Q1 2020 Earnings Call
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Some less profitable traditional bid type business such as local schools.
Total case volume within U.S. Broadline operations grew 0.5%, reflecting our ongoing disciplined approach in managing our national account business.
We expect to continue to see the impact of certain customer transitions and U.S. foodservice operations into the second quarter as well.
Gross profit grew by 2.6% driven by higher inflation the positive mix of local cases to total cases continued growth in sysco brand up 36 basis points and continued category management efforts.
Food cost inflation was 2.9% in U.S. broad line, driven primarily by the meat.
Produce dairy and poultry categories.
From an expense perspective, adjusted operating expense for the quarter grew only 0.4% driven by strong expense management throughout the business, including the impact of some of the transformational initiatives mentioned earlier, which drove down cost during the quarter.
This was partially offset by higher labor and operational costs.
Similar to the discussion we had in the second half of fiscal 2019, our labor costs were slightly higher due to our decision to retain driver and warehouse personnel in a tight labor market.
And while we do see some signs of improvement in the overall labor market. We will continue to evaluate this practice has the right one for our business over the next couple of quarters.
Moving to international Foodservice operations, we had mixed results for the quarter. Our international results were impacted by changes in foreign exchange and Joe will provide more details on that to you and just a few minutes.
However, on a constant currency basis sales increased 3% gross profit increased 2.1% adjusted operating expenses increased 1.3% and adjusted operating income increased 6.2%.
Canada, and Latin America had improved performance for the quarter driven by a combination of positive business environments driving the topline with positive synergies coming from programs such as the regionalization effort in Canada.
In Europe performance in our UK business remained stable, although uncertainties around Brexit certainly remained in the market.
However, challenges with our operational and supply chain integration in France continue to negatively impact our overall performance there will most likely continue through the remainder of our fiscal year.
The relatively soft gross profit performance was offset somewhat by solid expense management throughout our international segment as we continued to see benefits from the various integrations and other expense management initiatives.
I have improved operating income growth for the quarter.
Moving on to Sigma as mentioned previously we remain disciplined and focused on improving overall profitability our portfolio of customers in this segment.
Which included a gross margin expansion of 73 basis points as we saw total gross profit reduced by roughly 3%.
In addition, strong expense management and the closure of a distribution location drove adjusted operating expenses down 8.8% versus the same period last year, resulting in significantly improved operating performance.
We continue to feel very good about the progress, we're making within the segment and look forward to continuing to improve our operating performance throughout the year.
In summary, we feel good about the trajectory of our business for fiscal 2020, we continue to increase profitability through growth at local customers. Our disciplined approach in managing our national customer portfolio, managing our expenses and making progress in the various initiatives, we have discussed to transform our business.
As we look ahead, we are excited to celebrate our fiftyth anniversary this fiscal year.
For half century, our company has been at the forefront of the foodservice distribution industry passion about our customers dedicated to service and committed to being socially responsible.
Our team has enthusiastic about the changes we're making in our business model to ensure we remain the market leader and fulfill our vision to be our customers most valued and trusted business partner for the next 50 years.
Finally, I'd like to thank our dedicated associates across the company for all their efforts to make Cisco the distributor of choice for so many customers. They are truly all in.
Now I'll turn the call over to Joe brought a our chief financial Officer.
Thank you Tom good morning, everyone.
As Tom mentioned sales for the first quarter increased 0.6%. Despite a number of factors, including a difficult comparison versus the same period last year.
Our disciplined approach and managing stigma and national accounts within our U.S. Foodservice segment.
The divestiture of I have a premium.
And the negative impact of foreign exchange rates in our international segment.
Local case volume with the newest broadline operations grew 1.5% for the first quarter of which 1.4% was organic.
While total case volume within the US Broadline operations grew 0.5% of which 0.4% was organic.
Gross profit increased 1.4% versus the same period last year.
Gross margin increased 15 basis points.
We saw growth in our sales of Sysco brand products, which increased 20 basis points to 47.7% of local use cases.
And 36 basis points to 38.8% of total use cases in the first quarter.
We're pleased with our strong expense management for the quarter.
Our transformation initiatives continue to generate benefits to the business as adjusted operating expenses decreased 0.5% compared to the same period last year and slightly ahead of our expectations.
As a result, the gap between gross profit dollar growth and adjusted operating expense growth was 190 basis points.
And adjusted operating income grew 7.3% compared to the same period last year.
It is also important to note that our adjusted operating expenses grew only 0.4% within the U.S. foodservice segment, despite a challenging operating environment.
Although we had strong expense reductions throughout the quarter.
We continue to invest in areas of our business that will help facilitate future growth.
For example, our technology spend was higher versus the same period last year as we continue to make advancements in areas that help us streamlined work flow, while better supporting our customers and helping to support their growth.
During the first quarter in the US Foodservice segment, we saw a 220 basis point gap between gross profit dollar growth.
Adjusted operating expense growth, which translated into strong adjusted operating leverage for the quarter.
As Tom mentioned earlier, our results in the international segments were impacted by foreign exchange rates.
In that segment sales decreased 0.3% on a reported basis and increased 3.0% on a constant currency basis.
Gross profit decreased 1.7% on reported basis and increased to 2.1% on a constant currency basis.
Adjusted operating expenses decreased 2.7% on reported basis and increased 1.3% on a constant currency basis.
And adjusted operating income increased 3.8% on reported basis.
But increased 6.2% on a constant currency basis.
As it related taxes.
Our effective tax rate in the first quarter was 22% compared to 20% in the prior year period.
While higher than prior year. This rate was lower than our guidance of 24% primarily due to tax benefits from share based compensation.
Our adjusted earnings per share grew 8.6% to 98 cents per share.
Which is an increase of eight cents compared to the same period last year.
Cash flow from operations for the period.
It was $172 million for the quarter.
Which was $100 million lower compared to the same period last year.
Free cash flow was $1 million, which was $170 million lower compared to the same period last year.
Net capital expenditures totaled $171 million for the first quarter of fiscal 2020.
Which was $70 million higher compared to the prior year period.
The decline in free cash flow was due in part to an increase in working capital in the first quarter. This year, driven primarily by an increase in receivables.
Additionally, we saw planned higher capital spending due to the timing you investments in the prior year period.
However, we continue to expect strong cash flow for the full fiscal year 2020.
In July of 2019.
We adopted a new leased accounting standard that changes the way, we recognize operating leases by including the related right of use assets and lease liabilities on our consolidated balance sheet as the fiscal 2020.
The changes are also reflected in the consolidated results of operations and consolidated statement of cash flows. However, there was only minimal net impact.
We remain focused on delivering long term results for our shareholders through a strong and consistent approach to our capital allocation priorities, which are as follows.
Investing in the business consistently growing our dividend.
Participating in M&A.
And maintaining a balanced approach to share buybacks and paying down debt.
We typically review our dividend growth rate each November and expect to once again increased our dividend later this month.
We also have previously committed to a modestly higher rate of share repurchases that in the prior year.
In summary, we had a solid first quarter that reflects the sustained momentum of our work to transform our business.
The fundamentals of the industry and our business remains strong as we continued to deliver study local case growth.
Good gross profit dollar growth and strong expense management.
These results give us confidence that we remain on the right path to enhancing the customer experience.
And delivering high level of execution in all areas of our business as we continue our progress toward achieving our three year plan objectives.
Operator, we're now ready for acuity.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key on your Touchstone telephone. If your question has been answered or you wish to remove yourself from the Q. Please press the pound key once again to ask a question. Please press star and then one now.
And our first question comes from Edward Kelly from Wells Fargo. Your line is open.
Hi, guys good morning, and.
Nice quarter on.
On a slower overall case growth and that's really kind of what I want to ask you about common and Joel.
I was hoping could you provide just a little bit more detail on your outlook for the case growth and us business and you've talked about an improved cadence throughout the quarter can you give us any color on the exit rate.
You mentioned that you still expect some impact from customer losses in the second quarter kind of curious as to how we should be thinking about case growth here and then.
Just overall as we think about moments in the business, what's an acceptable level case growth that you're thinking about as you progress through the year and I'll then easing comparisons can maybe help us out with with what helps to drive that.
Sure good morning good.
Thanks for the questions. So specifically to case growth as we talked about the quarter.
Not to get to specific but we did see you know as we talked about that will be came out of Q4 and we all know we had some softer numbers, they're driven by both the lapping of a good quarter. The prior year, but also just some general softness in certain parts of the business specifically, we talked about some of the national accounts in these more of the micro chains.
What we're seeing as we came out of the first quarter was the local independent customers you know maintaining solid performance in continuing to grow.
And so we feel good about as we come out of that that we're getting about we finished this quarter and this 1.5% local case growth. We feel like that is the lower end of what you should expect from us going forward and we feel like that will be more in the range of what we have historically talked about.
With you guys overtime and so it doesn't mean every quarter is going to be the same but this idea that you should see us back in the two 2.5% range on local cases, where I'd tell you that you should think about.
As it relates to the the comment I made about some of the national account in some of the account transitions continuing it just really the timing of we know some fairly large customers and transition in the back half of last year fiscal year, and we have that overlap still ahead of US we had it in first quarter is why you saw the softening in the total cases and we will have.
That again in Q2, so I think thats. The that's the headline there when you talk about.
What's an acceptable level I think we continue to talk about the fact that we want to be gaining share certainly as it relates to the independent market and we see that at the even at the current rates were clearly close to being at.
Parity with what the market's doing if we're at the levels I just talked about we will continue to be gaining share, which is where we wanted to be throughout really all of the last couple of years and where we continue to be focused.
And so I think you should just think about that level being we want to be in a share growth in a share gaining scenario.
As you noticed from these numbers very little.
Case volume was attributed to any M&A activity and as we go forward, you'll see a little bit more of that showing up in the is we've had some recent acquisitions. So hopefully that gives you a sense of what we're thinking about where are we seeing things now and for the foreseeable future.
And just a quick follow up sell on the competitive environment has anything changed really on on that front. You have you know over the last couple of quarters highlighted a little bit more competitive intensity in the micro chain side, just curious as to what you're seeing there.
Yes, I don't think we've seen anything changed dramatically from what we had talked about and if you recall I had made a comment at the end of last quarter about.
Maybe us not be as competitive in some areas and so in the point, we're trying to make then and it will just reinforce today is that that was really on us and we have.
Kind of re stepped up our efforts to make sure that we're not losing business because of somehow we weren't being competitive and so I'd say it continues to be obviously competitive out there but.
We're not seeing any increased level of activity from what we talked about in the past.
Thank you you bet.
Thank you. Our next question comes from Christopher Mandeville from Jefferies. Your line is open.
Hi, This is Blake on for Chris just wondering on the upcoming quarter can you talk about.
Any other details on.
The timing of case growth in terms of.
Year over year comparisons, we should be aware of or holiday timing.
Just anything like that.
Hey, Blake.
No not really I mean, there's nothing major there as we called out that some of this national account.
Business they were cycling still will still be there in Q2, so I think that.
You should expect that based on the comments, we made but nothing else that unique or different other than what I just mentioned.
Okay. Thanks, and then my follow up is on some of the capital spending I know you you mentioned.
Free cash flow impact from working capital on and Capex on the Capex side I think you mentioned some project timing can you just.
Talk a little bit more about what was going on with that investment and then.
Maybe can you give us a.
The cadence for the free cash flow throughout the year any commentary about that would be helpful.
Absolutely. Thanks.
So couple of things on that I was specifically on the Capex piece.
We have a little bit on anomaly at our last year cash flow because in the in Q1 of our last fiscal year. We've just come off of Q4 of the previous fiscal year over year. It actually accelerated some capex as it related to us tax reforms, the best form and giving us an opportunity to accelerate some capex would that quarter, particularly fleet.
So we actually had I would I'd consider an unusually low first quarter of last year, where it came in the capex for the year over year comparison.
What I would I would characterize that as a bit of more of a normalized spend as we head into this year relative to where we would normally be purchasing more fleet, particularly in that first quarter last year. So that's that's where there is little bit of timing elements and again it really relates to the Q4 us tax reform axiom in those your prior to that.
We also if you remember we typically have a fair bit of just the thing about the overall kind of came some flow of our cash flow. We typically have a lower but some seasonality related to our first quarter. The number we actually had last year I would tell you. It was actually somewhat of an anomaly relative to how we've actually looked over the long.
Last few years on our Q1, and so I well, while somewhat you know obviously theres a bit of this time in capital spending again, there is a bit of award there's some working capital impact.
We certainly look at as somewhat short term.
This is not necessarily to unusual sequencing of our cash flow as it relates to our and our numbers historically, even though last year had a better numbers. So I would just tell you.
If you take a look at some of the way our cash flows gone outside of up over the last few years I think you should get a pretty good sense of what that will look like here and then obviously, it's certainly ramps up a lot as we head into the latter part of our of our fiscal year, but again, certainly feel confident of our ability to have a strong tuning strong cash flow.
Despite some of the timing issue here.
That's very helpful. Thank you.
Thank you. Our next question comes from John Heinbockel from Guggenheim Securities. Your line is open.
So Tom when you when you think about share gains maybe parse that out between new accounts that you're taking over as opposed to existing account market share because I think its existing account market share is probably pretty static or is that not right.
And then what are you seeing with regard to drop size I assume that's getting a little bit larger.
Hey, John Good morning.
This is we think about share I may you're right. It comes from two different places it comes from new business and obviously, maintaining our current business so holding on retaining our current customers and driving penetration or more cases through them.
I'd say it comes from both places and I I wouldn't look at it and assume that the new business isn't an opportunity given our relative share in the market, there's plenty of new business opportunities for us in for US It will define a new business as we haven't done business with someone for roughly a year no no business, then that would be new business. So.
There are customers in this business that cycle on a pretty regular basis, So I I wouldnt it all.
I think the new businesses and still a big part of our opportunity to grow and then as it relates to penetration I'd say, we're very focused on penetration because it's.
The more you can sell entity existing customer that's obviously the most efficient case that we can never get and so we're very focused on that as well. We've got some tools that are in place to help identify for our selling organization, where some opportunities might exist in those customers were there might be some products that they either.
We have walk from us in the past they may not be buying now or based on the type of customer. They are they could be buying from us in the future. So I'd say, it's really pretty balanced between the two and we always look at and talk about that mix of new retaining our current business and further penetrating our customers and to the point is we do have.
Our job on penetration that generally does help our drop size go up so I Wouldnt say theres been a significant increase in our drop size, but overall our drop size.
We're very comfortable with where our job sizes are and.
Our always focused on trying to improve that as we improve our overall penetration.
And then maybe for Joel the corporate expense adjusted might take no transformation.
Looked a little little high in EMEA grew 4% is that what drove that it is that the new run rate as we think about the rest of the year.
You up in that 3% to 4% Ranger to 35 to two 240 million a quarter.
Is that is that is at a run rate.
Well I guess, there I would characterize that John in the couple of things I mean again as we think about.
Again, we're where some of the transformation work is happening that some of that does result in some.
Some further investments in our corporate spend that are actually are then.
In some cases coming out of our field organization. So I think I think Joe some of what you're seeing there is a bit of a geography geography shift obviously of the net effect of which is actually a overall positive when you look at our Drs DNA. So I think again, probably probably thats the way I would characterize the majority of that.
So I think I think from that perspective, that's probably a reasonable way to view that but again I would just make sure. We take a think about it more holistically in the sense of how we think about our overall, our DNA spend and again, we've made some good progress there when you pick that as a whole.
John I might just to add up I'd, just add appointed Joel made in his earlier comments around technology. So like a technology investment it's going to show up in that corporate expense line.
But there are other offsets as he mentioned that through some of the transformative work that we're doing so we're going to invest where we need to and area like technology continues to be a big focus for us.
So I just to give you little more context behind it.
Thank you.
You bet.
Thank you.
Next question comes from Judah Frommer from Credit Suisse. Your line is open.
Hi, Thanks for taking the questions.
One of the areas that was more impressive tell us with certainly the gap in gross profit dollars in opex in the US business can you talk a little bit about balancing.
The pullback on Opex and making sure.
That you're finding them business in the right way to grow the topline and margins going forward and the opportunity to further reduce opex as you move into the back half of this year next year.
Ill take a started this and then let Joel chime in two to thanks for the question I think you look the gap is important we've talked about it a lot and it continues to be something we focus on because when you look for in a quarter, where the volume may not be exactly where.
We'd all like it to be we are very conscious of making sure that our expenses.
Fit in flow Accordingly, having said that I would say that.
As we just talked about with technology is a great example, we're going to continue to make investments in the things that are going to drive and support this business and you should absolutely expect that from us.
The types of things that we're getting the expense leverage onto the things we've been talking about we've added some administrative cost focus areas here last year, we're still getting some benefit from we've had this smart spending initiative, which is around just making sure that were removing some non value added expenses in parts of our business where possible we talked about the regionalization efforts.
In Canada, and Thats had some impact and then we've had things like the finance transformation that's been a.
A journey here, but we're still kind of benefiting from that work that's going on so I would say think about it as we're going to continue to stay focused on cost and we do believe there are additional opportunities there.
But those areas of opportunity are not the areas that would in any way reduce or slow down our focus on both transforming the business and accelerating our growth and.
Driving the share gains that we've been talking about.
Joel and has any you want to add yes, no I think as well said I think the only maybe small point I'd touch on part of your question in terms of ahead as we are what's the other is there more to come on some of that kind of stuff and I think the the answer to that is that in the context of what Tom talked about here in terms of taking some of those things that are more again non value added or.
Transformative or however, you want to say it.
Yes, Theres certainly a further.
Further run rate on some of that forget we you. Obviously, we started receiving from the benefits of a lot of that in the second half of last year.
But obviously, we remain very focused on continuing to find additional opportunities and so so that's something we certainly have we'll continue to pursue new should you expect to have some continued benefits that over the course of the year, but again just to reinforce Tom's point, none of those things are the things that are going to somehow get in a way of us investing for growth.
And so that's a that's a critical piece of that message I notice that certainly we are we just can't repeat enough.
Okay that makes sense and just to follow up on that.
Historically M&A is an important piece of both topline growth I will tell you also know driving margin Israel to strip cost out of acquired businesses.
With what you've seen out of the regulatory bodies and kind of review of M&A over the last couple of years.
Obviously on the larger size, but how does that affect your process going forward in terms of assessing deals and deal flow.
Well I think I think one of the points you made.
And our historical M&A as has been.
Really strongly focused on kind of those the smaller fold in tuck in type deals and so I think.
And that certainly is continues to be our focus the obviously as we talked about from time to time, we certainly have our eyes open for larger strategic opportunities, but but certainly the vast majority of the work that we do is within that smaller folded in tuck in space. So I I can't say you know truthfully that thats had that much is significant impact on our perspectives on that.
Obviously, we've certainly paid attention to what's going on there, but I think in general.
Yes, again with the J Kings deal we announced.
In the last quarter.
Yet. Another example of one of those opportunities that we have that certainly fits really nicely into our existing portfolio and so so I was just a judah generally speaking.
We feel good about our M&A pipeline, we feel good about the opportunities ahead of us and I can't say a lot of that even though we've certainly took and obviously taking note of it has been real significant impact on how we think about overall M&A pipeline.
Great. Thanks, guys.
Thank you. Our next question comes from Marisa Sullivan from Bank of America Merrill Lynch. Your line is open.
Good morning, Thanks for taking the question just wanted to touch on gross margin and see if you could maybe quantify what the impact of inflation lines on the gross margin improvement.
And with the outlook for inflation with the for the rest of the year and then if we think about modeling gross margin any other puts and takes us to keep in mind and into Q and the rest of the year. Thanks.
Yes sure Mrs. So I'll take that one I think the again in terms of quantifying them specific impact of inflation I don't know that will do that but I think the I think maybe the takeaway.
Now is again, we we've had good will we we always think about this sort of 2% to 3% ranges as a sort of get an optimal range for our industry, where we have the ability to pass those costs along them generally speaking our customers over the ability to pass those costs longer their customers over the longer term and so.
So I think we and we find ourselves on a pretty good place. There again. It obviously, though is driven depending somewhat on the categories that are inflating and certainly.
Nothing again that we that we see as something that's either particularly problematic or an issue for us at this point. So so I think my view on this would be that we have a modest level inflation that we expect here over the next few quarters.
And that again nothing.
No nothing really to call out other than the fact that we certainly like to placed rent from an inflationary perspective.
And versus if you think you asked about kind of going forward, what do we see I think what I'd just say is.
As we've talked about.
Meaning competitive in the competitive environment I don't think you should be modeling gross big gross margin.
Increases.
Don't think on the other hand, you need to be.
Heading south on those numbers, either but I think we feel like we've talked about this a few times in the last couple of quarters, we feel pretty good about where we are from a gross margin perspective, you know, where we sit relative to our peer group and so I think we feel comfortable and confident where we are right now, but probably at the high end of where we can.
You should think about us going forward.
Thanks, that's super helpful. If I could just quickly follow up with them. So another kind of modeling question on Sigma.
Should we think about the the one Q sales.
Performance as is indicative of what you'd expect going forward given that some of the business wrestling rationalization.
And if so when do you start to cycle that.
Similarly, I think Q1 was probably a little more.
Aggressive than we saw in Q4, but as we talked about.
Last year and the last year, we are in fact cycling some.
Some fairly large customer transitions there so I would say for the next couple of quarters, you ought to think about similar numbers and Theres a balance of transition customers and also performance within existing customers as you probably know on the Sigma side.
Not in every case, but when we have a customer we have the majority of their business in a geography and so their relative performance will in fact affect our performance there, but the bigger numbers, you're seeing are driven by the transitions we've been talking about.
Great. Thank you so much you bet.
Thank you. Our next question comes from Jeffrey Bernstein from Barclays. Your line is open.
Great. Thank you very much.
Two questions just one on the.
Topic of changed versus independence, and you mentioned the ongoing transition of presumably some of the chain accounts from just wondering how you'd characterize maybe the health of each of the sub segments being chain and independent and importantly, maybe some changes in sequential trends for either in terms of topline performance again, recognizing that you.
Pruning some of the chain larger business, but just how you think about changing independents in terms of the performance of late.
Sure Jefferies, though as we mentioned earlier to some of the comments and you guys have access to the same kind of information I think in general.
Were the numbers, you're seeing for us have more to do with transitions than softness wins within certain customer types. I think we continue to feel good about the independent no growth potential out there whether its existing customers or our opportunity to gain new business as we were talking earlier I think.
As it relates to some of the larger national type customers, we have their segments of the market that are growing faster than others.
Think about QSR is doing well you see some of the.
Casual dining maybe having a little harder time, but I think generally speaking we feel like the environment is pretty good for the restaurant operators and so I think we would say that the numbers you may see us talk about a reflected here will be more about decisions, we made or customers have made in doing business with Cisco.
So right now I'd say, we feel pretty good about that that environment in that market.
Great and then just following up on the M&A discussion I know youve often quoted that there's tons of room for growth for you guys with.
Only 16% share on the U.S.
Thank you mentioned you'd expect it to be a modest uptick for you guys, but still not huge M&A numbers expected.
With that said the comment around the the regulators in terms of seemingly being increasingly involved and scrutinizing I'm just wondering more so than just for yourselves, but do you think that changes the landscape of M&A in consolidation for the broader foodservice industry.
Yeah, I don't know, though we think about it that way and again I think the.
Yes, I think Joe in Tom's point, I mean, our outlook our M&A as we've talked about we anticipate between the half a percent and 1% of our our total sales in any given year, and obviously that moves around a bit given by quarter given.
What we may or may not have or lap a again, we feel certainly good about our pipeline.
Of deals out certainly feel good about the companies we brought on over the last.
No go a couple of years and I think.
I don't know I think from an overall industry perspective, I, just think theres, others plenty of room for consolidation.
Continues and and I can I, just I think that we'll continue to happen and a I think you certainly certainly should expect that from a broader industry and and from ourselves as well I think it's interesting to see how some of those things all play out and what but with regulators are interested in this map, but I would just as I said earlier in the call.
Don't believe.
What's what's happening there is really having a real significant impact and how we think about M&A.
In the Scottrade and just lastly, a clarification on what you said earlier about inflation.
Looks like now like you said, you're approaching 3%, which is maybe the upper end of year two to three sweet spot.
But has been kind of picking the past number of quarters I'm just wondering.
Whether you'd expect it to go out of that 2% to 3% range to the upside and if it did which commodity have you seen some more significant signs of inflation, whether its protein dairy and produce or otherwise.
Yeah, I mean, I think in getting Tom can chime in here I think the our view would be that we still stay within that range for the most part again the.
Obviously, we've had some some the issues as you know in terms of pork and some of the other real port related commodities that are better on the higher under that obviously have been some of the challenges certainly that are well documented.
Obviously produce has been certainly on the on the higher end of that range a little that certainly is often times of category that that moves around a fair bit. So I would just say generally speaking I am you're right. We're on the to the higher end of the range that we consider.
Kind of that optimal place, but but outside of that I don't know theres anything that that we would see that would drive significantly and we get questions fairly often on the on the question on pork.
Just in general that again, our focus certainly.
It's a fairly small percentage of our overall business and not something that people are seeing that our folks are seeing something that we should be overly concerned about over the near future.
Jeffrey I think the only thing I'd add is no as Joe mentioned, the Centerplate items are the ones that can drive the biggest impact for everyone. Because it's such an important part of the the menu for the operator, and and where they struggle to pass things along so I think we just have to stay focused on those key centerplate categories meat poultry.
Seafood and certainly pork falls in within the meat segment of that.
And then the last thing is Joe mentioned produce I think is something we just got to stay close to there was some ups and downs a year ago, seeing where that ends up and dairies been than than on the higher end too. So I think you're right. We're feeling good about where things are now we think that we hope that they maintain within this range, but if we have any concerns would be around those center.
Plate produce items.
Good to hear thank you.
Thank you.
Our next question comes from Andrew Wolf from <unk> capital markets. Your line is open.
Thanks, Good morning.
On the acquisition side.
You said you expect more unit, you announced a 155 million dollar acquisition.
Last quarter at the end of the.
Towards the end of this quarter when you just reported so.
Doing the math, that's about 25 Bips a little below what you think it sounds like you can get to our there first of all are there other acquisitions that we can model in right now that you kind of would add to that 25, bips roughly secondly kind of related to this.
The next two largest distributors in the industry or.
ALD and very large acquisitions at different stages with pretty early on.
How does the market look to you in terms as you know as a buyer out there looking for targets in terms of you know availability in valuations.
Thanks, Andy.
Well so a couple of things first of all as it relates to other acquisitions, you. Obviously again doing there can reiterate there obviously without.
Being able to reported anything specifically is that we continue to feel good about the pipeline that we have.
In front of us and certainly so.
Again, reiterating just our overall guidance around the sort of half a percent the 1%.
In any given year, which again moves around by quarter some but.
All I would all I guess I can say there is without being able to go into specifics as again, we certainly feel decent.
We feel really good place with our pipelines and obviously when there's something we can talk about we will certainly do that.
I guess just in general I mean, the sort of the view of the large.
Again, certainly don't want to speak for our other competitors in the space I guess, assuming I would say there, though just in terms of context.
Obviously the density of our network.
In this certainly are in the United States is I would say significantly higher than the others in our space and so so the ability to for the for them to take on additional geographies or additional areas are you consider white space for them as Bob as the a bit different than the way we would look at some of those things and so.
Outside of the deals that we've done in Hawaii recently, it obviously outside of our.
I will start our core markets here in North America.
But in our North American business again, the density of our network to puts is probably a little bit of a different place in terms of how we've looked at some of those deals and that in our probably the two largest competitors. So so I think just from that contextual perspective would be the way I would think about that.
We certainly didn't have begun lots of lots opportunities in front of us and a and we'll certainly continue to be aggressive in that space, but.
Probably the best context, and give you there at this time.
Okay, and then I just wanted to either circle back or just ask directly about starting this African swine fever in China in other parts of Asia that are.
You hear different views on that.
From.
You know kind of semi catastrophic to sort and probably not you know not that great. I was wondering how cisco sort of viewing this.
And I'm not asking you to make a prediction, but like what kind of contingencies are you thinking about what kind of scenario as you're looking at so if you have any thanks.
Yes, Andy as Don I.
Look I think it's something that's it's out there it's something that we are starting to stay very close to.
We think over the next six months that there could be some impacts in that area that especially if you think about.
Other markets, maybe beginning more important that because of their needs.
I think if you think about the pork segment. There are various components of that some that are more important than our bigger part of the the sales and others and so I think we're staying close to try to understand what impact might exist in some of those different areas.
So I think it's really there to probably two things you should just think about I mean there.
It's been out there for a while we haven't seen major impact yet, but we believe there could still be some and what we do we think about that is we work closely with our restaurant operators and certainly with our suppliers, we're not going to be in a position, we're not going to have availability, that's not going to be the issue. It's really a matter of due to the prices in some areas get to the point where.
Customers start to transition those menu items or think differently about those menu items and I think thats that work, we're always doing with our customers stay abreast of the impacts that might be happening on these certain product categories and try to proactively work with them so that they're not in a situation where it dramatically affect their ability to them.
Drive profitable growth in their own businesses. So I'd just say, we're very close to these kind of things we have lots of resources that are involved both with our supplier partners and here and.
Right now I think we're saying our son, our sense would be over the next six months, we'll probably see some increased impacts here, but we're proactively trying to manage that.
Both in the company with our customers, Yeah, and I would say just Stephen in terms of just sourcing availability of product as well as substitutes. So I think thats one of the things that we've certainly been very active in working with with customers on the managers navigate through those things in the past and certainly will going forward. So.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from Kelly Bania from BMO capital markets. Your line is open.
Hi, Good morning, Thanks for taking my questions, Tom and Joel.
What did you just go back to the independent and was wondering if you could always the local case growth I'm wondering if you could unpack that a 1.4%.
Just help us understand kind of what types of trends, you're seeing underneath that types restaurants regional trends, new opened new customer openings.
And regarding the improved exit rate.
Can you elaborate on that is that just comparisons are internal or external factors and.
Okay and then the last part is I think you had been targeting closer to 3% and so.
This is that still on the table or should we be thinking about a two to two and a half kind of.
Going forward for that segment. Thank you.
Great. Thanks Kelly.
So a couple of things as we talked about earlier on the 1.4% part of what we talked about as we feel very good about the growth within the independent restaurant segment and including in that would be the this.
More the regional or micro kind of change we've talked about as well we did talk about we do see this from time to time, we talked about the impact from what we think about is almost.
Local bid business. So we talked about a local schools are the example, there is some of that that falls into these local numbers it's not.
It's not it's not national business, because it's literally local school types agreements or some local governmental things that fall into that as well.
So I think what we see is and why we feel good in confident is that the restaurants side of it is is strong and we seeing good growth there and so I think that.
That piece you should rest assure that we feel good about the work we're doing and I think it's a combination of as I as we talked about us making sure. We're remaining competitive in that space, but also there are some as I mentioned also some tools that were providing our selling organization that help them to understand where they can improve their overall penetration within those.
Customers. So I think it's a good balance of bull.
New business opportunities that exist in that we're able to pick up as well as the penetration within those existing customers as far as a 3% number versus where we are today and maybe with a 2.5 I talked about earlier I think we just have to continue to.
Think about the fact that we're going to see improved growth in this segment given the fact that we have things like this local bid business in there. It's I can't sit here today and say that we're still deliver the 3% overall for the whole timeframe, but we still feel like that June after 3% is not.
And on reasonable number for us.
So it's we are cycling two of our biggest quarters in Q4 in Q1.
From prior years, we've talked and so I think we'll get some benefit of that may be going forward, but that really wasn't part of the sequential improvement I talked about as we exited Q Q1.
Okay. That's helpful and then.
I think I heard you mention maybe Joe mentioned, some signs of improvement in the labor market and I was wondering if you could elaborate on on where and what you're seeing and what you're thinking about in terms of where how you are staffed appropriately for the rest of the year.
Sure, Yes, I had mentioned that we are seeing some settling I guess red I'd I'd say it.
As we all know over the last couple of years landmark has been very tight it continues to be tight, but what I think we found is and we see this in our own associate retention numbers is we're seeing better retention and therefore, when I say, it's we're seeing feeling a little bit better about that labor market.
We feel like we're having a little more stability than we had there for while both in our mainly talking about our frontline operating associates warehouse and drivers.
And so what we have also talked about is one of the things we've been.
Focused on is not naturally transitioning some of that business when the seasons got softer because then we'd have to ramp back up as we came into the new season, and so we're still evaluating is we need to be thoughtful here, we'd rather maintain our good associates and continue to invest in them during the low.
Lower seasons to ensure that when we when time comes to ramp back up we don't we're not in the situation like we were in the past where were now scrambling for labor having to potentially do a lot of training, there's a lot of expense associated with new hires.
Not the least which is the training and development of them and getting them up to speed.
So thats really what I was referencing I think we will continue to evaluate we think the model. We have right now is a good one for us, but as we get into some of the lower parts of the year mean volumetrically that could have some impacts and we're just trying to make sure we understand the pros and cons of that business practice that we deployed.
Thank you.
You bet.
Thank you.
Our next question comes from John I think all from Jpmorgan. Your line is open.
Thank you at the Canadian Regionalization was was mentioned a couple of times and it sounds like you at least in that market. It is having some effectively at least in terms of delivering more profitability in.
Probably in it looks like as well some more case volume as well it are there any lessons to be learned.
From that project as it relates to the United States in other words is that lagging United States in terms of implementation of of that structure or might the United states be able to learn something as to what is happening in Canada.
Hey, John Thanks for the question. So the Canadian Regionalization is something we have talked about a few times and its effort that we started about about 15 months ago and we are we were implementing it throughout last fiscal year. So we're getting some continued benefit as we move into this fiscal.
And I would say that it it's a little different than the U.S. because of the just the sheer geography and the types of facilities. We had there we had regular size operating companies like you'd expect to see in us than we had some smaller operating companies significantly smaller than we'd have in the U.S. and then in the case of Canada, We had a similar man.
Judgment structure. It every one of those facilities and so what we we just felt like there was an opportunity to better.
Structure ourselves up there from a cost perspective.
To take out some of that additional expenses associated with some of those smaller facilities. There are certainly been learnings there that we do believe overtime might have some applicability to the us but it is a little bit different set up than what we have in the us in that drives some difference in the way we ought to think about it going forward, but we feel good about the lessons weve.
We're learning and we've had many and I would say, it's still work in progress, but we're feeling good about the the effort and time will show whether or not there some similar opportunities here in the U.S.
Okay. Thank you and this wasn't really apparent.
In the results, maybe a little bit just in terms of the overall inflation numbers, but there was some very unusual pricing behavior. This quarter that happened because of the beef processing.
Fire power plant fire that happened, where your number different state cots actually in the spot market spiked up considerably did you see anything unusual happening within European now the happened because it that's kind of intra week volatility specifically on the on the beside or is your company just big enough that that would have been noise.
Well, John first of all I mean, it because of the way we go to market and with the supplier partners and our agreements those things for us are probably a little bit of noise more than anything else.
But not big impacts for sure and that's one of the things as we've talked I think over the years that everyone should feel really good about is the long standing relationships. The way we've built our relationships with our suppliers are not short term there longer term in nature and that helps us I think dramatically as we go in and out of these type of events. It's unfortunately when they happen.
And then it's difficult for our suppliers, but we have we're generally able to manage through those pretty pretty seamlessly.
Thank you. Thank you.
Thank you and we will take our last question from Bob Summers from Buckingham Research. Your line is open.
Good morning, guys. Just quick question on the calendar for second quarter, yes. The.
You know the period between Thanksgiving.
And on Christmas a shortened I think last time, we went through something like this.
Starbucks was impacted I mean out because really pent up demand.
For for restaurants did that did impact you at all should we expect any weakness associated with that.
Well I don't think from where we're sitting today, we we don't necessarily believe so.
It's a fair question and something we're certainly going to little more work on but we don't at this point see any.
Historical impact or feel like thats going to be a problem.
Okay, and then second you guys seem really confident with the acquisition.
Brian just curious what you've seen on the seller expectation price point point of view I mean, arguably two big competitors are not of the market for some period of time.
I'm wondering if seller expectations have accordingly modified.
Yeah, Bob is so I don't know that.
I don't know that I'd say, we've had a lot of seller impact.
We have previously that asked a lot about just sort of the overall high price that have you assumed that Jay deal was an did that impact expectations.
I just I would say generally no I mean, we've got a pretty studies you never deals very different.
I can't say, we've run into a lot of situations, where we just.
Again that aren't very deal specific where we would say hey, there theres some inflated view of expectations or the opposite directions. I mean, I think we had a we've historically had a pretty even or I'd say normalize deal what will we expect our M&A multiples to be.
And I would say generally speaking the.
Discussions we have with people today are generally within that range and so there's nothing.
Again outside of what I'd call very deal specific situations.
The come up from time to time, Theres, nothing that I would say impact either direction of either higher or lower related to the deals or the as you suggested possible timing today. Okay. Thank you.
Thanks.
Thank you and that doesn't today's question and answer session, Ladies and gentlemen. This concludes today's conference call. Thank you for your participation. You may now disconnect everyone have a great day.