Sysco Corporation

Good morning and welcome to Cisco's second quarter fiscal 2020 conference call. As a reminder, today's call is being recorded. We will begin with opening remarks and introductions. I would like to turn the call over to Neil Russell, Vice President of Corporate Affairs. Please go ahead.

Good morning, everyone, and welcome to Cisco's second quarter fiscal 2020 earnings call. Joining me in Houston today are Ed Shirley, our Executive Chairman of the Board, Kevin Hurricane, our 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 29, 2019, subsequent SEC filings, and in the news release issued earlier this morning. A copy of those 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 Executive Chairman of the Board, Ed Shirley.

Good morning. Thank you, Neil, and thank you, everyone, for joining our second quarter fiscal 2020 earnings call. I'm proud to speak to you today as Cisco's new Executive Chairman. On today's call, I'll provide some introductory remarks about the recent leadership change, and then you'll hear from our new President and CEO, Kevin Hurrican. After that, Joel will walk you through our second quarter results. and then we'll take your questions. As you know, we recently announced senior leadership changes to accelerate the next phase of our development. This leadership transition was part of a deliberate and thoughtful process to ensure that Cisco is best positioned to enhance long-term value for all our stakeholders. While Cisco's performance has improved steadily over the last few years, we see a clear opportunity to accelerate growth. Kevin brings a demonstrated track record of delivering strong results and operational efficiencies within large and complex environments. He takes a strategic approach to winning in underdeveloped markets. We are highly confident he has the skill set and vision to capture the opportunities ahead. As executive chairman, I'll work closely with Kevin to ensure a smooth transition and provide input on key strategic priorities. Our board is excited about Cisco's future, and is fully supportive of Kevin, the leadership team, and all of Cisco's associates as they strive to continue to support our customers. I've had the opportunity to speak with many of you, and I look forward to continuing our dialogue as we move forward together. I'm now pleased to introduce Kevin, who will make brief remarks before handing the call over to Joel to discuss the quarter.

Thank you, Ed, and good morning, everyone. I'm excited to join you today for my first earnings call as Cisco's new president and CEO. And more importantly, I'm very excited to lead Cisco during this time in our company's history. I'd like to say a few words about what attracted me to Cisco and the compelling opportunity that I see ahead. For decades, I have admired Cisco's reputation as the market leader in cutting-edge food service solutions. Like Cisco, I've dedicated my career to excellence in supply chain, logistics, taking a customer-first approach, and leading successful teams. I've admired Cisco for its leadership, its brand, and its strong culture in these areas. When the opportunity arose to join the team, I immediately knew that this was the right next step for my career and a place where I could apply my leadership skill set and business passion. I also knew that this would present a unique opportunity to further strengthen the company as the market leader and enhance growth. Cisco's board and I collectively agree that there are opportunities to further capitalize on our scale advantages, win in underdeveloped markets, improve our performance, and increase operational efficiencies to unlock funding for growth. Our core strategy will remain in place, but we intend to accelerate execution in key areas to increase long-term value for all of our stakeholders. I look forward to working closely with Ed, the board, and our talented global team to deliver on our strategic plan. And I look forward to speaking and meeting with you, our associates, our analysts, and our investors. Your perspective on our business and the surrounding landscape will continue to be important as we move forward. Now I'll turn the call over to Joel so we can walk you through our second quarter results.

Thank you, Kevin. Good morning, everyone. This morning, we announced financial results for the second quarter of fiscal year 2020, which represented improved local case growth in our U.S. food service segment, primarily driven by our independent customers. I will start with second quarter results, continue with segment-specific commentary, transition into the first half of fiscal 2020 results, and then close with a general business update. Our total Cisco results for the second quarter include a sales increase of 1.8% to $15 billion, which was driven by US Broadline local case growth of 3.7%. Gross profit grew 2% to $2.8 billion and gross margin increased five basis points. We saw growth in our sales of Cisco brand products in the second quarter, which increased 27 basis points to 47% of local U.S. cases and 42 basis points to 38.3% of total U.S. cases. Adjusted operating expense increased 1.5% during the quarter, which resulted in an adjusted operating income increase of 3.9% to $626.9 million. Adjusted earnings per share grew 13.2% to 85 cents. I'll now transition to our quarterly results by business segments, starting with our US food service operations. Local case volume increased 3.7% versus the prior year period and has now grown for 23 consecutive quarters. As previously noted, we remain disciplined in our approach to managing our national account business, which was reflected this quarter in our total case volume growth. As a result, Total case volume growth was 2% for U.S. Broadline operations. Sales for the second quarter were $10.4 billion, which was an increase of 3.2% versus the prior year period. This includes the divestiture of Iowa Premium, our beef processing facility that was sold in the fourth quarter of fiscal 2019, which had a negative impact of $122 million for the quarter. Gross profit grew 2.4% to $2 billion for the quarter. While we are pleased with the gross profit dollar growth, gross margin declined to 17 basis points to 19.7%. This is primarily driven by a few key levers. First, we saw an unusually high rate of inflation, specifically in the dairy and beef categories. As a result, we were unable to efficiently pass inflation through to our customers. Separately, but still related, we saw a return to more normalized pricing in produce markets, compared to a sharp increase in the second quarter last year, which resulted in a negative impact to our gross profit dollar growth. We expect this year-over-year headwind to continue into the third fiscal quarter. Lastly, Fuel surcharges, which appear in gross profit for us, were less this year than in the prior year period. Turning our attention to costs, our adjusted operating expenses increased 1% to $1.3 billion. As we've discussed in our previous quarters, our labor costs were slightly higher due to our decision to retain driver and warehouse personnel in a tight labor market. We will continue to evaluate our staffing trends relative to our business model over the next couple of quarters. Additionally, we experienced a 12-day strike in Denver, which resulted in added costs from the business impact of continuing to serve customers during that period. Adjusted operating income increased 4.7% to $772 million within our U.S. food service operations segment. Moving to international food service operations, we had mixed results for the quarter. Our international results were modestly impacted by changes in foreign exchange rates. On a constant currency basis, sales increased 0.9%, gross profit increased 0.4%, adjusted operating expenses increased 2.2%, and adjusted operating income decreased 11.1%. Our business results in Canada softened for the quarter as a result of a slowing economy in some parts of the country and the loss of a large chain customer. Our business results across Europe were mixed. As mentioned during the first quarter call, we continue to experience operational challenges arising from our integration efforts between our two businesses in France, which is offsetting growth in our other international businesses. We expect this to continue through the end of our fiscal year. However, the UK business performance remains stable despite ongoing uncertainties around Brexit. We are continuing our work around modernizing the business and growing our customer base. In Sweden and Ireland, we saw positive results versus the prior year period stemming from a positive business environment and solid independent sales growth. we remain convinced that Europe will be a growth opportunity for the company in the years ahead. As for our business in Latin America, the companies are performing well and we remain excited about the growth opportunities in this region. We extended our retail cash and carry footprint from Costa Rica into Panama with plans to open more stores there in the future. In Costa Rica, we saw solid growth despite a slight economic slowdown due to the recent implementation of a value-added tax. In Mexico, the business has improved meaningfully year over year despite continued economic contraction. Our Sigma segment continues to show improved profitability as we remain disciplined and focused on our portfolio of customers. As a result, we saw planned top-line softness as sales decreased 5.3% versus the prior year period but gross margin expanded 62 basis points. Adjusted operating expenses were down for the quarter, driven by a focus on business and routing optimization, which led to an adjusted operating income improvement of $8 million versus the prior year period. We feel good about the continued progress we're making within Sigma and are confident in our ability to drive improved performance going forward. Finally, it is important to note that our core business is performing fairly well, as our adjusted operating income from operations increased 5.5% versus the prior year period. However, our corporate expenses increased due to several discrete items, such as costs from the Denver strike and other liability claims. Therefore, our adjusted operating income increased only 3.9% versus the prior year period. Now turning to our results for the first half of fiscal year 2020. Sales increased 1.2% to $30.3 billion. Our local case growth in the U.S. broad line was 2.9%, and total case growth was 1.4%. Gross profit increased 1.7% to $5.8 billion, and gross margin increased 10 basis points. Our overall expense management was solid, with adjusted operating expenses increasing only 0.5% for the first 26 weeks. Adjusted operating income increased 5.7% to $1.4 billion, resulting in a gap between gross profit dollar growth and adjusted operating expense growth of 120 basis points. Adjusted earnings per share increased by 10.7%, to $1.83. Cash flow from operations was $754.5 million for the first half of fiscal 2020. Net capex for the first half of the year was $383.1 million, or about 1.3% of sales, which, as a reminder, is in line with our previously noted guidance. Free cash flow for the first half of fiscal 2020 was $371.4 million, which was $329.5 million lower compared to the same period last year. The decline in free cash flow was impacted by an increase in working capital as we continue to experience challenges from our ongoing implementation and finance transformation roadmap, as well as an increase in bad debt accounts. Strong cash flow has always been a strength of Cisco, and we are confident that we will see an improvement to this trend by the end of the fiscal year. Before closing, I'd like to make a few additional comments about our financial performance, where we stand relative to our three-year plan goals and our outlook for the year. We have a chart on slide 14 of the earnings presentation slides on our website detailing anticipated results compared to our most recent three-year plan guidance. As you recall, our three-year plan included six different financial objectives. These included total case growth of 2.5% to 3%, for which we are tracking to 2.5%. Local case growth of 3% to 3.3%, for which we are tracking to 3.3%. Sales growth of 3.5% to 4%, for which we are tracking to 3.7%. Gross profit dollar growth of 3.5% to 4%, for which we are tracking to 3.6%. Adjusted operating income growth of about 8% or $600 million, for which we are tracking to 7%. and adjusted earnings per share growth of 15%, for which we are tracking to approximately 15.5%. When we announced senior leadership changes last month with a goal of accelerating growth and operating improvements, we noted that our fiscal year 2020 performance was generally tracking along with consensus estimates. As you can see from the chart, we continue to generate strong performance relative to our three-year plan across virtually all metrics. However, after closing the second fiscal quarter and considering recent performance, even with some clear positives, such as an acceleration in local case growth, we have decided to make adjustments to our outlook. Specifically, given challenges we are seeing and have discussed this morning relative to year-to-date performance, specifically challenges related to inflation changes, integration challenges in France, discrete corporate expenses I noted earlier, and given certain investment opportunities we see today that can deliver strong returns over time, we have decided to amend our plan. Specifically, we are lowering our adjusted operating income growth target to approximately $500 to $525 million from the previously communicated approximately $600 million target and lowering our three-year adjusted operating income growth guidance from approximately 8% to 7%. We would note that the benefits we're seeing below the line in areas such as interest and tax rate provided added flexibility to make these investments now while still delivering on our previously communicated top-line and bottom-line earnings-for-share targets. While we do not like to move backwards at any part of our previously communicated commitments, when given the decision between achieving a short-term goal or investing for the long term, we will always choose to invest for the future. The investments we are making will allow us to advance work that will both further enhance our customer focus while accelerating future growth and to continue our efforts to efficiently manage costs through improved processes. it is important to note that we are incredibly excited about Cisco's future, one that will include continued leadership across the food service industry, driven by investments in our customer-centric strategies, and fueled by the best associates in the business. With that, operator, we are now ready to take questions.

Ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touchtone telephone. If your question has been answered or you wish to move yourself from the queue, please press the pound key. Our first question comes from Edward Kelly with Wells Fargo.

Hi. Good morning, guys. Kevin, let me just be the first to say welcome to Cisco. My first question actually is for you, Kevin. I know it's obviously very early days, but you and the board have clearly highlighted the desire to grow faster as a company over time. Can you just give us some sense as to what that means and how you get there profitably? I think there is Just some concern around, you know, when companies make CEO changes and talk about accelerating growth, about what the cost of that, you know, potentially could be. And I was curious philosophically, you know, how you're thinking about how you think about the path to that.

Good morning, and I appreciate the call and the question on the call this morning. And first, I do want to acknowledge the good work that the company has been doing and the strong results, and as Joel said, the very capable team here, you know, at Cisco and To directly answer your question, where do we see opportunities for growth, the first is we need to and can leverage our scale and our size more efficiently. Joel referenced improved processes, taking costs out of the system. That cost that we can take out of the system is where we can fuel and fund top-line growth in the future. We will be very pragmatic and disciplined on our pricing strategies. Joel, I know, has covered that. consistently quarter over quarter, we will be very thoughtful about how we price the business. Ed referenced there are underserved markets for Cisco. A specific example would be the metro market where we underrepresent versus our national average. There are some things we can do vis-a-vis how we serve those customers more strategically with what we'll call customized tailored supply chain solutions for those markets, and that would be, again, another area of where and how we can grow That's not, you know, tied to price. You know, I guess I would just wrap up with saying, as you know, this is a very highly fragmented market, one where the largest player in the space through the investments that we can make, the capabilities that we can bring to the table, we can take increased share over time, and that's our plan.

And, Ed, if I could just add one thing to that, I think, you know, look, we've said many times and We've said our strategy as a leader in this industry has never been to lead with price. It never has been. It never will be. And so I think, again, some of the stuff that you're seeing this quarter, as we talked about, was related to some of the elevated inflation that happened at a higher level and at an accelerated rate that allowed us some inefficiencies on passing that along. But, again, I just want to reiterate a bit of what Kevin said and just to add on to that question just a bit. in that that is not and never will be a strategy of ours to lead with price.

Can I just follow up then, Joel? You know, the case-level profitability on gross profit per case this quarter was, you know, was obviously disappointing. And you mentioned, you know, the inflation component. But inflation overall, you know, didn't really accelerate from Q1. I'm just – I guess I'm struggling with, you know, what changed from an inflation standpoint and, you know, why you had issues there. with passing through costs within dairy and the protein side, and then why, even through the back half of the year, it sounds like you expect that pressure to continue.

Sure. So a couple points. First, I would say one of the things that we saw in – remember the average that we talk about in inflation is one number, but obviously it's made up of a lot of different categories – And some of those categories tend to be harder to pass along inflation with than others. And again, certainly the center of the plate categories are the ones that tend to be more emotional in our space. And so what we experienced, and particularly in the later part of the quarter, was an acceleration in the areas that we talked about, primarily in center of the plate in beef, in dairy, and as well in some in canned and dry. But really the beef and dairy categories were the primary ones. And I think You know, again, as we've talked about a number of times, it's not just that overall number. It's the rate at which they're actually accelerating. And certainly that's part of what we saw, again, towards the later part of this quarter that we struggled to pass along. The other point I would make when you actually look at the overall, again, if you will, gross profit per case, you know, one of the things we called out here is some of the produce markets that we had last year that was related to weather impacts in California. And so, you know, at that time we had some positive gains from the produce markets. That was the latter part of the second quarter last year, and we actually saw that carry into the early part of the third quarter last year as well. And so on a per case basis, when you look at the overall gross profit, it really is related to, again, some of the struggle of the inefficiency of passing some inflation along from the produce markets, again, the piece around the fuel surcharge, particularly areas that we struggled with. The question that you had in terms of, you know, as we see that outlook moving forward, you know, I think one of the things we did continue to see is some of those challenges that we had toward the latter part of this quarter carry into the early part of the third quarter. And so I think that, you know, some of it, again, will be somewhat self-correcting in the sense that in the case of our multi-unit customers, that 50% of the business that we have on a cost-plus arrangement where it's a relatively short time lag to pass some of that cost along. Again, we'll anticipate seeing, I'd say, some improvement there. But, again, particularly the categories that we saw the inflation in and the rate that we saw the increase is why we had some challenges passing that along, and it impacted our margins, particularly in the U.S. food service business.

Great. Thank you.

Thanks, Ed. Our next question comes from Chris Mandeville with Jefferies.

Hey, good morning. Kevin, I guess similar to Ed's question here, I imagine a little bit more of a detailed goal forward strategy can be laid out at some point. So I guess I'm just wondering what's a reasonable timeframe to expect there? And is there any ability to elaborate a bit more on the comments surrounding a desire to improve in underdeveloped markets and your ability to deliver strong results in large, complex environments? I mean, I guess when I think about that, it sounds like you're referring to urban markets, and from what we understand, that's already a fairly competitive environment and comes with low margins. So how do you navigate those waters in accelerating sales but yet not diluting your margin?

So let me take that. I'll let Kevin add in if he so desires. Obviously, it's pretty much his first day on the job, so we should take that into consideration here. But what I will say is the following. The idea that the metro markets are competitive is certainly true. The idea that the metro markets are somehow inherently unprofitable, I would certainly debate that with you significantly because, again, one of the areas that we have been underdeveloped is in some of the most sort of dense urban markets and cities. In some of those cases, it is about the ways that we go to market and the value that we provide to those customers. And in so many of the cases, and particularly in some, again, some of the high-end restaurants and some of the different metropolitan areas, again, price becomes much less of an issue when the go-to-market strategy is the right one. And so I'll let Kevin chime in here, but I just want to, probably a little bit debunked this idea that somehow we're just charging into a less profitable area. Kevin, I'll let you take it from there.

Yeah, Joel, it's perfect. And so what I was referring to, yes, was the more metro markets where our share underrepresents. And the why, as I mentioned earlier, was, you know, the supply chain solutions and the go-to-market strategy that works in a more suburban or rural area does not necessarily work in a downtown metro environment. Some of these high-volume, you know, let's just call New York City restaurants, they may need delivery multiple times per day. And what we will work on are solutions that provide more tailored support for those types of customers in a cost-efficient way so that the business would be profitable, and Joel already covered the profit per customer, so I won't build on that.

I think the other thing I would point out, Chris, when we talk about investments that we're making, some of the investments that we're talking about here are to continue to enhance the the way that our technology tools interact with our customers, to continue to enhance the way our technology tools allow our salespeople to be supported in a different way that allows, again, for these type of interactions. So I think, again, a lot of these things that we're talking about here certainly are where we see opportunities, and, again, particularly there is where we're significantly underpenetrated.

Okay, that's helpful. And then, Joel, I guess recently – I believe there was a decision to outsource your customer service department. Any way that you can elaborate on what went into that analysis with respect to potential cost savings versus maybe some service disruption or just changes for that matter? How does the department change with respect to overall interaction with the account? And does anyone else in the industry necessarily have a similar model?

Well, let me start with the premise of why that decision was made and the thought process around that. If you look at Cisco historically, one of the challenges that we've had in servicing our national customers is the idea that we've primarily had customer care at each operating company level. So if you're a, you know, name the CMU customer and you had to solve issues, whether it were credit issues, whether it were customer service issues, your primary points of contact We're in a very decentralized, you know, we service you in 50 locations. You basically have 50 points of contact, which obviously is suboptimal in terms of the service for a large national account. So the basic strategic premise for doing this was to actually have a situation where you actually had, again, sort of a one call, a one single point of contact for customer care, single point of contact for credit issues. And so... The whole reason strategically for doing this was around that. Part of the work that we did in the decisions in terms of why we chose to do things in the way that we did was, again, both to have a partner that would allow us to provide the technology support to enable that work and, again, to restructure the team somewhat differently in a way that, again, it was really more focused around teams as of this sort of single point of contact for customers. So I actually look at this as a very good strategic enhancement for a business, both from the perspective of the ability to actually sell those customers and serve them in a different way and take care of their needs. But in addition to that, and again, I'd say a little bit later down the line from a cost perspective, obviously there's some initial work required to invest in this model of Over time, we do believe it'll be a more efficient model. But that's the premise of what that was done for.

I appreciate it. Thanks.

Yep. Our next question comes from John Heimbach with Lutheran Securities.

Maybe for Kevin, when you think about the market share opportunity, particularly in those metro markets, what's your early thought on the structure and size of the sales organization? Do you think you need to step-up hiring of MAs in some of those areas, and then distribution platform. Do you think capital is required to put facilities in closer to some of those metro markets, or it's really not a capital issue as much as it's maybe trucking equipment and scheduling?

Yeah, thank you for the question, John. I'd say on the talent and people side, it's too premature for me to comment upon that. As Joel mentioned, I just started with the company, and a big part of my onboarding will be what we call a listening tour, which is going out and talking to our MAs all throughout the country, our sales associates, to listen and to learn from them. Some of the best, most customer-centric ideas, innovations, come from that frontline associate. It could be the MA, it could be the driver that's been delivering to an account for years, many, many years, in some instances at Cisco decades, they have great ideas on how we can better serve the customer. So I can't wait to get started in regards to traveling around the country and meeting our great associates and learning from them on how we can best serve our customers. So too premature to comment upon are there more or fewer over time. You'll hear more from us later in the year on our strategy on where we're headed in that regard. As it relates to supply chain solutions, this is my expertise by trade and by background. We will do a thorough end-to-end network optimization review to determine your number of facilities, optimization of which endpoints are served from those facilities. The work we do there, though, will be thoughtful, and we will self-fund the work that we need to do. We're not at this point communicating a need to increase capital investment. We can reduce costs and use that reduction in costs to fuel and fund the investments that we will make That is our remit. That is our charter. And I know you're looking for specifics today. Those specifics will come in due time.

And then, Joel, maybe I don't know if you have an idea of how much lower your share is in these urban metro markets. I assume it's more than half what your overall share is, but any idea how much lower it is?

It depends on the market, as you can imagine. There's some that were better penetrated than others, but I would say generally it's – I would say somewhat less than half would be the way I would think about that.

Okay, thanks.

I just want to add one thing to that. I want the participants on the call to perceive that our singular source of growth is through those metro markets. We have multiple vectors of growth. We just highlighted one of them as an example to answer a question earlier on in the call.

Thank you. Our next question comes from Judah Frummer with Credit Suisse.

Hi, thanks for taking the question. I just wanted to circle back on this decision to pull forward operating expense and what's going to effectively limit the adjusted operating income growth over the three-year period. There are clearly some issues with operating expense and delivery on operating income growth, both internationally and locally, whether it's labor in the U.S., or the consolidation in France. So can you help us with the decision to pull forward and kind of layer on top of what seems to be going in fits and starts? And then maybe more specifically, is a lot of this tied to the metro market share, or are there other aspects you can highlight as well?

Sure. So a couple points. Again, just as a – the general gist of the three-year plan takedown was, you know, as we talked about, some of the things related to some of the margin challenges and opportunities, the integration work in France, some of the street expenses from a corporate perspective. The investments in the business, the way I would actually characterize that, and, again, this falls into the category of the point I made literally toward the end of my prepared remarks. We talked about the decision, would we just simply hold off on investments that we believe are really important in order to hit short-term goals? or in order to accelerate some of those investments to continue to move forward on some of the things we believe are really important. And certainly we always have and always will choose the latter in that scenario. So the point Ken made earlier, again, the metro example is just simply one idea or one point that was an example of some of the areas we're looking to accelerate. But the investments really center around a few key areas that I'd probably highlight for you. It centers around these areas around accelerating work in our customer-facing technologies. It centers around accelerating work in the technologies that support our salespeople and allow them to go to market, support our customers in the way that we think, again, certainly moves some of these things forward in an accelerated way. They focus on areas, what I would call simplifications of our business in terms of the way that we interact with with our suppliers, with our customers. They look at the way that we can actually accelerate. And when I say cost savings, I look at cost from almost an end-to-end view in terms of both how we accelerate areas of cost of goods to indirect spend, all of those types of things that some of the investments that we're making we believe will allow us to accelerate in each of those areas, again, both due to simplification as well as some of the enhancements, again, in technology. So those are the ways I would categorize some of the work and the investments. And, you know, certainly as we talked about the need to continue to accelerate growth in this business, the need to leverage scale in a better way, the need to go to market in a way that enhances our ability to service this wider group of customers in a better way. I would characterize our investments as falling into that. And, again, frankly, we felt it was important. They're important long-term investments that we thought were very much worth accelerating.

Okay. Maybe just to follow up on that, Kevin, would you say that you had a hand in kind of pulling forward these investments, or are these kind of investments that have been out there beyond the current three-year plan that, you know, the board is deciding to pull forward? And then, Joel, if you could just help us with modeling the EPS growth coming in in line, any help on the interest expense or tax line would be great.

So Joel started, and then I'm going to do a follow-up close to what Joel covered.

Yeah, I mean, so look, what I would say is that it is a continuation to some degree of investments that have already been made, but an acceleration at work. And so what I would say is, and again, I'll let Kevin say this to you. I mean, I think, you know, Kevin, there's an alignment with the strategic approach we're taking. But to say Kevin was the one that directly said, hey, we'd accelerate that would not be a fair statement. We certainly believe as a leadership team that that was important work, again, supported by Kevin and by our board. I'll let you.

Yeah, I'll build on that. I'll ask a question and answer it. Kevin, are you aligned with the Cisco priorities and the investments that Joel just referred to are directly driving those key priorities? The answer to that is yes, I am. The company's number one priority is to be a customer-first culture, and I'm 100% aligned to that culture. As I mentioned earlier, the best ideas, The most innovative solutions come by better understanding the needs of your customer and providing solutions that help you do better business with those customers. Joel referenced that. It's also our MA Salesforce, providing them with better tools to be able to be more effective at their roles. That's a part of this investment, and I'm 100% aligned with that. The second one is our local transformation. And Joel talked about essentially a framework of capabilities that that can then be deployed to match the needs of a local trade area. One of those happens to be Metro. And that's customer onboarding. I mentioned supply chain solutions and a customer ordering tool improvement. I'm aligned with all of those things. And last but not least is business optimization. Joel talked about funding sources for growth by improving the manner with which we run our business. We've talked about leveraging our scale. Leveraging our scale is we should be the lowest cost operator in the business and therefore then be able to pass upon to our customers, you know, savings tied to the efficiency improvements and also create sources for investing growth dollars. So I am aligned with the priorities, and I'm very supportive of the decision that was made.

Great.

Our next question comes from Jeffrey Birdstein with Barclays. Great.

Thank you very much. Keith, you talked about – I'm sorry, Kevin, you talked about traveling the country, meeting with associates and management across the organization. I'm just wondering how long you think before you complete that initial review and maybe we get an update on what you see as the vision for Cisco and whether or not we would get another three-year guide or how you kind of think about the strategy of providing guidance to the streets.

Yeah, that's a great question, Jeffrey, and thank you for it. You know, I think, you know, most new CEOs coming in, there's a 90-day, 100-day plan, and this listening tour will be a part of that, in addition, by the way, to doing very specific deep dives into the business while doing that. It's not just a listening tour. But the listening tour is a vital and important part of onboarding. I think what I would say at this point in time is late summer is when you could expect to hear from us from an update perspective on where we are. you know, with our strategies. And more on that later, Neil will help, you know, manage and communicate in that regard.

Got it. And then I know you mentioned in your updated kind of three-year plan guidance chart within the slide deck, you talk about, you know, continued disciplined approach to profitable growth with your national and Sigma accounts. And this has been something we've been hearing for a little while now. I'm just wondering, as it relates to that, where do we stand on that? I mean, is that a process that you think is just something that we should expect to hear about for which is ongoing and, therefore, it's just every quarter of every year, that's kind of that? Or maybe is there kind of a short-term opportunity to pull that forward in order to no longer having to be focused on pruning those national accounts?

No, I mean, I would think that, again, that's something I think you'll actually continue to hear us talk about. Actually, we've talked about that consistently for actually many years in terms of how we view that. Again, those customers and the opportunity to be really disciplined in how we grow Yeah, I would say the only thing I would maybe say is, I mean, what you're seeing in our Sigma segment right now, which actually has a fairly acute decrease in the top line that was planned for and as part of this thing. Again, that's probably a little stronger year over year than you may anticipate as we move forward. But I think generally speaking, we will remain disciplined in this space. It is an important area to us, both strategically and in terms of covering fixed and providing opportunities for us to and service markets in outlying areas that may have that type of business that then allows us to have a great local business there as well. So, again, it's a strategically important part of the business, but nonetheless one that I think you'll continue to hear us talk about as one that we'll be disciplined in terms of how we approach.

Understood. And then lastly, I think, Joel, you mentioned something about their debt expense issue. It sounds like you were making reference to an increasing of late. I'm just wondering if you could talk about where you're seeing that pressure from. You know, we didn't get much color in terms of, you know, from a restaurant industry perspective, whether you're talking about national chains or independents or maybe one or both of their operating environments becoming more difficult, leading to the elevated debt expense.

Yeah, here's how I'd answer that. I mean, there's a little bit of both in terms of the market. I think, you know, again, I... Just one thing I would really emphasize here, there's no panic button being pushed for us in terms of the market itself. There is a bit of softness. We've had a few increased bankruptcies, and, again, I would say it's really both across the national and the local. I'd say the bigger impact, though, at this point certainly remains just continued challenges around the stabilization and implementation of some of the work that we did that really centralized credit activity. in an area that used to be a very decentralized activity across our businesses. And so that's accelerated a bit over the last couple quarters. We're certainly doing a lot of work to continue to stabilize that and certainly anticipate that happening. So, again, I'd say it's a little more self-induced. But, again, there's, I would say, a little bit of softness, certainly, though, not ready to push the panic button on the marketplace.

Great. Thank you. Yep. Our next question comes from Joshua Long with Piper Sandler.

Great. Thank you for taking the question. Wanted to circle back to the commentary around outsourcing the support. That was very helpful. Curious if that was more of a proactive decision or if this is feeding off of commentary you've received from your customers and your team members.

Well, I would say it's probably a little bit of both in the sense that obviously feedback from customers in terms of how we have serviced them over many years is that, hey, I'd rather have a single point of contact. I'd rather have, you know, instead of calling 50 people, I'd rather call one. I'd rather have a team that knows my business well, that can relate to me, again, both from a care perspective, from a credit perspective, et cetera, et cetera. So I would say it's in response to customer feedback and how we can do a better job servicing. But But, again, in that sense, then, I would call it proactive in the way that, you know, it was something that we believed was an important investment, one that we, again, found both the right, what we believe, structure, partner, and technology support in order to do that. It's still new. We're still, again, moving into that, and it will continue to improve and evolve. But the team's done a great job of rolling that out. And so, again, I'd call it proactive, but in response, certainly, to listening to our customers. and feedback that we received from them over a number of years of doing business with us.

Great. That's very helpful context. And then thinking about the international strategy, particularly in Europe, it sounds like that's still a long-term growth opportunity for you. Can you talk about what you've learned with the integration process, particularly with the French businesses that you mentioned and kind of how that process is coming along?

Sure. Sure. So, you know, I think a couple areas that I would say, thinking about how that business is integrating, it was two businesses that were acquired even prior to our acquisition of Brakes. They were similar-sized businesses that we have then ultimately chosen to bring together. And I would say the two bigger challenges really are what we call a single delivery, meaning instead of customers getting delivered by both businesses or being delivered by one, and the technology to support that. And so I think those, you know, in both cases, there's been challenges in making that happen. On a positive note, you know, doing some of that type of integration in France is often complex due to some of the labor and work councils and all that, and I think actually we got through that part of it very well. But nonetheless, those challenges remain, and some of the Impacts you've seen have been service levels that have been less than we'd like them to be, which then is translated into gross profit dollar impact there. And then what I'll call dual running costs, meaning we've had to have some of those things where both businesses running longer than we would have liked them to have done. So I think, again, we're certainly we've got a strong leadership team there. We've got lots of resources that we've dedicated both there and from here. in order to enhance that. Some of the investments that we're talking about here as well fall into the category of how we accelerate the stabilization of that. But as you said, again, we certainly are confident that we'll get there. And certainly, as you pointed out, believe that, again, this is a good long-term investment for us and, again, in a market that we certainly think will be one of the strongest ones that we have in the future.

Great. Thank you. Thanks. Our next question comes from Kelly Bernier with BMO Capital.

Hi, good morning. Thanks for taking my questions. I was wondering, you know, maybe for Joel, the decision to kind of bless consensus two weeks ago and lower kind of the outlook today, you know, can you just help us understand that decision? You talked about some of the factors. I'm just trying to really understand how much was the quarter and how much really is these investments in certain opportunities that you talked about. And I think what, you know, people are trying to, you know, struggle with understanding today is, you know, how many more investments really need to be made out there over the next couple of years.

Sure. Let me start with the first. And what I would say is a couple things. So, The timing of the announcement that was made on January 13th was obviously fairly early in both the process of closing as well as how we got into the third quarter. So I think one of the things that I would say as we've evolved and certainly finished the closing process of this quarter as well as saw some of the results that we talked about as we moved into the third quarter. Part of that was some of the reason that you probably heard a little bit different tone from both of those things. And so I think as we looked at some of the challenges that we talked about from a margin perspective that we continue to see fall into the third quarter, we took a look at some of the work that, again, was happening in this business in France, as we talked about, and certainly looking forward to see some continued challenges there. And in addition to that, again, it was just some of the work that we talked about with some of the investments. Again, these aren't brand new investments. They aren't things that we've never talked about doing, but certainly the opportunity to accelerate that growth, to accelerate as we build some momentum at the end of this year and head into the next year, we thought were very important in terms of how we did that. And so, again, So I would just say the combination, Kelly, of some of the kind of wrapping up of the quarter, seeing some of the way the third quarter was starting to play out in a number of different areas of the business, obviously some transition cost as well of the leadership change, and then thinking about how we actually spend that investment dollars moving forward. The question is how much are we going to continue to need to invest in this business? Look, I think this has been, as I know you know, a multi-year journey of transformation because the reality of it is, is that this company, you know, again, even 10 years ago was a business that had, it was significantly decentralized in a way that we approached the marketplace. If you think about the things that used to happen at a local operating level where, for the most part, I always joke about this a little bit, but, you know, Pretty much the only things they couldn't do were they couldn't give themselves a pay raise and they had to report according to U.S. GAAP. Other than that, it was for the most part their business to run. And so when you think about the things that we've done in terms of how we standardize, how we leverage scale, how we – the category management processes and the way that we go to market and set an assortment in a different way that is not just decided by every individual operating company, Those types of transformations, again, the latest one, again, we've talked about on this call, things like finance technology roadmap, things like the centralized customer care, all those things are one step along the way to continue to drive a more leveraged, efficient, nimble organization that can go to market in a different way. Again, there's not necessarily sort of a beginning and an end point to that. I do believe this business will continue to invest in itself. As we've talked about, our top capital allocation priority is and has been the ability to take the cash we generate and reinvest it in this business to continue to get better. And as Kevin said, as you've heard Ed talk about, our ability as the market leader to continue to leverage scale, to drive the things that we can do and, again, go to market in a different way, I think are important, and so you should expect us to continue to invest in our business that way.

Okay, and then maybe just one follow-up on the gross margin and the inflation impact. You know, how much of that, just given that it does look relatively manageable on an overall basis, but obviously there's more happening, I think, in meat and dairy companies, But how much of that is just pure mechanics of the type of inflation and the environment you're seeing versus the execution of that either at the local or the chain side?

Yeah, it's a little bit of both. I mean, on the chain side, again, it's actually a fairly mechanical process in the sense that You know, as we've talked about before, depending on the category, there's about a 7 to 30-day lag in terms of when prices recalculate. So that one is a little more, I'd call, mathematical and environment-driven. You know, obviously, there's some market-driven and there's some execution as well on the local side. Although, as we've talked about, historically, one of the areas that's actually really allowed us to do a better job of that, certainly over the last few years, is our revenue management function. That's been an area that we've leveraged well, both in deflationary times and inflationary times. And I certainly anticipate work that we have done and will continue to do in the Redman area will help us work through that. But we've also talked about the fact that in certain cases where inflation, and in certain categories, when inflation hits higher levels and escalates in a more rapid way that we still have some challenge in passing some of that along. So I think that's how I would frame it up. It's probably a little bit of all that, but certainly something that I believe moving forward we'll get a handle on. Again, our Redman function has certainly done a good job of helping us work through that over the number of years, and I anticipate that continuing moving forward.

Thank you.

Thanks, Kelly. Our next question comes from Bob Summers with Buckingham.

Good morning, guys. So just help me understand, you know, of the operating income revision, which I think is really just, what, two more quarters, how much of that is being driven by this investment pool for it? And what I'd really like to understand is what's the run rate of that investment? How should I think about it as we bleed into, you know, 2000 or 2021? And then on the benefit side of the equation, you know, how are you thinking about the return on this, either through cost savings or, you know, bolting on acceleration and case line growth? And when is that or when should we expect that?

Sure. So just starting with your first point on sort of the takedown, again, we haven't broken out the specifics of those things, but just to reiterate, again, a couple of the key points. You know, again, it is – there's a portion of it that's related to some of the challenges we've talked about both, again, as we kind of exit this quarter and enter the next one as it relates to some of the margin challenges. Again, it's related to some of the challenges that we've talked about in France. Again, there are some discrete costs, again, in corporate that I call are unplanned, things like the strike we had in Denver, things like that. We've seen a bit of higher level, I'll call claims activity in terms of things like auto liability and workers comp. Some of those types of things that were part of where you saw our corporate expenses elevate a bit, obviously, as well as some of the transition costs we talked about related to leadership. So those are things that are, again, some of the components to that, as well as an investment. Bob, I don't know that we're going to go out and break down the detail of every one of those components. I would say certainly probably the biggest ones really fall into the category of some of the point on the margins, the areas in France, as well as the investments, broadly speaking. And I guess from a run rate perspective, as I said, I don't know if we're going to go into that type of breakdown detail. What you should expect, though, as we head into our investor day and as we talk about, you know, as Kevin onboards, as we talk about our ongoing strategic opportunities, we certainly plan to go into more detail of that, both in terms of how it impacts our growth, how it impacts the expenses and the ability to fund that growth through some of the deficiencies. So certainly more to come on that. But I would say, again, those are the main categories of how to think about why the takedown happened.

Thank you. Thanks. Our next question comes from .

Hi. Thank you. I think the comment was made that we shouldn't expect an increase in CapEx. I do just want to make sure that I heard that correctly. You know, I guess especially in the context of, you know, what may be in coming years kind of a broad need to, you know, modernize, you know, facilities really not just for you but across the industry. and also, you know, potentially the use of new facilities, you know, smaller facilities to better penetrate, you know, some of the urban markets. So that's, you know, kind of the first point. And secondly, you know, is part of the plan or part of the thought at this point that you would enter new European countries or, you know, is kind of – getting the current countries to your acceptable returns the priority in the near term? Thanks.

Yeah, so let me take that one first, then I'll go back to your other one. I think the answer on that is that certainly stabilization is the highest priority right now in terms of that. And again, just maybe just to reiterate one thing, I know we talk about Europe as just one entity. Within that, again, the three out of the four main countries we're in in Europe are actually performing what I call acceptably well. And obviously the biggest challenges in France. But from a priority standpoint there, definitely stabilization is our focus at this point in time. Certainly over the long term, we'll continue to look for opportunities to grow in that part of the world. The CapEx piece, so look, a couple things I would say on that. You know, as we have, as we've talked about actually over the last couple of years, we actually have accelerated, even heading into this year, our CapEx level a bit. In other words, we've been running in that one, 1.1%-ish range, somewhere 1.1 to 1.2. As we talked about this year, we actually bumped that up a bit to a 1.3% of sales for some of the investments we plan to make. And as we talked about a little bit earlier in the prepared remarks, we're actually running at that rate. And so I would say, on one hand, there is a bit of acceleration from the perspective of VAT that was talked about, and it's where we're going. And so I think Kevin's point was we're not certainly saying what we're doing now at this moment in time. There are going to be, I think, some increased potential investments, but as we also look at how we rationalize those things, at the moment as a percentage has failed, I think you can think about fairly consistently how we've talked about, as we've headed into this year, we've talked about a bit of acceleration.

Okay, so more or less model 1.3 would be safe?

I think that's fair.

Thank you.

Our next question comes from Rebecca with Morningstar.

Good morning. So I'd like to circle back to protein inflation. You know, given the global protein shortage that has resulted from African flying fever, it's likely to think that this protein inflation will continue for at least the next year. Are you beginning to like proactively work with your customers on some price increases You know, are you just kind of playing it by ear? They have been admittedly volatile, the prices. You know, I'm just wondering what we should expect, you know, if there are possibly some further growth margin compression due to difficulties passing on this expected inflation. Thank you.

Sure. Thanks for the question. So I would, first of all, decouple a couple of these things a bit. The impact that we've seen from the African swine flu has actually been very minimal, I would say. This is something we've taken questions on for some time. And, you know, again, that's not something I would say has been a sizable or even, again, just barely above minimal impact in terms of us. I think the markets for center plate and beef do move around some, and I'd say we're going to experience a little bit more of acute inflation here in that category. I don't know that I'd look right now, though, out a longer term and say, yeah, there's some fundamental reason that there's going to be highly inflationary center plate markets for any time to come of any real significance. Here's what I would say, though, just as a reminder in terms of how we deal with some of those things and why, back to maybe the customer point, why this has been something actually we have historically been a strong partner for our customers in. Obviously, we have scale benefits that have allowed us to, in any of these types of moments, have access to products, have a traceability that obviously is – deep and well appreciated by our customers, the availability of substitutes. And so I think, you know, alternative products. And so I think, you know, if you think back a few years ago, even when we had the issues with the avian flu, one of the things that we were able to bring to our customers is simply the availability of products. And, again, traceability programs that actually ensure that those are safe and in the way that they would expect. So I think, I guess what I would say to summarize that all, again, decouple a little bit the African swine flu elements. That is not something that we've done, we've had a significant issue with. Some center of play challenges right now, although again, not necessarily looking at what I'd call acute inflation in that area over the longer term, But in the event of any of those things, I think your company is well-positioned to manage through that stuff in a better way.

Okay, Joel, thanks for the call. I'll pass it on.

Thank you. Our next question comes from Marissa Sullivan with B of A Securities.

Hey, good morning, and thanks for taking my question. Just wanted to circle back. Joel, I think you referenced some challenges with the implementation of your finance transformation roadmap. Just wondering if you could give a little bit more color on that and then you know, in the timeframe for working through those. And then as it relates to working capital and free cash flow, can you just comment on when or how quickly you might start to see improvements there? Thank you.

Yeah, sure. So a couple things. So think about the finance technology roadmap as in our history, we would have had all of the finance-related functions, things like credit, things like cash app, accounts payable, general ledger, each of those types of areas that would actually have been in each individual operating unit that over the last couple years, enabled by technology, we've moved many of those functions into a centralized place and in some case with an offshore partner as well. And I think what you're hearing us talk about here are challenges related specifically to local credit, where in In the past, each one of our operating units would have had a credit department responsible for credit and collections in each of their local markets. And in today's world, it's certainly, again, through the uses of technology and a bit of a different structure, we're just working through some of the bumps in terms of managing how to do that in a way that's more somewhat market but also much more centralized. And so – Again, an interesting example on working capital of a process, accounts payable had some bumps along the way as well, and we had a little bit of a positive benefit, if you will, in working capital on that in our previous year. That process has actually stabilized and, again, in a strange way, had a little bit of a negative impact on working capital in the sense that we paid our suppliers in a more efficient manner. So I would say that, in general, we certainly feel confident about our ability to stabilize that. We're certainly making the appropriate investments and leveraging the technology in order to do so, but there are some short-term bumps that we're having along the way. And I actually, you know, certainly in some of my prepared comments talked about the fact that we anticipate some of this continuing to improve over the course of the year, and I certainly expect that to be the case. The other point I would make, and just as a reminder as part of the free cash flow, is related to CapEx on a year-to-date basis. If you remember at the end of our fiscal 2018, based on some opportunities presented by U.S. tax reform, we actually accelerated the process of investing in some fleets. That actually then allowed us to invest at a lesser rate at the beginning of our fiscal 2019. So where we've gotten back to what I'll call a more normalized capital spend as it relates to fleet, the year-over-year comparison, certainly for the first half of the year, and, again, this will level out a little bit as the year goes by, looks worse, particularly due to that factor. So, again, all that to say, I do think we'll see some improvement in this area in the second half and certainly over the long term if you look at where we're at.

And then just very quickly, I'm wondering if you can give any comments about the current trends you're seeing with independent restaurants. You saw a nice acceleration in your local case growth this quarter, and I'm just wondering if you expect this to continue in the third quarter or if you can comment on quarter-to-day trends. Thanks.

Yeah, I think, look, a couple things. I mean, I think the team did a great job. We talked about actually a favorable exit rate from the first quarter. that continue to accelerate over the course of this quarter, particularly in our local business, and I would say particularly in the area of account penetration. So what this was not was just kind of going out and just people often ask, where did the growth come from? And it wasn't so much in the area of new customers, but it was in the area that actually, as we've talked about, is best for us in that further account penetration. The market itself, I would say, is kind of where it has been. I think it's in a a decent place. You know, there's sort of lots of reports that move around from time to time, and check sizes generally seem to be continuing to elevate. You know, traffic seems to be flattish. You know, some say it's up a little, some say it's down a little, but I would generally say the market is in an okay place, probably similar to what it has been. But I think, again, certainly a lot of good work by our teams in the U.S. to drive a strong level of growth, again, certainly in the independent space, and we anticipate some of those trends continuing as well.

Thanks so much, and best of luck.

Thank you.

Ladies and gentlemen, this does conclude the Q&A portion of today's conference. We'd like to thank everybody for participating in the All Disconnect, and have a wonderful day.