Sysco Corporation

Good morning and welcome to Cisco's third quarter fiscal 2020 conference call. As a reminder, today's conference 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. You may begin.

Good morning everyone and welcome to Cisco's third quarter fiscal 2020 earnings call. On today's call, we have Kevin Hurrikin, our President and Chief Executive Officer, and Joel Grade, our Chief Financial Officer. Before we begin, please note that statements made during this presentation, which 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 these materials can be found in the Investors section at Cisco.com or via Cisco's IR app. Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures are included at the end of the presentation slides and can also be found in the Investors section of our website. To ensure that we have sufficient time to answer all questions, we'd like to ask each participant to limit their time today to one question and one follow-up. At this time, I'd like to turn the call over to our President and Chief Executive Officer, Kevin Hurdkin.

Thank you, Neil, and good morning, everyone, and we thank you for joining our third quarter fiscal 2020 earnings call. I hope that you and your families are staying safe and healthy during this time. As the business world manages through this rapidly changing operating environment, our first priority as leaders and as a company will be the health and well-being of our associates, our customers, and our shareholders. Our prepared remarks today will be longer than normal due to the amount of content that we want to share with you. During this morning's call, I'll spend time discussing Cisco's rapid response to the COVID-19 crisis and how we are positioning the company for long-term success. It is extraordinarily important that we as leaders manage simultaneously for the short term and also for the long-term success of Cisco. My comments today will inform you on both of these time horizons. I'll then turn it over to Joel, who will discuss Cisco's third quarter results and provide further financial updates. Lastly, I'll make a few closing remarks before we complete the Q&A section of the agenda. As I begin my remarks, let me assure you, we have the financial ability to weather this storm for as long as it takes. We entered the COVID-19 crisis with an extremely strong balance sheet, and we have taken important steps to further strengthen our cash position, helping to ensure our liquidity during the crisis and enable our ability to emerge stronger than ever. In response to the current environment, we have identified four key areas of focus. First, we have taken swift action to further strengthen our overall liquidity. As I mentioned, we entered this crisis in a strong position, and we have strengthened our liquidity to provide us with additional flexibility. We have built more than $6 billion of cash and available liquidity that allows for not only financial flexibility and survivability during this crisis, but will enable us to capitalize on an unprecedented competitive opportunity. I am confident that Cisco has the financial ability to invest in inventory and also service levels upon the return of customer demand to food service. There will be profitable market share gains to be had as this crisis unfolds, and Cisco will have the investment capability to profitably win new customers. Second, we are focused on stabilizing the business by removing costs from the system. Towards the end of March, our business declined significantly from the moment the shelter in place orders were issued. It is a good thing that we are practicing social distancing as a society. The shelter in place orders are helping to flatten the curve. With that said, social distancing orders have had a significant impact on the restaurant, hospitality, and education customer segments that we serve. As a result, we needed to quickly reduce our expenses in order to match the lower level of business volume. Our leadership team has taken swift action to reduce costs during this downturn. In the fourth quarter of fiscal 2020 alone, we have removed more than $500 million of expenses from the business, which includes the difficult decision to reduce our staffing levels by approximately 33% through temporary workforce furloughs and permanent reductions in force. Additionally, we have substantially reduced miles driven by rerouting our transportation fleet and implementing productivity improvements in our operating companies. We will leverage technology improvements to implement those structural changes without compromising service or quality. This is one example of how we will be a leaner, more agile, and stronger version of Cisco post COVID-19. The benefits of these changes will begin to be realized in Q4 of fiscal 2020, and the permanent changes will deliver an annualized benefit of approximately $300 million. In the fourth quarter of fiscal 2020, the expense reductions, while significant, will be more than offset by the top line sales volume decreases that we are experiencing. Additionally, we have reduced capital expenditures to only business critical transformational projects. Physical projects like building expansions, fleet purchases, they have been put on hold. Our CAPEX investments will focus on those things that will improve Cisco's capabilities and will allow us to win market share in the future. By focusing on a narrower set of strategic initiatives, we will accelerate the pace of change at Cisco and we will complete key projects more rapidly than previously planned. Examples of these efforts include improving the capability of our shop platform, which is our customer ordering tool, increasing the effectiveness of our Salesforce selling tool, and implementing a pricing tool that will improve management of margin for the long term and increase the percentage of time that our Salesforce can spend on consultative selling versus administrative tasks. Combined, these capabilities will enable our sales team to visit more customers, inspire our customers to purchase more from Cisco, and simultaneously reduce friction in the purchasing environment. These investments in digital technology will allow us to improve the effectiveness of our Salesforce and increase their efficiency. As a more streamlined company, we will garner more business from our existing customers. An example of this improvement would be the development of a suggested order for our ongoing customers. These orders will include basic items they buy weekly, but will also introduce customers to new items, popular trends, and even deals of the week. These offers will be personalized to the individual customer. The intersection between personalized, relevant offers and Cisco's vast purchasing scale creates a capability that is unmatched in the marketplace. We will better leverage our scale advantages that we are now developing, and we are now developing differentiating customer centricity capabilities. Third, we are working diligently to leverage the upside that exists during this crisis by capturing new business opportunities and pivoting our support of current and new customers. Cisco serves a broad spectrum of the food service industry. Prior to the COVID-19 pandemic, roughly half of food consumption within the U.S. took a place away from home, and the other half took place inside the home. COVID-19 has obviously tilted that balance and shifted more purchases to the retail grocery channel. As a result, we have pivoted our distribution model to include retail, grocer, and use of supply chain partnerships, sectors that we essentially did not serve pre-COVID. We are working with some of the best retail companies in the world in an agile manner to meet the rapidly evolving needs of our customers and communities through both supply chain and labor service partnerships. Over the past several weeks, Cisco has shifted sales of products to regional and national retailers to help alleviate strain in the food supply chain due to a surge in demand at retail stores and shifts within the economy. A brief highlight of some of these wins. We are partnering with the government agencies across the global regions we service to provide much needed food to communities in need. In the UK, we are shipping more than 200,000 meal kits per week on the behalf of DEFRA, the UK's version of the USDA. In the U.S., we are working with FEMA and the USDA to provide fresh food for those in need through outreach to food insecure communities. And as recently as May 1st, we submitted our bid to participate in the coronavirus food assistance program. We would like to thank the various government authorities for their support of these communities in need and also the farmers that we partner with in the food supply chain. Cisco has become a supplier of products to retail grocers. We have shipped hundreds of truckloads of protein, fresh product, and bulk consumables to select retail partners. We expect the majority of this work to be transitory in nature with the potential for select partnerships to have staying power. We have increased our level of support to our healthcare customers. Our healthcare segment sales have increased roughly 15 to 20 percent as we continue to We are also working with the federal government to arrange for deliveries of critical products, including PPE to hospitals, urgent care facilities, and long-term care facilities. We are delivering in a safe manner for our associates and those healthcare customers. We are proud to support these frontline healthcare workers, and we salute their dedication to better health. On the logistics side, Cisco is now offering supply chain service contracts such as carrier services, cross-docking, and freight brokerage. Over 50 contracts have been signed with national and regional companies to provide third-party logistics services through the use of Cisco's vast transportation fleet and logistics capabilities. Lastly, Cisco has entered into labor-sharing agreements with select retailers to provide temporary work for opportunities of our furloughed Cisco associates. This action is providing work for our team members and enables Cisco to call them back as soon as volume returns. Our highly skilled laborer is providing much-needed assistance to retail. Furthermore, I am pleased to announce that we have filled our important Chief Supply Chain Officer position from the last time we spoke. On April 6th, we welcomed Marie Robinson to Cisco. Marie brings decades of substantial logistics experience to our team from a diverse set of industries in which she has worked. She has managed complex apparel distribution networks, international supply chain, and has direct experience in the food sector. I have full confidence that she will work collaboratively with the rest of our leadership team and will be a tremendous addition to Cisco. Many of our longer-term strategic initiatives will be led by our supply chain department as we transform how Cisco goes to market. It is important to note that while the retail and logistics opportunities are significant and show our ability to quickly adapt to the rapidly evolving environment, these opportunities do not offset our volume declines in the food away from home space. This good work shows our agility, the fight, if you will, within our culture, and we are proud to serve new partners during a downturn in our core business. The part of driving or upside efforts that I am most excited about is the work within our core business to help our restaurant customers be successful. Make no mistake, food away from home is struggling right now with substantial volume decreases the prior year. At risk are the hundreds of thousands of small business customers we serve. At Cisco, we take our leadership position in the food distribution industry very seriously and now, more than ever before, we are doing everything possible to help our customers. I am proud of the steps that we are taking to serve both new and existing restaurant customers during this difficult time. Cisco is delivering more products and solutions, including Cisco NoseFresh, an expansive product that includes fresh meats and seafood, produce, dairy, and refrigerated specialty items. We are 100% open for business across all lines of business, especially during these challenging times. We want our customers to know they can count on Cisco to help them succeed with innovative food and product offerings. We developed a COVID-19 selling bundle and leveraged our shop platform to introduce it to all of our customers. We call it our Focus 15 COVID package, which features a combination of cleaning products, takeout containers, paper goods, and PPE. These bundled solutions are quickly delivering critical goods that our customers need to maintain seamless business operations. By keeping our customers in stock with these essentials, we are helping enable their business to pivot to takeout and delivery and helping them keep their kitchens safe and clean. We remain in stock on these crucial products. We have been assisting thousands of customers with website development for takeout and delivery solutions throughout the outbreak of COVID-19. Many of our smaller partners do not have these capabilities in-house. Cisco has helped provide tools, tips, and solutions to develop digital platforms that drive customer engagement and increase traffic, while also helping provide ancillary services such as home delivery, menu design, to-go containers, and other considerations during this unique environment. We are offering training webinars and educational programs to help our customers navigate the CARES Act and supporting small businesses to help them retain their employees during this pandemic. In under 48 hours, we built a training webinar to help these small customers apply for loans and taught them what the funds are able to be used for in running their business. Our sales team actively invited our customers to join us for these important training sessions. It is a great example of how Cisco is delivering solutions, not just food-related products. Actions like this will ensure steadfast partnerships with our customers long into the future. In less than two weeks, we have helped thousands of restaurants create product marketplaces or grocery stores or pop-up shops, lots of names for it, which includes transforming dining areas into pop-up shops where customers can shop for essential pantry items like eggs, condiments, bread, toilet paper, and paper towels. These additional product sales are not only helping communities, but they're also helping the restaurant industry increase traffic and protect jobs. We are pleased to see that our volume to restaurant customers has been improving sequentially week over week since it hit the low mark at the end of March. At Cisco, we are helping our customers stay in business, run their business, and transform their business. We know that these activities will help us retain and win additional business from them well beyond the pandemic. In addition to helping our restaurant customers, Cisco has started rolling out -to-consumer sales, an area of business that we did not participate in pre-COVID. Our Buckhead Meat and Freshpoint companies have held several pop-up events which sell specialty meat and produce direct to consumers. Furthermore, through Cisco's new websites, OnTheFly.com within the U.S., and Cisco at home in Canada, consumers can purchase restaurant-quality steaks to be delivered direct to their home. We have started offering will-call opportunities from our physical locations through web-enabled ordering. If a customer prefers, they can purchase product directly from one of our operating companies and pick up the product themselves. And lastly, within the consumer space, we have partnered with third-party logistics services to offer pre-packaged meal boxes featuring a box of specialty produce delivered straight to the customer's front door. We are learning a lot in these -to-consumer initial concepts, and we are leveraging these learning opportunities to better serve our customers and keep the food supply chain running. Because, simply put, the food supply chain in this country does not work without Cisco. Finally, I would like to talk about what we are doing as a leadership team to ensure Cisco's success -COVID-19. We refer to this work internally as our Snap-back Planning. The Snap-back Planning includes the following key items. Integrated supply chain planning with our customers and our key suppliers to ensure that inventory levels will match the business recovery. Our strong relationships with key suppliers will enable Cisco to stay in stock for our customers during the recovery period and also as we win net new customers. We are also accelerating key strategic initiatives. An example of this work is the transformation of our -to-market sales structure. We are transforming our sales structure to be more focused, aligning the incentives of the sales force more closely with our business objectives, and increasing the partnership of our sales teams across our multiple lines of business. Cisco stands ready as the distribution provider that is properly positioned for food away from home once the demand returns. We have a strong balance sheet that will allow us to invest when others will not have the same level of strength. When our customers begin to reopen their restaurants, Cisco will have more than enough liquidity to rapidly replenish its inventory to meet the rising demand. To ensure that deliveries are made on time and in full capacity and to capitalize on the upside by winning new business. In fact, share opportunities are already emerging as Sigma won a substantial piece of new business as the incumbent distributor confronted economic challenges. Currently, our sales team is doubling down on their customer focus. We are focused on a combination of both better serving our customers and prospecting new ones. We are 100% confident there will be profitable new customers to be served as the crisis creates new opportunities to gain profitable share. We are also confident that demand for food away from home will return over time and we stand ready to enable that return of demand as we continue to be our customers' most valued business partner. Cisco will win in the marketplace through a combination of strong liquidity, agile business decisions, and value-added partnerships that fuel business relationships. We expect that the combination of winning more business from our existing customers through the trust and partnership we have cultivated during COVID-19 paired with the prospecting of net new customers will increase Cisco's market share within the $300-plus billion food away from home sector post-COVID. We believe that the capability improvements that we are accelerating during this crisis coupled with the financial strength of our company will enable our success for the long term. Now, we'll turn it over to Joel who will discuss our third quarter results along with additional financial details around our business environment. After we finish QA, I will come back on the line to offer a final perspective regarding the company. Joel, over to you. Thank you, Kevin. Good morning, everyone.

I will start with third quarter results for Cisco and results by segment followed by an overview of current segment performance. I will then give an update on cash flow and capital spend for the quarter. Finally, I will go through the impact of COVID-19 on the P&L, our working capital, and a detailed discussion about what we're seeing in the business. Our total Cisco results for the third quarter include a sales decrease of .5% to $13.7 billion. Gross profits decreased .9% to $2.6 billion and gross margin decreased seven basis points. Throughout the last couple weeks of the third quarter, we saw a significant decline in both volume and sales across all the business segments as a result of the COVID-19 pandemic. We will give further color on that in a few minutes. Adjusted operating expense increased .5% to $2.2 billion. It is important to note that while our aggressive cost reduction initiatives were implemented at the onset of the pandemic, there is a timing delay for the removal of the expenses. We expect savings from the cost reduction measures to be realized in the fourth quarter and into fiscal 2021. Also of note, corporate expenses for the third quarter were impacted by several discrete items such as liability claims, expenses associated with the recent senior leadership change, and the pull forward of certain investments as mentioned last quarter. Adjusted operating income decreased .2% to $377 million and adjusted earnings per share decreased 43% to $0.45 for total Cisco. Within the U.S. Food Service Operations segment, sales for the third quarter were $9.6 billion, which was a decrease of .1% versus the prior year period. Local case volume within U.S. Broadline operations decreased 4.1%, while total case volume had We did see growth in our sales of Cisco brand products in the third quarter, which increased 37 basis points to 47% of local U.S. cases and 81 basis points to 38% of total U.S. cases. However, gross profit decreased .7% to $1.9 billion for the quarter and gross margin declined 11 basis points to 19.8%. Our adjusted operating expenses increased .4% to $1.3 billion and adjusted operating income decreased .1% to $637 million. Our international food service operations were modestly impacted by changes in foreign exchange rates. On a constant currency basis, sales decreased 7.8%, gross profits decreased 10%, gross margin decreased 50 basis points, adjusted operating expenses decreased 0.5%, and adjusted operating income decreased 93.5%. Prior to the impact of the pandemic for the third quarter, the U.K. business remained stable. Our Sweden and Ireland businesses performed well, and our work around integration efforts in France were progressing. We remained convinced that Europe will be a platform for long-term growth for Cisco in the years ahead. Both Canada and Latin America improved performance for the third quarter as well, as a result of steady investments to support customer growth in both these geologies. In our Sigma segment, we continued to see steady progress of profitability improvement as a result of a disciplined approach to profitable growth. Cash roll from operations was $1.1 billion for the first 39 weeks of fiscal 2020. NetcapX for the first 39 weeks was $591 million, or about .3% of sales. Free cash flow for the first 39 weeks of fiscal 2020 was $488 million, which was $511 million lower than the same period last year. The decline in free cash flow was principally the result of the COVID-19 pandemic, as well as a combination of softer accounts receivable, initially higher inventory from the steep volume decline, and the timing impact of fleet additions, as we have discussed in prior quarters. I will now transition to the COVID-19 pandemic impact on the business, followed by details about liquidity, working capital, and capital allocation. The exit rate of the third quarter saw a significant decline in volume, sales, and gross profit across all of the business segments as a result of the pandemic. For total Cisco, our sales were down approximately 60% during the last two weeks of the quarter. In US food service operations, sales were down approximately 60% as well. Sigma was down approximately 50%, and International was down 70%. It should be noted that our sales decline may be higher when compared to our peer group as a result of our over-indexing in local and independent restaurant customers. However, we are glad to say that recent trends have shown about 15% increases from the end of March. We have seen sequential weekly improvement that shows further momentum and upwards trajectory. Combined with certain states opening in-restaurant dining, we expect additional improvement throughout the month of May. Our Sigma business had less of an impact to sales and volume, as quick service restaurants experienced less of a downturn compared to other restaurant types. In addition, we recently won a new piece of business valued at more than $500 million, which is a good example of us taking share in the industry. We were able to onboard the customer within seven days, which shows both our financial stability and supply chain expertise, but fast in-stock service. The impact of sales was steeper in Europe. Our business is down as countries had issued -at-home orders sooner and the restaurant foot traffic decreased as a result. As Kevin mentioned earlier, we are diligently working to leverage the upside by capturing new business opportunities and pivoting our efforts to provide support for our communities that we serve. Those efforts have improved sales trends, particularly in the UK, due to the GFA program, which, similar to the US, has also seen a sales trajectory improvement over the past several weeks. In Canada, restaurant sales performed similar to the US, as consumers are practicing isolation measures to protect the health and safety of one another. We are pursuing different avenues of revenue that we normally might not have tapped into, such as redirecting significant amounts of inventory to retail outlets and supplying indigenous communities with critical food needs. This has contributed to the trend of improving sales most recently. As for our business in Latin America, the impact of COVID-19 has been most prominent in Mexico, where volumes decreased rapidly. In Costa Rica, our cash and carry stores are helping supplement the decrease in sales from restaurants. However, Costa Rica has also allowed for the soft reopen of restaurants, which along with increased sales to retail and other supporting sales to the government, has led to recent -over-year increases in sales. Now that we've covered COVID-19 impact of volumes, I will move to commentary about expenses. As a reminder, roughly two-thirds of our operating expenses are variable, and we have been swift with our cost reduction initiatives. As Kevin mentioned earlier, the timing of those expense reductions, which total more than $500 million in the fourth quarter alone, will be more fully realized throughout the remainder of fiscal 2020 and into fiscal 2021. These expense reductions not only temporarily adjusted expenses for volume, but also accelerated opportunities to make permanent structural reductions to our business. The permanent changes will deliver an annualized benefit of approximately $300 million. However, to be clear, the cost reductions will not fully cover the significant impact of the crisis. On that note, to summarize from a P&L perspective, as it relates to Q4, there will be negative operating income as a result of the crisis. However, based on recent improving trends and certain states reopening, we feel that Q4 is the operating income trough. Now let's talk about some of the liquidity impacts to the business from the COVID-19 pandemic. As it relates to working capital, we expect our collections to remain soft for the remainder of the fiscal year. However, we have done extensive modeling for various scenarios of impact, and our current collections are ahead of those expected cash flows. We feel good about the progress we've made given the current situation. Nonetheless, we have booked an additional reserve to reflect estimated exposure subsequent to the third quarter of $153 million, which we classified as a certain item. On the accounts payable front, we have been continuously working to increase standard payment terms with our suppliers, and have seen good progress with that initiative. Our leadership position in the industry allows us to have these deeper strategic partnerships, as suppliers are willing to partner with us on extensions due to the size of our relationship and our financial strength. For inventories, we have taken appropriate steps to quickly flex our inventory levels to align with volume trends. While we have experienced some elevated levels of food spoilage, a combination of our transition to retail business and product donation has alleviated some of the impact. Our ample liquidity will allow us adequately replenish inventory levels once consumer and customer demand returns. While we navigate this unique fluid environment, we continue to review our capital allocation priorities, as we take decisive actions to manage our costs, capital spend, and working capital. I will now revisit our four priorities. As previously mentioned, we have chosen the substantially reduced capital expenditures to only urgent projects and those targeted investments to accelerate certain capabilities to make it easier for customers to do business with Cisco, and to continue our focus on industry-leading service and safety. Capital spend was in line to the prior year for the third quarter, but we expect spend to be more than $200 million below fourth quarter fiscal 2019 as a result of these efforts. Regarding our dividend, we remain committed to returning substantial value to our shareholders through our dividend payments. If needed, we would evaluate this approach each quarter moving forward. As it relates to M&A, we continue to reevaluate potential future opportunities, but should not have a high priority on large complex deals in this environment, particularly any large international deals. As previously noted in March, we have temporarily paused our share repurchase program. And as it relates to debt, we recently completed a $4 billion debt offering. We intend to use the net proceeds from the offering to repay commercial paper borrowings, to repay outstanding senior notes due in October, and for other needs as warranted, including ensuring that our business is well positioned for the return of demand to food away from home. As part of our efforts to continue strengthening our liquidity position, another important update is that we are nearing completion of our efforts to address the EBITDA interest expense ratio covenant in our revolving credit facility to help ensure our ongoing compliance with our debt covenant, even in circumstances where the COVID-19 pandemic impacts continue beyond our current expectations. We anticipate completing these efforts and disclosing our resolution in the very near term. In addition, we are launching a $600 million sterling commercial paper offering in the UK to take action to support the liquidity needs of our European operations. Cisco's Strong Balance Sheet has afforded us the stability and flexibility to navigate this unprecedented and rapidly changing business environment. More importantly, it provides confidence in our ability to achieve continued success and growth over the long term. As of May 5, 2020, we have more than $6 billion of cash in available liquidity. While we do not expect to immediately deploy the majority of the capital proceeds, we view it as prudent to ensure we have access to available liquidity given the near term uncertainties. We have not asked, and we do not intend to ask, for government bailout money or government financial assistance. Cisco was in a strong financial position prior to the COVID-19 pandemic, and we will weather the storm to emerge an even stronger company. Operator, we are now ready to take questions.

Thank you. Ladies and gentlemen, to ask the question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Mandeville with Jeffery. The line is open.

Hey, good morning, guys. Kevin, just quickly looking at the international business and the performance in the quarter there, I appreciate some of the country-specific color, but if we just kind of bundled everything up together, can you give us some perspective on where sales trends are performing relative to the U.S. in recent weeks? And in light of the material decline in profitability, can you remind us of how varied the cost structure is internationally versus the U.S.?

Yeah, sure. Thank you for the question, Chris. I'll take the first part, and then I'll toss it to Joel on the cost structure of Europe versus the U.S. It is a little bit different mostly because in the United States, we own our assets and equipment. We do some leasing overseas, but we'll end with that. Europe, the business from a top-line perspective, has been hit harder than other parts of the globe. A, it was hit earlier, and B, the declines themselves were steeper. So, as Joel said in his remarks, we're about 60% down. We were at about 60% down at the trough. Good news is across the globe, we are recovering sequentially week over week. As we mentioned, we're up about 15% from where we were at the trough. But Europe started earlier. The declines were steeper, and the recovery has been a little bit slower. And really, it comes down to one basic key concept. They have fewer drive-thrus in Europe than in the United States. So, think about all the fast-food chains in the United States and the drive-thru capability. The segment of our business that's performing the best is quick serve, drive-thru in Europe. It's more small restaurants. Many of them have closed temporarily and aren't even doing the pickup and delivery that you're seeing pretty robustly across the United States. So, we do anticipate the Europe business, European business, to come back. It's a matter of when, not if. And it's taking a little bit longer. And some of the social distancing practices in select European countries have been quite strong. Ireland, as an example, was a business of ours performing quite well before COVID. And they've had some of the most strict restrictions. What is good is that we now have line of sight for each of those countries as to what their reopening plans look like. And even in Ireland, in the month of June in particular, we're going to begin to see easing of restrictions that will result in improved business trends. As I said, being in the rear view mirror. Joel, I'll toss to you on the expense side of the question.

Yeah, thanks, Kevin. Yeah, Chris, I think the way to think about that, as Kevin mentioned in the beginning of his comment, that the expense structure in Europe is slightly different than we have throughout the rest of the organization in the sense that the assets that we have for most of the company are owned and much higher percentage of those in Europe is leased. And so this idea of the ability to flex variable, obviously, as we've done across the remainder of the business, the European business has aggressively done that type of work, both from a headcount reduction as well as a productivity. However, they do still have lease agreements. Again, work's been done there to renegotiate the terms on some of those. And again, a lot of work there. But just to be clear, that expense structure is slightly different. And therefore, you're going to see some of that increased impact there relative to here. The other thing I would remind you is that Europe has been a bit ahead of the curve in the U.S. in terms of the timing of when the -at-home requirements happened. And so, again, they've been a little bit further on, a little bit deeper into that than we are here.

Okay, that's helpful. And then, Joel, on the write-down of about $153 million, a little over $100 million or so, if that is U.S.-related, I can't speak to what competition has done, but I guess I'm just curious that, call it $107 million or so in the U.S., relative to your size, it is quite a bit different than, let's just say, U.S. Foods, whom has a notably higher write-down to date. So I guess just how comfortable are you guys with respect to that $107 million domestically? And is there any additional call you can offer with respect to how you approach that?

Yeah, so absolutely. Thank you. A couple things I would point out on that. Number one is that the $153 million as an enterprise is essentially, think about it as an estimate of what we should know now that happened between the end of the quarter and earnings. Right? So it was essentially an estimate of that amount. It is not intended to be fully reflective of all impacts that we would have going forward, but it's our best estimate of what we know today. We do anticipate some continued pressure in that space, and again, as things continue to evolve in the fourth quarter. But having said that, there's a couple key points I'd like to make in terms of what you've talked about in terms of the relative magnitude. Number one, we've made some really solid progress in terms of our collection efforts. And frankly, as I mentioned in my prepared remarks, we're actually ahead of schedule in terms of where we would have been in terms of the modeling. The second thing, as part of that, we've refined our tools, both from the collection that we do at the center, and have engaged significantly our sales force to help with our collection efforts, even to the point where actually as we've thought about incentives for them during some of this time, the work that we've done has actually included an incentive for collection for our sales team. So I would say one of the things that we feel good about, even despite some of the challenges, is a very collective and aggressive effort in terms of collections. And then the third point I'd make is that in terms of how we thought about that, it's been a combination of things where for selected customers, we've supported them in the forms of payment plans, in the forms of deferrals, and in the forms of then collecting new receivables on shorter terms. And so again, doing the things that we can do to help support their business as they're struggling through their own opportunities. So just a couple of points there, but again, we feel good about that for now, but I don't want that to be taken as the fact that yes, we've absorbed all of our exposure into that debt. But the combination of that and a lot of good collection efforts is I think the result there.

Okay. I'll leave it there. Good luck in Q4, guys. Thanks. Thank you.

Thank you. Our next question comes from the line of Judah Frommer with CreditSwift. Your line is open.

Hi, good morning, guys. Thanks for taking the question. Thanks for all the color around business trends and kind of the trough and the sequential acceleration. I was just hoping you could maybe unpack for us a bit kind of chain versus independent trends. Clearly, the independents are probably going to get going a little bit slower than chains did, and potentially are you seeing some independent closing slow the trajectory of that recovery? And then additionally, does that last week of April benefit from an Easter compared to the point where that might look a little better?

Yeah, it's Kevin. I'll start with the macro trends and then Joel can back clean up on anything that I missed. We talked about geographic differences in the business in Chris's question on this one. I think you have a pretty good insight into what's happening in the business. As I mentioned, the quick serve restaurants are doing better than all others because of the drive-through capability. The fine dining and smaller restaurants are struggling the most. What we saw throughout the month of April, not just the week of Easter that you're referencing, was a sequential -over-week improvement. Two things were happening. Those customers of ours that were in fact doing takeout and delivery are getting better at it. As we mentioned in my prepared remarks, we've helped them with their websites. We've helped them with creating social media posts. In fact, we started a campaign called Hashtag Takeout to Give Back just to creating a momentum around help that small business operator, creating awareness. And we've seen an increase in those restaurants that were up and running throughout the entire crisis sequentially -over-week, and they are ordering more from us as a result. What we've also seen is each week in April, more of our customers were getting back into business. Some of them at the very beginning of the social distancing, temporarily closed shop, we're seeing about a 10% -over-week increase in the number of unique customers that we are serving. To be clear, we still have many customers that are currently closed, but we're seeing a 10% increase -over-week. There's some uniqueness with Easter. We can go normalize for that. We can go back in time to know when Easter fell on that week, and we have in fact normalized for that. And we're seeing, as I said, sequential -over-week improvement. And in the month of May, we will accelerate further as many states in the U.S. are beginning to open up. Texas, the state we are in on Friday, May 1st, opened up, and we can see already an impact positive due to that. Canada, similarly, is kind of following a similar speed and pace, and our Latin American business is actually slightly ahead of the United States in its recovery. As we mentioned already, Europe is lagging. It entered earlier, and it's lagging from a come out the other side piece. Joel, anything to add to that?

No, other than to reemphasize, there was a sequential improvement, Judah. It was not just kind of a point A to point B where the 15%. We actually had an incremental sequential improvement over the course of the month, other than that, I have nothing else to add.

Okay, and Kevin, maybe you could help us a bit with the profitable growth on the other side of this. We hear you're signing a large Sigma customer, QSR is doing better. Maybe there's some incremental color on how you win profitable accounts. Clearly, there's some costs being pulled out of the business, but kind of maintaining the margin structure. Does meat inflation make you at all nervous on the other side of this as well?

I will take that question in two parts. I'll have Joel comment upon inflation, but let me take the profitable new business wins. The reason I say the word profitable each time I say new business wins is we want to be very clear. We have no intentions of going out and trying to buy the business. We are seeing rational pricing in the marketplace by ourselves and others in the space, and we have no intentions of buying the business. What we're referring to is our capabilities that we are bringing. I'll remind everybody that we have roughly 30% of the share of wallet of our existing customers. The work that we're doing to help them through this crisis, we help lobby for the CARES Act, we help teach them how to apply for the loans, we help teaching them how to set up websites for takeout and delivery, we're providing them with PPE that helps them stay in business. These things create long-term win-win partnerships for them and for us. We expect for an increase in share of wallet from existing customers. The shop enhancements that I referred to, and hopefully we're going to have an investor day at some point in time later this year, we can show you the improvements that we're making to the shop tool to increase the effectiveness of the suggested order that we provide those existing customers. Again, we know will result in increased share of wallet. What I was referring to on the new business opportunity, I'll do the local level first. We are changing the compensation structure for our local sales associates to align the incentives of those associates more directly to winning new business profitably. We're also changing the -to-market structure of how we organize that work. Who does what? Who calls on new customers? Who comes in and sells in additional product like our premium meat business, like our seafood and fresh-cut produce business. So it's an entire -to-end campaign -a-vis new customer prospecting, and it's being rolled out as we speak. So it's an opportunity when others are perhaps struggling to deal with this crisis, perhaps having financial challenges that will hinder their ability to acquire the inventory that they need to bring back their business. We will have the inventory in place. We will have the ability to ship on time and in full, and we will have the largest sales force in the industry actively prospecting new customers. Joel, and I'll ask if you have anything to add for inflation.

No, just a real quick on the meat piece. I mean, I think, you know, look, we do expect there to have some inflationary impact on beef due to some of the higher demand and supply shortages, as we're saying, as a result of the plant closures. I think the one thing I would just emphasize, as always, I mean, number one, we do have a substantial supply of frozen inventories that I think will continue to help carry the day there. We also, as always, have been the supplier of choice where we have access to a tremendously diversified supplier base. And so, again, access to products has always been something during any of these types of supply shortages. We've been the provider that's been able to do that. And I think just as one common general on inflation, obviously, there's a lot of moving parts in April. You know, again, the inflation numbers, obviously, we talk about one number, but there's a lot of different categories. That's a difficult thing to predict right now in general. And so we're not really looking to do that based on the forward look just with everything going on in April. But I mean, there is some view that there'll be some inflationary pressure on the meat side, without a doubt. Okay. Thanks and good luck. Thanks. Thank you.

Thank you. Our next question comes from the line of Edward Kelly with Wells Fargo. The line is open.

Hi, guys. Good morning. Thanks for all the color. My first question is really around Q4 and, Joel, your guidance on negative operating income. Can you just help us out? What level of sales declines are you anticipating that outlook? I mean, it looks like April is probably down a bit more than 50% or so. You talk about $500 million in cost saves. I don't know. You run the numbers for the model and it doesn't look like OPX is going to be down by $500 million. And then is there additional sort of like gross margin pressure in this that we need to think about or pressure on profit per case?

Yeah. So a couple of things, Ed. Thanks for the question and good morning. I think, yes, I think the way I would think about this is the following. I think your approach to your approximation of April is roughly correct. Again, I think as we talked about some level of gradual incremental improvements over the course of the quarter, I think would be what we are expecting just given the trends that we're seeing and obviously the state's gradual reopening of their economies. From a margin perspective, I do think there's, you know, our margins in this time are impacted, I guess, I would think about really by a couple of things. One is the mix of the business. Obviously, as we've talked about, there's a bit more of the chain and in particular QSR space has been better off than the local. And so that obviously will result in some level of mixed shift. In general, there also for a time period in order to move inventory, there was some level of discounting we had done in order to move some of that product. And so that is not to suggest irrational competitive behavior. It's simply to suggest movement of inventory. So I think, you know, you'll continue to see some of that. So I think there is a margin pressure that is likely to be continuing to impact that is probably one of the pieces that you're missing out of your modeling there.

And then just on the op-ed, Joel, the $500 million, is that gross number, net number?

Well, so in other words, what I would suggest is that you should think about the trends you're anticipating based on volume movement. We've given the account of a two-thirds variable and six, et cetera, et cetera. And then we've actually taken $500 million of the expense out. So I don't know how else to say it other than just to run your expense model and add back $500 million.

Okay. And then the one follow-up I just had to all that is how, you know, the variable cost component and how things, you know, customers are just not open and you're able to put a lot of costs on the sideline is probably different than it looks like when we reopen and customers are back, but everybody drops sizes or half of what they were maybe, right? How do we think about the next few quarters, you know, as we reopen and what the ramp in the cost sort of looks like against the reopenings and the variable cost component and how it changes in that environment?

Well, I'd say a couple of things to that, Ed. Number one, I want to reemphasize our point that, you know, we do believe while we try to be clear on what we expect for Q4, we do believe that's the trough. Number one, I think that's an important point to reemphasize. The second thing I would emphasize, point out is that as part of the cost work, it's not only been reduction of the heads and reduction of variable cost in that way, but the productivity improvements that we've made have also been significant. We've taken all those 90% of our overtime hours out. We've taken actually action to ensure that our routing is reflective of the fact that, again, we have the metric called pieces per trip that is only down a slight percentage from the actual volume decline, meaning that we're sending out a lot less trucks. We've got a very fast and agile rerouting of our fleet in order to maximize and optimize our routing. And so I think that's another part that comes into play here is what you're talking about. So I guess to put a bow on all that, to summarize, yeah, we're going to anticipate there's going to be some capacity restrictions or whatever things at restaurants. And there will likely be some lower than normal drops. But as we've done now, we will be very flexible and agile in terms of ensuring we're optimizing our productivity and the profitability of the business that we're going to do.

Great. Thanks, guys, and good luck going forward.

Thank you,

Ed. Thank you. Our next question comes from the line of Jeffrey Bernstein with Barclays. Your line is open.

Great. Thank you very much. A couple of questions as well. First one, just in terms of the independent restaurant outlook, I know you mentioned in your prepared remarks that perhaps your sales are a little lower than peers because you kind of overindex towards those customers. I'm just wondering, as you think about their recovery, they're getting lots of questions in terms of survival of a lot of these independents. It's been difficult to use history as a guide because we just don't have a period of time that's even close to something like this. But any thoughts you might have in terms of the potential for significant independent store closures, whether or not you can look at maybe current accounts that aren't returning calls or how you think about sizing up the independent restaurant outlook over the next six to 12 months on the heels of the pandemic? And then I had a follow-up.

Yeah, Jeff, I'll be pretty concise on this first question because obviously we can't with precision predict the question that you're asking. What we would say are a couple of key components from a color perspective. For the longest term, we expect for that local street independent customer business to normalize and return back to its pre-COVID levels. People like eating at local restaurants, the whole farm to table, organic, local, etc. Was a big trend pre-COVID and we would anticipate over time that it will revert back to that type of business penetration. And it's the most profitable segment and one where we have significant upside potential from a market share perspective. And our sales force is uniquely positioned to do well in that space for the reasons I said earlier. As it relates to the second half of calendar 2020 and what will be the first half of our fiscal 2020, we'll say it this way. From an expense management perspective, we will be planning for and preparing for the worst and we will be driving hard to make it be better than that potential outcome scenario. So that's about as clear as I can be at this point in time on that color.

Thank you. Due to the interest of time, that would be our last question. I would now like to turn the call back over to Kevin Herrigan for closing remarks.

Okay. You know, I want to thank everyone for your questions and I'm sorry that our prepared remarks took longer than they normally do. And therefore, we didn't get to as many questions as we would have liked, but we thought it was really important for us to provide you with the details we did. And I would like to close with a final few thoughts before we end the call. I'd like to summarize the significant amount of content that we covered with you this morning. As Joel reviewed, the financial impact of COVID-19 on our business is significant in the short term. With that said, we want to be very clear that we are very confident in the long term success of Cisco. We will continue to be the leader in this business and we will win new business through this crisis. We will profitably gain market share in the businesses we serve today. And we will closely evaluate new business opportunities that have been identified during this crisis. To summarize the actions we've taken, we've improved our liquidity, we've reduced our operating expenses, we are driving our upside by leveraging new business opportunities in the short term, and most importantly, we are using the COVID-19 crisis to transform our company. It is Rahm Emanuel who is most often cited with the quote, don't let a good crisis go to waste. We have taken those words to heart at Cisco. The crisis has galvanized our team to focus on a narrow set of strategic initiatives. We are working in an agile and collaborative manner in a way that is better than at any time in our proud company's history. This leadership focus will enable us to implement transformational initiatives like the ones I highlighted today in rapid manner. This includes improving our shop tool, implementing a new -to-market sales structure and selling model, and developing and implementing a world-class pricing tool to better manage top line growth and margin management. Each of these initiatives will help us become a more agile focused company. They will enable us to serve our customers more effectively, which will result in increased market share. When you combine what we will become as a company with the amazing work our sales team has done during this crisis to help our customers, we know we will be our customers most trusted business partner. That trust will help increase share of wallet with them and grow our top line and bottom line. I would like to thank all of our Cisco associates for their tireless efforts and leadership they're displaying during this crisis. Our associates inspire me every day. That concludes today's call and we thank you for joining us.