Sysco Corporation

Good morning and welcome to Cisco's Second Quarter Fiscal 2018 Conference Call. As a reminder, today's call is being recorded. We will begin today's call with opening remarks and an introduction. I would like to turn the call over to Neal Russell, Vice President of Investor Relations, Communications, and Treasurer. You may begin, sir.

Thanks, Natalia, and good morning, everyone. Welcome to Cisco's Second Quarter Fiscal 2019 Earnings Call. Joining me in Houston today are Tom Binet, our Chairman, President, and Chief Executive Officer, and Joel Grady, our Chief Financial Officer. Before we begin, please note that statements made during this presentation that state the company's or management's intentions, beliefs, expectations, or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act, and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the company's SEC filings. This includes, but is not limited to, risk factors contained in our annual report on Form 10-K for the year ended June 30, 2018, subsequent SEC filings, and in the news release issued earlier this morning. A copy of these materials can be found in the Investors section at cisco.com or via Cisco's IR app. 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 are included at the end of the presentation slides and can also be found in the Investors section of our website. To ensure that we have sufficient time to answer all questions, we'd like to ask each participant to limit their time today to one question and one follow-up. At this time, I'd like to turn the call over to our Chairman, President, and Chief Executive Officer, Tom Benet. Good morning, everyone, and thank you, as always, for joining us.

I'd like to start this morning with some key themes that drove our results for the quarter, along with some comments on the current macro environment we're operating in, followed by a discussion of recent organizational changes, then continuing with our U.S. Food Service Operations business results and concluding with a discussion of our international and other business segments. Joel will then discuss the financial results in more detail. For the second quarter, we saw improved year-over-year top-line results and are continuing to execute on our strategic priorities designed to improve our overall performance. Our focus for the quarter was led by our efforts to enrich the customer's experience of doing business with Cisco and to consistently provide excellent service to help our customers be successful. We remain committed to achieving our three-year plan financial objectives, although the manner in which we achieve them may look slightly different than what we originally outlined. Joel will discuss this further in just a few moments. Our results for the second quarter include a sales increase of 2.5% to $14.8 billion, gross profit growth of 2.7% to $2.8 billion, and adjusted operating expense growth of 2.1%, which delivered an adjusted operating income increase of 4.8% to $603.3, and an adjusted earnings per share decrease of $0.03 per share to $0.75. Local case volume was solid within U.S. Broadline operations, growing 3.3%, of which 2.4% was organic. Total case volume within U.S. Broadline grew 2.9%, of which 2% was organic, with local growth outpacing national this quarter. As previously discussed, we expected overall softer volume this quarter due to the lapping of the HFM acquisition and the lapping of two large national customers. Looking at broader economic and industry trends, And as we think about the key drivers in food service and the segments in which we operate, there are a number of factors which are important to the overall macro environment, including consumer confidence and discretionary spending. And even with the recent and somewhat volatile financial markets, we continue to see U.S. consumer confidence remaining fairly strong, driven by the solid labor market with unemployment remaining low at 3.9% as of December, which is normally a good indicator of that higher consumer confidence. In the restaurant industry, we continue to see sales growth, particularly in same-store sales, though traffic continues to be mixed. And lastly, from an international economic outlook perspective, it's mixed where we do business. In the U.K., the consumer is still dealing with uncertainty and concerns over Brexit next steps. However, this is balanced with some strength in other geographies and, generally speaking, decent consumer spending and overall industry trends in the other international markets where we do business. Turning to the topic of M&A, M&A continues to be an important part of our strategy for growth. Last week, two new acquisitions were made public, one in the U.S., Wah Foods, and one in Ireland, Classic Drinks. So these are examples of smaller transactions, especially compared to the size of Total Cisco, These acquisitions are great examples of our M&A strategy. WA Foods is a central Illinois distributor with the overwhelming majority of its business with independent restaurants. And Classic Drinks is an established specialized wine and spirits distributor, which will further strengthen our existing product portfolio in our Ireland business. I'd like to now transition to some organizational and leadership changes that we recently announced. In order to drive continued growth, and to create value for all Cisco stakeholders, we implemented organizational and executive leadership changes, which will further align the company with its customer-first operating model and streamline the business. These changes will help us increase agility, reduce costs, and accelerate decision-making across the business by getting closer to our customers and better aligning our resources to support and address their evolving needs. Additionally, this reorganization results in an approximate 10% reduction in salaried corporate support positions. And while any decision which impacts our associates is a difficult one, this is an essential step to realign the organization and sharpen our focus on the company's key strategies to enable growth. Now I'd like to transition to our second quarter results by business segment, beginning with U.S. food service operations. Sales for the second quarter were $10.1 billion, an increase of 4.2%. Gross profit grew 4.5%, operating expenses grew 4.7%, and operating income increased 4.2%. Inflation during the first two months of the quarter remained relatively flat, but increased towards the end of the quarter, contributing to the total gross profit dollar growth. Overall gross profit growth was also positively impacted by an increase in case growth, a reduction in spot market usage of inbound freight, continued growth in Cisco brand, which was up 59 basis points in our local segment versus prior year, benefiting from our ongoing category management initiatives and our cutting-edge solutions innovation platform. Our cutting-edge solutions continue to provide value-added products for our customers. We are excited about our next launch of these innovative new products that will be taking place in a couple of weeks, which we also believe could be our best yet. Also of note, we continue to see an increase in the utilization of our digital ordering platform, which has improved over 50% of local cases ordered. Additionally, we continue to make progress on improving our customer-facing tools, including a refreshed delivery app and improvements to our digital shopping platform. From an expense perspective, operating expenses grew for the quarter, driven primarily by continued supply chain cost increases in both the warehouse and transportation areas. While we have seen increased costs in these areas in recent quarters, we continue to remain focused on better managing and mitigating these costs. As an example, we continue to focus on specialized recruiting, training, and onboarding efforts, and we are starting to see an improvement in retention, especially in the warehouse. Moving on to our international food service operations for the quarter, sales increased 0.8%, gross profit decreased 1.6%, Adjusted operating expenses decreased by 2.6%, and adjusted operating income grew 5.1%. In our international segment, from a top-line perspective, we saw improved performance in Canada, with strong sales growth year-over-year, despite some softness in Alberta. In the U.K., top-line performance for the quarter was impacted by continued uncertainty surrounding Brexit, and our business in France was impacted by the Yellow Vest protests during the critical holiday timeframes. From a cost perspective in our international segment, we had some supply chain challenges in the U.K. as we onboarded several new customers to the business. In Ireland, the team continues to execute strongly against their integration initiatives, and as a result, synergies from the merger of Brakes Ireland and Palace are ahead of schedule. Our integration of Brake France and Davigel into Cisco France is not only progressing well, but we launched our new Cisco France brand to the French market last week. at the SURHA World Hospitality and Food Service event in Lyon. This is an important step to building on our position as a leading European food service provider. As we've also discussed, in Europe we have accelerated the investments we are making related to our long-term strategic growth plan, which are designed to enrich the customer experience and position us well in these markets. Joel will discuss this point further in a moment and its impact to our certain items this quarter. Moving on to Sigma, performance for the quarter was down as we continue to optimize our business in this industry segment, and we remain focused on improving our overall operational performance. We expect to see continued softness in the top line as we make disciplined choices in an effort to improve profitability for the long term. And lastly, in our other business segment, guest supply had strong top line performance during the quarter with increased sales of 8.3% and increased gross profit of 5.2%. So costs continue to be a challenge due to continued impact of tariffs, product availability, and the increased cost of shipping products to our customers. Overall, we are pleased with our performance in the hospitality segment and remain excited about the long-term potential for this business. In summary, Overall, the fundamentals in our industry and in our business remain solid. We plan to continue to deliver against our strategic priorities to provide an improved customer experience, excellent customer service, and strong operating performance. And finally, I'd like to thank our dedicated associates across the company for all of their efforts to make Cisco the distributor of choice for our customers and the leader in the food service industry. Now I'll turn the call over to Joel Grady, our Chief Financial Officer.

Thank you, Tom. Good morning, everyone. I would like to provide you with additional financial details surrounding our performance for the quarter. As Tom noted, for the second quarter, for total Cisco, sales were $14.8 billion, an increase of 2.5% compared to the same period last year. Changes in foreign exchange rates decreased sales by 0.7%. Gross profit in the second quarter increased 2.7%, and gross margin increased four basis points. During the quarter, particularly in December, in our U.S. Broadline business, we experienced 1.4% inflation, driven by a few categories, primarily frozen potato, meat, paper, and produce. Adjusted operating expenses for total Cisco were up 2.1% for the quarter. With regard to the leverage of operating expense growth, gross profit dollar growth, our performance was in line with our expectations. While we did improve performance compared to the first quarter of this fiscal year, we remain focused on improving this trend in the third quarter, the second half of the year, and for the remainder of the three-year plan. Total adjusted operating income was $603.3 million in the quarter, an increase of 4.8% compared to the same period last year. Changes in foreign exchange rates decreased adjusted operating income by 48 basis points. We have previously discussed transformative initiatives that we have in place, which will allow us to continue to grow our business and capitalize on our strong fundamentals. As we continue to evolve as a company, we are placing further emphasis on the holistic assessment of our work in order to effectively centralize and standardize our business, including by leveraging technology and strengthening Cisco overall. We will continue to focus on strong implementation and execution while accelerating some of this work, all of which provides us with the confidence to achieve our financial objectives. As a reminder, we are expecting to see increased cost savings benefit from these initiatives in the second half of this fiscal year. Some of these initiatives include, first, our finance transformation roadmap. This important work is about modernizing our global financial platform, starting mostly within our U.S. operations. We are centralizing activities, automating work, and working with offshore partners where the transactional work can be done more efficiently and cost-effectively. Changes have begun, and we expect to see the benefits in the second half of this fiscal year. The second area of focus is our smart spending initiatives. Here are We take a detailed and accelerated view of indirect spending categories to identify and execute on cost reductions in these areas. Again, we anticipate benefits being realized in the second half of the fiscal year. In our Canadian regionalization, this work is about optimizing the leadership and overall structure of our Canadian business, which historically has been highly decentralized. We have good opportunities here and feel great about the progress we've made thus far. And finally, regarding overall administrative expenses, we continue to aggressively look for new and innovative ways to drive cost out of the business, which align with our transformative efforts to drive growth. Areas that are not only in line with our three-year plan objectives, but also either accelerate some initiatives or are incremental to the original plan. An example would be the changes we discussed earlier, regarding the new streamlined organizational and business unit structure. Turning to earnings per share, our adjusted EPS for the quarter decreased $0.03 to $0.75 per share. Our EPS results this quarter were impacted by our tax rate. As a reminder, in the second quarter of fiscal 2018, we saw retroactive benefits back to the beginning of our fiscal year in FY18, due to the adoption of reduced tax rates in the US. While US tax rates are lower in fiscal 2019 as compared to fiscal 2018, the retroactive benefit created a larger benefit in the second quarter of our fiscal 2018 as compared to the second quarter of fiscal 2019. Our EPS results this quarter were also impacted by increased interest expense, which was higher than the same period last year due to variable rate changes, and less stock option exercises than in the prior year. I would also like to remind you that we anticipate our effective tax rate for this fiscal year to be 25%. I'd like to take a minute now to talk about why we had a large amount of certain items this quarter. We continue making investments in our business related to our strategic plans designed to position us for long-term growth. Our certain items in the second quarter are primarily related to these initiatives, including the integration of our businesses in France and Ireland, European multi-temperature investments, our finance transformation roadmap, and Canadian regionalization. The largest of the certain items is related to the restructuring of our France business, which included significant severance. As we've discussed with the France restructurings, we are integrating our Braked France and Davigel businesses into Cisco France. The merger of these two businesses will position us well for continued success in the French marketplace, and we expect to see benefit from this initiative in our France business beginning in fiscal 2020. Additionally, as we have stated, we anticipate seeing benefit from our finance transformation roadmap and Canadian regionalization initiatives in the second half of this fiscal year Now turning to cash flow. Cash flow from operations was $917.8 million for the first 26 weeks of fiscal 2019, which was $15.4 million lower compared to the prior year period. Free cash flow for the first 26 weeks of fiscal 2019 was $700.9 million, which was $22.4 million higher compared to the prior year. The improvement in pre-cash flow was due primarily to continuing improvements in payables and receivables. As a reminder, in the second quarter of fiscal 2018, we deferred cash tax payments due to flood relief associated with Hurricane Harvey, so this is impacting our year-over-year comparison. Net capital expenditures totaled $216.9 million for the first 26 weeks of fiscal 2019, which was $37.8 million lower compared to the prior year period. In summary, we saw improved results for the second quarter, and we remain focused on supporting our customers and executing our business initiatives to achieve our objectives. At this point, we are halfway through our three-year plan and have increased adjusted operating income by $241 million. We are committed to achieving our goals, and as always, We are committed to performing consistently on a high level to achieve customer satisfaction and solidify our industry-leading position. Operator, we are now ready for Q&A.

Ladies and gentlemen, at this time, if you would like to ask a question, please press star 1 on your telephone keypad. Again, that is star, then the number 1. Your first question is from the line of Karen Short with Barclays.

Hi, thanks. Just to clarify a couple things. So as we look at the percent of savings coming from gross profit dollars versus OPEX, it does seem that it will be much more skewed to OPEX now with these layoffs. Can you maybe just give an update on how to think about that?

Yeah, hi, Karen. It's Joel. I would say somewhat more than what kind of, you know, I wouldn't call it dramatically more. But, again, just if you think about, you know, the first half of this three-year plan, for the most part, we've had relatively flat levels of inflation, certainly some of the challenges we've had in the supply chain. So I guess I would just say that, you know, there's a bit more emphasis on some of the administrative cost reductions. But, you know, again, as we've seen a little bit of inflation returning and certainly just obviously continue to work to mitigate some of the challenges. On the supply chain side, again, I would say somewhat more focused, but, again, I wouldn't say we're really dramatically shifting. We talked about it earlier.

And, Karen, I might just add, I mean, I think if you think about it as we really have two big buckets. You had gross profit and you had cost. And what we're really talking about and what we've been sharing is that our supply chain costs have been higher over the last few quarters, so we're having to balance that still on the cost side. So it's kind of cost and gross profit isn't the big shift. It's really more between some of the cost buckets that we're really focusing on.

Okay, but just for modeling purposes to clarify, when I look at the corporate number, it's fair to say that that only included the benefit of the corporate or the supply chain, sorry, shared services for one month out of the three and a quarter, right? So going forward as we model corporate, that number should be quite a bit lower?

Yeah, so it would not have included any of that at this point. So there will be some impact on corporate expenses moving forward, yes.

Okay, and then just my follow-up is I was curious if local organic case growth internally was in line with plan, and I know you said the kind of quarter was in general, but I'm only asking because you actually no longer have a slide highlighting case growth, and you guys have kind of had that slide in the past, so any color on that would be great.

We'll have to look back at that slide. I'm not sure about that. But as far as the local case growth, I think we feel really good about the case growth. I think there was, you know, a little bit of choppiness in the quarter. It kind of came back a little stronger towards the end, which is, you know, we feel good about. But I would say it was maybe a little less than we had planned, but not dramatically different.

Great. Thanks.

Your next question is from the line of John Heinbacher with Guggenheim Securities.

Hey, guys. Tom, maybe a quick question. Could you maybe walk through some of the changes you made here on the organizational side? They sound more operational. So, you know, what happened in terms of, you know, span of control, layers of management? You know, how do you go to market differently because of this? And then how do you guard against any adverse impact on your customer?

Great question, John. Thanks. So let's start with the changes we made were, in fact, around kind of streamlining the business. And when you think about spans and layers was the key focus. Very focused in corporate. And so when you think about impact to our customers or to our selling organization or or to our growth plans, little to none. I mean, that's not where the focus was. This is really about how do we kind of improve the agility of this organization, our ability to make decisions more quickly. And so it was heavily focused on corporate office. And as you probably saw or heard, there was a couple of changes with my leadership team. So the headline here is mostly a kind of a spans and layers exercise. in areas where we felt like we could remove some cost and maybe some redundancy, and candidly get us more focused on the key priorities we've got and that we've outlined to you all. From a leadership perspective, there are a couple of changes that are probably worth highlighting. One is that we've been going through some work. within our technology area. We've got a kind of an innovation technology group and we've got a core traditional technology group. And we're looking at how we bring those two organizations closer together. And we've been doing some work around that. And as we continue that work, we will continue to make some adjustments. And so what you saw there was a change taking place within the kind of traditional IT area The great news for us is we've got a deep bench here. We feel very good about the team we've got and the work we're doing. And so I don't think you should expect, and we certainly don't expect to miss a beat with our technology efforts. The other thing is there was some, think about in this administration area, we had a role that was a kind of administrative role. There was a combination of a lot of other things that as a company we had tucked under that role over the last couple of years. Think about CSR. Think about even some of our communications work. And so we felt like there was an opportunity here to streamline that work and that organization. And so we obviously replaced the important part of that role, which was the chief legal officer role. And we promoted a talented woman named Eve McFadden here at Cisco, who's now our new chief legal officer and corporate secretary. And so, again, really no impact there, I think, from an overall business perspective or certainly from any of our customers or our strategic focus. And so those were probably the largest changes that are worth highlighting.

Yeah, and if I could just add one thing, I mean, just to reiterate something Tom said, is that none of these – None of these were cost changes that were in any way inconsistent. We're not taking costs out that are actually supporting growth. So I think that's really an important point here, that there's work being done to streamline and tighten the connection between our customers and ourselves, but there's certainly nothing done that's going to impact growth.

And then one last thing. If you look at the step-up in inflation, right, you saw in December, and it's not clear if that's going to continue, but let's assume it does. How do you feel about pass-through right now relative to all the other cost pressures your customers are seeing, maybe compared to the past? Do you think you can pass-through as you have in the past, or maybe it's a little more challenging?

Yeah, I don't think we've seen really a big change there. Look, as we've always said, too much inflation is hard to pass-through. But as long as it remains at kind of this modest level, I think we still feel very good about our ability to do that. Clearly, we've got lots of tools in our tool belt here, including Cisco Brand, which we continue to talk a lot about, but it's driving really good performance. I think it was 59 basis points we talked about this quarter. And, again, we've kind of seen that ongoing benefit that we get from Cisco Brand, and that, again, helps our customers a lot. It generally provides them some value and obviously is good for us as well.

Okay, thank you. Seth?

Your next question is from the line of Vincent Sinisi with Morgan Stanley.

Hey, great. Thanks very much for taking my question, guys. Just wanted to follow up on the headcount reductions. Can you just kind of give us maybe a little bit more color on how does that fit into, you know, kind of the grand scheme of the cost-cutting initiatives, especially as we go through the next couple of years here? Is it fair to say that that's kind of the largest bucket among them and, you know, other ones that, you know, might be worth noting in terms of progress?

So let me start, and I'll let Joel talk here, too. And I think it's important to go back to the things we've been consistently talking about. So certainly cost is an important part of us delivering the three-year plan. And as we continue to talk, I mean, the balance of that cost may be slightly different than we initially had talked about, primarily between the supply chain area, because that area has been increasing, and the administrative cost side. But this recent action is really about maintaining Um, the focus that we talked about on cost broadly, yes, it was focused on administrative, administrative side of this, but I wouldn't say that this is a large part of the overall. When you think about the plans we had over the three years, all of these areas need to work together. And this is just one piece of that, that overall puzzle. In addition to the big buckets that Joel also has mentioned numerous times. So with that, I'll let Joel kind of build on that.

Yeah. I think the only thing I'd add Vinny, and this is just, uh, Yeah, we talked about the fact that we've had some of these initiatives that we have that were some multi-year in scope. And in some cases, some benefits were being able to be accelerated on those. And then in some cases, there are also things that we looked at that were outside of the main scope of those. And this would be one of those things. And so, in other words, as we sort of thought about some of the things we've talked about at our overall meeting, you know, cost discussions, this would be one of those things that would be incremental to that. And so, anyway, that's the way I would think about it. And, again, just, you know, again, as a reminder, you know, there's obviously still a very large part of this benefit that we're looking to get from our gross profit dollar growth as well. So, I mean, I still consider this a very balanced approach with just some further acceleration of these things. And, again, some of these things like this that were incremental to the additional plans that we laid out.

Okay, that's helpful, guys. Thank you. And then maybe just a quick follow-up. Tom, I think you said in your prepared remarks that you had a reduction in spot market usage. Can you guys just give us a quick update on transportation freight costs, kind of where you are on a sequential basis and how you're able to be better managing through?

Yeah, the thing about that comment is very specific to inbound freight. And if you think about a year ago when we really hit, I think in this quarter, had a big increase in that spot market utilization because the tight market hit and everyone was scrambling, we got, like probably everybody, we got kind of pushed to the spot market. We've just done, as we've talked for the last really four quarters, a much better job of managing that. And so as we went into this year, it's that overlap that I'm really referring to that was down. So I think we talked about this last quarter. I'd say the inbound freight is kind of at a new normal. It's higher than it was certainly a year ago, kind of spread out over a year. But year over year for the quarter, we saw some benefit just because that's when we took the biggest impact last year.

Got it. All right. That's super helpful. Thanks very much, guys. Good luck. Thanks.

Your next question is from the line of Judah Frommer with Credit Suisse.

Thanks for taking the question, guys. Maybe first just on the independent case growth commentary. I think it's been a while that you've been talking about same-store sales being flattish to positive and traffic being more mixed. I mean, kind of at what point do you get concerned about the trajectory of that independent business? And can you talk about those very small one- and two-store independents versus the chains that you've been talking about more recently?

Yeah, good morning, Judah. I think we continue to feel good about the mix of our business. We've talked over the last couple quarters about this kind of regional change or these kind of micro changes are growing, and that continues. And I think we still feel good about our position there because of the value proposition that we have for those customers. When you think about the true independents, the ones you're talking about, these kind of one and two unit kind of operators, But we continue to see, as we said, a decent growth there. Now, again, it's very much driven by... the outlet and the type of business that they're, they're running and the experience they're providing. But generally speaking, we still feel good about that. So I think there, and as we, you've heard us talk a lot and I won't, you know, overdo it on the, this market's still very fragmented. So the acquisitions are a good example, even while laws is fairly small acquisition relative to Cisco size. It's a great example of where there are a lot of really good regional distributors out there who are still doing good business and are a good fit. And so those guys are heavily independent-driven, and it's a great example of how we can leverage some great work and a great organization that they have with Cisco and the capabilities we bring. So a long-winded way of saying, look, I think we still feel really good about our position, our growth, and certainly our prospects, given the marketplace that we operate in.

Okay, great. And then maybe just quickly, if we kind of rewind to Q1, I would say there was some combination of warehouse labor pressure and flattish inflation causing some consternation on your part that hitting the midpoint of 2020 guidance would be tougher than against that backdrop. Would you say that, you know, we fast forward to Q2 and kind of the exit rates there, that with kind of the offsets in operating expense and inflation kind of, you know, re-ramping that you do feel better about those 2020 targets than you did three and a half months ago?

Well, I think we felt good about the 2020 targets all along. So I think what we've talked about is some shifting of how we might deliver that. But we have consistently said we feel good about our ability to deliver this three-year plan, and we still feel very comfortable about that.

Yeah, Jude, I think we just called out a couple things that we've said are causing us to continue to accelerate some other things because we're certainly not just sitting on our laurels and – And, you know, saying inflation is low, supply chain is high, obviously we're going after some of that stuff. But I think we've been pretty consistent in expressing our confidence in achieving our target.

Great. Thanks.

Your next question is from the line of Marissa Sullivan with Bank of America.

Good morning. Thanks for taking my question. I wanted to ask about inflation. cost savings as, um, you know, some of the initiatives that you've, that you've talked about kind of rolling and kicking in the back half. Um, do you think that you'll get back to that longer term, 150 basis point gap between, um, gross profit dollar and OpEx growth in three Q or is that more of a, will it take more time to get you back to that longterm level?

Hey, Marissa, it's Joel. Yeah. So the way I would think about that, obviously we don't give that type of quarterly guidance, but what I would say is that, um, Again, as we continue to express confidence in achieving our three-year targets and as mathematically it would be necessary in order to get back to or exceed that rate over the next six quarters, I would think about it that way. Again, we've talked about the fact that our second half of this fiscal year we believe will ramp in some of those areas, including that gap. So, again, without giving specific guidance, I would just tell you that we continue to express that confidence. And, again, I'd say mathematically that would – certainly have to be the case over the course of those six quarters.

Gotcha. And then on the corporate reductions that you announced this morning, when do they kick in? You know, how quickly do they roll on to the P&L? And is there more room to go? And, you know, do you have to kind of find more incremental pockets to get you maybe back to that mid to higher end of the EBIT improvement range?

Why don't I start here? I mean, so I think the question, when does this start to kick in, that will be in the third quarter. And so you'll start to see some of those benefits hit in Q3 and, again, over the second half of the fiscal year. I guess the other thing I would say, and again, it's only time to chime in here, we're always continually – looking for ways to do this. Again, we often get asked, you know, hey, we've got these sort of key initiatives we've laid out. Are there other things you're doing? And, again, that's our job to always look for different opportunities, and so we'll certainly continue to do that. But hopefully that gives you some clarity, though, on the timing.

Yeah, Marissa, I think that's well said. I mean, I think anytime you take an action like this, it's difficult for the associates involved. And we take that very seriously here. But I think at the same time, it is our responsibility to be constantly looking for ways to optimize this business and improve the overall experience our customers have with doing business with us. And we're going to continue to do that as an organization. And time will tell whether or not some of those things need to be accelerated or not. But we feel really good about the plans we have in place right now.

Yeah. And I think the only thing I've just, again, not to sound like a broken record here as But, again, these are not – again, we're not taking costs out of things that are actually facilitating growth in our company. And so I think that's just really important. We continue to invest in this company. We continue to ensure that we're investing in the right places to grow. And we also continue to look for opportunities to streamline. I just think it's important to make sure that message is loud and clear.

Thanks. That's super helpful.

Your next question is from the line of Kelly Bania with BMO Capital. Hello.

Hi, good morning. Thanks for taking my questions. Just going back to the workforce reduction, I guess two questions. One, can you just talk about the size of the impact of that on a dollar standpoint on an annualized basis? And then I just guess to clarify, was this always part of the three-year plan or was there any change into the size of the structure of it or was it just pulled forward in terms of timing? relative to your original expectations.

Hey, Kelly. Thanks for the question. Yeah, so, no, first of all, a couple things on that. We haven't actually given the dollar amount, the dollar magnitude of that. We did talk about, you know, 10% of positions in corporate support, but we have not given that dollar amount. The question, and so, again, as I mentioned in my remarks, I would characterize this as one of those things that are incremental positions. to some of the stuff that we actually talked about as part of our plan. This would fall into one of those categories. We often get the question, hey, what else are you guys doing? This would be one of those things. And so this would not have fallen into one of the things we talked about specifically in our investor day or key initiatives we often talk about.

Okay, perfect. And then in terms of the inflation, it sounded like that started really in the latter part of the quarter. Just curious if that has continued into January and what maybe you're expecting for the back half in terms of inflation in your plan.

Yeah, I would say, Kelly, to this point, that that has continued. And I think our expectation is I'd call modest levels of inflation here over the next couple of quarters.

Okay, great, and maybe just a bigger picture one then. As you look at your competitive set, obviously the big three have about a third of the share, but just curious what you're seeing from that other two-thirds and those regional distributors. You talked about some of them performing well with independents or catering to the independents well, but are you seeing any changes in behavior or strategy with this group of distributors that we don't really get to hear from on a regular basis?

Hey, Kelly, it's Tom. No, I don't think we really – I mean, it remains very competitive, obviously, out there. And we've talked about this a fair amount, but as you know, the big – kind of the public three, while that's very visible to everyone, there are very good and very capable regional distributors in this business, and many of them. But there are some fairly large ones as well on a regional basis that we all compete with. And I would say that, you know, they have always been good competition and they continue to be, but I don't think we've seen anything kind of new or different from them or dramatically changed. So highly competitive, but, you know, there are certainly a lot of good companies out there in this industry. Thanks.

Your next question is from the line of Karen Holdhouse with Goldman Sachs.

Hi, thanks for taking the question. Just on the inflation commentary, so it was pretty flat in the first two months, and then you ended up a little bit ahead of 1% for the quarter, really just driven by December. Would that, just the math would imply that you were running north of 4% probably in December. Is that the right way to think about it, and is that how to think about a run rate into the into the third quarter or were there really some parts of that that you would view as more temporary?

Uh, yeah. So Karen, it's Joel. We, uh, first of all, I'd say we're slightly inflationary or, uh, again, over the first couple of months. So I wouldn't say we're flat. Uh, and for that was, that does that the math for us doesn't apply 4% over the December. So it certainly, uh, implies some acceleration in December. Uh, you know, as I mentioned, uh, Some of that inflation, again, I'd say it's carried over into the third quarter, and we anticipate, again, modest levels of inflation as we head into the second half of the year, but I would not anticipate 4% inflation heading into the second half of the year.

Okay, thank you.

Your next question is from the line of John Ivanko with J.P. Morgan.

Hi, thank you. First, I wanted to get back to some of the prepared remarks about the industry, which I think were you're discussing the expectation of same-store sales growth but traffic being mixed. Can you elaborate on, you know, what sectors, you know, that you're seeing in terms of, you know, that aren't participating in this overall economic growth and, you know, maybe how you're positioning, you know, towards the better sectors and less towards the, you know, the slower or even negative sectors, you know, might be changing over the next couple of years and then I'll have a follow-up as well.

Sure. I mean, if you think about, we talked a lot about the various sectors over the years and if you think about the, restaurants obviously being the largest segment of this industry and of the market. Let's start there. But I think when we talk about the traffic and the spend, it's highly variable. So if you think about it from an NPD perspective, the total traffic during this last timeframe was basically up slightly, and the spend was up about 3%. QSR was driving the majority of that. Mid-scale, what they call mid-scale dining, traffic was down about two and spend was up about one. And then casual was also traffic was down and the spend was up. So it's kind of mixed if you think about the various segments within restaurants. As we've also talked a lot about, though, we participate in lots of different segments. We continue to see growth opportunities in places like health care and certainly education. Retail sector continues to be a growing food service segment. And so there continues to be lots of areas of growth out there. And we've also talked, and it's been a focus for us for a few years now, but it continues to be, is the ethnic segments within restaurants continue to see growth. And depending on, you know, that's somewhat maybe a little more geographic-based, but we see, you know, solid growth in certain ethnic segments as well.

Okay, helpful. I wanted to see if there was maybe a change of tone in any way regarding your comments, and it sounds like it's more consistent. The next question, if I can sneak another one in before the final one, digital ordering now at 50% of local case growth ordered. That would suggest maybe we're at some type of a tipping point where obviously the marketing associates are doing less ordering and they're doing a lot more servicing or adding value to their customers. Could you remind us whether we're now at the point where the level of marketing associates is relatively stable despite the expectation of local case growth or maybe we can get to a point where the best marketing associates can serve more clients and just be more overall profit additive to the corporation?

Sure, John. That's a good question. So we've actually been over 50% for a few quarters now, but we have kind of hit this. I think it's an important question because it's a good percentage of our business that is online. And remember, this is the local business we're talking about. Our national or contract business, a lot higher portion of that is actually online. done online or through things like EDI. But within this local segment, about the same time a year ago, we also talked about we were adding some marketing associates. We've kind of gotten through that addition, and we felt like that was real important at the time because we had now had some tools available to us that were enabling us to target where those resources could go. Think about that as where we had some bigger maybe share gaps or share opportunities. And once we had identified that, we wanted to make sure we were – focused there. If we think about it today, given that percentage of ordering, given some of the additional tools we continue to provide our customers and our organization, I do think we're at a place where we're somewhat stable from a selling resource perspective. We are seeing larger territories. We think that's a good thing. but we aren't looking at this as a way to dramatically reduce or change our selling resources. We continue to believe they're a very, very important part of our model, and we know from our customer feedback that they are highly valued. So it's really about continuing to give them more tools to help them be more effective and obviously more consultative, but also making sure that our customers have the opportunity to do business with us the way they want to, which has been also our focus and our model.

Great, thank you for that. And then the final question, the acquisition of classic drinks, which does wine and spirits in Ireland, is that a one-off for you? Obviously the U.S. has, especially even on a per-state basis, has a lot of unique challenges in terms of wine and spirits distribution, but is that a unique to Ireland type of business segment for you, or might there be other types of applications in your geographies around the world in that type of segment?

I would say it's a little more unique to Ireland or maybe some parts of Europe. In Ireland, we sold a small amount of wine and spirits. In that market in particular, the competitive set, wine and spirits is a big part of the competitive set. So the classic drinks acquisition really puts us in a great spot to compete more broadly in that overall market. And so I'd say it is a little more unique. They don't have nearly the state-by-state laws that we have here in the U.S., and so I'd say at this point think about it as something that's appropriate for that market but not something that is a strategic shift for Cisco. Thank you.

Your next question is from the line of Edward Kelly with Wells Fargo.

Hi, guys. Good morning. Good morning. I want to just start off with – a question on gross profit per case. Your gross profit dollars exceeded case growth in U.S. broad lines again after really kind of, I guess, stalling over the last couple of quarters, so obviously encouraging. I would imagine that this is reinflation, you know, normalization of inbound freight, better local mix. I mean, all things that are good for you and the industry, obviously. Is there anything else in here that was driving that, and should we expect that to continue going forward?

Yeah, I think, Ed, so I think the other thing you probably – I think you summarized it pretty well. The only thing I might add is our brand growth. Again, that's something, you know, 59 percentage points up, again, in our local brand sales discourse. So, I mean, I think that's – I'd say that's one other area that's certainly strongly impacting that. And so I think you're right. I mean, again, some of the – a few of the things that you did talk about, again, to Tom's point, you know, the – The inbound freight piece was a little bit of an overlap issue, I'd call it, that if you recall a year ago we were talking about was a fairly sizable impact for us. So there's probably some, you know, a little bit of heavier influence from that. But broadly speaking, I think the mix, the brand, you know, the more inflation and, again, normalizing some of the impacts we had on the inbound freight I think is certainly a fair way to look at that.

All right, and then just on the OpEx side, you know, the growth in OpEx moderated a bit from Q1, but, you know, still, you know, reasonably high, and obviously that's warehouse labor and driver pay. Just, you know, thoughts on, you know, where you are in terms of having to raise wages on both of those sides, and how are you thinking about, you know, the necessity of future wage increases? Just any thoughts on whether things are settling down at all there for you?

And I think what's happening is we are kind of at a new level, as we talked about, on the inbound side and certainly, I'd say, on some of the internal operating expenses. Having said that, so I don't think we're necessarily anticipating any larger or significant, you know, costs, like hourly increases that are going to dramatically change the OPEX going forward. Where we're very focused on is how do we go after some of those big cost buckets that drive the expense? And so in this business, as you well know, there are things like miles driven. There are things like cases per mile driven. So the efficiencies that we can drive that really impact the cost are the things that we're trying to focus on. And we've got a couple initiatives that we feel early days are helping us and performing well. We've talked about small delivery vehicles a bit in the past. We think that that's a mitigating factor in the fact that we can bring in kind of non-CDL drivers in that environment and deliver those cases at a little lower cost per case. So we're trying to do a lot of those things that ultimately help the overall cost, the operating expense, if you will, more broadly on a sustainable basis, knowing that we do have higher wage rates than we did in the past and that we'll probably continue to see that going forward. But I don't think it's a new spike that's coming in front of us. I think it's more we've now kind of hit that number and we're now just trying to manage the overall utilization of our headcount and our resources.

I think if I could add one thing to that also is, Just the – again, part of our – part of the challenge we were having was some of the retention of some of the newly hired associates. And so I think – which was then driving overtime, which was then driving other things that are kind of, you know, lower – a little bit lower productivity. And so I think some of what we're also making a significant emphasis on in terms of our hiring, our training, our onboarding processes to ensure that we do have a better retention rate with some of the hiring, both on the driver and the warehouse side, that I think – And again, to Tom's point, I agree. I think it's leveled out somewhat, but certainly they're not in a position where we'd say we're past the issue.

Joel, just one quick one for you on the tax rate. When you say the full-year tax rate at 25%, I think the adjusted tax rate in the first half is lower than that. How should we think about the back half tax rate? I guess that's what I'm asking you.

Yeah, I would just look at the whole – about a 25% run rate would be the way I would think about that. Okay. Thank you.

Your next question is from the line of AJ Jane with Pivotal Research.

Yeah, hi. Good morning. Thanks for sneaking me in. On the cost cutting that you've just announced, it sounds like those initiatives are mostly focused on U.S. operations. So I don't know if there's any international component for the headcount reductions, but can you give any additional geographic breakdown on the latest cost-cutting initiatives? And then within the U.S., what's the relative breakdown of the cost cuts between regional operating companies and corporate?

Sure. So I'll start here. So the discussion we had regarding the cost cuts here was exclusively focused in our U.S. business and and really in our corporate office and our corporate support. So I think this was not a, what I'll call, U.S. field related. It was, again, it was really specifically in our U.S. and corporate support operations. So I think some of the stuff we did talk about, you know, on a few of the certain items was related to, again, some of the infrastructure changes we had in bringing our businesses together in France. But what you're specifically asking about is U.S., is U.S. related only. Okay.

Okay, and I know you didn't want to provide a dollar amount for the cost savings in response to an earlier question, but can you at least confirm what you're expecting for overall restructuring charges that's associated with the layoff?

Yeah, AJ, we haven't given that out. We're not planning to.

Okay. Thank you very much. Thank you.

Your next question is from the line of Bob Summers with Buckingham.

Jake, good morning, guys. You talked about volumes being choppy during the quarter but coming back toward the end. But any comment on how January was and any impact from the shutdown?

I don't think we saw much of an impact from the shutdown. I think what I'd say is that we feel good about how the quarter has started, and we feel like it's delivering on the trajectory that we had hoped. Okay.

And then circling back to the cost-saving numbers, you know, when I think about the transformation and the smart spending and having a second-half impact, is it fair to say that you're trying to get us to wait that more toward the fourth quarter?

I don't know that we've said that, Bob. I mean, I think we've been pretty consistent in saying that we anticipated improvement in the second half of the year. Having said that, That doesn't mean day one in Q3, like, everything happens. And so there is a little bit of a spreading over the third quarter where things kick in, which I guess would then suggest the fourth quarter be a bit stronger. But we've been pretty consistent, again, as most of the second half. And, you know, as these things do happen, again, it's a little bit of a, you know, ramp over the course of Q3.

Right, of course. And then lastly, you know, as I think about all the expense savings that you've articulated, And, you know, are they sufficient enough to drive, you know, the expense growth, say, below 2.5%, which would allow you the opportunity to flex that spread up, which, you know, if you think about achieving the plan, at some point, you know, you'll have to overachieve on that spread for a couple quarters to get back on track. Is that fair to hold you to that?

I think it is, and certainly, again, we certainly acknowledge that and, again, certainly continue to look for acceleration of opportunities there. But, yeah, I think that's fair. Okay. Thanks.

Your final question is from the line of Andrew Wolf with Alube Capital Markets.

Thanks, and good morning. So the quarter, the U.S. local case growth, I think you could face the toughest year-ago comparison of this economic cycle, if you will. So given the commentary you just made, Tom, that you like how January is, and what you said about the macro environment, really, I guess, the idea that you get easier comparisons, it shouldn't be too much of a leap of faith for us to begin to model somewhat better case growth than you showed this quarter?

Look, I think I'd start with, and we talked about this prior quarter, and we talked about it again here, In the second quarter, we lost cases from acquisition that we did a year ago, HFM, also a couple of large national customers that we lapped. We have another acquisition that we're going to be lapping that we did last year, a larger one than the ones we've done, that we're going to be lapping kind of in the third quarter. So I would say my commentary around the start to this quarter is it's in line with what we had hoped and what we expected, and so we feel generally good. Having said that, you guys all know, many of you live in the frozen where the polar vortex happened a week ago. There's always things that come up and happen throughout the quarter that we're all having to deal with And so, you know, you see little impacts from things like that as well in certain parts of geography. So I would just say we feel good about the momentum we've had. We feel like we're on the path that we had hoped for. And I don't think there's anything that would necessarily change your thoughts, your projections one way or another. I think you should, you know, the commentary we've given is we feel good about the back half. We feel like we can deliver the project. incremental upside that we've talked about, primarily driven by a lot of the cost activities. And we're feeling pretty good right now.

The only thing I would add to that, just a slight caveat, is just remember, I mean, our third quarter, March is our big month. In other words, so certainly a couple, again, talked about, as Tom said, some decent trends coming out of this thing. But, yeah, obviously our Q3 is made or broken to some extent by March. So just as a reminder of that.

Sure. Thank you. Both of those comments. And just to close on product cost inflation and talking about how it reflected, and we can see those in the numbers to cover in the reports as well. Just curious, do your systems and management allow for that to be passed through, if possible, almost real time, number one? And how about competitively? Is there just a normal lag, just a sense that nobody wants to be the first guy to move up prices or or do these prices get through pretty much as they occur?

Hey, Andy, I think what I would say to that is that just keep in mind the order of magnitude of these things, too. I mean, what we always talked about is that this industry with a couple percent inflation typically has been historically able to pass those things along, and so certainly we continue to feel good about that. And I think, you know, a little bit of a lag on our, you know, if you think about half our business being a contract with some type of cost plus, there is typically a little bit of lag in terms of when we actually are able to book, you know, cost increases and then pass that through. So it's not sort of an immediate thing. And on the local side, again, I would just say in these times of what I call modest inflation, I think we generally feel pretty good about our ability to pass those things through. So. I wouldn't call us in a place where we've got some rapidly accelerated inflation. I think we're at a pretty good inflation point and certainly feel pretty good about our ability to do so.

Okay, and if I could, lastly, just on the international gross margin contracting a bit this quarter, sort of a trend, is that still mainly driven out of the U.K. with the cost inflation they're getting because of their currency, or is it more broad-based?

It's primarily U.K., a little bit also in Mexico, but primarily U.K. Okay. Thank you. Thanks.

Thank you for joining us today. This concludes today's earnings call. You may now disconnect.