Sysco Corporation

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

Thank you, Joelle, and good morning, everyone. Welcome to Cisco's fourth quarter and full year fiscal 2020 earnings call. On today's call, we have Kevin Hurrican, our President and Chief Executive Officer, and Joel Grady, our Chief Financial Officer. Before we begin, please note that statements made during this presentation would 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 Hurrican.

Thank you, Neil, and good morning, everyone. I thank you for joining the call with us this morning. I hope that you and your families are safe and healthy. As we continue to navigate through this unprecedented environment, our first priority will always be the health and well-being of our associates. I want to thank all of our associates for their tremendous work during a period of high stress at both work and at home. I want to especially thank our warehouse associates and our drivers, whose frontline associates showed up every day during this crisis to take care of our customers, including those customers in the healthcare sector that needed our support more than ever. During this morning's call, I will discuss the state of the current business environment, Cisco's effective management of the COVID-19 crisis, and how we are strategically transforming the company to be even more effective in how we service our customers and grow our business. I'll then turn it over to Joel, who will discuss Cisco's fourth quarter and fiscal 2020 financial results. Lastly, I'll make a few closing remarks before we turn the call over for Q&A. It has been five months since the effects of COVID-19's pandemic began to significantly impact our industry in Cisco's business directly. As we discussed during the third quarter call, immediately after the onset of the crisis, Cisco took swift and decisive action to reduce variable and structural costs, to ensure liquidity, and to pivot our business to maximize sales during a period of disruption. I am tremendously proud of the work that we have done during this crisis to help our restaurant partners be as successful as possible during immensely difficult operating conditions. I will highlight a few of these wins in just a moment. Most importantly, we are not just managing through a crisis. We are transforming our company during this crisis. While others are focused on survival, we are transforming our company to improve how we serve our customers and differentiate from our competition. I will highlight the progress we are making on our transformation during today's call. Before I cover our transformation, however, I would like to give you a quick update on how we have managed the crisis to date and the general state of our business. First, Joel and his team took swift action to further strengthen our overall liquidity, which affords us financial flexibility during this difficult operating environment. As Joel will describe further, We have approximately $8 billion of available liquidity, which enables us to manage through the crisis and position Cisco for long-term success. We are unique in our ability to invest in our business to transform the company during a time of tumult. Second, we have worked rapidly to stabilize the business by taking out costs. In the fourth quarter alone, we removed approximately $500 million worth of operating expenses. which includes more than $300 million of structural and permanent costs on an annual run rate basis. We are working to remove even more structural expense, something I will discuss further in a moment. Third, we created new sources of revenue, which included the extensive work we have done to help our restaurant customers be successful. I'm very proud of the work our sales force has been doing to help our customers during this uncertain time. We have helped our restaurant customers pivot to new selling models, which includes helping them with pop-up shops in the front of their dining room and provides additional revenue streams for these customers. A powerful example of this is the fact that the restaurant operators that have engaged with Cisco on concepts like a restaurant marketplace are performing over 20% better to prior year than those who have not engaged. Our sales consultants, importantly, have helped over 16,000 of our customers set up marketplaces. We have also helped our customers with alternative reopening plans, such as patio extensions and outdoor dining options. We have provided customers with the technological support to start a website if they did not already have one. Additionally, we have helped connect them to preferred delivery partners and set up takeout menus and have provided them with the much-needed to-go containers needed to support a delivery model. We've helped our customers narrow their menus to a more focused assortment to help them maintain profitability on that narrower menu selection. Lastly, we have provided products for cleaning, sanitation, and personal protection without disruption so that our customers may continue business operations. We believe that these overall actions will help us retain customers and win net new ones in the independent restaurant customer space well beyond the pandemic. We can measure the impact of these actions through our Net Promoter Score with restaurant operators. I am proud to say that our NPS has increased 900 basis points during this crisis when compared pre versus post. For those that know NPS, a 900 basis point improvement in 100 days is a dramatic improvement. Increasing MPS has proven to increase sales and customer retention over time. This improvement is a perfect example of the Cisco we are becoming. We are not just selling food products. We are delivering products and valued services. Separately, we have shifted sales of products to regional and national grocery retailers to help alleviate the strain in the food supply chain. Although some of those sales to our larger retail partners will be opportunistic in nature, we have in fact created long-term relationships with select regional grocers where we can add value to items such as quality proteins or fresh produce where our buying advantage is helpful to them. On our last call, we announced a $500 million on an annual basis new business win. Since that time, we have secured an additional $500 million worth of incremental new business. The reliability of our operations and the capability of Cisco have enabled us to win over 1 billion annualized of new business during this crisis. We have the capability and the sales force to win new customers at the local and at the national contract level simultaneously. As it relates to the current business environment, I would like to highlight the pace of our business recovery. From May through June, we experienced steady and consistent week-over-week sales improvement. As countries and states began reopening, we experienced a swift business recovery. Unfortunately, as cases have begun increasing in certain locations, the business recovery has somewhat stagnated. With that said, it is clear that food away from home fatigue is real, excuse me, food at home fatigue is real, and that consumers are ready to reengage with restaurants, when it is safe to do so in their community. The speed and pace of that re-engagement will be dictated by the restrictions that are placed upon the industry. As long as there are safe ways to access restaurant quality meals, consumers are ready to eat away from home. Until then, our best customers are succeeding through things like takeout, delivery, and extensive patio dining. I'm glad to say that the rate of Cisco customer closures is less than the industry average, illustrating the value that we can bring to our customers through value-added services and advice. Joe will go into further details about the business environment by geography in just a little bit. Our business improvement throughout the quarter was significant, which we feel good about. We are pleased to communicate today that our results came in notably better than expected. We exited fiscal 2020 with a profitable adjusted operating income rate, which bodes well for fiscal year 2021. Additionally, Cisco was able to generate positive free cash flow during the last period of the quarter. Both the positive free cash flow and adjusted operating income were achieved despite a sales decline of approximately 30%. We anticipate sales in fiscal 2021 to be stronger than that exit rate of fiscal 2020, even with a choppy recovery, and therefore we have increased confidence in regards to fiscal 2021 profitability. I will now shift to highlight some of our progress against our transformation initiatives. We are undertaking a bold transformation that will improve how we serve our customers, differentiate Cisco from our competitors, and help transform the industry. First, we have accelerated our work to become a more digitally enabled company. We are investing to improve our digital order platform called Cisco Shop. This tool makes it easier for customers to do business with Cisco, allows Cisco to increase sales with those customers, and increases customer retention. Examples of these digital technological improvements include the following. improving the search function capabilities so that relevant and compelling results are returned to customers, which will help increase lines per customer order. We've also implemented a suggested order function for our customers, which will help introduce new items or menu trends. We've increased the effectiveness of our sales consultants by providing them with digital tools to engage their customers. Examples include enabling them to show streaming videos, highlighting menu trends, in pushing promotional opportunities to their customer base. Additionally, we are deploying a digital pricing tool. With the implementation of our new pricing tool, we can simultaneously increase sales and create margin expansion. Our second transformation effort is in our sales model. We are making it easier for our customers to do business with Cisco and to increase the effectiveness of our sales teams. 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. This includes a change to our sales compensation model, which will now focus more directly on growth. Additionally, we are increasing the number of sales specialists who will help increase sales penetration with both new and existing customers. These roles will help increase our share of wallet and increase sales in premium products, which we have struggled to penetrate in the past. Combined, these capabilities will enable our sales team to visit more customers, inspire our customers to purchase more from Cisco, and reduce friction in the purchasing environment. The last piece Friction removal will also be enabled by centralizing key customer support functions for large and or national accounts. These key accounts will have dedicated account reps that will own their experience end-to-end across all facets of Cisco's extensive business. Our third transformation, and new since the last time we have spoken, we are regionalizing our operations in the U.S., This important initiative was not public at the time of our Q3 earnings call, but we have recently begun our implementation. In July, we completed wave number one of our regionalization efforts. Through regionalization, we will be a more efficient company, we will be more agile with our decision-making, and we will execute against strategies in a more efficient manner. Our leaders will have bigger roles and will help ensure alignment and consistency across the country. Regionalization is a new leadership structure for our U.S. Broadline business. With this change, we will move from our current six markets comprised of 76 operating companies to four markets that consist of approximately 30 regions, each made up of two to three operating sites. Each region will consist of one region president and one cross-functional regional leadership team responsible for the performance across that region. This regionalization of our U.S. business is the enabler that allows us an entirely new, more centralized, more aligned, more agile Cisco to go to market. We're unleashing the power of the consolidated enterprise by making this change, eliminating redundancies, and shortening time to making decisions. This regionalization project will lay the necessary foundation for all future transformation initiatives in Cisco's future growth. It is important to note that we are not closing any physical distribution locations with this change, and we are retaining our local drivers, our local warehouse associates, and importantly, our local sales force that supports our customers. Our fourth transformation is our structural fixed cost removal from our business and becoming a more efficient company. As previously mentioned on our third quarter earnings call, we had identified and implemented actions to remove approximately 300 million of annualized permanent fixed costs from the business for fiscal 2021. Today we are updating those figures to 350 million derived from improvements we are making in operations, transportation, and corporate functions. In addition to this 350 million for 2021, We have identified additional cost improvement opportunities that we are pursuing that will generate savings starting in fiscal 2022 and beyond. We are calling these combined efforts our corporate modernization, and we will update investors on the additional favorable impact that can be expected as we move forward. Throughout this crisis, we have stayed focused on supporting our customers and putting them first as we have defined our strategy. The decisions that have impacted our associates were difficult to make. With that said, our decisions were informed by our strategy. That strategy will improve the service that we provide our customers and differentiate Cisco from others in our space. The transformation ensures that we are a stronger, leaner, and more agile company. And through our transformation, we will be better aligned to execute on what matters most. By accelerating the pace of change at Cisco through our company-wide focus on these strategic initiatives, we are positioning the company for future success, ensuring that we will emerge from the crisis stronger. Now I would like to turn the call over to Joel, who will discuss our fourth quarter and fiscal 2020 results, along with additional financial details around our business environment. I'll come back after to offer a final perspective before moving into Q&A. Joel, over to you.

Thank you, Kevin. Good morning, everyone. I will start with fourth quarter results for Cisco and results by segments, followed by an overview of full year fiscal 2020 performance. I will then give an update on cash flow and capital spend for the quarter. And finally, I'll go through our capital allocation priorities and closing comments. Our total Cisco results for the fourth quarter include a sales decrease of 43% to $8.9 billion. Local case volume within U.S. Broadline operations decreased 38.7% for the fourth quarter, while total case volume within U.S. Broadline operations decreased 41.5%. As a result of the COVID-19 pandemic, we saw a significant decline in both volume and sales across all the business segments. Gross profit decreased 47% to $1.6 billion, and gross margin decreased 159 basis points. Our gross margin for the fourth quarter was impacted by pricing to help move inventory and avoid spoilage, and by a temporary shift in customer mix as a result of the current operating environment. These results were in line with our previous guidance as it relates to margins. Adjusted operating expense decreased 26% to $1.6 billion. It is important to note that we had $115 million of incentive pay accrual reversals that favorably impacted operating expenses, and the run rate in Q1 of fiscal 2021 will be normalized when compared to Q4 fiscal 2020. With that said, The adjusted operating income run rate was profitable in June, even without the accrual reversal. Adjusted operating income decreased 104% to a loss of $34 million, and adjusted earnings per share decreased 126% to a negative 29 cents for total Cisco. Across the business, our results were impacted by various financial certain items, which I will review before proceeding into individual segment results. Our fourth quarter results are impacted by restructuring and transformational project costs associated with our various transformation initiatives. Examples of the restructuring charges include our regionalization efforts that Kevin previously mentioned. and a technology change related to our ongoing integration in France. We have also experienced an increase in past-due receivables as a result of the COVID pandemic, which has led to excess bad debt of approximately $170 million for the fourth quarter. However, we feel good about the progress we have made, tightly managing receivables, and we will continue to manage this tightly during an environment of higher bankruptcy risk. Additionally, we have taken goodwill impairment charges within our international segment due to better visibility of the volume declines stemming from the global pandemic and their impact to our France and fresh direct businesses. Lastly, during the quarter, we made the decision to allocate corporate resources that are fully dedicated to our U.S. food service operations to that reporting segment. We feel that this reclassification better reflects the true expenses of managing the U.S. business and aligns our leadership squarely on combined efficiency improvement. Moving on to results by segment. For the U.S. food service operations segment, sales for the fourth quarter were $6.1 billion which was a decrease of 43% versus the prior year period. Volume and sales both showed recovery throughout the quarter, as the exit rate was markedly improved compared to the start of the quarter. Gross profit decreased 46% to $1.2 billion for the quarter, and gross margin declined 102 basis points to 19.1%. Cisco brand sales for the fourth quarter decreased two basis points to 38.5% of total U.S. cases and decreased 239 basis points to 45.2% of local U.S. cases, which was driven by shifts in customer mix and temporary customer closures as a result of the pandemic. Our adjusted operating expenses decreased 24% to $1 billion in which was favorably impacted by changes in the business, including permanent reductions in force, more productive staffing, better warehouse operations, and efficiency improvements within our transportation initiatives. Adjusted operating income decreased 80% to $165 million. Our international food service operations were impacted by changes in foreign exchange rates. On a constant currency basis, sales decreased 52%, gross profit decreased 56%, gross margin decreased 199 basis points, adjusted operating expenses decreased 32%, and adjusted operating income decreased 162% for an adjusted operating loss of $73 million. Throughout the fourth quarter, Our UK business has remained stable as we continued our work with the DEFRA program, providing boxes of food to those in need. Our Ireland and Sweden businesses have both shown steady improvement during the quarter, as restaurants, hotels, and pubs continue to reopen for customers. Although our results have been favorable, the current rise in COVID-19 cases warrants continued attention. In Canada, the country has been steadily reopening for the past eight weeks, and we feel good about our business. The exit rate was much improved compared to the beginning of the fourth quarter. Additionally, our regionalized cost structure was beneficial and allowed for greater flexibility during the crisis. We saw mixed results throughout our Latin American countries of operations. The impact from COVID-19 continues to be most prominent in Mexico and Panama, as they have been heavily impacted by restrictions as a result of the pandemic. However, we opened a new cash and carry store in Panama that is performing well and partially offsetting some of the decline in the current environment. In Costa Rica, our cash and carry stores are also helping to partially supplement the decrease in sales from restaurants. Moving on to the SGMA segment, Sales decreased 17% to $1.3 billion compared to the prior year period, as quick-serve and drive-through restaurants continued to experience less of a downturn compared to other restaurant types. Gross profit decreased 11% to $114 million for the quarter, but gross margins improved by 56 basis points. We are encouraged by the steady progress of profitability improvement as a result of disciplined approach to profitable growth. Adjusted operating expenses decreased 11% to $103 million due to lower transportation costs. And adjusted operating income decreased 12% to $11 million. Now turning to our results for the full fiscal year 2020. Sales decreased 12% to $52.9 billion. Our total case volume for the year in US Broadline decreased 11.2% and our local case volume for the year in US Broadline decreased 9.6%. Gross profit decreased 13% to $9.9 billion and gross margin decreased 26 basis points. The cost reduction efforts put in place at the beginning of the pandemic led to an adjusted operating expense decrease of 6%. And as a result, adjusted operating income decreased 37% to $1.7 billion. Adjusted earnings per share decreased by $1.54 to $2.01, primarily driven by volume and sales softness as a result of the pandemic. Our U.S. food service segment had been growing during the first half of the fiscal year, particularly with local customers, as the work we were doing pre-COVID to grow business was progressing well. We are confident that our work to accelerate growth will return to pre-COVID levels as demand returns, and that our transformation initiatives will drive future growth. Within the international segment, Our business in Canada has performed similarly to the U.S. during the COVID time period, and we are encouraged by the recovery that has taken place throughout the fourth quarter. For our European operations, the impact from COVID-19 occurred earlier in the crisis and the declines were initially steeper, but our business has since improved. The U.K. and Ireland are now open for business and consumers are responding well. Our business in France had the strongest year-over-year revenue growth in the month of July, which is reflective of the French culture of dining out combined with the solid work deployed by our team during the crisis to improve our supply chain challenges. Currently, France is our top performing country in Europe on a top line basis. As for our businesses in Latin America, the companies were performing well pre-COVID and are continuing to show signs of recovery as restaurants and food-away-from-home places reopen. For the full year, Sigma's results, despite the impact of the pandemic, achieved their operating income plan, showing their ability to gain new customers and operate efficiently through the crisis. I will now move to cash flow and working capital. For the fourth quarter, cash flow from operations was $540 million, We had a working capital benefit, which was driven by reduced volume levels in addition to improved accounts receivables and accounts payables, ESOs. Our net CapEx for the fourth quarter was $101 million as a result of our substantially reduced capital expenditures that were directed only to targeted initiative spend and urgent projects. As previously indicated, our fourth quarter fiscal 2020 spend was $200 million less than our fourth quarter fiscal 2019 spent. And as a result, free cash flow was $439 million. For fiscal 2020, cash flow from operations was $1.6 billion, which is $793 million lower than fiscal 2019. Net capex for fiscal year 2020 was $692 million, or about 1.3% of sales. Free cash flow for fiscal 2020 was $927 million, which was $813 million lower than the same period last year. The decline in free cash flow was principally the result of the stop-to-top line due to the COVID-19 pandemic, but was partially offset by positive working capital throughout the fourth quarter. I am proud to say that despite the softer performance, we exited fiscal 2020 with a positive adjusted operating income rate, and we had 10 consecutive weeks of positive free cash flow during the end of the fourth quarter. I want to remind everyone of the seasonality of our cash flow, which is typically lower in the first half of the fiscal year and higher in the back half of the fiscal year. I'm also proud to say that we have a balance sheet that affords us the stability and flexibility to navigate this rapidly changing business environment. As of August 11, 2020, we have more than $8 billion of cash and available liquidity, which ensures survivability for an extended period and through an impact much worse than we are currently experiencing or expecting. While we do not currently expect to 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. I also want to reiterate that even as we continue to navigate through the COVID-19 pandemic, our capital allocation priorities remain the same. Let me give you a comment around each area. From an investment perspective, As previously mentioned, we have chosen to substantially reduce 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 continue our focus on industry-leading service and safety. Regarding Cisco's dividend, we remain committed to returning substantial value to our shareholders through our dividend payment. We are unable to grow our dividend due to an amendment restriction as previously communicated. However, we are committed to the long-term growth of the dividend. For M&A, we continue to reevaluate potential future opportunities, but do not have a high priority on large complex deals in this environment. Let me also note that we are choosing to divest our cake business in the first quarter of fiscal 2021. This divestiture will allow us to better focus and accelerate growth in our core business. Our CAKE business is a technology program we sell to customers largely driven by point of sale systems. We would like to thank the CAKE associates and leaders for their hard work and dedication to our business. The technology is a good solution for our customers and we'll continue to support it through the transition. The CAKE divestiture, it should be noted, will not impact our lab's employees who are supporting our digital transformation efforts. As it relates to our share buyback program, we have temporarily paused our share repurchases. Currently, we expect to maintain this position throughout fiscal 2021. And lastly, as it relates to debt, We paid down $930 million on our revolving credit facility during the fourth quarter, and we have $700 million still remaining on the facility. In addition, we have $750 million of senior note maturity due in October. As a reminder, we do not have any secured debt. We have the flexibility to make decisions that are in the best interest of our company. Now, before closing, I'd like to provide you with some commentary on the outlook for fiscal 2021. Cisco is well positioned for current and future success with an ability to shift focus across all segments throughout the food service industry, whether local or national. As a result, we can easily pivot our concentration to areas such as QSR and healthcare, which are currently outperforming. or shift into other food away from home segments such as education and travel and leisure as economic demand recovers. During the fourth quarter, gross margins were initially pressured due to product discounting to help mitigate inventory spoilage, but improved throughout the quarter. We expect gross margins to reflect top line mix changes, but otherwise remain stable throughout fiscal 2021. As Kevin said, we now also have a run rate of approximately $350 million in structural annualized costs removed from the business. Interest expense has risen during the crisis as we strengthened our balance sheets, but those increases have now stabilized in the current run rate. Lastly, from a tax perspective, we expect our overall effective tax rate to be approximately 24% in fiscal 2021. With that said, and considering the uncertainty of the current environment, forward-looking financial and operational results cannot be reasonably estimated at this time. Before we go to Q&A, let me turn it back over to Kevin for some closing comments. Back to you, Kevin.

Thank you, Joel. I'd like to close with a few final thoughts before we move into Q&A. Cisco went into this crisis in a position of strength, which afforded us the ability to act quickly, reduce costs, ensure liquidity, and pivot our business in support of customers. Although it has been a tough operating environment, we have managed well through the crisis, and the exit velocity of the business was positive, as Joel just communicated. Through our new business wins, totaling more than $1 billion since the onset of the pandemic, and our continued cost-out efforts, now totaling more than $350 million for fiscal 2021, Cisco is well-positioned for current success and future growth. More importantly, we are confident our transformation initiatives, including digital transformation, sales model, regionalization, and expense structure modernization are paving the path for the company's long-term success. As I've said, we are managing the COVID crisis and transforming our company. We will exit this crisis a stronger Cisco better able to serve our customers, and differentiated from others in our space. I want to close our call today once again by thanking our associates, especially our frontline heroes, who are out there working hard serving our customers every day. And with that, operator, we're now ready for questions.

Thank you. To ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Chris Mandeville with Jefferies. Your line is now open.

Hey, good morning, gentlemen. Kevin, can you just shed some additional light on what you're seeing with your total and local case growth quarter to date? And then specific to the local, what's kind of the delta in performance for those of whom opened up early versus late? Maybe you could talk about any notable geographic or suburban versus rural cases versus urban differences that you're seeing. And then can you also just help us better understand that negative mix shift in private label penetration for local? I mean, is that a reflection of some of your really truer subscale operators seeing greater challenges within that segment?

Yeah, Chris, good morning, and thank you for the questions. I've got a couple of them in there, so I'll go through them, you know, in order. As I indicated in my prepared remarks, the sequential improvement through Q4 was steady. So each week getting better than the week before, pretty much across the globe, pretty much in all sectors, both suburban and rural and urban. Unfortunately, in the month of July, there was some stagnation. I think that's been pretty well documented by both the restaurant customers we serve and others in our space. The good news is it's not going backward. So as cases are surging in many parts of the globe and states within United States, we are not seeing a backward slide. And recently, we are beginning to see, again, that incremental sequential, you know, week-over-week improvements. We're not going to quote stats for the month of August, but, you know, we were improving every week through Q4. We saw stagnation in July, and we're now seeing, once again, steady improvement in the month of August on a week-on-week basis. As Joel said, from a geographic perspective, I think, you know, that's some of the uniqueness of Cisco is our European operations in Q4 were hit the hardest, they were hit the earliest, and they were the slowest to recover. However, that headwind in Q4 is actually more of a tailwind in Q1, because Europe has done a pretty nice job, actually, of managing the crisis from a health perspective, and we're seeing very strong improvement. And as Joel communicated, from a top-line perspective, France being the top-performing country in our entire portfolio right now, as essentially restaurants are open for business in its entirety. So we're monitoring it very closely. We're doing everything within our capability and power to help our restaurant operating customers be successful, providing them extensions on their patios, providing them with takeout to go, et cetera. Your question about rural versus urban, I think your insights there are probably on target. The more rural, the better the performance the prior year has been than urban. But we are seeing improvement in all sectors, including restaurants. urban sectors. And I'll toss to Joel for the question on the, I believe you were asking about Cisco private brand penetration, and I'll toss over to Joel to answer that question.

Thanks, Kevin. Yeah, Chris, I would suggest that I think the, as in our business, good operators win all the time, and others that struggle at times struggle. And so I think the, what you're really seeing there is just the impact of the mixed change in the business that is indicative of both the mix between, again, some of the better operators and others that have not managed to survive, and then also between the overall business that's obviously growing faster in those areas of QSR, of national accounts, of health care. So I think really that's the primary impact that you're seeing there from a brand perspective.

Okay. And then just my follow-up is, Joe, as we look to fiscal 21, Can you quantify that the customer makes impact to Q4 gross margins? As you stated, that's what will only likely persist going forward. And then can you offer any more concrete color on capex spend and DNA since the latter actually increased quite notably in the quarter? Sure.

Yeah, from a margin perspective, Chris, I'm not going to quantify that specifically. What I would say, as we talked about, the margins improved consistently over the course of the fourth quarter and heading into the first quarter. So some of the impact that we had in the beginning of the quarter, that was really related to inventory movement to avoid spoilage, something that actually continued to go away really throughout the course of the quarter. And the margins were more reflective of the mixed impact that we're referring to. We anticipate those to continue as we move into the first quarter, but I'm not going to give any other specific commentary or guidance on that. The second part, as it relates to – I'm sorry, I lost the second question.

Depreciation was an increase in Q4 versus question.

Yeah, I'm not able to hear you. Okay. Can you repeat the question, Chris?

Yeah, no, the latter part was just with regards to how to think about capex spend in fiscal 21 as well as DNA since it saw a pretty notable uptick in Q4.

Yeah, so I think the capital spend piece, you know, we certainly, as we indicated, we're going to be much lower than we were the prior year in Q4. And I would anticipate we would continue those trends as we head into the next fiscal year. I think at one point we talked about the fact that we anticipated our total capital spend to be somewhere in the range of 25% of what we'd call our normalized run rate. And I would anticipate that being more likely than not. We will, of course, continue to evaluate that as the year goes by and conditions change. But again, certainly focused on those urgent projects and those key transformational initiatives that we've talked about.

Okay. And anything on the DNA front?

You know, there's nothing really major to call out there, Chris, on the DNA side. I mean, I think there – yeah, I don't – there's nothing really significant there to call out. Okay. Best of luck on the back half of the calendar year, guys. Thank you. Thanks.

Thank you, Chris.

Thank you. Our next question comes from Edward Kelly with Wells Fargo. Your line is now open.

Hi, guys. Good morning. I just wanted to follow up on the case growth trend just to avoid some confusion here. At the bottom, you were down about 60% or so. I think it was around mid-May or so you had given us an update. Post that, we had heard from you that things continued to get better. I'm just kind of curious as to why you won't talk about the exit rate on case growth. It kind of seems like logic would follow that you're probably down in the U.S. somewhere in the low to mid 20% range at the end of the quarter. Is that ballpark? Just any way you can help us there because it's important as to how we're going to start modeling the current quarter.

Yeah, Ed, we exited the month of June in the more like the minus 30 range. That's a global number, you know, across all lines of business that we've had. And we've seen improvement in August from that starting point, if you will, for Q1 of fiscal 2021. In fact, the most recent week was our strongest week since the beginning of the pandemic. So as I said, there was steady improvement. We exited Q4 at minus 30. We were stagnated in July. And then we begin to see a weekly improvement since that point in time, with the most recent week being our best week. That's where we are at this point. We're not going to get into kind of the business of providing weekly guidance for obvious reasons, but we're seeing positive trends and improvement. And another key point that we said in our prepared remarks, we're profitable at a minus 30%, and we are confident that our sales results for fiscal 2021 will be better than that rate. And we're prepared if, in fact, a worst-case scenario were to occur and we were forced to have restaurant operators shut down again, we're prepared to handle inventory reductions, expense reductions in a rapid manner if that were to occur.

Great. Thanks. That's helpful, Kevin. And also, just as a follow-up, on the regionalization, can you just talk about the genesis of the initiative, the benefits that you expect to get from it, What are the risks, if any? I'm just kind of curious as to what's really changing here for you and the upside associated with it.

Yeah. Thank you for the question. Appreciate it. The Opco model, as we called it, served Cisco well for decades. And there's an entrepreneurial spirit and culture tied to Cisco that grew up from the foundation of this company, which was my family's coming together to form a purchasing consortium. So That's how we grew up. It's who we were. We had regional, excuse me, operating company leaders who, yes, ran the Cisco playbook, but there was a fair amount of independence in entrepreneurial thinking and behavior in regards to how that structure worked. There are strengths tied to that. The disadvantages tied to that, though, would be it takes longer for Cisco to implement a change, and we wouldn't be as consistent as we wanted to be across the country in if we rolled out a new program, a new initiative. With regionalization, we've essentially removed the operating company mentality and moved on to a regional president who will now supervise multiple physical locations and a single combined sales force across all locations. The benefits that will come from a regionalization approach is a better alignment to the corporate strategy, ability to move faster on implementing change, and to be a more consistent version of Cisco. On the risk side, we have some leaders that have departed the organization as a part of that change, and these were hardworking people who cared about the success of Cisco. On the opposite side of that risk would be we've placed, obviously, our top talent into these bigger jobs, and we call it fewer bigger roles led by our top talent. So what I'm personally confident in, because I've done this before multiple times in my career, when you put top talent into bigger roles, they can have a very positive impact on an even broader geography situation. on an even broader set of responsibilities. I do just want to explain with, you know, detail one specific upside, which would be to now have our sales force led across physical geographies. We can do a better job of sharing resources across boundaries, being easier to do business with for our larger customers. And net-net, we believe it will accelerate our pace of change.

Great. Thank you.

Thank you, Ed. Thank you.

Thank you. Our next question comes from Nicole Miller with Piper Sandler. Your line is now open.

Thank you so much and good morning. Just two quick questions for me. The first is going back to the early prepared commentary around your ability to invest and find leverage while others focus on survival. Could you just talk really big picture about the national distribution situation It seems to me you don't really need anybody to lose for you to win. And what I'm wondering about is it seems to be making consumers confident to eat at restaurants and taking the share back from grocery. I think that there's plenty of super regionals that are actually seeing a recovery as well. So could you talk about maybe you as a global brand, maybe there's a difference between a super regional versus a regional versus an independent? Thank you.

Nicole, thank you for the question. I just want to come back to one of your key points, which is we, as Cisco, can and will win during this environment. It doesn't necessarily need to come at the loss of a specific competitor, so to speak. Some of the key stats that we use to convey these points, we have roughly 30% share of wallet from our independent street customers that we serve today. That is something that we know we can improve. And with just the customers we serve today, we know we can drive increased sales at Cisco. We've also recently changed our sales consultant compensation system to motivate them to go win more local street customer business. We believe we can increase market share through that activity. Today, we're not declaring the amount of net new business at the local level that we are winning because there's a lot of churn and tumult within the independent street customer business that I can come back to later. So we're not quoting those stats on today's call. The billion dollars of net new business that I articulated in my prepared remarks actually did come from the national sales level, some of that business in the SGMA sector. And the why we're winning business at the national level at an accelerating rate is because the trust that those customers have in Cisco. They have confidence that we will have access to product, including fresh product. They have confidence that we're going to ship on time and in full. And they're moving business away from others over to us because they have confidence that we are here to succeed with them, both during this pandemic and, more importantly, afterwards, that they can grow with us. So why I'm confident is we know we can win at the national level for the reasons that I just described. And we have a billion dollars of net new wins Q3, and we know we can win at the local independent street level by increasing share of wallet and winning net new doors at the independent sector level. I'll pause there, Nicole, and come back to you if you have a follow-up.

Thank you. My follow-up is around the pieces of the business. So I believe it's like two-thirds, so a big chunk is in restaurants. And I wanted to understand the percentage in what might be called a limited service or QSR versus full service or casual dining. And I'm asking because of that comment around, you know, the recovery kind of stalling out in July. We know from Map Track that casual dining was down 25 and limited service across the board flat. So if I just do the math, it's about 80% of your restaurant portfolio is in the QSR versus about 20% in casual dining. Is that right? Is it flawed? And then there was also a comment about, hey, we can easily shift to QSR. Can you tell us a little bit more about how you do that? Thank you.

Sure, I'll start with that. And a couple points. Number one is that the general mix of our business, if you think about it, is about 50-50 when it comes to local and contract. So when you think about the 62% of our business as restaurants, I think that roughly applies. And then, again, there's a smaller percentage of that that is the QSR versus the fast casual. So we haven't specifically given those points out, but that's really how to think about it. And I think the math that you did is fairly representative of of uh you know how i would think about that ultimately i think the question on whether the talk about the shift is really related to this idea of you know fishing where the fish are let me be very clear we are not this is not some overall strategic focus that says we're no longer focused on independence we clearly that's our bread and butter that's the things that we do best that's the business that we support in the most effective way. And so that clearly remains the focus of ours. But during this time of uncertainty where those recoveries may be somewhat slower in that part of the industry, this is really about, well, good, and I'll call fishing where the fish are. And focusing on those areas where we have a right to win in that space, in the QSR space, in some of the other chain businesses, in healthcare would be another opportunity where I would say is somewhere we'd over-index. So that's the perspective I'd give as it relates to that. Kevin, I don't know if there's anything else you'd like to add there.

Yeah, it's a good question, and we understand the question. And just to be clear, as Joel said, we are actively pursuing growth in both sectors. I just want to make one important point. Prior to COVID, we, Cisco, were posting our highest case growth in the independent sector in more than 10 years. We were winning share at an accelerating rate. We anticipate that will continue post-pandemic. And customers want to eat at independent restaurant customers, farm-to-table, fresher trends, et cetera. And we're going to win in that space, and it's the most profitable sector. So we're not shy about the fact that we want to win in that space, and that will be our long-term growth strategy. In the meantime, Joel's expression of fish where the fish are, yes, QSR is the best-performing sector at this point in time, and we have the opportunity to go win new business in that space, and we will do so.

Thank you.

Thank you. Thank you.

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

Great. Thank you very much. Just two broader industry questions. Excuse me, Kevin. You mentioned in your prepared remarks that perhaps Cisco is seeing less of independent closures among their customers versus the industry average. I was wondering if you can provide any color on whether it's your closures or what you're hearing in terms of the broader industry. The food service distributors seem to be our best gauge of how the independents are doing during such a difficult crisis. And then I had one follow-up.

Yeah, Jeff, thanks for the question. And so, you know, what we quoted is, you know, our customers from a closure perspective are performing better than the industry average. I prefer not to get into, you know, quoting those percentages, but it is a factually accurate, you know, statement. What we see in the independent space, because this is a really important question, I think there's been some external reports that are embellished as it relates to permanent bankruptcy closures. There's two types of closures that we're seeing right now. We're seeing the temporary closure for the restaurant operator who is struggling with how to succeed in just a takeout and delivery business. We're in active conversations with those customers, and as restrictions ease, they're getting back into the game. And then, obviously, there's permanent closures. I think some of the industry reports tied to permanent closures are very elevated. What we anticipate is that there will be an increase in churn. There will be a timing gap caused by that churn by those that exit and then those that will actually get back into this business after they've cleared their bankruptcy. But there's an opportunity for us to take share during that environment as well as we increase share of wallet and as we do more new customer prospecting this summer and into the fall than we've ever done before. and that 30% share of wallet that I talked about. It is also important, this HEALS Act that's being negotiated, we are optimistic and hopeful that it will get approved because our small business customers would benefit and need help from that act. And we like the initial drafts of what's being proposed and we're optimistic and hopeful that the HEALS Act can get approved and assist those small customers. So that's our best way of answering it. We anticipate an elevated amount of churn we do not see a substantial and significant reduction in the number of doors in the industry for the long term. And I'll toss it back to you, Jeffrey, your follow-up.

Actually, Kevin, if I could just add one other important point there. I think, Jeffrey, the other point that's really key is the help that we are actually providing to our restaurant customers. I think one of the things that we certainly feel good about are the things that we've done in terms of, you know, Kevin mentioned in his prepared remarks, the grocery rounds, the marketplaces, the product baskets around the PP&E and sanitizing products, the things we're doing to help assist with the outdoor dining, with the to-go containers, et cetera. There's a whole series of things, including web development, that we've done to actually help our customers, and actually we feel good about that, and I think that's part of the reason that we do feel we've had some lower than what we'd call in the industry. So just wanted to add that one point.

No, I appreciate that color. And then just my follow-up, kind of broader industry question. Again, Kevin, in your prepared remarks, you said, you know, you think the, obviously the recovery was stagnant in the month of July, it's improving a little bit now in August, but you mentioned that you thought the, you know, food at home fatigue is real, and you thought that the consumers would re-engage when things are safe, which is obviously a very bullish comment. I'm just wondering how, what gives you the confidence that the restaurant industry can get back to seating what was 100% capacity or at least serving, whether in restaurant or at home, when it just seems so hard to read it right now when most of these restaurants are only reopening at 50% capacity. So I'm just wondering how the confidence level in terms of 100%, when right now it does seem good, but in reality they're just not servicing or they're not necessarily looking at the full industry. Thank you.

Yeah, it's a really good question and appreciate it. And why we are bullish about our ability to say that is because we can see the data at a finite level across the globe by sector, by geography, rural versus urban, et cetera. And here's what I can say with confidence. As the restrictions are removed on the restaurant operator, there's almost an immediate improvement in the results in that sector. And so we can see very clearly in those places where the easing of restrictions is greater, the data performing substantially better. And when they move from a phase one to a two or three, you know, et cetera, there's an almost immediate pop. You know, the reason that we've stagnated or did stagnate in July is, as you know, we paused in most locales the extension of, you know, the easing of restrictions. So that's why the recovery stagnated. But, no, what we're seeing is in August, even with that stagnated level of restrictions, the business is now starting to get better again because consumers want to go out. And so that's my best way of answering the question. You know, rural versus urban where the restrictions are different, we can very clearly see the difference in the results. And we do know that at some point in time in the future, those restrictions are going to begin to ease. And if people wear masks and wash their hands and do all the things we're supposed to do, you can safely go out to eat, do takeout, do delivery. And restaurant operators are also getting better at it. Last thing I'd say, our restaurant operators are getting better at doing takeout and delivery. And the customers are getting used to using an app to order food, be picked up at a restaurant, and then bring it to their home. So it's for those reasons that we have confidence.

Great. Thank you very much.

Thank you. Our next question comes from Kelly Banya with BML Capital. Your line is now open.

Hi. Good morning. Thanks for taking our questions. Kevin and Joel, I was wondering if you could just talk a little bit more about the changes to the compensation structure that you mentioned and how that's being received across your sales force. and anything we should consider in relation to this change as we think about just trying to model margins going forward or how much of that compensation structure is part of the 350 million in longer-term structural cost savings?

Yeah, I'll do the first part, Kelly, and then I'll toss to Joel for margin. But let me make one thing very clear. The comp change was not in any way, shape, or form intended to decrease our operating expenses. The comp change was to better align the focus of our sales consultants on the strategy of our company, which is to profitably grow. So the biggest change, and I'd actually prefer not to get into the granular details of our comp structure because it's proprietary confidential and we believe, you know, a differentiating item at Cisco versus other places where people can work. But what we've clearly been able to do is create a comp structure that provides our associates with a level of base pay that they need to be able to pay their bills and have a comfortable living, and appropriate incentives that drive their behavior to prospect net new profitable business at a rate that will be greater than the past. However, with that said, the compensation system was informed by and advised by our sales consultants. We asked them what they wanted. We asked them what they felt would be a fair and appropriate method of compensation to address their concerns, address their needs. So to answer your question directly, The feedback and the input from our sales consultants has been extremely positive about this change. But it's change. And when you introduce change to a large number of people, obviously communication is important, change management is important, and we've leaned very, very heavily into the communication and change management efforts tied to this. But we know this is going to help drive improved business performance, and it was not done to reduce operating expenses. I'll toss it over to Joel to talk about the margin comment or question.

Sure. Kelly, the way I would think about that is this program, as Kevin talked about, is designed to incent profitable growth. What that means to me is continue to drive line item penetration, to continue to drive new customers. When you combine that with some of the other things that we've talked about that we'll obviously be providing more detail later, such as our pricing tool, some of these things ultimately we do believe are things that will not only improve our gross profit dollars, which is really the most important measure, but certainly the growth from a margin percentage and ultimately generating more gross profit dollars. Again, I like percentages. I like dollars more. And I think the way I would think about that is ultimately what this is designed to drive and how I would think about that, Kelly.

Thank you. And our next question comes from John Ivanko with JP Morgan. Your line is now open.

Hi, thank you. I remember maybe it was a couple of years ago, and I'm going to just do all this by memory, not my notes, so excuse me for that. The regionalization of Canada is And the question, I think, was asked back then whether there would be some opportunities of kind of applying that regionalization done in Canada to the U.S. And I think for a number of different reasons, I think just how the geography of Canada is different than the U.S., the answer was no. But am I right in kind of remembering that correctly? What did you see in Canada in terms of overall productivity and reception from both the employees and the customers and If there were any learnings from Canada, whether positive or negative, that we can apply to the U.S. is basically a good benchmark, if you will, in comparison of those two markets. Thanks.

Yeah, John, it's a really good question, and I'll just say a couple of important things tied to this. In a host of ways, Canada is a great business for us to test things, try things, and there's a host of examples, regionalization being one. We're doing some work on direct-to-consumer up in Canada to learn a lot about that space right now. We can test marketing concepts in Canada. So it's actually really helpful. It's a business that is reasonably consistent and similar to our U.S. business, and it's a business that we can use as a test laboratory. And our Canadian team wanted to do what I just described, the regionalization, and it's worked very well for Canada. As indicated, they can move more swiftly on rolling out change. They can get to better, quicker alignment on key transformation initiatives. And as Joel said in his prepared remarks, when needed, they can execute on things like expense reductions faster. So a leaner, more efficient, more aligned model. And we believe the U.S. business will benefit for all of those reasons. John, my point, too, is there's no better time than the middle of a pandemic to make a change like this. And I mean that sincerely. Thank you. So we have a proud 50-plus year culture that served this company well. We're a very profitable company. We've consistently grown sales and profit. And change like this introduces risk. There's no better time than now to be able to do that. And why I say that is our team understands the impetus and the need for change. Our leaders are completely aligned with what we're doing, and they're running towards the light as to a better operating model. And Change Management 101 says, But this COVID crisis, if there's a silver lining in the cloud, the impetus for change and the willingness and the appetite for our leaders to get on board and go in the direction where we're headed has never been higher, and I believe that will pave a road of success for us as we head to the future. Great. Thank you. Thank you, John.

Thank you. That concludes our question and answer session, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.