Q4 2019 Earnings Call
Good morning, and welcome to Cisco's fourth quarter fiscal 2019 conference call.
As a reminder, today's call is being recorded.
We will begin today's call with opening remarks and introductions.
I would like to turn the call over to Neil Russell Vice President Corporate Affairs. Please go ahead.
Good morning, everyone and welcome to Cisco's fourth quarter and fiscal year 2019 earnings call.
Joining me in Houston today are Jon Benet, our chairman, President and Chief Executive Officer, and Joe brought a our chief financial Officer.
Before we begin please note that statements made during this presentation that state the company's or management's intentions beliefs expectations or predictions of the future are forward looking statements within the meaning of the private Securities Litigation Reform Act and actual results could differ in a material manner.
Additional information about factors that could cause results to differ from those in the forward looking statements is contained in the company's SEC filings.
This includes but is not limited to risk factors contained in our annual report on Form 10-K for the year ended June 32018, 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 Dot com 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 Chairman President and Chief Executive Officer, Tom Today.
Thanks, Neal and good morning, everyone. Thank you all for joining us.
This morning, we announced financial results, which reflect improved year over year performance for the fourth quarter and fiscal year 2019.
For the full year, we made solid progress against our multi year transformational initiatives, which we believe position us well to exceed our customers expectations and deliver long term growth.
During the year, we had solid 8% adjusted operating income growth and adjusted earnings per share growth of 13%.
Starting with Cisco's full year fiscal 2019 results sales grew 2.4% to $60.1 billion driven by steady growth as local customers and the acquisition of several smaller distributors in both the U.S. and Europe , which were partially offset by the transitioning of some national customers in both our broad line and Sigma businesses.
Gross profit for the year grew 2.9% to $11.4 billion driven by a continued shift in our customer mix as we grew local cases at a faster pace than total case growth.
Favorable favorable product mix as we continue to drive growth in our Sysco brand portfolio not only through the addition of an innovative products, but also bring sysco brand to additional geographies beyond the U.S.
The continuation of our successful category management effort as we are now starting to bring this successful process to our European business.
And the ongoing management of inbound freight there is now stabilized although not back to the pre fiscal 2018 levels.
Finally across the entire business, we saw a modest level of inflation for the year about 1% to 2%.
From an expense perspective, we saw solid overall expense management for the year.
With adjusted operating expenses, increasing only 1.4% driven by benefits from our transformative initiatives and solid corporate expense management, all of which helped to offset the ongoing rising labor costs in both the transportation and warehouse areas.
The gap between gross profit dollar growth and adjusted operating expense growth was 150 basis points for the full year, despite a challenging year over year comparison in the fourth quarter.
For total Cisco.
We delivered solid adjusted operating income growth of 8% to $2.7 billion, which helped to drive our adjusted earnings per share up 13% to $3.55.
As we look at the results by business segment, let's start with the United States and the overall macroeconomic trends, which continue to be relatively positive.
The underlying economic picture remains encouraging with GDP at 2.1% for the second quarter of 2019 and continued low unemployment, which was just 3.7% in July .
Consumer confidence has decreased slightly but still remain solid.
These factors are important macroeconomic indicators, which describe the environment. Our customers are currently operating in and speaks to the relative health of our food away from home market.
As for restaurant industry trends Knapp track and Black spot Blackbox show same store sales relatively flat in June and consistent with what we previously discussed while traffic continues to be negative.
Within us foodservice operations for the year sales for fiscal 2019 were $41.3 billion, an increase of 4.2% compared to the prior year.
Inflation and U.S. broad line was 1.5% and local case growth grew 3.1% of which 2.2% was organic while total case volume within US broad line grew 2.7% of which 2% was organic.
Gross profit dollars increased 4.4% and gross margin increased five basis points to 20%.
Gross profit was positively impacted by strong sysco brand sales year over year favorability of inbound freight and continued category management benefits.
Regarding sysco brand using customer insights, we launched two new brands, including Cisco or plus a planet friendly non foods solution for operators looking for a wide range of reliable and economically environmentally responsible products and Cisco simply a platform designed to enable our customers to accommodate the growing consumer demand for very dietary and lifestyle choices.
Our adjusted operating expenses for the year increased 4.4% due mainly to increased costs in both the transportation and warehouse areas, partly as a result of the tight labor market.
This combined with seasonal hiring of driver and warehouse staff have driven increased operational cost on a per unit basis as volume has softened.
Finally, adjusted operating income was $3.2 billion, an increase of 4.4% compared to the prior year.
Now turning to our international Foodservice operations results for the year, the macro environment for the macroeconomic environment for the geographies in which we serve remains relatively positive while the foodservice industry data suggest modestly improved sales with flat to slightly higher volume growth.
The Cisco results in this segment overall were mixed during fiscal 2019 with improved performance during the second half of the year.
Overall for fiscal 2019 sales decreased as 0.2%.
Gross profit decreased 1.8%.
Adjusted operating expenses decreased decreased 3.7% and adjusted operating income was $354.8 million an increase of 10.7%.
Topline growth for the year across our international businesses was also mixed candidate in most of Europe performed well, especially Ireland, and Sweden, and we dealt with some operational challenges in France is our efforts to integrate our two businesses break France individual has impacted our ability to drive growth.
From a cost perspective, we continue to make investments across much of Europe to position us for future business growth.
We've also begun to leverage broader cisco capabilities and processes to deliver improved synergies across the European business.
Additionally, our regionalization efforts in Canada continued to deliver results and also helped to drive improved cost performance in this segment.
In Latin America, our businesses are operating well with continued growth in sales gross profit and operating income in Costa Rica, and Panama from both a broad line and cash and carry segments.
The Bahamas, and our international Food group export business also continue to experience growth, but were partially offset by our business in Mexico, which in the fourth quarter began to show some progress from weaker performance earlier this year.
Turning to Sigma we continue to focus on improving overall profitability as a result, we saw plan softness in the topline while gross margin increased 30 basis points year over year.
Adjusted operating expenses were down for the year driven by a focus on removing unproductive miles and rightsizing underperforming locations, which helped to drive an adjusted operating income increase of 25% versus prior year.
We feel very good about the continued progress we are making within Sigma and are confident in our ability to drive improved performance going forward.
Now, let me turn the call over to Joel brought a who will talk with you about our fourth quarter performance along with additional financial details for both the quarter and the year I will then come back to offer perspective regarding our overall business performance for the year. So important updates as we look ahead and some things we are excited about for the future.
Thank you Tom good morning, everyone.
I would like to discuss our fourth quarter results followed by some additional perspective on our full fiscal year results.
Closing with some commentary regarding fiscal year 2020.
Sales for the fourth quarter increased 1% compared to the same period last year.
Foreign exchange rates negatively affected total Cisco sales by approximately 0.8%.
Local case volume within U.S. Broadline operations grew 1.4% for the fourth quarter of which 1.3% was organic while total case volume within the U.S. problem, an operations grew 0.4% of which 0.3% was organic.
Even though case growth was softer than anticipated it is worth noting the tough comparison to prior year local case growth of 5% and total case growth of 5.3%.
Gross profit increased 2.1% versus the prior year.
And gross margin increased 21 basis points.
We saw solid expense management for the quarter, despite operational cost challenges in our USA segment.
Our transformational initiatives continued to provide benefit as adjusted operating expenses grew only 0.6% for the year.
And as a result, we achieved the gap between gross profit dollar growth and adjusted operating expense growth of 150 basis points.
And adjusted operating income grew 6.6% compared to the same period last year.
It's important to note that this performance as well was achieved despite having difficult year over year comparison.
Where the gap between gross profit dollar growth.
And adjusted operating expense growth was 300 basis points.
As it relates to taxes.
Our GAAP tax rate in the fourth quarter was 21.5%.
And when adjusted for certain items was close to 20%.
For the fourth quarter of fiscal 2019.
We recognized a benefit as a reduction of income tax expense attributable to stock option exercises that occurred in the quarter.
In addition, we recognized a one time benefit in France.
Related to a favorable ruling on tax Carryovers and employment tax credits.
Now turning to our results for the fiscal year 2019.
Sales increased 2.4% to $60.1 billion.
Foreign exchange rates negatively impacted total Cisco sales during the year by 0.8%.
Our local case growth for the year in US broad line was 3.1% one of the highest full year percentage increases in several years.
Gross profit increased 2.9% to $11.4 billion and gross margin increased 10 basis points.
For the year, our overall expense management was solid driven by benefits from our transformation initiatives with adjusted operating expenses increasing 1.4%.
[noise], resulting in an adjusted operating income increase of 7.9% to $2.7 billion.
Foreign exchange rates negatively impacted total Cisco operating income during fiscal 2019.
By 0.5%.
For the year, we achieved the gap between gross profit dollar growth and adjusted operating expense growth of 150 basis points.
Adjusted earnings per share increased by 41 cents to $3.55.
Primarily impacted by growth in adjusted operating income.
And our fiscal year, 2019, non-GAAP effective tax rate, which was 21%.
For fiscal 2019, our non-GAAP tax rate reflects tax benefits attributable to equity compensation elections and credits.
Cash flow from operations was $2.4 billion for fiscal year 2019.
Which was $256 million higher compared to last year.
Net capex for fiscal year, 2019, with $671 million or about 1.1% of sales, which was $5.9 million higher compared to last year.
We continue to generate meaningful free cash flow as we achieved $1.7 billion for fiscal year 2019.
Which was $250 million higher compared to last year due in part to reduced pension contributions, partially offset by higher cash taxes.
We were pleased that our adjusted return on invested capital grew 170 basis points to 16.4% in fiscal 2019.
Reflecting continued disciplined investments in our business.
And solid operating performance during the year.
Now before closing I would like to provide you with some commentary on the outlook for fiscal year 2020.
Capital expenditures during fiscal 2020 are expected to be approximately 1.3% of sales.
Consistent with our previous through your guidance.
From a tax perspective.
We expect our overall effective tax rate to be approximately 24% in fiscal 2020.
And we intend to continue to improve working capital days to achieve our three year plan goal of two days improvement by the end of fiscal 2020.
At the end of fiscal 2019, we have improved working capital by approximately one day versus start of the three year plan.
In addition, we continued to maintain a strong and consistent capital allocation priority of investing in our business and returning value to shareholders with the increased cash flows from the business.
These priorities include.
First investing in our business for long term growth and increasing our industry leading position.
Second our commitment to consistently growing our dividend something we have done each year for the last 50 years.
Third participating of successful tuck him and specialty acquisitions as well as being opportunistic when it comes to larger more strategic deals.
In fact, I'm proud to announce today.
That we're signing a definitive agreement to acquire Jay Kings food service professionals.
In New York based distributor with $155 million in annual sales majority of which are local customers.
Fourth a balanced approach between debt paydown and opportunistic share repurchase.
As a result of our confidence in our long term growth opportunities and our strong market leadership position.
We intend to increase the amount of our share repurchases to more than $1 billion of shares.
During fiscal 2020.
Before we go to Kunaev, let me turn it back over to Tom for some closing comments.
Thanks Joel.
Before closing I'd like to first review a couple of things we've shared with you. This morning.
As mentioned, we delivered a strong fiscal 2019 with 8% adjusted operating income growth and 13% adjusted earnings per share growth.
However, we didnt finished the year strong as we would have liked especially in the US foodservice segment, and therefore, didnt meet our own expectations for the fourth quarter.
When you combine the overall softness in our topline driven primarily by national and regional customer losses, along with some increased operational expenses and with our previously communicated reduction in go forward operating income from the sale of Iowa premium our be processing facility.
We are now lowering our fiscal 2018 to 2023 year plan adjusted operating income growth target to approximately $600 million from the previously communicated low end of this $650 million to $700 million range.
Having said that I'd like to reinforce why we feel very confident in our ability to improve the current trajectory and continue to achieve success over the long term. Despite some of these near term challenges.
We know from our ongoing customer feedback that we are strategically on the right track as we work to improve the experience our customers have in doing business with Cisco.
That includes our ongoing investment in customer facing technology as we look to improve the way our customers do business with us.
Additionally, we will continue to drive growth in our Sysco brand not only through the addition of new and innovative products, but also by expanding the reach of these type of products and additional geographies beyond the us and Canada.
We continue to have the strongest balance sheet in the industry and expect to leverage that to drive growth both in the core business and in returning value to shareholders that includes planned M&A in both segments and geographies.
In which we currently serve as well as relative Adjacencies overtime, which will only further strengthen our position as we see the level of competition in the industry increasing.
In summary in fiscal 2019, we saw improved year over year year over year financial performance, which included strong adjusted operating income growth double digit adjusted earnings per share growth and strong cash flow performance.
All achieved while investing in the business and returning value to shareholders with our fiftyth dividend increase and over $1 billion in share repurchases.
Looking ahead, our focus remains squarely on the customer and achieving the newly outlined three year plan financial targets I remain very confident we have the right strategies and most importantly, the right team to vigorously compete on service the highest quality products and price.
Finally.
I would like to thank each of our 69000 associates across the globe for their continued dedication and hard work to ensuring Cisco remains our customers' most valued and trusted business partner.
Operator, we're now ready for Q and a.
Ladies and gentlemen, if youd like to ask a question. Please press Star then one.
If your question has been answered your likes you move yourself from the queue you May press the pound key.
Once again to ask a question that's star then one.
Our first question comes from Kelly Bania of BMO capital. Your line is open.
Good morning, Thanks for taking my questions and for all the color.
I guess just wanted to start with maybe a diagnosis of the top line and the case growth.
And if there's any execution factors that you see that either with sales reps or service level.
Well you really think it's just a function of the industry and I think you just made a comment about the level of competition, increasing so maybe you can just.
Expand on on what you're seeing there and how you feel about execution and then I guess second part of the question as to the outlook for 600, I guess does imply a little bit of a stronger.
Year in fiscal 20, then the last two years and just maybe helping it seeing if you can help us walk through the puts and takes on how you're thinking about modeling that.
Thank you great yes, thanks Kelly.
Let's start with the topline and it's a great question. So as I shared we've certainly seen and continued to focus on disciplined profitable growth as relates to our national customers and so we've seen certainly some impacts there and some fairly significant change in the trajectory of that business as weve kind of were in the fourth quarter, even as we're into the new year. So that's a big part of what we're talking about here. We've seen that also at some of the regional customer level. So weve talked over the last year. So about our focus on these micro chains and we cycled some business that we picked up in the past, but we've also seen competition ramp up in that space and so that's the biggest single impact I think you will see both in the fourth quarter driving our top line performance. Joel also talked about just the overlap we had year over year. Our Q4 last year was one of our biggest quarters.
In record, both local and total cases as far as operational or Executional things.
Most of what we're talking about is on the expense side, although as we talk about some of the transformative initiatives that we've been executing what we see from time to time as we're learning that there are some customer service challenges that get created we're not broadly concerned about that and don't feel like that is a long term issue, but weve certainly seen a little bit of impact both from our finance transformation and also from some of the work we've done with our new ordering platform, but again in both cases, we think there are short term and we're working through them and obviously, our customer services kind of Paramount for us and everything we do.
As it relates to fiscal year 20, I think your point is correct, which is even at the 600 million number that does.
Suggest a step up from we are today and I think it's a combination of good performance in the U.S. and obviously continuing to see that business performed well improving business across our international segments and as I mentioned continued improving performance within Sigma as well so it's a little bit across the board, but we feel going into 20 fairly confident that we can deliver that $600 million number and that increased step up for fiscal year 2000.
Our next question comes from Edward Kelly of Wells Fargo. Your line is open.
Yeah, Hi, guys good morning.
I just wanted to follow up first question. Another question on now on Kelly's question here, you know industry data for July hasn't really been great I'm, just kind of curious as to what you're seeing so far in Q1, and then how should we think about the progress of case growth throughout the year, just given what you put up in Q4 some of the commentary about.
About that being more disciplined on now on accounts.
Just kind of curious here as to how what the expectation should be.
In terms of case growth as we progress through 2020 and given what we just saw.
Great. It so let's start with the Q1 question that I'd say is we've started in Q1 in July has had some of that same softness that we just talked about for Q4 and I think it's mostly in the same areas for us These national and regional customers, where we transitioned some business there or heads losses. So we we see that similar trajectory as we started the quarter as we think about case growth broadly is weve talked for a long time now our focus continues to be on those places where we can add the most value. So those local customers. Some of those still have those regional concepts I don't want to digitally that that those aren't important part of our growth story as well, but the independent customers, where we add the most value we continue to see that part of the business performing.
Well, it's not maybe at the some of the high as you saw a year ago, but we still see that business performing well, we feel like we're continuing to progress nicely with those customers.
We do believe that we will start to see some improved.
Volume growth throughout the fiscal year 20, as we continue to cycle. Some losses that we had earlier in the year and the national customer sector.
But generally speaking I think we feel like the overall case numbers as we talked about I think last quarter are going to be a little softer than we originally projected for the three year plan.
Okay, and then I just wanted to ask you about bad debt.
And just have really kind of what's going on we haven't I'm looking at the cash flow statement by the and I'm. Assuming this is your your accrual, but it hasn't been this high really since 2009 I am just kind of curious is there.
Is there one specific situation that drove that this year is it something more broad based this 2020 normalize.
Yes. It is so I think what I the way I would think about that is that I do think we've seen some of some worsening of the environment for bad debt.
I think the.
It's.
I wouldn't certainly call it a crisis situation, but it has certainly gotten worse.
Our overall days are little softer we've had it seems like we had about one.
Fairly significant hit per quarter to some extent that.
That has impacted us.
And so on one hand, the bad debt expense.
When you look at it year over year. There is an element of some pickups, we hadn't last year's numbers that account for about half of the difference, but but nonetheless, I would say the environment has gotten a little bit worse, it's certainly something we're keeping a close eye on and I would say if you look at our performance relatively over the last few years, we've got a we've got a pretty strong run and so again I think that's a fair comment to say it has gotten it has gotten somewhat worse.
That's certainly something we're monitoring carefully.
All right. Thanks, guys.
Thank you.
Our next question comes from Chris Mandeville of Jefferies. Your line is open.
Hey, good morning.
Tom you characterize some of the losses or just reduction in customer count.
Both the national and in regional from a perspective of loss and then planned.
Can you just go into the loss is a little bit more in greater detail. Just is there a common thread with respect to why they are choosing to go elsewhere or.
It's competition doing something a little bit more aggressively anything you can add there in terms of contact.
Sure Chris I think you are right to suggest there's bowl theres the customers that we as we go into the negotiation we ended up not being renewal for Cisco, where we've taken a loss it's generally.
Driven by kind of competitive pricing and what I mean by that is more aggressive.
Distribution fees than what we have comfortable with.
And part of what we've tried to work through is how do we continue to improve the cost to serve our customers. So that we are obviously competitive on a day to day basis for almost any customer, but when we've typically lost its been because the fees have been beyond where we've been comfortable and.
So that's that's been a big driver of what has happened in some of these regional customers.
And I would say to this is one add to that I mean, there is a little bit and theres been I'd say, a little bit more of the upfront monies that have been moved around in the industry. At this point, that's the thing in areas that.
Again disciplined why is the times, we're just not comfortable making making some of those decisions.
So I'd say, that's probably the other part that plays into that same point.
Okay, and then just looking to fiscal 2000 years and really just the the updated EBIT guidance for 600 million or so is that still again very much predicated on opex.
And the larger buckets, which you've outlined in the past and.
Are we able to essentially hit that $600 million if in the event, we don't see any material acceleration in total cases.
It's a great question I think this conversation we've had for a couple of years now around the balance between.
Gross profit and operating expense is going to be key and so if we do see we don't see a dramatic uptick in volume and therefore gross profit we've got to make sure that that spread remains at the 150 basis points. So it is a it I wouldn't say, it's not really predicated only on that but that balance of those two is very important as we as we continue to move forward with the business.
Okay. Thank you.
Yep.
Our next question comes from John Heinbockel Guggenheim Your line is open.
So Tom let me start local case growth is not bad.
But it could be better right.
Particularly stacked up against some peers, where the where do you think maybe you can put some investment muscle behind the business right.
If you think you can to drive some incremental growth.
Where do you how happy are you with the the growth.
In the M- population and their performance is there a case to be made for stepping that up a little bit.
Selectively looked like you did two years ago.
Yeah.
Our next question comes from Judah Frommer of Credit Suisse. Your line is open.
Hi, good morning, Thanks for taking the questions maybe first just to follow up on now kind of the competitive landscape within within broad lines can you help us with you know what what types of competitors may be winning.
Those customers away from you or are they more local in nature in nature and then you know why is your scale not helping you with kind of lower cost to serve in those locales.
Ladies and gentlemen, please standby were experiencing technical difficulties. Thank you for your placements patience and please do you just standby.
Once again, thank you for your patience and please continue to standby ladies and gentlemen.
Okay.
Thanks.
[laughter].
[noise].
Jeffrey Bernstein Your line is open.
Great. Thank you can you hear me.
Hello.
As that Jeff, Yes, hi, there. Thank you hi, Jeff.
Good morning go ahead with your question.
Thank you couple of follow ups as we think about the three year profitability target.
Obviously big into that the sales side of things I'm, just wondering from a cost perspective.
First I guess on commodities under the basket inflation. This past quarter was 2.5% seems like it's been creeping up the past few quarters, just wondering what you're assuming in terms of fiscal 20, whether you're anticipating a further acceleration of inflation, maybe any thoughts specific to the proteins that might be more vulnerable or any color you can provide on the food cost side of things.
Yes, sure Jeff It's Joel.
I would say at this point I mean, we're anticipating where we continue to refer to as modest levels of inflation over the next couple of quarters.
Which which I would interpret to say is fairly consistent where we are today and we will certainly the inflationary categories really have been in meat and poultry in produce and then to some extent.
Now frozen potatoes, as well has been an area. That's continued to have some inflation. So I don't know that we.
Our look for the next couple of quarters anything.
Really dramatic or above that but I certainly we do anticipate continued.
Inflation and I'd say in approximately the range for our today.
And on the Labor front is that.
Any color you can provide in terms of whether there is a basket inflation number or how you look at it from turnover just competition for drivers and associates.
Yes, I think what we tried to manage through here Jack is there.
It's probably worth spending a minute here for everyone's benefit is we went into the fourth quarter and we did have some volume softening traditionally what we would be much probably more aggressive on trying to reduce.
The number of drivers the number of selectors, we have and given the labor market in the environment. We're operating in we choose we've chosen really take more of a long term view on this and so part of what we're wrestling with right now as these increased operating expenses not so much driven by increased labor rates because our lead our lever we paid were pretty good they are in the market, but trying to make sure we're not letting people go during.
Maybe a little bit of a softer volume time, so we're still paying for those resources, probably at a level that we havent historically to maintain.
The service and support levels for our customers.
As we look forward.
The volume if the volume numbers will be softer over longer period of time, we will manage that more appropriately, but I think we're just trying to make sure. We're not in a situation where we were a couple of years ago. We had lots of retention challenges and we are struggling to even get drivers into fill routes. So today, we're feeling much better about our retention and as we look to the labor rates next year, we don't see anything that's beyond that kind of 2% to 3% that we've dealt with over the past and we look to offset some of that with productivity benefits in the in the operations, we still feeling pretty good about the labor rate increases.
Just continuing to manage the retention and making sure we're not doing anything in the short term to impact our ability to service our customers.
Got it and just lastly, you mentioned national customer softening I'm. Just wondering if you were able to dig into that whether it's more quick service versus casual dining with the differential there or whether it's a regional differential or is it kind of a broad brush comment across.
All brands and all geographies.
Yes, I think it's more of a broader comment part of it was losses, meaning we didn't renew or.
Didnt werent successful in renewing a customer there are some softness in certain customers, but I would say, it's not specific to any one geography or even customer type.
It's probably more certain brands that are performing better than others and.
You guys, probably have a sense of who those are and so some of those are in our portfolio. Both on the positive side and on the challenge side.
Got it. Thank you very much thank you.
Our next question comes from John Heinbockel of Guggenheim. Your line is open.
And Tom can you hear me.
I can hear you John we're glad you're back her or we are back to where we thought we lost.
[laughter].
So when you when you look at local case growth and you think about trend right because obviously.
Two year stack, it probably a little bit better in the fourth quarter, where do you where do you think you are as well have you seen any deterioration in local case growth say the last three to six months.
And then is there opportunity right a couple of years ago, you selectively added or stepped up and may hiring.
Is there an opportunity to do that again or you don't think that would result in incremental share gains.
So let's start with the local cases, it was probably a little softer you think about the last two quarters, but.
To your point about the two year stack as we look at how we've grown over the last couple of years, we still feel pretty good about it and.
Even as we move into this year on that true independent customer I think we feel good about where we're at there are some of these as weve talked regional chains, where we've seen some impacts and we've got to stay close to that and part of that is making sure. We're staying competitive in those situations and so thats something that were going to be very focused on.
As we think about.
Is there a way to accelerate that growth even further.
The amaze continue to play an important role in our portfolio. As you guys know we've talked about often the fact that our customers really value that resource and we obviously see the benefits of having them out there.
We will selectively add resources, where it makes sense meeting where our share position is such that there is lots of upside.
And but I don't think it makes sense for us to go and add a significant amount of resources in that area at what we're trying to make sure. We do is we have the right support around them.
Especially as we have more and more customers go online to make sure that theyve got the whether its the specialist support around.
Proteins or its around certain product categories that we feel are important to those customers.
Or some of the other tools and technology that weve built to support them. So it's less about adding adding more resources, because we feel like we're pretty balanced and the size of territories that they have and the amount that they can handle going forward.
We are thinking about ways to increase our new business, our new business has been strong, but theres always an opportunity to increase the new business side of things, especially as we've had some of these transitions happen.
And then when you think about 2020 right. So two things impact the financial roadmap in 2020, maybe versus 19, and then and then maybe for Joel.
So DNA in 2020.
Is that likely to be sort of $775 million to $800 million range.
I know, it's been stepping down a bit is that a fair range to look at.
So as long as part of the DNA comment I mean, we typically.
We typically have our DNA that I don't know if theres anything I'd say, it's any material or significant changes as it relates to that I mean, I think as you sometimes find again as we make investments.
Our guard.
Some stuff falls off in something that is in our DNA may go up.
Uptick, but I I, just broadly speaking would not say there was anything of significance that you should expect.
From a DNA perspective.
Moving forward.
In General you financial roadmap is there something in particular.
No I'm just curious when you look at your your operating initiatives right, you think about which one can make a bigger difference.
Of that group before right it would seem like financial roadmap could be one of one to one of the ones that would.
Having a bigger impact in 2020 than this past year was that is that not right. Yes, I Wouldnt say it this way I think we we actually had a.
Significant impact in that way 19 that are financed transmitters roadmap and actually certainly expecting.
Even a slightly more significant impact in flight 20, I think a couple of those key initiatives again, Canada regionalization as well and as you think about that was that was really something that had a.
Benefits.
In both this year and as it carries into next year. It kind of started in the middle of the year and so the way I would look at these initiatives John is that.
Many of them. If you remember started benefiting in the second half of the fiscal year, which carries into the some of the first and then obviously some further benefit builds on that so I would call I would say a couple of those.
Certainly.
We can.
Good and strong impact last year and expect another solid year as we had in those next year as well.
Okay. Thank you.
Our next question comes from AJ Jain of pivotal Research group. Your line is open.
Yes, hi, good morning, and thanks for taking my question.
I think as others have pointed out.
I think you still need to deliver over $200 million incremental growth to hit the three year target.
And so im just trying to figure out where that's coming from.
In 2000, Twentys I could do you think that growth will be broad based across.
Hi, your segments or should we expect.
Continued pressure in our us foodservice I think in the U.S. foodservice.
Earnings growth was flat in Q4 and that was a pretty sharp sequential.
Decrease in the growth rate. So do you have any color on what you're assuming.
Across the three main segments in terms of growth for 2020.
Yes, Jay I as mentioned earlier I think it's going to be a balance across all international us and Sigma and we see that in the U.S., it's about maintaining that balance between gross profit and operating expense and we have we feel pretty good about our ability to do that we have initiatives in place to drive that is it relates to the European business and the rest of international I think we feel.
Like we dealt with a few challenges this year that we had not expected.
Specifically talked about Mexico, and also France, and so we think we feel much better going into next year about that and then Cigna I think we're just on a good trajectory at this point, we've we've got ourselves in a place where we need to be to be able to continue to see improved improving both.
Not so much topline because we've got that business I think at a place now where it makes sense, but more around balancing the gross profit and the cost side. So we can deliver operating performance.
Okay. Thank you and I had one follow up I think Tom in your prepared comments you.
I sort of presented a mixed picture with strong.
A strong economic backdrop and softer industry trends.
In terms of restaurant spending in the us with flight restaurant comps of negative traffic trends.
So im just trying to reconcile.
The weaker industry backdrop with.
Your operating performance and that of your competitors I think apart from the weaker.
I guess I'm just wondering apart from the weaker traffic trends do you feel like you're losing any piece of the independent business to competition I'm asking specifically.
In relation to some of your competitors have reported.
An acceleration with the independent case volume.
Yes, well as you guys. All know there's tremendous amount a number of competitors in the space. We operate in the public guys and then there is a tremendous amount of regional and local folks.
I think there are geographies, where we've had more impact from a competitive environment than others I would say broadly speaking, we feel comfortable with where we're at but it is getting aggressive out there and more competitive and we just need to make sure we're maintaining our position and doing everything we can to continue to earn our customers business every day not just on price, but obviously on things like our service platform and our product portfolio.
Yes, Andrew I think just just as a reminder, though as well I think some of the commentary earlier was also related to the fact that again within within what we talk about as local there's a couple of different types of those customers and I think when you think about the kind of the true independence versus talked with some of the regional or local chains and I think some of the pressure a little bit as Tom talked about earlier.
Is more in that area, where there certainly seems to have been a bit of a ramp up them.
And pricing in some upfront and then I think we just again we.
We're keeping a very close eye on that but also getting trying to remain maintaining our discipline.
In some of those areas. So I just think I would just distinguish a little bit between really the true independents and some of the other areas that we're actually doing more of the pressure.
Okay. Thank you very much.
Our next question comes from John Ivankoe of Jpmorgan. Your line is open.
Hi, Thank you.
I'd just direct follow up on the previous question actually.
That level of competition that you had cited in your prepared remarks, I think even a few times I mean do you think thats that service level, driven or are you seeing competitors that are materially using a gross margin to drive case growth then.
Like using your previous history.
In this industry I mean, do you think we're at the cost spots, which we've obviously been in several times before companies that might be using gross margin just and in of itself and to drive case growth and is that something that at this point that you are at least contemplating on a.
Customer by customer basis.
Let's start with its always been competitive out there and our comments are we are certainly seeing some increased competition in certain geographies and segments and we've we've tried to articulate that as it relates to how we need to think about that going forward and whether others are investing.
We need to make sure we're competitive every single day in every customer and we intend to do that.
I think the way, we think about that has more to do with.
Making sure that our overall offering is top notch for our customers and that includes service product and cost and pricing.
I don't think we are we are having any adverse impact based on our service. We continue to provide very high levels of service and I would argue that we.
As we've talked about with some of the investments we're making on the operating expense side, we will continue to.
Put services a top priority we know in this business that's critically important to our customers. If you don't have the product it doesn't really matter what prices.
And so we.
It's really a broad based approach John and therefore, the answer is there is not one specific thing, but we we certainly don't want to be and won't be in a position to be uncompetitive.
However that looks by customer type or geography.
Understood. Thank you.
It's certainly often across many different industries inc., including food service distribution were corporate efficiencies can you can improve costs and margins for the corporate but it can change or maybe even lower service levels for customers. So in terms of how you measure service levels can you go into some of those measurements in terms of how you've been able to maintain or even improve service levels across your customer base in the past couple of years and.
Yep Yep. So the first point then secondly are there any changes you mentioned about investments in Opex or are there any changes that you think that you might need to make you have to get back into things like day of the week delivery would have whatever that case may be that a specific customer wants to regain some of their case volume.
Yes, so a couple of things, we you referring to the corporate expense.
Adjustments, we made earlier in the in the calendar year, our end of our kind of sorry about that.
I am yes, but also some of the broader business transformation efforts that even occurred before that yes. So those things are really design that we've talked about those as non kind of operational are service related investments or our focus for us and what we really tried to do there is removed non value added expenses in our business and so that we talk about corporate expenses those are kind of tightening our belts here, making sure. We're doing all the things we need to do so that we can be competitive in the marketplace. So nothing that we've done there would be necessarily at effecting our service ability or our ability to take care of our customers either from a pricing or.
Cost standpoint, or they would do is further improve our ability to do that as it relates to how we service. The service has been a hallmark for Cisco for a long time and we look at everything we have lots of metrics there, but some examples of things we're doing to improve even our our service level is to make sure that we have a way of communicating to our customers on a daily basis throughout the day, where their delivery is as an example.
So the we have they have both an application we use technology. So they can look and see where their deliveries that but we also have ways of making sure. We're staying more in touch with our drivers throughout the day. So we can remove any obstacles they might have to delivering that customer when they expect to be delivered so that when I talk about investments some of its technology investments. Some of it is resourcing investments as we've talked about.
But.
We intend to make sure kind of for US table Stakes does a great service offering and certainly lever is a big part of that yet I, just Don and just as a summary of that I would just think it's just really important to be clear that the the work. We've done have been some again, some streamlining spans and layers efficiencies in terms of administrative but that in no way shape or form are we are we somehow reducing investments and in our ability to grow to provide great service I think that's that's just a really key.
The key takeaway here just want to reinforce absolutely absolutely.
Certainly.
Excuse me.
Excuse me for fiscal 19.
And that was clearly the case that it was corporate driven but some of the business transformation.
The efforts before that.
Were put into place with deal with routing and purchasing and.
In what have you could have had it could have had an impact on consumers that were actually delayed and so that was the question that I was asking if you were to go back versus several years ago and looked at your service levels. After the variety of business transformation efforts that you've put forth, whether you've been able to maintain or even increase service levels. Despite those changes, which have obviously been a big part of the efficiencies in our profit growth that Cisco is seen.
Okay. Thanks for the clarity if youre, referring back to some of the ERP implementation work Yeah. We certainly had some fairly significant service challenges in those companies that had transition.
We're well beyond that and our systems are operating well and certainly that is a big driver of our ability to make sure that we've got the assets on the road to deliver our customer's expectation. So yes, we're in a much different place than we would have been years ago, and we feel very good about our ability to continue to improve in that area.
Okay. Thank you.
Thank you.
Our next question comes from Judah Frommer of Credit Suisse. Your line is open.
Hi, Good morning, guys I was hoping first you could kind of help on packs a commentary on competition within the us business between.
Kind of National Regional and then kind of truly independent cases, you guys do probably have more chain business within your local case number than some competitors and I don't want to put words in your mouth, but it sounds like.
You are seeing that elevated competition on the chain side of things as opposed to independents.
And Kevin can you help us with why that may be happening.
When we talk about regional accounts, you might I guess I don't think oftentimes folks talking about them is changed certainly technomic I don't think talks about him Hes always change, but some of the larger regional concepts is what we have talked about it and we are referring to here and so I'd say just we're just seeing increased competition folks who I think look at that as a growth opportunity as certainly we have and just become more aggressive in the.
Going after those customers those are the type of accounts that Joel referred to earlier that.
Our susceptible to.
Some aggressive pricing as they look to change their offering and we tend to be more balanced in our focus on those customers around certainly product pricing is important but so is our ability to service them and make sure that they have what they need to keep growing.
Okay, 'cause it could that be potentially create a dynamic over the course of the year, where you're seeing maybe cases slowed down but kind of.
Average profitability across your local customers improve if youre kind of calling some relatively lower margin business within to local customer base.
You see a little of that today based on that mix, but thats certainly not our objective, meaning we're not trying to in those customers per se.
Change the mix or certainly not looking too.
Drive more pricing in our independent segment, we feel like.
We're positioned well there so it's not about.
It's not about driving additional margin with local customers I guess is the key point I'm trying but I do think you're seeing a little bit of that even now Judah when you see the.
Our our margin this past quarter continued to increase despite some little bit higher inflation I think some of that is related to the fact that theres a bit of a shift in mix in terms of where the where the growth is which got a little little more on the.
Little more towards the.
Orbital move away from fuel some of the contract.
Okay.
If I could just squeeze one more in as as you kind of lower.
The three year operating income plan to 600 million.
There are things that within the three year period of kind of worked out.
After you guys expressing concern, namely the inbound freight and inflation seems to be in a supportive area would you say that you're setting. The current guide assuming that everything kind of continues as is Q4 and early into Q1 or would you say that you know there are kind of executional improvements you can make that could drive upside to the to the updated guide.
I think the way we talked about that is that someone referenced earlier. This is a big step up from the prior two years and we know that.
We've got to be able to deliver that so we feel like it's a reasonable number based on all the things we need to execute the topline that we've talked about continue improvement in our cost. So that we are being competitive out there every day and ultimately making sure that the industry and the market continues at least at the pace that its at now so I think what we would say is we feel good about the number but I wouldnt go as far as assuming there's a bunch of upside in there based on where we sit today.
Okay. Thanks.
Our next question comes from Edward Kelly of Wells Fargo. Your line is open.
Hey, Thanks, guys. Thanks, let me back up.
I just wanted to ask just one question here Tom and this.
As it relates to.
Kind of beyond 2020.
Just.
Any thoughts on sort of the next three years. When we'll think we'll get some color are you planning an analyst day at all later this year and.
And if we take a step back and you hit your $600 million and you're still going to average 8% EBIT growth rate over this period and what was one of the toughest operating environments in the industry in quite a while.
Thats, a really hard to find and consumer.
Just thoughts on how you're thinking about the longer term outlook kind of beyond 2020, even if its qualitatively at this point.
Well I appreciate you raising a couple of those points. So we feel really good about that three year number and to your point, that's delivering really solid results I think as we look ahead.
We have not set a date yet to do an analyst day or Investor day, but we are we certainly talking about that and trying to think through when's. The best time to do that given the current three year plan and.
I think the way we think about it is how do we continue to invest for the long term and drive well we would argue is.
Top quartile results in the industry and so it's a combination of the two we still have a lot of investments that we're making.
In the international sector, even here in the U.S., we still believe there are things we need to continue to invest in around technology to put ourselves in the right place going forward.
And obviously M&A continues to be an opportunity as we think about how do we grow in the future. So probably not giving you what you want other than to say that we feel good about the performance. We've had over the last couple of years, we feel like Thats. The kind of performance that we should be able to deliver going forward and will.
Pick a date here in the not too distant future to be able to get together with you all and talk about that.
Great. Thank you.
Thank you.
Our last question comes from Rebecca's gentlemen of Morningstar. Your line is open.
Good morning, so I'm going to switch gears, a little bit and just ask about the international division the profitability came in.
A bit better than we were expecting and.
4% operating margins in the quarter I was just wondering is this a reflection of the Canadian reorganization and something that could be more sustained and possibly a new kind of base heading forward or was there something unique about the Q4 that.
Well, you know that temporarily cannibalistic profitability that we should not expect to carry forward.
Hi, Rebecca Thanks for joining us I Wouldnt say was any unique things that happened in the quarter I think it's a combination of things. The regionalization is a good example of where we need to be bringing.
More consistency across how we run the international businesses and in the case of Canada, leveraging a model that.
Given the geography, there could help us drive more a benefit on the cost side as our costs were a bit out of whack.
As it relates to Europe . Some of those same opportunities exist and you heard me say in the prepared comments that we're starting to bring some of the same kind of capabilities that we have as a company and processes to some of these businesses, maybe historically havent operated that way. So I think what we would say is that we feel good about where we ended the year as we said, though we was a little bit rougher in the first half and we still have some work to do.
I think balancing the investments, we're making and the improvements you should see in our operating expenses over time and the international sector.
Should be.
Kind of a way to think about us going forward.
Okay, great. Thank you.
Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a great day.