far away from their existing stores we can leverage the Cisco inbound supply chain to nearby one of our warehouses to bring that product to this store in a cost-effective way. 125 net new stores. Canada is an upside opportunity beyond these numbers. In the out years, we see a real opportunity up north in Canada. We call it the better together thesis. $250 million has been underwritten in the deal model for the two blue circles that are on the top of the page. The first is procurement synergies. We buy many of the same products from common suppliers. We can get better rates from those suppliers, and that includes trucking costs. We know we can get greater rates because of our combined leverage. Opening approximately five to six net new stores per year is the top right blue box. The four that are on the bottom are not yet included in our deal model. Post the deal getting approved, we will talk in more detail about sizing the prize of these revenue synergies. We have communicated on balance they could be worth more than the procurement synergies that we have already told you about. Broader assortments. We each have product that the other business can sell and we're going to do that post-close. I'm super excited about the opportunity to better service select customers. Think a delivery primary customer who runs out of something and needs it Now we can leverage a Restaurant Depot store that oftentimes will be closer to that customer for something we would call same-day delivery. We can provide digital capabilities to Restaurant Depot to help them better harness that membership data that Brandon talked about from a loyalty perspective. We can sell more to more customers by being the first truly nationwide multi-channel food service distribution entity. These revenue synergies are significant and not yet included in our math. So I'll wrap up. My very last slide, I appreciate your patience. Three things to remember. Core, Cisco, meaningfully strengthening, driven by local business health, including Cisco brand improvement. Thing two, front-footed AI transformation of our business model to be in a more efficient version of ourselves, creating $500 million of operating margin expansion, which moves the midpoint of our guidance by 300 basis points. All set in the stage for a bold new chapter for Cisco, a restaurant depot transaction that is truly financially accretive to our shareholders over time. And as Brandon has said, when we can be ahead of schedule on that delevering, on cash flow generation, we will delever faster. By deleverING faster, we can get back into shareholder-friendly actions like share buyback sooner than the commitments that, Brandon, you have already made. So we thank you for your time. If you have questions on the new incremental guidance and information we've put out today, please see Kevin Kim from our Investor Relations team. Jeff, thank you for having us. Everyone have a great rest of your day. Thank you very much.