Q2 2020 Earnings Call
I'd like turn the call over to know Russell Vice President of Corporate Affairs. Please go ahead.
Good morning, everyone and welcome to Cisco second quarter fiscal 2020 earnings call.
Joining me in Houston today are and surely our executive chairman of the board.
Kevin her again, our president and Chief Executive Officer, and Joe Grotty or Chief Financial Officer.
Before we begin please note that statements made during this presentation that state the companies or management's intentions beliefs expectations or predictions. Other 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 FCC filings.
This includes but is not limited to risk factors contained in our annual report on form 10-K for the year ended June 29 2019.
Subsequent SEC filings and in the news release issued earlier this morning.
Many of those materials can be found in the investor section at Cisco Dotcom or via Cisco's IR App.
Non-GAAP financial measures are included in our comments today and in our presentation slides.
A reconciliation of these non-GAAP measures to the corresponding GAAP measures are included at the end of the presentation slides. It can also be found in the investor section of our website.
To ensure that we have sufficient time to answer all questions, we'd like to ask each participant to them at their time today to one question and one follow up.
At this time I'd like to turn the call over to our executive Chairman of the board and Shirley.
Good morning, Thank you Neil and thank you everyone for joining our second quarter fiscal 2020 earnings call.
I'm proud to speak you today as discussed new executive Chairman.
On today's call I'll provide some introductory my remarks about the recent leadership change.
Then you'll hear from our new President and CEO, Kevin Hurricanes.
After that Joe will walk you through our second quarter results and then we'll take your questions.
As you know, we recently announced senior leadership changes to accelerate the next phase of our development.
This leadership transition was part of a deliberate and thoughtful process to ensure that Cisco is best positioned to enhance long term value for all our stakeholders.
Well Cisco's performance has improved steadily over the last few years, we see a clear opportunity to accelerate growth.
Kevin brings that demonstrated track record of delivering strong results and operational efficiencies within large and complex environments.
He takes a strategic approach to winning and underdeveloped markets.
We're highly confident he has the skill set in vision to capture the opportunities ahead.
As executive Chairman I worked closely with Kevin to ensure smooth transition and provide input on key strategic priorities.
Our board is excited about this goes future and is fully support about Kevin the leadership team and all of Cisco's associates as they strive to continue to support our customers.
I've had the opportunity to speak with many of you and I look forward to continue in our dialogue as we move forward together.
I'm now pleased to introduce Kevin will make brief remarks before handing the call over to Joel to discuss the quarter.
Thank you Ed and good morning, everyone I'm excited to join you today for my first earnings call is Cisco's, new President and CEO and more importantly, I'm very excited to lead the Cisco. During this time in our company's history I'd like to say a few words about what attracted me to Cisco and the compelling opportunity that I see I had.
For decades, I've admired Cisco is reputation as the market leader in cutting edge foodservice solutions like Cisco I've dedicated my career to excellence the supply chain logistics, taking a customer first approach and leading successful teams.
Admired Cisco for its leadership, it's brand and its strong culture in these areas.
On the opportunity arose to join the team I immediately knew that this was the right next step for my career and a place where I can apply my leadership skill set and business passion.
I also knew that this would present a unique opportunity to further strengthen the company as the market leader and enhance growth.
Cisco's Board and I collectively agree that there are opportunities to further capitalize on our scale advantages.
When in underdeveloped markets improve our performance and increased operational efficiencies to unlock funding for growth.
Our core strategy will remain in place, but we intend to accelerate execution in key areas to increase long term value for all of our stakeholders.
I look forward to working closely with Ed The board and our talented global team to deliver on our strategic plan.
And I look forward to speaking and meeting with you our associates or analysts and our investors your perspective on our business in the surrounding landscape will continue to be important as we move forward now I'll turn the call over Joel. So we can walk you through our second quarter results.
Thank you Kevin good morning, everyone.
This morning, we announced financial results for the second quarter of fiscal year, 2020, which represented improved local case growth in our U.S. foodservice segment.
Primarily driven by our independent customers.
I will start with second quarter results.
Continue with segment specific commentary.
In addition into the first half of fiscal 2020 results.
And then close or the general business update.
Our total Cisco results for the second quarter include the sales increase of 1.8% to $15 billion, which is driven by U.S. broadline local case growth of 3.7%.
Gross profit grew 2% to $2.8 billion.
And gross margin increased five basis points.
We saw growth in our sales of Sysco brand products in the second quarter, which increased 27 basis points to 47% of local U.S. cases.
And 42 basis points to 38.3% of total U.S. cases.
Adjusted operating expense increased 1.5% during the quarter.
Which resulted in an adjusted operating income increased 3.9%.
To $626.9 million.
Adjusted earnings per share grew 13.2% to 85 cents.
I'll now transition to our quarterly results by business segment, starting with our U.S. foodservice operations.
Local case volume increased 3.7% versus the prior year period.
And it's now grown for 23 consecutive quarters.
As previously noted we remain disciplined in our approach to managing our national account business, which was reflected this quarter in our total case volume growth.
As a result total case volume growth was 2% for U.S. Broadline operations.
Sales for the second quarter were $10.4 billion.
Which was an increase of 3.2% versus the prior year period.
This includes a divestiture of Io premium our beef processing facility that was sold in the fourth quarter fiscal 2019, which had a negative impact $122 million for the quarter.
Gross profit grew 2.4% to $2 billion for the quarter.
Well, we are pleased with the gross profit dollar growth gross margin declined to 17 basis points to 19.7%.
This is primarily driven by a few key levers.
First we saw an unusually high rate of inflation, specifically in the dairy and beef categories.
As a result, we're unable to efficiently pass inflation through to our customers.
Separately, but still related.
We saw a return to more normalized pricing and produce markets compared to a sharp increase in the second quarter last year, which resulted in a negative impact to our gross profit dollar growth.
We expect this year over year headwind to continue into the third fiscal quarter.
Lastly, fuel surcharges, which appear in gross profit for us we're less this year than in the prior year period.
Turning our attention the cost.
Our adjusted operating expenses increased 1% to $1.3 billion.
As we've discussed in our previous quarters.
Our labor costs were slightly higher due to our decision to retain driver and warehouse personnel and they tight labor market.
We will continue to evaluate our staffing trends relative to our business model over the next couple of quarters.
Additionally, we experienced a 12 they strike in Denver, which resulted an added costs from the business impact of continuing to serve customers during that period.
Adjusted operating income increased 4.7%.
To $772 million within our U.S. foodservice operations segment.
Moving to international Foodservice operations, we had mixed results for the quarter.
Our international results were modestly impacted by changes in foreign exchange rates.
On a constant currency basis.
Sales increased 0.9%.
Gross profit increased 0.4%.
Adjusted operating expenses increased 2.2%.
And adjusted operating income decreased 11.1%.
Our business results in Canada softened for the quarter as a result of a slowing economy in some parts of the country and the loss on a large chain customer.
Our business results across Europe were mixed.
As mentioned during the first quarter call. We continue to experience operational challenges arising from our integration efforts between our two businesses in France.
This is offsetting growth in our other international businesses.
We expect this to continue through the end of our fiscal year.
However, the UK business performance remains stable despite ongoing uncertainties around Brexit.
We are continuing our work around modernizing the business and growing our customer base.
In Sweden, and Ireland, we saw positive results versus the prior year period.
Coming from positive business environment.
And solid independent sales growth.
We remain convinced that Europe will be a growth opportunity for the company in years ahead.
As for our business in Latin America, the companies are performing well and we remain excited about the growth opportunities in this region.
We extended our retail cash and carry footprint from Costa Rica into Panama with plans to open more stores there in the future.
In Costa Rica, we saw solid drove despite a slight economic slowdown due to the recent implementation of value added tax.
In Mexico, the business has improved meaningfully year over year, Despite continued economic contraction.
Our cigarettes segments continues to show improved profitability as we remain disciplined and focused on our portfolio of customers.
As a result, we still plan to topline softness as sales decreased 5.3% versus the prior year period.
Gross margin expanded 62 basis points.
Adjusted operating expenses were down for the quarter, driven by a focus on business and routing optimization.
Which led to an adjusted operating income improvement of $8 million versus the prior year period.
We feel good about the continued progress we're making within SYGMA and are confident in our ability to drive improved performance going forward.
Finally, it is important to note that our core business is performing fairly well as our adjusted operating income from operations increased 5.5% versus the prior year period.
However, our corporate expenses increased due to several discrete items.
Such as cost from the Denver strike and other liability claims.
Therefore, our adjusted operating income increased only 3.9% versus the prior year period.
Now turning to our results for the first half of fiscal year 2020.
Sales increased 1.2% to $30.3 billion.
Our local case growth and he was broad line it was 2.9%.
And total case growth was 1.4%.
Gross profit increased 1.7% to $5.8 billion.
Gross margin increased 10 basis points.
Our overall expense management and solid.
With adjusted operating expenses, increasing only 0.5% for the first 26 weeks.
Adjusted operating income increased 5.7% to $1.4 billion.
Resulting in a gap between gross profit dollar growth and adjusted operating expense growth of 120 basis points.
Adjusted earnings per share increased by 10.7% to $1.83 cents.
Cash flow from operations was 754.5 million for the first half of fiscal 2020.
Net capex for the first half of the year was $383.1 million.
Or about 1.3% of sales, which as a reminder is inline with our previously noted guidance.
Free cash flow for the first half of fiscal 2020 was $371.4 million.
Which is $329.5 million lower compared to the same period last year.
The decline in free cash flow was impacted by an increase in working capital.
As we continue to experience challenges from our ongoing implementation the finance transformation roadmap.
As well as an increase in bad debt accounts.
Strong cash flow has always been a strength of Cisco and we're confident that we'll see an improvement to this trend by the end of the fiscal year.
Before closing.
I'd like to make a few additional comments about our financial performance.
Where we stand relative to our three year plan goals and our outlook for the year.
We have a chart on slide 14 to their earnings presentation slides on our web sites detailing anticipated results.
Compared to our most recent three year plan guidance.
As you recall.
Our three year plan includes six different financial objectives.
These included.
Total case growth of 2.5% to 3%.
For which we are tracking two 2.5%.
Local case growth of 3% to 3.3%.
For which we are tracking to 3.3%.
Sales growth of three and a half the 4%.
For which we are tracking to 3.7%.
Gross profit dollar growth of 3.5% to 4%.
For which we are tracking to 3.6%.
Adjusted operating income growth.
<unk>, 8% or $600 million.
For which we are tracking to 7%.
And adjusted earnings per share growth of 15%.
For what you're tracking to approximately 15.5%.
When we announced a senior leadership changes last month with a goal of accelerating growth and operating improvements.
We noted that our fiscal year 2020 performance was generally tracking along with consensus estimates.
As you can see from the chart, we continued to generate strong performance relative to our three year plan across virtually all metrics.
However, after closing the second fiscal quarter and considering recent performance.
Even with some clear positives such as an acceleration in local case growth.
We have decided to make adjustments to our outlook.
Specifically given challenges, we're seeing and have discussed this morning relative to year to date performance.
Specifically challenges related to inflation changes.
Integration challenges in France.
Discrete corporate expenses I noted earlier.
And given certain investment opportunities, we see today that can deliver strong returns over time, we have decided to amend our plan.
Specifically, we are lowering our adjusted operating income growth target.
Approximately $500 million to $525 million.
The previously communicated approximately 600 million dollar target.
And lowering our three year adjusted operating income growth guidance for approximately 8% to 7%.
We would note that the benefits were seeing below the line in areas such as interest and tax rate.
Provided added flexibility to make these investments now while still delivering on our previously communicated topline and bottom line earnings per share targets.
Well, we do not like some backwards and any part of our previously communicated commitments.
When given the decision between achieving a short term goal, we're investing for the long term.
We will always choose to invest for the future.
The investments, we're making will allow us to advance work that will further enhance our customer focus while accelerating future growth.
And to continue our efforts to efficiently manage costs through improved processes.
It is important to note that we're incredibly excited about cisco's future.
When that will include continued leadership across the food service industry.
Driven by investments in our customer centric strategies.
And fueled by the best associates in the business.
With that operator, we're now ready to take questions.
Ladies and gentlemen, if you have a question or comment at this time. Please press Star then one key on your touched on telephone. If your question. It's been it's pretty much done we saw from MCU. Please press the pound cake.
Our first question comes from Edward Kelly with Wells Fargo.
Hi, Good morning, guys and Kevin Let me just be the fair to say welcome to at Cisco.
My first question actually use for you Kevin I mean, I know, it's you know, it's obviously very early days, but you and the board have clearly highlighted the desired to grow faster as a company over time can you just give us some sense as to what that means and how you get there profitably I think there is just some concern around.
You know when companies make CEO changes and talk about accelerating growth about what the cost of that potentially could be and just curious philosophically you know how you're thinking about how you think about the path to that.
Yeah, Good morning, and appreciate the call or the question on the call. This morning first I do want to acknowledge the good work that the company has been doing in the strong results and as Joel said, the very capable team here at Cisco and to directly answer your question your where do we see opportunities for growth.
First is we need to in can leverage our scale in our size more efficiently Joe referenced improved processes, taking cost out of the system that cost that we can take out of the system. It is where we can fuel and fund topline growth in the future, we will be very pragmatic and disciplined on our pricing strategies, Joel I know as covered that.
Consistently quarter over quarter, we'll be very thoughtful about how we price the business add reference there are underserved markets for Cisco a specific example would be the metro market, where we are underrepresented versus our national leverage there are some things we can do vis-a-vis how we serve those customers more strategically.
Well I wont call customized tailored supply chain solutions for those markets and that would be again, another area, where and how we can grow that's not tied to price I guess I would just wrap up we're saying as you know this is a very highly fragmented market, one where the largest player in the space.
Pace through the investments that we can make the capabilities that we can bring to the table. We can take increased share over time and that's our plan.
And at a packages add one thing to that I.
I think you know look we've we've said many times and we've said that our strategy as a leader in this in the news industry has never been to lead with price.
It never has been and never will be and so I think the given some of the stuff that you're seeing this quarter as we talked about was it related to some of that elevated inflation that happened at a higher level and at an accelerated rate that allowed us some inefficiencies on passing that along but again I just want to reiterate a better what Kevin said just to add onto that.
Questions just a bit in that that is not and never will be a strategy of ours the lead with price.
Can I just follow up then Joel you know the case level profitability on gross profit per case. This quarter was it was obviously disappointing and you mentioned entity inflation component.
But inflation overall, you know didnt really accelerate from Q1, I'm, just I guess I'm struggling with.
You know what changed from an inflation standpoint, and why you had issues with passing through a cost within dairy and the protein side and then why.
Even through the back half of the year. It sounds like you expect that pressure to continue.
Sure. So a couple of points first I would say one of the things that we saw in you know remember the average that we talk about inflation is one number but obviously, it's made up of a lot of different categories.
And some of those categories tend to be harder to pass along inflation a with than others in.
And again, the certainly the Senate played categories the ones that tend to be more emotional in our space and so so what we experienced in particularly in the later part of the quarter was an acceleration in the areas that we've talked about primarily in center played in beef.
In dairy and as well and someone can and drive it but really the beef and dairy categories were the primary ones and I think you know given as we've talked about number of times as it's it's not just that overall number is the rate at which they are actually accelerating and certainly that's part of what we saw again towards the later part of this quarter that we struggled.
To pass along.
The other point I would make when you actually look at the overall given if you will gross profit per case, you know one other things we called out.
Here is.
I don't produce markets that we had is insane last year those related to weather impacts in California.
And so you know that that time, we've had some positive gains from the protest markets that was the latter part of the second quarter last year, and we actually saw that carry into the early.
Early part of the third quarters last year as well and so on a per case basis. When you look at the overall gross profit a it really is related to again some of the struggle the inefficiency of passing some inflation along the pros markets given the piece around the fuel surcharge, particularly in areas that we that we struggled with.
The question that you had in terms of yeah, as we see that outlook moving forward you I think one of the things. We did continue to see if some of those challenges that we had towards the latter part of this quarter and carry into the early part of the third quarter and so I think that see on some of that again will be somewhat self correcting.
In a sense that in the case of our multi unit customers to that that 50% of the business that we have on a cost plus arrangement, where it's a relatively short time lag the pass some of that costs along again, we anticipate seeing I'd say some improvement there, but but again, particularly the categories that we saw the inflation in the rate that we saw the increase is why we.
Had some some challenges passing that along and and it impacted our margins, particularly with.
Foodservice business.
Great. Thank you.
Thanks, Ed.
Your next question comes from Chris Mandeville with Jefferies.
Hey, good morning.
Kevin I guess similar to add to question here I imagine a little bit more of a detailed go forward strata you can you laid out at some point so I.
I guess im just wondering what the reasonable timeframe to expect there and and is there any ability to elaborate a bit more on the comments surrounding.
Desired and improving underdeveloped markets in your ability to deliver strong results in large complex environments. I mean, I guess when I think about that it sounds like you're referring to urban markets and from what we understand that's already a fairly competitive environment and comes with low margins. So how do you navigate those.
The waters.
Accelerating sales, but yet not diluting your margin.
So let me take that I'll, let Kevin and then if he if you so desires, obviously, it's a pretty much. His first day on the job solution, we should take that into consideration here, but what I will say is following.
The idea that the metro markets are competitive is certainly true.
The idea the metro markets hours somehow inherently unprofitable I would certainly debate that will do significantly because again there is one of the areas that we have been under developed is in some of the most sorta dense urban markets and in some of those cases. It is about the ways that we go too.
Markets and the value that we provide to those customers.
And in so many of the cases in particularly in some again the from the high end restaurants in some of the different metropolitan areas again price becomes much less Evan issue.
When the go to market strategy is the right one and so I am sorry, so I'll, let Kevin chime in here, but I just want to probably little bit debunked. This idea that some our discharging into a less profitable or Kevin I'll, let you take a schedule. It's perfect answer what I was referring to yes was the more metro markets, where our share under represents in the why as I mentioned earlier was.
Supply chain solutions and they go to market strategy that works and you're on more suburban or rural area does not necessarily work into downtown Metro environment. Some of these high volume.
This is called New York City restaurants, they may need delivery multiple times per day, and what we will work on our solutions that provide more tailored support for those types of customers in a cost efficient way so that the business would be profitable and Joel already covered the profit per customer so I won't build on that.
I think the other thing I would point out Chris when we talk about investments that we're making.
Some of the investments that we're talking about here are to continue to enhance the way that our technology tools interact with our customers to continue to enhance the way our technology tools allow our salespeople to be supported and different way that allows again for these types of interactions. So so I think again so.
A lot of these things that we're talking about here certainly are where we see opportunities and again, particularly these areas were very were significantly underpenetrated.
Okay. That's helpful and then Joel I guess recently.
Believed there was a decision to outsource your customer service Department.
Anyway that you can elaborate on what went into that analysis with respect to potential cost savings versus maybe some service.
Disruption or just changes for that matter how does the department.
Change with respect its overall interaction with accounts.
And does anyone else in the industry necessarily have a similar model.
Well, let me start with the premise of why that decision is made in the and the thought process around that if if you look at Cisco historically, one of the challenges that we've had in servicing our national customers is the idea that weve, primarily had customer care at each operating company level. So if you're a.
Name, the CMU customer and you add to solve issues whether were credit issues, whether we're customer service issues. Your primary points of contact we're in a very decentralized you know you had we service in 50 locations you basically at 50 points, a contact which obviously is sub optimal in terms of the service free.
In large national account so the basic strategic Prime Minister doing this was the actually have a situation where you actually had again sort of a one call a one single point of contact for customer care single point of contact for credit issues.
And so.
The whole reasons strategically for doing this was was around that.
Part of the work that we did in the decisions in terms of why we chose to do things in the way that we did was again both to have a partner that would allow us to provide the technology support to enable that work.
And so and again into to restructure the teams somewhat differently a in a way that again it was really more focused around teams at this sort of single point of contact for customers.
So I actually look at this as a very good strategic enhancements for our business both from the perspective, a of the ability to actually sell those customers and serve them at a different way and take care of their needs.
But in addition to that and again I'd say a little bit later down the line from a cost perspective, obviously, there's some initial work required to invest in this model overtime. We do believe it will be a more efficient model.
But that's stuff the promise of what that that was done for.
Okay I appreciate it thanks Yep.
Our next question comes from John Heinbockel with Guggenheim Securities.
Maybe just maybe for Kevin when you think about the market share opportunity right, particularly in those metro markets.
What's your early thought on the structured and size of the sales organization I do you think you need to.
Step up hiring of amazed and some of those areas and then distribution platform do you think.
Capital is required.
To put the facilities in closer to some of those metro markets or this is really not a capital issue as much as its maybe.
You know trucking equipment and scheduling.
Yes. Thank you for the question your John I'd say on the on the talented people side, it's too premature for me to comment upon that as Joe mentioned just started with the company in a big part of my on boarding will be will be call listening tour, which is going out and talking to our amaze all throughout the country or sales associates to listen to learn from them some of the best most.
Customer centric ideas innovations come from that frontline associated there could be that may it could be the driver that's been delivering through an account for many many years in some instances at Cisco decade, they have great ideas on how we can better serve the customers. So I can't wait to get started in regards to traveling around the country in meeting our great associates and.
Learning from them on how we can best serve our customers are too premature to comment upon are there more or fewer overtime, you'll hear more from US later in the year on our on our strategy on where we're headed in that regard as it relates to supply chain solutions. This is my expertise by trade in by background, we will do a thorough.
No end to end network optimization review.
To determine your number of facilities optimization of which endpoints are served from those facilities. The work. We do there, though will be thoughtful and we will sell fund the work that we needed to where we're not at this point communicating and need to increase capital investment.
We can reduce cost and use that reduction in cost to fuel and funded the investments that we will make that has ever admit that as our charter and I know you're looking for specifics today. There was specifics will come in due time.
And then Joel maybe I don't know if you haven't idea of how much lower your share is in these are urban metro markets I assume it's more it's more than half.
What are your overall share is but any any idea how much lowered his.
It depends on the market as you can imagine there's some that were better penetrated other than others, but I would say generally it's us I would say somewhat somewhat less than half would be the way I would think about that.
Okay. Thanks.
I just want to add one thing to that I want the participants on the call to perceive that are single source of growth is through those metro markets. We have multiple vectors of growth. We just highlighted one of them as an example to answer your question earlier on this call.
Thank you.
Our next question comes from Judah Fromer with credit Suisse.
Hi, Thanks for taking my question.
I just wanted to circle back on kind of this decision to pull forward operating expense and then what's gonna effectively kind of limit the adjust the adjusted operating income growth over the three year period. So there are clearly some issues with with operating expense.
And delivery on on operating income growth, both internationally and locally whether its labor in the U.S. or the consolidation in France. So can you can you help us with the decision to pull forward and kind of layer on top of what seems to be.
Going in in fits and starts and then maybe more specifically.
A lot of this tied to the metro market market share are there other aspects you can highlight as well.
Sure. So a couple points a again just as a the general just of the three year plan take down it was as you know as we've talked about some of the things related to some of the margin challenges and opportunities or the work the integration work in France.
Some of the discrete expenses from a corporate perspective.
The investments in the business the way I would actually characterize that and again at this falls into the category of the point I mean literally towards the end of my prepared remarks, we talked about decision would we just simply hold off on investments that we believe are really important in order that short term goals or order to accelerate some of those investments to continue to move forward.
On some of the things we believe are really important.
And a little bit and then certainly we always have and always will choose the ladder in that scenario.
So the point, Kevin made earlier the getting the Metro examples just simply one.
Idea or one point to that was a an example of that some of their as we're looking to accelerate but the investments really centered around a few key areas that I'd, probably that probably highlight for you.
If centers around these areas around accelerating working our customer facing technologies.
It's centers around accelerating work in the technologies that support our salespeople and allow them to go to market support our customers in the way that we think again certainly moves some of these things forward in a an accelerated way.
They focus on the area is what I would call simplification of our business.
In terms of the way that we interact with with our suppliers with our customers.
They do they look at the way that we can actually accelerates and I went out when I say cost savings I look at cost from almost an end to end view in terms of both for how we accelerate areas of.
Cost of goods all to indirect spend all of those types of things that some of the investments that we're making we believe will allow us to accelerate in each of those areas again, both due to a simplification as well some of the enhancements again in technology and then so those are the way I would categorize some of the work.
And the investments and you know certainly as we've talked about a the need to continue to accelerate growth in this business that need to leverage scale in a better way the need to go to market in a way that a enhances our ability to service. This wider group of customers in a better way I would characterize our investments as falling into that and.
Yeah, again, and frankly, we felt it is important to they're important long term investments.
That we thought we were a we're very much worth accelerating.
Okay. So maybe just a follow up on that Kevin would you would you say you had I hand in kind of pulling forward. These investments are these kind of investments that have been out there beyond the current three year plan that.
You know the board is deciding to pull forward and then Joel if you could just help us with model EPS growth coming in in line. Many any help on interest expense or tax line would be great.
Yes, Joe will start and then I'm going to do a follow up close to what you will cover yeah I being so look I, what I would say is that there as it is a continuation to some degree of investments that have already been made but an acceleration that were again. So I would say is and again I'll, let Kevin say this deal I mean, I think Kevin there's a there's an alignment with the strategic approach were.
Taking a but but the say Kevin was one that directly said hey, we accelerate that would would would not be a fair statement. We certainly believe doesn't leadership team that that was important work again supported by Kevin and and by our board lets you Yeah I'll just I'll build on I'll ask a question and answer it and it's Kevin or you are aligned with the Cisco priorities and the IND.
Vestments that Joel just referred to are directly driving those key priorities. The answer to that is yes, I am the company's number one priority to be a customer first culture and I'm, a 100% aligned to that culture as I mentioned earlier, the best ideas and most innovation innovative solutions come by better understanding the needs of your customer and provide.
Writing solutions that help you do better business with those customers Joe referenced that it's also where it may salesforce, providing them with better tools to be able to be more effective at their roles. That's a part of this investment and I am 100% aligned with that the second one is our local transformation and Joel talked about essentially framework as.
Cities that can then be deployed to match the needs of a local trade area. One of those happens to be metro and Thats customer Onboarding I mentioned supply chain solutions in a customer ordering tool improvement I'm aligned with all of those things and last but not least as business optimization, Phil talked about funding sources for growth by improve.
Moving the manner with which we run our business, we've talked about leveraging our scale leveraging our scale is we should be the lowest cost operator in the business and therefore, then be able to pass upon.
To our customers savings tied to the efficiency improvements and also create sources for investing growth dollars. So I am aligned with the priorities and I'm very supportive of the decision that was made.
Great.
Our next question comes from Jeffrey Bernstein with Barclays.
Great. Thank you very much.
Keith you talked about.
No just im sorry, Kevin you talked about.
Traveling in the country meeting with.
Associates and management across the organization I'm just wondering how long you think before you complete that initial review and maybe we get an update on the what you see is the vision for Cisco and whether or not we would get another three year guide or how you kind of think about the strategy of providing guidance to the street.
Yes, it's a great questions every thank you for it I think most new CEO is coming in there is a 90 day hundred day planned in this listening to our will be a part of that in addition by the way to doing very specific deep dives into the business while doing that it's not just the listening tour, but the listening tour is a vital an important part of Onboarding.
I think what I would say at this point in time as late summer is when you could expect to hear from us from an update perspective on where we are.
With our strategies and more on that later, Neil will help manage and communicate in that regard.
Got it and then I know you mentioned in your updated three year plan guidance chart within the slide deck you talk about continued disciplined approach to profitable growth with your National and Sigma Council. This has been something we've been hearing for little while the now I'm just wondering as big as it relates to that what do we stand on that I mean is that a process that you think is just from that.
We should expect to hear about for which is ongoing and therefore says every quarter every year, that's kind of that or maybe is there kind of short term opportunity to.
Pull that forward.
In order to no longer having to refocus on putting those national accounts.
No I mean, I would think that again my that somebody I think you'll actually continue to hear us talk about actually we've talked about that consistently for actually many years in terms of how we view that are they getting those customers an opportunity through a disciplined how we grow yeah I would say the only thing I would maybe stay as I mean, what you're seeing and our Sigma segment, right now which actually.
He has a fairly acute decreased in the top line that was planned for and as part of this thing again, that's probably a little stronger year over year. The then you may anticipate as we move forward, but I think generally speaking.
We will remain disciplined in this space.
It is an important area to us.
Both strategically and in terms of covering fixed and providing opportunities for us to.
Enter and service markets and outlying areas that may have that type of business that that allows us to have a great local business there as well. So again, it's a strategically important part of the business, but nonetheless, one that I think you'll continue to hear us talk about as one that we will be disciplined in terms, how we approach.
Understood and then lastly, just I think Joe you mentioned something about bad debt expense it sounds like you're making reference to an increasing of late so I'm. Just wondering if you could talk about where you're seeing that.
Russia from.
Didn't get much color in terms of from a restaurant industry perspective, whether you're talking about national chains are independence, or maybe one of one or both or operating environments, becoming more difficult leading to the elevated bad debt expense.
Yeah, Here's how I'd answer that I mean, there's a little bit of both in terms of a market. I think you know again I just wondering I would really emphasize here, where there is no panic button being pushed for us in terms of the the market itself. There is a bit of softness we've got a few increased bankruptcies and again I would say, it's really both across the national.
In the local I'd say the bigger impact, though at this point certainly remains just to continued challenges around the stabilization and implementation of some of the work that we did that really centralized credit activity.
In an area that used to be very decentralized activity across our businesses and so.
That's a that's accelerated a bit over the last couple of quarters. There were certainly doing a lot of work to continue to stabilize that and certainly anticipate that happening. So again I'd say, it's a little more self induced but again, there's I would say a little bit of softness certainly, though not ready to push the panic button on the up on the marketplace.
Great. Thank you.
Yes.
Our next question comes from Joshua long with Piper soon.
Great. Thank you for taking the question wanted to circle back to the commentary around outsourcing. The support that was very helpful. Curious if that was more of a proactive decision or if this is feeding off the commentary you've received from your customers in your team members.
Well I would say, if it's probably a little bit of both in the sense that obviously feedback from customers in terms of how we have service them over many years is that hey, I'd, rather have a single point of contact I'd, rather have instead of calling 50 people I'd rather call one I'd rather have a team that knows my business well that can relates to me.
In both from a care perspective from a credit perspective et cetera, et cetera. So I would say it's in response to customer feedback and how we can do a better job servicing, but but again in that sense that I would call a proactive in the way that it was something that we.
Believed it was an important investment one that we again found both the rights what we believe structure a partner and technology support in order to do that it's still new we're still getting moving into that and we'll continue to improve and evolve but the teams done a great job of of rolling that out and so again I'd call a proactive button.
Sponsor with the listen to our customers and feedback that we receive from them over.
And number of years doing business.
Great. Thanks, that's very helpful context, and then thinking about the international strategy, particularly in Europe sounds like that's still long term growth opportunity for you can you talk about what you've learned with the integration process, particularly with the sprint the French businesses that you mentioned that how that process is coming along.
Sure. So you know I think the couple areas that I would say it thinking about how that business is integrating it was it was two businesses that were acquired even prior to our acquisition of breaks they were similar sized businesses that we have then ultimately chosen to bring together.
And I would say the two bigger challenge is really our what we call a single deliveries meeting instead of customers getting delivered by both businesses are being delivered by one and the technology to support that and so I think those in both cases of there's theres been challenges in making that happen.
On a positive note you know doing some of that type of integration in France is often complex or do some of the labor and work councils and all that and I think actually we got through that part of it very well.
But nonetheless, those challenges remain and then some of the impacts you seen have been a service levels that have been less than we'd like them to be which then is translated into gross profit dollar impact.
There and then what I'll call dual running costs, meaning we've had to have some of those things, we're both businesses running longer than we would've liked them to have done.
So I think again, we're certainly we've got a strong leadership team. There we've got lots of resources that we've dedicated both there and from here nor to enhance that suddenly investments that we're talking about here as well fall under the category of how we accelerated the stabilization of that but but as you.
I said.
Again, we certainly we're confident that we'll get there and certainly as you pointed out believe that's a again. This is a good long term investment for us and again in a market that.
We certainly think will be one of the strongest ones that we have oh, yeah in the future.
Great. Thank you.
Thanks.
Our next question comes from Kelly Bania with BMO capital.
Hi, good morning, Thanks for taking my questions.
I was wondering.
Maybe for Joel.
Susan.
Kind of less consensus two weeks ago, and lower kind of outlook.
I can you just help us understand that decision you talked about some of the factors.
I'm just trying to really understand how much was the quarter and how much really is these investments.
Certain opportunities that you talked about and I think what people are China.
Struggle with understanding todays how many more investments really need to be made out there over the next couple of years.
Sure, let me start with the first and what I would say is a couple of things. So the timing of the invest the announcement was made on January 13th.
Was obviously fairly early in.
Both the process of closing as well as the.
How we got into the third quarter. So I think one of the things that I would say as we've evolved and certainly a finished the closing process of this quarter as well as.
Saw some of the results that we've talked about as we moved into the third quarter part of that with some of the reason that you probably heard a little bit different tone from both of those things.
And so I think as we looked at some of the challenges that we've talked about from a margin perspective that we continue to see a fall into the third quarter.
We took a look at some of the work that again, what's happening in this business in France, as we've talked about a and looking certainly looking forward to see some continued challenges there.
And in addition that again it was just some of the work that we've talked about with somebody investments again. These are brand new investments. They are things that weve never talked about doing but certainly the opportunity to accelerate that growth.
To accelerate as we build some momentum at the end of this year and headed into the next year.
We thought were very important.
In terms of how we did that and so so I would just say the combination Kelly of.
Some of the kind of wrapping up a core the seeing some of the way the of the third quarter was starting to play out in a number of different areas of the business. Obviously, some transition cost as well have a the leadership change and then thinking about how we actually.
Spend that investment dollars moving forward. The question is how much are we going to continue to need to invest in this business look I think.
This is Ben as you I know you know a multiyear journey of transformation because the reality of it is is that this company you know again, even 10 years ago was a business that had it was significantly de centralized in a way that we approached the marketplace you think about this.
Things that used to happen at a local operating level, where for the most part I was joke about this a little bit but you know.
Pretty much the only thing they couldn't do were they couldn't give themselves the pay raise and they had reported Gordon you as gap other than that it was for the most part their business to run.
And so when you think about the things that we've done in terms of how we standardize how we leverage scale how we.
The the category management processes and the way that we go to market and set an assortment in a different way that is not just decided by every individual operating company. Those type of transformation is again the the latest one of them again, we've talked about on this call or things like finance technology roadmap things like the centralized customer care.
All those things are bits are one step along the way to continue to drive a more leveraged efficient.
Nimble organization that can go to market in a different way and so.
Again, there's not necessarily sort of a beginning in an endpoint to that I do believe this business will continue to invest that itself as we've talked about our top capital allocation priority is and has been the ability to take the cash regenerate and reinvested in this business to continue to get better.
And as Kevin said is as you've heard us talk about our ability as the market leader to continue to leverage scale to drive the things that we can do and and again go to market in a different way I think are important then so you will you should expect us to continue to invest in our business that way.
Okay, and then maybe just one follow up on on the gross margin in the inflation impact.
How much of that just given that it does look relatively manageable on an overall basis, but obviously, there's more happening I think in meat and dairy.
But how much of that is just pure mechanics of that's the type of inflation.
You are saying versus the execution of that.
The local or the the chain side, yeah, it's a little bit of both I mean on the on the on the execute on the chain side again, it's actually a fairly mechanical process in the sense that you know as we've talked about before there's depending on the category. There's about a 70 30 degree 30 day lag in terms.
So when prices recalculate, so that when there's a little more I'd call mathematical and and environment driven you. Obviously, there's some market driven and there's some execution as well I'm a I'm a local side, although as we've talked about historically one of the areas. That's actually really allowed us to do a better job of that certainly over the last few years our revenue managed.
When function.
That's been an area that we've met and we've leveraged well both in deflationary times and inflationary times and I certainly anticipate work that we have done and we'll continue to do in the Rev men area.
It will will help us work through that but we've also talked about the fact that in certain cases, where inflation and in certain categories when inflation hits higher levels and escalates and are in a.
More rapid wave that we still have some challenge in passing some of that along so I I think that's how I would frame it up is probably a little bit of all that but certainly.
Something that I believe moving forward will go to handle on again, our redman function as has certainly done a good job of will help us work through that over the number of years and I anticipate that continuing moving forward.
Thank you.
Thanks Scott.
Our next question comes from Bob Summers with Buckingham.
Good morning, guys. So just help me understand you know of the.
Operating income revision.
Which I think it's really just what two more quarters, how much of that is being driven by this investment pull forward and what I'd really like to understand is what's what's the run rate about investment.
I think about it as we bleed into 2000 2021.
And then on on the benefits how did the equation.
How are you thinking about the return on this either through cost savings or bolting on acceleration and in case volume growth in when when is that when should we expect that.
Sure. So just starting with your first points on a sort of the take down again, you again, we haven't broken out the specifics of those things, but just to reiterate again a couple other key points. You know again. It is a there is a portion of it that is related to some of the challenges we've talked to.
Both a again as we kind of exit this quarter and enter the next one as it relates to some of the margin challenges.
Again, it's related to some of the challenges that we've talked about in France.
Again, there are some discrete costs in getting corporate that Oh God color unplanned things like the strike we hadn't Denver.
Things like that we've seen.
That have higher level all call claims activity.
In terms of things like auto auto liability.
And workers comp.
Some of those type of things that were part of where you saw our corporate expenses elevate a bit obviously as well as some of the transition costs, we talked about related leadership.
So those are things that are again, some of the components to that as well as investment.
I don't know that we're going to go and break down the detail every one of those components, a I would say certainly.
Probably the biggest ones really fall under the category that some of the point on the margins the areas in France, a as well as the investments broadly speaking.
And I guess, the you know some from a run rate perspective, as I said I don't know we're gonna go into that type of breakdown detail. What are you could exceed what are you should expect though as we head into our Investor day and as we talk about you know, it's Kevin Onboards as we talk about our ongoing strategic opportunities. We certainly playing to go into more detail of that both in terms of howdy.
Impacts our growth how it impacts the expenses and the ability to fund that growth through some of the a efficiencies. So certainly more to come on that but Ah, but I would say again those those are the those are the main categories of how to think about why the take down happened.
Thank you.
Thanks.
Our next question comes from John Ivankoe JP Morgan.
Hi, Thank you I think the comment was made that we shouldn't at stacked an increasing capex I'd. You did you just want to make sure that I've heard that correctly.
You know I guess it specially in the context of what may be in coming years kind of a broad need to modernize odd facilities really not just for you but across the industry and also potentially the use of new facilities I get to.
Smaller facilities to better penetrate some of the urban markets. So that's kind of the first point and secondly, it's part of the plan are part of the thought at this point that you would enter new European countries or you know, it's kind of you're getting to crank countries to your acceptable returns the priority in the near term. Thanks, Yeah. So let me take that one first then I'll go back.
Two other one I think the answer on that is that's certainly stabilization is the highest priority right now in terms of that and then again just maybe just to reiterate one thing I know we talk about Europe is just one entity within that again, the three out of the four main countries room in Europe are actually performing what I'd call acceptably well and.
Obviously, the biggest challenges in France, but but from a priority standpoint, there definitely stabilization is our focus at this point in time certainly over the long term will continue to look for opportunities to grow in that part of the world.
The Capex piece, so look a couple of things I would say on that you know as we have as we've talked about actually over the last couple of years, a we actually have accelerated even heading into this year, our capex level a bit in other words, we had been running in that one 1.1% ish range somewhere one one to one too.
As we've talked about this year, we actually bumped that up a bit to a 1.3% of sales for some of the investments we plan to make and and as we've talked a little bit earlier in the prepared remarks, we're we're actually running at that rate and so so I would say on one hand, a there is a bit of acceleration.
From the perspective of that but that was talked about and it's it's where we're going in so I think it would be I think kevins point was you know, we're we're not certainly saying what we're doing now at this moment in time, there are gonna be I think some increased of potential investments, but as we also look at how we rationalize those things.
As the moment as a percentage of sales I think you can think about fairly consistently how we've talked about as we headed into this year, we've talked about a bit of acceleration.
Okay, so much more or less model 1.3 would be safe.
I think that's fair thank you.
Our next question comes from Rebecca's freedom and with Morningstar.
Good morning.
To circle back to protein inflation.
Given the global proteins shortage that resulted from a African swine fever, it's likely to thinks that this protein inflation will continue for at least the next year.
Are you beginning to proactively work with your customers on some price increases or.
Are you just kind of playing it by year. They have been admittedly volatile prices I'm just wondering what we should expect and you know if well.
Is there, possibly some further gross margin compression due to difficulties passing on this expected inflation. Thank you.
Sure. Thanks for the question. So I would say first of all decouple a couple of these things a bit the impact that we've seen from the African swine flu has actually been very minimal I would say a this is something we've taken questions on for some time and.
Hi, good that's that's not something I would say has done a a sizeable or even again.
Just barely above minimal impact in terms of us.
I think the yeah, the markets for Centerplate and beef do move around some and I'd say, we're getting we experienced a little bit more of a cute.
Inflation here in that category I don't I don't know that I'd look right now, though out longer term and say yeah. There's some fundamental reason that there's going to be a highly inflationary centerplate markets for anytime to come of of any real significance, Here's what I would say, though it just as a reminder.
In terms of how we deal with some of those things and why.
Back to maybe their customer point.
Why this has been something actually we have historically been a a strong partner for our customers and obviously, we have scale benefits that have allowed us to a in any of these types of moments have they have access to products.
Have us trace ability that obviously is of deep and well appreciated by our customers.
The availability of substitutes and so I think and be alternative products.
And so I think you if you think back a few years ago, even when we had the issues with the avian flu or what are the things that we were able to bring to our customers is simply the availability of product.
And again, a trace ability programs that actually.
Ensure that those are our safe and.
In the way that they would expect so I think I.
I guess, what I'd say to summarize that's all.
Again, decouple, a little bit the.
The the African.
The swine flu elements that is not than something that we've done we've had a significant issue with.
Some sort of play challenges right now the they'll get not necessarily looking at what I'd call acute inflation in that area over the longer term, but in the event of any of those things I think your company is well positioned.
To manage to that stuff that a better way.
Okay well thanks.
Thank you.
Our next question comes from versus all of them with B of a securities.
Hi, Good morning, and then thanks for that.
Taking my question.
Mr Go back Jody Thank you.
Frank.
Alan just with the implementation of your finance transformation roadmap, just want to give a little bit more color on that and then.
And the time for working through those and then as it relates to working capital and free cash flow.
Just a comment on when or how quickly you might start to see improvements.
Thank you yeah sure. So a couple of things on so think about the finance technology Road map as.
In our history, we would have had all of the finance related functions.
Or things like credit things like cash App accounts payable general ledger.
Each of those types of areas that would actually have been in each individual operating units that over the last couple of years enabled by technology. We've moved many of those functions into a centralized placed in some case a in some case through and with an offshore partner as well.
And I think the what's you're hearing us talk about here our challenge is related specifically to local credit where in in the past each one of our operating units would have had a credit department responsible for credit in collections.
In each of their local markets.
And in today's world. It certainly again through the use of technology and a bit of a different structure. We're just working through some of the bumps.
In terms of managing how to do that in a way that's more somewhat market, but also a much more centralized and so.
Again, the in interesting example, on working capital of a process accounts payable had some bumps along the way as well.
And we had a little bit of a positive benefit if you will in working capital on that and in a in our previous year that process is actually stabilized and again in a strange way had a little bit of negative impact on working capital in the sense that we paid our suppliers in a more efficient manner.
So I would say that in general we certainly feel confident about our ability to stabilize that we're certainly making the appropriate investments and leveraging the technology in order to do so but there are some short term bumps that we're having a long way in.
I I actually you know certainly in some of my prepared comments talked about the fact that we anticipate some of this continuing to improve over the course of the year and a and I certainly expect that to be the case.
The other point I would make and just as a reminder, as part of the free cash flow is related due to capex a year to date basis.
If you remember at the end of our fiscal 2018 based on some opportunities presented by U.S. tax reform.
We actually accelerated the process of investing in some fleet.
That actually then allowed us to invest at a lesser rate at the beginning of our fiscal 2019, so where we've gotten back to what I'll call a normal I'm more normalized capital spend as it relates to fleets the year over year comparison, certainly for the first half the year and again this will level out a little bit as the year goes by looks worse, particularly.
Due to that factor so given all that to say I do think we'll see some can swing proven answered the second half.
And and certainly over the long term feel good about or.
And then just very quickly I'm wondering if you can give.
Any comments about current trends, you're seeing with independent restaurants, you saw nice acceleration your local case growth this quarter and I'm just wondering.
If you expect us to continue in the third quarter or you can comment on quarter to date trend. Thanks.
Yeah, I think look a couple of things I mean, I think the team did a great job a a this yeah, we talked about actually a.
A favorable exit rate from the first quarter that continue to accelerate over the course of this quarter, particularly in our local business and I would say, particularly in the area of account penetration. So what this was not was it just a you know just kind of going out and and just a you know people often ask where did the growth come from and it wasn't so much in there.
We have new customers, but as an area that actually as we've talked about as best for us.
In that further account penetration yeah. The market itself I would say is kind of where it has been I think it's in a a decent place a you know there's there's sort of.
Lots of reports a move around from time to time in check sizes generally seem to be continuing to elevate traffic seems to be flattish knows you say, it's up a little suzi, it's down a little but I would generally stay the market is in a isn't an okay place probably similar to what it has been.
But I think a again certainly a lot of good work by our by our teams in the U.S. to drive a strong level growth again, that's certainly in the a independent space and and we anticipate some of those trends continuing as well.
Thanks, so much and best of luck.
Thank you.
Ladies and gentlemen, just conclude the Q and a portion of today's conference we like to thank everybody for participating in the all disconnect have a wonderful day.