Q2 2021 Sysco Corp Earnings Call

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Yeah.

Good morning, and welcome to Sysco second quarter fiscal 'twenty 'twenty, One conference call.

As a reminder, today's call is being recorded.

We'll begin with opening remarks, and introductions I'd like to turn the call over to Neil Russell Senior Vice President of corporate Affairs, and Chief Communications operator.

Officer. Please go ahead.

Good morning, everyone and welcome to Sysco second quarter fiscal 2021 earnings call on today's call, we have Kevin Hurricane, our President and Chief Executive Officer, and Eric <unk>, Our Chief Financial Officer.

Before we begin please note that statements made during this presentation, which state the companys or managements 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 addition.

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 27, 2020, subsequent SEC filings and in the news release issued earlier this morning.

Copies of these materials can be found in the investors section at Sysco Dot com.

Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures 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 now.

Now I'd like to turn the call over to our President and Chief Executive Officer, Kevin Hurricane.

Thank you Neil.

Good morning, everyone and thank you for joining our call today I hope that you and your families are staying safe and healthy.

During this mornings call I will spend time discussing sysco as recent performance I will provide an update on our business transformation and I'll share some highlights of our preparation for the pending business environment recovery. I'll, then turn it over to Aaron who will discuss sysco second quarter fiscal results.

As we have discussed during prior calls Sysco has taken swift and decisive action throughout the pandemic to help our customers succeed during a time of disruption.

We have carefully managed our associate productivity inventory productivity and business investments.

To that end, we initiated a bold business transformation to strategically transform our company for long term success.

I am pleased to confirm that our business transformation remains on track and we are confident that the strategic initiatives will enable profitable future growth and will differentiate sysco from our competitors.

The Covid environment has placed substantial restrictions upon the customers, we serve and the food away from home sector and has disrupted our marketplace.

In light of those realities, we are pleased with the financial results.

That we delivered in the first half of fiscal 2021 and for the second quarter. We performed generally in line with our expectations adjusted for the environment.

While our second quarter financial results were down compared to prior year, we delivered a profitable quarter. Despite 22, 23% decline in our topline sales and funded investments to enable our transformation.

Our customers experienced increasingly restrictive conditions on their operations during the second quarter, which were most notable in December when restaurant traffic and sales declined.

Additionally, our international segment has been hard hit due to tougher restrictions in the countries in which we operate.

At Sysco, we are not taking the restrictions on customers as a gravity issue.

We are doing more than ever before to help our customers navigate this challenging environment.

I am pleased to report that during the second quarter Sysco gained overall market share versus the rest of the industry.

Reflecting the early progress of our transformation and the success, we are having in winning new business.

We continue to win meaningful business in the National account space and signed an incremental $200 million.

Of net new business in the quarter.

Which totals more than one 5 billion of net new contracted business since the start of the pandemic.

Additionally throughout the second quarter, we began making investments in preparation for the business recovery that we believe will begin in calendar year 2021.

Those investments will increase in the third fiscal quarter and Erin will speak more to this in a moment.

Examples of investments during the second quarter include investments in our customers and our people and our working capital and in our technology.

I'd like to highlight some examples of each of these purposeful choices.

Investments in our customers, including our new restaurants, rising campaign, which makes it easier for restaurants to succeed and strength in their business for the future.

A visual representation of our restaurants rising campaign can be found on page six of our presentation most.

Most notably we announced in November that we are eliminating minimum delivery requirements for regularly scheduled delivery days, which provides operators significant flexibility in managing their business and makes it easier to order what they need when they need it.

In addition, we are not eliminating delivery service days during the second wave of Covid practice, we know select competition is currently doing.

We see the light at the end of the tunnel and as such we are prioritizing customer service.

A little incremental expense right now is a small price to pay for customer loyalty and partnership.

Our sales consultants are leveraging the restaurants rising program to retain current customers and help sysco attract and serve new ones.

In addition to the no order minimums commitment sysco sales consultants are assisting their customers with setting up touchless menus, optimizing delivery and takeout operations and helping with marketing programs to create awareness of our customers' operations just to name a few of our value added services.

I am proud to report that our net promoter score increased by more than 1000 basis points in the quarter.

Due in large part to the connections with our customers generated by the restaurant rising program the.

The NPS increase was our largest quarterly increase in our company's history.

Importantly, as you can see on page seven in our slides the incremental closure rate of sysco as customers is 50% below the industry average on.

And lastly, we on boarded more new local customers in Q2 than in any single quarter in the last five years.

In addition to investing on our customers, we are making investments in our people.

We are intentionally retaining drivers despite a volume decline in December to ensure we have them available for our pending volume recovery.

Drivers are in short supply across the country and while this investment will drive some incremental transportation expense in the short term over the long term. It will help ensure that sysco is able to maximize our share gains during the upcoming business recovery.

As you know we made changes to our sales organization and sales compensation during the summer our associate retention has improved compared to historical retention rates and our improved retention will help with sales productivity metrics in the future.

We are beginning to make investments in working capital to position the right products and the right locations and preparation for the upcoming business recovery.

Sysco has the broadest inventory assortment in the industry.

Our ability to ship product on time and in full during the upcoming period of volume recovery is a core element of what makes sysco the strongest broadline distributor in the industry.

We have the financial strength and capacity to invest in products and in inventory, while other foodservice distributors may struggle with sufficient cash flow to make similar investments in the coming quarters.

We are also offering payment plans in partnership with our customers to ensure their continuity.

Lastly, we are making strategic investments in our technology to improve the customer experience. This includes our sysco shop technology, our new pricing software and improvements we are making in our supply chain systems.

<unk> ability to invest in our customers our people our inventory on our technology, while delivering a profitable quarter. During this pandemic is a testament to the strength of our balance sheet and our leadership team.

I'd like to turn now to providing an update on our business transformation.

First as we have shared previously we are focused on advancing our customer facing digital tools to improve the customers' experience with sysco and drive incremental sales.

Priority number one is improving our mobile ordering platform Sysco shop.

Notably, we're now Onboarding, new customers on less than 24 hours a step change improvement.

The number of customer orders placed through Sysco shop continues to meaningfully increase throughout the quarter.

Additionally, our new pricing software is now live in our first test reason, we're learning a lot through this regional pilot and we remain on track to rollout the pricing system across the country.

The goal of this effort is to improve pricing transparency with our customers and drive incremental sales and gross profit growth by optimizing prices at the customer item level.

Additionally, by automating customer level pricing, we will free up time for our valued sales consultants to spend with customers on value added activities, such as menu design Sysco brand penetration and other drivers of sales and margin.

Second we are improving our go to market selling strategy by transforming our sales process.

Through our sales transformation, we have an improved more customer centric organizational structure.

Our sales transformation is progressing well and the team based selling approach is gaining traction.

We have created and build new specialists selling positions, we have implemented a sales quarterback position that helps guide the collective sales teams across a given geography.

As I mentioned on our last call. We have launched our first cuisine segment go to market selling strategy and we're seeing initial signs of success with that customer segment through incremental market share gains.

We will rollout this program to additional cuisine segments in calendar 2021.

Lastly, sysco completed the regionalization of our field leadership structure at the start of our second quarter I am pleased to report that our new regional presidents are in place and are finding quick wins to improve our business the.

The average tenure of our market and regional leaders as over 20 years and these experienced and talented leaders are highly capable of driving top performance within sysco.

Examples of quick wins include optimizing our inventory assortment across multiple physical sites and optimizing the servicing of key customers by ensuring the most efficient physical location services each customer location.

To be a great company you need to have a world class leadership team.

I am pleased that during the quarter, we made important progress in strengthening our leadership team.

Renault joined Sysco, as our Chief Financial Officer.

Erin is with us today, and you'll be hearing from him next.

Erin is a proven finance leader with over 20 years of experience in foodservice and retail leadership positions. He has a track record of transformation and a value creation at large organizations in multiple industries.

Additionally, Tom <unk> has joined Sysco as Chief information and digital Officer Tom.

Tom has experienced leading enterprise information technology strategy services operations risk and cyber security for large global enterprises and his most recent role he worked for a global <unk> distributor in the electronics industry experience that is directly applicable to the transformational journey at Sysco.

Additionally, <unk> has officially started his position leading our international Division.

Tim will be based on our London offices, and will be responsible for driving profitable growth and operational excellence across our international geographies.

With Tim joining Cisco I was able to reduce the number of my direct reports by four which allows me to focus more of my time and energy on managing this strategy development and execution of the company.

Joel <unk> has begun his new role leading business development and is actively engaged in identifying new sources of growth for sysco.

I am pleased to say that the transition of Cisco's leadership team is now complete we have a strong management team that balances sysco and foodservice industry expertise with best in class experience from other industries.

Our new leaders to on a talented and experienced sysco leadership team.

Greg Bertrand the leader of our U S business has over 35 years of industry experience in 30 years specific with sysco.

Greg's expertise and steady hand on running our largest business during the COVID-19 disruption has been invaluable.

I appreciate his leadership and the strong impact he has on our results.

Great leadership teams work as a team on a common agenda. Our transformation strategy has galvanized this leadership team around a common purpose and I am honored to work with them to set the standard for foodservice distribution for many years to come.

Yes.

I report to you today with strong confidence that our pending business recovery sits before us as.

Vaccine administration mixed progress across the globe. The restrictions currently placed upon our customers will begin to ease.

We can see in our performance data that once those restrictions ease and consumers are ready and willing to eat away from home.

At Sysco, we are working to maximize our opportunity to recover faster than the industry.

We have an opportunity to gain market share given our financial strength and our compelling business transformation. We are prepared to do more than any other foodservice distributor in the industry to ensure the success of our customers.

And our customer success will generate business growth for sysco.

In closing I'd like to give a sincere. Thank you to all Sysco associates, who are working hard to help our customers grow and succeed in this challenging environment.

Our industry, leading sales force has been inspired by the restaurants rising campaign to support our customers at levels higher than any point in our proud history.

Our warehouse and delivery associates are the best in the business working hard everyday to ensure we shipped to our customers what they want when they need it.

I am proud of their dedication during this challenging operating time.

I also want to thank our customers for their resilience their grid that they have shown in the place that they have displayed during this pandemic at sysco or customers are an inspiration to us and we will show them just as much determination and how we serve them.

I will now turn the call over to <unk>, who will discuss our second quarter results along with additional financial details Erin welcome to Sysco and over to you. Thank.

Thank you Kevin and good morning, I am really excited to be at Sysco before I joined Sysco, what I can see from the outside was a company with global scale, a strong competitive position and great profitability and liquidity for the industry now.

Now that I'm on the inside I see all of that in addition to a driven leadership team were let let's say focused on being ready for the business recovery and on driving a customer and capability led transformation and short I see many opportunities in front of us to create shareholder value.

I will start today with second quarter results for the enterprise and our business segments, followed by an update on cash flow.

Second quarter sales were $11 6 billion, a decrease of 23, 1% from the prior year, but flat to the prior quarter sales had been trending ahead of Q1 through October and November as restrictions ease, but new lockdown restrictions during December reversed the earlier progress, particularly in the international segment.

There are a couple of additional metrics for the quarter local case volume within U S. Broadline operations decreased 19, 7%, while total case volume within U S. Broadline operations decreased 23, 7%.

We do know that there is keen interest and the continued impact of Covid the.

The answer varies by region.

Europe went into Lockdown in December and is expected to remain in varying degrees of lockdown for a significant portion of the second half.

However, since the week after the holidays, we have been seeing signs of life from volume improvements in our U S <unk> business and Sigma continues to grow.

This battle will be fought week by week region by region for the next couple of quarters until the vaccination is widespread in the business recovery takes hold.

The only commitment we can make is that we will be ready and more competitive than ever.

As we move down the P&L gross profit decreased 25, 8% to $2 1 billion.

In the second quarter low.

The decline in gross profit was driven by lower volumes due to COVID-19.

However, we did see modest gross margin dilution at the enterprise level of roughly 67 basis points as a rate came in at 18, 2%.

A couple of thoughts on that.

First we typically see a seasonal decline in gross margins sequentially from the first quarter to the second quarter as we did this year.

Second our largest segment U S foodservice and its partner segment SYGMA each had a flat gross margin rate versus the same pre COVID-19 quarter.

Which is frankly remarkable given these market dynamics.

Given the growth of our national accounts business at SYGMA, which is lower margin, we did see business mix shift which accounted for the vast majority of the margin rate change.

Our enterprise margin was also impacted by the international and other businesses as both showed gross margin decline for the quarter for reasons, which are being addressed our expense profile changed over the course of our second quarter as adjusted operating expense decreased 15, 3% to $1 9 billion.

This expense profile reflects the deleverage of our cost structure as sales remained down 23%.

These results horizon from some purposeful choices.

First and on the positive side of the equation, we targeted and achieved increased productivity in key areas such as our warehouse network.

We also maintained our key transportation efficiency metrics, despite significant swings in case volume.

We continue to make excellent progress against our $350 million of cost savings initiatives in fiscal 2021.

I can see the savings and the detailed income statement.

And we continue to identify and pursue more opportunities.

Third but on the other side of the equation, we have made the purposeful choice to leverage our financial strength to prepare for the business recovery before it happens.

As previously announced we changed our sales consultant compensation to include both on fixed and variable component to drive retention and focus on key operational metrics.

You can see that change working at our market wins.

Additionally, we brought back hundreds of associates in the second quarter in support of our business model.

In the third quarter energy in the back half, we anticipate we will hire thousands of additional sales consultants new business developers culinary experts and operations associates in anticipation of the pending business recovery.

We plan to be ahead of the recovery curve not catching up and we have the financial resources to do just that.

Finally, as Kevin mentioned, we continue to make purposeful investments in our capability builds in support of our transformation pricing customer experience sales vendor management and personalization.

While we expect significant returns on these efforts in future quarters. The investment dollars are offsetting part of our savings in the second quarter and we will do so on the back half when combined with the impact of slower openings in our international segment, we expect our third quarter results to be more challenging than originally anticipated.

However, as volume returns on grows whether due to market recovery or a purposeful investments, we expect to move up the sales curve more rapidly than others and expect that over the next several quarters the impact of the cost savings efforts separated from the ongoing investments will be more visible finally at the enterprise level adjusted opera.

<unk> income decreased 63% to $234 million.

For the second quarter, our non-GAAP tax rate of 16, 8% was favorable driven by the impact of stock option exercises.

Adjusted earnings per share decreased 80% to 17.

For the quarter.

Now, let's turn to our second quarter results by business segment, starting with the U S. Foodservice operations sales were $8 billion.

Which was a decrease of 23, 9% versus the prior year period.

Notwithstanding the difficult environment, the business acquired a record number of new customers as our sales teams hit the streets and we deploy digital tools.

We also saw growth international accounts customer base.

Within the business Sysco brand sales for the second quarter decreased to 165 basis points to 36, 5% for total U S cases, driven by the customer and product mix shift.

With respect to local U S cases, Sysco brand sales decreased 455 basis points to 42%, which was driven by product mix shift into pre packaged and takeaway ready products.

Gross profit decreased 24% to $1 6 billion for the quarter, though as I called out earlier gross margin was flat for the quarter at 19, 7% as the business very successfully managed through the puts and takes on the COVID-19 environment and addressed headwinds such as aged inventory for customers like cruise lines and product mix shift out of higher <unk>.

Categories like PP&E.

The segment's adjusted operating expenses decreased 18, 9% to $1 1 billion and adjusted operating income decreased 33% to $472 million.

Moving on to the SYGMA segment sales increased 4% to $1 5 billion compared to the prior year period, driven by the success of National and regional quick service restaurant servicing drive traffic.

This is the second consecutive quarter of sales growth in this segment.

We continue to see new business wins on the SYGMA segments and are pleased by the overall improvement.

Gross profit increased four 1% to $129 million for the quarter and gross margin was flat to the prior year adjusted operating expenses increased 4% or $118 million.

And adjusted operating income increased 5% to $11 million.

Moving to the international segment, our European Canadian and Latin American businesses have been substantially impacted by recent spec pumps, which are more aggressive than lockdowns on the U S. The international Foodservice operations segment saw sales of $2 billion.

A decrease of 32% while gross profit decreased 36, 2% and gross margin decreased to 128 basis points.

The gross margin decline was a result of adverse market mix customer mix product mix and aged inventory.

For the International segment, adjusted operating expenses decreased 16% and adjusted operating income decreased 175% for an operating loss of $55 million.

Our other segment, which includes our guest worldwide business remains challenged as hospitality occupancy rates remained low compared to prior year levels.

However, the business is in better shape than many of its competitors and has achieved a number of recent customer wins, including being named the preferred distributor for Renaissance hotels, J W. Marriott and Westin hotels via new contract with a vendor in both the U S and Canada and being given access to all Marriott properties in North America Central America.

In the Caribbean.

While still in turnaround mode, and a difficult hospitality environment the business improved its underlying profitability during the second quarter.

Cash flow from operations was $937 million for the first half of fiscal 2021.

Free cash flow was $788 million year to date, which is in line with our previously noted guidance.

Net capex for the first half of fiscal 2021 was $148 million.

Which was $235 million lower than last year as the company carefully assess its capital investment choices in the face of Covid.

Sysco remains financially strong from a balance sheet perspective at quarter end, we had balance sheet cash of $5 8 billion.

Plus access to $2 billion of available borrowing capacity for a total of $7 8 billion.

Our cash and available liquidity ensures us the stability and flexibility to make decisions that are in the best interest of the company. We continue to monitor our operating environment carefully and as we assess reopening timelines and investment needs consistent with the transformation, we will be updating our views of our levels of cash and capital structure opportunities in future calls.

<unk>.

Although this is a tough operating environment for our customers, which will impact our results for the next quarter or two sysco remains resolutely focused on managing its businesses aggressively preparing for the business recovery and building customer centric capabilities to accelerate long term growth.

We believe our strategy and our transformational initiatives will drive future value for our associates shareholders and customers.

Operator, we are now ready for questions.

At this time I would like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad and we'll pause for a moment, while we compile the Q&A roster.

Our first question comes from the line of Alex Slagle with Jefferies. Go ahead. Please your line is open.

Thank you and good morning.

Kevin question real with the full year under your belt now congrats on that interested in your high level assessment of the progress made in the transformational data Bill.

First your expectations, obviously, the pandemic was a major curve ball, but if you could talk about what elements of the transformation surprise due to lowest in terms of the level of progress on the SaaS opportunities.

Maybe you didn't fully appreciate when you started.

Hello, Good morning, Alex I appreciate the question.

In regards to the where we are one year later I'm pleased with where we are I would actually say from a transformation perspective. We're ahead of schedule and I've said this many many times in our company town Hall meetings, and then you have private conversations with investors, while the Covid crisis has obviously been tremendously difficult.

On the customers that we serve in our environment overall, the silver lining in that dark cloud as we've used it as an opportunity to accelerate our transformation.

I mentioned before our Regionalization program, we had a plan to complete that over two years and it's now done as you heard me say on our prepared remarks on today's call. So our ability to accelerate change management the buy in from our experienced team on the impetus for change meaningfully improved and so.

When you look at our selling model our leadership model, our technology tools I would say we're ahead of schedule on those activities and I am pleased with where we are and we're very confident that these transformation initiatives are going to enable our company to be very successful what we need obviously is the overall business environment to improve.

For all of those activities to be more visible in our results than they currently are but we can see the internal data.

It's promising.

Alex The last thing I would just say is in your team to have a great company you need to have a great team and I said it in my prepared remarks, we have a really strong team now that we've built that sysco, which is a combination of extremely experienced leaders like Greg Bertrand who runs our by far our largest business and new leaders that have joined our company that can help bring best practices from other <unk>.

Histories, and frankly key capabilities that we need at our company like Judy who has joined us as our chief commercial officer.

Tom <unk>, who has joined US from a technology perspective, and then obviously theyre on who you heard from today, who is just a really terrific talented financial executive and transformation executive to help accelerate our results. So in summary, Alex I would say I think we're ahead of schedule and I'm looking forward like all of you are to have corporate behind us. So we can prove it and our outcomes.

Thanks, I appreciate that.

Thanks, Alex.

Our next question comes from the line of Edward Kelly with Wells Fargo. Go ahead. Please your line is open.

Yes, hi, guys good morning.

And Kevin and Iron.

This is a particularly tough period to sort of model. Your company. So obviously, you're positioning for recovery, which makes a ton of sense.

Thats hurting near term results, especially when the industry sees some setback.

I guess, what I'm trying to figure out is how to better sort of frame what's going on in the outlook. So.

Don't know if you can tell us on what level of sales your cost base is positioned for currently.

How you see this ramping from here I don't know if there is a way to sort of frame that for us.

As we sort of think about Q3, and you did mention that Q3 will be lower than.

Debt initially thought I'm not really sure what that means relative to Q2. So I'm just kind of curious as to whether you could sort of help us along with.

With any of that.

The modeling in the next few quarters.

Great. Thanks. This is Kevin I'll start and I'm going to toss it over to Eric for comments specific to Q3 and.

And we understand that this is a difficult quarter to model in a difficult year to model and we also have respect and empathy to the fact that we haven't given guidance. This year and the reason obviously is because it is choppy and the recovery is not linear so we're going to do the best we can to give you a color commentary on where we are.

<unk> and Aaron will provide debt in a moment for Q3 as it relates to what we're investing in.

If you put it into two buckets, we have some key initiatives that we are investing in which is the building of capabilities and in many instances technology that will advance our ability to be a better company in the future and that's our pricing project. We're building a customer personalization engine to improve the type of offers.

That we provide to our customers using machine learning and predictive analytics to help our sales force being more be more effective we're going to talk with you more about debt at an investor day that we plan on holding in May Neil will send out more details on that Investor day.

We know we owe you more specifics on our transformation the size of that price and we will cover those details with you at that May Investor day.

It relates to the other half of the quote to investments that we do see a pending business recovery, we see a light at the end of the tunnel and it's not a train coming towards us.

Dawning of a new more promising day, we can see it on our data here on the facts behind what happens.

As soon as restaurant restrictions are eased our business immediately pumps and how do we know that we know that because states like Florida, and Texas with limited restrictions our business is substantially better than our national average, we can see it in states like California, which just allowed for at <unk>.

State level, the reopening of outdoor dining which is important in a state that has quality whether in the state of New York has now begun the easing of restrictions with New York City reporting this week that Valentine's day in restaurant dining will be authorized again, so we see immediate jumps on our business when that happens.

The reason you're hearing some tempering of enthusiasm from a specific to Q3.

On the international business that is under severe lockdown you probably all know this but I just want to be really clear about this in international specifically Europe.

Restaurants are closed Europe is currently in operating conditions that are similar to what the United States, who is experiencing back on April one day in London. For instance, you can hold leave your house for an hour a day you can only go to the grocery store to the park and you need to stay within five kilometers of your home units is that locked down.

They don't have drive throughs to the degree that we have them in the United States. So in the Europe business, our sales have been significantly impacted most notably the European governments and come out and said that they don't anticipate easing those restrictions until roughly Easter. So we're going to be really careful and thoughtful in Europe, we will move at a slower pace in Europe, and we will.

Meter, our investments and net business tied to that businesses recovery, but in the United States. We believe that the progress that's being made and vaccination is substantial the at risk population being protected now moving on to category <unk> and eventually categories two and three.

Vaccines make progress as the death rate comes down as ICU bed capacity improves that will give governors the confidence to ease restrictions and when that happens our business immediately pops. So we need to do things in preparation for that and that's what Aaron was referring to we need to get inventory back into our facilities.

Need to staff up in both warehouse and driver positions to ensure that when our customers are ready to place orders, we're not putting out a job wreck and trying to fill a job and then the time delay that comes along with that so.

So we have the financial strength to do that.

A purposeful choice and I'll just leave you with this last comment on I'm going to toss it to Darren.

And choices in service right now.

We had to cut delivery frequency back in what is our.

The period of April May and June of last fiscal year, we purposely chosen not to do that this time, we are servicing our customers six plus days a week, we're not cutting delivery frequency, we waived order minimums. All of these things are to help our customers during their difficult Covid wave two and that's a choice. We made we believe that's a choice that we'll pay it.

Forward with loyalty and future growth and net.

Basis points of NPS improvement that I covered on my prepared remarks that is a notable notable reflection and those that understand NPS understand that that is a pay it forward metric that will benefit our company into the future. So erinn I'll toss it over to you specific to Q3, if there's anything you wanted to add to that.

Great Hey, good morning. Thank you for the question, we don't provide quarterly guidance per se, but what I would like to do is take a moment and give you. Some context on Q3 by talking a bit more about Q2, and what we saw there I believe there are some parallels as you will have observed from our release and from the comments, we experienced deleveraging during the second.

Quarter as sales dropped 23% from prior year and you will recall from prior earnings calls that Joel had previously observed that our cost structure is approximately a one third two third split between fixed and variable costs. You can do the math on what that should mean for the quarter versus our prior year.

I would comment that we benefited extensively from efficiency efforts I call out some of them during the call and specific identified and executed cost savings during the quarter, our quarterly component of the $350 million debt.

The team has been talking about for the last couple of quarters.

I commented during the results that we.

We could see the savings on the P&L and let me give you a couple of examples of that.

People.

Overall across the enterprise, we have 15100 fewer employees today than we did a year ago and that includes a significant cut at our corporate headquarters as well, we've identified and executed specific cogs cost savings that I can see on the P&L, we've rationalized our technology.

<unk> investments to be more forward focused we've identified indirect cost savings professional costs et cetera. So what I want you to take away is the cost savings are real and while we haven't disclosed the exact level of on what it is quarter to quarter, it's material and they're out there.

Now the cost savings are important because they offset a combination of two things going on that I would have you think about it is really call. It a 50 50 spread the first is as Kevin just talked about we did make incremental investments against both the business recovery and the transformation in the quarter.

We purposely used some of our savings from gross cost savings initiatives to fund the investments against these short term recovery and the long term transformation and then there was a mix of other one time expenses or additional fixed cost deleveraging that we experienced in those corporate given what was going on in Europe and other parts of our network.

To summarize we do believe that some incremental expense now is worth it and it gets us ready for the recovery to come.

Some of the investments and costs that I called out earlier, we will continue into the back half, particularly into Q3, we wanted to be transparent about that but importantly, as we get into the true end of the year and into next year. Those same savings there structural they are recurring they are real and they will become much more apparent as we reverse the sales.

Klein and get the early investments and the recovery in the transformation behind us.

Great. Thanks, guys.

Thank you Ed.

Our next question comes from the line of Jeffrey Bernstein with Barclays. Go ahead. Please your line is open.

Great. Thank you very much I had one question on one follow up question just.

When we get through Covid.

At some point sooner rather than later.

When you think about the largest foodservice distributors, including yourselves I'm, just wondering whether you think you'd achieve greater benefit on the revenue or the expense line I know you've targeted on both but just wondering your thoughts on where the bigger opportunity is.

And if you could just offer some context on the small and mid sized competitors.

Can you just talk about these market share gains, it's very difficult to on our end to see the market share gains, but any qualitative color on those competitive sets that would be great and then I had one follow up.

Sure, Jeff, It's Kevin I'll take that one.

Both ends on.

The strength of the stronger players right strength strength get stronger during times of diversity in crisis.

Erin <unk>, referring to is the $350 million of cost takeout is real it's concrete and we can track it and as our volume gets back to pre COVID-19 levels and it will that's going to flow straight to the bottom line. The reason it's less visible now is because we have all these other things happening vis vis investments and the recovery investments in new capabilities et cetera et cetera.

But that 350 is real and it will be visible as our volume recover so.

We're not done we've said that before too we are not done with structural cost improvements. If there is more to be attained and again thats something we can talk about more at our May investor day specific on the revenue side. The number we've quoted explicitly is the national sales when its impressive thats material $1 5 billion.

Net new wins International sales segment, you can see it on our performance results in SYGMA and also you can see it in our performance results and just our general overall case growth, but what we haven't explicitly quantified for you because it is challenging with what's happening in the marketplace is the wins, we're having at the local level in my prepared.

Remarks, I said the following we won more new customers at the independent local level in Q2 debt at any point in time over the last five years. That's just concrete specific as I can be and it's real we can track. It we use it tool called sysco or $3 60 to track every customer activity those wins.

<unk> are going to be visible again as our volume.

Recovers the reason, it's less visible on top line growth, it's because the average order per customer is currently down because of Covid and the takeout and delivery world customers order, a fewer appetizers fewer desserts.

They focus more on that main entre and so the average volume per customer is down, but we've added a substantial number of new customers and that's not just in the U S that applies to Canada that applies to all of our businesses in Europe as well so that will be a pay it forward activity and what we anticipate we will be able to show you.

At our May Investor Day is what is the size of the price of all of these activities worse the trajectory that we're on from a sales growth perspective, and then these key enabling transformational elements, what they're worse from a market share capture perspective, and then how that flows through to the bottom line.

Where we go to a follow up I'll just ask Aaron if there's anything he wants to add to what I just said.

No Kevin I think the two thoughts are a rising tide lifts all boats and we are going to experience that as the sales recovery continues and to the point on profitability I think we should just remind the team that look as I believe the team commented earlier we're profitable.

As sales are down even 30% to 35% and so we have incredible financial strength and opportunity to get ready for that sales lift.

Thanks, Jeff to your follow up.

Yes. Thank you very much so I know it's difficult in the short term and not keen to necessarily give third quarter or second half guidance, but you did make a couple of comments I was hoping for a little color on I know you mentioned regional sales structure quick wins and menu segmentation success kind of quicker wins I guess.

I think you even said U S food and SYGMA has been growing of late I'm. Just wondering if there's any quantification you can provide on any of that.

So we can kind of gauge.

Early success. Thanks.

Yes, Geoff I know, it's frustrating that we're not giving guidance and we're going to resist that.

Doing so again for Q3 I can however put a little more color on the examples that I was just providing and I also realize that the second half of your first question, which was tied to the smaller competitors how are they performing.

I didnt sufficiently answered that on the first question.

There's no doubt that the bigger players are getting stronger Ben.

<unk> to directly before Kevin how is it true that each of the major players are reporting that they are winning market share. While it is true that is what is happening and what that mathematically implies is that smaller players are currently donating share most likely because they don't have the ability to invest in inventory during a period of volume growth.

We know for a fact that select competitors are cutting delivery frequency. They cut Saturday first day Wednesday second we have not done that Jeff. So we have not canceled Saturday, we have not canceled Wednesday in fact as you well know we eliminated order minimums, we are seeing improvement in our trends for the customers that we serve as.

Those programs have been launched which is restaurants rising and we are seeing retention of customers because we're not cutting back on service.

A data point that I quoted before is for those customers that have joined US on this restaurant ryzen campaign, leveraging our menu services, leveraging our ability to help them with takeout and delivery.

They are performing 20% on average better than the customers that choose not to engage our priority obviously is to get more and more and more of them engaged and we're working on that the second one I'll just take you to page seven in our deck.

And that is the closure rate of Sysco customers. So this chart has been normalized to.

Normal year would be at zero and our closure rate of our customers is 50% lower than the national average and this data doesn't come from our internal systems. This data comes from Yelp. So as I put a 1000 basis points improvement in NPS, we've won more new customers in this quarter than in five plus years.

When I put the closure rate of our customers is 50% less than the industry average and that we can see market share gains. These things give you confidence that sysco will be a net winner in the business and when you layer on the future periods, where others are going to meaningfully struggled Joel made this point on many different times, others going on going on really struggled with bill.

<unk> inventory in advance of the sales actually hitting their business because thats a period of balance sheet stress, we have the capability because of the strength of our balance sheet to build inventory in advance on the customer ordering Jeff Thats a big deal.

Thanks for the color.

Thank you Jeff.

Our next question comes from the line of Nicole Miller with Piper Sandler Go ahead. Please your line is open.

Thank you so much.

Quick questions I'll pose the first one.

I believe the prior run rate on the $350 million of cost saves.

80% flow through.

So what I think I hear you, saying this quarter is you reinvested more against that and we can understand why.

So what was the approximate flow through I, just haven't been able to work with the numbers at this point.

You also mentioned one time expenses how material are those onetime expenses. So we can factor that into our <unk>.

Good afternoon.

And Nicole I will toss return for that question. Thank you for the question.

Turning Nicole good morning, Great question, I would our free it back to some of the thoughts I had earlier around how to think about this we have not disclosed the build rates of the $350 million plus those synergies.

Cost savings that we are identifying as we carry forward because youre trying to model what I would encourage you to do is to look at our reflect on my comment that.

Approximately 50% of.

What we saw on the quarter was.

Our investments against the transformation and against the business recovery on 50% was onetime expenses, our industrial on additional fixed cost deleveraging on parts of the portfolio.

That's interesting, but the really important point is that look the one time costs. They are onetime and will go away in any fixed cost deleveraging as the tide rises with sales that will also disappear and the investments against the.

Recovery and the against investments against the transformation, while they may occur for a couple of quarters. They are also transitory in nature and we will have the.

We will have the benefit of achieving the run rate savings that Joel had called out previously in future quarters.

Our situation has evolved we're continuing to evolve to Bob and weave, reflecting our financial strength, because we're going to be ahead of the curve.

Okay.

Thank you I guess that with PDC asked and answered I guess I just didn't understand it that way. So we can do the math on that 50% a bigger picture question.

To understand is retention of your own employee net promoter scores should be tied together. So I guess the question I would pose as you talked about retention being improved and I'm wondering if that's the right way to ask.

Or to tie those two things together. So this question might some challenging its literally not not non TB, but when you're forced turnover right and where what anyone else go. So I mean, indeed retention by definition on with <unk> to improve sales were.

Wondering if our people are making more or less are you offering more benefits what kind of feedback and is that the correlation to net promoter scores. If it is as net promoter scores go up.

What happens then I mean, I know its sales, but could you tie that for example to wallet share of independents, which is 30% versus 40 personnel chain low.

Independent wallet share go up I, just wanted to see how it kind of ties together if that makes sense. Thank you.

And of course, it's a great question and by no means is it is a challenging question. It's the spirit of your question is excellent and I. Appreciate your asking it I'm going to unpack that in two ways. One is mps's are our customers voice to us and we have a large sample size, we track it real time and we take acts.

<unk> on it and we see in our NPS data, where we have strength the by far biggest strength of Sysco is our sales consultants, we massively over index, our competitors and the quality and support given to our customers through that audience by far our biggest strength is our sales consult.

Such a strength, we will continue to leverage on I'm going to get to that in a minute when I talk about what I meant by associate retention. So we need to continue to harness in fact further leverage our biggest strength.

And Nicole what we need to do on NPS can make it overall improvement lift is address the pain points right. So here are the things we were hearing through this COVID-19 crisis has a pinpoint Kevin by volume is down but yet you have these order minimums youre willing to come one time per week. During this period of time on my volume is down because you cut Saturday delivery, so we leaned into it and we addressed it.

Hard work.

We did as we ensured that this COVID-19 wave two we were not going to cut delivery frequency and the biggest pain point, we heard was from our restaurant operators I can't predict what my order volume is going to be and I'm really worried about your minimum orders and we eliminated debt problem for them. We just took it off the table from now through the end of this crisis, the crisis and it very well might be permanent.

We are not asking for order minimums, we're here to ship what they need when they need it regardless of the order volume on a regularly scheduled delivery day, and we're not going to cut delivery frequency.

So Nicole here's what happened.

Associate piece of debt NPS survey got even higher because our sales consultants are leaning into helping restaurant operators with menu design to takeout and delivery and hooking them up with a delivery partner.

And then the pain point of delivery, we meaningfully improved you put the two together, we saw 1000 basis points lift.

What that will do for our business in the future is higher customer retention and higher share of wallet. If you studied the NPS or it's a lag right. So as you improve NPS meaningfully it is in the forward facing quarters and into years when that results in higher retention and higher share of wallet, it's not an immediate need NB.

But we're confident that we're doing the right things in support of our customers and they will reward us with business what I referred to in my script as it relates to associate retention was tied to our sales consultant compensation change that we made this summer.

Why we made the sales compensation change was twofold, one we had some disincentives in our old structure that motivated our sales consultants to do some things that were inconsistent with our company strategy 0.1, 0.2, we had too much turnover, especially in our newer associates. They were on a full condition previously and they do.

Simply in those early years Couldnt earn enough when they were on full commission.

To make it through their learning curve as they built their business and our new model, we have a base plus bonus structure, where they make a livable wage off of their base and then they have the opportunity to make a very healthy income through their bonus that was implemented this summer changes hard when you implement a new tool like that but statistically significantly statistic.

<unk>.

Statistically significant I meant to say we are seeing improvements in retention and it's not just because we reduced the number of people earlier in the year. It is because actually the folks that we're tracking that I've been here before during and after Covid, we're seeing retention at a higher rate attributable to that change in comp, but Nicole I will toss it back to you to see if there's any follow up Tony.

I just said.

That actually helped me out a lot I appreciate that color. Thank you for taking my question.

Thanks Nicole.

Our next question comes from the line of John Glass with Morgan Stanley Go ahead. Please your line is open.

Thanks, so much good morning.

Kevin just going back to this wallet share issued I think you talked about that 30% historically with the local cases has that changed meaningfully recently during this pandemic and if you inside of that when we talk about these value added services in the restaurants have done much better using those as your wallet share meaningfully higher as they are weighted gauge how high it can go if they customers fully engage.

And all the services you provide to them.

Yeah.

Yes, John Great question.

I'm not going to report out on share of wallet percent by month or by quarter, there's too much volatility in that type of a metric to be that specific on the call. What I can definitely say however is that for the customers that are engaged with us on the restaurants rising campaign, yes, we win more share of wallet with.

And we retained them, there's a lot of churn in this industry. Many customers use multiple distributors two or three distributors and there are reasons why they do that and what we're seeing in the restaurants rising campaign and the work we're doing with our transformation is that a customer is less meeting to have much.

<unk> distributors I'll introduce one of our other strategic initiatives, which is our pricing initiative. The number one reason why a customer leaves sysco to go to a competitor and vice versa, frankly is because of price and specifically transparency for price. They think they can get a price somewhere else or they want to keep their distributor honest by taking portions of it.

Their business and bringing it to a competitor as we implement our pricing software and we give customer items specific pricing pricing that's right at the item level.

We believe that we will lose less individual lines to competitors types to price and frankly, the opposite will have the opportunity to win incremental cases with existing customers because we will be right on price for the items that matter, which will drive volume growth and how to keep margins neutral is on in the elastic items that are on the.

<unk> of the inventory assortment you can take some nominal increases on price to offset the margin dilution all in we're bullish on our ability to increase share of wallet. When we meet in May at our Investor day, we will be able to explain in more detail. What we believe is possible from a share of wallet growth perspective, but we have customers to answer your question, specifically that are well north of <unk>.

30% with Sysco.

That's helpful. If I could just ask one follow up on the international Okay. How many how much of the programs you've implemented the U S. Whether it's restaurants rising where the price tool how many of those are applicable to the international business. How many have been implemented is that a real opportunity there or is it just a very different market and those things don't always apply.

It's a huge opportunity for international and it's why we hired Tim Tim is here. He is now on board, which is based in London as I said it will be full time focused on improving our strategy and our execution in international and his remit will be exactly what you were just implying to your question, which is okay. You are deploying a best in class pricing tool.

One way on how do you deploy that to your European businesses, we're working on a new team based selling strategy, when and where and how do you deploy that each of these key initiatives are applicable in our international business segments hard stop.

What is unique in these countries is the cuisine type and specifically the <unk>.

Penetration mix of local vs contract bid, but the best in class strategies of how to sell <unk>.

To engage customers with our mobile ordering platform improving cogs through a global purchasing scale. We're in the early innings of these things in international and actually that gives me confidence that we can improve the profitability of our international segment, that's something that Erin myself and Tim will be very focused on.

Okay. Thanks for that.

Thanks, John.

Our next question comes from the line of John <unk> with Guggenheim Partners Go ahead. Please your line is open.

So Kevin two questions related number one you talked about bringing back or bringing on thousands of sales related folks.

What's the timing of that.

Where will they come from right.

And then secondarily, if you think about the rollout of pricing zone tested in one region.

The pace of that rollout and then how do you think about the interplay between bringing on a lot of folks managing the recovery and rolling out and expanding pricing because that will be done simultaneously.

Yes.

Sean Good question and as always I just wanted to clarify one thing on the thousands comment that was in Aaron's prepared remarks that thousands applied to each of the things that we're after what he said he said sales associates warehouse associates drivers and support resources. So the thousands.

<unk> applies to the cumulative of all of them. So we're not going to be hiring thousands of new sales associates, we will hire new sales associates, we're hiring new specialists, we're hiring national business developers I'm, sorry, new business developers NBD is is what we call them.

To grow our business, but the majority of the thousands comment is actually in the warehouse and driver populations simply tied to the business volume recovery that we anticipate.

Quoted we have 15000 fewer people working for us today than we did pre COVID-19 and we will and expect to get back to pre COVID-19 volume levels down the road and we need to hire up to be able to staff up to be able to support that business recovery I just wanted to be really clear its not.

Today, It is zero and tomorrow, it's thousands it's a week by week staffing plan, and we will be able to throttle up and throttle it down based upon what we see and our data, but they need to be trained on it takes X number of weeks to become productive on our warehouse. It takes X plus even more to become productive as a driver and as you know it takes time to become productive.

Sales associated as well so we're building that was training.

Durations of time into our staffing model, John and when we say invest in advance of the recovery what I'm, specifically, referring to was the trading window. If it takes six weeks to get productive we need to hire that person X weeks before they're needed and then we have a week by week by week expectation of what we anticipate the volume recovery will be tied to net staffing plan if the <unk>.

Recovery doesn't materialize the way that we anticipate we will slow down if the volume recovery is faster than what we anticipate that we will speed up the good news is we have the financial capability to do both of those.

Two things.

On your second part of your question was on pricing as always it's a good one but that'll be a staggered rollout. So we're on our first region right now we're not going to go from one region pilot to a national rollout, we've learned a lot that sysco over the years on how to rollout new tools, New software change management and the like the good news is that this price.

<unk> software is being warmly embraced by our sales consultants.

Takes a significant component of work off their plate.

Time that they can then reinvest back into their customers as I said in my prepared remarks, and I just want to be really crystal clear about something we will not be reducing our sales consultants because of our pricing tool because time is freed up for them. It's the opposite we will take that time that gets freed up on their work week.

And invest it back into our customers and John we're optimistic that that will help from a sales growth perspective as well. So we're going to do a regional pilot that we're currently in we will expand to four additional regions.

In this Q3 period, and then we will read and react based on the business results. The change management learnings and then John we will determine the pace with which we will bring it to the rest of the country and I don't have a declarative end date for that project because I want the success of the project and the change management learnings to determine the speed and pace with which.

So John I'll toss it back to you if you have any follow up.

No no that was great. Thank you.

Thanks, John.

Our next question comes from the line of Lauren Silberman with Credit Suisse. Go ahead. Please your line is open.

Thanks, and congrats on the new role you talked about the very strong winds at the local level are there any differences in the behavior of on new local customer cohorts relative to what you've seen historically, whether that's national welfare Sysco brand penetration digital utilization and to what extent do you think that's company specific initiatives or the competitive environment, just trying to understand how youre thinking about that.

Sustainability of these wins given some unique dynamics on the environment makes my disturb me here's pulling back on frequency delivery jobs any lessons from multiple distributors.

Hello, and good question.

Here's the behavior change that drove it.

And it's really clear we changed their compensation.

In the prior compensation model they were paid more on increase the profitability of an existing customer than they were on when new business. That's what I meant earlier when I said, we had a disincentive in our system that was never our intention we didnt want for them to not be out prospecting, but if they had an hour to spend they were going to spend that hour.

We're on increasing the profitability of an existing customer and they weren't going to spend on on prospecting.

And our new compensation model, which is the base plus bonus the bonus metrics are configurable, we can make them whatever we want them to be in fact, we can change them quarter to quarter month to month on what matters and we've been doing exactly that so now we have a better balance between improving penetration of lines with existing customers, which.

Is a profit driver and it's super important and we need to better balance it with new customer prospecting. So the biggest reason for our improvement in our performance Lauren on the new customer growth is a behavior change our associates are spending much more time with new customer prospecting than they were previously and the point you made which was now how do you retain these customers.

<unk> is paramount.

Partly it's the reason why we are investing in service, while we are investing in no order minimums by reinvesting and not cutting back on delivery frequency things like that matter.

I think I've talked about this yet we're also investing in payment plans. So that we can help our customers with their credit balances through this difficult period of time and not cutting them off because they're having some challenges we negotiated with each customer one by one using a predictive model on risk for that customer and we're helping them, we're helping them make payment plans spread out smoothed.

So that they can stay with us and it will be imperative Lauren to do what you said, which is we need to retain these new wins, we need to work on things like Sysco brand penetration for these new wins to increase the profit rate of each of them, we need to add more lines and thats, where our new selling model comes in and this is the last thing I'll say.

We need to penetrate other additional categories.

They could be buying dry and frozen from us and they have never considered a broad liner for fresh produce guess, what we have one of the best fresh produce businesses in the United States. We turned net inventory on a weekly basis and we can penetrate produce if we introduced the right sales person to that customer. So those are the activities when the new customer through improved.

Prospecting once that customer has been one penetrate sysco lines increased additional categories provide them with tremendous service and retention will meet or beat expectations on back to you. If you have a follow up.

Great. Thanks, that's really helpful. Just one quick one on Sysco brand sales as a percentage of local cases down 450 basis points can you stand on the factors that drove that decrease in the private label penetration and do you expect that to be largely transitory.

It's a 100% transitory Lauren the reason for Sysco brand penetration being down is explicitly the customers that we're serving and also.

The balance of sales by category. So the business that's down the lowest for Sysco right now is actually our biggest business our biggest customer businesses. So it's the FSM on hospitality categories. We have an excellent sysco brand penetration with those customers on those businesses are down more than our average and therefore, that's just to grab it.

The issue on Sysco brand and then believe it or not within the businesses that are doing well right now like take out products to go products. There isn't a lot of brands Sysco brand product in that space to the degree that we have in other categories. So it's simply balance of sale and we have the opportunity to not just to recover where we've been our merchant team is.

Working on.

New products and innovation within Sysco brand and we absolutely anticipate that to be a source of profit growth into the future.

Great. Thanks, so much.

Excellent.

Our next question comes from the line of Kelly Bania with BMO Capital Go ahead. Please your line is open.

Hi, good morning, Thanks for taking our questions.

Wanted to just ask a little bit more about international gross margin it sounds like.

Some mix pressures there, but also maybe some inventory.

Just curious if you can manage that gross margin.

Better, let's just a little surprising that it was lower than it was even a couple of quarters ago when sales were even worse.

So just curious.

How we should think about what you can do to manage that margin in international and if theres anything.

Different either thinking about in terms of the longer term potential recovery for international versus the U S.

Yes, Great question I'll start and then at the end I'll toss it over to Aaron.

For color commentary.

And to what I cover so international margin, we called it out I mean, it was a difficult quarter from an international perspective, there's two reasons why one is the customer mix just to be very clear restaurants are closed in France, and the UK and in Ireland. There close unlike in the United States were on Prem dining is allowed.

In delivery and takeout and drive throughs are robust our most profitable customer segment in Europe is closed they can do takeout and delivery, but takeout and delivery are much much less active.

Activated than they are in the United States and we anticipate they will be closed until April so we've got a meaningful headwind in that regard.

Im going to weave in here that one point you made about long term I just want to remind everybody that right before COVID-19 wave to the best business in our entire book of business was in France, We were minus 5% in France right before the challenges of this secondary locked down so we fully anticipate that the international.

Business will respond just as fast if not even faster than the United States. Once these lockdowns are eased and again, it's frustrating to us that we think that theyre talking.

Easter.

But we can focus on what we can control. So the margin percent is mostly driven by customer penetration mix. We did have some inventories spoilage challenges Kelly.

It's appropriate to call it out our business results in Q2 that we think about it from this perspective, France goes from minus five to minus 55 week.

We have fresh inventory.

There's challenges when that happens.

And the pace and speed with which Europe went into Lockdown was significant similar to what happened. If you remember back in Q4, you remember my narrative Kelly from back in Q4, and here's what I've said Europe entered the Lockdown earlier and swifter and came out later and slower and I anticipate that same thing is going to happen with this second wave.

But we have full expectations that it will come out strong it's going to take longer Aaron I'm going to talk to you. If theres anything that you would like to add or if I missed anything.

Thank you Kevin and good morning, Kelly three quick add first Kelly as we all know what's really important to us dollars in the bank.

On the bank and so our first objective with Europe is just to get the business back up and running and contributing to the bottom line, Kevin did an excellent job of covering two.

Two of the primary drivers on the rate impact of international but I do on it.

He talks about the customers being closed on the inventory obsolescence, but I do want to call out two additional elements one is product mix shift where across our international operations.

On premise dining is not available, but takeout our takeaway is right. We do have a product mix shift.

Two products in support of that is lower margin and then lastly, and perhaps the most materially we have some business mix shift going on where with France closed in other operations in Europe constrained, we've actually mixed into our Canadian contract business, which has lower margin for four within the international segment Youre seeing that on some.

On the numbers.

Okay.

Very helpful. And then if I can just follow up with one more on market share a lot of Ben address there already and it sounds like more will become visible in may.

With respect to the local side of that equation on the U S. But in terms of the $1 5 billion for National accounts, which is pretty substantial I guess the question is how much of that is a function of what Cisco is doing and the strategy that you're pursuing versus the function of the circumstances with competitors and Nash.

<unk> accounts looking for solution at Sysco.

Yeah, Kelly Great question.

Majority of our transformation is at the local level, because that's where the profit is the highest it's where we have the greatest opportunity to profitably grow and it's where our new business operating model. We will have the greatest dividend and we'll be clear about that on the vectors of growth how each of these transformation initiatives drive.

Improved business performance at the national level to Oversimplify. The reason, we're doing so well with new business capture as these large national customers are looking for a distributor that they have confidence in that they believe in that can shift. This is simple I know this on time and in full and be able to stock the inventory that they need to be able to deliver.

So there are thousands of locations.

They have tremendous confidence that sysco is debt partner.

And we have been very successful in the contract bids this summer and into this fall.

Kelly one reason why we've been able to be more successful there as we put focus on it we used this expression fish, where the fish are we can see the restaurant ticket data from all the banks and the credit card seeing how well <unk> is doing and we needed to win where the growth was happening and we had the capacity to do it Kelly because.

Our overall business volume is down.

And as our business volume recovers you might be thinking well, Kevin what's that going to do your storage and throughput capacity, we're working aggressively on that and there are several things that we can do to make more room in our warehouses for this incremental volume. So that it is flowing through to the Bottomline like Aaron said the way we needed to SKU rationalization between.

Sites slower moving inventory being pulled out of forward facing locations et cetera. These are.

Things, we can do to improve the throughput of our warehouses to allow us to be able to support the substantial business wins that we've had $1 5 billion net since the beginning of this crisis. So it is as simple as.

They trust US we can do the business at a national level and that businesses available for us from a winning perspective, what we need to do is make sure. It's a sufficiently profitable business for us and here's my commitment to all of our investors, we will not bid on business that isn't profitable.

Our company.

We have been very very disciplined in the contracts that we have underwritten them since the beginning of this crisis.

Thank you.

Thanks Scott.

And our last question of the day comes from John <unk> with Jpmorgan go ahead. Please your line is open.

Yeah.

And John <unk> Co. Your line is open.

If you're on my please on mute your line can you hear me.

We can do on.

Excellent sorry, Youre at now you are on Speaker I don't know what's wrong my headset.

On the eight or 9% of customers.

Closed overall and obviously your share is 50% better than that.

You kind of bucket them in any types of categories, whether it's.

Region or city or suburb or custom work or customer type.

The first point in DTC.

DTC distributors in particular that disproportionately serve those types of customers that may.

Finally get debt consolidation in the delivery space that a lot of us thought.

What has happened at some point in 2020, and I have follow ups on that as well.

Yes, so great question I think it would be fair to say the following the hardest restricted markets. So the urban areas are aware of the closure rate is higher than the places that have fewer restrictions, which would be the southern third of the United States and more rural geography.

So I think that would be a fair thing to communicate and it's obvious right where the restrictions on the greatest that's where the closures are the highest John we're not seeing any specific cuisine type.

Giving a higher rate of closure.

Again on the closure side is it temporary is it permanent.

<unk> been pretty consistent from the beginning of this crisis to communicate is we believe there'll be an elevation in churn over this tumultuous period, but from an overall bankruptcy rate perspective, or the number of doors in the market. Two years from now I don't believe it's going to be meaningfully different than the number we have now there'll be an elevation in churn.

But theres not going to be a substantial substantial reduction in customer doors, I know that select agencies have come out and said bold statistics like 30% to 40% bankruptcies. That's just not what we see it's not what we see in our data as I've said before if a person owns their family restaurant and this was what they've done for 25 years.

They're not going to close and Vigo become a plumber. They may have to temporary close then they have to call debt business to restructure.

Restructure their debt and guess what they are probably going to reopen a restaurant at some point in time so.

We believe the independent restaurant customers are fighters as I said in my prepared remarks, and Theyre doing a terrific job in light of the conditions that they are dealing with.

To stay in business and we're proud of the work that we're doing and you said you had a follow up John some of the prospects yes.

FERC on that first question and then also on I'm going to.

Ask one about Europe, giving.

Giving you our cash flow given your cash.

When does it or does it make sense to be opportunistic.

It is difficult to enter urban markets from a foodservice distributor perspective then.

Maybe by some share as opposed to just winning it organically first question on the United States and secondly.

We think there'll be some conversations with Europe right now with either Payless scale out of a market that is always more difficult to do business and then the U S or maybe it's time to double down in Europe in some way where is your current thinking in terms of the call on that.

Okay. John Thank you two part question I'll do the first part.

A couple of comments on international and Aaron I'm Gonna toss to you. If there's anything you want to add to the international part of that question.

Your question John on the first part was Metro markets, where I have told you previously we under index as a percentage of our total and in fact, it was a year ago today that I told you that that was going to be a big focus of our company that we could win in the metro markets and John that still exist that is still absolutely an opportunity for this company I put that project on pause given places.

Like New York, and Chicago, and La are closed for business figure of speech only and it wouldn't have been a prudent time for us to do that we have a couple of pilots going we can talk more about this in May. This is one of our vectors of growth is to improve our performance in those metro markets, we have a very significant financial opportunity.

When we close the gap at those metro markets to our National total from a sales and profit growth perspective, and it's more John on the supply chain opportunity than it is anything else, we need to deliver more frequently to those customers. We need to do same day next day delivery to those customers as you know they've got these tiny back rooms, they can't have big bulk storage.

They need produce delivered on a daily basis, and we've got the capability of doing that I don't want on the cat out of the bag, but we've got a couple of pilots undergoing that are showing promise and youre going to see more from sysco in that capability. The more insightful part of your question was like so when's, the right time and I heard you loud and clear and we're working on that I don't have anything declarative to say today.

Day on the win other than we have the ability to invest when we see an activity that will be promising for us in debt will be an area, where sysco improves our capabilities and we fully expect to be able to win profitable business. The good thing about that business is as you know has a higher profit percentage than other customer types. So it's a pretty attractive.

Market for us on the international side I haven't talked as much about the new customer wins in international because that business is right now doing poorly in aggregate versus the rest of our business because as Aaron said, the fixed cost deleverage and the overall sales being down but just in the last quarter not included actually in the $200 million that I quoted.

We have a notable win with a very large customer in Europe excuse me on the U K, we have a notable win in Sweden, we have a notable win in Ireland, John we're starting to make traction on new customer wins of substance and what we need to do in addition to that though is when at the local level.

And thats been challenging during this crisis, because most of our customers in places like Paris actually closed the government schemes are so robust in France that its actually more profitable for the restaurant in France to actually temporarily closed and to stay open. So it's pretty hard to win new customers. When the customers were trying to serve our close but we're going to go after.

It hard when those markets reopened a combination of wins at the national level, and then incremental wins at the local level. The question I was asked 10 minutes ago on can you bring some of these U S best practices across the pond and we fully intend to do that Aaron on <unk> for final word and then I have one comment I want to make about our Q3 trends that I didn't get a chance to cover yet to close out the call. So.

Darren over to you please.

Great. Thanks.

Thanks for the question and here's what I would say.

Given our strength across the portfolio Sysco has every right to win internationally the way that it does domestically from a sense of magnitude perspective of our international portfolio as Canada, The U K, France, Sweden, Ireland.

And then Latin America from a scale perspective, that's just a contextual point and from what I can see in early days as we have real pockets of strength in Canada, The UK, Sweden, and Ireland and parts of Latin America.

But we also have some opportunities to improve and the team is working hard on hard against those notwithstanding the COVID-19 crisis.

I'm still getting to know the teams and the businesses that will be unfair for me to comment on any one part of the business, but on one commitment I can make is that our management team will regularly assess our portfolio and where we need to we'll take some action and you saw us do that recently most recently in Spain, when we divested the <unk> business. So I am excited to get to know the business better.

And as I said, we have everywhere every right to win internationally as well.

Very insightful thank you erinn.

John I appreciate the question and then I know we're over time, we appreciate everyone's patience and staying on past the top of the hour. Thank you for that thank you for your interest in Sysco and I just wanted to leave you with one statement of of.

<unk> I know, we talked about December being a really tough month for us and that the quarter had sequentially been decelerating, we're seeing the opposite in Q3, which is a good thing our January month, which just closed performed better than December and we are seeing sequential improvement in our business trends.

Even more optimistic into these forward facing months as those restrictions that are placed upon our customers ease and it's all going to be tied to the progress that we make in vaccine administration. I think you all know I worked on health care for eight years before I came here.

The news is giving a doomsday scenario on vaccine administration, it's going better than the news is covering it and what happens next is vaccines are going to begin to be distributed in places like Walmart and Walgreens and Cvs on when when we can get 40000 places in this country.

Administering vaccines and can make meaningful progress on fighting this COVID-19 crisis, we're going to see governments be much more willing to ease restrictions in even places like UK, where we are in complete Lockdown U K is the country is doing a terrific job with vaccine administration, that's going to provide.

And opportunity for our business recovery in calendar 2021, and we're poised and ready to take advantage of it Neel I'm going to toss it over to you if there's anything else to close out the call.

Thank you, Kevin and I, just wanted to reiterate thanks to our investors and analysts who have joined US today. Thank you very much for your interest in our company. If you need anything else. Please feel free to follow up with us on so James the operator over to you to go ahead and close this out.

Ladies and gentlemen, once again, we do want to thank you for attending today's conference call you may now disconnect.

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Bill.

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Okay.

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