Q3 2020 Earnings Call
[music].
Good morning.
It goes third quarter fiscal 2020 conference call.
As a reminder, today's conference is being recorded.
We will begin with opening remarks and introduction.
I would like to turn call over to Neal Russell Vice President of Corporate Affairs, you may begin.
Good morning, everyone and welcome to just because third quarter fiscal 2020 earnings call on today's call, we have Kevin Hurricane, our President and Chief Executive Officer, and Joe broadening our Chief Financial Officer.
Before we begin please note that statements made during this presentation, which state the company's or management's intentions beliefs expectations or predictions of the future are forward looking statements within the meaning of the private Securities Litigation Reform Act and actual results could differ in a material manner.
Additional information about factors that could cause results to differ from those in the forward looking statements is contained in the company's SEC filings. This includes but is not limited to risk factors contained in our annual report on form 10-K for the year ended June 29 2019.
Subsequent SEC filings and in the news release issued earlier. This morning, a copy of these materials can be found in the Investor section at Cisco Dotcom RBS Cisco's IR App.
Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures are included at the end of the presentation slides and can also be found in the investors section of our website.
To ensure that we have sufficient time to answer all questions, we'd like to ask each participant to limit their time today to one question and one follow up.
At this time I'd like to turn the call over to our President and Chief Executive Officer, Kevin Hurricanes.
Thank you Neil and good morning, everyone and we thank you for joining our third quarter fiscal Twentytwenty earnings call.
I hope that you and your families are seeing safe and healthy during this time.
But the business World manages through this rapidly changing operating environment, our first priority as leaders in as a company will be the health and well being over associates, our customers and our shareholders.
Our prepared remarks today will be longer than normal due to the amount of content that we want to share with you.
During this morning's call I will spend time discussing Cisco is rapid response to the Cobra 19 crisis and how we are positioning the company for long term success.
It is extraordinarily important that we as leaders managed simultaneously for the short term and also for the long term success of Cisco.
My comments today will inform you on both of these time horizons.
I'll, then turn it over to Joel who will discuss Cisco is third quarter results and provide further financial updates.
Lastly, I'll make a few closing remarks before we complete acuities section of the agenda.
As I begin my remarks, let me assure you we have the financial ability to weather the storm for as long as it takes.
We entered the cobot 19 crisis within extremely strong balance sheet, and we have taken important steps to further strengthen our cash position, helping to ensure our liquidity during the crisis and enable our ability to emerge stronger than ever.
In response to the current environment, we have identified four key areas of focus.
First we have taken Swift action to further strengthen our overall liquidity.
As I mentioned, we entered this crisis in a strong position and we have strengthened our liquidity to provide us with additional flexibility.
We have built more than $6 billion of cash and available liquidity that allows for not only financial flexibility in survivability. During this crisis, but will enable us to capitalize on an unprecedented competitive opportunity.
I am confident that Cisco has the financial ability to invest in inventory and also service levels. Upon the return of customer demands to food service.
There will be profitable market share gains to be had as this crisis unfolds in Cisco will have the investment capability to profitably win new customers.
Second we are focused on stabilizing the business by removing costs from the system.
Towards the end of March our business declined significantly from the moment the shelter in place orders were issued.
It is a good thing that we're practicing social distancing as a society to shelter in place orders are helping to flatten the curve.
With that said social distancing orders have had a significant impact on the restaurant hospitality and education customer segments that we serve.
As a result, we needed to quickly reduce our expenses in order to match the lower level of business volume.
Our leadership team has taken swift action to reduce costs during this downturn.
In the fourth quarter of fiscal Twentytwenty alone, we have removed more than 500 million of expenses from the business, which includes the difficult decision to reduce our staffing levels by approximately 33% through temporary workforce furloughs and permanent reductions in force.
Additionally, we have substantially reduced miles driven by rerouting, our transportation fleet in implementing productivity improvements in our operating companies.
We will leverage technology improvements to implement those structural changes without compromising service or quality.
This is one example of how we will be a leaner more agile in stronger version of Cisco Post Cobot 19.
The benefits of these changes will begin to be realized in Q4 of fiscal twentytwenty in the permanent changes will deliver in annualized benefit of approximately $300 million.
In the fourth quarter of fiscal Twentytwenty, the expense reductions, while significant will be more than offset by the topline sales volume decreases that we are experiencing.
Additionally, we have reduced capital expenditures to only business critical transformational projects.
Physical projects like building expansions fleet purchases they had been put on hold.
Our capex investments will focus on those things that will improve Cisco is capabilities and will allow us to win market share in the future.
By focusing on a narrower set of strategic initiatives, we will accelerate the pace of change at Cisco and we will complete key projects more rapidly than previously planned.
Examples of these efforts include improving the capability of our shop platform, which is our customer ordering tool.
Increasing the effectiveness of our salesforce selling tool in implementing a pricing tool that will improve managements of margin for the long term and increase the percentage of time that our salesforce can spend on consultative selling versus administrative tasks.
Combined these capabilities will enable our sales team to visit more customers inspire our customers to purchase more from Cisco and simultaneously reduce friction in the purchasing environment.
These investments in digital technology will allow us to improve the effectiveness of our salesforce and increase their efficiency.
As a more streamlined company, we will garner more business from our existing customers.
An example of this improvement would be the development of a suggested order or our ongoing customers. These orders will include basic items. They biweekly, but will also introduced customers to new items popular trends and even deals of that week.
These offers will be personalized to the individual customer.
The intersection between personalized.
Relevant offers and Cisco is vast purchasing scale creates a capability that is unmatched in the marketplace.
We will better leverage our scale advantages that we are now developing and we are now developing differentiating customer centricity capabilities.
Third we are working diligently to leverage the upside that exists during this crisis by capturing new business opportunities.
And pivoting our support of current and new customers.
Cisco serves a broad spectrum of the foodservice industry.
Prior to the Cobot 19 pandemic roughly half of food consumption within the U.S. took place away from home.
The other half took place inside the home.
Over 19 is obviously tilted that balance and shifted more purchases to the retail grocery channel.
As a result, we have pivoted our distribution model to include retail grocer in new supply chain partnerships.
Sectors that we essentially did not serve pre coated.
We are working with some of the best retail companies in the world in an agile manner to meet the rapidly evolving needs of our customers and communities through both supply chain in labor service partnerships over the past several weeks Cisco has shifted sales of products through regional and national retailers to help alleviate.
Strain in the food supply chain due to a surge in demand that retail stores and shifts within the economy.
A brief highlight of some of these wins.
We are partnering with the government agencies across the global regions, we service to provide much needed food to communities in need in the UK, we're shipping more than 200000 meal kits per week on their behalf of Defra. The UK is version of the U.S. da.
In the US we are working with FEMA and to the U.S. da to provide fresh food for those in need through outreach to food in secure communities and as recently as May Onest, we submitted our bid to participate in the Corona Dividers food assistance program.
We would like to thank the various government authorities for their support of these communities in need and also the farmers that we partner with in the food supply chain.
Cisco has become a supplier products to retail grocers, we have shipped hundreds of truckloads of protein fresh products.
In both consumables to select retail partners. We expect the majority of this work to be transitory in nature with the potential for select partnerships to have staying power.
We have increased our level of support to our healthcare customers. Our healthcare segment sales have increased roughly 15%, 20% as we continue to arrange for deliveries of critical products, including PE, two hospitals urgent care facilities and long term care facilities, we are deliver.
During in a safe manner for our associates and to those healthcare customers. We are proud to support these frontline healthcare workers and we salute their dedication to better health.
On the logistic side Cisco has now offering supply chain service contracts, such as carrier services Cross docking and freight brokerage over 50 contracts have been signed with national and regional companies to provide third party logistics services through the use of Cisco is vast transportation fleet and logistic.
Cities and lastly, Cisco has entered into labor sharing agreements with select retailers to provide temporary work for opportunities of our furloughed Cisco Associates. This action is providing work for our team members and enables Cisco to call them back as soon as volume returns are highly skilled laborers provide.
Getting much needed assistance to retail.
Furthermore, I'm pleased to announce that we have filled our important chief supply chain officer position from the last time, we spoke.
On April six we welcome to Murray Robinson to Cisco.
Murray brings decades of some substantial logistics experience to our team from a diverse set of industries in which he has worked.
He has managed complex apparel distribution networks international supply chain.
And has direct experience in the food sector.
I have full confidence that she will work collaboratively with the rest of our leadership team and will be a tremendous addition to Cisco.
Many of our longer term strategic initiatives will be led by our supply chain Department as we transform how Cisco goes to market.
It is important to note that while the retail logistics opportunities are significant and show our ability to quickly adapt to the rapidly evolving environment. These opportunities do not offset our volume declines in the food away from home space.
Yes, good work shows our agility to fight if you will within our culture and we're proud to serve new partners during a downturn in our core business.
The part of driving or upside efforts that I am most excited about is the work within our core business to help our restaurant customers be successful make no mistake food away from home is struggling right now with substantial volume decreases the prior year.
At risk are the one hundreds of thousands of small business customers we serve.
At Cisco, we take our leadership position in the food distribution industry very seriously and now more than ever before we are doing everything possible to help our customers.
I am proud of the steps that we are taking to serve both new and existing restaurant customers. During this difficult time.
Cisco is delivering more products and solutions, including Cisco knows fresh in expansive product assortment that includes fresh meat and seafood produce dairy in refrigerated specialty items, we are 100% open for business across all lines of business, especially during these challenging times, we want our cost.
Summers to know they can count on Cisco to help them succeed with innovative food and product offerings.
We developed at Cobot, 19, selling bundle and leverage our shop platform to introduce it to all of our customers we call. It our focus 15 cobot package, which features a combination of cleaning products takeout containers paper goods in PE.
These bundled solutions are quickly delivering critical goods that our customers need to maintain seamless business operations by keeping our customers in stock with these a central as we are helping enable their business to pivot to takeout and delivery and helping them keep their kitchens safe in clean we remain in.
In stock on these crucial products.
We have been assisting thousands of customers with web site development for takeout and delivery solutions throughout the outbreak of cobot 19.
Many of our smaller partners do not have these capabilities in house Cisco has helped provide tools tips and solutions to develop digital platforms that drive customer engagement and increased traffic. While also helping provide ancillary services such as home delivery menu design to go containers and other.
Considerations during this unique environment.
We are offering training webinars and educational programs to help our customers navigate the cares act in supporting small businesses to help them retain their employees during this pandemic.
Under 48 hours, we built a training webinars to help these customers small customers apply for loans in taught them. What the funds are able to be used for in running their business.
Our sales team actively invited our customers to join US for these important to training sessions. It is a great example of how Cisco with delivering solutions not just food related products actions like this will ensure steadfast partnerships with our customers long into the future.
In less than two weeks, we have helped thousands of restaurants create product marketplaces, where gross rents or pop up shops lots of names for it which includes transforming dining areas into pop up shops, where customers can shop for essential pantry items like eggs condiments, Brent toilet paper in paper towels.
These additional product sales are not only helping communities, but they're also helping the restaurant industry increased traffic and protect jobs.
We're pleased to see that our volume to restaurant customers has been improving sequentially week over week since it hit the low mark at the end of March.
At Cisco, we're helping our customers stay in business run their business and transform their business. We know that these activities will help us retained and win additional business from them well beyond the pandemic.
In addition to helping our restaurant customers Cisco has started rolling out direct to consumer sales in area of business that we did not participate in pre cobot.
Our buckhead meat and fresh point companies have held several pop up events, which sell specialty meat and produce direct to consumers. Furthermore, through Cisco does new web sites on the fly dotcom within the us and Cisco at home in Canada consumers can purchase restaurant quality stakes to be delivered direct to their home.
We have started offering will call opportunities from our physical locations. The web enabled ordering for customer prefers they can purchase product directly from one of our operating companies and pick up the product themselves and lastly, within the consumer space. We have partnered with third party logistics services to offer prepackaged neo boxes.
Yes, featuring a box at the specialty produce delivered straight to the customers front door.
We are learning a lot in these direct to consumer initial concepts and we are leveraging these learning opportunities to better serve our customers and keep the food supply chain running.
Because simply put the food supply chain in this country does not work without Cisco.
Finally, I would like to talk about what we're doing his leadership team to ensure cisco's success post Coburn 19.
We referred to this work internally as our snapped back planning.
The snap back planning includes the following key items.
Integrated supply chain planning with our customers and our key suppliers to ensure that inventory levels well matched the business recovery.
Our strong relationships with key suppliers will enable Cisco to stay in stock for our customers during the recovery period and also as we win net new customers.
We are also accelerating key strategic initiatives. An example of this work is the transformation of our go to market sales structure.
We are transforming ourselves structure to be more focused.
Aligning the incentives of the Salesforce more closely with our business objectives and increasing the partnership of our sales teams across our multiple lines of business.
Cisco stands ready as the distribution provider that has properly positioned for food away from home. Once the demand returns we have a strong balance sheet that will allow us to invest when others will not have the same level of strength.
When our customers begin to reopen their restaurants, Cisco will have more than enough liquidity to rapidly replenished inventory to meet the rising demand to ensure that deliveries are made on time and in full capacity into capitalize on the upside by winning new business in fact share opportunities are already emerging as.
Sigma won a substantial piece of new business as the incumbent distributor confronted economic challenges.
Currently our sales team is doubling down on their customer focus.
We are focused on a combination of both better serving our customers and prospecting new ones.
We are 100% confident there will be profitable new customers to be served as the crisis creates new opportunities to gain profitable share.
We're also confident that demand for food away from home will return overtime, and we stand ready to enable that return of demand as we continued to be our customers most valued business partner.
Cisco will win in the marketplace through a combination of the strong liquidity agile business decisions and value added partnerships that fuel business relationships.
We expect that the combination of winning more business from our existing customers through the trust in partnership we have cultivated during cobot 19 paired with the prospecting of net new customers will increase Cisco is market share within the 300 plus billion dollar food away from home sector post Covance.
We believe that the capability improvements that we are accelerating during this crisis, coupled with the financial strength of our company will enable our success for the long term.
Now I'll turn it over to Joel who will discuss our third quarter results along with additional financial details around our business environment. After we finished Q way I will come back on the line to offer a final perspective regarding the company jolt overview.
Thank you Kevin good morning, everyone.
I'll start with third quarter results for Cisco and results by segment, followed by an overview of current segment performance.
I will then give an update on cash flow and capital spend for the quarter.
Finally, I will go through the impact of Cowen 19 on the PML, our working capital and a detailed discussion about what we're seeing in the business.
Our total Cisco results for the third quarter include a sales decrease of 6.5% to $13.7 billion.
Gross profit decreased 6.9% to $2.6 billion.
And gross margin decreased seven basis points.
Throughout the last couple of weeks, a third quarter, we saw significant decline in both volume and sales across all the business segments. As result of the code 19 pandemic.
We will give further color on that in a few minutes.
Adjusted operating expense increased 2.5% to $2.2 billion.
It is important to note that while our aggressive cost reduction initiatives were implemented at the onset of the pandemic.
There's a timing delay for the removal of the expenses.
We expect savings from the cost reduction measures to being realized in the fourth quarter and into fiscal 2021.
Also of note corporate expenses for the third quarter were impacted by several discrete items such as liability claims.
Expenses associated with the recent senior leadership change and the pull forward of certain investments as mentioned last quarter.
Adjusted operating income decreased 39.2% to $377 million.
And adjusted earnings per share decreased 43%.
To 45 cents for total Cisco.
Within the U.S. foodservice operations segment.
Sales for the third quarter were $9.6 billion, which was a decrease of 5.1% versus the prior year period.
Local case volume with the newest broadline operations decreased 4.1%.
While total case volume decreased 5.2%.
We did see growth at our sales of Sysco brand products in the third quarter, which increased 37 basis points to 47% of local use cases.
And 81 basis points to 38% of told Us cases.
However, gross profit decreased 5.7% to $1.9 billion for the quarter.
And gross margin declined 11 basis points to 19.8%.
Our adjusted operating expenses increased 1.4% to $1.3 billion.
And adjusted operating income decreased 17.1% to $637 million.
Our international foodservice operations or modestly impacted by changes in foreign exchange rates.
On a constant currency basis sales decreased 7.8%.
Gross profit decreased 10%.
Gross margin decreased 50 basis points.
Adjusted operating expenses decreased 0.5%.
And adjusted operating income decreased 93.5%.
Prior to the impact of the pandemic for the third quarter, the UK business remains stable.
Our Sweden, Ireland businesses performed well.
And our workaround integration efforts in France for progressing.
We remain convinced that Europe will be a platform for long term growth for Cisco in years ahead.
Both Canada, and Latin America improved performance for the third quarter as well.
As a result of steady investments to support customer growth in both these geographies.
And our Sigma segments, we continued to see steady progress of profitability improvement as a result in a disciplined approach to profitable growth.
Cash flow from operations as $1.1 billion for the first 39 weeks of fiscal 2020.
Net capex for the first 39 weeks was $591 million or about 1.3% of sales.
Free cash flow for the first 39 weeks of fiscal 2020 was $488 million.
Which was $511 million lower than the same period last year.
The decline in free cash flow was principally the result of the coven 19 pandemic.
As well as a combination of softer accounts receivable initially higher inventory from the steep volume decline.
And the timing impact of fleet additions as we've discussed in prior quarters.
I will now transition of the covert 19 pandemic impact on the business followed by details about liquidity working capital and capital allocation.
The exit rate in the third quarter saw significant decline in volume sales and gross profit across all of the business segments results of the pandemic.
For total Cisco our sales were down approximately 60% during the last two weeks of the quarter.
In us foodservice operations sales were down approximately 60% as well.
Segment was down approximately 50%.
And international was down 70%.
It should be noted that our sales decline, maybe higher when compared to our peer group as a result of our over indexing and local and independent restaurant customers.
However, we are glad to say that recent trends have shown about 15 percentage points increases from the end of March.
We have seen sequential weekly improvement that shows further momentum and upwards trajectory.
Combined with certain states opening in restaurant dining we expect additional improvement throughout the month of May.
Our Sigma business had less than an impact to sales and volume as quick service restaurant experience less of a downturn compared to other restaurant types.
In addition, we recently won a new piece of business valued at more than $500 million, which has a good example of taking share in the industry.
We were able to onboard the customer within seven days.
Which shows both our financial stability and supply chain expertise surprised fast in stock service.
The impact the sales a steeper in Europe.
Our businesses down as countries had issued stand homeowners sooner and the restaurant foot traffic decreased as a result.
As Kevin mentioned earlier, we are diligently working to leverage the upside by capturing new business opportunities and pivoting our efforts to provide support to our communities that we serve.
Those efforts have improved sales trends, particularly in the UK due to the different program, which similar to the US has also seen a sales trajectory improvement over the past several weeks.
In Canada restaurant sales perform similar to the us as consumers are practicing isolation measures to protect the health and safety of one another.
We are pursuing different avenues of revenue that we normally might not have tapped into such as redirecting significant amounts of inventory to retail outlets.
And supplying indigenous communities of critical food names.
This has contributed to the trend of improving sales most recently.
As for our business in Latin America, the impact of covered 19 has that most prominent in Mexico, where volumes decreased rapidly.
In Costa Rica, our cash and carry stores are helping supplement the decrease in sales from restaurants.
However cluster Inc. has also allowed for the soft reopen of restaurants, which along with increased sales to retail another supporting sales so the government.
Has led to recent year over year increases in sales.
How do we have covered co that impacted volumes I will move to commentary about expenses.
As a reminder, roughly two thirds of our operating expenses are variable and we have been swift with our cost reduction initiatives.
As Kevin mentioned earlier, the timing of those expense reductions, which totaled more than $500 million in the fourth quarter alone.
We will be more fully realized throughout the remainder of fiscal 2020 and in to fiscal 2021.
These expense reductions nominally temporarily adjusted expenses for volume.
But also accelerated opportunities to make permanent structural reductions to our business.
The permanent changes will deliver an annualized benefit of approximately $300 million. However.
To be clear the cost reductions will not fully cover the significant impact of the crisis.
On that note to summarize from a piano perspective as it relates to Q4.
There will be negative operating income as a result of the crisis.
However, based on recent improving trends and certain states reopening.
We feel that Q4 as the operating income trough.
Now, let's talk about some of the liquidity impacts to the business from the Coven 19 pandemic.
As it relates to working capital, we expect our collections to remain soft for the remainder of the fiscal years.
However, we have done extensive modeling for various and has an impact and our current collections are ahead of those expected cash flows.
We feel good about the progress we've made it given the current situation.
Nonetheless, we have hoped and additional reserve to reflect estimated exposure subsequent to the third quarter of $153 million, which we classified as a certain items.
On the accounts payable fronts. We then continuously working to increase standard payment terms with our suppliers and a seeing good progress with that initiative.
Our leadership position in the industry allows us to have these deeper strategic partnerships.
As suppliers are willing to partner with us on extensions due to the size our relationship at our financial strength.
For inventory as we have taken appropriate steps to quickly flex our inventory levels to align with volume trends.
While we have experienced some elevated levels of food spoilage.
A combination of our transition the retail business and product donation as leaving it in some of the impact.
Our ample liquidity will allow us adequately replenish inventory levels once consumer and customer demand returns.
While we navigate this unique fluid environment, we continue to review our capital allocation priorities as we take decisive actions to manage our costs capital spend and working capital.
I will now revisit our four priorities.
As previously mentioned, we have chosen to substantially reduce capital expenditures jointly urgent projects and those targeted investments to accelerate certain capabilities to make it easier for customers to do business with Cisco and to continue our focus at industry, leading service and safety.
Capex spend was in line to the prior year for the third quarter.
But we expect spend to be more than 200 million below fourth quarter fiscal 2019 as results of these efforts.
Regarding our dividend.
We remain committed to returning substantial value to our shareholders through our dividend payments.
If needed we would evaluate this approach each quarter moving forward.
As it relates to M&A, we continue to reevaluate potential future opportunities, but do not have a high priority.
Our large complex deals in this environment, particularly any large international deals.
As previously noted in March we have temporarily pause our share repurchase program.
And as it relates to debt, we recently completed a $4 billion debt offering.
We intend to use the net proceeds from the offering to repay commercial paper borrowings.
To repay outstanding senior notes due in October and for other needs as warranted, including ensuring that our business is well positioned for the return of demand to food away from home.
As part of our efforts to continue strengthening our liquidity position. Another important uptake is that we are nearing completion of our efforts.
To address the EBITDA to interest expense ratio covenant in our revolving credit facility.
To help ensure our ongoing compliance with our debt covenant, even in circumstances, where the coven 19 pandemic impacts continue beyond our current expectations.
We anticipate completing these efforts and disclosing our resolution in the very near term.
In addition, we are launching a 600 million Sterling commercial paper offering in the UK to take action to support the liquidity means our European operations.
Cisco strong balance sheet has afforded us the stability and flexibility to navigate this unprecedented and rapidly changing business environment.
More importantly, and provides confidence in our ability to achieve continued success and growth over the long term.
As of May Fiveth, 2020, we have more than $6 billion of cash and available liquidity.
While we do not expect to immediately deploy the majority of the capital proceeds we view it as prudent to ensure we have access to available liquidity given the near term uncertainties.
We have not asked and we do not intend to ask for government develop money or government financial systems.
Cisco was in a strong financial position prior to the code 19, pandemic and we will weather the storm to emerge and even stronger company.
Operator, we're now ready to take questions.
Thank you.
Ladies and gentlemen to ask the question you will need to press Star then one when your telephone.
So withdraw your question you asked about key.
Again, Thats still wanted to ask the question.
Please standby, while we compared to Q.
First question.
Men to deal with Jefferies. Your line is open.
Hey, good morning, guys.
Kevin just quickly looking at the international business and the performance in the quarter there.
I appreciate some of the country specific color, but if we just kind of bundled everything up together can you give us some perspective on where sales trends are performing relative to us in recent weeks and.
In light of the material decline in profitability can you remind us of how bearing the cost structure is internationally versus new us.
Yes sure out now thank you for the question, Chris and I'll take the first part and then I'll toss it to Joel on the cost structure of Europe versus the US it is a little bit differ mostly because in the United States, we owner assets and equipment, we do some leasing overseas, but it will end with that.
In Europe, the business from a topline perspective has been hit harder than other parts of the globe a was hit earlier and be the declines themselves were steeper. So as Joe said in his remarks were about 60% down we were at about 60% down at the trough. Good news is across the globe. We are recovering sequentially week over week.
And we're up about 15% from where we were at the trough, but Europe started earlier the declines were steeper and the recovery has been a little bit slower and really it comes down to one basic key concept they have fewer drive throughs in Europe than in the United States. So think about all the fast food chains in the United States in the drive through capability the segment of our bid.
Business, that's performing the best as quick serve.
Drive through in Europe, that's more small restaurants, many of them have closed temporarily in R&D been doing that pickup and delivery that youre seeing pretty robustly across the United States. So we do anticipate the Europe business European business to come back it's a matter of when not if.
And it's just it's taking a little bit longer in some of the social distinct practices in select European countries have been quite strong Ireland. As an example was a business of ours performing quite well before coated and they've had some of the most strip.
Restrictions what is good is that we now have line of sight for each of those countries as to what their reopening plans look like and even in Ireland in the month of June in particular, we're going to begin to see easing of restrictions that will result in improved business trends as I said the trough being in the river near Joel Thomas to you on the expense side.
The question, yes, Thanks, Kevin Yes, Chris I think the way to think about that as Kevin mentioned in the beginning of this comment that the expense structure in Europe is slightly different than we have throughout the rest of the organization in the sense that.
The assets that we have for most of accompany our owned and much higher percentage of those in Europe in leased and so this idea of the ability to flex variable obviously as we've done across the remainder of the business. The European business has aggressively done that type of work at both from our headcount reduction as well as a productivity.
However, they do still have lease agreements again work's been done there to renegotiate the terms on some of those and get a lot of work there, but but just to be clear that expense structure is slightly different and therefore, you're going to see some of that increased impact there relative to here. The other thing I would remind you is that Europe has done a bit ahead of the curve in the us in terms of.
The timing of when the stay at home requirements happened and so again, they've done a little bit further on a little bit that deeper into that than we are here.
Okay, that's helpful and until on the the write down of about 153 million little over 100 yourself that us related.
I can't speak to what competition has done, but I guess I'm just curious.
At call it 107 million or style in the us relative to your size in its quite a bit different than and let's just say us foods, Tim had a notably higher like down today. So I guess just how comfortable are you guys with respect to that hundred 7 million domestically and.
Is there any additional color you can offer with respect to how you approach staff.
Yes, so absolutely. Thank you a couple things I would point out on that.
Number one is that the.
153 million as an enterprise is essentially think about it as an estimate of what we should know now that they happened between the ended the quarter and earnings.
Right. So it was essentially an estimate of that amount. It is not intended to be fully reflective of all impacts that we would have going forward, but it's our best estimate of what we know today.
We do anticipate seeing continued pressure in that space and again as as things continue to evolve in the fourth quarter, but evidenced by having said that there is a couple key points I'd like to make in terms of what you've talked about in terms of the relative magnitude.
Number one we made some really solid progress in terms of our collection efforts and frankly as I mentioned in our prepared remarks were actually ahead of schedule in terms of where we would have been in terms of a modeling.
The second thing as part of that we've refined our tools and both from the collection that we do at the center and have engaged to significantly our salesforce to help with our collection efforts even to the point, we're actually as we've thought about incentives for them during from this time.
The work that we've done as actually included an incentive for collection for our sales teams. So I would say one of the things that we feel good about even despite some of the challenges as they vary collective and aggressive effort in terms of collections.
And then the third point I'd make as that in terms of how we thought about that it's been a combination of things were for selected customers. We have supported them in the forms of payment plans in the forms of deferrals and forms of then collecting new receivables on shorter terms and so again during the things that we can do to help support.
Our business as there are struggling through their own opportunities. So just a couple of points there, but again, we feel good about that for now, but I don't want that to be taken as the fact that yes. We've we've absorbed all of our exposure in the bad debt, but the combination of that a lot of good collection efforts I think the result there.
Okay I'll leave it there good luck in Q4 guidance. Thanks. Thank you.
Thank you.
Our next question comes from the line of due to from Credit Suisse. Your line is open.
Hi, Good morning, guys. Thanks for taking my question. Thanks for all the color around business trends and kind of the trough and the sequential acceleration I was just hoping you can maybe unpack for us a bit Tom chain versus independent Trans clearly the independents are probably going to get going a little bit slower.
Then then chains Dade and potentially are you seeing some independent closings slow the trajectory of that recovery and then additionally to that last week of April benefit from an Easter compared to the point, where that might look a little better.
Hi, Jay it's Kevin I'll start with the macro trends and then Jochen back cleanup on anything that I missed the we talked about geographic differences in the business.
Increases question on this one I think you have a pretty good insight as to what's happening in the business as I mentioned the quick serve restaurants are doing better than all others because of the drive through capability.
The fine dining and smaller restaurants are struggling the most what we saw throughout the month of April not just the week of Easter that Youre referencing was a sequential week over week improvement two things were happening those customers of ours that were in fact doing takeout and delivery are getting better at it.
As we mentioned in my prepared remarks, we've helped them with their websites, we help them with creating social media posts. In fact, we've started a campaign called hash tag take out to give back just to creating a momentum around help that small business operator, creating awareness and we've seen an increase in those restaurants that were up and running throughout the end.
Tire crisis sequentially week over week, and they are ordering more from us as a result, but we've also seen as each week in April more of our customers were getting back into business. So for some of them at the very beginning of the social distancing temporary they closed shop, we're seeing about a 10% week over week increase in the number of.
Unique customers that we are serving so to be clear we still have many customers that are currently closed, but we're seeing a 10% increase week over week. So yes, there is some.
Uniqueness for Easter weakening Doe normalized for that we can go back in time to know when Easter fell on that weekend. We have in fact normalized for that and we're seeing as I said sequential week over week improvement in the month of May we will accelerate further as many states in the US are beginning to open up Texas. The state. We are in on Friday May Onest opened up and we.
You can see already an impact positive due to that Canada. Similarly is kind of following a similar speed and pace in our Latin American business is actually slightly ahead of the United States and its recovery as we mentioned already Europe is lagging it entered earlier in its a lagging from a come out the other side piece and Joel anything to add to that no.
Other than to reemphasize over the sequential improvement Judah there was not just kind of 0.8, a point being where the 15% we actually an incremental sequential improvement over the course, among other than that as our outlook, Okay and Kevin maybe you can help us a bit with the profitable growth on the other side of this right. We hear you sign large sigma customer.
QSR is doing better maybe there's some incremental color on how you win profitable accounts clearly there are some costs being pulled out of the business.
But kind of maintaining the margin structure and does does meet inflation make at all nervous on the other side of this as well.
So I will take that question in two parts all have Joel comment upon inflation, but let me take the the profitable new business wins, the reason ice and stayed the word profitable each time I say new business wins is we want to be very clear, we have no intentions of going out and trying to buy the business. We are seeing rational pricing in the marketplace.
By ourselves and others in the space and we have no intentions of buying the business, what we're referring to you as our capabilities that we are bringing I'll remind everybody that we have roughly 30% of the share of wallet of our existing customers. The work that we're doing to help them do this crisis. We helped lobby for the cares Act, we help teach them how to apply for the loans.
Well keeping them at a set up web sites for takeout and delivery for providing them with PE that helps and stay in business. These things create long term when when partnerships for them and for US we expect for an increase in share of wallet from existing customers. The shop enhancements that I referred to and hopefully we're going to have an investor day at some point time later this year, we can show.
The improvements that we're making to the shop tool to increase the effectiveness of the suggested order that we provide those existing customers again, we know will result in increased share of wallet, what I was referring to on the net new business opportunity I'll do the local level Onest, we're changing the compensation structure for our local sales associates to align the answer.
In terms of those associates more directly to winning new business profitably. We're also changing the go to market structure of how we organize network, who does what who calls on new customers who comes in and sells in additional product like our premium meat business like our seafood and fresh cut produce business. So it's an entire end to end campaign.
Vis-a-vis new customer prospecting in its being rolled out as we speak so as an opportunity when others are perhaps struggling to deal with this crisis, perhaps having financial challenges that will hinder their ability to acquire the inventory that they need to bring back their business. We will have the inventory in place we will have the ability to ship.
On time and in full and we will have the largest salesforce in the industry actively prospecting new customers.
General and I'll ask if you have anything to add for inflation now just a real quick on the meat piece I mean, I think look we do expect there to have some inflationary impacts on beef due to some of the higher demand and supply shortages as resentment result of the plant closures.
I think the one thing I would just emphasize as always I mean number one we have we do have a substantial supply of some frozen inventories that I think will continue in health care in the day. There. We also as always our have bed in the supplier of choice, where we have access to a tremendously diversified supplier base and so again access to pro.
Products has always been something during any of these type of supply shortages. We've been the provider that's been able to do that and I think just as a one common in general about inflation, obviously, there's a lot of moving parts in April and getting the inflation numbers. Obviously, we talk about one number but theres a lot of different categories. That's a difficult thing to protect right now in general and.
So we're not really looking to do that based on the forward look just with everything going on in April but I mean, there is some view as there'll be some inflationary pressure on the side without a doubt.
Thanks, and good luck.
Thanks, Thank you.
Thank you. Our next question comes from the line.
With Wells Fargo. Your line is open.
Hi, guys. Good morning, Thanks for arrive for all the color.
My first question is really around as around Q4, and Joe all year.
Guidance on on negative operating income can you just help us out what level of sales declines are you anticipating that outlook I mean, it looks like april's, probably down a bit more than 50% or so.
You talk about $500 million in and cost saves.
I don't know you run the numbers for the model. It doesn't look like Opex is going to be down by $500 million and then.
Is that is there additional sort of like gross margin pressure in this that we need to think about or more pressure on profit per case.
Yes, so a couple things and thanks for the question and good morning, I think I guess I think the way I would think about this is the following I think the.
I think your approach your approximation of April as is roughly correct again, I think as we've talked about some level of gradual incremental improvements over the course of the quarter I think would be what we are expecting just given the trends that we're seeing and obviously the the other states gradual reopening of other economies.
From a margin perspective, I do think theres.
Our margins in this time are impacted I guess I'd think about really by a couple of things. One is the mix of the business, obviously as we've talked about theres a bit more of the both chain and in particular QSR space has done better offsetting the local and so that obviously will result in some level of mix shift.
In general and they're also for a time period in order to Rio move inventory. There was some level of discounting we had dogs in order to move some of that product and so that is not to suggest irrational competitive behavior as supply the suggest movement of inventories. So I think you'll continue to see some.
With that.
So I think there is some margin pressure that is likely to be continued to impact that is probably one of the pieces unsure of this and out of a heavier modeling there.
And then just on the Opex Joel the $500 million stats.
Gross number in that number.
Well so in other words, what I, what I would suggest as you should think about the trends you are anticipating based on volume movement between given the account of two thirds variable in fact that said, our et cetera, and then we've actually taken $500 million an expense out so.
I'd also say at other than just to.
Run running response model and add back 500 million okay.
And then one follow up I just had to all that is how.
The variable cost component and how things.
No customers are just not open.
And you're able to put a lot of costs on the sidelines.
It is probably different than it looks like when we reopened and.
Customers are back, but everybody crop sizes are half of what they were mainly right.
How do we think about the next few quarters.
As for in reopened.
And what the what the what the ramp in the cost sort of looks like against the Reopenings.
And the variable cost component, how it changes in that environment.
Well I'd say a couple of things to that end number one I want to reemphasize our point that we.
We do believe quality and getting to try to be clear on what we expect for Q4, we do believe that's the trough number one I think thats important points reemphasize. The second I would emphasize point out is that as part of the costs work, it's not only ban reduction on the heads and reduction of variable costs in that way, but the productivity improvements that we've made.
I have also been significant we've taken almost 90% are overtime hours, our we've taken actually action to ensure that our routing is reflective of the fact that.
I guess, how can we have as a metric call pieces per trip that is only about a slight percentage from the actual volume decline, meaning that we're sending out a lot less trucks, we've done a very strong fast and agile rerouting of our fleet in order to maximize and optimize our routing and so I think that's another part that comes into play here in what you're talking about.
So I guess to put a bull on all that to summarize.
Yes, we're going to anticipate there's going to me some capacity in restrictions or whatever things at restaurants.
And and there will likely be some lower than normal drops, but as we've done now we will be very flexible and agile in terms of ensuring we're optimizing our productivity in the profitability in the business. So we're going to do.
Great. Thanks, guys and good luck going forward.
Thank you Ed.
Thank you.
Next question comes from the line of Jeffrey Bernstein with Barclays. Your line is open.
Great. Thank you very much.
Couple of questions as well first one just in terms of.
The the independent restaurant outlook I know you mentioned in your prepared remarks that perhaps your sales are little lower than peers, because you kind of over index towards those customers. So I'm just wondering if you think about there.
Recovery that getting lots of questions in terms of survival of a lot of these independence.
In difficulties history as a guide because we don't have a period of time, that's even close to something like this but.
So what you might have in terms of the potential for significant independent store closures, whether or not you can look at maybe current accounts that are returning calls or how you think about sizing up the independent restaurant outlook over the next six to 12 months on the heels of the pandemic and then how to follow.
Yes, Jeff I'll be pretty concise on this first question because obviously we can't.
Precision predict the question that you are asking what we would say a couple of.
Key components from a color perspective for the longest term we expect for that local street independent customer business to normalize and returned back to its pre covert levels people like eating at local restaurants, the old farm to table organic local et cetera was a big trend pre covidien and we would anticipate overtime.
And that it will revert back to that type of business penetration and it's the most profitable segment in one where we have significant upside potential from a market share perspective, and our salesforce is uniquely positioned to do well in that space for the reasons I said earlier as it relates to the second half of calendar 22.
Andy and what will be the first half of our fiscal Twentytwenty, we'll say it this way from an expense management perspective, we will be planning for and preparing for the worst and we will be driving hard to make it be better than that potential outcome scenario. So thats about as clear as I can be at this point in time on that color.
Thank you.
So to the engines that will be Allied question I would now like to turn the call back over to Kevin Harrigan for closing remarks.
Okay I want to thank everyone for your questions and I'm, sorry that our prepared remarks took longer than they normally do in.
Therefore, we didn't get to as many questions as we would have liked but we thought it was really important for us to provide you with the details we did and I would like to close with the final few thoughts before we end the call.
I'd like to summarize the significant amount of content that we covered with you. This morning as Joe reviewed the financial impact of Cobot 19 on our business is significant in the short term.
With that said, we want to be very clear that we're very confident in the long term success of Cisco, We will continue to be the leader in this business and we will win new business through this crisis.
We will profitably gain market share in the business as we serve today and we will closely evaluate new business opportunities that had been identified during this crisis to summarize the actions. We've taken we've improved our liquidity we've reduced our operating expenses, we are driving or upside by leveraging new business opportunities in the short term and most importantly, we are you.
Using the Coburn 19 crisis to transform our company.
It is rahm Emanuel, whose most often cited with the quote don't let a good crisis go to waste we've taken those words the heart at Cisco.
The crisis as galvanized our team to focus on a narrow set of strategic initiatives. We are working in an agile in collaborative manner in a way that is better than at any time in our proud company's history.
This leadership focus will enable us to implement transformational initiatives like the ones I highlighted today in rapid manner. This includes improving our shop tool implementing a new go to market sales structure in selling model in developing and implementing a world class pricing tool to better manage topline growth and margin management.
Each of these initiatives will help us becoming more agile focused company they will enable us to serve our customers more effectively which will result in increased market share.
When you combine what we will become as a company with the amazing work. Our sales team has done during this crisis to help our customers. We know we will be our customers most trusted business partner.
That trust will help increase share of wallet with them and grow our topline and bottomline.
I would like to thank all of our Cisco associates for their tireless efforts and leadership there displaying during this crisis. Our associates inspire me every day that concludes today's call and we thank you for joining us.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect.
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