Sysco Corporation

Good morning and welcome to Cisco's second quarter fiscal 2022 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 Kevin Kim, Vice President of Investor Relations. Please go ahead.

Hello and welcome to Cisco's second quarter fiscal 2022 earnings call. On today's call, we have Kevin Hurkin, our President and Chief Executive Officer, and Erin 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 July 3, 2021, 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. 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 is included at the end of the presentation slides and can be found in the investor section of our website. To ensure that we have sufficient time to answer all questions, we'd like to ask each participant to limit their time today to one question and one follow-up. At this time, I'd like to turn the call over to Kevin Harkin.

Good morning, everyone, and thank you for joining. I will highlight four topics today during our call. First, our financial results for the quarter. Second, I will provide some color on the current state of our business and the COVID environment. Third, I will detail our continued share gains despite a difficult macro environment. And finally, I will outline our approach to the long game with some highlights of our recipe for growth transformation. I'll then turn it over to Aaron to discuss our financial results in more detail. So let's get started with our financial results displayed on slide four. Earlier this morning, Cisco reported fiscal second quarter results that were fueled by substantial top line momentum and an acceleration of market share gains. Our sales and volume performance success is a testament to our supply chain strength and the advancement of our recipe for growth. Our operating expenses for the period were elevated due to the effects of COVID on our business. And as a result, Our bottom line results were below our expectations this quarter. Key headlines for the quarter include strong sales results and market share gains. We delivered growth of more than 1.2 times the market, which exceeded our expectations for the period. We delivered sales growth of 10.5% versus 2019 and sequential volume improvements throughout the quarter until the Omicron variant impacted our December performance. More on Omicron in a moment. As I mentioned, Operational expenses within our supply chain were above expectations due to the challenges that COVID is presenting to our labor environment and our transportation costs. I will detail this complex operating environment in a moment, but we remain confident these incremental expenses driven by labor costs are near-term challenges that will improve over time. Our strong sales results in elevated operating expenses resulted in an adjusted earnings per share of 57 cents for the quarter. We further advanced our recipe for growth strategy, which we believe will uniquely position Cisco to win in the marketplace for the long term. Cisco's strength of income statement and balance sheet have enabled us to continue advancing our strategy during a difficult operating environment. That strategic and economic reality will enable Cisco to outperform the market for quarters and years to come. Topic two for today, an update on the state of the business. As I mentioned a moment ago, COVID continues to negatively impact supply chains across the globe, and the effect was elevated in Q2 relative to our first quarter. The impact is being felt in product availability shortages from our suppliers and higher than anticipated labor and transportation costs. I would like to further explain some of the labor cost pressures that we are addressing. At Cisco, we have hired thousands of new associates over the past quarter to support the recovery of our industry, which is coming faster and stronger than had been anticipated. We are also winning market share across our business sectors, which adds to our hiring needs. As a result of our hiring and an industry-wide higher rate of associate turnover, we have a higher ratio of new associates in our labor population than we had originally planned. A higher population of less experienced associates has a direct and negative impact on our supply chain productivity. The punchline, is that our tenured associates perform at a much higher rate of productivity than new associates. With that said, we are confident that we can and will move our newer associates up the productivity curve over time. We have also incurred higher-than-planned expenses as COVID-related illnesses accelerated in the quarter and have continued into January. To provide a sense of the magnitude of this disruption, nearly 10% of our U.S. workforce tested positive for COVID during the month of January, and were out for a minimum of several days. To cover these absences, we invested in overtime and supplemental third-party resources to ensure that we properly supported our customers. At Cisco, we cannot let our healthcare, education, hospitality, and important restaurant partners go without food because of these labor challenges caused by COVID. Our customer-centric approach to ensure that we can ship on time and in full will benefit our relationship with our customers for the long term. positively impacting retention and growth. We are confident that our service performance is stronger than the industry as measured by our Net Promoter Score. In fact, our NPS performance versus the market expanded in the quarter. Lastly, as I mentioned, Omicron negatively impacted our top line performance starting the weekend after Thanksgiving. Our business in Europe was impacted first with the reintroduction of major restrictions on our customers Our sales and volume performances in December were impacted by those restrictions, most notably in the UK, France, and Canada. For example, restaurants in the majority of Canada began closing for on-premise dining at the end of the second quarter, with restrictions slowly starting to ease in February. These types of restrictions impact our customers' performance and ordering patterns. As a result, we expect the top-line impact from Omicron to continue into the third quarter. The speed of the return to pre-Omicron volume levels is uncertain, but we are seeing signs of progress in Europe as restrictions have begun easing. I would like to highlight again that Cisco sequentially improved sales and volume performance every month compared to 2019 levels until the impact of Omicron began being felt Thanksgiving weekend, and we are confident that we will get back to that growth pattern as Omicron recedes. Topic three, let's turn to our market share performance highlighted on slide five. Despite the challenges presented by Omicron at the end of the quarter, as you can see on slide five, Cisco delivered exceptional growth versus the market in the second quarter. As a result, we are now confident we will exceed our 1.2 times the market growth target for the full fiscal year. Our performance versus the market expanded this quarter. Furthermore, looking back over the last three quarters, we are beginning to pull ahead of the industry. The next slide from NPD shows how, over the last two years, we have consistently increased the percentage of customers that purchase exclusively from Cisco. This compares to the dotted line that shows the percentage of customers not yet buying from Cisco. You can see that the dotted line is steadily declining. These slides are just two more proof points that our team is winning in the marketplace and that our strategy is working. Lastly, topic four. I will highlight examples in our business transformation and how that progress will enable consistent, profitable growth. Today, I will give an update on two of our growth initiatives, Cisco Your Way and our Italian Cuisine program. As a reminder, Cisco Your Way is a new service model that we are piloting to better serve what we call restaurant-dense neighborhoods. Through this program, we are providing our customers with enhanced levels of service and sales support, We are very pleased with the success of the pilot locations and we will be expanding the program to net new neighborhoods in the spring of 2022. In addition to Cisco YearWay, I would like to provide an update on our Italian cuisine platform work. As a reminder, Italian is one of the largest cuisine segments and Cisco historically under-penetrated with this important customer segment. We did not have an optimal assortment and we lacked the go-to-market selling strategy to win. Our GRECO acquisition has changed that capability in a meaningful way. First off, GRECO is off to a great start and is exceeding our year one top and bottom line expectations. We are really pleased with the GRECO business and the great work that they are doing. As importantly, we are leveraging the GRECO product assortment and selling prowess and bringing the best selling items to Cisco houses across the country. More on that in due course. Winning in the specialty sectors, like Italian, is a priority for our recipe for growth strategy. Turning to slide seven, in summary for the quarter, we are winning as a company in the marketplace. We are growing our business with new and existing customers. Our year-to-date growth is exceeding our 1.2 times the industry target for the year and is being driven by our supply chain strength and our recipe for growth strategy. We also returned over 650 million of cash to our shareholders during the quarter. We are confident that the impact of our initiatives will grow over time, enabling us to consistently outperform the market at large. As I wrap up my prepared remarks, I want to thank all of our associates at Cisco. These past two years have been challenging. We continue to lead the industry from a service perspective and make deliveries to our customers regardless of the COVID conditions. I am proud of our sales, operations, and global support center teams for the persistence and customer focus that they have displayed. I really want to thank them for their tenacity, and I'll use another word, endurance. I am honored to serve these associates and work by their side. I would also like to welcome the recently appointed members of our board of directors, Ali Dibaj, Joe Golder, and Allison Kenny-Paul. Together, they bring deep industry experience, a modern skills inventory, including finance, consumer, and digital and strategy capabilities. Our three new board members will be extremely valuable to Cisco in our transformation for years to come. I'll now turn it over to Aaron, who will provide additional financial details before we open it up for questions. Thank you, Kevin. Good morning. Here are our second quarter fiscal 2022 financial headlines, as seen on slide nine. Sales growth of 41.2% compared to last year, also up 10.5% versus fiscal 2019, leading to our highest Q2 sales ever. Good management of our product cost inflation, recording the highest gross profit in absolute dollar terms for NEQ2 at Cisco. A doubling of adjusted operating income and a 62.9% increase in adjusted EBITDA compared to last year, notwithstanding a cost environment which worsened during the quarter. Continued investment against our long-term recipe for growth, with $44 million of operating expense investments against our strategic investments, creating momentum with our commercial capabilities. Proactive action on the COVID-generated labor and safety environments in which we are operating, with $73 million in transitory snapback operating investments, such as recruiting costs, hiring marketing, vaccination promotion, contract labor, and sign-on and retention bonuses in the quarter. And while the magnitude was greater than we could foresee last quarter, we experienced productivity challenges and much higher overtime costs in the quarter resulting from the pandemic-related workforce transition and our prioritization of customer service. With respect to our capital allocation, we refinanced elements of our long-term debt during the quarter, and we returned $657 million of cash to shareholders. With those headlines on the table, let's turn to some details on the financials for the quarter and some thoughts on our outlook. Second quarter sales were $16.3 billion, an increase of 41.2% from fiscal 2021 and a 10.5% increase from fiscal 2019. In the United States, sales in our largest segment, U.S. Food Service, showed excellent progress, up 45.1% versus fiscal 2021, and up 14% versus fiscal 2019, reflecting the pre-Thanksgiving and pre-Omicron resurgence in volumes and sales. Local case volume within the subset of USFS, our U.S. Broadline operations, increased 17.6%, while total case volume within U.S. broad line operations increased 22.5%. Sigma sales were up 16.5% versus fiscal 2021 and up 15.3% versus fiscal 2019, even with the large customer rationalization we disposed earlier, which we expect will be complete on a comparable basis following Q3. International sales were up 43% versus fiscal 2021 and down approximately 3% versus fiscal 2019, Sales trends were accelerating nicely in our international segment before the onset of Omicron and restrictions in our key international markets, such as the UK. And we are watching post-lockdown trends carefully. Foreign exchange rates had a positive impact of 0.3% on Cisco's sales results. We continue to monitor the impact on our customers and on our business as international restrictions are starting to ease, including in Ireland and the UK. Inflation continued to be a factor during the quarter at approximately 14.6% in our U.S. broad-line business. Gross profit for the enterprise was approximately $3 billion in the second quarter, increasing 37.8% versus the second quarter of fiscal 2021, and also exceeding gross profit in fiscal 2019 by 4%. The increase in gross profit was driven by year-over-year improvements in volume versus fiscal 21, and compared to the same quarter in both fiscal 2021 and fiscal 2019, increases in gross profit dollars per case across all four of our reporting segments as we successfully managed increased costs for our product suppliers while addressing some, but not all, of our increased operating costs. Gross margin rate was 17.7% during the quarter, with the margin rate math impacted by product inflation. Of course, it is gross profit dollars that count in an inflationary environment. Turning back to the enterprise, adjusted operating expense came in at $2.4 billion with a combination of planned and unexpected expense increases from the prior year really driven by four things. First, the increased variable costs associated with significantly increased volumes. Second, as you can see in slide 10, more than $73 million of one-time and short-term transitory expenses associated with the SNAP Act, which we expect to decline in the third quarter. While we have increased wages in select locations, those increases are not material. and have the opportunity to be offset by productivity and cost-out improvements going forward. Third, $44 million of purposeful operating expense investments against our recipe for growth initiatives, like personalization, digital sales tools, and assortment capabilities, which remain on track to be elevated for the rest of the year. And fourth, the productivity expense challenges Kevin referenced earlier, including ramp-up time associated with new higher productivity in our warehouses and trucks, elevated overtime, and third-party labor support in the face of staff absences. I want to emphasize that the management team at Cisco has been aggressive in pursuing the root cause of the cost increases. While the transformation continues unabated, the team has also pushed hard to identify and action incremental profit opportunities and cost reduction initiatives, which should help the company in the back half and beyond as the environment stabilizes. Together, the snapback investments and the transformation costs totaled approximately $116 million, of operating expenses this quarter and negatively impacted our adjusted EPS by approximately 17 cents. All in, we leveraged our adjusted operating expense structure and delivered expense as a percentage of sales of 14.7%, which is flat from fiscal 2019 and down 145 basis points from fiscal 2021. Our cost-out efforts are meaningfully benefiting our P&L and we continue to assess and execute against new cost-out projects each quarter. Finally, for the second quarter of fiscal 2022, adjusted operating income increased $262 million from last year to $496 million. This was primarily driven by a 45% improvement in U.S. food service and continued progress on profitability from international, partially offset by SGMA. The second quarter SGMA operating loss is driven by higher than expected labor costs, which will be offset in future quarters by specific actions already taken by the SGMA management team. Adjusted earnings per share increased to $0.40 to $0.57 for the second quarter compared to last year. Now let me share a couple of comments on cash flow in the balance sheet. Cash flow from operations was $377 million on a year-to-date basis, driven by our higher income and lower interest, offset by higher tax payments and a significant investment in working capital. Net capex was $175.9 million, somewhat lower than expected given increased lead times on fleet and and equipment. Adjusted free cash flow year-to-date was $201 million. At the end of the second quarter, we had $1.4 billion of cash and cash equivalents on hand. As seen in slide 15, our results this quarter also reflected incremental progress against our capital allocation priorities. This included the further strengthening of our balance sheet by successfully refinancing debt during the quarter at longer maturities and more attractive rates, lowering our adjusted interest expense costs going forward. We also commenced our share repurchase program during the second quarter and repurchased approximately 5.7 million shares for a total of $416 million and an average share price of $72.30. This was in addition to paying our quarterly dividend of $0.47 per share in October. We remain committed to growing our dividend and, as previously communicated, plan to next address decisions around our dividend per share during our fiscal Q4. While our track record goes back decades, as you can see in slide 16, over the last seven years, cumulatively, we have returned over $12 billion of cash to shareholders. Let's turn now to the look forward. Our recipe for growth transformation plan is on track. However, Omicron had a noticeable impact on our December and Q2 results, continuing into January and now February. As a result, We are reaffirming our long-term guidance that for fiscal 2024, Cisco will deliver adjusted EPS growth of at least 30% over our record 2019 EPS of $3.55. We are updating our view of the back half to reflect the realities of the disruption caused by Omicron and the labor environment. We expect to fall below our prior EPS guidance for fiscal year 2022. For the full year, we expect adjusted EPS of approximately $3 to $3.10. This translates to adjusted EPS in the back half of about $1.60 to $1.70. In a typical pre-COVID fiscal year, adjusted EPS for our second half is generally weighted around 40% to Q3 and 60% in Q4 due to normal seasonality of our business. This year, we expect our second half profitability to be weighted even more to the fourth quarter. We expect a stronger Q4 this year relative to Q3 as a result of anticipated volume recovery, lower SNAP-X expenses, improved operating productivity, and specific actions we are taking to offset Omicron. In offering this perspective, we are assuming no further COVID variant disruptions to our operating environment. With that, let me turn the call back over to Kevin for closing remarks. Thank you, Aaron. As we conclude, I'd like to provide a brief summary. This quarter included substantial top line momentum and an acceleration of our market share gains. We are winning in the marketplace and we have confidence that we will continue to win share. With that said, Q2 presented challenges from Omicron on both our top and bottom line. Our sequential volume growth progress stalled post-Thanksgiving and that headwind has continued into January. More importantly, COVID-related staffing disruptions increased our operating expenses for the quarter. As a result, our bottom line results were below our expectations. Second, despite the short-term impact of Omicron on our business, we are confident that we will resume our volume improvement as soon as the variant recedes, and we can see green shoots of progress in February from a volume perspective. As it relates to expenses, we have a management plan to improve our year-to-go operating expenses. We are meaningfully focused on improving associate retention, training, and productivity. These activities are a core competency of Cisco and our experienced field leadership team has a plan to deliver improvement for the remainder of the year. Third, we remain confident in the long-term trajectory at Cisco. And as Aaron stated, we are reaffirming our long-term guidance that includes significant sales and EPS growth. Our recipe for growth transformation is creating capabilities at Cisco that will help us profitably grow for the long term. The customer first solutions we are developing will enable us to grow our share profitably and also enables Cisco to be more efficient. There are bright days ahead for Cisco, and I am proud to be part of the journey. Operator, you can now turn it over for questions.

Thank you, sir. At this time, I would like to remind everyone, if you would like to ask a question, simply press star, then the number one on your telephone keypad. To withdraw your question, press the pound key. Your first question comes from the line of Edward Kelly of Wells Fargo.

Hi, guys. Good morning. So, Kevin and Aaron, I mean, obviously, you know, Omicron has been, you know, pretty disruptive to your operations more recently. Can you quantify how much additional costs you saw in Q2 related to that? Is that all in the snapback costs that you provided, or is it in addition to that? And then how do we think about, you know, those costs, snapback, transformation like that in Q3 and then Q4 at this point?

Good morning. Great questions. I'm going to refer you back to our earlier remarks on pieces of that and then provide a couple additional supplements. What was remarkable to us was the progress we were making up through the Thanksgiving holiday on the top line and indeed against the overall plan. With the onset of Omicron, we started to see the impact on volumes and certainly on our operating expenses. Before the quarter, we incurred $73 million of SNAPBAC costs, which is the combination of contract labor, retention bonuses, sign-on bonuses, training, vaccination credits, et cetera. We also incurred more than $40 million on transformation costs. But what's not in those two numbers that I referenced in the script is $40 million of overtime and other productivity impacts driven by both our response, ensuring that we're serving the customer, but also then us working with the labor force in transition.

Yep, great. That's helpful. And then Q3, you know, how do we think about, I mean, you gave, you know, helped us with guidance with Q3, but how do we think about, you know, those costs as we're sort of modeling out Q3? And then I guess the other aspects, and so count this as my follow-up, is, you know, how do we think about, you know, where case volumes are running, you know, now? relative to sort of like that 5% level in the U.S. that you talked about versus 19 in Q2, and then help internationally there as well.

Why don't I touch the expectations on OPEX and then toss it to Kevin on volume. From an OPEX perspective, what we experienced in December continued into January, as we described in our prepared remarks, and as Kevin alluded to, we're starting to see some green shoots in February, but green shoots does not equal back to back to pre-Omicron run rate. We are anticipating that our snapback costs will come down in the back half. We're also anticipating that our supply chain team, given our scale, will make good progress against productivity in the back half as well. But we have work to do, which is why we were purposeful in our remarks in calling out both the seasonal splits on our guidance between Q3 and Q4, sorry, on our results between Q3 and Q4, the 40-60, if you will, and emphasizing that given the continued Omicron environment, notwithstanding the green shoots and the work we have to do, that we expect the updated guidance to be heavily weighted to Q4. Kevin? Thanks, Eric. Good morning. Thanks for the questions. As it relates to case volume, one of my comments in the prepared remarks is we have five consecutive sequential months of improvement in case volume growth, which continues Q4 of last fiscal year. Again, we were sequentially improving each and every month. taking market share as evidenced by our slide chart, we're really beginning to pull away from the rest of the market, so winning in aggregate. December was impacted. January was impacted because the restrictions were in place for all of January. We are beginning to see some signs of progress or green shoots in February as restrictions begin to ease, but we're not fully yet back to the pre-Omicron levels. We have 50% restaurant restriction, For on-premise dining in Canada, we have mandatory work from home work orders in France and in the UK. And then in northern urban locations within the United States, still heavy, heavy work from home, which impacts day part restaurant traffic, as you well know. So we're not quite back to where we were. What we are very confident in is as the restrictions on our customers ease, vaccine passports and things like that, mask mandates that impact people's psychology tied to going out, As those things ease, we see fast recovery from our customers, and we're prepared from an inventory perspective. We're prepared from a staffing perspective. We're prepared from a service-level perspective to be able to serve when our customers are ready, and we expect to continue to pull away from the market from a growth versus the industry perspective. Ed, thanks for the questions. We appreciate it. Thank you.

Your next question comes from the line of Alex Slagle of Jefferies.

Thanks. Good morning. What do you think are the most important changes or improvements you've made as a company just to be better prepared for unexpected surges or events like this that we've been through? I mean, perhaps things that are less obvious to investors that might give confidence that the impact of future events would be less of a headwind, perhaps even more of a share gain opportunity for Cisco.

Yeah, great question, Alex. This is Kevin. First and foremost, inventory management. We have perishable products, so as volume declines, we need to be super fast and agile in regards to managing shrink and risk associated with spoilage. We've gotten very good at that. And, you know, you can see it in our performance results that just, you know, our inventory management is significantly improved from two years ago when COVID first began. The second is in labor strategy. One of the things that I made the call with full support of our board back in December when Omicron began impacting, we were not going to furlough associates hard stop. That would be a penny wise, dollar foolish decision. Any pennies that we could save from furloughing staff in December and January would cost us twice as much as we attempted to restock the bench and bring people back off furlough because in today's labor environment, we furlough someone, they're going to get a job at another industry at another company. We made that very purposeful choice to not furlough any staff, not a single person over that period of time, December and January. That will pay dividends for our company. My guess would be smaller, less capitalized companies are not fortunate enough to be able to make those types of decisions. In fact, not only did we not furlough anyone, we hired thousands of people in our Q2 and have continued hiring December into January at this moment in time. We literally have hundreds of drivers in the passenger seat of a truck getting trained on Cisco standards, Cisco processes, and they will be ready to be driving their own truck as the volume recovery begins. Because keep in mind that there's an entire sector that we serve that isn't yet even back in business sufficiently, and that's what we call business and industry. We had been anticipating that the business and industry sector would have kicked in in January, as most companies were planning a return to work after the holidays. That has not occurred, as you know, and that's future tailwinds to the Cisco recovery as business and industry will begin kicking back in here. It's hard to predict when, but we will be prepared. We'll be ready. Those are just a handful of things that are on the do different from March of 2020, and we've gotten pretty agile at dealing with these curveballs. But back to you if you have a follow-up.

That's helpful. Follow-up just on the Cisco branded product mix and how is this impacted by the supply chain challenges versus customer preferences and how do you see that progressing through the calendar year?

We view it as an opportunity to increase Cisco brand for factual. Our Cisco brand fill rate and in-stock is exceeding national brand. That's important. Our ability to keep those very profitable products for Cisco in-stock is an important priority for us and The partners that we work with to produce that product are doing well. And again, Cisco brand in aggregate has a higher rate of in-stock than national brands. That's point one. Point two, because of inflation being elevated and everybody knows it's currently elevated, Cisco brand has an even bigger punch than it normally would. So we view Cisco brand as an opportunity to save our customers money with a high quality product. And we are doing a good job with our sales team of introducing customers to products that they perhaps have not purchased before. And we did see progress, in fact, 250 basis points of progress from Q1 into Q2 on Cisco brand penetration. And I would view further tailwind in that regard in the coming years. Got it. Thanks. Thanks, Alex.

Your next question comes from the line of John Heikenbockel of Guggenheim Partners.

So, Kevin, let me start with your thoughts on elevated inflation rates. you know, an impact on unit demand, right, food away from home. And then, you know, if you guys, can you grow faster than that 1.5 goal for 2024? You know, what would it take to do that? And, you know, for example, you know, could you get close to two times if the market grew slower and, you know, to get to where you want to get to, share gains have to play a bigger role. What's your thought on that?

John, thanks for the questions. Tied to inflation. You know, it's double digit at this time. As you know, it's been double digit now for longer than any of us in the industry would like. We have not seen yet a reduction in consumer demand tied to that higher inflation. And it's hard to predict, you know, how long that will be able to persist. But we're not seeing elasticity of pricing impact consumer purchasing yet. And that is a positive. That has obviously helped our P&L. In the most recent quarter, as Aaron said, we increased GP dollars per case in each of our reportable segments. So we're doing a good job of passing through inflation. We're also doing a good job of helping our customers find lower cost alternatives. So menu suggestions, narrowing the number of items on the menu so they can increase their profitability, portion size, as you know, optimization so that they can keep their ticket on the menu the same and do so from a lower COGS to them. So those things are going well. Protein is even higher than the overall basket of inflation. We need to see progress on supplier availability in protein. It's a priority for Cisco. We are working with our supplier partners in the protein category to work on longer range forecasts so they have consistency of purchase volume from Cisco so that they can be efficient in their production. And we are working as hard as we can to find additional sources of supply in the protein category, because we need to bring the protein inflation down, John. That's the number one focus for us from an inflation perspective. As it relates to the second half of your question, which was, can we grow faster than 1.5? We're pleased to report today that we are exceeding our goal for this year, which was 1.2. Prior quarter, we had said we are on track to deliver 1.2. So those words matter. We changed our words from on track to exceed. We are confident we will exceed the 1.2 this year. Our third-year goal of our three-year plan, which is fiscal 2024, remains at this time at 1.5. Do I have confidence we can do better than that? And we'll talk more about that at Investor Day. But we like our strategy. It's winning in the marketplace. If you look at the chart in our prepared remarks, you can see the pulling away from the industry, and I don't anticipate that slowing down.

Maybe just as a quick follow-up, when you think about 24 now versus maybe six months ago, Do you think your thought now is revenue will be higher and profit margins lower than you thought six months ago or it's too early to make that call?

Good morning. It's Aaron. I really liked your question because, like you, we are very focused on the long term. And we were purposeful in reaffirming our 2024 guidance. We believe it. We can see it. And we're going to get there. And I would take you back to something I said at our investor day back in May, which was the opportunity is everywhere at Cisco. What I would describe it now is progress is everywhere at Cisco. And we're going to get through the current volatility driven by Omicron. I'm quite pleased with what I'm seeing from a discipline perspective in the business. And we are putting all the pieces in place so that by the time we get to 2024, we're talking about the upside. But for the moment, we have to stay focused on getting through Omicron, getting through the quarter, getting through the half, but we are quite confident in the future.

Thank you. Thank you, John.

Your next question comes from the line of Jake Bartlett of Truist Securities.

Great. Thanks for taking the question. My first was on Omicron and kind of understanding the near-term impacts. that this had on your staffing and demand. But I'm wondering if there's any longer term impacts in your view, and whether that's pushing out the supply chain disruptions materially, having a longer impact there. And did you see any disruptions, maybe closures, for instance, with some of your independent customers? Anything that might just last longer than as we look at the cases come down sharply here?

Jake, it's a good question. I'll answer it directly as asked, and then I'm going to add one point that we believe is on investors' minds tied to this. First and foremost, scale matters in this industry, meaningfully. So purchasing scale matters so we can get best possible costs so we can share value with our customers. Scale matters from a physicality perspective. So we have more distribution centers available. in the United States, our primary country than anyone else, which means our last mile delivery is a shorter route, a more dense route than others. And as we continue to grow, Aaron and I will make appropriate investments in incremental physical capabilities to put us even closer to the customer, which will lower our cost to serve. And you can see the flywheel that comes from the size, breadth, and scale of Cisco. And we believe that will become an increasing strength capability over time. Because of the cash generation of this company and our strong balance sheet, we have the ability to invest in net new facilities to lower that cost to serve last mile delivery. So we believe it will be an increasing strength formula for our company. One of the questions that we believe is on investors' minds is, Kevin, aren't you worried about labor costs? Everyone we talk to is talking about labor costs going up. I just want to be clear on this topic. Labor wage rate is immaterial. to the cost pressure that we experienced in Q2. I'll repeat that, the labor wage rate was immaterial in our Q2. Our wage, excuse me, our operating cost pressure in this past quarter, if you had to single it down to like the biggest thing, was the percentage of people working for us that are new, tied to the hiring, and there was more turnover that occurred this past summer than is typical in our industry, tied to what some people call that great resignation. So we are working feverishly on improving associate retention, improving training of our associates, improving the productivity of our associates. As I mentioned, this is our core competence. This is what we do, and we are confident we will move up the productivity ladder. As Erin said, that'll be more Q4 impactful than Q3 because it takes time. As I mentioned earlier, I gave a decent piece of color. When you start as a driver at our company, you're in the passenger seat for weeks learning Cisco standards, learning our customer experience, relations interface, because that driver is the face of this company. And also, of course, learning the challenging type of driving, which is mostly backing up to restaurant locations that our drivers have to do. So those investments we're making will reduce over time, which is why we are confident that we will improve our productivity, which will then begin to flow through to improved EBIT percent margins. So I just want to be clear, labor rate increase is not something that is causing our current operating cost pressure. As you look to the future, will that change? We do anticipate when we do our annual review process that we will have a nominally higher wage rate increase provided to our associates. They work hard. They deserve to be paid fairly and appropriately. And we have productivity improvement efforts that can help offset those types of increases.

Great. Great. Thank you very much. And just really a quick follow-up to that. Last week Brinker talked about interesting rehire rates and seeing an increase in the rehiring of former employees. I'm just wondering whether that's something that I think is a sign of an improving labor market but also could really help with productivity. Is that something that you're measuring or seeing any material change there as people who might have left for whatever reason are coming back to Cisco?

Yeah, Jake, it's a great question. I think I said a couple of quarters ago, we've rehired 100% of people that we furloughed back in March from the supply chain perspective. So we've been fully open for business now for a long time, and we're growing. So we're taking market share. We're winning new customers. Our sales are obviously well above 19. Our volumes, we anticipate, will be back to and then above 19 in the not too distant future. So we've got the open to hire shingle out there. In fact, we're getting much more effective at recruiting for open positions. Our marketing team has gotten more sophisticated on how to target applicants, and we're getting better and better at training them. But in the future, to specifically answer your question, Jake, we're actually going to have to go to people from outside this industry to meet the hiring needs and hiring demands that we have. It's why we formed our Driver Academy. Just a little bit of color on that. We're now live in two physical Driver Academy locations. Our first CDL class has graduated from our Driver Academy. And we think we're going to have to eat our own cooking, pun intended, where we're going to have to find people who aren't today CDO class drivers, teach them the trade, train them, and then have them work for a long time for Cisco. And again, that's an example of size and scale matter. We pay people to participate in that program. Whereas today, if you were an average person wanting to become a driver and you entered driver school, you actually have to pay the driver school. So think about that flip from having to go from having to pay to attend and losing time working, do we actually pay you to attend the Cisco Driver Academy? And we're bullish about that and expanding that opportunity across the country. Jake, thank you for the questions.

Thank you.

Your next question comes from the line of Jeffrey Bernstein of Barclays.

Great. Thank you very much. Kevin and Aaron, I think you both mentioned green shoots I believe that was in reference to just more recent February, early February trends. I'm just trying to assess whether that's more on the sales side starting to recover, which I know we've heard some talk about starting in mid-January, things are getting better, or whether you're referring to more inflation because we've seen spot prices maybe start to ease sequentially on commodities and maybe, as we've talked about earlier, maybe a little bit easier to do some hiring. So just trying to assess what you think comes first as you talk about the green shoots through the fiscal third quarter.

Morning, Jeff. Thanks for the question. The green shoot comment that I made was actually tied to cases, excuse me, case and volume, therefore, and sales beginning to improve. That's what that comment was tied to. As restrictions begin to ease, you know, Canada just in February has relaxed. They still have a very onerous restriction in place, which is 50% on-prem dining. But it was like literally restaurants were closed in Canada. In the GTA, greater Toronto area and Quebec province, you couldn't eat at a restaurant for the month of January. So those restrictions have began easing. In the U.K. and France, the restrictions have been very heavy. Mandatory work from home, we're seeing restrictions ease there. And the green shoot comment was tied to, as those restrictions ease, we can see a recovery of the business and a return of volume. And then in the U.S., you know, I didn't give this color commentary, the southern third of the United States continues to perform very well. The headwind in the U.S. is in the urban centers in the northwest, And we anticipate recovery being made in those environments as, again, restrictions in these. That's mostly a city mayor decision as the restrictions they're putting on customers ease. Point two, though, is where else will progress come from? So we do expect volume in sales to make progress in Q3 and certainly into Q4. But operating expenses, we have a plan. We have a management action plan to address our operating expenses. It's a five-part plan. I'll cover three quickly, and then I'll toss to Aaron, who will cover two. First and foremost, it's about retention, training, and productivity. We need to move the new hires up the productivity curve, and we are maniacally focused on improving that new hire productivity. Topic two is transportation efficiency. There's gold in them hills, we like to say, on ensuring that the trucks are being routed most optimally. There's work we can do. It's pick and shovel work to ensure that our transportation efficiency is operating at the highest level. The third is Cisco brand, the question that came up earlier in today's conversation from Alex. We are making progress in Cisco brand. It will be a big focus in the year to go, and we anticipate profit improvement in the year to go tied to increasing penetration of Cisco brand. And I'll toss to Aaron for the two other topics we're addressing. Aaron, over to you. Thanks, Kevin. Of equal importance are our progress against COGS. We have opportunities to source better. Our strategic sourcing efforts are gathering steam, and we're bullish on where that will take us over time. And then, of course, being relentless on cost out and accelerating our efforts and, frankly, finding new projects. We have a big goal out there from May. We are accelerating that goal, trying to bring the goodness forward to help us offset what we've been experiencing over the last couple of quarters. I do want to toss out one modeling point just for clarification. I want to point out to those who are working on their models that January is a seasonal low for us. even in the absence of Omicron. And so while the green shoots, you're hearing us talk about green shoots, those are largely coming in February and beyond.

Understood. And then my follow-up, I guess, relates to that profitability point you just made. I know for a number of quarters now, you guys have referenced improving profitability starting in the second half of fiscal 22, which we're finally here, seemingly as, I guess, investments ease a little bit, profitability improves, initiatives on that front. Just wondering whether you still see that thesis intact or whether there's been delays to that. Obviously, you reiterated the fiscal 24, so it seems like the end zone is still at the same spot, but just wondering whether there's concern that there's more of a hockey stick type recovery or whether you still believe that starting in the back half of fiscal 22, a lot of the initiatives you've put in place are really going to start to bear fruit, putting aside kind of the Omicron variant.

I appreciate the question. Let me offer some perspective first. Everything we have said we are going to do, we are doing. What has changed is the environment in which we're operating. And so while we got out of the box early at the end of fiscal 21, working on aggressive cost-out efforts and working on GP sourcing efforts, the visibility of those things in the P&L has been impacted by the environment in which we're operating. So we do have strong confidence in our long-term guidance. We have visibility to the actions that we had planned to take internally on cost-out and gross profit recovery actions, and we aren't backing away from those, and those efforts aren't slowing down. If anything, they're actually accelerating. So while I'm going to refer you back to my earlier comments about the back-calf guidance and what the short-term environment means for us, Kevin and I and the entire management team are locked hands, and we're going to deliver on fiscal 24 of being at or above our all-time EPSI from fiscal 2019. Understood. Thank you. Thank you, Jeff.

Your next question comes from the line of John Glass of Morgan Stanley.

Thanks very much. I wanted to go back to the health of your customer base and looking at the difference between your overall broad-line case growth and your local case growth. Is it fair to say independent restaurants have been more negatively impacted by the things like you mentioned about staffing shortages, et cetera? And inside of that, is there any growing concern that inflation is impacting their financial health? Is there any negative reads that you're seeing in terms of independent restaurants' viability in this inflationary environment or not?

Hey, John, that's a really terrific question. Let me just go back to this health of the customer component. If we go back to the beginning of COVID-19, you know, fast food, QSR, drive-through, meaningful share winner. And you could see that in our Sigma reportable segment for last year. Sigma had a record year in both top line and bottom line, in part because Sigma, you know, indexes, you know, towards obviously serving that customer type. That was year one of COVID. Year two of COVID, you know, the big winners are the sophisticated restaurant chains that have a digital app that allows, you know, to go ordering, that allows, you know, paperless delivery contactless payment, I meant to say, and just frictionless ease of purchase and really loyalty. One of the things we're working on at Cisco is personalization. Well, there are select retailers, excuse me, restaurants, I won't name the names of them, that have pretty fantastic loyalty programs that prompt their customers to buy more from them and come back to their restaurants more often. Those are the big winners at this point in time. As it relates to Cisco and how we can help the mom and pop, this is the sweet spot of who we are. So we are helping independent restaurants figure out how to connect to a delivery partner. We help them with a creation of a mobile version of their menu so that customers can shop remotely and pick up or take out. And also, we're helping them with things like contactless payment in the restaurant. So we have the largest sales force in the industry, and that literally is what they do. They don't just sell food. They consult with mom and pops to help them compete more effectively with some of the larger companies and we believe that will earn loyalty to Cisco over time. We believe that will increase Cisco's stickiness. And I refer you back to the chart in our slide deck that talked about the percentage of Cisco customers now buying just from us, and then the percentage of customers that weren't previously buying from us. And both of those indices are improving steadily. So we're confident in the long term of the mom and pop independence. There are many of them out there, and we can help them succeed. And we believe that Cisco's independent customers are going to outperform the mom and pop that does not partner with Cisco. In fact, we've got data that shows that, in fact, is the case, and our sales reps use that in their selling process. Point two was, will inflation more negatively impact mom and pop's I would say yes, but then I would call it back to the Cisco thesis. And why does the national chain perhaps have more mitigating buffering? Many of them have long-term supplier contracts with fixed pricing and or scales tied to inflation, and the mom and pop has less of that. But that's who we are. We are essentially their purchasing agent. We are pushing back hard on cost increases, as I mentioned in one of the earlier questions from the other John. is what are we doing about this inflation component? We are working aggressively to find alternative suppliers, alternative items, lower cost items that could be substituted to. And again, that's what motivates us at Cisco is to serve that mom and pop. And we've got a lot of good things happening to help them with their inflation, which includes Cisco brand. And our mom and pop restaurant customers love Cisco brand for the fact that it saves them time and saves them money. And we anticipate making progress in that regard as well.

Thanks for that. And then just on inflation, on the comment, do you think the second quarter here was the peak of inflation as you look into what you're seeing in the third quarter? Do you think the rate of inflation begins to cool off, or do you not see that yet?

We are continuing to see elevated levels of inflation. And as much as I would like to call when the down point will be, impossible for us to do. And so we are assuming elevated inflation through the rest of the fiscal year, if modestly down in Q4 versus Q3. Thank you. Thank you, John.

Your next question comes from the line of Mark Cardin of UBS.

Good morning. Thanks a lot for taking my questions. So not too long ago, you guys noted that you'd seen a 10% increase in local doors served against a 10% decline in overall local doors open. Do these numbers still largely hold true? Has the variant disruption had much of an impact on this front? Thanks.

Yeah, Mark, holding true. So, in fact, we're continuing to make progress. We kind of pivoted on how we reported it this quarter. The answer to your question is yes, it's holding true. This quarter, we chose to provide even more color by putting a chart in our prepared remarks that shows the percent of customers buying unique from us going up and then the percent who do not buy from us going down. You put those two together, and it's resulting in the number of unique doors that we're serving continues to go up. And I would say the bankruptcy rate of independent customers continues to be lower than what many had predicted. And I think, you know, mom and pop operators, they see a light at the end of the tunnel, and they're prepared to benefit from an industry recovery that's still in front of us.

Okay, great. And then thinking more from the food distribution industry perspective, has Omicron impacted the competitive landscape in the sense of the combination of another wave of restrictions and continued labor pressures impacted their abilities to stay in business, either in the US or internationally, and thinking about the smaller independent distributors there.

Yeah, Mark, appreciate the question. I would just, you know, kind of call back to, you know, my answer to one of the previous questions, which is that size and scale matter and have become even more important in this COVID environment. Supply chain resiliency is the newest buzzword. You think about, you know, a place like World Economic Forum and what our CEO is talking about. It used to be supply chain agility, and people now are talking about supply chain resiliency, that you can weather storms of environmental conditions, political unrest, and then things like, you know, this, which is a healthcare, you know, tied topic. So size and scale matter meaningfully when you're talking supply chain resiliency. We have the inventory to be able to support our customers as they recover. Aaron and I have invested to ensure that we have more inventory on hand at the present time than we did pre-COVID. We also are investing in labor, as I mentioned earlier, and some less strong balance sheet and income statement competitors of ours aren't able to do that. They're holding on to get through, and we're hiring thousands of people while Omicron is in our midst, and that's intentional. And yes, it impacted our operating expenses in Q2, but it will position us to be able to serve our customers in a proper way, win new business, and then that's business we intend to keep forever. So those are our ambitions. We are confident in our ability to do so. And yes, size and scale matter. Last comment for me is digital before I toss to Aaron. One of our transformation investments is to improve our digital capabilities. So modern pricing software, substantial improvements to our website. We've made substantial improvements to our Salesforce guiding tool, which we call Salesforce 360, which literally guides the sales rep on what the job to be done is at that restaurant on that given visit. We've made substantial improvements to that tool, which have increased our sales consultant's success rate on penetrating new cases and winning new lines of business with existing customers. So those types of investments, which are not immaterial, as Aaron quoted on the call today, $44 million worth of investments in those types of capabilities We're going to distance ourselves from those that we compete with. Talk to Aaron for additional comments. Kevin, I just want to ladder back to one of our earlier answers, which is this is why we're confident in our long-term guidance, because we are willing to support the customer now, right? Short-term, it will have an impact on profit, but we're doing the right things by the customer when they need us while investing for the long-term. And this is going to be part of the ecosystem and the algorithm we build to meet or exceed that guidance for 2024. Great. Thanks so much, guys. Thank you, Mark.

Your next question comes from the line of Lauren Silberman of Credit Suisse.

Thank you for the question. Just first a follow-up on the snapback and transformation costs. How much of these costs are going to carry forward in the fiscal 23 cost base? Should we see the full sort of 73 million of snapbacks fall off in fiscal second quarter of 23 and really the 44 million of transformation costs to be in the base? Just trying to understand how to think about the structural.

Great questions. Of course, I haven't provided you with fiscal 23 guidance. I'm not going to do so today. We're going to get through the back half of this year and then We're going to work towards the long-term guidance. That important qualifier aside, a couple of observations. The first is that the SNAP PAC costs we're calling out, they're transitory, short-term, or one-time in nature. And so we do not expect those to be long-term or even medium-term increases to our cost structure. And I want to emphasize something Kevin said earlier, which is wage rate increase. increases are immaterial to our current results. And so those don't include structural changes, so to speak. With respect to our transformation investments, we will continue to invest against the transformation. We'll provide more clarity on what that looks like in 23 when we get to 23 guidance. An important caveat, though, I think I've said before, let me say it again now, we will continue to invest in the transformation. And in the back half, assumed in our guidance, is that The transformation OPEX investments will be at or above where they were in Q2.

Okay. And then separately, seeing double-digit inflation, you've talked about effectively managing the product inflation. Can you talk about the dynamics between inflation hitting the cost line versus the price that you're pushing through on top line to try and understand the pricing power opportunities to recoup some of the elevated OPEX costs? I know some are transitory, some are permanent. So just said more clearly, can we assume you are pricing above the 14.5% inflation in U.S. broad line?

Great question. The math, because our cost of our gross profit dollars per case is up, would imply that we are indeed able to pass through and manage our product cost inflation. If we weren't past, if that wasn't going up, we would be stable, right? As far as how far we go, it's a choice we have to make in the context of the environment we're in as far as how much of the operating costs we pass through on a regular basis. We are committed to supporting the customers and doing the right thing in the short-term environment as we focus on the long-term guidance. Kevin, anything you want to add to that? Yeah, just one thing to add. It really is a good question, Lauren. I want to be clear on something that might not be obvious outside our company. There are certain customer types where our transaction with them is purely through the purchase of the food and how much the food costs. So Aaron just described that very well, and we're doing a good job in that regard for that customer type. We also have other customers that we transact from a fee-per-case basis, and it's in those contracts that there are times our provisions for food cost increases, but when our operating costs increase like they did in the most recent quarter, that's where we get pinched. And we are working aggressively on that. In fact, our SGMA reporting segment, our operating costs increased in SGMA in the most recent quarter tied to the same reasons that I described earlier. We've got a plan to meaningfully improve the productivity within SGMA as our staffing is improving. And also, we are looking at the long-term contracts that we have in those types of fee-per-case arrangements so that we have fairness and partnership with the customers that we work with in that reporting segment. I hope that gives you some color where it's item price, yes, we can do what you described, and if it's a deeper case, it's actually a conversation with our customers and that partnership long-term relationship management that I referenced a second ago.

Thank you guys very much.

Thank you, Lauren.

Your next question comes from the line of Brian Mullen of Deutsche Bank.

Hey, thank you. Just wondering if you might provide an update where the volume recovery stands at present for some of the non-restaurant sectors in the U.S., you know, relative to the fiscal 19 level of business. If you could just talk about hospitality and healthcare. You know, Kevin, you referenced business and industry as well, the prayer of March. Just looking for a sense of magnitude in terms of how much there is to go when we get back to normal.

Yeah, Brian, terrific question. I hinted at this a little bit ago. We have two primary sectors that are still down meaningfully. We're not going to quote a percentage, but I'll say down meaningfully, and that's business and industry, and we're the leading food provider in that space. So we partner with food service management companies, and we are the primary distributor to those companies for offices, catering, and the rest. So that sector is still down meaningfully. We had anticipated that that sector was going to really kick in in January, and that did not occur. Most companies are still currently working from home. Most companies have actually stopped trying to predict when they're going to go back to working from the office. But we do anticipate progress being made in the year to go. But it will be slower progress than we thought. On the Optimist longer-term view, it's additional tailwind fuel at Cisco. And what we've said is that we'd be getting to flat volume to $19 million you know, kind of inclusive of our current business performance and trends that got delayed because of Omicron, as Aaron said very well in his prepared remarks. But we have tailwind still in front of us on that business and industry. The second is travel and hospitality. Again, we are a very large player in the travel and hospitality space. Business travel currently down significantly. Leisure travel performed quite well last summer. We anticipate this summer will be a very strong leisure travel summer, but business travel conferences and the like that drives a big portion of that business isn't meaningfully recovered yet, and that will also be further tailwind for us into the future.

Okay, thank you. And then as a follow-up, just a question on the loyalty program pilots in the U.S. Are there any early learnings you might be able to discuss? And then at a high level, could you talk about what you're envisioning for the program? What are some of the longer-term benefits if you get it right? And then Conversely, what are some of the challenges in terms of getting this done the way you want, driving widespread restaurant customer adoption?

Hey, Brian, that's a great question. I love it. Today I chose to focus on Cisco Your Way and Italian cuisine, just to keep my prepared remarks short, but we've got progress happening in all five elements of our recipe for growth, and for sure we're making meaningful progress in personalization. It starts with data. Treasure troves of data of purchasing patterns and purchasing behavior are And that data is now in the cloud. We've got machine learning and artificial intelligence technology going against that data to provide customers with offers that are unique to them. And those offers are now showing up through our Cisco shop platform. And the customer almost doesn't even know that it's happening. And that's what's brilliant about N of one personalization. And when we say N of one, it means each specific customer getting an offer that's unique for them. I can assure you we're the only food service distributor that is doing that. The second point, though, is our sales rep activation, which I mentioned briefly a moment ago. We've got the best trained sales team in the industry, and they're experts in food. These are chefs. These are former restaurant owners. We're now, though, teeing up for them. Hey, as you're heading into the bar and grill on Main Street, this is specifically what they haven't been buying from us. Here's an offer specific for you for today only that you can talk to that customer about. There's a sample that'll be on the next truck. There's a Cisco brand selling opportunity to save them money. And just the power of that data being provided to our sales reps and also to the customer through Cisco Shop, it's going to increase penetration with existing customers, which is the best way to improve profitability for a distributor like us. But it's also going to enable us to win new business as it relates to Cisco Shop now being able to provide pricing at the item level for someone even before they have begun ordering from Cisco. That's a first for us. Tied to your customer adoption question, that's a very good one. In the future, we will talk to you about our loyalty program. It's called Cisco Perks. That is an actual loyalty program that we are enrolling people into, and today I'm not prepared to give an update on that endeavor other than the pilot is going well, and more to come at a future update on the expansion plans of that pilot.

Thank you.

Thank you, Brian.

Your next question comes from the line of Kelly Bonilla of BMO Capital.

Hi, good morning. Thanks for fitting us in. I wanted to just ask about another question on hiring. Aside from kind of the near-term, you know, illness-related staffing pressures, just curious how much more hiring you need to do by the end of the fiscal year. And can you talk about the level of talent you're able to find and just any quantification of that wage gap rate figure. I think it was noted as not material, but are we talking low single-digit, mid single-digit? Any help on that front would be helpful.

Kelly, thanks. We're not going to quote a year-to-go hiring number. That's not something that we're going to do. Aaron provided an outlook. I just reference you to the outlook that he provided. As it relates to the wage pressure, we were pretty clear today to talk about that's not actually material and should not be something that is concerning as it relates to our long-term expense algorithm. We do anticipate the summer that it will be elevated versus our norm, but it's an amount that will be manageable in our ecosystem. We've got compelling projects that we're working on to improve driver productivity. We're purchasing a piece of material handling equipment that we are equipping our drivers to use on their routes that help them with managing their day. And those are the types of things that we're talking about. So, again, our expense pressure that we've experienced in the most recent quarter are the things that we described with wage increase not being material.

Okay, fair enough. And then, Kevin, you talked about this a little bit in terms of the contract side of the business, but I guess investors are just really wondering how the contract negotiation process is going and just in general the competitive for contracts and how, if at all, the cost environment is being kind of factored into contracts as you're re-signing those and moving forward.

Yeah, Kelly, it's a really good question. And, you know, it's obviously I'm going to keep private between us and our key customers and suppliers, the contract negotiations that we have and the relationship discussions that we have. But I would say the following. We are appreciated even more now than ever before tied to our size, scale, our ability to ship on time and in full. You can infer what that means vis-a-vis contracting language, but we are appreciated even more now than ever before. There's a scarcity of supply. There's a lack of ship on time and ship in full capacity on the market right now. And we're not going to, quote, unquote, take advantage of that. That's not who we are as a company because we look at long-term partnerships and relationships. But we're going to have fair and balanced contracts with the people we do business with. And Cisco has appreciated more now than probably ever before. Hopefully that was clear.

Thank you.

Thank you. Appreciate the question.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.