Q4 2020 Sysco Corp Earnings Call
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Good morning, and welcome to Cisco's fourth quarter and well your physical 2020 conference call. As a reminder, today's call is being recorded.
You will begin with opening remarks, and introductions I would now like to tend to call over to Neal Russell Vice President of corporate up English. Please go ahead.
Thank you dwell and good morning, everyone welcome to Cisco's fourth quarter and full year fiscal 2020 earnings call.
On today's call, we have Kevin Hurricane or President and Chief Executive Officer, and joke riding our Chief Financial Officer.
Before we begin please note that statements made during this presentation, which state the company's where 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 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.
A copy of these materials can be found in the investors 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. 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 Nielsen and good morning, everyone. Thank you for joining the call with US This morning.
I hope that you and your families are safe and healthy.
As we continued to navigate through this unprecedented environment. Our first priority will always be the health and wellbeing of our associates.
I want to thank all of our associates for their tremendous work during a period of high stress at both work and at home I want to especially thank our warehouse associates and our drivers who is frontline associates showed up everyday during this crisis to take care of our customers, including those customers in the healthcare sector that needed our support more than ever.
During this morning's call I will discuss the state of the current business environment.
Cisco is effective management of the Coburn 19 crisis, and how we're strategically transforming the company to be in even more effective and how we service our customers and grow our business.
Ill, then turn it over to Joel who will discuss Cisco as fourth quarter in fiscal Twentytwenty financial results.
Lastly, I'll make a few closing remarks before we turn the call over for Q1 day.
It has been five months since the effects of Kobin Nineteens pandemic began to significantly impact our industry and Cisco as business directly.
As we discussed during the third quarter call immediately after the onset of the crisis.
Cisco took swift and decisive action to reduce the variable and structural costs to ensure liquidity and to pivot our business to maximize sales during a period of disruption.
Im tremendously proud of the work that we have done during this crisis to help our restaurant partners be as successful as possible during immensely difficult operating conditions I will highlight a few of these wins in just a moment.
Most importantly, we are not just managing through a crisis.
We are transforming our company during this crisis.
While others are focused on survival, we are transforming our company to improve how we serve our customers in differentiate from our competition.
I will highlight the progress we are making on our transformation during today's call.
Before I cover our transformation, however, I would like to give you a quick update on how we have managed the crisis to date and the general state of our business.
First Joel and his team took swift action to further strengthen our overall liquidity, which affords us financial flexibility during this difficult operating environment.
As Joe will describe further we have approximately 8 billion of available liquidity, which enables us to manage through the crisis in positions Cisco for long term success.
We are unique in our ability to invest in our business to transform the company during a time of totaled.
Second.
We have worked to rapidly to stabilize the business by taking out cost.
In the fourth quarter alone, we removed approximately $500 million worth of operating expenses.
Which includes more than $300 million of structural in permanent costs on an annual run rate basis.
We are working to remove even more structure will expense something I will discuss further in a moment.
Third we created new sources of revenue, which included the extensive work we have done to help our restaurant customers be successful.
I'm very proud of the work our Salesforce has been doing to help our customers. During this uncertain time.
We have helped our restaurant customers pivot to new selling models, which includes helping them with pop up shops in the front of their dining room and provides additional revenue streams for these customers.
A powerful example of this is the fact that the restaurant operators that have engaged with Cisco and concept like a restaurant marketplace are performing over 20% better to prior year than those who have not engaged.
Our sales consultants importantly have helped over 16000 of our customers set up marketplaces.
We have also helped our customers with alternative reopening plan, such as patio extensions and outdoor dining options. We have provided customers with the technological support to start a website. If it did not already have one. Additionally, we have helped connect them to preferred delivery partners and set up take our menus in it provided them with a much needed to go.
Containers needed to support a delivery model.
We have helped our customers narrowed their menus to a more focused assortment to help them maintain profitability on that narrower menu selection.
Lastly, we have provided products for cleaning sanitation and personal protection without disruption so that our customers may continue business operations.
We believe that these overall actions will help us retain customers in when net new ones in the independent restaurant customer space well beyond the pandemic.
We can measure the impact of these actions through our net promoter score with restaurant operators.
I am proud to say that our NPS has increased 900 basis points. During this crisis when compared pre versus post.
For those that no NPS, a 900 basis point improvement in 100 days is a dramatic improvement.
Increasing MPS has proven to increase sales and customer retention overtime.
This improvement is a perfect example of the Cisco we are becoming.
We are not just selling food products, we are delivering products and valued services.
Separately, we have shifted sales of products to regional and national grocery retailers to help alleviate the strain in the food supply chain.
Although some of those sales through our larger retail partners will be opportunistic in nature. We have in fact created long term relationships with select regional grocers, where we can add value through items, such as quality proteins are fresh produce where our buying advantages helpful to them.
On our last call, we announced a 500 million dollar on an annual basis, new business wins.
Since that time, we have secured an additional $500 million worth of incremental new business.
The reliability of our operations in the capability of Cisco have enabled us to win over 1 billion annualized of new business. During this crisis.
We have that capability and the salesforce to win new customers at the local and at the national contract level simultaneously.
As it relates to the current business environment I would like to highlight the pace of our business recovery.
From May through June, we experienced steady and consistent week over week sales improvement.
As countries in states began reopening we experienced a swift business recovery.
Unfortunately as cases, it began increasing in certain locations the business recovery has somewhat stagnated.
With that said it is clear that food away from home fatigue is real excuse me food at home fatigue is real and that consumers are ready to reengage with restaurants. When it is safe to do so in their community.
The speed and pace of that Reengagement will be dictated by the restrictions that are placed upon the industry.
As long as there are safe waste of excess restaurant quality meals consumers are ready to eat away from home until then our best customers are succeeding through things like takeout delivery and extensive patio dining.
Im glad to say that the rate of Cisco customer closures is less than in the first and then the industry average illustrating the value that we can bring to our customers through value added services and advice.
Joe will go into further details about the business environment by geography in just a little bit.
Our business improvement throughout the quarter with significant which we feel good about.
We're pleased to communicate today that our results came in notably better than expected.
We exited fiscal twentytwenty with a profitable adjusted operating income rate.
Which bodes well for fiscal year 2021.
Additionally, Cisco was able to generate positive free cash flow during the last period of the quarter.
Both the positive free cash flow and adjusted operating income were achieved despite these sales decline of approximately 30%.
We anticipate sales in fiscal 2021 to be stronger than that exit rate of fiscal 2020, even with a choppy recovery and therefore, we have increased confidence in regards to fiscal Twentytwenty one profitability.
I will now shift to highlight some of our progress against our transformation initiatives.
We are undertaking a bold transformation that will improve how we serve our customers differentiates Cisco from our competitors and help transform the industry.
First we have accelerated our work to become a more digitally enabled company.
We are investing to improve our digital order platform called Cisco shop.
This tool makes it easier for customers to do business with Cisco.
Allow cisco to increase sales with those customers in increases customer retention.
Examples of these digital technological improvements include the following.
Proving the search function capabilities, so that relevant and compelling results are returned to customers, which will help increase lines per customer order.
We have also implemented a suggested order function for our customers, which will help introduced new items or menu trends.
We've increased the effectiveness of our sales consultants.
For brought by providing them with digital tools to engage their customers. Examples include enabling them to show streaming videos highlighting menu trends in pushing promotional opportunities to their customer base.
Additionally, we are deploying a digital pricing tool with the implementation of our new pricing tool, we can simultaneously increase sales and create and margin expansion.
Our second transformation effort is in our sales model.
We are making it easier for our customers to do business with Cisco into increased the effectiveness of our sales teams.
We are transforming our sales 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.
This includes a change to our sales compensation model, which will now focus more directly on growth.
Additionally, we are increasing the number of sales specialists, who will help increase sales penetration with both new and existing customers. These roles will help increase our share of wallet in increase sales in premium products, which we have struggled to penetrate in the past.
Combined these capabilities will enable our sales team to visit more customers.
Inspire our customers to purchase more from Cisco and reduce friction in the purchasing environment.
The last piece friction removal will also be enabled by centralizing key customer support functions for large international accounts.
These key accounts will have dedicated account reps that will own their experience end to end across all facets of cisco's extensive business.
Our third transformation and new since the last time, we have spoken we're regionalizing our operations in the us.
This important initiative was not public at the time of our Q3 earnings call. What we have recently begun our implementation.
In July we completed waived number one of our regionalization efforts through regionalization, we will be a more efficient company.
We will be more agile with our decision, making and we will execute against strategies in a more efficient manner.
Our leaders, while bigger roles and will help ensure alignment inconsistency across the country.
Regionalization is a new leadership structure for our us broadline business.
With this change we will move from our current six markets comprised of 76 operating companies to four markets that consist of approximately 30 regions. Each made up of two to three operating sites.
Each region will consist of one region, President and one cross functional regional leadership team responsible for the performance across that region.
This regionalization of our US business is the enabler that allows us an entirely new more centralized more aligned more agile Cisco to go to market.
We are unleashing the power of the consolidated enterprise by making this change eliminating redundancies in shortening time to making decisions. This regionalization project will lay the necessary foundation for all future transformation initiatives and cisco's future growth.
It is important to note that we are not closing any physical distribution locations with this change and we are retaining our local drivers our local warehouse associates and importantly, our local salesforce that supports our customers.
Our fourth transformation is our structural fixed cost removal from our business and becoming a more efficient company.
As previously mentioned on our third quarter earnings call, we had identified and implemented actions to remove approximately 300 million of annualized permanent fix cost from the business for fiscal 2021.
Today, we are updating those figures to $350 million derive from improvements we are making an operations transportation in corporate functions.
In addition to this 350 million for 2021, we have identified additional cost improvement opportunities that we are pursuing that will generate savings starting in fiscal 2022 and beyond.
We're calling these combined efforts our corporate modernization and we will update investors on the additional favorable impact to that can be expected as we move forward.
Throughout this crisis, we have stayed focused on supporting our customers and putting them first as we have defined our strategy.
The decision that have impacted our associates were difficult to make.
With that said our decisions were informed by our strategy.
That strategy will improve the service that we provide our customers in differentiate Cisco from others in our space.
The transformation ensures that we are a stronger leaner and more agile company and through our transformation, we will be better aligned to execute on what matters most.
By accelerating the pace of change at Cisco through our companywide focus on these strategic initiatives. We are positioning the company for future success, ensuring that we will emerge from the crisis stronger.
Now I'd like to turn the call over to Joel who will discuss our fourth quarter in fiscal 2020 results along with additional financial details around our business environment I'll come back after to offer a final perspective before moving into Q today Jolt overview.
Thanks, Kevin Good morning, everyone.
I'll start with fourth quarter results for Cisco and results by segments.
Followed by an overview of full year fiscal 2020 performance.
I will then give an update on cash flow and capital spend for the quarter.
And finally, I will go through our capital allocation priorities.
In closing comments.
Our total Cisco results for the fourth quarter include a sales decrease of 43% to $8.9 billion.
Local case volume within us broadline operations decreased 38.7% for the fourth quarter.
While total case volume within newest broadline operations decreased 41.5%.
As a result of the coven 19 pandemic.
We saw significant decline in both volume and sales across all the business segments.
Gross profit decreased to 47% to $1.6 billion.
And gross margin decreased 159 basis points.
Our gross margin for the fourth quarter was impacted by pricing tell move inventory and avoid spoilage.
And by a temporary shifts in customer mix as a result of the current operating environments.
These results were in line with our previous guidance as it relates to margins.
Adjusted operating expense decreased 26% to $1.6 billion.
It is important to note that we had $115 million and incentive pay accrual reversals.
That favorably impacted operating expenses.
And the run rate in Q1 of fiscal 2021 will be normalized when compared to Q4 fiscal 2020.
With that said the adjusted operating income run rate was profitable in June even with with even without the accrual reversal.
Adjusted operating income decreased 104%.
To a loss of $34 million.
And adjusted earnings per share decreased 126%.
Two negative 29 cents for total Cisco.
Across the business our results were impacted by various financial certain items, which I will review before proceeding into individual segment results.
Our fourth quarter results are impacted by restructuring and transformational project costs associated with our various transformation initiatives.
Examples of the restructuring charges include our regionalization efforts that Kevin previously mentioned.
The technology change related to our ongoing integration in France.
We have also experienced an increase in past due receivables as a result of the coded pandemic.
Which has led to excess bad debt of approximately $170 million for the fourth quarter.
However, we feel good about the progress we've made tightly managing receivables and we will continue to manage this tightly during an environment of higher bankruptcy risk.
Additionally, we have taken goodwill impairment charges was in our international segments.
Due to better visibility of the volume declines stemming from the global Pandemics and their impact to our France and fresh direct businesses.
Lastly, during the quarter, we made the decision to allocate corporate resources that are fully dedicated to our newest foodservice operations that reporting segments.
We feel that this reclassification better reflects the true expenses of managing the us business and aligns our leadership squarely on combined efficiency improvements.
Moving onto results by segment.
For the newest foodservice operations segment sales for the fourth quarter were $6.1 billion.
Which was a decrease of 43% versus the prior year period.
Volume and sales both showed recovery throughout the quarter as the exit rate was markedly improved compared to the start of the quarter.
Gross profit decreased 46% to $1.2 billion for the quarter.
And gross margin declined 102 basis points to 19.1%.
Fiscal brand sales for the fourth quarter decreased two basis points to 38.5% of total use cases.
And decreased 239 basis points to 45.2% of local use cases.
Which was driven by shifts in customer mix and temporary customer closures as a result of dependent.
Our adjusted operating expenses decreased 24% to $1 billion, which was favorably impacted by changes in the business.
Including permanent reductions in force.
More productive staffing.
Better warehouse operations.
And efficiency improvements within our transportation initiatives.
Adjusted operating income decreased 80% to $165 million.
Our international Foodservice operations were impacted by changes in foreign exchange rates.
On a constant currency basis.
Sales decreased 52%.
Gross profit decreased to 56%.
Gross margin decreased 199 basis points.
Adjusted operating expenses decreased 32%.
And adjusted operating income decreased 162% for an adjusted operating loss of $73 million.
Throughout the fourth quarter, our UK business has remained stable as we continued our work with Adeptra program, providing boxes of food to those in need.
Our Ireland and sweetened businesses, both shown steady improvement during the quarter as restaurants hotels in pubs continued to reopen for customers.
Although our results have been favorable the current rising over 19 cases warrants continued attention.
In Canada, the country has been steadily reopening for the past eight weeks and we feel good about our business.
Exit rate was much improved compared to the beginning of the fourth quarter.
Additionally, our regionalized cost structure was beneficial and allow for greater flexibility during the crisis.
We saw a mixed results throughout our Latin American countries of operations.
The impact until the 19 continues to be most prominent in Mexico, and Panama as they have been heavily impacted by restrictions as a result of the pandemic.
However, we opened a new cash and carry store in Panama that is performing well and partially offsetting some of the decline in the current environment.
In Costa Rica, our cash and carry stores are also helping the partially supplement the decrease in sales from restaurants.
Moving on to the Sigma segments.
Sales decreased 17% to $1.3 billion compared to the prior year period.
As quick serve and drive through restaurants continued to experience less of a downturn compared to other restaurant types.
Gross profit decreased 11% to $114 million for the quarter, but gross margins improved by 56 basis points.
We are encouraged by the steady progress of profitability improvement as result of disciplined approach to profitable growth.
Adjusted operating expenses decreased 11% to $103 million due to lower transportation costs.
And adjusted operating income decreased 12% to $11 million.
Now turning to our results for the full fiscal year 2020.
Sales decreased 12% to $52.9 billion.
Our total fees volume for the year in newest broad line decreased 11.2%.
And our local case volume for the year in us broadline decreased 9.6%.
Gross profit decreased 13% to $9.9 billion.
And gross margin decreased 26 basis points.
The cost reduction efforts put in place at the beginning of the pandemic led to an adjusted operating expense decreased of 6%.
And as a result, adjusted operating income decreased 37% to $1.7 billion.
Adjusted earnings per share decreased by $1.54 cents to $2.01, primarily driven by volume and sales softness as a result of appendix.
Our us foodservice segment had been growing during the first half of the fiscal year, particularly with local customers as the work we're doing freak coded to growth business is progressing well.
We are confident that our work to accelerate growth will return to pre coated levels as demand returns.
And that our transformation initiatives will drive future growth.
Within the international segments.
Our business in Canada has performed similarly to the us during the cold and time period.
And we are encouraged by the recovery that has taken place throughout the fourth quarter.
For our European operations, the impact from Coven 19 occurred earlier in the crisis.
And the declines were initially deeper but our business has since improved.
The UK in Ireland are now open for business and consumers are responding well.
Our business in France had the strongest year over year revenue growth in the month of July which is reflective of the French culture of dining out combined with a solid worth deployed by our team during the crisis to improve our supply chain challenges.
Currently France is our top performing country in Europe on the topline basis.
As for our businesses in Latin America. The companies are performing well pretty cobot and are continuing to show signs of recovery as restaurants and food away from home places reopened.
For the full year Cigna's results. Despite the impact of the pandemic achieved their operating income plan.
Showing their ability to gain new customers and operate efficiently through the crackers.
Ill now move to cash flow in working capital.
For the fourth quarter cash flow from operations was $540 million.
We had a working capital benefit which was driven by reduced volume levels. In addition to improved accounts receivables and account payables dsos.
Our net capex for the fourth quarter was $101 million.
As a result of our substantially reduced capital expenditures that were directed only to targeted initiatives spend and urgent projects.
As previously indicated our fourth quarter fiscal 2020 spend was $200 million less than our fourth quarter fiscal 2019 spend.
And as a result free cash flow was $439 million.
For fiscal 2020 cash flow from operations was $1.6 billion.
Which is $793 million lower than fiscal 2019.
Net capex for fiscal year, 2020 was $692 million or about 1.3% of sales.
Free cash flow for fiscal 2020 was $927 million.
Which was $813 million lower than same period last year.
The decline in free cash flow was principally the result of the softer topline due to the code 19 pandemic, but was partially offset by positive working capital throughout the fourth quarter.
I am proud to say that despite the softer performance, we exited fiscal 2020 with a positive adjusted operating income rates.
And we had 10 consecutive weeks of positive free cash flow during the end of the fourth quarter.
I want to remind everyone of the seasonality of our cash flow, which is typically lower in the first half of the fiscal year and higher in the back half the fiscal year.
I'm also proud to say that we have a balance sheet that affords us the stability and flexibility to navigate this rapidly changing business environment.
As of August 11, 2020, we have more than $8 billion of cash and available liquidity.
Which ensures survivability for an extended period and through an impacted much worse than we are currently experiencing or expected.
While we do not currently expect to 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.
I also want to reiterate that even as we continue to navigate through the coven 19 pandemic.
Our capital allocation priorities remain the same.
Let me give you a comments around each area.
From an investment perspective.
As previously mentioned, we have chosen to substantially reduce capital expenditures.
The only urgent project and those targeted investments.
To accelerate certain capabilities to make it easier for customers to do business with Cisco and continue our focus on industry, leading service and safety.
Regarding cisco's dividend, we remain committed to returning substantial value to our shareholders through our dividend payments.
We are unable to grow our dividend is due to an amendment restriction as previously communicated. However, we are committed to the long term growth of the dividend.
For M&A, we continue to reevaluate potential future opportunities that should not have a high priority on large complex deals in this environment.
Let me also note that we're choosing to divest our cake business in the first quarter of fiscal 2021.
This divestiture will allow us to better focus and accelerate growth at our core business.
Our cake business is a technology program, we sell to customers largely driven by point of sale systems.
We would like to thank the cake associates and leaders for their hard work and dedication to our business.
The technology isn't good solution for our customers and we'll continue to support it through the transition.
The cake divestiture it should be noted will not impact our labs employees, who are supporting our digital transformation efforts.
As it relates to our share buyback program.
We have temporarily paused our share repurchases.
Currently we expect to maintain this position throughout fiscal 2021.
And lastly, as it relates to debt.
We paid down $930 million on our revolving credit facility during the fourth quarter.
And we have 700 million still remaining on the facility.
In addition, we have $750 million as senior note maturities due in October.
As a reminder, we do not have any secured debt.
We have the flexibility to make decisions that are in the best interest for our company.
Now before closing I'd like to provides you with some commentary on the outlook for fiscal Twentytwenty one.
Cisco is well positioned for current and future success with an ability to shift focus across all segments throughout the foodservice industry.
Whether local or national.
As a result, we can easily pivot our concentration to areas such as QSR and health care, which are currently outperforming.
Or shift into other food away from home segments, such as education, and travel and leisure as economic demand recovers.
During the fourth quarter.
Gross margins were initially pressured due to product discounting to help mitigate inventories spoilage that improved throughout the quarter.
We expect gross margins to reflect topline mix changes, but otherwise remained stable throughout fiscal 2021.
As Kevin said, we now also have a run rate of approximately $350 million in structural annualized cost removed from the business.
Interest expense has risen during the crisis as we strengthened our balance sheets.
But those increases have now stabilized in the current run rate.
Lastly from a tax perspective, we expect our overall effective tax rate to be approximately 24% in fiscal 2021.
With that said and considering the uncertainty of the current environments forward looking financial and operational results do not be reasonably estimated at this time.
Before we go to Q anyway, let me turn it back over to Kevin for some closing comments back to you Kevin.
Thank you Joel I'd like to close with a few final thoughts before we move into Q anite.
Cisco went into this crisis in a position of strength.
Which afforded us the ability to act quickly reduce costs ensure liquidity can pivot our business in support of customers.
Although it has been a tough operating environment, we have managed well through the crisis in the exit velocity the business was positive as Joel just communicated.
You are new business wins totaling more than $1 billion since the onset of the pandemic and our continued cost out efforts now totaling more than 350 million for fiscal 2021.
Cisco is well positioned for current success and future growth.
More importantly, we are confident our transformation initiatives, including digital transformation sales model regionalization and expense structure modernization are paving the path for the company is long term success.
As I've said, we're managing the Kobin crisis and transforming our company.
We will exit this crisis, a stronger Cisco better able to serve our customers in differentiated from others in our space.
I want to close our call today once again by thanking our associates, especially our frontline heroes for out there working hard serving our customers every day.
And with that operator, we're now ready for questions.
Thanks.
Ask a question you on the tapas style one on yet.
Sure Rich's question comes to Panky T sand violently capacity today last year.
First question comes from Chris Mandeville with Jefferies. Your line is now offering.
Hey, good morning, gentlemen.
Kevin can you shed some additional light on what you're seeing with your total and local case growth.
Quarter to date, and then specific to the local let's kind of the Delta and performance for those of opened up early versus late.
Maybe you could talk about any notable geographical our suburban versus overall our versus urban difference in that you're seeing and then.
Nielsen has helped to better understand that negative mix shift and private land private label penetration for local media that is that a reflection of some of your really tour subscale operators seeing greater challenges with in that segment.
Yeah, Chris Good morning, and thank you for the questions say get a couple of in there. So I'll go through them in order.
As I indicated in my prepared remarks, the sequential improvement through Q4 was was steady so each week getting better than the week before pretty much across the globe pretty much in all the sectors, both suburban and rural and urban.
Unfortunately in the month of July there was some stagnation I think thats been pretty well documented by role to the restaurant customers, we serve and others in our space. The good news is it's not going backward. So as cases are surging in many parts of the gobain states within the United States, we're not seeing a backward slide in recently we are.
Beginning to see again that incremental sequential week over week improvements, we're not going to quit stats for the month of August, but we were improving every week through Q4, we saw stagnation in July and we're now seeing once again is steady improvement in the month of August on a week on week basis, as Joe said from a geographic per se.
Active I think that some of the uniqueness of Cisco our European operations in Q4 or hit the hardest that hit the earliest and there was the slowest to recover however that headwind in Q4 is actually more of a tailwind in Q1, because Europe has done a pretty nice job actually of managing the crisis from a health perspective, and we're seeing very strong.
Improvement and as Joel communicated from a topline perspective, France in the top performing.
Country, and our entire portfolio right now as essentially restaurants are open for business.
In its entirety. So we're monitoring it very closely we're doing everything within our capability in power to help our restaurant operating customers be successful providing them extensions on their patios, providing them with take out to go et cetera.
Question about rural versus urban I think your insights there are probably on target them more rural the better the performance to prior year has been an urban but we are seeing improvement in all sectors, including urban sectors and altus to Joel for the question on the on the I believe you're asking about Cisco private brand penetration.
And I'll toss over to Joel to answer that question.
Yes, Kevin Yes, Chris I would suggest that I think the.
As in our business good operators when all the time and others that have struggled at times struggle in so I think the what you're really seeing there is just the impact of the mix change in the business that is indicative of both the mix between the given some of the better operators and others that have not managed to survive and.
And also between the overall business Thats, obviously growing faster in those areas of QSR of National accounts of health care. So I think really thats the primary impact that you're seeing there from a brand prospectus.
Okay, and then just my follow up as Joe as we look to fiscal 21.
Can you quantify that customer mix impact in Q4 gross margin as you stated Thats what is what will only likely persist going forward and then can you offer any more concrete color on capex spend the in DNA and that the latter actually increased quite notably in the quarter.
Sure. We are from a margin perspective, Chris I'm, not going to quantify that specifically, what I would say as we've talked about the margins improved consistently over the course of the fourth quarter and heading into the first quarter. So some of the impact that we had in the beginning of the quarter that was really related to inventory movement to avoid spoilage.
Something that actually continue to go away really out throughout the course of the quarter and the margins were more reflective of the mix impacts that we're referring to we anticipate those to continue as we move into the first quarter, but I'm not going to give any other specific commentary under our guidance on that.
The second part.
As it relates to.
I'm, sorry, I lost the with the second question units were up the depreciation was up increase in Q4 versus question.
Yes, IMAX I'm not able to here okay. He would you repeat the question Chris.
Yes, and as of the latter part was just with regards to how to think about capex spend in fiscal 2001 as well yes.
DNA since its operating notable uptick in Q4.
Yes, so I think the capital spend fees, we certainly as we indicated we're going to be much lower than we were the prior year in Q4, and I would anticipate we would continue those trends as we head into the next fiscal year I think the at one point, we've talked about the fact that we anticipated our total capital spend.
To be somewhere in the range of 25%.
Of what we'd call our normalized run rate and I would anticipate that being more likely than than not we will of course continue to evaluate that as the year goes by end conditions changed.
But again certainly focused on those urgent projects and those key transformational initiatives that we've talked about.
Okay and anything on the DNA front.
Yes, there is nothing really major to call out there Chris on the DNA Aside I mean I think there.
Yes, I don't Theres, nothing really significant there to follow.
Okay, that's like in the back half the calendar guys. Thank you. Thanks.
Thank you Chris Thanks.
Thank you and next question comes from Edward Kelly Saga. Your line is now open.
Hi, guys. Good morning, I just wanted to follow up on on the case growth trend just too.
So a void.
Some confusion here you.
At the bottom you were down about 60% or so and.
I think it was around mid may or so you had given us an update.
Post that we had higher for me to things continue to get better.
Just kind of curious as to why you won't talk about in at the exit rate on on case growth kind of seems like logic would follow that you're probably down in the U.S. somewhere in like the low to mid 20% range at the end of the corner is that ballpark.
Just any any way you can help us there because it's important as to how we're going to start modeling the current quarter.
Yes, I said, we exited the month of June in the more like the minus 30 range. That's a global number across all lines of business that we've had and we've seen improvement in August from that starting point. If you will for Q1 of fiscal 2021 in five.
The most recent week was our strongest weeks since the beginning of the pandemic. So as I said there were steady improvement we exited Q4 at minus 30 per stagnated in July and then we begin to see a weekly improvements since that point in time with the most recent week being our best week.
At sub where we are at this point, we're just working we're not going to get into kind of the business are providing weekly guidance for obvious reasons, but we're seeing positive trends and improvement in another key point that we said in our prepared remarks were profitable at a minus 30% and we're confident that our sales results for fiscal 2021 will be better.
Other than that rate and we are prepared if in fact, a worst case scenario were to occur and we were forced to have restaurant operators shutdown again, we're prepared to handle inventory reductions expense reductions.
In a rapid manner, if that were to occur.
Great. Thanks, that's helpful kind of and I also I just as a follow up.
On the regionalization can you just talk about the Genesis of the initiative.
The the benefits that you expect to get half from it.
One of the risk if any if any on just kind of curious as to what's really changing here for you and the upside associated with it.
Yes. Thank you for the question appreciate at the Opco model as we call that served Cisco well for decades and.
There is an entrepreneurial spirit in culture tied to two Cisco that grew up from the foundation of this company, which was I families coming together to form our purchasing consortium. So that's how we grew up to two we were we had regional excuse me operating company leaders, who yes ran the Cisco playbook, but there was fair amount of.
Independence, and entrepreneurial thinking and behavior in regards to how that structure work.
Theres strengths tied to that the disadvantages tied to that though would be it takes longer for Cisco to implement a change and we wouldn't be as consistent as we wanted to be across the country. If we rolled out a new program and new initiative with regionalization, we've essentially remove the operating company mentality and moved onto.
A regional President who will now supervise multiple physical locations and a single combined the sales force across all locations. The benefits that will come from a regionalization approach as a better alignment to the corporate strategy ability to move faster on implementing change and to be a more consistent version of Cisco.
On the risk side, we have some leaders that have departed the organization as a part of that change in these were hardworking people cared about the success of Cisco.
The opposite side of that risk would be we've placed obviously our top talent into these bigger jobs and we caught fewer bigger roles led by our top talent. So what I'm personally confident because I've done this before multiple times in my career when you put top talent into bigger roles. They can have a very positive impact on an even broader geography on an even broader set of responsible.
Cities I'd, just want to explain with near detail one specific upside which would be to now have our sales force led our cross physical geographies, we can do a better job of sharing resources across boundaries being easier to do business with far larger customers and net net we believe it will accelerate our pace of change.
Great. Thank you.
Thank you Ed.
Thank you next question comes and call now with Piper Stanley. Your line is now open.
Thank you so much and good morning.
Two quick questions from me.
Going back to that early prepared commentary around your ability to invest and fine leverage while others focused on survival.
Pop really big picture about the national distribution situation.
Let me you don't really need anybody.
Affiliates for you to win or what I'm wondering about is.
Seems to be making consumer confidence.
Ron Johnson, taking share back from grocery.
I think that there's plenty of super regionals that are actually seeing a recovery as well.
So could you talk about maybe you as a global brand maybe there's a difference in Tina Super regional presence, our regional versus an independent thank you.
Nicole. Thank you for the question I just want to come back to one of your key points, which is we Cisco can and will win during this environment and then doesn't necessarily need to commit the loss of a specific competitors. So to speak some of the key steps that we use to convey these points we have roughly.
30% share of wallet from our independent Street customers that we serve today that is something that we know we can improve and with just the customers. We serve today. We know we can drive increased sales at Cisco. We've also recently changed our sales consultant compensation system to motivate them to go.
When more local street customer business.
We believe we can increase market share through that activity today were not declaring the amount of net new business at the local level that we are winning because there's a lot of churn in tumult within the independent three customer business that I can come back to later, so we're not quoting those steps on todays call the billion dollars of net new business that.
Articulated in my prepared remarks actually did come from the national sales level some of that business in the Sigma sector in the why we're winning business at the national level at an accelerating rate is because the trust that there was customers have been Cisco they have confidence that we will have access to product, including fresh product they occur.
Competence that we're going to ship on time in full and they're moving business away from others over to us because they have confidence that we are here to succeed with them. Both during this pandemic and more importantly, afterwards, but they can grow with us. So lie I am confident is we know we can win at the national level for the reasons that I just to say.
Drive than we have a $1 billion of net new wins since Q3, and we know we can win at the local independent street level by increasing share of wallet and winning net new doors at the independent sector level I'll pause there Nicole and come back to you. If you have a follow up.
Thank you Mike My follow up is around.
The pieces of the business. So I believe it's like two third so with big chunk is in restaurants, and I wanted to understand the percentage in what might be call. The limited service or QSR versus full service, a casual dining and I'm asking because of that comment around the recovery kind of falling out in July we know from Knapp track that casual dining with that.
25 unlimited service across the board flat, so if I just do the math.
About 80% of your restaurant portfolio is in the QSR versus about 20% in casual dining is that right of slide and then there was also comment about havey can easily shifted QSR can you talk a little bit more about how you do that thank you.
Sure I'll start with that and couple of points.
Number one is that the general mix of our business. If you think about it is about 50 51 comes to local and contract. So and we think about these 62% of our business those restaurants, I think that roughly applies and then again there is a smaller percentage of that that is the QSR versus the fast casual so we haven't spin.
For the given those points out, but thats really how to think about and I think the math that you did is fairly representative of.
Ill I would think about that ultimately I think the question on whether the talk about the shift is really related to this idea of fishing, where the fish are let me be very clear. We are not this is not some overall strategic focus that says we're no longer focused on independents, we clearly that's our bread and butter.
Peter Thats, the things that we do best that the business that we support.
In the most effective way and so that clearly remains a focus of ours, but that during this time of uncertainty where those recoveries may be somewhat slower in that part of the industry. This is really about Logan now fishing, where the fish are and focusing on those areas, where we have a right to win in that space in the QSR space in.
Some of the other chain businesses in health care, the another opportunity where I would say is somewhere we'd over index. So so thats the perspective ideas as it relates to that.
Kevin I don't look as announced you'd like to add there. Yes, just it's a good question and we understand the question and just to be clear as Joe said, we are actively pursuing growth in both sectors I just want to make one important point prior to co bid, we Cisco or posting our highest case growth in the independent sector in more than 10 years, we were winning share at.
Getting rate, we anticipate that will continue post pandemic in customers want to eat at independent restaurant customers farm to table fresher trends et cetera, and we're going to win in that space and it's the most profitable sector. So we're not shy about the fact that we want to win in that space and that will be our long term growth strategy in the meantime.
Jos expression of fish for the fish are yes, QSR is the best performing sector at this point in time, and we have the opportunity to go when new business in that space and we will do so.
Thank you.
Thank you. Thank you.
Thank you Sir our next question comes from Jeffrey Bernstein with Barclays. Your line is now open.
Great. Thank you very much.
Just to broader industry questions excuse me, Kevin you mentioned.
In your prepared remarks that perhaps Cisco is seeing less of independent closures among their customers versus the industry average I was wondering if you can provide any color.
On whether it's your closures or what you're hearing in terms of the broader industry.
Foodservice distributors seem to be our best gauge of how the independents are doing during such a difficult crisis and then I had one follow up.
Yeah. Thanks for the question in so where we could it is certainly our customers from a closure perspective are performing better than the industry average I prefer not to get into quoting those percentages, but it is a factually accurate statement.
What we see an independent space because this is a really important question I think theres been some external reports that are embellished as it relates to permanent bankruptcy closures. There's two types of closures that we're seeing right now we're seeing the temporary closure for the restaurant operator, who is struggling with how to succeed in just a takeout and delivery.
Business, we're in active conversations with those customers in as restrictions ease they're getting back into the game and then obviously theres permanent closures I think some of the industry reports tied to permanent closures are very elevated what we anticipated that there'll be an increase in churn.
You will be a timing GAAP caused by that churn by those that exit and then there was that will actually get back into this business after they've cleared their bankruptcy but.
But there's an opportunity for us to take share during that environment as well as we increased share of wallet and as we do more new customer prospecting this summer and into their fall into the fall than we've ever done before and that 30% share of wallet that I talked about it is also important.
This heels assets being negotiated we are optimistic and hopeful that it will get approved because our small business customers would benefit in need help from that act and we'd like the initial drafts of what's being proposed and we're optimistic and hopeful that the yields that can get approved and assist those small customers. So.
That's our best way of answering it we anticipate an elevated amount of churn we do not see a substantial in significant reduction in the number of doors in the industry for the long term and I will tell us about few Jeffrey your follow up execution. If I could just had one other important point there I think Jeffrey the other point, that's really key is that help that we are actually providing.
To our restaurant customers I think one of the things that we certainly feel good about are the things that we've done in terms of you'll Kevin mentioned in his prepared remarks, the gross around the marketplaces the product baskets around around the pp any and sanitizing products. The things we're doing to help assist with the outdoor.
Dining.
The to go containers et cetera, there is there's a whole series of things, including web development that we've done that actually help our customers and actually we feel good about that and I think thats part of the reason that we do feel we've had some lower than what we'd call in the industry. So just wanted to add that one point.
No I appreciate that color and then just my follow up kind of broader industry question.
And Kevin in your prepared remarks, you said you think the.
Obviously this recovery with stagnant in the month of July it's improving a little bit now in August, but you mentioned that you thought the.
Food at home fatigue is real and.
The consumers of Reengage when things are safe, which is obviously a very bullish comments.
Was wondering how what gives you the confidence that the restaurant industry can get back to seating was 100% capacity or at least serving whether in restaurant or at home.
When it just seems so hard to in to read it right now when most these restaurants are only reopening a 50% capacity. So I'm just wondering how the confidence level in terms of 100% when right now it does seem good but in reality, they're just not servicing whether or not.
Necessarily looking at the full industry. Thank you.
Yes, it's a really good question at appreciated in the why we are bullish about our ability to say that is because we can see the data at a finite level across the globe by sector by geography.
Rural versus urban et cetera, and here's what I can say year with confidence has the restrictions are removed on the restaurant operator, there is on almost an immediate improvement in the results in that sector and so we can see very clearly in those places where the easing of restrictions as greater the data.
Performing substantially better and when they move from a phase one two or two or three through et cetera, There's an almost immediate pop the reason that weve stagnated or did stagnate in July as you know we paused in most locales the extension of.
The easing of restrictions, so thats why that recovery stagnated.
No. What we're seeing is in August even with that stagnated level of restrictions the businesses now starting to get better again, because consumers want to go out and so thats My best way of answering the question.
Roll versus urban where the restrictions are different we can very clearly see the difference in the results and we do know that at some point in time in the in the future. There was restrictions are going to begin to ease. The people were masks are westar has to do all the things. We're supposed to do you can safely go out to eat through takeout do delivery and our restaurant operators are offs are getting better at it.
Last thing I'd say, our restaurant operators are getting better at doing takeout and delivery and the customers are getting used to using an app to order crude to be picked up at a restaurant and then bring it to their homes. So it's for those reasons that we have confidence.
Great. Thank you very much.
Your next question comes from carry Banya with BMO capital. Your line is now open.
Hi, good morning, thank for taking my questions.
Kevin until I was wondering if you could just talk a little bit more about the changes to the conference compensation structure that you mentioned and how thats being received across your sales force.
And anything we should consider in relation to this changes we think about.
Trying to model.
Surgeons going forward or how much of that.
Compensation structure is part of that 350 million and longer term structural cost savings.
Yes, I'll do the first part Kelly and then I will tell us to Joe for margin, but let me make one thing very clear the comp change was not in any way shape or form intended to decrease our operating expenses. The comp change was to better align the focus of our sales consultants on the strategy of our company, which is to profitably grow so the biggest.
Range and I'd actually prefer not to get into the granular details of our comp structure, because we'd its proprietary confidential and we believe.
A differentiating items at Cisco versus other places where people can work, but what we have clearly been able to do is great. A comp structure that provides our associates with a level of base pay that they need to be able to pay their bills and have a comfortable living and appropriate incentives that drive their behavior to prospect net new.
Profitable business at a rate that will be greater than the past.
However, with that said the compensation system was.
Informed by and advised by our sales consultants, we ask for them what they wanted we ask them what they felt would be a fair in appropriate method of compensation to address their concerns address their needs. So to answer your question directly the feedback and the input from our sales consultants has been extremely positive about.
At this change here, but a change in when you introduce change to a large number of people. Obviously communication is important change management is important and weve lean very very heavily into the communication and change management efforts tied to this but we know this is going to help drive improved business performance and it was not done to reduce operating expenses I'll toss it over to Joel.
The talk about the margin comment or question sure Kelly the way I would do in the way I would think above that is.
This program as Kevin talked about is designed to incense profitable growth what that means to me is.
Continue to drive line item penetration to continue to drive new customers. When you combine that with some of the other things that we've talked about that will obviously, providing more detail later such as our pricing tool at some of these things ultimately we do believe are things that will not only improve our gross profit.
Followers, which is really the most important measure, but certainly the growth from margin percentage on ultimately generating more gross profit dollars again, I'd like percentages I'd like dollars more and I think led the way I would think about that is ultimately what this is designed to drive and how I would think about backfilling.
Thank you.
And our next question comes from John of anchor TP, Mike in your line is now open.
Hi, Thank you I remember, maybe just a couple of years ago and I'm going to just do all this Bob by memory not my notes so excuse me for that.
The regionalization of Canada.
The question I think was asked back then whether there would be some opportunities of kind of applying that regionalization done in Canada to the U.S. and.
I think for a number of different reasons I think just how the geography, Canada is different than the U.S. the answer with no.
Slide.
I am I right income remembering that correctly, what did you see in Canada odd in terms of overall productivity and reception from both the employees and the customer is then if there were any learnings from Canada, whether positive or negative yes that we can apply to us is basically a good benchmark if you will.
In comparison that those two markets. Thanks.
Yes, John it's a really good question and I'll, just say a couple of important things tied to this in a host of ways Canada.
As a great business for us to test Dick's try things and there's a host of examples regionalization being one we're doing some work on direct to consumer up in Canada to learn a lot about that space right. Now we can test marketing concepts in Canada. So it's actually really helpful. It's a business that is.
Reasonably consistent in similar to our us business and it's a business that we can use as a test laboratory and arcane team wanted to do what I've. Just described the regionalization and it's worked very well for Canada as indicated they can move more swiftly on rolling out changed they can get to better quicker alignment on key transformation.
And initiatives and as Joe said in his prepared remarks when needed they can execute on things like expense reductions faster. So a leaner more efficient more aligned model.
We believe the us business will benefit for all of those reasons. John My point to is there is no, but our time than the middle of a pandemic to make change like this and I mean that sincerely right. So we have a proud 50 plus year culture that serve this company well were very profitable company, we've consistently grown sales and profit.
And change like this introduces risk theres no better time than now to be able to do that and why is say that is our team understands the impetus in the need for change our leaders are completely aligned with what we're doing and they're running towards the life as to a better operating model and no change management, one on one but this.
Kobin crisis, if theres, a silver lining in the cloud the impetus for change in the willingness in the appetite for our leaders to get Onboarding go in the direction, where we're headed has never been higher and I believe that will pave erode of success for us as we had to future.
Great. Thank you.
Thank you John.
Thank you second creates a question and answer session, ladies and gentlemen, Ics concludes today's conference call. Thank you for participating you may now disconnect.
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