Sysco Corporation

Good morning, and welcome to Cisco's second quarter fiscal 2021 conference call. As a reminder, today's call is being recorded. We will begin with opening remarks and introductions. I'd like to turn the call over to Neil Russell, Senior Vice President of Corporate Affairs and Chief Communications Operator. Officer, please go ahead.

Good morning, everyone, and welcome to Cisco's second quarter fiscal 2021 earnings call. On today's call, we have Kevin Hurrican, our President and Chief Executive Officer, and Aaron Ault, 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 27, 2020, subsequent SEC filings, and in the news release issued earlier this morning. A copy of these materials can be found in the Investor section at cisco.com. Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures are included at the end of the presentation slides and can also be found in the investor section of our website. To ensure that we have sufficient time to answer all questions, we'd like to ask each participant to limit their time today to one question and one follow-up. Now, I'd like to turn the call over to our President and Chief Executive Officer, Kevin Hurrican. Thank you, Neil.

Good morning, everyone, and thank you for joining our call today. I hope that you and your families are staying safe and healthy. During this morning's call, I will spend time discussing Cisco's recent performance. I'll provide an update on our business transformation, and I'll share some highlights of our preparation for the pending business environment recovery. I'll then turn it over to Aaron, who will discuss Cisco's second quarter fiscal results. As we have discussed during prior calls, Cisco has taken swift and decisive action throughout the pandemic to help our customers succeed during a time of disruption. We have carefully managed our associate productivity, inventory productivity, and business investments. To that end, we initiated a bold business transformation to strategically transform our company for long-term success. I am pleased to confirm that our business transformation remains on track, and we are confident that the strategic initiatives will enable profitable future growth and will differentiate Cisco from our competitors. The COVID environment has placed substantial restrictions upon the customers we serve, in the food away from home sector, and has disrupted our marketplace. In light of those realities, we are pleased with the financial results that we delivered in the first half of fiscal 2021, and for the second quarter, we performed generally in line with our expectations adjusted for the environment. While our second quarter financial results were down compared to prior years, we delivered a profitable quarter despite 23% decline in our top line sales and funded investments to enable our transformation. Our customers experienced increasingly restrictive conditions on their operations during the second quarter, which were most notable in December when restaurant traffic and sales declined. Additionally, our international segment has been hard hit due to tougher restrictions in the countries in which we operate. At Cisco, we are not taking the restrictions on customers as a gravity issue. We are doing more than ever before to help our customers navigate this challenging environment. I am pleased to report that during the second quarter, Cisco gained overall market share versus the rest of the industry, reflecting the early progress of our transformation and the success we are having in winning new business. We continue to win meaningful business in the national account space and signed an incremental $200 million of net new business in the quarter, which totals more than 1.5 billion of net new contracted business since the start of the pandemic. Additionally, throughout the second quarter, we began making investments in preparation for the business recovery that we believe will begin in calendar year 2021. Those investments will increase in the third fiscal quarter, and Aaron will speak more to this in a moment. Examples of investments during the second quarter include investments in our customers, in our people, in our working capital, and in our technology. I'd like to highlight some examples of each of these purposeful choices. Investments in our customers, including our New Restaurants Rising campaign, which makes it easier for restaurants to succeed and strengthen their business for the future. a visual representation of our restaurants rising campaign can be found on page six of our presentation. Most notably, we announced in November that we are eliminating minimum delivery requirements for regularly scheduled delivery days, which provides operators significant flexibility in managing their business and makes it easier to order what they need when they need it. In addition, We are not eliminating delivery service days during the second wave of COVID, a practice we know select competition is currently doing. We see the light at the end of the tunnel, and as such, we are prioritizing customer service. A little incremental expense right now is a small price to pay for customer loyalty and partnership. Our sales consultants are leveraging the Restaurants Rising program to retain current customers and helps Cisco attract and serve new ones. In addition to the no-order minimums commitment, Cisco sales consultants are assisting their customers with setting up touchless menus, optimizing delivery and takeout operations, and helping with marketing programs to create awareness of our customers' operations, just to name a few of our value-added services. I am proud to report that our net promoter score increased by more than 1,000 basis points in the quarter, due in large part to the connections with our customers generated by the Restaurant Rising program. The MPS increase was our largest quarterly increase in our company's history. Importantly, as you can see on page seven in our slides, the incremental closure rate of Cisco's customers is 50% below the industry average. And lastly, we onboarded more new local customers in Q2 than in any single quarter in the last five years. In addition to investing in our customers, we are making investments in our people. We are intentionally retaining drivers despite a volume decline in December to ensure we have them available for our pending volume recovery. Drivers are in short supply across the country, and while this investment will drive some incremental transportation expense in the short term, over the long term, it will help ensure that Cisco is able to maximize our share gains during the upcoming business recovery. As you know, we made changes to our sales organization and sales compensation during the summer. Our associate retention has improved compared to historical retention rates, and our improved retention will help with sales productivity metrics in the future. We are beginning to make investments in working capital to position the right products in the right locations in preparation for the upcoming business recovery. Cisco has the broadest inventory assortment in the industry. Our ability to ship product on time and in full during the upcoming period of volume recovery is a core element of what makes Cisco the strongest broad line distributor in the industry. We have the financial strength and capacity to invest in products and in inventory, while other food service distributors may struggle with sufficient cash flow to make similar investments in the coming quarters. We are also offering payment plans in partnership with our customers to ensure their continuity. Lastly, we are making strategic investments in our technology to improve the customer experience. This includes our Cisco shop technology, our new pricing software, and improvements we are making in our supply chain systems. Cisco's ability to invest in our customers, our people, our inventory, and our technology while delivering a profitable quarter during this pandemic is a testament to the strength of our balance sheet and our leadership team. I'd like to turn now to providing an update on our business transformation. First, as we have shared previously, we are focused on advancing our customer-facing digital tools to improve the customer's experience with Cisco and drive incremental sales. Priority number one is improving our mobile ordering platform, Cisco Shop. Notably, We are now onboarding new customers in less than 24 hours, a step change improvement. The number of customer orders placed through Cisco Shop continues to meaningfully increase throughout the quarter. Additionally, our new pricing software is now live in our first test region. We are learning a lot through this regional pilot, and we remain on track to roll out the pricing system across the country. The goal of this effort is to improve pricing transparency with our customers and drive incremental sales and gross profit growth by optimizing prices at the customer item level. Additionally, by automating customer-level pricing, we will free up time for our valued sales consultants to spend with customers on value-added activities such as menu design, Cisco brand penetration, and other drivers of sales and margins. Second, we are improving our go-to-market selling strategy by transforming our sales process. Through our sales transformation, we have an improved, more customer-centric organizational structure. Our sales transformation is progressing well, and the team-based selling approach is gaining traction. We have created in-field new specialist selling positions. We have implemented a sales quarterback position that helps guide the collective sales teams across a given geography. As I mentioned on our last call, we have launched our first cuisine segment go-to-market selling strategy and we're seeing initial signs of success with that customer segment through incremental market share gains. We will roll out this program to additional cuisine segments in calendar 2021. Lastly, Cisco completed the regionalization of our field leadership structure at the start of our second quarter. I am pleased to report that our new regional presidents are in place and are finding quick wins to improve our business. The average tenure of our market and regional leaders is over 20 years, and these experienced and talented leaders are highly capable of driving top performance within Cisco. Examples of quick wins include optimizing our inventory assortment across multiple physical sites and optimizing the servicing of key customers by ensuring the most efficient physical location services each customer location. To be a great company, you need to have a world-class leadership team. I am pleased that during the quarter, we made important progress in strengthening our leadership team. Aaron Alt joined Cisco as our Chief Financial Officer. Aaron is with us today, and you'll be hearing from him next. Aaron is a proven finance leader with over 20 years of experience in food service and retail leadership positions. He has a track record of transformation and a value creation at large organizations in multiple industries. Additionally, Tom Pecht has joined Cisco as Chief Information and Digital Officer. Tom has experience leading enterprise information technology strategy, services, operations, risk, and cybersecurity for large global enterprises. In his most recent role, He worked for a global B2B distributor in the electronics industry, experience that is directly applicable to the transformational journey at Cisco. Additionally, Tim Orting has officially started his position leading our international division. Tim will be based in our London offices and will be responsible for driving profitable growth and operational excellence across our international geographies. With Tim joining Cisco, I was able to reduce the number of my direct reports by four, which allows me to focus more of my time and energy on managing the strategy development and execution of the company. Joel Grady has begun his new role leading business development and is actively engaged in identifying new sources of growth for Cisco. I am pleased to say that the transition of Cisco's leadership team is now complete. We have a strong management team that balances Cisco and food service industry expertise with best-in-class experience from other industries. Our new leaders join a talented and an experienced Cisco leadership team. Greg Bertrand, the leader of our US business, has over 35 years of industry experience and 30 years specific with Cisco. Greg's expertise in steady hand and running our largest business during the COVID disruption has been invaluable. I appreciate his leadership and the strong impact he has on our results. Great leadership teams work as a team on a common agenda. Our transformation strategy has galvanized this leadership team around a common purpose, and I am honored to work with them to set the standard for food service distribution for many years to come. I report to you today with strong confidence that a pending business recovery sits before us. As vaccine administration makes progress across the globe, the restrictions currently placed upon our customers will begin to ease. We can see in our performance data that once those restrictions ease, consumers are ready and willing to eat away from home. At Cisco, we are working to maximize our opportunity to recover faster than the industry. We have an opportunity to gain market share given our financial strength and our compelling business transformation. We are prepared to do more than any other food service distributor in the industry to ensure the success of our customers. And our customer success will generate business growth for Cisco. In closing, I'd like to give a sincere thank you to all Cisco associates who are working hard to help our customers grow and succeed in this challenging environment. Our industry-leading sales force has been inspired by the Restaurants Rising campaign to support our customers at levels higher than any point in our proud history. Our warehouse and delivery associates are the best in the business, working hard every day to ensure we ship to our customers what they want, when they need it. I am proud of their dedication during this challenging operating time. I also want to thank our customers for their resilience the grit that they have shown, and the fight that they have displayed during this pandemic. At Cisco, our customers are an inspiration to us, and we will show them just as much determination in how we serve them. I will now turn the call over to Aaron Ault, who will discuss our second quarter results, along with additional financial details.

Aaron, welcome to Cisco, and over to you. Thank you, Kevin, and good morning. I am really excited to be at Cisco. Before I joined Cisco, what I could see from the outside was a company with global scale, a strong competitive position, and great profitability and liquidity for the industry. Now that I'm on the inside, I see all of that, in addition to a driven leadership team, relentlessly focused on being ready for the business recovery and on driving a customer and capability-led transformation. In short, I see many opportunities in front of us to create shareholder value. I will start today with second quarter results for the enterprise and our business segments, followed by an update on cash flow. Second quarter sales were $11.6 billion, a decrease of 23.1% from the prior year, but flat to the prior quarter. Sales had been trending ahead of Q1 through October and November as restrictions eased, but new lockdown restrictions during December reversed the earlier progress, particularly in the international segment. Here are a couple of additional metrics. For the quarter, local case volume within U.S. broad line operations decreased 19.7%, while total case volume within U.S. broad line operations decreased 23.7%. We do know that there is keen interest in the continued impact of COVID. The answer varies by region. Europe went into lockdown in December and is expected to remain in varying degrees of lockdown for a significant portion of the second half. However, since the week after the holidays, we have been seeing signs of light from volume improvements in our USFS business, and SGMA continues to grow. This battle will be fought week by week, region by region, for the next couple of quarters until the vaccination is widespread and the business recovery takes hold. The only commitment we can make is that we will be ready and more competitive than ever. As we move down the P&L, gross profit decreased 25.8% to $2.1 billion. in the second quarter. Most of the decline in gross profit was driven by lower volumes due to COVID. However, we did see modest gross margin dilution at the enterprise level of roughly 67 basis points as our rate came in at 18.2%. A couple of thoughts on that. First, we typically see a seasonal decline in gross margin sequentially from the first quarter to the second quarter as we did this year. Second, our largest segment, U.S. Food Service, and its partner segment, Sigma, each had a flat gross margin rate versus the same pre-COVID quarter, which is frankly remarkable given the market dynamics. Given the growth of our national accounts business at Sigma, which is lower margin, we did see business mix shift, which accounted for the vast majority of the margin rate change. Our enterprise margin was also impacted by the international and other businesses, as both showed gross margin decline in the quarter for reasons which are being addressed. Our expense profile changed over the course of our second quarter as adjusted operating expense decreased 15.3% to $1.9 billion. This expense profile reflects a deleverage of our cost structure as sales remained down 23%. These results arise from some purposeful choices. First, and on the positive side of the equation, we targeted and achieved increased productivity in key areas such as our warehouse network. We also maintained our key transportation efficiency metrics despite significant swings in case volume. Second, we continue to make excellent progress against our $350 million of cost savings initiatives in fiscal 2021. I can see the savings in the detailed income statement, and we continue to identify and pursue more opportunities. Third, but on the other side of the equation, we have made the purposeful choice to leverage our financial strength to prepare for the business recovery before it happens. As previously announced, we changed our sales consultant compensation to include both a fixed and variable component to drive retention and focus on key operational metrics. We can see that change working in our market wins. Additionally, we brought back hundreds of associates in the second quarter in support of our business model. In the third quarter, and indeed the back half, We anticipate we will hire thousands of additional sales consultants, new business developers, culinary experts, and operations associates in anticipation of the pending business recovery. We plan to be ahead of the recovery curve, not catching up, and we have the financial resources to do just that. Finally, as Kevin mentioned, we continue to make purposeful investments in our capability builds in support of our transformation. Pricing, customer experience, sales, vendor management, and personalization. While we expect significant returns on these efforts in future quarters, the investment dollars are offsetting part of our savings in the second quarter and will do so in the back half. When combined with the impact of slower openings in our international segment, we expect our third quarter results to be more challenging than originally anticipated. However, as volume returns and grows, whether due to market recovery or our purposeful investments, we expect to move up the sales curve more rapidly than others and expect that over the next several quarters, the impact of the cost savings efforts separated from the ongoing investments will be more visible. Finally, at the enterprise level, adjusted operating income decreased 63% to $234 million. For the second quarter, our non-GAAP tax rate of 16.8% was favorably driven by the impact of stock option exercises. Adjusted earnings per share decreased 80% to 17 cents for the quarter. Now let's turn to our second quarter results by business segments, starting with the U.S. food service operations. Sales were $8 billion, which was a decrease of 23.9% versus the prior year period. Notwithstanding the difficult environment, the business acquired a record number of new customers as our sales teams hit the streets and we deployed digital tools. We also saw growth in our national accounts customer base. Within the business, Cisco brand sales for the second quarter decreased 165 basis points to 36.5% for total U.S. cases, driven by the customer and product mix shift. With respect to local U.S. cases, Cisco brand sales decreased 455 basis points to 42%, which was driven by product mix shift into prepackaged and takeaway-ready products. Gross profit decreased 24% to $1.6 billion for the quarter, though as I called out earlier, Gross margin was flat for the quarter at 19.7% as the business very successfully managed through the puts and takes of the COVID environment and addressed headwinds such as aged inventory for customers like cruise lines and product mix shift out of higher margin categories like BP&E. The segment's adjusted operating expenses decreased 18.9% to $1.1 billion and adjusted operating income decreased 33% to $472 million. Moving on to the SGMA segment, sales increased 4% to $1.5 billion compared to the prior year period, driven by the success of national and regional quick service restaurant servicing drive-thru traffic. This is the second consecutive quarter of sales growth in this segment. We continue to see new business wins in the SGMA segment and are pleased by the overall improvement. Gross profit increased 4.1% to $129 million per quarter, and gross margin was flat the prior year. Adjusted operating expenses increased 4%, $118 million, and adjusted operating income increased 5% to $11 million. Moving to the international segment, our European, Canadian, and Latin American businesses have been substantially impacted by recent shutdowns, which are more aggressive than lockdowns in the U.S. The international food service operations segment saw sales of $2 billion, a decrease of 32%, while gross profit decreased 36.2%, and gross margin decreased 128 basis points. The gross margin decline was a result of adverse market mix, customer mix, product mix, and aged inventory. For the international segment, adjusted operating expenses decreased 16%, and adjusted operating income decreased 175% for an operating loss of $55 million. Our other segment, which includes our guest worldwide business, remains challenged. as hospitality occupancy rates remain low compared to prior year levels. However, the business is in better shape than many of its competitors and has achieved a number of recent customer wins, including being named the preferred distributor for Renaissance Hotels, JW Marriott, and Westin Hotels via a new contract with Avendra in both the U.S. and Canada, and being given access to all Marriott properties in North America, Central America, and the Caribbean. While still in turnaround mode in a difficult hospitality environment, the business improved its underlying profitability during the second quarter. Cash flow from operations was $937 million for the first half of fiscal 2021. Free cash flow was $788 million year-to-date, which is in line with our previously noted guidance. Net capex for the first half of fiscal 2021 was $148 million, which was $235 million lower than last year, as the company carefully assessed its capital investment choices in the face of COVID. Cisco remains financially strong from a balance sheet perspective. At quarter end, we had balance sheet cash of $5.8 billion, plus access to $2 billion of available borrowing capacity for a total of $7.8 billion. Our cash and available liquidity ensures us the stability and flexibility to make decisions that are in the best interest of the company. we continue to monitor our operating environment carefully. And as we assess reopening timelines and investment needs consistent with the transformation, we will be updating our views of our levels of cash and cash instructor opportunities in future calls. Although this is a tough operating environment for our customers, which will impact our results for the next quarter or two, Cisco remains resolutely focused on managing its businesses, aggressively preparing for the business recovery, and building customer-centric capabilities to accelerate long-term growth. We believe our strategy and our transformational initiatives will drive future value for our associates, shareholders, and customers. Operator, we are now ready for questions.

At this time, I'd like to remind everyone in order to ask a question, please press star followed by the number one on your telephone keypad. And we'll pause for a moment while we compile the Q&A roster. Our first question comes from the line of Alex Legle with Jeffrey. Go ahead, please. Your line is open.

Thank you. Good morning. Kevin, the question for you with a full year under your belt now. Congrats on that. Interested in your high-level assessment of the progress made in the transformation of date, Billy? versus your expectations. Obviously, the pandemic was a major curveball, but if you could talk about what elements of the transformation surprised you the most in terms of the level of progress or the size of opportunities that you maybe didn't fully appreciate when you started.

Well, good morning, Alex. I appreciate the question. In regards to where we are one year later, I'm pleased with where we are. I would actually say from a transformation perspective, we're ahead of schedule. I've said this many, many times in our company town hall meetings and in private conversations with investors. While the COVID crisis has obviously been tremendously difficult on the customers that we serve in our environment overall, the silver lining in that dark cloud is we've used it as an opportunity to accelerate our transformation. I've mentioned before our regionalization program. We had a plan to complete that over two years. And it's now done, as you heard me say on our prepared remarks on today's call. So our ability to accelerate change management, the buy-in from our experienced team on the impetus for change, meaningfully improved. And so when you look at our selling model, our leadership model, our technology tools, I would say we're ahead of schedule on those activities. And I'm pleased with where we are, and we're very confident that these transformation initiatives are going to enable our company to be very successful. What we need, obviously, is the overall business environment to improve for all of those activities to be more visible in our results than they currently are. But we can see the internal data, and it's promising. Alex, the last thing I would just say is your team. To have a great company, you need to have a great team. And I said it in my prepared remarks. We have a really strong team now that we've built at Cisco, which is a combination of extremely experienced leaders like Greg Bertrand, who runs our by far largest business, and new leaders that have joined our company that can help bring best practices from other industries and, frankly, key capabilities that we need at our company, like Judy, who's joined us as our chief commercial officer and Tom Peck, who's joined us from a technology perspective, and then obviously Aaron, who you heard from today, who's just a really terrific, talented financial executive and transformation executive to help accelerate our results. So in summary, Alex, I would say I think we're ahead of schedule and looking forward, like all of you are, to have COVID behind us so we can prove it in our outcomes.

Thanks. Appreciate that.

Thanks, Alex.

Our next question comes from the line of Edward Kelly with Wells Fargo. Go ahead, please. Your line is open.

Yeah, hi, guys. Good morning. Kevin and Aaron, you know, this is a particularly tough period to sort of model your company. So, you know, obviously you're positioning for the recovery, which makes a ton of sense. You know, that's hurting your term results, especially when the industry sees some setback. I guess what I'm trying to figure out is how to better sort of frame what's going on in the outlook. So I don't know if you can tell us what level of sales your cost base is positioned for currently. How you see this ramping from here, I don't know if there is a way to sort of frame that for us. As we sort of think about Q3, you did mention that Q3 will be lower. then initially thought, I'm not really sure what that means relative to Q2. So I'm just kind of curious as to whether you could sort of help us along with any of that, you know, to help the modeling in the next few quarters.

Great, Ed. Thanks. This is Kevin. I'll start, and I'm going to toss it over to Aaron for comments specific to Q3. And we understand that this is a difficult quarter to model and a difficult year to model. We also have Respect and empathy to the fact that we haven't given guidance this year, and the reason, obviously, is because it's choppy and the recovery is not linear. So we're going to do the best we can to give you color commentary on where we are, what we're seeing, and Aaron will provide that in a moment for Q3. As it relates to what we're investing in, if you put it into two buckets, we have some key initiatives that we are investing in, which is the building of capabilities for And in many instances, technology that will advance our ability to be a better company in the future. And that's our pricing project. We're building a customer personalization engine to improve the type of offers that we provide to our customers using machine learning and predictive analytics to help our sales force be more effective. We're going to talk with you more about that at an investor day that we plan on holding in May. Neil will send out more details on that investor day. We know we owe you more specifics on our transformation, the size of that prize, and we will cover those details with you at that May Investor Day. As it relates to the other half of the quote investments, we do see a pending business recovery. We see a light at the end of the tunnel, and it's not a train coming towards us. It's the dawning of a new, more promising day. We can see it in our data. Here are the facts behind what happens. As soon as restaurant restrictions are eased, our business immediately pops. And how do we know that? We know that because states like Florida and Texas with limited restrictions, our business is substantially better than our national average. We can see it in states like California, which just allowed for, at the state level, the reopening of outdoor dining, which is important in a state that has quality weather and State of New York has now begun the easing of restrictions with New York City reporting this week that Valentine's Day in restaurant dining will be authorized again. So we see immediate jumps in our business when that happens. The reason you're hearing some tempering of enthusiasm from us specific to Q3 is we have an international business that is under severe lockdown. You probably all know this, but I just want to be really clear about this. In international, specifically Europe, Restaurants are closed. Europe is currently in operating conditions that are similar to what the United States was experiencing back in April and May. In London, for instance, you can only leave your house for an hour a day. You can only go to the grocery store, to the park, and you need to stay within five kilometers of your home. I mean, it's that locked down. And they don't have drive-thrus to the degree that we have them in the United States. So in the Europe business, our sales have been significantly impacted. Most notably... The European governments have come out and said that they don't anticipate easing those restrictions until roughly Easter. So we're going to be really careful and thoughtful in Europe. We will move at a slower pace in Europe, and we will meter our investments in that business tied to that business's recovery. But in the United States, we believe that the progress that's being made in vaccination is substantial. The at-risk population being protected. Now moving on to Category 1B, 1C, and eventually Categories 2 and 3. As vaccines make progress, as the death rate comes down, as ICU bed capacity improves, that will give governors the confidence to ease restrictions. And when that happens, our business immediately pops. So we need to do things in preparation for that. And that's what Aaron was referring to. We need to get inventory back into our facilities. We need to staff up in both warehouse and in driver positions to ensure that when our customers are ready to place orders, We're not putting out a job rec and trying to fill a job and then the time delay that comes along with that. So we have the financial strength to do that. It's a purposeful choice. And I'll just leave you, Ed, with this last comment, then I'm going to toss it to Aaron. And choices in service right now. We had to cut delivery frequency back in, you know, what is our, you know, period of April, May, and June of last fiscal year. We've purposely chosen not to do that this time. We are servicing our customers six plus days a week. We're not cutting delivery frequency. We waived order minimums. All of these things are to help our customers during their difficult COVID wave too. And that's a choice we made. We believe that's a choice that will pay itself forward with loyalty and future growth. And that thousand basis points of NPS improvement that I covered in my prepared remarks, that is a notable, notable reflection. And those that understand NPS understand that that is a pay it forward metric. that will benefit our company into the future. So, Aaron, I'll toss it over to you specific to Q3 if there's anything you wanted to add to that.

Great. Ed, good morning. Thank you for the question. We don't provide quarterly guidance per se, but what I'd like to do is take a moment and give you some context on Q3 by talking a bit more about Q2 and what we saw there. I believe there are some parallels. As you will have observed from our release and from the comments, we experienced deleveraging during the second quarter as sales dropped, you know, 23% from prior year. And you will recall from prior earnings calls that Joel had previously observed that our cost structure is, you know, approximately a one-third, two-third split between fixed and variable costs. You can do the math on what that should mean for the quarter versus our, you know, prior year. I would comment that, you know, we benefited extensively from efficiency efforts. I called out some of them during the call and specific identified and executed cost savings during the quarter. the quarterly component of the $350 million that the team has been talking about for the last couple of quarters. I commented during the results that we could see the savings in the P&L. And let me give you a couple examples of that. People, overall across the enterprise, we have 15,100 fewer employees today than we did a year ago. And that includes a significant cut at our corporate headquarters as well. We've identified and executed specific COGS cost savings that I can see in the P&L. We've rationalized our technology investments to be more forward-focused. We've identified indirect cost savings, professional costs, et cetera. So what I want you to take away is the cost savings are real, and while we haven't disclosed the exact level of what it is quarter-to-quarter, it's material, and they're out there. Now, the cost savings are important because they offset, you know, a combination of two things going on, and I would have you think about it as really, you know, call it a 50-50 spread. The first is, as Kevin just talked about, we did make incremental investments against both the business recovery and the transformation in the quarter. We purposely used some of our savings from those cost savings initiatives to fund the investments against the short-term recovery and the long-term transformation. And then there was a mix of other one-time expenses or additional fixed cost deleveraging that we experienced. And Nils Pappert gave what was going on in Europe and other parts of our network. You know, to summarize, we do believe that some incremental expense now is worth it and gets us ready for the recovery to come. Some of the investments and costs that I called out earlier will continue into the back half, particularly into Q3. We want to be transparent about that. But importantly, you know, as we get into the true end of the year and into next year, those same savings, they're structural, they're recurring, they're real, and they will become much more apparent as we reverse the sales decline and get the early investments and they recover in the transformation behind us.

Great. Thanks, guys. Thank you, Ed. Our next question comes from the line of Jeffrey Bernstein with Barclays. Go ahead, please. Your line is open.

Great. Thank you very much. I had one question and then one follow-up. The question just when we get through COVID at some point sooner rather than later, when you think about the largest food service distributors, including yourselves, I'm just wondering, you know, whether you think you'd achieve greater benefit on the revenue or the expense line. I know you've targeted on both, but just wondering your thoughts on where the bigger opportunity is. And if you could just offer some context on the small and mid-sized competitors that especially as you talk about these market share gains. It's very difficult on our end to see the market share gains. But any qualitative color on those competitive sets, that would be great. And then I had one follow-up.

Sure, Jeff. That's Kevin. I'll take that one. It's a both-and on the strength of the stronger players, right? Strength gets stronger during times of adversity and crisis. And what Aaron was just referring to is the $350 million of cost takeout is real, it's concrete, and we can track it. And as our volume gets back to pre-COVID levels, and it will, that's going to flow straight to the bottom line. The reason it's less visible now is because we have all these other things happening vis-a-vis investments in the recovery, investments in new capabilities, et cetera, et cetera. But that 350 is hard real, and it will be visible as our volume recovers. And we're not done. We've said that before, too. We are not done with structural cost improvement. There's more to be attained. And, again, that's something we can talk about more at our May investor day. Specific on the revenue side, the number we've quoted explicitly is the national sales win. It's impressive. It's material, $1.5 billion of net new wins in the national sales segment. You can see it in our performance results in Sigma, and also you can see it in our performance results in just our general overall case growth. But what we haven't explicitly quantified for you, because it's challenging with what's happening in the marketplace, is the wins we're having at the local level. In my prepared remarks, I said the following. We want more new customers at the independent local level in Q2 than at any point in time over the last five years. That's as concrete and specific as I can be, and it's real. We can track it. We use a tool called Cisco 360 to track every customer activity. Those wins are going to be visible, again, as our volume increases. recovers. The reason it's less visible on top line growth is because the average order per customer is currently down because of COVID. In a takeout and delivery world, customers order fewer appetizers, fewer desserts. They focus more on that main entree. And so the average volume per customer is down, but we've added a substantial number of new customers. And that's not just in the U.S. That applies to Canada. That applies to you know, all of our businesses in Europe as well. So that will be a pay it forward activity. And what we anticipate we will be able to show you at our May investor day is what is the size of the prize of all of these activities worth, the trajectory that we are on from a sales growth perspective, and then these key enabling transformational elements, what they're worth from a market share capture perspective, and then how that flows through to the bottom line. Before we go to your follow-up, I'll just ask Aaron if there's anything he wants to add to what I just said.

No, Kevin, I think the two thoughts are, you know, rising tide lifts all boats, and we're going to experience that as the sales recovery continues. And to the point on, you know, profitability, I think we should just remind the team that, you know, look, as I believe the team commented earlier, we're profitable as sales are down even 30% to 35%. And so we have incredible financial strength and opportunity to get ready for that sales lift.

Thanks, Aaron. Jeff, to your follow-up? Yep. Thank you very much. So I know it's difficult in the short term and not keen to necessarily give third quarter or second half guidance. But you did make a couple of comments I was hoping for a little color on. I know you mentioned, you know, regional sales structure, quick wins and menu segmentation success kind of. quicker wins, I guess. And I think he even said U.S. food and Sigma has been growing of late. I'm just wondering if there's any quantification you can provide on any of that, just so we can kind of gauge early success. Thanks.

Yeah, Jeff, I know it's frustrating that we're not giving guidance and, you know, we're going to resist the doing so, you know, again, for Q3. I can, however, put a little more color on the examples that I was just providing. And I also realized that the second half of your first question, which was tied to the smaller competitors, you know, how are they performing? I didn't sufficiently answer that on the first question. There's no doubt that the bigger players are getting stronger. I have been asked directly before, you know, Kevin, how is it true that You know, each of the major players are reporting that they are winning market share. Well, it is true. That is what is happening. And what that mathematically implies is that smaller players are currently donating share, most likely because they don't have the ability to invest in inventory during a period of volume growth. We know for a fact that select competitors are cutting delivery frequency. They cut Saturday first. They cut Wednesday second. We have not done that, Jeff. So we have not canceled Saturday. We have not canceled Wednesday. In fact, as you well know, we eliminated order minimums. We are seeing improvement in our trends for the customers that we serve as those programs have been launched, which is Restaurants Rising, and we are seeing retention of customers because we're not cutting back on service. A data point that I've quoted before is for those customers that have joined us on this Restaurant Rising campaign, leveraging our menu services, leveraging our ability to help them with takeout and delivery, they are performing 20% on average better than the customers that choose not to engage. Our priority, obviously, is to get more and more and more of them engaged, and we're working on that. The second one I just take you to page seven in our deck, and that is the closure rate of Cisco customers. So this chart has been normalized to a normal year would be at zero. And our closure rate of our customers is 50% lower than the national average. And this data doesn't come from our internal systems. This data comes from Yelp. So as I put 1,000 basis points improvement in NPS, we've won more new customers in this quarter than in five-plus years. When I put the closure rate of our customers, it's 50% less than the industry average. And then we can see market share gains. These things give you confidence that Cisco will be a net winner in the business. And when you layer on the future periods where others are going to meaningfully struggle, Joel made this point many different times, others are going to really struggle with building inventory in advance of the sales actually hitting their business because that's a period of balance sheet stress. We have the capability because of the strength of our balance sheet to build inventory in advance of the customer ordering. Jeff, that's a big deal. Thanks for the color.

Thank you, Jeff. Our next question comes from the line of Nicole Miller with Piper Spandler. Go ahead, please. Your line is open.

Thank you so much. Two quick questions. I'll pose the first one. I believe, you know, the prior run rate on the $350 million of cost saves was about 80% flow through. So what I think I hear you saying this quarter is you reinvested more against that, and we can understand why. So what was the approximate flow through? I just haven't been able to work with the numbers at this point. And you also mentioned one-time expenses. How material are those one-time expenses so we can factor that into our forward estimates?

And, Nicole, I'll toss it to Erin for that question. Thank you for the question.

Good morning. Great question. I would refer you back to some of the thoughts I had earlier around how to think about this. We have not disclosed the build rate of the $350 million plus those energies or cost savings that we are identifying as we carry forward. As you're trying to model, what I would encourage you to do is to look at or reflect on my comment that approximately 50% of what we saw in the quarter was are investments against the transformation and against the business recovery, and 50% was one-time expenses or additional fixed cost deleveraging in parts of the portfolio. That's interesting, but the really important point is that, look, the one-time costs, they are one-time and will go away, and any fixed cost deleveraging as the tide rises with sales, that will also disappear. And the investments against the... uh recovery and the against uh investments against the transformation while they may occur for a couple of quarters they are also transitory in nature and we will have the uh we'll have the benefit of uh achieving the run rate savings that joel had called out previously in future quarters you know this our situation has evolved we're continuing to evolve to bob and weave reflecting our financial strength because we're going to be ahead of the curve okay

Thank you. I guess that was previously asked and answered. I guess I just didn't understand it that way. So we can do the math on that 50%. A bigger picture question, trying to understand if retention of your own employees and net promoter score should be tied together. So I guess the question I would pose is you talked about retention being improved. And I'm wondering if that's the right way to ask or to tie those two things together. So this question might sound challenging. It's literally not meant to be. But, I mean, you forced turnover, right? And where would anyone else go? So, I mean, indeed, retention by definition almost has to improve. So I was wondering if, you know, are people making more or less? Are you offering more benefits? What kind of feedback? And is that the correlation to net promoter scores? If it is, as net promoter scores go up, you know, what happens then? I mean, I know it's sales, but could you tie that, for example, to wallet share of independents, which is 30% versus 40% of chain? Did local independent wallet share go up? I just wanted to see how it kind of ties together, if that makes sense. Thank you.

And, Nicole, it's a great question, and by no means is it a challenging question. The spirit of your question is excellent, and I appreciate your asking it. I'm going to unpack it in two ways. One is NPS is our, you know, our customer's voice, you know, to us. And we have a large sample size. We track it real time and we take action on it. And, you know, we see in our NPS data where we have strength. The by far biggest strength of Cisco is our sales consultants. We massively over-index our competitors in the quality and support given to our customers through that audience. By far, our biggest strength is our sales consultants. That's a strength we will continue to leverage, and I'm going to get to that in a minute when I talk about what I meant by associate retention. So we need to continue to harness, in fact, further leverage our biggest strength. And Nicole, what we need to do on NPS to make it overall improve and lift is address the pain points, right? So here are things we were hearing through this COVID crisis as a pain point. You know, Kevin, my volume is down, but yet you have these order minimums. You know, you're willing to come, you know, one time per week, you know, during this period of time when my volume is down because you cut Saturday delivery. So we just leaned into it and we addressed it hard. What we did is we ensured that this COVID wave two, we were not going to cut delivery frequency. And the biggest pain point we heard was from our restaurant operators, I can't predict what my order volume is going to be, and I'm really worried about your minimum orders. And we eliminated that problem for them. We just took it off the table. From now through the end of this crisis, and it very well might be permanent, we are not asking for order minimums. We're here to ship what they need, when they need it, regardless of the order volume on their regularly scheduled delivery day, and we're not going to cut delivery frequency. So, Nicole, here's what happened. The associate piece of that NPS survey got even higher because our sales consultants are leaning into helping restaurant operators with menu design and takeout and delivery and hooking them up with a delivery partner. And then the pain point of delivery, we meaningfully improved. You put the two together, we saw a thousand basis points left. What that will do for our business in the future is higher customer retention and higher share of wallet. If you study NPS though, it's a lag, right? So as you improve NPS meaningfully, It is in the forward facing quarters and into years when that results in higher retention and higher share of wallet. It's not an immediate aid and B, but we're confident that we're doing the right things in support of our customers and they will reward us with business. What I referred to in my script as it relates to associate retention was tied to our sales consultant compensation change that we made this summer. The why we made the sales compensation change was twofold. One, We had some disincentives in our old structure that motivated our sales consultants to do some things that were inconsistent with our company strategy, point one. Point two, we had too much turnover, especially in our newer associates. They were on full commission previously, and they just simply in those early years couldn't earn enough when they were on full commission to make it through their learning curve as they built their business. In our new model, we have a base plus bonus structure where they make a livable wage off of their base. And then they have the opportunity to make a very healthy income through their bonus. That was implemented this summer. Change is hard when you implement a new tool like that. But statistically and significantly statistically, excuse me, statistically significant, I meant to say, we are seeing improvements in retention. And it's not just because we reduced the number of people earlier in the year. It is because actually the folks that we're tracking that have been here before, during, and after COVID, we're seeing retention at a higher rate attributable to that change in comp. But, Nicole, I'll toss it back to you to see if there's any follow-up to anything I just said.

That actually helped me out a lot. I appreciate that, caller. Thank you for taking my question.

Thanks, Nicole.

Our next question comes from the line of John Glass with Morgan Stanley. Go ahead, please. Your line is open.

Thanks very much. Good morning. Kevin, just going back to this wallet share issue, I think you talked about that 30% historically with the local cases. Has that changed meaningfully recently during this pandemic? And if you, inside of that, when you talk about these value-added services and the restaurants that have done much better using those, is your wallet share meaningfully higher? Is there a way to gauge how high it could go if the customers fully engage in all the services you provide to them?

Yeah, John, great question. I'm not going to report out on share of wallet percent by month or by quarter. There's too much volatility in that type of metric to be that specific on a call. What I can definitely say, however, is that for the customers that have engaged with us on the restaurants rising campaign, yes, we win more share of wallet with them and we retain them. There's a lot of churn in this industry. Many customers use multiple distributors, two or three distributors. There are reasons why they do that. And what we're seeing in the Restaurants Rising campaign and the work we're doing with our transformation is that a customer is less needing to have multiple distributors. I'll introduce one of our other strategic initiatives, which is our pricing initiative. The number one reason why a customer leaves Cisco to go to a competitor and vice versa, frankly, is because of price and specifically transparency for price. They think they can get a price somewhere else, so they want to keep their distributor honest by taking portions of their business and bringing it to a competitor. As we implement our pricing software and we give customer item-specific pricing, pricing that's right at the item level, We believe that we will lose less individual lines to competitors, tides to price, and frankly, the opposite. We'll have the opportunity to win incremental cases with existing customers because we will be right on price for the items that matter, which will drive volume growth. And how to keep margins neutral is in elastic items that are on the tail of the inventory assortment. You can take some nominal increases on price to offset the margin dilution. All in, we're bullish on our ability to increase share of wallets. When we meet in May at our investor day, we'll be able to explain in more detail what we believe is possible from a share wallet growth perspective. But we have customers to answer your questions specifically that are well north of 30% with Cisco.

That's helpful. If I could just ask one follow-up. How much of the programs you've implemented in the U.S., whether it's Restaurants Rising or the Price Tool, how many of those are applicable to the international business? How many have been implemented? Is that a real opportunity there, or is it just a very different market and those things don't always apply?

It's a huge opportunity for international, and it's why we hired Tim. Tim is here. He's now on board. He's based in London. As I said, he'll be full-time focused on improving our strategy and our execution in international markets. And his remit will be exactly what you were just implying through your question, which is, okay, you're deploying a best-in-class pricing tool. When, where, and how do you deploy that to your European businesses? We're working on a new team-based selling strategy. When and where and how do you deploy that? Each of these key initiatives are applicable in our international business segments, you know, hard stop. What is unique in these countries is the cuisine type. and specifically the penetration mix of local versus contract bid, but the best-in-class strategies of how to sell, how to engage customers with a mobile ordering platform, improving COGS through a global purchasing scale. We're in the early innings of these things in international, and actually that gives me big confidence that we can improve the profitability of our international segment. It's something that Aaron mentioned. myself and Tim will be very focused on. Thanks for that. Thanks, John.

Our next question comes from the line of John Heinbockel with Guggenheim Partners. Go ahead, please. Your line is open.

So, Kevin, two questions related. Number one, you talked about bringing back or bringing on thousands of sales-related folks. What's the timing of that? You know, where will they come from, right? And then secondarily, you know, if you think about the rollout of pricing, right, so tested in one region, what's the pace of that rollout? And then how do you think about the interplay between, you know, bringing on a lot of folks, managing the recovery, and rolling out and expanding pricing? Can that all be done simultaneously?

John, good question, as always. I just want to clarify one thing on the thousands comment that was in Aaron's prepared remarks. That thousands applied to each of the things that were after what he said. He said sales associates, warehouse associates, drivers, and support resources. So the thousands declarative applies to the cumulative of all of them. So we're not going to be hiring thousands of new sales associates. We will hire new sales associates. We're hiring new specialists. We're hiring national business developers. I'm sorry, new business developers, NBDs is what we call them, to grow our business. But the majority of the thousands comment is actually in the warehouse and driver populations, simply tied to the business volume recovery that we anticipate. As Aaron quoted, we have 15,000 fewer people working for us today than we did pre-COVID. And we will and expect to get back to pre-COVID volume levels down the road. And we need to hire up to be able to staff up to be able to support that business recovery. I just want to be really clear. It's not, you know, today it's zero and tomorrow it's thousands. It's a week-by-week staffing plan. And we will be able to throttle it up and throttle it down based upon what we see and our data. But they need to be trained. You know, it takes X number of weeks to become productive in our warehouse. It takes X plus even more. to become productive as a driver. And as you know, it takes time to become productive as a sales associate as well. So we're building those training durations of time into our staffing model, John. And when we say invest in advance of the recovery, what I'm specifically referring to is the training window. If it takes X weeks to get productive, we need to hire that person X weeks before they're needed. And then we have a week by week by week expectation of what we anticipate the volume recovery will be to tie to that staffing plan. If the volume recovery doesn't materialize the way that we anticipate, we will slow down. If the volume recovery is faster than what we anticipate, then we'll speed up. The good news is we have the financial capability to do both of those two things. And then, John, your second part of your question was on pricing. As always, it's a good one. That will be a staggered rollout. So we're in our first region right now. We're not going to go from one region pilot to a national rollout. We've learned a lot at Cisco over the years on how to roll out new tools, new software, change management, and the like. The good news is that this pricing software is being warmly embraced by our sales consultants. It takes a significant component of work off their plate, time that they can then reinvest back into their customers, as I said in my prepared remarks. And I just want to be really crystal clear about something. we will not be reducing sales consultants because of our pricing tool, because time is freed up for them. It's the opposite. We will take that time that gets freed up on their work week and invest it back into our customers. And, John, we're optimistic that that will help from a sales growth perspective as well. So we're going to do our regional pilot that we're currently in. We will expand to four additional regions in this Q3 period. And then we will read and react based on the business results, the change management learnings, and then, John, we will determine the pace with which we will bring it to the rest of the country. And I don't have a declarative end date for that project because I want the success of the project and the change management learnings to determine the speed and pace with which we go. John, I'll toss it back to you if you have any follow-up.

No, no, that was great. Thank you.

Thanks, John.

Our next question comes from the line of Lauren Silberman with Credit Suisse. Go ahead, please. Your line is open.

Thanks, and congrats on the new role. You've talked about the very strong wins at the local level. Are there any differences in the behavior among new local customer cohorts relative to what you've seen historically, whether that's initial wild share, Cisco brand penetration, digital utilization? And to what extent do you think that's company-specific initiatives versus the competitive environment? Just trying to understand how you're thinking about the sustainability of these wins, given some unique dynamics in the environment, like smaller distributors pulling back on frequency of delivery drops and less need for multiple distributors.

Yeah, Lauren, good question. Here's the behavior change that drove it, and it's really clear. We changed their compensations. In the prior compensation model, they were paid more on increase the profitability of an existing customer than they were on win new business. That's what I meant earlier when I said we had a disincentive in our system. That was never our intention. We didn't want for them to not be out prospecting. But if they had an hour to spend, they were going to spend that hour on increasing the profitability of an existing customer, and they weren't going to spend it on prospecting. In our new compensation model, which is the base plus bonus, The bonus metrics are configurable. We can make them whatever we want them to be. In fact, we can change them quarter to quarter, month to month on what matters. And we've been doing exactly that. So now we have a better balance between improving penetration of lines with existing customers, which is a profit driver, and it's super important. And we need to better balance it with new customer prospecting. So the biggest reason for our improvement in our performance, Lauren, and new customer growth is a behavior change. Our associates are spending much more time with new customer prospecting than they were previously. And the point you made, which was now, how do you retain these customers is paramount. Partly it's the reason why we're investing in service, why we're investing in no order minimums, why we're investing in not cutting back on delivery frequency, things like that matter. I don't think I've talked about this yet. We're also investing in payment plans so that we can help our customers with their credit balances, through this difficult period of time and not quote cutting them off because now they're having some challenges. We negotiate with each customer one by one using a predictive model on risk for that customer. And we're helping them. We're helping them make payment plans spread out, smoothed out so that they can stay with us. And it will be imperative, Warren, to do what you said, which is we need to retain these new wins. We need to work on things like Cisco brand penetration for these new wins to increase the profit rate of each of them. We need to add more lines. And that's where our new selling model comes in, and this is the last thing I'll say. We need to penetrate other additional categories. They could be buying dry and frozen from us, and they've never considered a broadliner for fresh produce. Guess what? We have one of the best fresh produce businesses in the United States. We turn that inventory on a weekly basis, and we can penetrate produce if we introduce the right salesperson to that customer. So those are the activities. Win the new customer through improved prospecting. Once that customer has been won, penetrate Cisco lines, increase additional categories, provide them with tremendous service, and retention will meet or beat expectations. Lauren, back to you if you have a follow-up.

Great, thanks. That's really helpful. Yeah, just one quick one. On Cisco brand sales, this percentage of local cases, the down 450 basis points, can you expand on the factors that drove that decrease in the private label penetration, and do you expect that to be largely transitory?

It's 100% transitory, Lauren. The reason for Cisco brand penetration being down is explicitly the customers that we're serving and also the balance of sale by category. So the business that's down the most for Cisco right now is actually our biggest customer businesses. So it's the FSM and hospitality categories. We have an excellent Cisco brand penetration with those customers, and those businesses are down more than our average. And therefore, that's just a gravity issue on Cisco brand. And then, believe it or not, within the businesses that are doing well right now, like takeout products, to-go products, there isn't a lot of Cisco brand product in that space to the degree that we have in other categories. So it's simply balance of sale. And we have the opportunity to not just recover where we've been. Our merchant team is working on new products. and innovation within Cisco brand. And we absolutely anticipate that to be a source of profit growth into the future.

Great. Thanks so much.

Excellent.

Our next question comes from the line of Kelly Banya with BMO Capital. Go ahead, please. Your line is open.

Hi, good morning. Thanks for taking our questions. Wanted to just ask a little bit more about international gross margin. It sounds like some mix pressures there, but also maybe some inventory. Just curious if you can manage that gross margin better. It was just a little surprising that it was lower than it was even a couple quarters ago when sales were even worse. So just curious, you know, how we should think about what you can do to manage that margin in international. And if there's anything that different you're thinking about in terms of the longer-term potential recovery for international versus the U.S.?

Yeah, Kelly, great question. I'll start, and then at the end, I'll toss it over to Aaron for color commentary in addition to what I covered. So international margin, we called it out. I mean, it was a difficult quarter from an international perspective. There's two reasons why. One is the customer mix. Just to be very clear, restaurants are closed in France, in the U.K., and in Ireland. They're closed. Unlike in the United States where on-prem dining is allowed and delivery and takeout and drive-thrus are robust. our most profitable customer segment in Europe is closed. They can do takeout and delivery, but takeout and delivery are much, much less activated than they are in the United States. And we anticipate they will be closed until April. So we've got a meaningful headwind in that regard. I'm going to weave in here, though, a point you made about long-term. I just want to remind everybody that right before COVID wave two, The best business in our entire book of business was in France. We were minus 5% in France right before the challenges of this secondary lockdown. So we fully anticipate that the international business will respond just as fast, if not even faster than the United States once these lockdowns are eased. And, again, it's frustrating to us that we think that they're talking easter. But we can focus on what we can control. So the margin percent is mostly driven by customer penetration mix. We did have some inventory spoilage challenges, Kelly. It's appropriate to call it out. Our business results in Q2, though, think about it from this perspective. France goes from minus 5 to minus 55 in a week. We have fresh inventory. There's challenges when that happens. And the pace and speed with which Europe went into lockdown was significant, similar to what happened, if you remember, back in Q4. You remember my narrative, Kelly, from back in Q4. Here's what I said. Europe entered the lockdown earlier and swifter and came out later and slower. And I anticipate that same thing is going to happen with this second wave. But we have full expectations that it will come out strong. It's just going to take longer. Aaron, I'm going to toss to you if there's anything that you would like to add or if I missed anything.

Thank you, Kevin, and good morning, Kelly. Three quick ads. First, Kelly, as we all know, what's really important is dollars in the bank, profit dollars in the bank, and so our first objective with Europe is just to get the business back up and running and contributing to the bottom line. Kevin did an excellent job of covering two of the primary drivers on the rate impact of international, but I do want to, when he talks about the customers being closed and the inventory obsolescence, but I do want to call out two additional elements. One is product mix shift, where across our international operations, on-premises dining is not available, but takeout or takeaway is. We do have a product mix shift into products in support of that is lower margin. And then lastly, and perhaps the most materially, we have some business mix shift going on where with France closed and other operations in Europe constrained, we've actually mixed into our Canadian contract business, which is lower margin. margin for within the international segment. You're seeing that in some of the numbers.

Okay, that's very helpful. And then if I can just follow up with one more on market share. A lot has been addressed there already, and it sounds like more will become visible in May with respect to the local side of that equation in the U.S. But in terms of the $1.5 billion for national accounts, which is pretty substantial, I guess The question is, how much of that is a function of what Cisco is doing and the strategy that you're pursuing versus a function of the circumstances with competitors and national accounts looking for a solution at Cisco?

Yeah, Kelly, great question. The majority of our transformation is at the local level because that's where the profit is the highest. It's where we have the greatest opportunity to profitably grow, and it's where our new business operating model will have the greatest dividend, and we'll be clear about that in May on the vectors of growth, how each of these transformation initiatives drives improved business performance. At the national level, to oversimplify, the reason we're doing so well with New Business Capture is these large national customers are looking for a distributor that they have confidence in, that they believe in, that can ship, and this is simple, I know this, on time and in full and be able to stock the inventory that they need to be able to deliver to their thousands of locations. They have tremendous confidence that Cisco is that partner. And we have been very successful in the contract bids this summer and into this fall. And Kelly, one reason why we've been able to be more successful there is we put focus on it. We use this expression, fish where the fish are. We can see the restaurant ticket data from all the banks and the credit cards, seeing how well QSR is doing. And we needed to win where the growth was happening. And we had the capacity to do it, Kelly, because our overall business volume is down. And as our business volume recovers, you might be thinking, well, Kevin, what's that going to do your storage and throughput capacity? We're working aggressively on that. And there are several things that we can do to make more room in our warehouses to for this incremental volume so that it is flowing through to the bottom line, like Aaron said, the way we need it to. Skew rationalization between sites, slower moving inventory being pulled out of forward-facing locations, et cetera. These are things we can do to improve the throughput of our warehouses to allow us to be able to support this substantial business win that we've had, 1.5 billion net since the beginning of this crisis. So it is as simple as, They trust us. We can do the business at a national level, and that business is available for us from a winning perspective. What we need to do is make sure it's a sufficiently profitable business for us, and here's my commitment to all of our investors. We will not bid on business that isn't profitable for our company, and we have been very, very disciplined in the contracts that we have underwritten since the beginning of this crisis.

Thank you.

Thanks, Kelly.

And our last question of the day comes from John Ivanco with JP Morgan. Go ahead, please. Your line is open.

And John Ivanco, your line is open.

If you're on mute, please unmute your line. Can you hear me?

We can, John. All right, excellent. Sorry, now you're on speaker. I don't know what's wrong with my headset. You know, of the 8% or 9% of customers you know, that closed overall, and obviously your share was 50% better than that. You know, can you kind of bucket them in any types of categories, whether it's, you know, region or city or suburb or, you know, customer type? You know, it's kind of the first point. And, you know, do you see distributors in particular that disproportionately serve those types of customers, you know, that may, you know, finally give the consolidation in the delivery space that a lot of us thought, you know, what has happened at some point in 2020. And I have follow-ups on that as well.

Yeah, it's a great question. You know, I think it would be fair to say the following. The hardest restricted markets, so the urban areas, are where the closure rate is higher than the places that have fewer restrictions, which would be, you know, the southern third of the United States and more rural geographies. So I think that would be a fair thing to communicate. And it's obvious, right? Where the restrictions are the greatest, that's where the closures are the highest. John, we're not seeing any specific cuisine type having a higher rate of closure. And again, on the closure side, is it temporary? Is it permanent? What I've been pretty consistent from the beginning of this crisis to communicate is we believe there will be an elevation in churn over this tumultuous period. but from an overall bankruptcy rate perspective or the number of doors in the market two years from now, I don't believe it's going to be meaningfully different than the number we have now. There'll be an elevation in churn, but there's not going to be a substantial, substantial reduction in customer doors. I know that select agencies have come out and said bold statistics like 30% to 40% bankruptcies. It's just not what we see. It's not what we see in our data and As I've said before, if a person owns their family restaurant and this is what they've done for 25 years, they're not going to close and become a plumber. They may have to temporarily close. They may have to close that business to restructure their debt. And guess what? They're probably going to reopen a restaurant at some point in time. So we believe the independent restaurant customers are fighters, as I said in my prepared remarks, and they're doing a terrific job in light of the conditions that they're dealing with. to stay in business, and we're proud of the work that we're doing. You said you had a follow-up, John, so I'm going to toss back to you.

Yes. Well, on that first question, and also I'm going to ask one about Europe. You know, given your cash flow, given your cash, you know, when does it, you know, or does it, you know, make sense to be opportunistic, you know, in those difficult-to-enter urban markets from a food service distributor perspective? And you know, maybe buy some share as opposed to just winning it organically? You know, first question in the United States. And secondly, you know, I would think, you know, there'd be some conversations with Europe right now. It's either, hey, let's scale out of the market. That's always more difficult to do business in than the U.S. Or maybe it's time to double down in Europe in some way. Where's your current, you know, thinking in terms of the continent?

Okay, John, thank you. Two-part question. I'll do the first part. I'll say a couple of comments on international. And, Aaron, I'm going to toss to you if there's anything you want to add to the international part of that question. You know, your question, John, on the first part was, you know, metro markets where I've told you previously we under-index as a percent of our total. In fact, it was a year ago today that I told you that that was going to be a big focus of our company, that we could win in the metro markets. And, John, that still exists. That is still absolutely an opportunity for this company. I put that project on pause. given places like New York and Chicago and L.A. are calls for business, figure of speech only, and it wouldn't have been a prudent time for us to do that. We have a couple of pilots going. We can talk more about this in May. This is one of our vectors of growth, is to improve our performance in those metro markets. We have a very significant financial opportunity when we close the gap at those metro markets to our national total from a sales and profit growth perspective. And it's more, John, of a supply chain opportunity than it is anything else. We need to deliver more frequently to those customers. We need to do same-day, next-day delivery to those customers. As you know, they've got these tiny back rooms. They can't have big bulk storage. They need produce delivered on a daily basis. And we've got the capability of doing that. I don't want to get out of the bag, but we've got a couple of pilots undergoing that are showing promise. And you're going to see more from Cisco in that capability. The more insightful part of your question was like, so when's the right time? And I heard you loud and clear, and we're working on that. I don't have anything declarative to say today on the when, other than we have the ability to invest when we see an activity that will be promising for us, and that will be an area where Cisco improves our capabilities and we fully expect to be able to win profitable business. The good thing about that business is, as you know, it has a higher profit percentage than other customer types, so it's a pretty attractive market for us. On the international side, you know, I haven't talked as much about the new customer wins in international because that business is right now doing poorly in aggregate versus the rest of our business because, as Aaron said, the fixed cost, the leverage, and the overall sales being down. But just in the last quarter, not included actually in the 200 million that I quoted, we have a notable win with a very large customer in Europe, excuse me, in the U.K. We have a notable win in Sweden. We have a notable win in Ireland. John, we're starting to make traction on new customer wins of substance. And what we need to do in addition to that, though, is win at the local level. And that's been challenging during this crisis because most of our customers in places like Paris actually closed. The government schemes are so robust in France that it's actually more profitable for the restaurant in France to actually temporarily close than to stay open. So it's pretty hard to win new customers when the customers are trying to serve our clothes. But we're going to go after it hard when those markets reopen. A combination of wins at the national level and then incremental wins at the local level. The question I was asked, you know, 10 minutes ago on can you bring some of these U.S. best practices across the pond? And we fully intend to do that. Aaron, I'll throw to you for final word. And then I have one comment I want to make about our Q3 trends that I didn't get a chance to cover yet to close out the call. So, Aaron, over to you, please.

Great. Thanks for the question. And here's what I would say. Given our strength across the portfolio, Cisco has every right to win internationally the way that it does domestically. From a sense of magnitude perspective, our international portfolio is Canada, the U.K., France, Sweden, Ireland, and then Latin America from a scale perspective. That's just a contextual point. And from what I can see in early days is we have real pockets of strength in Canada, the U.K., Sweden and Ireland and parts of Latin America. But we also have some opportunities to improve, and the team is working hard against those, notwithstanding the COVID crisis. You know, I'm still going to know the teams and the businesses. It would be unfair for me to comment on any one part of the business, but one commitment I can make is that our management team will regularly assess our portfolio, and where we need to, we'll take some action. And you saw us do that recently, most recently in Spain when we divested the Davizol. business. So I'm excited to get to know the business better. And as I said, we have every right to win internationally as well.

Very insightful.

Thank you, Aaron. John, appreciate the question. And I know we're over time. We appreciate everyone's patience and staying on past the top of the hour. Thank you for that. Thank you for your interest in Cisco. And I just want to leave you with one statement of optimism. I know we talked about December being a really tough month for us and that the quarter had sequentially been decelerating We're seeing the opposite in Q3, which is a good thing. Our January month, which just closed, performed better than December. And we are seeing sequential improvement in our business trends. I'm even more optimistic into these forward-facing months as those restrictions that are placed upon our customers ease. And it's all going to be tied to the progress that we make in vaccine administration. I think you all know I worked in healthcare for eight years before I came here. The news is giving a doomsday scenario in vaccine administration. It's going better than the news is covering it. And what happens next is vaccines are going to begin to be distributed in places like Walmart and Walgreens and CVS. And when we can get 40,000 places in this country administering vaccines and can make meaningful progress on fighting this COVID crisis, we're going to see governments be much more willing to ease restrictions. And even places like U.K., where we're in complete lockdown, UK as a country is doing a terrific job with vaccine administration. And that's going to provide an opportunity for a business recovery in calendar 2021. And we're poised and ready to take advantage of it. Neil, I'm going to toss it over to you if there's anything else to close out the call.

Thank you, Kevin. And I just want to reiterate your thanks to our investors and analysts who have joined us today. Thank you very much for your interest in our company. If you need anything else, please feel free to follow up with us. So, James, the operator, over to you to go ahead and close us out.

Ladies and gentlemen, once again, we do want to thank you for attending today's conference call. You may now disconnect.