Sysco Corporation

Good morning and welcome to Cisco's third quarter fiscal year 2019 conference call. As a reminder, today's call is being recorded. We will begin today's call with opening remarks and introductions. I would like to turn the call over to Neil Russell, Vice President of Investor Relations, Communications, and Treasure. Please go ahead.

Good morning, everyone, and welcome to Cisco's third quarter fiscal 2019 earnings call. Joining me in Houston today are Tom Bonnet, our Chairman, President, and Chief Executive Officer, and Joel Brade, 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 investor 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 Binet.

Good morning, everyone, and thank you all for joining us. I'd like to start off this morning with an overview of our third quarter performance and a discussion around our business segments and the key highlights for the quarter. Following that, Joel will cover the financial results in further detail. Overall, We are pleased with our overall operating and financial performance for the third quarter. We delivered improved year-over-year growth in line with our expectations and managed costs well, including the ongoing cost savings associated with our business transformation initiatives. The improved pace of performance for the second half of fiscal 2019 that we previously spoke of is, in fact, taking shape. And while we still have work to do, We remain confident in our ability to deliver our adjusted operating income growth target and now expect that to be at the low end of the $650 to $700 million range. Joel and I will both elaborate on this further. From a total Cisco perspective, our third quarter results include increased sales of 2.2% to $14.7 billion, gross profit growth of 2.9%, an adjusted operating expense decrease of 0.4%, which translated into an adjusted operating income increase of 16.6% to $620 million, and an adjusted earnings per share increase of 17.4% to 79 cents. Turning to U.S. restaurant industry data, the overall sales trends remain mixed. According to BlackBox and Naptrack, we saw some choppiness throughout the quarter. as March data was generally positive compared to February, in part due to weather, which negatively impacted February sales. Additionally, same-store sales were positive for the quarter, although traffic once again declined. However, even with this recent choppy industry performance, the overall macro trends remain generally favorable for our customers, as illustrated by continued low unemployment, which was at 3.8% for March, and strong GDP growth for the first quarter at 3.2%. Economic growth in the international markets in which we operate was mostly positive. This includes modest growth in the food service sector, although we continue to see the impacts of Brexit on our UK business due to uncertainty and low consumer confidence. In Canada, the Consumer Confidence Index continues to rise, with March seeing the third consecutive monthly increase. with economic forecasting the Canadian food service industry to grow 0.6% in real terms or 4.1% on a nominal basis for calendar year 2019. Additionally, we continue to see reasonable overall trends in the other international markets where we do business. As we discussed last quarter, we anticipated seeing an increased benefit from our transformation initiatives beginning in the second half of this year. and we began to see those benefits show up this quarter. Overall, our results included a bit softer top line than expected, offset by good overall expense management, which delivered solid operating profit performance that was in line with our expectations. Examples of initiatives that are driving benefits from an expense management perspective include our field finance transformation and the corporate office administrative restructuring, which we implemented last quarter. As it relates to acquisitions, In April, we acquired J&M Wholesale Meat and Imperial Foods, two smaller Central California distributors. J&M Meat is a food service distributor that specializes in key center-of-the-plate products, and Imperial Foods carries dry canned good products, which both are complementary to our existing broad-line business in the Central California area. They also provide Cisco with the opportunity to further extend our reach to the important Hispanic customer segment. we will begin to see the impact to our business in the fourth quarter from both of these acquisitions. Additionally, in the quarter, we made the decision to sell our Iowa premium cattle processing business. While our three-year plan forecast included positive operating income for this business, we believe the divestiture of this business is in alignment with our strategic priorities and allows us to focus on our core strength as a distributor. The transaction will result in a reduction of planned operating income of approximately $25 million and is the reason for us now projecting to achieve the low end of our adjusted operating income growth range. Now I'd like to transition to our third quarter results by business segment, beginning with U.S. food service operations. Sales for the third quarter were $10.1 billion, an increase of 4.1%. Gross profit grew 5.1%. including an improvement in gross margin of 18 basis points. Adjusted operating expenses grew 2.3%, and adjusted operating income increased 10%. Total case volume within U.S. Broadline grew modestly at 2.1% for the quarter, of which 1.3% was organic. However, we delivered relatively solid growth in our local business, as local case growth was up 3.1%, of which 2.2% was organic. We are pleased with the gross profit growth we delivered for the quarter, which was impacted by a number of factors, including continued positive momentum from category management as we continue to deepen our relationships with our strategic supplier partners, year-over-year favorability from the impact of inbound freight, and continued growth in our Cisco-branded products, which increased by 28 basis points with our local customers this quarter. In addition, the inflation rate for the quarter was 2.3% in U.S. broad lines, up nearly a point from the second quarter of this fiscal year. Technology continues to be one of our fundamental enablers of growth as we transform our business to serve our customers in ways that best meet their needs. We are continuing to provide new capabilities and tools to enable an improved experience of doing business with Cisco, including new ordering tools, which has driven our e-commerce ordering utilization to more than 53% with our local customers. From a cost perspective, Within U.S. food service operations, our expense management was solid, as adjusted operating expenses were 2.3% for the quarter. While we continue to see supply chain cost challenges in the warehouse and transportation areas, we are seeing positive momentum from our recruiting, onboarding, and retention initiatives. These challenges were partially offset by continued improvements seen as a result of our routing optimization initiatives and ongoing process improvements. Furthermore, our finance transformation and smart spending initiative have also provided benefits in the quarter. Moving on to international food service operations for the quarter, sales decreased 1.5%, gross profit decreased 3.1%, adjusted operating expenses decreased by 5.8%, and adjusted operating income grew 30%. We saw solid overall performance in Canada with strong top-line growth and solid gross profit dollar growth of more than 5%, driven in part by an inflation rate of 2.6%, along with strong expense management partially benefiting from our ongoing regionalization efforts, which are progressing well. In Europe, we continue to have mixed results. The U.K. continues to feel the effects of Brexit uncertainty, causing depressed consumer confidence. However, our Brexit U.K. business continues to stabilize operationally, as a result of our multi-year initiatives to transform the business. In France, social unrest continues to impact tourism and consequently food away from home consumption. Our sales performance during the third quarter was adversely impacted by this unrest and by some operational challenges associated with integrating Break France and Davigel into Cisco France. That said, the overall integration and supply chain transformation continues to be on track to deliver the long-term benefits that are part of our multi-year plan. As for our business in Latin America, we continue to see growth opportunities in this region, both with our chain restaurant customers and with our expansion of cash and carry locations to complement our broad-line footprint in both Costa Rica and Panama. Moving on to SGMA, we continue to make disciplined choices in an effort to deliver improved profitability. In Q3, we saw expected softness in the top line due to transition customers, while seeing gross margin increase by 28 basis points year over year. Solid expense management drove adjusted operating expenses down 7.1% versus prior year, resulting in significantly improved operating performance. In an effort to improve overall profitability in this important segment of the business, we will continue to take a very disciplined approach to growth as we move forward. Lastly, in our other business segment, we recently announced the restructuring of guest supply. As the industry landscape evolves, we are focusing on optimizing our business model and creating a more focused and agile organization to better meet the changing needs of our customers. The new operating structures created three distinct business units under the parent company Guest Worldwide. The business units include Gilchrist & Soames, our amenity manufacturing unit, Manchester Mills, one of the world's leading textile producers, and Get Supply, which serves the world's top hotel chains and independent properties in over 100 countries as a full-spectrum distribution solution provider. In summary, we continue to feel good about the fundamentals of our business. Our customer and operational strategies are firmly aligned around enriching our customers' experience of doing business with Cisco. and we remain focused on engaging our 67,000 dedicated associates around the world to deliver against our financial objectives associated with our three-year plan. Let me now turn the call over to Joel Grade, our Chief Financial Officer.

Thank you, Tom, and good morning, everyone. I would like to provide you with additional financial details surrounding our performance for the quarter. As Tom mentioned earlier, we saw improved year-over-year results for the third quarter. Although we saw some softness in the top line, our earnings reflect solid expense management and strong adjusted operating income growth, which are in line with what we previously stated and are a result of our enterprise-wide transformational initiatives. These initiatives, which are designed to streamline efficiencies and allow us to reinvest in the business to facilitate continued growth, include our finance transformation roadmap, smart spending, and the Canadian Regionalization Initiative. For the third quarter of fiscal 2019, total Cisco sales grew 2.2%. Foreign exchange rates negatively affected total Cisco sales by approximately 1.1%. In our U.S. broad line business, we experienced 2.3% inflation driven by a few categories, including the frozen potato, poultry, and meat categories, and we are managing this modest increase in inflation well. Gross profit in third quarter increased 2.9%, and gross margin increased 14 basis points, while adjusted operating expenses decreased by 0.4%, resulting in strong adjusted operating income growth of 16.6% to $620 million. Changes in foreign exchange rates decreased adjusted operating income by 34 basis points. Although it will vary from quarter to quarter, we are focused on maintaining the 150 basis point gap between gross profit dollars and operating expense dollars that we committed to as part of our three-year plan in order to achieve our adjusted operating income growth target. Turning to earnings per share. Our adjusted earnings per share for the quarter increased 12 cents to 79 cents per share. Our EPS results this quarter were impacted by our strong operating income, adjusted tax rate, foreign exchange impact, and stock option exercises. I would now like to discuss our tax rate for the quarter. The GAAP effective tax rate of negative 2% for the third quarter of fiscal 2019 is primarily attributable to the determination made during the quarter to recognize the favorable impact of 95 million of foreign tax credits generated as a result of distribution to Cisco from our foreign operations at the end of fiscal 2018. Our adjusted tax rate for the quarter was 21%. Looking to our fourth quarter, we would expect our effective tax rate to be in the 23% to 25% range. Now turning to cash flow. Cash flow from operations was $1.4 billion for the first 39 weeks of fiscal 2019, which is $244 million higher compared to the prior year period. Free cash flow for the first 39 weeks of fiscal 2019 was $1 billion, which was $233 million higher compared to the prior year. The improvement in free cash flow was primarily due to last year's pension contribution, partially offset by cash taxes and the impact to working capital from an increase in day sales outstanding. Net capital expenditures totaled $367 million for the first 39 weeks of fiscal 2019, which was $10.8 million higher compared to the prior year period. For the full year, fiscal 2019, We now expect a capital expenditure forecast of approximately 1.1% of sales, down slightly from our previously stated 1.2%. That said, there are no changes to the prioritized order of capital allocation, which is as follows. Investing in the business, consistently growing our dividend, participating in M&A, and a balanced approach to share buybacks and paying down debt. As Tom mentioned earlier, with the anticipated sale of Iowa Premium, we expect to achieve our target at the low end, the $650 to $700 million range, as a result of our planned operating income being decreased by $25 million. In summary, we saw improved year-over-year results for the third quarter, led by continued momentum from improved underlying business performance, solid local case growth, and good cost management. That said, we have more work to do in order to achieve the financial objectives of our three-year plan, although we remain confident in our ability to achieve these objectives. We are committed to serving our customers and delivering at a high level of execution in all areas of our business that will improve our financial performance in both the near and long term. Operator, we are now ready for Q&A.

At this time, I would like to let everyone know, if you would like to ask a question, please press star and then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question is from Christopher Mandeville from Jefferies. Your line is open.

Hey, good morning. Can you speak to the gross margin improvement in the quarter and maybe help us understand those reference impacts by order of magnitude. And then, Tom or Joel, as it relates to private label penetration, it was, again, expansion, but it was one of the lower rates we've seen in recent quarters. So maybe you could kind of help us understand that as to whether or not it was an anomaly and we can return back to that 50 to 60 bps expansion going forward or any color would be appreciated.

Yeah, sure, Chris. Good morning, Joel. I'll start. I think the way I would think about that, again, it's really balanced across some of the levers, I would say, but, I mean, certainly our continued opportunities in our Cisco brand certainly are a strong driver, as well as continuing category management efforts when we continue to, again, obviously, it's not what it was five years ago where we had this giant year-over-year jump. But the reality is we continue to enhance our relationships with our suppliers and continue to drive category management as well across our business. And so I think those are a couple of the areas that certainly are driving, again, I'm interacting with a margin percentage, but again, I'm really talking about what we think about most, and that is our gross profit dollars. We obviously also have some favorable benefits of some inflation. Inflation in our world clearly is something that ultimately Certainly in the moderate range it's at today is a good driver of opportunities, again, to move, to continue to push cost of goods through to our customers. And so that's certainly beneficial in terms of dollars and gross profit. And I would say it's not necessarily at the level that's detrimental, really. Again, the comment that I think we made is just, you know, we're managing these cost of goods inflation well, and I think that's really related to the fact that this is, yeah, this term, inflation number is really in our wheelhouse in terms of where this thing functions best. So I would really say those are some of the main drivers of what we're looking at here, and just in general, some of the tools that you've heard about in the past in terms of, you know, again, revenue management continue to help us to drive our margins as positively.

Hey, Chris, this is Tom. There's just maybe two other things that I'd We did get some positive year-over-year benefit on the inbound freight side, which, as we've talked in the past, does impact gross margin. And then your specific question around Cisco brand, you know, we look at 28 basis point improvement as a very positive number still. As long as that continues to move in the right direction, that's a reflection for us of a couple things. our customers still reacting positively to all the Cisco brand. And two, we continue to bring innovative ideas and solutions to the market. So we actually do that to be a solid number. While it might be a little less in the growth than you've seen in a couple other quarters, it's still a really good number.

Okay. And then just my final question would be, as you brought it up, Joel, inflation, what should we be expecting in the coming quarter? And if there's a willingness, would you guys be able to disclose that? organic case growth quarter to date?

Yeah. So, I mean, I think the – just on your question on inflation, I mean, I think certainly our forecast is to continue to see, I'll say, moderate levels of inflation as we move forward, certainly over the next couple quarters. There's nothing that jumps out necessarily that would be really significant in terms of the overall inflation numbers. So I would say to expect certainly an additional, even moderate level of inflation over the next couple of quarters. Organic case growth, I think that was part of the US Food Service Office, 2.2% was the overall number that was organic.

But you're asking year to date, right, Chris? And that's quarter to date. Oh, quarter to date, okay.

Yeah, just to try and strip out some of the noise from weather and what have you, and maybe like the calendar shift for Easter as well.

Yeah, so what we talked about there is our local case volume for the quarter, the question I was answering, was 2.2%. It was organic. Total case volume, organic, was 1.3%. New spot line.

But is there any real comment for April?

Not really. I mean, we continue to, you know, I think we feel good about the continued momentum of the business, and I don't think there's anything necessarily. There was a bit of an Easter shift, but not a big shift, given the timing of when it fell last year in the quarter versus this year.

Okay. Thanks, guys.

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

Hi, guys. Good morning. Good morning. I want to start with OpEx, and I was hoping that you could give us a little bit of help here. I mean, obviously you had a big quarter from a cost perspective. Maybe just dig in a little bit more related to the drivers. And I'm asking this question because I think a lot of the accelerated efforts that you guys have been talking about weren't supposed to be at a full run rate this quarter. So I'm just trying to figure out how we think about OpEx going forward. And then as part of this, Q4's comparison looks pretty hard. And I think at a workers' comp benefit last year, they got the lap. Can you get to that 1.5% spread in Q4?

Well, I'll start. I mean, I think a couple of things I would say to that. Number one, I'll maybe take the last point first. You know, the one-and-a-half point spread, obviously, and I think I even said in my prepared comments, is something we looked at over the course of the three-year plan. That doesn't mean that necessarily every quarter is going to look the same. Some actually are. Some actually possibly be more, as obviously we've seen both here. I think the way I would look at it, though, I mean, again, as we did at Signal, we did anticipate some improved performance in the second half of the year. Obviously, some of these benefits started to kick in from our finance technology roadmap, smart spending work, the academy regionalization, some of the other administrative cost work that we did around some of our corporate office transitions. I think the – again, we feel good about our – Those things kicking in, as we said, in the second half of this year, as we have it in next year as well. I would also call out just, you know, again, overall, our operating performance continues to be pretty strong in the expense line. That's in the face of, actually, we had a little bit of a fuel headwind this particular quarter. That was about three cents a case. So, I mean, we had, I think the question is, do you expect this to continue in these areas? I do, to your point. There are some headwinds that we're anticipating that we're going to be up against in the fourth quarter, but certainly, as we've talked about here for a little while, we certainly anticipated our leverage for the second half of the year to be better than the first half, and I think we certainly start to see that.

Okay, and then just a follow-up on CapEx. So the CapEx guidance is, you know, is down a bit. Can you just talk a bit about what's driving that? I don't know if Iowa Premium has anything to do with it. And how sustainable, you know, a rate of sort of 1.1% would be going forward?

Well, I mean, again, the way I would look at that, I mean, number one, it's not that often we're capped. But, I mean, the reality of it is, you know, we – spend our capex and make our investments based really, truly on the needs of the business. There's been absolutely no change in terms of our perspective on our capital allocation priorities that always start with investment in our business. We're obviously very committed to doing that. We've got a lot of change programs and things transitioning in our organization that'll continue to require investments. I would just tell you from a timing perspective, some of those things happen Again, things do move around in the business in some ways, and so some of that's probably a little bit of timing as much as anything. But I would definitely not take away that there's some change in terms of the way we're looking at forecasting our capex. We just adjust spending and investment in terms of the needs of the business. Great. Thanks, guys. Thanks, Ed.

Your next question comes from the line of Karen Short from Barclays. Your line is open.

Hi, thanks. First thing I just wanted to ask was, in terms of the composition of the now, I guess, kind of $650 million, is there any change to the breakout between gross profit and then the supply chain versus the admin?

No, Karen, so there's not. The only shift at all is related to the anticipated sale of the business, but no, there's no bucketing difference, if you will.

Okay, and then the second question I just want to ask, I know you obviously mentioned and you have been mentioning positive same-store sales, but traffic weakness. I was just wondering if you could talk a little bit about trends with traffic and, I guess, same-store sales on a true, like, mom-and-pop local basis in terms of the independence versus kind of the microchains. Any patterns or differences you could point to there?

Yeah, good morning, Karen. This is Tom. I mean, look, I think We have seen certainly some choppiness this quarter in particular, and I think there are probably a bunch of different things driving that. But it depends really on what source you look at. I mean, NPD would call out that, you know, that while overall spend is up, traffic is up in some areas as well and down in others. And Black Box and NAPTRAC, they're probably a little more consistent than they have called traffic down really across most of the segments. So I think it's driven by everything from some weather choppiness in Q3, our Q3, and mostly in February, and then, I think, again, kind of consumer efforts during that time. The small chains seem to be doing a little bit better, so that's going to be your kind of micro chains. And then the pure independents, at least in this quarter, according to NPD, tend to be a little bit softer. But I would say from our perspective, we have seen necessarily any major difference in trend lines that we've experienced over the last couple of quarters. So we continue to feel like this independent growth that we've had in that sector is doing well. And we continue to feel pretty confident in our ability to continue to grow and take share in that space.

Okay, sorry, and then just last housekeeping. Corporate came in on a dollar basis a lot higher than I would have expected given the layoffs that you'd announced. I don't know if that's just an allocation issue or what, because I would have thought on the dollar basis it would have been quite a bit down sequentially in your rear.

Are you talking about the last kind of the – corporate layoffs. We're talking in total administrative costs. Obviously, there's a lot of things that are part of our finance technology roadmap that are very much field focused. And so, in fact, one of the things we talked about in the first half of the year is that there were, again, why did we feel confident about this? Because there had been notifications of a sizable number of field personnel. And so, I would tell you, I think the majority of what you're seeing is pretty is probably even more field-focused than corporate, but it's balanced between the two.

Okay, thank you. Thank you.

Our next question comes from the line of Andrew Wolfe from Loop Capital Markets. Your line is open.

Good morning. I wanted to follow up on the cadence of sales question that people asked about. You guys said, you know, January was strong. I know good weather comparison, February, but not good. Should we take away from that sort of March and April of somewhat normalized? I mean, people are trying to get, you know, we're obviously trying to get a sense of whether the industry is slowed or not, in your view, sort of on a normalized basis.

Yeah, I think we would say that we feel like there are certainly things since the weather impacts in the early part of the quarter, things have stabilized.

And I know you gave us, I may have missed this, but I heard a technology forecast for Canada. Do you have one for the U.S. that you might be able to share with us?

As you know, Technomic kind of gets out ahead of it, and they do it by sub-segment. I may have that information. Let me see if I have it, I can get it to you. We may need to get back to you on that, but we generally do have that information.

Okay, and I just have one other question unrelated to sales. So you took a $35 million charge that was related to the – a change in the business technology strategy. So could you expand a little upon that, what the change is in your business technology strategy?

So just, can you ask that question one more time, maybe?

Of the $72 million, you know, charges he excluded out of operating expense, $35 million is what's allocated for what you call the change in business technology strategy. Is that basically, you know, going to the cloud and could you expand on, you know, so we can understand? Yeah, it's some of that.

It's also kind of a variety of things. I mean, there was actually an accelerated depreciation we took in Europe that was related also to a technology change. So, you know, there's been a few things that, again, that number also, it's just, you know, accelerated our DNA a little bit, but I wouldn't say there's one thing that it fell into. There are a number of things that are just parts of our technology strategy that are included in that number, and there's not necessarily one big thing there. The takeaway would not be that we somehow have a significant change in technology, because we do not. There's just a variety of things going on.

That was what I was trying to get to, so appreciate it.

Yeah, yeah. Think about this more specifically around the finance transformation, which is a technology component of it, and then the European work we've been doing where we have an ERP in France that we've been updating. And so those are the two main drivers of it.

Thank you. Yeah. Your next question comes from the line of Marissa Sullivan from Bank of America, Maryland. Your line is open.

Great. Good morning. Thanks for taking the question. I just wanted to touch on fuel quickly. You called out that it was a slight headwind in the third quarter. Well, how should we think about fuel in the fourth quarter as it impacts your area?

Yeah, I anticipate some of those continued headwinds as we head into the fourth quarter and probably a little bit as we head into next year as well.

Gotcha. And then, you know, I haven't heard you guys talk about category management in a while on these calls. I'm wondering if Was there anything you guys were doing differently in the third quarter that kind of, you know, made it of greater impact? Anything that you're planning for the fourth quarter, as we should think about personal marketing, Catman?

Hey, Marissa, it's Tom. No, I wouldn't say anything unique. I think what we were just trying to highlight is we continue to – it's an ongoing process. It has been now for years. And we're starting to do some deeper work with some of our more strategic supplier partners and Think about that more as some potentially long-term benefits as we begin to partner more deeply with some suppliers.

Gotcha. And are you seeing any impacts, you know, or any customer feedback on category management? Are they liking what you're doing or is it, you know, are they having to adjust to assortment changes?

No, I think we're at a point now where it's, you know, early, early days, so quite a few years ago now, I think because we were changing some suppliers in some areas or products, that was creating some choppiness. But we've actually continued to have a very good feedback from our customers around the work we're doing in Catman. Obviously, it drives cost benefit for them. They're very excited about that. And as I mentioned, we are getting more focused on strategic partnerships so that we can have more consistent supply for the long term. So it's generally been very positive.

Thank you so much.

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

Hi. Thanks for taking the question. Maybe first just on the changes to guidance related to Iowa premium. I think you said the entire kind of reduction in guidance is due to Iowa premium, but if we're stripping $25 million out, obviously, you know, that's not necessarily the low end. So when you say the low end, are you saying, you know, $650 to $675 effectively?

Yeah, no, I think, and here's the way I would think about that, Judah. I think what we talked about really, our previous guidance was really around the midpoint of the range, and so if you do, you know, 650 to 700, that would be 675. Really, what we're talking about here is the 25 million related Iowa premium, and yes, that is the only adjustment to our guidance at this point, which takes us from that midpoint down to the lower end of the range.

Okay, that's helpful. And switching gears, I thought you said that freight was a tailwind on the inbound side in Q3. Is that right? Are you telling us that you're actually getting a benefit there or that it was less of a headwind year over year? And any commentary around kind of the freight situation and driver shortages and ability to retain drivers lately would be helpful.

Sure. Just remember, we have to separate a couple things here. So inbound is our gross margin. And I did mention that, you know, we had some year over year positive impact of that Again, because a year ago, we were still dealing with quite a few challenges that related to inbound freight. So I think about it as it has gotten better. We're not feeling that kind of impact, and there was a piece of that gross margin improvement that was driven by that this year. As it relates to outbound, we continue to have, you know, certainly be managing that, I think, better than we were a year ago as well. but we still have challenges from a transportation perspective, although, albeit, I think the work that we're doing around recruiting and retention is much improved, and we are seeing positive impacts across our operations versus a year ago in that regard.

Yeah, just one thing I'd just add to that. I think I would characterize the inbound freight as less of a headwind and not necessarily a benefit. In other words, there is some level of resetting in the overall structure that's happened, but relative to Tom's point, to a

Great, thanks.

Your next question comes from the line of John Heinbockel from Guggenheim Securities. Your line is open.

So, Tom, maybe 18 months ago, you guys selectively added MAs in a few markets. So how are they performing? And then, you know, if you think about the opportunity on the share side, Is there an opportunity today to go out and redirect some of the cost savings into more MA hiring to try to drive more share, or is that not productive?

Hey, good morning, John. Thanks for the question. So I would say, first of all, we felt really good about the work we did around MAs a little over a year ago. And if you recall when we talked about it back then, what we really focused on was, few tools that enabled us to do a better job of understanding where the biggest opportunities were and then applying those resources to those specific geographies or areas. And so we continue to believe that that targeted approach is the right approach. And as we think about over time, you know, so it's not as much just about adding MAs for the sake of adding MAs. It's about adding them where we now know we have the biggest opportunity to succeed. And so we'll continue to selectively do that and we're all the time evaluating our territories in each of our opportunity areas, and that may encourage us to shift in certain areas versus others. But I would say just outright adding a bunch more MAs for the sake of that is not really our strategy. We continue to see our territory size get a little bit larger as we are able to provide the marketing associates with more tools and support. We talk a lot about the tools and support that we offer our customers on that side of the business, and we continue to do, I think, a really nice job of building out those capabilities, whether that be things like menu planning analysis for our business review process where we have our chefs engaged. So I think we're continuing to focus those total resources on the local side of the business, not just the marketing associates, but leveraging EMAs to bring these other kind of tools and capabilities that we've built behind them to the market.

And then if you guys started to give thought to, you know, when you provide the next plan, right, what's the timeframe for that? And, you know, is the idea another three-year plan or, you know, or sort of shift to, you know, a year-by-year outlook?

I don't think we – we haven't made a call on that yet, John. And so we're – I think we're still working through ourselves what's the best approach. And so I'd say kind of more to come. We'll certainly talk with you all when we're in a place we want to do that.

Okay, thank you.

Thank you.

Once again, in order to ask a question, please press star and then the number one on your telephone keypad. Your next question comes from the line of A.J. Jane from Pivotal Research Group. Your line is open.

Yeah, hi. I know you guys don't typically comment on case growth internationally. And Tom, you did mention in the preferred comments that, you know, top line in Canada is really strong. And then you also talked about, you know, some of the challenges in France and the UK. But is there any way you can give some directional commentary about organic case growth internationally, specifically for, you know, Canada, the UK and the rest of Europe sequentially and year over year?

Honestly, EJ, I think it's part of the challenge for us in this area is the way we are still, I would say, managing through that transition. The cases that we talk about in the U.S. and the consistency that we can provide you guys does not exist in that business yet. And so potentially over time we might be in a place to do that, but today the way we still account for the sales and the way we think about the cases or the pounds or the units that we sell in different parts of the world are not kind of on a consistent basis. But what I did say, and I will reinforce here, we did have strong top-line growth in Canada. And what we said in Europe is, look, we had a couple of things going on in Europe that are impacting us. Certainly the U.K. and everything with Brexit has created some choppiness over there. Our sales are positive. It's just that they're not growing at the rate we would like them to or would want them to at this point. And then in France, I think we all thought the unrest that was going on, the social unrest in France, were divided. By now, it's certainly clear, and it just has not. And while that's, you know, it's not a huge impact because it's a big country, there's certainly still some things going on there that are creating issues for our customers and therefore us getting products to them. So, one way of saying, I think we still feel generally good about those businesses. We would have liked to see a little more top-line growth in in Europe in this last quarter. And that's kind of built into my prepared comments, driving that overall numbers. We feel good about the US numbers and certainly about Canada. We just don't have the information in a way that we feel like it's easily provideable to you guys.

Okay, thank you. Would it be possible to confirm how much you've allocated for severance in Q3 and year to date? I think there was some kind of breakdown provided last quarter for Canada and Europe, but I'm just wondering if there's any update on severance that includes U.S. food service, and also wondering if you can give your outlook for severance for Q4.

You know, as you hear Paul answer that, I mean, there are not gap wrecks. I mean, we do have a fair amount of detail that is probably the best I'd be able to give you here in terms of spelling that out. You know, again, obviously... If you think about the areas, you know, certainly really across our business, we've had with this finance technology roadmap, some of the work we've talked about at corporate here in the U.S. side, obviously the Canada regionalization, some of the work we've done in France in terms of those programs. I mean, obviously, again, some of that I think you'll see spelled out in some of our NOMGAP rec, but I think that's probably the best view of that. And the one thing I would say is there's some pretty sizable numbers in there, particularly the last four as it relates to Europe. Obviously, that was, well, not all inclusive. I would say that was obviously the biggest majority that was going to come there and lead to that part of the world.

Okay. And in terms of the impact from the recent headcount restructuring, will that be more reflected in Q4, or was the majority of that allocated in Q3?

Yeah, I mean, I think the majority of that, again, the majority of that is actually going to be within Q2, but then also here in Q3. So I wouldn't expect a lot of that to be reflected in Q4. On to the benefits, we're starting to realize here, as we talked about in the second half of the year and as we head into next year.

Okay, I have one final question, if I can. I think you've made some adjustments in the financials for accelerated depreciation year-to-date. I'm not sure if there was any impact. in Q3 itself, but I thought at this point you should have, you know, cycled the technology restructuring plan from a few years ago, and maybe I can get some clarification offline, but I thought conceptually at this point there shouldn't be any residual impact from the SAP accelerated depreciation unless, you know, your year-to-date adjustments are for Europe or, you know, unrelated to the previous year.

Yeah, I would think about it that way. I mean, we actually have some DNA, particularly on the D side. I increased this quarter that was related to, I would call accelerated depreciation in Europe for the most part. There's some, as Tom referenced earlier, there's some of the technology changes we're making over there that, again, allowed us to actually accelerate some depreciation there. And so the majority of the depreciation increase you're seeing is related to some technology transitions in Europe. So that's if you're right officer in the U.S. Okay, thank you.

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

Hey, great. Good morning, guys. Thanks very much for taking my questions. I wanted to just go back to the choppiness in the top line in the domestic business. Obviously, as you said a few times, it seems like more kind of February and weather specifically, but just wondering, was there a lot of variability that you could see by region? Another way of asking, was it basically the weather and largely February the way to think of it, or were there any other factors that might just be worth us knowing?

I would say nothing that was inconsistent with what you just said. When I talked about whether we saw certain parts of the country where there were more impacts than others, I wouldn't say nothing else beyond that that we saw.

Okay. And then just on, I appreciate the color on the Iowa premium versus the three-year plan, but as you had this quarter, very nice expense control. Just kind of curious, more from like a high-level perspective, like, you know, with the buckets that you're getting more of the, you know, kind of cost-cut efforts pulled to date, how much kind of lead time or planning is there with some of the levers that you have to pull? You know, kind of said another way, like, you know, kind of how much quarter-by-quarter planning or impact or not, is there any kind of way to think about that?

Maybe I'll start and then let Joel chime in. If you think about the way our business operates, we have regular operating expense, which is generally built into the businesses, that is going to have a pretty consistent cadence depending on volume and our top line being a big driver. A lot of that's driven by cost per unit. In addition, we've talked about big strategic initiatives like finance transformation, like Canada regionalization, like smart spending, that we have planned out and we believe, you know, we have a good view as to when those impacts would be happening. And then we have things like our last quarter when we announced the corporate restructuring that is more of a one-time event where, you know, we see that coming into the business. So a long-winded way of saying is I think generally speaking, our operating expense moves with our business performance, meaning our volume. And certainly the headwinds or tailwinds we see in the business, fuel being a great example of a headwind we're feeling right now. Certainly things like driver and warehouse turnover in the past and just the low employment rates driving higher cost of some of those roles in the company. But everything else is generally planned out and we have visibility to that except for these one-timers. Does that get at what you're asking?

Yeah, no, that was very helpful and did get at it. Thank you, Tom.

Okay. Your next question comes from the line of John Ivanko from J.P. Morgan. Your line is open.

Hi, thank you. I want to follow up on some comments that were made about maybe independent restaurants being a little bit softer in the March quarter, I mean, whether we adjust for weather or not. And, you know, in the context of the question, really what I'm getting at is, have you seen a significant rate of openings, you know, for independent restaurants? In other words, your addressable customer base may be over – the last 12 months and, you know, considering, you know, the amount of labor pressure that independent restaurants are facing and, you know, just, you know, margins which are in general lower than chains, are you actually seeing, you know, a pickup in closures on the independent side? You know, that's noteworthy even on like a very market-specific basis.

Hey, John. Good morning. Look, I wouldn't say anything that's unique that's happened there. I mean, as you, we all know, in this industry, You've got a lot of new business coming online all the time, and you also have folks that aren't closing. I wouldn't say that we have seen any dramatic shift in that area. As I mentioned, the different data sources have some mixed information, but all of them generally talk about positive spend, dollars being up, in that kind of 2.5% to 3.5% range. And then you have traffic generally down, with the exception of NPD, which is showing slight increase in traffic. So I don't think there's anything unique or anything in this quarter that we've seen that is highly different than what we've seen in the past quarters.

And is there anything to note, you know, by category or by regional, you know, that you're beginning to see? And obviously, you know, I think there's a lot of questions that are being asked you of, you know, whether you think, you know, there's a slowdown. And I think the answer, at least as it stands today, is no. You know, but when you look at, you know, different categories or different regions, is there anything interesting, you know, that you're seeing, you know, in the marketplace in a little bit more detail, either positive or negative, you know, that you can basically talk about? now that gives us, I guess, somewhat of a forecast of the future from Cisco's perspective as opposed to some of the third-party sources that you use for your data.

Not really. I mean, there's nothing else that I would tell you that we're seeing that's any different.

Understood. Thank you.

Thank you.

Your next question comes from the line of Kelly Benia from BMO Capital. Your line is open.

Hi, good morning. Thanks for taking my questions. Going back to expenses, again, it seems like there was a good amount of upside, at least in our model, on the international. Can we think about the performance this quarter? I think it was down about $30 million year over year. Is that kind of the right run rate to think about for the next few quarters international? And then maybe can you tie in just the impact of the corporate restructuring on the expense performance this quarter?

Yeah, can I start? And I think the answer to that is, I mean, obviously, we're continuing to do a lot of work there to streamline and make our operations more efficient. I guess I'd say that there is some run rate consistency there, but what I would also tell you is, I mean, we just have a lot of moving parts right now in some of our international business. What I would not necessarily tie it to, one of the things we've talked about in the past is the sizable transformation we're doing in France. I think the majority of that benefit really we start to see next year. So I would not tie a lot of that necessarily to that big restructuring that we're doing in our French business. But I would say generally speaking, I think it's fair to continue to see that as a relative run rate. Realizing, again, we've just got a lot of moving parts over there in terms of the transformation we're doing. So I guess my answer is generally yes, but again, there's Just realize things are going to move around quarter to quarter based on the amount of stuff we've got moving around in that business.

Okay, that's helpful. And maybe just in terms of the U.S. broad line business, can you talk a little bit about some of the specialty meat and produce, some of the categories that aren't necessarily part of the normal case growth and what kind of trends you're seeing in those other areas of the U.S. business?

Sure. This is Tom Kelly. Good morning. Look, I think we continue to feel really good about our specialty company strategy. As we've talked for a few years, we know that our customers certainly value broad line, but they also have needs that oftentimes they can be better met by some specialty companies. And in our case, you know, meat, seafood, poultry on that side, and then the produce at the fresh point. And so I think we continue to feel really good about overall what we bring to the market and the value proposition we have there. We've been working on ways of even helping our customers make that easier for them to procure products both from Cisco and from the Cisco specialty companies, and we're seeing benefits of that as well. And so creating the environment where it's easy for them to kind of do business with both of those entities as they need to and as they feel like they want to. And so versus feeling maybe like two or three different companies that they're doing business with the idea that they could do business with one Cisco and get the value out of that. So we continue to believe that's an important part of the market, and we continue to feel really good about the work we're doing there.

Thank you.

Your final question comes from the line of Bob Summers at Buckingham. Your line is open.

Good morning, guys. I just wanted to dig a little deeper into the transportation. Drive van spot rates have been contracting all year. Can you maybe talk about how that flows through in your business, either by talking about you know, the percent of business that you do at the spot rate. Maybe talk about how that spot rate influences contract rates, you know, as you may be threatened to move more to the spot market. And then lastly, how that impacts what you have to pay your drivers.

Hey, Bob. Again, kind of back to this conversation about transportation and cost. The piece you're really referring to is the inbound freight part for us, which does hit our gross margin. And we – We called out the paradigm, as we've talked a bit here this morning, about that we are seeing severe over-year improvement benefit there. It's not huge, and it's not something that, you know, is a major driver for us, but the market has come down, certainly from where it was a year ago, and obviously everybody benefits from that. We obviously try to minimize the spot market, because when that happens, That's the one that gets the most out of whack the fastest, and that's what happened a year ago. So we continue to manage that side of our business, mostly with contracts. But, yes, it certainly is that whole market comes down that affects both sides, the spot and contract side. And as it relates to our drivers, as we said, I think we've done a lot of work around both recruiting and retention and the way we're operating our business to improve as much as we can our driver retention. And so we feel better about where we're at than we were a year ago, but it continues to be a challenging part of the business, and I think will be as long as the market's the way that it is, meaning unemployment's low and there's a lot of freight on the road. So we feel much better where we are now than we were a year ago, but that doesn't mean that we don't still have ongoing challenges associated with hiring and retention of drivers. Good. Thanks.

That concludes today's conference call. You may now disconnect.